Fiat
Most people use fiat money every day without ever hearing the word. Fiat is Latin for “let it be done”. Fiat money is money because a government declares it so, not because it is backed by gold or anything else you could claim. The dollar, euro, pound, yen and birr in your pocket are all fiat.
Who decides how much to print?
A central bank, such as the U.S. Federal Reserve, sets interest rates and can create new money with a keystroke. Commercial banks create most new money when they lend. Governments that spend more than they collect borrow the difference, and the central bank often ends up buying that debt. You, the person who earned and saved the money, get no vote.
There is no fixed limit
No law of nature or fixed rule caps the supply. It can grow as fast as those in charge decide. U.S. M2, a broad measure of dollars, grew from about $15.4 trillion in February 2020 to about $21.7 trillion by April 2022: roughly 40% more dollars in about two years.
It loses value, and some currencies fail
No major fiat currency has kept its purchasing power over the long run. A 1913 U.S. dollar buys about 3 cents of goods today. Many go further and collapse: Germany in 1923, Hungary in 1946, Zimbabwe in 2008, Venezuela after 2016. The money is then replaced, redenominated or abandoned.
Ask yourself:
- Why is there no limit on the supply of money?
- Technology has made producing and transporting things far easier. Shouldn’t things get cheaper, not more expensive? Why don’t they?
- Why does the money I worked for buy less year after year? Where does the value I lose go?
- Who decides how much money is added to the supply we worked for? Doesn’t that make our savings worth less? Isn’t that a hidden tax?
- Why did some countries’ money fail? Is mine heading there, given its value erodes every year? If so, what can I do to protect what I earned?
- Why do people rush to buy property and stocks to save? If money stored value, wouldn’t they just save money? Was that home bought to live in, or as an investment?
Sources: FRED, M2 money stock · BLS CPI inflation calculator · Bank of England, “Money creation in the modern economy”
How fiat payments move
A payment can look complete before the money has settled. Follow the banks, messages, and fees behind a card purchase or bank transfer.
Choose a payment
Illustrative amounts and fees, not bank quotes.
Follow the payment
Use Next to read one step at a time, or Play to follow the sequence.
Cardholder swipes at merchant POS
The cardholder swipes their card at the merchant POS. This starts authorization only; no money has moved.
What you see
Presenting card0 secondsWhere the money stands
Not moved—Full payment route
Select a participant to inspect its role below. The highlighted step follows playback.
Select an entity on the diagram or step forward.
Payment costs
Illustrative teaching model — not a quote.
No fees assessed yet at this step.