The gold standard means that a currency has a fixed value directly linked to gold and is convertible into gold. Fiat money is not backed by anything. It gives central banks the control to print all the money they want. The main advantage of the gold standard compared to fiat currency is that it is much more resistant to inflation.
The limited supply of gold and the government's inability to create more gold as it pleases help to avoid rapid changes in the currency's valuation over relatively short periods of time. A fiat currency loses its value significantly if the issuing government or central bank loses the ability to continue to guarantee its value or refuse to do so. The adoption of fiat currency in many countries, starting in the 18th century, made it possible for much greater variations in the supply of money. The value of fiat money is not based on any physical product and is allowed to fluctuate dynamically against other currencies in the foreign exchange markets.
The most notable currency not included in this table is the Chinese yuan, whose statistics are listed as unavailable. In a Lagos and Wright model, fiat money has no intrinsic value, but agents get more of the goods they want when they negotiate, assuming that fiat money is valuable. The next Yuan dynasty was the first dynasty in China to use paper money as the predominant circulating medium. Since it can no longer be converted into gold and is not directly linked to the amount of gold the government stores, fiat money risks inflation.
Since fiat money is not tied to valuable commodities such as rare metals or oil, governments, or more precisely, central banks, can limit the supply of their currencies to help protect their value. Fiat currency has value because it is backed by a government and the people who own it agree with its value. Central banks generally issue fiat currency in the form of paper notes and coins that are not manufactured or backed by precious metals. The gold standard is a monetary system under which the value of a country's currency is directly linked to gold.
The term derives from the Latin word fiat, which means a determination by an authority. In this case, it is the government that decrees the value of the currency and is not representative of another asset or financial instrument such as gold or a check. During the gold standard era, gold was a fundamental component of the world economy and affected everything from international trade to the value of the currency. Fiat money is physical money, both paper money and coins, while representative money is a form of currency that represents the intention to pay, such as a check.
Fiat money is an alternative to commercial money, which is a currency that has an intrinsic value because it contains, for example, a precious metal such as gold or silver that is embedded in the currency.