commodity versus fiat money
Hold a gold coin and a paper banknote side by side. The gold coin is worth something even if you melt it down — gold is useful and scarce in its own right. The paper note is worth almost nothing as paper; it is valuable only because everyone agrees to treat it as money. That contrast is the difference between commodity money and fiat money, the two great families of money in history.
Commodity money is money that has intrinsic value: it is made of, or directly redeemable for, a useful good — gold, silver, salt, cattle, cigarettes in a prison camp. Its value is anchored to something real, which limits how much can exist (you can't conjure gold from nothing). Fiat money has no intrinsic value and is not backed by any commodity; the word fiat is Latin for 'let it be done'. It is money because a government declares it legal tender and, crucially, because people trust that others will keep accepting it. A modern $100 note costs a few cents to print yet buys $100 of goods purely on shared confidence. In between sits representative money — paper that was once a claim on gold held in a vault — which is how the world transitioned from one to the other.
Almost every country today uses fiat money, having abandoned the gold standard during the twentieth century (the United States cut the dollar's last link to gold in 1971). The advantage is flexibility: a central bank can adjust the money supply to fight recessions, something a fixed stock of gold cannot do. The danger is that, without a commodity anchor, the value of fiat money rests entirely on the issuer's discipline — print too much and you get inflation, or in extreme cases hyperinflation. So fiat money is a trade-off: more control over the economy, in exchange for needing institutions trustworthy enough not to abuse that control.
In prisoner-of-war camps, cigarettes became commodity money: scarce, durable, divisible, and useful in themselves, so men priced soap and chocolate in cigarettes. The dollar in your wallet is fiat money: nobody wants the paper itself, yet it buys goods because everyone trusts it will keep being accepted.
Cigarettes are valued for themselves (commodity money); a banknote is valued only by shared trust (fiat money).
A common myth is that fiat currencies are 'backed by gold'. They are not — modern money is backed by trust, law, and the central bank's commitment to keep its value stable. Cryptocurrencies are a separate, debated category: not commodity money and not state fiat.