How Does Fiat Money Work
A story-based beginner’s introduction to fiat money!
When it comes to transactions of value, fiat money is the norm in today’s world. But it was not always like this. In fact, humanity’s collective transition to fiat money happened relatively recently.
Why was fiat money not the norm in the past? And why is it the norm today? To begin answering these questions, one needs to understand how fiat money works, and how it historically came to be.
In this essay, I will try to construct a story-based beginner’s framework for the notion of fiat money. But before I proceed, let me quote Investopedia’s definition of fiat money:
“Fiat money is a government-issued currency that is not backed by a commodity such as gold.”
— Investopedia
If that is all there is to fiat money, why should I bother writing an essay about it? Well, as often is the case with abstract concepts, the simplicity of fiat money turns out to be surprisingly deceptive. In short, there is more than what meets the eye here.
We will eventually uncover what is hiding underneath. But for now, let us begin with a fundamental underlying concept.
