View source for Fiat money

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[[File:Yuan dynasty banknote with its printing plate 1287.jpg|thumb|[[Yuan dynasty]] banknotes are the earliest known fiat money.]]

'''Fiat money''' is a [[currency]] without [[Intrinsic value (numismatics)|intrinsic value]] that has been established as [[Monetary system|money]], often by government regulation. Fiat money does not have [[use value]], and has value only because a government maintains its value, or because parties engaging in exchange agree on its value.<ref>{{Cite journal|last=Goldberg|first=Dror|date=2005|title=Famous Myths of "Fiat Money"|jstor=3839155|journal=Journal of Money, Credit and Banking|volume=37|issue=5|pages=957–967}}</ref> It was introduced as an alternative to [[commodity money]] and [[representative money]]. Commodity money is created from a good, often a [[precious metal]] such as [[gold standard|gold]] or [[silver standard|silver]], which has uses other than as a [[medium of exchange]] (such a good is called a [[commodity]]). Representative money is similar to fiat money, but it represents a claim on a commodity (which can be redeemed to a greater or lesser extent).<ref name=mankiw /><ref name="Walsh 2003">{{cite book
 | last = Walsh | first = Carl E.
 | title = Monetary Theory and Policy
 | publisher = The MIT Press
 | year = 2003
 | isbn = 978-0-262-23231-9 }}</ref>{{refn|group=note|See [[Monetary economics]] for further discussion.}}

Fiat money first began to be used in China in the 11th century. Since then, it has been used by various countries, usually concurrently with commodity currencies. Fiat money started to dominate in the 20th century. Since the [[Nixon shock|decoupling of the US dollar from gold by Richard Nixon in 1971]], a system of national fiat currencies has been used globally.

Fiat money has been defined variously as:
* Any money declared by a government to be [[legal tender]].<ref>{{cite book
 |title       = Money and Investments
 |author      = Montgomery Rollins
 |year        = 1917
 |publisher   = George Routledge & Sons
 |url         = https://books.google.co.uk/books?id=GqRlvgAACAAJ&dq=Money+and+Investments+Montgomery+Rollins&hl=en&sa=X&redir_esc=y
 |quote       = Fiat Money. Money which a government declares shall be accepted as legal tender at its face value;
 |deadurl     = no
 |archiveurl  = https://web.archive.org/web/20161227060423/https://books.google.co.uk/books?id=GqRlvgAACAAJ&dq=Money+and+Investments+Montgomery+Rollins&hl=en&sa=X&redir_esc=y
 |archivedate = December 27, 2016
 |df          = mdy-all
}}</ref>
* State-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.<ref name="keynesp7">{{cite book
|title=A Treatise on Money
|author=John Maynard Keynes
|volume=1
|page =7
|chapter=1. The Classification of Money
|origyear=1930
|year=1965
|quote=''Fiat Money'' is Representative (or token) Money (''i.e'' something the intrinsic value of the material substance of which is divorced from its monetary face value) – now generally made of paper except in the case of small denominations&nbsp;– which is created and issued by the State, but is not convertible by law into anything other than itself, and has no fixed value in terms of an objective standard.
|publisher=Macmillan & Co Ltd}}</ref>
* Intrinsically valueless money used as money because of government decree.<ref name=mankiw>
{{cite book
|quote=fiat money: money without intrinsic value that is used as money because of government decree
|title= Principles of Economics
|author=[[N. Gregory Mankiw]]
|url=https://books.google.com/books?id=3ubKAgAAQBAJ&pg=PA220
|page=220
|isbn=978-1-285-16592-9
|year=2014}}</ref>
* An intrinsically useless object that serves as a medium of exchange<ref>{{Cite book|url=https://www.worldcat.org/oclc/968345651|title=The new Palgrave dictionary of economics|others=Palgrave Macmillan (Firm),|isbn=9781349951215|edition=Living Reference Work|location=United Kingdom|oclc=968345651}}</ref> (also known as '''[[fiduciary]] money'''.)<ref>{{Cite news|url=https://quickonomics.com/different-types-of-money/|title=The Four Different Types of Money - Quickonomics|date=2016-09-17|work=Quickonomics|access-date=2018-02-12|language=en-US|deadurl=no|archiveurl=https://web.archive.org/web/20180213195105/https://quickonomics.com/different-types-of-money/|archivedate=February 13, 2018|df=mdy-all}}</ref>

