Fiat currencies maintain their value based on several key factors:
- Government Authority: The state declares what counts as legal tender. You can pay taxes, settle debts, or buy groceries using euros because the government recognizes and enforces their use.
- Central Banks: Institutions like the European Central Bank or the Federal Reserve regulate the money supply, set interest rates, and aim to keep inflation in check.
- Public Trust: People trust that their money will still be accepted and hold value tomorrow. This trust is rooted in the perceived stability of the economy, the political system, and legal structures.
In short: Fiat money works because people have confidence in the institutions that issue and manage it.
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