What is fiat money?

Fiat money is defined as currency that has no intrinsic value and is not backed by physical commodities like gold or silver. Instead, its value comes from the trust and confidence that people and institutions have in the government that issues it. This trust is reinforced by legal tender laws that compel people to accept it as a medium of exchange for goods and services.

In contrast, currency backed by gold reserves refers to representative money, while commodity money is actual goods that have intrinsic value (like gold or silver). Currency that fluctuates with market value typically refers to cryptocurrencies or other forms of money that are based on supply and demand in the market. Fiat money remains stable primarily due to the backing of the government and its acceptance in the economy rather than any intrinsic worth. This understanding of fiat money is fundamental in the field of economics, particularly within the realms of money and banking.