The term ''fiat'' derives from the [[Latin language|Latin]] ''[[wikt:fiat#Latin|fiat]]'' ("let it be done")<ref>''Fiat'' is  the third-person singular present active subjunctive of ''[[wikt:en:fio#Latin|fiō]]'' ("I become", "I am made").</ref> used in the sense of an order, decree<ref name=mankiw /> or resolution.<ref>{{Cite book|url=http://www.heg-fr.ch/EN/School-of-Management/Communication-and-Events/events/Pages/EventViewer.aspx?Event=patrick-schuffel.aspx|title=The Concise Fintech Compendium|last=Schueffel|first=Patrick|publisher=School of Management Fribourg/Switzerland|year=2017|isbn=|location=Fribourg|pages=|deadurl=no|archiveurl=https://web.archive.org/web/20171024205446/http://www.heg-fr.ch/EN/School-of-Management/Communication-and-Events/events/Pages/EventViewer.aspx?Event=patrick-schuffel.aspx|archivedate=October 24, 2017|df=mdy-all}}</ref>

==Treatment in economics==
In [[monetary economics]], fiat money is an intrinsically valueless object or record that is widely accepted as a means of payment.<ref name="Walsh 2003"/>{{failed verification|date=February 2017}} In some micro-founded models of money, fiat money is [[endogeneity (econometrics)|created internally]] in a community making feasible trades that would not otherwise be possible, either because producers and consumers may not anonymously write [[IOU]]s, or because of physical constraints.<ref>{{Cite journal |authorlink=Nobuhiro Kiyotaki |first=Nobuhiro |last=Kiyotaki |lastauthoramp=yes |authorlink2=Randall Wright |first2=Randall |last2=Wright |year=1989 |title=On Money as a Medium of Exchange |journal=[[Journal of Political Economy]] |volume=97 |issue=4 |pages=927–54 |doi= 10.1086/261634 |postscript=. }}.</ref><ref>{{Cite journal |first=Ricardo |last=Lagos |lastauthoramp= yes |first2=Randall |last2=Wright |year=2005 |title=A Unified Framework for Monetary Theory and Policy Analysis |journal=Journal of Political Economy |volume=113 |issue=3 |pages=463–84 |doi=10.1086/429804 |citeseerx=10.1.1.563.3199 }}.</ref>

==Precious metals==
Circulating [[silver coin]]s in the 1960s ceased to be produced containing the precious metal when the [[face value]] of the coin was below the cost of the [[Periodic table#Metals.2C metalloids and nonmetals|elemental metal]]. The [[Coinage Act of 1965]] eliminated [[silver]] from the circulating dimes and quarter dollars of the United States, and most other countries did the same with their coins.

[[Penny (Canadian coin)|The Canadian penny]] was mostly [[copper]] until 1996 and was removed from circulation in the fall of 2012 due to the cost of production relative to face value.<ref>{{cite web|url=http://www.cra-arc.gc.ca/gncy/bdgt/2012/cngsystm-eng.html|title=ARCHIVED – Eliminating the penny from Canada's coinage system - Canada.ca|first=Canada Revenue|last=Agency|date=|website=www.cra-arc.gc.ca|accessdate=May 8, 2018|deadurl=no|archiveurl=https://web.archive.org/web/20170517021557/http://www.cra-arc.gc.ca/gncy/bdgt/2012/cngsystm-eng.html|archivedate=May 17, 2017|df=mdy-all}}</ref>

In 2007 the Royal Canadian Mint produced a million dollar [[gold]] [[bullion coin]] and sold five of them. In 2015, the gold in the coins was worth more than 3.5 times the face value.<ref>{{cite web|url=http://www.mint.ca/store/mint/about-the-mint/million-dollar-coin-1600006#|title=Million Dollar Coin|author=|date=|website=www.mint.ca|accessdate=May 8, 2018|deadurl=no|archiveurl=https://www.webcitation.org/6VqwLId4c?url=http://www.mint.ca/store/mint/about-the-mint/million-dollar-coin-1600006|archivedate=January 25, 2015|df=mdy-all}}</ref>

