We can think of fiat money as a money that is proportional to the value of the state, rather than a money that is printed in the literal meaning of goods or physically. This money is completely legal. In other words, the state creates the value of this money. If the state that created the fiat money is strong, the money is also strong. If the state is weak, the value of the fiat currency is also low.
Many countries in the world use this currency to purchase services and products instead of physical money. In fact, in recent years, we can say that it is a system that shows the value of the state's national currency for nominal money. In other words, nominal money has taken the place of commodities and gold, which have shown the value of states for centuries.
How Did Fiat Money Come Up?
Gold determines the paper money a government can print. In other words, the more gold the state has in its coffers, the more paper money the state can issue. Putting more money on the market than gold causes the economy to deteriorate. We can call this a commodity-based monetary system. In other words, as we have seen, in the classical state system, money and gold are considered together.
So, what is the difference between fiat money and this system? In fiat monetary systems, states are more effective and controlled over monetary systems. According to those who defend the old gold foundation, the gold system seems to be more stable. According to those who support fiat money, on the contrary, gold is an unstable system.
Pros of Fiat Money
The cost of fiat money is less than the old system. When economic crises occur, it allows the state to act more than the other system. This currency is inexpensive, as it does not need to be stored or tracked. However, since these currencies can be created from scratch, they can cause high inflation.