Governments usually issue or print money that was either backed by an actual asset, such as gold or silver, or that could be exchanged for an equivalent amount of that value, which led to the development of fiat money. But as time passed, it became next to impossible for governments to maintain sufficient reserves of precious metals to support every coin and piece of paper money, and so-called fiat currencies proliferated.
For instance, the United States’ present fiat money system was established during the 20th century when several nations abandoned the gold standard, in which currencies were inextricably linked to gold. Government policy and foreign exchange markets determine Fiat money’s value because it cannot be exchanged for an underlying asset.
Currently, there are about 180 fiat currencies in use worldwide. The forces of supply and demand determine the value of fiat currencies. A fiat currency’s credibility depends on the stability of the government that issues it and the central bank that controls its supply.