==History==
===China===
Fiat money originated in 11th century China,<ref>{{citation | last = Selgin | first = George | year = 2003 | title = Adaptive Learning and the Transition to Fiat Money | journal = The Economic Journal | volume = 113 | issue = 484 | pages = 147–65 | doi=10.1111/1468-0297.00094}}.</ref> and its use became widespread during the [[Yuan Dynasty|Yuan]] and [[Ming Dynasty|Ming]] dynasties.<ref>{{citation | last = Von Glahn | first = Richard | year = 1996 | title = Fountain of Fortune: Money and Monetary Policy in China, 1000–1700 | place = Berkeley | publisher = University of California Press}}.</ref>

[[File:Jiao zi.jpg|thumb|right|180px|Song Dynasty ''Jiaozi,'' the world's earliest paper money.]]

The [[Song Dynasty]] in [[China]] was the first to issue paper money, ''[[Jiaozi (currency)|jiaozi]]'', around the 10th century AD. Although the notes were valued at a certain exchange rate for gold, silver, or silk, conversion was never allowed in practice. The notes were initially to be redeemed after three years' service, to be replaced by new notes for a 3% service charge, but, as more of them were printed without notes being retired, inflation became evident. The government made several attempts to support the paper by demanding taxes partly in currency and making other laws, but the damage had been done, and the notes fell out of favor.<ref>{{cite web |last=Ramsden |first=Dave |year=2004 |title=A Very Short History of Chinese Paper Money |url=http://www.financialsense.com/fsu/editorials/ramsden/2004/0617.html |publisher=[[Jim Puplava|James J. Puplava]] Financial Sense |deadurl=yes |archiveurl=https://web.archive.org/web/20080609220821/http://www.financialsense.com/fsu/editorials/ramsden/2004/0617.html |archivedate=June 9, 2008 |df=mdy }}</ref>

The successive [[Yuan Dynasty]] was the first dynasty in China to use paper currency as the predominant circulating medium. The founder of the Yuan Dynasty, [[Kublai Khan]], issued paper money known as [[Chao (currency)|Chao]] in his reign. The original notes during the Yuan Dynasty were restricted in area and duration as in the Song Dynasty.

During the 13th century, [[Marco Polo]] described the fiat money of the [[Yuan Dynasty]] in his book ''[[The Travels of Marco Polo]]''.<ref name="MilesScott">{{cite book|author1=David Miles|author2=Andrew Scott|title=Macroeconomics: Understanding the Wealth of Nations|date=January 14, 2005|publisher=John Wiley & Sons|isbn=978-0-470-01243-7|pages=273}}<!--|accessdate=September 28, 2012--></ref><ref name="Marco Polo">{{cite book|author=Marco Polo|title=The Travels of Marco Polo, a Venetian, in the Thirteenth Century: Being a Description, by that Early Traveller, of Remarkable Places and Things, in the Eastern Parts of the World|url=https://books.google.com/books?id=JetQAAAAcAAJ&pg=PA353|accessdate=September 19, 2012|year=1818|pages=353–55}}</ref>

{{quote|All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver... and indeed everybody takes them readily, for wheresoever a person may go throughout the Great Kaan's dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold.|Marco Polo|''The Travels of Marco Polo''}}

===Europe===

[[Washington Irving]] records an emergency use of paper money by the Spanish in a siege during the [[Conquest of Granada]] (1482–1492). In 1661, [[Johan Palmstruch]] issued the first regular paper money in the West, under royal charter from the Kingdom of Sweden, through a new institution, the [[Stockholms Banco|Bank of Stockholm]]. While this private paper currency was largely a failure, the Swedish parliament eventually took over the issue of paper money in the country.  By 1745, its paper money was inconvertible to specie, but acceptance was mandated by the government.<ref>{{cite book |title= Fiat Paper Money – The History and Evolution of Our Currency |last= Foster |first= Ralph T. |authorlink= |coauthors= |year= 2010|publisher= Foster Publishing |location= Berkeley, California |isbn= 978-0-9643066-1-5|pages=59–60 |url= }}<!--|accessdate=March 20, 2012--></ref> This fiat currency depreciated so rapidly that by 1776 it returned to a silver standard. Fiat money also has other roots in 17th-century Europe, having been introduced by the Bank of Amsterdam in 1683.<ref>{{cite web|url=http://www.frbatlanta.org/pubs/wp/working_paper_2010-17.cfm|title=How Amsterdam Got Fiat Money|author=|date=|website=www.frbatlanta.org|accessdate=May 8, 2018|deadurl=no|archiveurl=https://web.archive.org/web/20131110233455/http://www.frbatlanta.org/pubs/wp/working_paper_2010-17.cfm|archivedate=November 10, 2013|df=mdy-all}}</ref>

