On 16 September 2026 the Federal Reserve raised its key interest rate by a quarter of a percentage point, to a range of 3.75% to 4%. The same day, a quarter-point increase that the European Central Bank had decided on 10 September took effect, lifting its deposit rate to 2.50%. The next day the Bank of England held its own rate at 3.75%. None of the three promises to blockchain, dove gli utenti scambiano token direttamente dal proprio wallet senza affidare la custodia dei fondi a una società.">swap its money for gold. Their decisions still reach mortgages and savings accounts.
That is the short answer to the question what is fiat money: money that no one can swap for a fixed amount of metal, whose value rests on the law, on the taxes it pays and on a central bank charged with keeping its purchasing power steady. Figures in this lesson are as of 22 October 2026.
It follows our lesson on the history of money, which ends on the evening Richard Nixon closed the gold window. If the three jobs of money (paying, pricing, saving) are new to you, start with our guide to what money is.
What is fiat money? Money that works because the law says so
The word comes from Latin: fiat means “let it be done”. Fiat money is money by decree. A government declares that a unit (the dollar, the euro, the pound) is the official money of its territory, and no issuer promises to exchange it for gold, silver or anything else at a fixed rate.
Compare that with commodity money, which is valuable as a thing (a gold coin), or with representative money, a paper claim on a stock of metal held somewhere (a banknote you could once redeem for gold at the bank). A twenty-dollar bill today is neither. Hand it to the Federal Reserve and you get another twenty-dollar bill, or a balance of twenty dollars.
The dollar, the euro, the pound, the yen and the Swiss franc all work this way, and so does the balance in your bank account, a promise in the same unit.
What backs fiat money, if not gold
“Backed by nothing” is the usual slogan. It is half true: there is no metal claim. But four things hold the value of a fiat currency up.
The first is taxes. A government that demands its taxes in dollars or euros creates steady demand for them: every household and company needs the unit to settle with the state. The second is the law. Courts enforce contracts written in the national currency, and debts are settled in it.
The third is an institution. A central bank is given the task of keeping the currency’s purchasing power stable and the tools to manage how much of it circulates. The fourth is habit, built on the first three: people accept dollars because they expect everyone else to accept them tomorrow.
When those pillars crack, the currency fails: our history lesson recounts what happened in Weimar Germany, Zimbabwe and Venezuela.
Legal tender: what the law forces, and what it does not
For Americans, the legal basis sits in the US Code (31 U.S.C. 5103), which makes US coins and currency, Federal Reserve notes included, “legal tender for all debts, public charges, taxes, and dues”. The Federal Reserve’s own FAQ adds a point many readers get wrong: no federal law obliges a private business to accept cash, and shops may set their own policy unless a state law says otherwise.
Legal tender therefore means that a creditor cannot refuse it when you settle a debt. It does not mean every seller must take it. In the euro area, the euro is the legal tender of the 21 countries that use it since Bulgaria joined on 1 January 2026. In the UK the pound plays that role. Crypto-assets are legal tender in none of the three.
From gold to paper: Bretton Woods, 1971 and the Jamaica Accords
Under the Bretton Woods arrangement agreed in 1944, other currencies were pegged to the US dollar, and, according to the Federal Reserve’s history essay on the end of gold convertibility, once the system became fully operational in 1958 dollars could be converted into gold at a fixed $35 an ounce. Gold sat one step behind everyday money: households held francs or lire, governments held dollars, and only the dollar was tied to metal.
The promise depended on the United States holding enough gold for all the dollars piling up abroad. It did not. On the evening of 15 August 1971, President Nixon announced a new economic policy. In the words of the Fed’s essay, “Foreign governments could no longer exchange their dollars for gold.” The same package froze wages and prices for 90 days and imposed a 10% surcharge on imports.
The break did not happen in one night. In December 1971 the Smithsonian Agreement tried to rebuild fixed exchange rates around a devalued dollar, as the US State Department’s Office of the Historian recounts. Speculation forced a second devaluation in February 1973, and in March 1973 six European Community members tied their currencies together and floated them jointly against the dollar. Fixed rates were over in practice.
The law caught up later. At a meeting of an IMF committee in Kingston, Jamaica, on 7 and 8 January 1976, member countries agreed to accept floating exchange rates and to end the official price of gold. The resulting amendment to the IMF’s rules took effect in 1978. Since then no major currency has had a legal link to gold.
The myth that money “became fiat” overnight
It is common to read that 1971 is the year “money became fiat”. For ordinary people, it had happened decades earlier: Britain left gold in 1931 and the United States abandoned the gold standard for domestic purposes in 1933, as our history lesson recounts. What 1971 ended was the last link between gold and the dollar for foreign governments. After 1973 the big currencies floated against each other, and their value came to depend on the four pillars above, the central bank first among them.
The practical change was large. The quantity of money was no longer capped by a stock of metal. That gives central banks room to respond to a crisis, and it gives a careless government room to print.
