Fiat currencies

In a recent conversation I had along with some old and new friends, a question came up about what is Fiat (referring to the type of currency; though some certainly thought we were talking about cars)? And a few of us had thought of Singapore dollars as fiat money but our friend’s Dad who was in the conversation disagreed.

And it was his attack on our economics credentials that got me thinking about it and came to understand his perspective. The very key element of fiat money is that they are inconvertible into anything else by the issuing authority. Fiat is a word from latin (“let it be done”) basically implies “by decree”. And the thing is, Singapore dollar is technically backed by a basket of currencies, which means that it is supposed to be “convertible” per se though it isn’t since the actual composition of the basket of currencies is not disclosed.

Nevertheless, that basket of currencies probably are all fiat or at best backed by other fiat currencies. So to say Singapore dollars is not fiat seems be ‘turtles all the way down’ kind of argument. Nevertheless, these are just semantics. I think what is important is to recognise then that the so-called “intrinsic” value of fiat has to do with confidence in the economy and government/central bank of that country.

Thinking through these is probably very important at a point of time when the concept of money is being challenged by cryptocurrencies and all. Something I never had thought would happen in my lifetime.