===New France 1685–1770===
{{Main|Card money in New France}}
{{see also|History of the Canada dollar}}

In 17th century [[New France]], now part of Canada, the universally accepted [[medium of exchange]] was the [[beaver]] pelt. As the colony expanded, coins from France came to be widely used, but there was usually a shortage of French coins. In 1685, the colonial authorities in New France found themselves seriously short of money. A military expedition against the [[Iroquois]] had gone badly and tax revenues were down, reducing government money reserves. Typically, when short of funds, the government would simply delay paying merchants for purchases, but it was not safe to delay payment to soldiers due to the risk of [[mutiny]].

[[Jacques de Meulles]], the Intendant of Finance, came up with an ingenious [[ad-hoc]] solution – the temporary issuance of paper money to pay the soldiers, in the form of [[playing card]]s. He confiscated all the playing cards in the colony, cut them up into pieces, wrote denominations on the pieces, signed them, and issued them to the soldiers as pay in lieu of gold and silver. Because of the chronic shortages of money of all types in the colonies, these cards were readily accepted by merchants and the public and circulated freely at [[face value]]. It was intended to be purely a temporary expedient, and it was not until years later that its role as a [[medium of exchange]] was recognized. The first issue of playing card money occurred in June 1685 and was redeemed three months later. However, the shortages of coinage reoccurred and more issues of card money were made in subsequent years.  Because of their wide acceptance as money and the general shortage of money in the colony, many of the playing cards were not redeemed but continued to circulate, acting as a useful substitute for scarce gold and silver coins from France. Eventually, the [[Governor of New France]] acknowledged their useful role as a circulating medium of exchange.<ref name="Candollar">{{cite web
 |author      = [[Bank of Canada]]
 |work        = A History of the Canadian Dollar
 |title       = New France (ca. 1600–1770)
 |url         = http://www.bankofcanada.ca/wp-content/uploads/2010/07/1600-1770.pdf
 |publisher   = Bank of Canada
 |year        = 2010
 |accessdate  = February 12, 2014
 |deadurl     = no
 |archiveurl  = https://web.archive.org/web/20131002061441/http://www.bankofcanada.ca/wp-content/uploads/2010/07/1600-1770.pdf
 |archivedate = October 2, 2013
 |df          = mdy-all
}}</ref>

As the finances of the French government deteriorated because of European wars, it reduced its financial support for its colonies, so the colonial authorities in Canada relied more and more on card money. By 1757, the government had discontinued all payments in coin and payments were made in paper instead. In an application of [[Gresham’s Law]] – bad money drives out good – people [[hoarding|hoarded]] gold and silver, and used paper money instead. The costs of the [[Seven Years' War|war with the British]] led to [[hyperinflation|rapid inflation]] in New France. Following the [[Canada under British rule|British conquest]] in 1760, the paper money became almost worthless, but business did not come to a halt because gold and silver that had been hoarded came back into circulation. Under the [[Treaty of Paris (1763)]], the French government agreed to convert the outstanding card money into [[debenture]]s, but with the French government [[sovereign default|essentially bankrupt]], these bonds fell into default and by 1771 they were worthless.

