What is fiat currency, and where does it come from?

There's a word that's finally entered (or maybe re-entered?) the common lexicon, 'fiat currency.' I'm overjoyed at this because it's taken decades and the tireless efforts of generations of people.

It's because understanding this one, simple concept can change your life in profound ways.

That being said though, there's still a lot of confusion around the term. Worse yet, there are people and groups who still think putting 'the right people in charge' of one is the way to economic prosperity.

As an accountant, I can offer a particularly clear view of just what this stuff is from a financial standpoint, which is really the only thing that matters when we're talking about banking.

So what is the answer to the question of what a dollar, or a pound sterling, or a euro, yen, yuan, rupee or ruble, is?

It's unsecured debt.

This isn't my opinion, it's a matter of accounting standards. Just look at the 2015 financial statements of the Federal Reserve. They're listed at the very top of the 'Liabilities' section of the balance sheet.

And if you're still unsure it says the following on page 13:

Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a specific Reserve Bank, must be fully collateralized. All of the Reserve Banks’ assets are eligible to be pledged as collateral.

Here we also have the secret to how new Federal Reserve notes (i.e. 'Dollars') are issued in to existence too. In the kind of jargon only a central banker could find meaningful, they explain that these notes come in to existence when the Federal Reserve purchases something on credit.

My bear friends go into more detail below:

'Note' is simply legal shorthand for a 'promissory note', which is defined in the Uniform Commercial Code as:

...an instrument that evidences a promise to pay a monetary obligation

So now that you know your money supply is a public manifestation of the central bank's debt, that they have no borrowing limits and never have to pay it back. Can you now see why some people might have a problem with this arrangement and want an alternative that doesn't carry such a risk?