Randall Wright - Consultant
This essay explains the use of fiat money, or why intrinsically useless objects are accepted as payment in transactions. People accept a particular object as a means of payment because others do: social conventions matter more than the intrinsic characteristics of the object itself. Not everything can become a fiat money, though. If an object is especially costly to hold, for example, it will not be accepted as a means of payment. This explanation of fiat money is illustrated in a simple theoretical economic model.
This essay was originally published in The New Palgrave Dictionary of Money and Finance. It is reprinted in this journal with the permission of Macmillan Press and Stockton Press.
Reprinted From: The New Palgrave Dictionary of Money and Finance
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