Fiat standard refers to a monetary system in which the face value of the monetary unit is very much higher than that of the value material used as money.
Such monetary units is termed as.
Which may be made of paper or any other material.
However, as is generally observed in countries where fiat money circulates, it is generally made of paper credit money which, however, could not be redeemed by the government which issued it even after a considerable lapse of time.
Second, because paper is thought of as one of the cheapest, if not the cheapest, materials available.
Certain essential characteristics of a fiat standard may be enumerated.
They are as following: (1.
) A unit of fiat money is adopted as the standard unit of value.
(2.
) The standard fiat money is made full legal tender.
(3.
) All credit money issued by the government and the central bank as well as all other legal tender money are redeemable or exchangeable in the standard fiat money.
There are two important consideration to observe in testing whether money is fiat or not.
First, the value of the money is very much higher than the value of the material used as money.
Second, the money does not represent a promise to pay some other forms of money.
Now, it may asked: If fiat money has no intrinsic value, why does the public accept it? The reason for the public's acceptance of fiat money are because it possesses legal tender power and, moreover, because it performs the function of a medium of exchange or as a means of payment.