For Americans of my generation, Fiat may be remembered as meaning "Fix It Again Tony."
But… Fiat is Money.
Fiat money originated in 11th century China. Its use became widespread during the Yuan and Ming dynasties.
The Chinese Song Dynasty was the first to issue paper money – Jiaozi (pictured above) – around the 10th century AD. This is believed to be the world’s first paper currency.
Although the notes were valued at a certain exchange rate based on the equal value of gold, silver, or silk, an actual conversion was never allowed in practice.
The banknotes were initially redeemed after three years' service and 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 then made several attempts to support the paper money by demanding taxes, partly in currency and via other laws, but the damage had been done and the Jiaozi fell out of favor.
The successive Yuan Dynasty was the first dynasty in China to use paper currency as the predominant circulating medium. Kublai Khan, the founder of the Yuan Dynasty, issued paper money known as Chao during his reign. These original notes issued during the Yuan Dynasty were restricted in area and duration, as in the Song Dynasty described above.
Fiat money can be defined as either of:
- Money declared by a government to be legal tender. And, legal tender can furthermore be defined as a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation.
- Fiat money can also be defined as state-issued money, which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.
- Finally, fiat money may be money without any intrinsic value. In economic terms, the intrinsic theory of value (or theory of objective value) is any theory of value that holds that the value of an object, good or service, is intrinsic, i.e. contained in the item itself.
Note that Bitcoin does not generally match these broad definitions of fiat money as legal tender. However, Bitcoin does have intrinsic value that is mostly based on supply and demand generated by people trading Bitcoin.
The original term was derived from the Latin word Fiat (which means, loosely translated, "let it become", "let it be done", or "it shall be").
Originally, gold- or silver-backed money entailed a legal requirement for the issuing bank to be able to redeem it in fixed weights of gold or silver. Today, fiat money's value is unrelated to the value of any physical quantity.
For example, coins containing valuable metals are considered to be fiat currency based on its face value as defined by law, which may be different from its market value, as metal. In 1971 U.S. President Nixon ended the direct convertibility of the United States Dollar, to gold. Since then, all reserve currencies have been fiat currencies, including the U.S. dollar and the Euro.
Oh yeah... and Tony doesn't have to fix it again anymore. Fiat S.p.A. not only makes some awesome cars nowadays, but also owns American Chrysler Group LLC.