A currency that has been established as a valid form of money, typically supported by a government regulation that declares it to be legal tender. The term fiat comes from the Latin and as a word used to describe a government decree, order or resolution. By definition, fiat money is a currency that does not have any intrinsic value as it is not backed by a physical commodity and is usually made of a worthless or low-value material (such as a small piece of paper). Even so, fiat money is widely accepted as a means of payment.
Besides the government approval and regulation, the main reason why fiat money is considered valid and valuable in our society is due to a collective belief. In other words, the fiat value is highly dependent on a collective agreement that it has market value and may be used as a medium of exchange, with an intrinsic purchasing power. Thus, the acceptance of fiat money is strongly dependent on a government decree along with a social convention (and expectation that it will keep its value in the future). If either the social belief or the government decree gets compromised, the real value of the currency, as a means of payment, is quickly and greatly reduced.
Due to the fact that most fiat currencies are not backed by precious metals (such as gold, silver, and copper) nor any other commodity, central banks are able to cause large variations in the supply of money, which may eventually lead to episodes of extremely high inflation rates (hyperinflation).
Historical records suggest that the first form of paper money was created in the 11th century China. The Song dynasty is known for issuing the so-called jiaozi, regarded as the first government-issued paper money in history. Jiaozi was a primitive form of banknote created to replace the heavy iron cash coins that were being used at that time. However, the succeeding Great Yuan dynasty was the one to actually adopt and use fiat money on a large scale - as the predominant medium of exchange. The Great Yuan period lasted from 1271 to 1368, but the fiat money continued to be adopted by the following Great Ming dynasty (1368-1644).