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Fiat Currency: What it is And How it Works

"Fiat" means "let it be so" in Latin language.

The first fiat currency was created in China in the 11th century during the Ming and Yuan dynasties. It refers to money declared by a government as a legal tender, while at the same time it's not convertible to any other value.

Fiat currency has no intrinsic value, therefore no backing in gold, silver or any other objective value.

The US dollar is fiat currency and so is the euro and the British pound. Although, in the past the US dollar was indeed backed by gold reserves held at Fort Knox. In 1971, President Richard Nixon took the dollar off the gold standard. This means that the US dollar is no longer backed by gold, as it was until then... Thus, the American currency is more vulnerable to market and economy shocks. It is prone to inflation.

Today, the US dollar is still the reserve currency of the World and the euro is the second most wide-spread reserve currency.

Fiat money is rather unstable, it is more prone to devaluation. This could happen, for instance through inflation, but also through debasement.

The best hedge against inflation threatening fiat money are precious metals, for instance gold, silver, potentially platinum or others.

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