Fiat Money vs Commodity Money
Fiat Money and Commodity Money are two Money, Banking & Finance concepts in AP Economics that students often mix up. In short: fiat money is fiat money is currency that has value because a government declares it legal tender, not because it's backed by a commodity like gold. Meanwhile, commodity money is commodity money is money that has intrinsic value as a good, such as gold, silver, or salt, in addition to its use as money. Here is how they compare side by side.
Fiat money is currency that has value because a government declares it legal tender, not because it's backed by a commodity like gold.
Modern currencies like the U.S. dollar are fiat money; their value rests on trust and the government's stability. It gives central banks flexibility over the money supply but requires discipline to avoid inflation.
Commodity money is money that has intrinsic value as a good, such as gold, silver, or salt, in addition to its use as money.
Its value comes from the commodity itself, unlike fiat money. It limits a government's ability to expand the money supply, which constrains inflation but reduces monetary flexibility.