The [[Royal Canadian Mint]] still issues Playing Card Money in commemoration of its history, but now in 92.5% silver form with gold plate on the edge. It therefore has an [[intrinsic value (numismatics)|intrinsic value]] which considerably exceeds its fiat value.<ref>{{cite web | url=http://www.mint.ca/store/coin/playing-card-money-set-prod220020#.UvvzS_ldV8F | title=Playing Card Money Set | publisher=Royal Canadian Mint | year=2014 | accessdate=July 6, 2016 | deadurl=no | archiveurl=https://web.archive.org/web/20160815194624/http://www.mint.ca/store/coin/playing-card-money-set-prod220020#.UvvzS_ldV8F | archivedate=August 15, 2016 | df=mdy-all }}</ref> The Bank of Canada and Canadian economists often use this early form of paper currency to illustrate the true nature of money for Canadians.<ref name="Candollar"/>

===18th and 19th century===
{| class="wikitable" style="{{float right}}"
|+Adoption of 'Gold Standard'
(Paper currency convertible into gold)<ref>{{cite web|url=http://www.news24.com/MyNews24/Rise-and-fall-of-the-Gold-Standard-20140530|title=Rise and fall of the Gold Standard|author=|date=|website=news24.com|accessdate=May 8, 2018|deadurl=no|archiveurl=https://web.archive.org/web/20170504121408/http://www.news24.com/MyNews24/Rise-and-fall-of-the-Gold-Standard-20140530|archivedate=May 4, 2017|df=mdy-all}}</ref>
!Country
!Year
|-
| [[United Kingdom of Great Britain and Ireland|United Kingdom]] || 1821
|-
| Germany || 1871
|-
| Sweden || 1873
|-
| [[United States]] ([[de facto]])|| 1873
|-
| [[French Third Republic|France]] || 1874
|-
| Belgium || 1874
|-
| Italy || 1874
|-
| Switzerland || 1874
|-
| Netherlands  || 1875
|-
| [[Austria-Hungary]] || 1892
|-
| [[Empire of Japan|Japan]] || 1897
|-
| Russia || 1898
|-
| [[United States]] ([[de jure]])|| 1900
|}

An early form of fiat currency in the [[Thirteen Colonies|American Colonies]] were "[[Bill of credit|bills of credit]]."<ref name="Michener2003">Michener, Ron (2003). "[http://eh.net/encyclopedia/money-in-the-american-colonies/ Money in the American Colonies] {{webarchive|url=https://web.archive.org/web/20150221072516/http://eh.net/encyclopedia/money-in-the-american-colonies/ |date=February 21, 2015 }}." EH.Net Encyclopedia, edited by Robert Whaples.</ref> Provincial governments produced notes which were fiat currency, with the promise to allow holders to pay taxes in those notes. The notes were issued to pay current obligations and could be called by levying taxes at a later time.<ref name="Michener2003"/>
Since the notes were denominated in the local unit of account, they were circulated from person to person in non-tax transactions. These types of notes were issued particularly in [[Pennsylvania]], [[Virginia]] and [[Massachusetts]]. Such money was sold at a discount of silver, which the government would then spend, and would expire at a fixed point in time later.<ref name="Michener2003"/>

Bills of credit have generated some controversy from their inception. Those who have wanted to highlight the dangers of inflation have focused on the colonies where the bills of credit depreciated most dramatically&nbsp;– New England and the Carolinas.<ref name="Michener2003"/> Those who have wanted to defend the use of bills of credit in the colonies have focused on the middle colonies, where inflation was practically nonexistent.<ref name="Michener2003"/>

Colonial powers consciously introduced fiat currencies backed by taxes, e.g. [[hut tax]]es or [[Tax per head|poll taxes]], to mobilise economic resources in their new possessions, at least as a transitional arrangement. The purpose of such taxes was later served by [[property tax]]. The repeated cycle of deflationary hard money, followed by inflationary paper money continued through much of the 18th and 19th centuries. Often nations would have dual currencies, with paper trading at some discount to [[Commodity money|specie]]-backed money.

Examples include the “[[Continental (currency)|Continental]]” issued by the [[U.S. Congress]] before the [[United States Constitution|Constitution]]; paper versus gold [[ducat]]s in [[Napoleon]]ic era [[Vienna]], where paper often traded at 100:1 against gold; the [[South Sea Bubble]], which produced bank notes not backed by sufficient reserves; and the [[Mississippi Company]] scheme of [[John Law (economist)|John Law]].

