Fiat money is neither just paper nor every debt. Central bank money includes notes and bank reserves; commercial bank money is mainly bank deposits, liabilities of commercial banks. Legal tender is a jurisdiction-specific status, not an automatic duty to accept every payment form. Bitcoin has a different issuance and settlement architecture, but that distinction alone does not rank either asset in every use.
Fiat currency has no fixed conversion into gold or another commodity. The state and central bank define its unit and base money, while contracts, prices, wages, taxes, payment networks and expectations support use. No commodity backing does not mean no assets, institutions or demand.
Tax and public-payment use, law, network effects and expected acceptance support demand. Legal tender usually concerns discharge of monetary debts under particular law; it need not force every merchant to take cash or prohibit another agreed currency. Verify the jurisdiction.
Central bank money consists of notes and reserves held by banks. Commercial bank money is mainly bank deposits: a customer asset and a bank liability backed by its assets and governed by banking law. The same nominal unit can have different issuer, risk and settlement paths.
When a bank lends, it normally credits a new deposit: the loan is its asset and the deposit its liability. Principal repayment destroys that deposit. Credit risk, capital, liquidity, regulation, funding and loan demand constrain banks; they cannot expand balance sheets without cost or limit.
An internal payment can reassign one bank’s liabilities. Across banks, customer deposits change and banks normally settle net positions in central bank reserves through payment systems. A quick notification is not always the same as legal finality, irrevocability or final interbank settlement.
The monetary base covers central bank money; broader measures add selected bank deposits and liquid instruments, such as M1, M2 or M3. There is no single fiat-supply number without currency, date and methodology. More reserves need not proportionally raise loans, deposits, prices or output.
Central banks influence conditions through rates, asset operations, collateral, reserves and communication. Transmission runs through funding, credit rates, asset prices, exchange rates and expectations and may be slow or uneven. Fiscal policy belongs to government; it interacts with but is not monetary policy.
Purchasing power moves with the price level; inflation is the change rate of a chosen index, not an equal rise in every price. Demand, supply, credit, exchange rates, wages, taxes and expectations can matter. A 2% target is a medium-term strategy, not a promise of fixed individual prices.
A banknote is a direct monetary-authority liability; a bank deposit bears bank counterparty and operating risk, mitigated in some systems by supervision, central-bank liquidity and deposit insurance. Authorities may change denominations, cash rules, capital controls or convertibility. Fiat alone does not determine stability.
Compare concrete layers: issuer, transfer validator, supply process, liability, finality, custody, censorship, volatility and legal enforceability. Bitcoin has rule-bounded issuance and on-chain settlement without a bank claim; fiat links to tax and banking systems. Verify aggregates, issuer balance sheets, inflation, deposit protection, withdrawal and FX rules rather than slogans. Sources: IMF — What Is Money?; ECB — What is money?; Bank of England — Money creation in the modern economy; ECB — Monetary policy strategy statement 2025; BIS — The next-generation monetary and financial system.
For the clearest picture, read this entry together with Bitcoin, Sound money, Legal tender, Commodity Money, Monetary base, Broad money. The reverse links also lead from Austrian economics, Sound money, Monetary Premium, Cantillon Effect.