What characterizes fiat money?

Fiat money is characterized primarily by the fact that its value is backed by a government mandate rather than any intrinsic value or physical asset, such as gold or silver. This means that the currency itself does not have any inherent value; rather, its value derives from the trust and authority placed in the currency by the issuing government. When a government declares that a certain form of currency must be accepted as a method of payment for goods and services, it effectively gives that currency its value.

While fiat money is often widely accepted in trade (an aspect of its use) and can theoretically be produced in large quantities, these characteristics do not define what fiat money is at its core. Intrinsic value refers to the actual worth of something based on its properties and not on external factors; however, fiat money does not possess inherent value. Furthermore, fiat money is usually regulated by central banks, which can control its supply, but the statement that it is produced without limits does not accurately reflect the monetary policies that countries typically have in place to maintain economic stability. Thus, the defining feature of fiat money is its backing by a government which facilitates its role in the economy.