Fiat money facts for kids

Yuan dynasty banknotes are the earliest known fiat money.

Fiat money is a special kind of money, like the paper bills and coins you use every day. It's different because its value doesn't come from a precious metal like gold or silver. Instead, its value comes from two main things:

• A government says it's legal to use for buying and selling things.
• People who use it trust that it has value and will be accepted by others.

This means that a US dollar bill, for example, is worth something because the U.S. government says it is, and because people believe they can use it to buy goods and services.

How is Fiat Money Different?

Fiat money is not the only type of money that has been used throughout history. It is different from two other main types:

• Commodity money: This type of money gets its value from the material it's made of. A good example is gold or silver coins. The metal itself is valuable and can be used for other things. People wanted gold because it was rare and useful.
• Representative money: This is like a promise to give you a commodity. Imagine you have a paper note that says it can be exchanged for a certain amount of gold kept in a bank. The paper itself isn't valuable, but it represents something valuable.

Fiat money is different because it's not backed by a physical commodity like gold. Its value comes from trust and government rules.

Why Do We Use Fiat Money?

One big reason governments like fiat money is that they can control how much of it is in circulation. With commodity money, like gold, the amount of money depends on how much gold can be found. With fiat money, a government can print more money if needed, or reduce the amount.

Some people worry that if a government can just print more money, it might lead to something called inflation. Inflation means that prices for goods and services go up, and your money buys less than it used to. However, governments and central banks try to manage the amount of money carefully to keep prices stable.

What Do Some Economists Think?

Some economists, who are experts in how money and economies work, have different ideas about fiat money.

For example, Alan Greenspan, who used to be in charge of the U.S. central bank, was once worried about fiat money. He believed that the value of money should be connected to something real, like gold. He thought that when governments spend more money than they collect in taxes (this is called "deficit spending"), it could make people's savings worth less.

Other economists believe that an economy grows best when it produces more goods and services, rather than just borrowing or printing more money. They think it's important for countries to make things themselves instead of always buying from other countries using borrowed money.

Images for kids

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  Song Dynasty Jiaozi, the world's earliest paper money.

See also

In Spanish: Dinero por decreto para niños