During the [[American Civil War]], the Federal Government issued [[United States Note]]s, a form of paper fiat currency popularly known as 'greenbacks'. Their issue was limited by Congress just slightly over $340 million. During the 1870s, withdrawal of the notes from circulation was opposed by the [[United States Greenback Party]]. It was termed as 'fiat money' in an 1878 party convention.<ref>{{cite news|title=Fiat Money|work=Chicago Daily Tribune|date=May 24, 1878}}</ref>

===20th century===
After [[World War I]], governments and banks generally still promised to convert notes and coins into their underlying nominal commodity (redemption in specie, typically gold) on demand. However, the costs of the war and the required repairs and economic growth based on government borrowing afterward made governments suspend redemption in specie. Some governments were careful of avoiding [[sovereign default]] but not wary of the consequences of paying debts by consigning newly printed cash which had no metal-backed standard to their creditors, which led to [[hyperinflation]]&nbsp;– for example [[Hyperinflation in the Weimar Republic|the hyperinflation in the Weimar Republic]].

From 1944 to 1971, the [[Bretton Woods system|Bretton Woods agreement]] fixed the value of 35 United States dollars to one [[troy ounce]] of gold.<ref name="Library of Congress">{{cite web|url=http://lcweb2.loc.gov/frd/cs/austria/at_glos.html|title="Bretton Woods" Federal Research Division Country Studies (Austria)|publisher=Library of Congress|deadurl=no|archiveurl=https://web.archive.org/web/20101202070528/http://lcweb2.loc.gov/frd/cs/austria/at_glos.html|archivedate=December 2, 2010|df=mdy-all}}</ref>  Other currencies were pegged to the U.S. dollar at fixed rates. The U.S. promised to redeem dollars in gold to other central banks. Trade imbalances were corrected by gold reserve exchanges or by loans from the [[International Monetary Fund]].

The Bretton Woods system collapsed in what became known as the [[Nixon Shock]].  This was a series of economic measures taken by United States President [[Richard Nixon]] in 1971, including unilaterally canceling the direct [[convertibility]] of the [[United States dollar]] to [[gold]].  Since then, a system of national fiat monies has been used globally, with freely floating exchange rates between the major currencies.<ref>
{{cite book
|title=Macroeconomics for Global Economies
|author=Jeffrey D. Sachs, Felipe Larrain
|date=1992
|quote=The Bretton Woods arrangement collapsed in 1971 when U.S. President Richard Nixon suspended the convertibility of the dollar into gold. Since then, the world has lived in a system of national fiat monies, with flexible exchange rates between the major currencies
|isbn=0745006086
|publisher=Prentice-Hall}}</ref>

==Money creation and regulation==
{{main|Money creation|Monetary policy}}
A [[central bank]] introduces new money into the economy by purchasing [[financial asset]]s or lending money to financial institutions. [[Commercial bank]]s then redeploy or repurpose this base money by credit creation through [[fractional reserve banking]], which expands the total supply of [[broad money]] (cash plus [[demand deposit]]s).{{citation needed|date=July 2014}}

In modern economies, relatively little of the supply of broad money is in physical currency. For example, in December 2010 in the U.S., of the $8,853.4 billion in broad money supply (M2), only $915.7 billion (about 10%) consisted of physical coins and paper money.<ref>{{cite web|url=http://www.federalreserve.gov/releases/h6/20110127/|title=FRB: H.6 Release--Money Stock and Debt Measures--January 27, 2011|author=|date=|website=www.federalreserve.gov|accessdate=May 8, 2018|deadurl=no|archiveurl=https://web.archive.org/web/20170710091626/https://www.federalreserve.gov/releases/h6/20110127/|archivedate=July 10, 2017|df=mdy-all}}</ref>  The manufacturing of new physical money is usually the responsibility of the central bank, or sometimes, the government's [[treasury]].

