fiat money

fiat money , inconvertible money that is made legal tender by the decree, or fiat, of the government but that is not covered by a specie reserve. It is commonly understood to be of paper, although it may also consist of overvalued metal coins. The circulation of fiat money may lead to inflation, whereas money redeemable in gold or other securities is held much less likely to do so. Under conditions of proper monetary management, however, fiat paper money can be a stable currency. In fact, contemporary American money is essentially fiat money. All Federal Reserve notes and most circulating coins are money because the government says they are, not because they are backed by precious metals. Earlier, less stable examples of fiat paper money were the continentals issued by the American government during the Revolutionary War, the assignats issued during the French Revolution, and the greenbacks issued by the U.S. government during the Civil War. Most such issues were accompanied by severe price rises.

Bibliography: See W. C. Mitchell, History of the Greenbacks (1903, repr. 1960); F. Reinfeld, Story of Paper Money (rev. ed. 1960).