Fiat Money and Fiduciary Money: What They Mean and When the Dollar Became Fiat

Fiat money is money whose value rests on the law and on trust in the issuer, not on a metal it can be swapped for. The European Central Bank puts it in one sentence: “Fiat money is declared legal tender and issued by a central bank. It can't be directly converted into, for example, gold” (ECB, What is money?, updated June 19, 2024). The U.S. dollar, the euro and the yen are all fiat currencies.

Fiat money vs. fiduciary money: one term, two uses

“Fiduciary money” is where readers get confused, because the term does not mean the same thing in every language.

So the answer depends on the language. In Spanish usage, a “fiduciary currency” is a currency that holds its value through trust in the issuer, the same idea as fiat. In French usage, set against “scriptural” or bank money, it means the banknotes in your wallet. English usage varies, and we found no English-language central bank definition that fixes it; this page uses the two definitions above. The Banco de España page says it plainly (Banco de España, What is fiat money?); the Banque de France sheet uses the French meaning (Banque de France, L'éco en bref, June 2016, PDF).

The kinds of money, from commodity to fiat

The ECB explainer describes money in stages. The order is roughly historical.

• Commodity money. Objects with a value of their own, such as gold or silver coins.
• Representative money. Banknotes that could be exchanged against a fixed amount of gold or silver held by the issuer.
• Fiat money. Money issued by a central bank, such as banknotes and the reserves banks hold with it; banknotes are legal tender, and none of it can be converted into a metal.
• Commercial bank money. Bank deposits. The ECB notes that it “makes up most of the money that people actually use” and is “created by banks expanding their balance sheets,” for example when they grant a loan.

Whatever the kind, the ECB lists the same three functions: a medium of exchange, a unit of account and a store of value. How well fiat money keeps its value over time depends on inflation, covered below. The Banque de France sheet put scriptural money, the balances on accounts, at 90% of the currency in circulation in the euro area when it was written in 2016.

Dates in the history of fiat money

The Bretton Woods system was designed in July 1944 and lasted until 1971 (Federal Reserve History, Creation of the Bretton Woods System); it became fully operational only in 1958. After a meeting at Camp David from August 13 to 15, 1971, Nixon announced the end of convertibility on August 15, together with a 90-day freeze on wages and prices and a 10% surcharge on imports. Federal Reserve History sums up the result: “Foreign governments could no longer exchange their dollars for gold; in effect, the international monetary system turned into a fiat one” (Federal Reserve History, Nixon Ends Convertibility of U.S. Dollars to Gold).

Legal tender: what it obliges, and what it does not

Legal tender status is what makes fiat money hard to refuse for a debt. U.S. law, 31 U.S.C. 5103, states that U.S. coins and currency are “legal tender for all debts, public charges, taxes, and dues.” The Federal Reserve adds the limit: “There is no federal statute mandating that a private business, a person, or an organization must accept currency or coins as payment for goods or services” (Federal Reserve FAQ, Is it legal for a business to refuse cash?, updated July 21, 2020). A shop can therefore refuse cash, unless a state law says otherwise.

What fiat money did to prices since 1971

One cost of fiat money for savers is inflation. The U.S. consumer price index for all urban consumers (CPI-U, all items, U.S. city average, not seasonally adjusted, published by the Bureau of Labor Statistics) gives the size of that rise since the end of gold convertibility.

From August 1971 to September 2026 the index rose 8.26 times (336.940 divided by 40.8). Put the other way, a dollar of September 2026 buys about 12.1% of what a dollar bought in August 1971, a loss of about 87.9% of purchasing power. Over the last year, to September 2026, the index rose 3.74% (BLS, CPI-U series CUUR0000SA0). These are our computations on the BLS series. The chart below applies the same division to August of each decade: the August 1971 index, 40.8, divided by the index of the later month.

The index measures prices; it does not say how much of the rise is due to the end of convertibility, and prices also rose under the gold standard in some periods.

Pros and cons of fiat money

For traders, the end of Bretton Woods matters too. Federal Reserve History adds that a few months after August 1971 “the Smithsonian agreement attempted to maintain pegged exchange rates, but the Bretton Woods system ended soon thereafter.” Today the exchange rates between the major currencies move in the market described in the forex market. Stock returns are quoted in fiat dollars too, so they are worth reading against the CPI: what U.S. large caps returned over 28 years, dividends included, is measured in blue chip stocks vs. the S&P 500. Other markets are compared in asset classes.