What Is Fiat Money? Definition, Legal Tender and Where Its Value Comes From

Fiat money is currency that a government issues and that cannot be exchanged for gold or any other asset. In the Bank of England's words, "Fiat money is not convertible to gold or any other asset." Its value rests on law and on "public trust in the government and its management of the economy." The US dollar, the euro and the pound sterling are all fiat currencies. Most of this money is not cash at all. In the UK, the Bank of England puts bank deposits at about 96% of money and notes and coins at about 4%.

What "fiat" means

Fiat is a Latin word, the third-person singular present subjunctive of fieri, "to be done." Dictionaries render it as "let it be done." In English it has meant an authoritative order or decree since the 1600s. Fiat money is money by decree: it is worth something because an authority issues it and people accept it, not because it can be swapped for a metal.

Where its value comes from

Commodity money, or money convertible into a commodity, takes some of its value from that commodity. Fiat money has nothing like that. Three things hold it up:

• Law. Governments make their currency legal tender and accept it for taxes.
• Trust. People accept it because they expect others to accept it later, at a broadly predictable value.
• Supply management. A central bank steers how much money exists and what it costs, mainly through interest rates.

If trust in the issuer or its management of the money collapses, the currency's value can collapse with it. That is the central weakness of a fiat system.

Legal tender is narrower than most people think

Legal tender is a legal status, and it mostly concerns settling debts. Its exact rules differ from country to country, as the three cases below show.

United States

Under 31 U.S.C. § 5103, US coins and currency, including Federal Reserve notes, are "legal tender for all debts, public charges, taxes, and dues." The Federal Reserve adds that "there is no federal statute mandating that a private business, a person, or an organization must accept currency or coins" for goods or services. A shop can refuse cash unless a state law says otherwise.

United Kingdom

The Bank of England says legal tender matters when you offer to pay a debt in full. If you do, you cannot be successfully sued for non-payment, unless a contract specifies another way to pay. "A shop owner can choose what to accept." What counts as legal tender also varies by region. In England and Wales it is Royal Mint coins and Bank of England notes. In Scotland and Northern Ireland only Royal Mint coins qualify. Cards, cheques and contactless payments are not legal tender anywhere in the UK.

Euro area

Article 128 of the Treaty on the Functioning of the European Union makes banknotes issued by the European Central Bank and the national central banks "the only such notes to have the status of legal tender within the Union." The legal tender status of euro coins comes from Regulation (EC) No 974/98. On 26 January 2021, in Joined Cases C-422/19 and C-423/19, the Court of Justice of the EU ruled that legal tender means acceptance in principle, not absolute acceptance. Member states may allow limited exceptions to accepting cash. A 2023 Commission proposal (COM(2023) 364) would write mandatory acceptance at full face value into a binding regulation. A Council document dated 17 December 2025 still listed it as a draft.

Most fiat money is created by commercial banks

Notes and coins are only a small part of the money supply. The Bank of England's Quarterly Bulletin of 14 March 2014 says "the majority of money in the modern economy is created by commercial banks making loans." When a bank makes a loan, it creates a matching deposit. Banks do not simply lend out savers' deposits. Bank lending is still not unlimited. The same article says the total amount of money ultimately depends on the central bank's monetary policy, which is usually set through interest rates.

How the world moved to fiat money

• 1931, United Kingdom. The Bank of England says the link between its banknotes and gold "ended in 1931."
• 15 August 1971, United States. President Nixon closed the "gold window." Foreign governments could no longer exchange dollars for gold. Federal Reserve History says this in effect made the international monetary system fiat. The same announcement brought a 90-day freeze on wages and prices and a 10% import surcharge.
• 1973. IMF history describes the Bretton Woods system of fixed exchange rates as breaking down in stages between 1968 and 1973.
• April 1978. The Second Amendment to the IMF's Articles of Agreement came into force. It removed gold's role in the monetary system and let member countries choose their own exchange arrangements, other than pegging to gold.

The main risk: losing purchasing power

Fiat money is designed to lose value slowly. The US Federal Open Market Committee targets inflation of 2% a year over the longer run, measured by the price index for personal consumption expenditures. The UK government sets the Bank of England an inflation target of 2%, measured by the Consumer Prices Index. Even when inflation stays on target, prices roughly double in about 35 years (1.02^35 ≈ 2). Cash or a bank balance that earns no interest buys about half as much over that period. If an issuer loses control of the money supply, or loses public trust, inflation can run far above target.

Fiat money compared with commodity money and crypto

Central bank digital currencies are a digital form of fiat money issued by the central bank. For the mechanics, see how digital central bank money works.