What is a “fiat” currency? Are there other types of currency?
"A ""fiat"" currency is non-convertible paper currency that a government establishes as legal tender. Most countries today are using fiat currencies. The rest have currencies pegged (or convertible to) US Dollars (which is a fiat currency). In the past, money was usually based on precious metals such as gold or silver. Until the end of the gold standard, you could theoretically go the the US Treasury with a US Note or Federal Reserve Note and convert the note into a fixed quantity of gold or silver (depending on the note). The US had a bi-metallic currency policy for political reasons, which means that money was backed by both gold and silver." In short. A fiat currency is money that has value only because (usually) a government says it does.  A counter example (non-fiat currency) is a gold coin that has intrinsic value usually because it is made of valuable materials that people would trade goods/services. That is the value comes from what you are holding more than what it represents. "fiat in Latin means ""let it be"" or ""let it happen"" - as in ""fiat lux!"" meaning ""let there be light!"". Thus, fiat money means money that are created by the government decree - they would be random worthless pieces of paper otherwise, so the government says ""let this paper be worth $100"" and it becomes $100. Non-fiat money have some value that is beyond declaration - e.g., gold coin has the value of gold that is made of. Since 1971, almost all world currencies are fiat money." There's two types of categories at play that define currency types - but I think the first is more like what you are after.  The first is there are essentially three currency types now recognised - see them described here: http://finance.mapsofworld.com/money/types/ The second is currencies can be categorised by the type of economy from which they are generated (reserve/commodity/etc) - see them described here: http://www.forextraders.com/learn-forex-trading-course/major-currency-pairs.html
"I think the important fact here is that all of our currencies are Fiat Currencies. So currency technically means nothing, because (as you mentioned) the country could print more any time it wants. Now what makes it useful is the combination of two big things: So I would say, we know they owe us 100 ""dollars"", and the dollar is just a word we use to represent value. It is not technically worth anything, beyond the fact that the government controls the amount of that currency in circulation and you trust that people still want more of that currency." First, realize that Wikipedia is written by individuals, just like this board has thousands of members. The two definition were written and edited by different people, most likely.  Think Venn diagram.  The definition for financial instruments claims that it's the larger set, and securities is contained in a subset.  Comparing the two, it seems pretty consistent.  Yes, Securities include derivatives.  Transferable is close to tradable, although to me tradable implies a market as compared to private transfers.  I don't believe there's an opposite, per se, but there's 'other stuff.' My house has value, but is not a security. My coffee cup has no value. Back to the concept of Venn. There aren't really opposites, just items falling outside the set we're discussing.  I'd caution, this is a semantic exercise. If you know what you're buying, a stock, a bond, a gold bar, etc, whether it's a financial instrument or security doesn't matter to you. "Correct!  But this is only true when a central bank is involved.  So if there's a single institution that has a territorial monopoly on the production of money (and competing currencies aren't allowed via ""legal tender laws""), then the debt-based money system OP describes isn't actually the system being used.  That's the problem with his post:  he's trying to make it seem like our current system of fiat currencies is somehow natural or emergent.  It's not.  What we have now is the result of a legal monopoly." "No money is gone.  The movement of the existing currency has slowed down.  Currency moves through the economy through deposits or loans to banks, and withdrawal from banks as proceeds from loans or return of deposits.  When a bank makes a loan they provide a balance in a bank account, which isn't converted to hard currency until withdrawn.  So those bank loans essentially count as currency, and thus effectively multiply the stock of currency available.  Deposits into money market funds, and those funds loans into the commercial paper markets, have the same effect.  Banks and money funds are now making fewer loans.  In particular they are not funding ""companies"" that invested in securitizations of home mortgages and credit card receivables, but they are also lending less to businesses and consumers.  Because they are lending less they are ""effectively multiplying"" the currency less.   