The [[Bank for International Settlements]], published a detailed review of payment system developments in the [[Group of Ten (economics)|G10 countries]] in 1985 in the first of a series that has become known as "red books". Currently the red books cover the participating countries on Committee on Payments and Market Infrastructures (CPMI).<ref>{{cite web|url=http://www.bis.org/cpmi/info.htm?m=3%7C16%7C29|title=About the CPMI|author=|date=February 2, 2016|website=www.bis.org|accessdate=May 8, 2018|deadurl=no|archiveurl=https://web.archive.org/web/20171004051401/https://www.bis.org/cpmi/info.htm?m=3%7C16%7C29|archivedate=October 4, 2017|df=mdy-all}}</ref> A red book summary of the value of banknotes and coins in circulation is shown in the table below where the local currency is converted to US dollars using the end of the year rates.<ref>{{cite web|url=http://www.bis.org/list/cpmi/tid_57/|title=CPMI - BIS - Red Book: CPMI countries|author=|date=|website=www.bis.org|accessdate=May 8, 2018|deadurl=no|archiveurl=https://web.archive.org/web/20171020070317/http://www.bis.org/list/cpmi/tid_57/|archivedate=October 20, 2017|df=mdy-all}}</ref> The value of this physical currency as a percentage of GDP ranges from a high of 19.4% in Japan to a low of 1.7% in Sweden with the overall average for all countries in the table being 8.9% (7.9% for the US).

{| style="text-align: center;" class="wikitable sortable" 
|+ style="text-align: left;" | Banknotes and coins in circulation (12/31/2015) 
|-
! Country
! Billions of dollars
! Per capita
|-
|United States	||$1,425||$4,433
|-
|[[Eurozone]]	||$1,210	||$3,571
|-
|Japan	||$857	||$6,739
|-
|India	||$251	||$195
|-
|Russia	||$117	||$799
|-
|United Kingdom	||$103	||$1,583
|-
|Switzerland	||$76	||$9,213
|-
|Korea	||$74	||$1,460
|-
|Mexico	||$72	||$599
|-
|Canada	||$59	||$1,641
|-
|Brazil	||$58	||$282
|-
|Australia	||$55	||$2,320
|-
|Saudi Arabia	||$53	||$1,708
|-
|Hong Kong SAR	||$48	||$6,550
|-
|Turkey	||$36	||$458
|-
|Singapore	||$27	||$4,911
|-
|Sweden	||$9	||$872
|-
|South Africa	||$6	||$113
|-
!'''Total/Average'''	!!$4,536	!!$1,558
|}

The most notable currency not included in this table is the Chinese [[Yuan (currency)|yuan]], for which the statistics are listed as "not available".

==Inflation==
{{main|Inflation}}
The adoption of fiat currency by many countries, from the 18th century onwards, made much larger variations in the supply of money possible. Since then, huge increases in the supply of [[paper money]] have taken place in a number of countries, producing [[hyperinflation]]s – episodes of extreme inflation rates much higher than those observed in earlier periods of [[commodity money]]. The [[hyperinflation in the Weimar Republic]] of Germany is a notable example.

Economists generally believe that high rates of inflation and [[hyperinflation]] are caused by an excessive growth of the [[money supply]].<ref>Robert Barro and Vittorio Grilli (1994), ''European Macroeconomics'', Ch. 8, p. 139, Fig. 8.1. Macmillan, {{ISBN|0-333-57764-7}}.</ref> Today, most economists favor a low and steady rate of inflation.<ref name="econjournalwatch.org">Hummel, Jeffrey Rogers. "Death and Taxes, Including Inflation: the Public versus Economists" (January 2007). {{cite web |url=http://econjwatch.org/articles/death-and-taxes-including-inflation-the-public-versus-economists |title=Archived copy |accessdate=2014-03-30 |deadurl=no |archiveurl=https://web.archive.org/web/20131225042059/http://econjwatch.org/articles/death-and-taxes-including-inflation-the-public-versus-economists |archivedate=December 25, 2013 |df=mdy-all }} p. 56</ref> Low (as opposed to zero or [[Deflation|negative]]) inflation reduces the severity of economic [[recessions]] by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a [[liquidity trap]] prevents [[monetary policy]] from stabilizing the economy.<ref>"[http://www.aeaweb.org/articles.php?doi=10.1257/089533003772034934 Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others] {{webarchive|url=https://web.archive.org/web/20140226234952/http://www.aeaweb.org/articles.php?doi=10.1257%2F089533003772034934 |date=February 26, 2014 }}" Lars E.O.  Svensson, ''Journal of Economic Perspectives'', Volume 17, Issue 4 Fall 2003, pp. 145–66</ref> However, money supply growth does not always cause nominal price increases. Money supply growth may instead lead to stable prices at a time in which they would otherwise be falling. Some economists maintain that under the conditions of a [[liquidity trap]], large monetary injections are like "pushing on a string."<ref>{{cite web | author = [[John Makin]] | publisher = [[American Enterprise Institute|AEI]] | title = Bernanke Battles U.S. Deflation Threat | date = November 2010 | url = http://67.208.89.102/files/2010/11/01/11-Nov-2010-EO-g.pdf | deadurl = yes | archiveurl = https://www.webcitation.org/6M1re5gZu?url=http://67.208.89.102/files/2010/11/01/11-Nov-2010-EO-g.pdf | archivedate = December 21, 2013 | df = mdy-all }}</ref><ref>{{cite web | author1 = [[Paul Krugman]] | author2 = [[Gauti Eggertsson]] | title = Debt, Deleveraging, and the liquidity trap: A Fisher‐Minsky‐Koo approach | url = http://www.frbsf.org/economic-research/conferences/1102/eggertsson.pdf | deadurl = no | archiveurl = https://web.archive.org/web/20131217041416/http://www.frbsf.org/economic-research/conferences/1102/eggertsson.pdf | archivedate = December 17, 2013 | df = mdy-all }}</ref>

