Fiat Money: The Rumour of a Tax Collected Without Sending a Bill

Fiat money is money that a government recognizes and accepts for payment without promising to exchange each note for a fixed amount of gold or silver. The IMF describes it as money whose value rests on social acceptance and on the state requiring taxes to be paid in it. A paper note has little material value of its own. Its usefulness depends on law, trust, and the ability to use it for goods and services.

Inflation occurs when the general price level keeps rising over time. A higher price for one loaf of bread is not enough. When many goods and services become more expensive, the number in a savings account may stay the same while its purchasing power falls. The St. Louis Fed uses purchasing power to describe this change. If prices rise by 2 percent each year, the same amount of money buys less over time.