The Economic Way of Thinking 13th Edition by David Prychitko, Peter Boettke, Paul Heyne

Exercise 4

The term fiat money is sometimes used to describe paper money that is not backed by gold or anything else, and that consequently seems to have value merely because some authority has declared, "Let it become money."
(a) Is fiat money any less money than gold coins are? What kind of "authority" does it take to turn a "worthless piece of paper" into money?
(b) Are U.S. dollars money in Canada? Are Canadian dollars money in the United States? Why are U.S. dollars warmly welcomed by retailers in many countries of the world? Can you think of circumstances in which the people of a country would refuse to accept their own national currency in payment, but would welcome payments made in U.S. dollars? What does all this indicate about the "authority" of governments that try to create fiat money?