The task of keeping the rate of inflation low and stable is usually given to [[monetary authority|monetary authorities]]. Generally, these monetary authorities are the [[central bank]]s that control monetary policy through the setting of [[interest rate]]s, through [[open market operation]]s, and through the setting of banking [[reserve requirements]].<ref name=Taylor>{{Cite book |last = Taylor |first=Timothy |title=Principles of Economics |publisher=Freeload Press |publication-date=2008 |isbn=1-930789-05-X}}</ref>

==Loss of backing==
A fiat-money currency greatly loses its value should the issuing government or [[central bank]] either lose the ability to, or refuse to, further guarantee its value. The usual consequence is [[hyperinflation]]. Some examples where this has occurred are the [[Zimbabwean dollar]], [[Hyperinflation#China|China in 1945]] and the [[Hyperinflation in the Weimar Republic|mark in the Weimar Republic in 1923]].

But this need not necessarily occur; for example, the [[Iraqi Swiss dinar|so-called Swiss dinar]] continued to retain value in [[Kurdistan Regional Government|Kurdish Iraq]] even after its legal tender status was withdrawn by the Iraqi central government which issued the notes.<ref name="Foote">{{Cite journal |last=Foote |first=Christopher |last2=Block |first2=William |last3=Crane |first3=Keith |lastauthoramp=yes |last4=Gray |first4=Simon |title=Economic Policy and Prospects in Iraq |journal=The Journal of Economic Perspectives |volume=18 |issue=3 |pages=47–70 |year=2004 |doi=10.1257/0895330042162395 |postscript=. |url=https://www.econstor.eu/bitstream/10419/23447/1/ppdp0401.pdf }}.</ref><ref>{{cite web|author=Budget and Finance |title=Iraq Currency Exchange |url=http://www.cpa-iraq.org/budget/IraqCurrencyExchange.html |publisher=The Coalition Provisional Authority |date=2003 |deadurl=yes |archiveurl=https://web.archive.org/web/20070515093736/http://www.cpa-iraq.org/budget/IraqCurrencyExchange.html |archivedate=May 15, 2007 |df=mdy }}</ref>

==See also==
{{Portal|Economics|Numismatics|Money}}
* [[Criticism of the Federal Reserve]]
* [[Debasement]]
* [[Fractional-reserve banking]]
* [[Hard currency]]
* [[Money creation]]
* [[Money supply]]
* [[Network effect]]
* [[Seigniorage]]
* [[Silver coin]]
* [[Silver standard]]

==Notes==
{{reflist|group=note}}

==References==
{{Reflist|colwidth=30em}}

{{Authority control}}

{{DEFAULTSORT:Fiat Money}}
[[Category:Currency]]
[[Category:Monetary reform]]
[[Category:Numismatics]]