Fiat Money:

Fiat money is basically money that is intrinsically useless but is used only as a medium of exchange. Fiat money system is a system in which money is not backed by a physical commodity such as gold. Instead, the only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it. In a fiat monetary system, there is no restrain on the amount of money that can be created. Hence this allows unlimited credit creation. Initially, a rapid growth in the availability of credit is often mistaken for economic growth, as spending and business profits grow and frequently there is a rapid growth in equity prices. In the long run, however, the economy tends to suffer much more by the following contraction than it gained from the expansion in credit. This expansion in credit can be seen in the Debt/GDP ratio. In most cases, a fiat monetary system comes into existence as a result of excessive public debt. When the government is unable to repay all its debt in gold or silver, the temptation to remove physical backing rather than to default becomes irresistible. This was the case in eighteenth century France during the Law scheme, as well as in the 70s in the US, when Nixon removed the last link between the dollar and gold which is still in effect today. Hyper-inflation is the final stage of any fiat currency. In hyper-inflation, money loses most of its value practically overnight. Hyper-inflation is often the result of increasing regular inflation to the point where all confidence in money is lost. In a fiat monetary system, the value of money is based on confidence, and once that confidence is gone, money irreversibly becomes worthless, regardless of its scarcity.