Fiat currency.

In plain English

Fiat currency is money declared legal tender by a government, with no commodity backing it and no promise to exchange it for metal. Its value rests on the state requiring taxes to be paid in it and on the shared expectation that others will take it in trade. That arrangement lets a central bank adjust the money supply in response to conditions, which a metal standard makes difficult. The cost is that purchasing power depends on policy and on confidence, and it can be eroded steadily by inflation or destroyed quickly in extreme cases. Nearly every national currency in use today works this way.

01Why it matters

Because the value of fiat money rests on policy and confidence rather than on a fixed backing, holding cash is a decision that carries inflation risk, not a neutral position.

02The math, step by step

Say prices rise 3 percent a year. A $10,000 cash balance buys $10,000 of goods today. After one year the same goods cost $10,300, so the balance buys about $9,709 worth in today's terms. Over ten years at that rate, its buying power falls to roughly $7,441.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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