Fiat Money:
- Fiat money is currency which has been declared to be a legal tender by the government.
- Fiat currency does not have any intrinsic value nor it is backed by any physical commodity.
- In the modern Economies, fiat currency is the prevalent mode of currencies which is dominantly in the form of paper.
- Every currency note bears on its face a promise from the Governor of RBI that "I promise to Pay the bearer the sum of rupees ............ ".
- This promise entitles the piece of paper a Fiat currency.
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- The same is also true of coins.
- Currency notes and coins are therefore called fiat money.
- The value of fiat currency is derived from the relationship between supply and demand rather than the value of the material that the money is made of.
- The value of fiat currency is also affected by the inflation in the economy.
Legal
tender:
- It is the payment method that is recognised by the law of the land, as valid for payment of debt.
- The RBI Act of 1934, which gives the central bank the sole right to issue bank notes, states that “Every bank note shall be legal tender at any place in India in payment for the amount expressed therein”.
- They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction.
- Cheques ,instruments like
commercial bills and virtual currency, however, can
be refused by anyone as a mode of payment so these can’t be used as legal tender money.
- When the government withdraws legal tender status to a currency denomination, it cannot be used for settling transactions.
- Ex. Old currencies after demonetization in India.
Legal tender can either be limited or unlimited in character.
Unlimited Legal tender:
- Currency that can be used for settlement of any amount of debt.
- In India, all currency notes are unlimited legal tender.
Limited Legal Tender:
In India, coins function as limited legal tender. Coins in India can be used for settlement of dues with certain limitation as mentioned below :
- a coin of any denomination not lower than one rupee, for any sum not exceeding one thousand rupees;
- a half-rupee coin, for any sum not exceeding ten rupees;
- any other coin, for any sum not exceeding one rupee:
LEGAL TENDER VS FIAT MONEY :
- Legal tender refers to a specific form of payment that is recognized by law of the land while fiat money refers to a type of currency that is backed by the government's fiat.
- In other words, legal tender is a legal requirement for debt settlement, while fiat money is a type of currency that the government has issued.
