Fiat dollars refer to dollars that do not possess any sort of intrinsic value. They are not backed up by gold or any other tangible asset, only by the full faith and trust in the United States government. Since the United States abandoned the venerable and stable gold standard back in 1971, the U.S. currency has been one of only fiat dollars.
Fiat actually refers to the Latin for “let it be done.” Dollars that are fiat dollars are valued based on the decree of the government. They are not redeemable for anything else.
Until 1971, the dollar proved to be convertible into a certain set quantity of gold. This had been the case along with all other major currencies around the world for nearly two hundred years. Gold backed dollars and other currency proved to be extremely stable and constantly valued for huge spans of time stretching from forty to sixty years before some turbulence like the Civil War would impact their value for a few years. This resulted in part from governments only being able to print as many dollars and other currency as they had gold.
Since the U.S. currency became one of fiat dollars, its stability has vanished, along with its former constant value. One ounce of gold only represented $38.90 valued U.S. dollars at the end of 1970. Today the same ounce of gold equates to $1,350. Another way of putting this is that one 1970 gold backed dollar is equal to nearly $35 fiat dollars in 2010. You might also say that the Fiat dollar has declined by more than ninety-seven percent in the time span of almost forty years since it began its life as a Fiat dollar.
This says several important things about Fiat dollars. They are at the mercy of the international markets, since they are not backed up by any tangible value. They are also able to be printed or electronically multiplied in infinite quantities, since they are not restricted by a given fixed amount of gold. It also means that they are unstable in their values and can collapse fairly easily and quickly, since their real worth is only one of perceived value as determined by the confidence of buyers and sellers.
Fiat dollars are not the only currency that has been decoupled from real valued backing like gold. Euros, Japanese Yen, British Pounds, and practically all major currencies of the world are similarly only based on the faith and trust of their respective governments. The only currency among the major developed economies that might be considered to be non fiat is the Swiss Franc.
The Swiss constitution requires that the government holds a full quarter of the number of Swiss Francs in existence in gold in their vaults. This would give them a twenty-five percent gold backing to their currency. The truth is that since the Swiss value their gold reserves at $250 per ounce, and gold is trading consistently well over $1,200 per ounce to even $1,350 per ounce, at over five times the Swiss value of their gold, this means that they actually have their currency covered by in excess of one hundred percent of actual valued gold holdings, since five times their twenty-five percent gold reserve amounts to one hundred and twenty-five percent.