Fiat means ‘by decree’ and is another term for the paper money that is given worth by decree of the state. It has worth because a government says it is legal tender but the intrinsic paper of coinage from which it is made may not have any value.
Fiat money typically contrasts sound money because its only value is in what is assigned by the government, whereas sound money has the value of the metal, usually gold, that it contains – a coin made of gold has more value that a coin made of copper, even if they are both given the same ‘fiat’ value. When the UK was still on the gold standard it was possible to exchange a £5 note for five pounds of gold at the Bank of England. That is no longer possible and the ‘five pounds’ is merely a fiat value given to the note by the state.
The term ‘fiat’ comes from the latin, meaning ‘let it be done’.