Fiat Money

Definition

Fiat money refers to currency that is not backed by a physical commodity, such as gold or silver. Its value is derived from the trust and confidence people have in the government that issues it.

Analogy

Think of fiat money like a concert ticket. The ticket itself doesn't have any intrinsic value, but it represents access to an event. Similarly, fiat money has value because people believe it can be exchanged for goods and services.

Related terms

Commodity Money: Commodity money is a type of currency that has intrinsic value because it is made of a valuable material, like gold or silver.

Medium of Exchange: A medium of exchange is anything that is widely accepted as payment for goods and services. It can be physical (like cash) or digital (like electronic transfers).

Legal Tender: Legal tender refers to the official currency recognized by the government as acceptable for settling debts and transactions within a country.