Fiat Money
Fiat money refers to money that is not backed by reserves of another commodity. The money itself is given value by government fiat (Latin for "let it be done") or decree, enforcing legal tender laws, previously known as "forced tender", whereby debtors are legally relieved of the debt if they (offer to) pay it off in the government's money.
By law the refusal of "legal tender" money in favour of some other form of payment is illegal, and has at times in history (Rome under Diocletian, and post-revolutionary France during the collapse of the assignats) invoked the death penalty.
Governments through history have often switched to forms of fiat money in times of need such as war, sometimes by suspending the service they provided of exchanging their money for gold, and other times by simply printing the money that they needed (eg. Germany of World War 1). When governments produce money more rapidly than economic growth, the money supply overtakes economic value. Therefore, the excess money eventually dilutes the market value of all money issued. This is called Inflation.
In 1971 the US finally switched to fiat money indefinitely. At this point in time many of the economically developed countries' currencies were fixed to the US dollar (Bretton Woods Conference), and so this single step meant that much of the western world's currencies became fiat money based.
As stated by leaders of the OECD as presented in their 2001 “Forum for the Future“ conference held in Luxembourg, today, trust has shifted from a belief in the convertible value of money “toward the critical acceptance of the institutional capacity of controlling the flows of money.” OECD. (2002)., The Future of Money. Organisation for Economic Co-operation and Development, OECD Publications Service. p.44.
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