Fiat money

Fiduciary currencies — from the Latin fiducia, "trust" — are what we know as "real money": the real, the dollar, the euro, the pound. In English they are usually called fiat money, from fiat, "let it be done": the currency is worth something by decision of the authority that issues it. They are not convertible into metal, and their value does not come from the material: paper and printing are worth a fraction of what is printed on the note.

In Brazil, the real has been the unit of the National Monetary System since July 1, 1994, and it is legal tender throughout the country [16]. Refusing to accept legal tender at its face value is a criminal misdemeanor [17].

The value of fiat money comes from trust in whoever issues it and from the legal requirement to accept it. You accept reais today because you know someone will accept reais tomorrow.

Features of fiat currencies

When money is physical (banknotes and coins), it has other properties as well: it belongs to whoever holds it, needs no intermediaries to pay, circulates without recording the payer's name and, once handed over, cannot be reversed.

The three functions of money

Economists usually describe money by three functions [22]:

1. Medium of exchange — simplifies transactions
2. Unit of account — provides a common measure for prices and debts
3. Store of value — lets purchasing power be carried from the present into the future

Fiat money performs the first two well. The third is the most debated: with inflation, idle money loses purchasing power, which is why critics of the system advocate scarce assets or assets with a use value of their own.

An analogy helps: Monopoly money is worth something inside the game because all the players accept the rules. If the bank issued too many notes relative to what there is to buy, prices would rise — that is inflation, which erodes the value held by anyone who keeps money idle.