How a fiat currency works

A fiat currency is a monetary system where the medium of exchange has no intrinsic value. Fiat money is backed solely by the authority of a governing body and the trust of the public. Since it is not backed by something with intrinsic value like gold or silver, it is instead representing existing and new value created in the economy. A fiat currency is much more elastic than a gold or silver backed monetary system because all it takes to satisfy an economy with unlimited demand is to create new issues of currency. However, as soon as money is created, it is accompanied by inflation because it dilutes the value of existing currency in circulation. This goes the same for the destruction of money as this adds more value to the surviving currency in circulation. For a fiat currency to work, it needs the trust of everybody using it. It is done by various regulations that governments can enforce in order to regain value or build trust to its currency.

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