Think of deposited and lent currency as spare cycles on a desktop computer.  You let your computer help decipher the genome when you aren't using it yourself.  If you somehow feared that you would lose those cycles, slowing down your own computing, you would be less likely to lend those cycles out.  There would still be the same number of computing cycles in the world, but the stock of those available for actual computing would appear to be diminished.  The technical term for this concept is ""monetary velocity"" and it is a crucial factor in determing the level of overall economic activity, banking stability, and inflation." I asked a followup question on the Islam site. The issue with Islam seems to be that exchanging money for other money is 'riba' (roughly speaking usury). There are different opinions, but it seems that in general exchanging money for 'something else' is fine, but exchanging money for other money is forbidden. The physicality of either the things or the money is not relevant (though again, opinions may differ). It's allowed to buy a piece of software for download, even though nothing physical is ever bought. Speculating on currency is therefore forbidden, and that's true whether or not a pile of banknotes gets moved around at any point. But that's my interpretation of what was said on the Islam site. I'm sure they would answer more detailed questions. The fiat currency is the basis for currency markets - that is, currency that is not made of precious metals.   The factors that influence what the value of a fiat currency are the state of the country's economy, what the gov't says the value should be, their fiscal policies, as well as what the currency is trading at.   And what the currency is trading at is a product of these factors as well as the typical factors which would affect any stock trading.  eHow has a great outline, here, which describes them. "Keep in mind that not every currency is ""tradeable"", i.e.: convertible.  In fact, neither the Brazilian nor the Thai currencies are fully convertible, and the trading with them may be limited. There are 17 fully convertible currencies currently in the word, you can find the list here." Echoing JohnF, and assuming you mean the physical, rather than abstract meaning of money?  The abstract concept obviously isn't replaced (unless the currency is discredited, or like the creation of the Euro which saw local currencies abandoned). The actual bits of paper are regularly collected, shredded (into itty-bitty-bits) and destroyed.  Coinage tends to last a lot longer, but it also collected and melted down eventually. Depends on the country, though.  No doubt, many people who took a gap year to go travelling in points diverse came across countries where the money is a sort of brown-grey smudge you hold with care in thick wadges. The more modern economies replace paper money on a dedicated cycle (around three years according to Wikipedia, anyway). AFAIK money is a fiat currency. The penny is only worth what the US government says it it worth. If I choose to have my coin material made into pennies then I face an opportunity cost because I could of used that copper elsewhere. If a penny worth of copper is worth 1.8 cents and I choose to make it into a a coin with a value of 1 cent then my opportunity cost is .8 cents.  The whole point of a fiat currency is to take the actual material value of the money out of the equation. A gold coin back before fiat currencies was worth its weight in gold. This would be like saying that you are going to nominally change the value of your gold coin into a coin worth half of its weight. Its weight(value) is equal to 1 gold coin but its spending power is equal to 1/2 a gold coin.  Do you lose value? Of course not. Do you lose spending power? YES Fiat currency is all about spending power, the value is fictional.   When I make the spending power less than the value the purpose of a fiat currency breaks down. "You say you want a more ""stable"" system. Recall from your introductory economics courses that money has three roles: a medium of exchange (here is $, give me goods), a unit of account (you owe me $; the business made $ last year), and a store of value (I have saved $ for the future!). I assume that you are mostly concerned with the store-of-value role being eroded due to inflation. But first consider that most people still want regular currency, so as a medium of exchange or accounting unit anything would face an uphill battle. If you discard that role for your currency, and only want to store value with it, you could just buy equities and commodities and baskets of currencies and debt in a brokerage account (possibly using mutual funds) to store your value. Trillions of dollars' worth of business takes place this way every year already. Virtual currency was a bit of a dot-com bubble thing. The systems which didn't go completely bust and are still around have been beset by money-laundering, and otherwise remain largely an ignored niche. An online fiat currency has the same basic problem that another currency has. You need to trust the central bank not to create more money and cause inflation (or even just abscond with the funds... or go bankrupt / get sued). Perhaps the Federal Reserve may be jerking us around on that front right now.... they're still a lot more believable than a small private institution. Some banks might possibly be trustworthy enough to launch a currency, but it's hard to see why they'd bother (it can't be a big profit center, because people aren't willing to pay too much to just use money.) And an online currency that's backed by commodities (e.g. gold) is going to be subject to potentially violent swings in the prices of commodities. Imagine getting a loan out for your house, denominated in terms of e-gold, and then the price of gold triples. Ouch?" "Forex. I will employ my skill for ""suspension of disbelief"" and answer with no visceral reaction to Bitcoin itself. The Euro is not an 'investment.' It's a currency. People trade currencies in order to capture relative movements between pairs of currencies. Unlike stocks, that have an underlying business and potential for growth (or failure, of course) a currency trade is a zero sum game, two people on opposite sides of a bet.  Bitcoin has no underlying asset either, no stock, no commodity. It trades, de facto, like a currency, and for purposes of objective classification, it would be considered a currency, and held similar to any Forex position." "The benefit of having gold to trade is that there is almost always someone that will take gold when the fiat currency is in trouble.    The potential downfall of doing this is that when people think the fiat currency is in trouble, they tend to buy up gold, thus driving up the price.  This means that you get less gold for each hour of work you perform (deer-haunch, basket of apples, etc.).    Even more, if the financial crisis is limited to only one fiat currency, you have a situation where that fiat currency devalues but others can gain in value as people try to sell their old currency for the new standard currency.  If people also sell their gold to buy up this currency, that lowers the price of gold in that currency.    For example, let us assume that gold was 1000 dollars an ounce and 1000 euros an ounce.  Suddenly, people start thinking that the euro is in trouble, so they start buying gold.  The law of supply and demand kicks in (more buyers, same supply, so higher prices) and gold is suddenly worth 2000 dollars and 2000 euros an ounce.  If you start buying at this point, you get half as much gold as the person who bought in the beginning.  Suddenly, the euro collapses.  Stores that used to take euros start demanding dollars.  Suddenly, it costs 20,000 euros for an ounce of gold but an ounce of gold will only get you 1,000 dollars since everyone is selling their gold to get dollars.    The people who buy gold in the ""panic"" end up losing half the value of their money if not more.  The ""speculators"" that bought gold at $1,000, sold it at $2,000, and bought it back at $1,000 now have all their gold back plus the $1,000 the other people lost." "Arbitrage is basically taking advantage of a difference in price.  Generally extending to ""in different places for the same thing"". A monetary version would be interlisted stocks, that is stocks in companies that are on both the NYSE/Nasdaq and Toronto stock exchanges.  If somebody comes along and buys a large number of shares in Toronto, that will tend to make the price go up - standard supply and demand. But if someone else can buy shares instead in NY, and then sell them in Toronto where the first person is buying up shares, where the price is higher, they the the arbitrageur (second person) can make pretty easy money. By its very nature, this tends to bring the prices back in line, as NY will then go up and Toronto will then go down (ignoring FX rates and the like for ease of explanation). The same can work for physical goods, although it does tend to get more complex with taxes, duties, and the like." Currencies don't have intrinsic value. Just because you have to pay taxes in USD does not mean it has intrinsic value. The government could theoretically switch currency every second, not that that will ever happen.  But yes the USD is supported by the US government and that's like a safety net for the value of the USD. Bitcoin doesn't have a government accepting bitcoin in taxes (except maybe liberland or something) so BTC doesn't have that safenet. But with such a liquid market and millions of buyorders bitcoin doesn't really need a safenet. There will always be demand. I prefer a scarce currency with growing demand than an inflationary currency backed by a corrupt government that loses value over time. My local credit Union has insured IRA accounts or IRA certificates that get the same low interest rates that non-IRA accounts receive. They get NCUA insurance, which is the equivalence of FDIC insurance.