What a central bank does: five jobs, three big banks
A central bank is the public institution that manages a currency. It is a bank for banks and for the state, not for you: you cannot open a current account at the Fed or the ECB. Its work fits into five jobs.
- It sets the price of money in the short term through a policy interest rate, the rate at which banks borrow from it or park money with it.
- It can buy or sell large amounts of bonds, which changes the size of its balance sheet (quantitative easing and tightening, below).
- It lends to sound banks in a panic, as the lender of last resort.
- It issues banknotes and keeps the payment systems between banks running.
- In many countries, the euro area included, it also supervises banks or works closely with the supervisor.
The euro area shares the job out. The Eurosystem is made up of the ECB in Frankfurt and the national central banks of the 21 euro countries; the ECB has run monetary policy for the euro area since 1 January 1999. The Banca d’Italia, for example, describes itself as an integral part of the Eurosystem. In the United States the Federal Reserve System has a Board of Governors in Washington and twelve regional Reserve Banks, and rates are set by its Federal Open Market Committee (FOMC). In the UK, the Bank of England’s Monetary Policy Committee (MPC) decides.
| European Central Bank | Federal Reserve | Bank of England | |
|---|---|---|---|
| Currency | Euro (21 countries) | US dollar | Pound sterling |
| Decision body | Governing Council | Federal Open Market Committee | Monetary Policy Committee |
| Goal in law | Price stability first | Maximum employment, stable prices, moderate long-term interest rates | Price stability, then the government’s economic policy |
| Inflation target | 2% over the medium term, symmetric | 2% (longer-run goal) | 2%, set by the government |
| Measure | HICP (Eurostat) | PCE price index | CPI (ONS) |
Price stability: why the target is 2% and not zero
All three banks aim at roughly the same number. The ECB’s Governing Council aims for 2% inflation over the medium term, measured by the euro area’s harmonised consumer price index, and treats an undershoot as just as bad as an overshoot: its own page calls negative and positive deviations “equally undesirable”.
The Fed works under a broader law. Section 2A of the Federal Reserve Act tells it to pursue maximum employment, stable prices and moderate long-term interest rates, usually shortened to the “dual mandate”. The FOMC’s Statement on Longer-Run Goals, reaffirmed in January 2026, sets the goal at 2% inflation as measured by the price index for personal consumption expenditures (PCE).
In Britain the target is not the Bank’s choice. The Bank of England explains that the government sets it, at 2% on the consumer prices index. If inflation strays more than one percentage point either side, the Governor must write to the Chancellor of the Exchequer to explain why and what the Bank will do.
Why not zero? The ECB’s strategy page gives a safety margin as the main reason: interest rates can only be cut so far, and a little positive inflation leaves room to cut them in a downturn. It adds that price indexes may overstate true inflation. A steady 2% halves the value of money in about 35 years, which is why the target is about predictability more than about preserving every cent. Our next lesson, on inflation and purchasing power, works through the arithmetic.
The targets are being tested right now. US consumer prices rose 3.7% in the twelve months to September 2026, according to the Bureau of Labor Statistics (release of 14 October), driven largely by gasoline. ECB President Christine Lagarde put euro area inflation at 3.8% in September in a statement of 17 October, to the IMF’s steering committee, as our report on Lagarde’s digital euro pilot noted. Both are far from 2%. The Fed said its September increase would support “a timelier return to the Committee’s 2 percent goal”.
Policy rates in October 2026: how a quarter point reaches your loan
The ECB sets three rates. The deposit facility rate is what banks earn on money left at the central bank overnight; with banks holding large reserves, as they do now, it is the one that steers market rates. The main refinancing rate is what banks pay to borrow for a week, and the marginal lending rate is the overnight emergency ceiling.
| Central bank | Rate | Level as of 22 October 2026 | Last decision | Change | Next scheduled decision |
|---|---|---|---|---|---|
| ECB | Deposit facility | 2.50% | 10 September 2026 (effective 16 September) | +0.25 point | Not published on the pages we checked |
| ECB | Main refinancing operations | 2.65% | 10 September 2026 (effective 16 September) | +0.25 point | |
| ECB | Marginal lending facility | 2.90% | 10 September 2026 (effective 16 September) | +0.25 point | |
| Federal Reserve | Federal funds target range | 3.75% to 4.00% | 16 September 2026 (12-0 vote) | +0.25 point | FOMC meeting of 27-28 October 2026 |
| Bank of England | Bank Rate | 3.75% | 17 September 2026 | Held | 5 November 2026 |
Sources: ECB key interest rates, FOMC statement of 16 September 2026, Bank of England Bank Rate page. These numbers move: check the official pages before relying on them.
The ECB’s September move was its second increase of 2026, after one that took effect on 17 June. The Bank of England has kept Bank Rate at 3.75% at its June, July and September meetings.
How does that reach you? A bank funds part of its lending in the money market, where rates follow the central bank within days. New variable-rate mortgages, credit lines and credit cards reprice quickly; fixed-rate loans reprice only when new ones are written. On the other side, savings accounts and money market funds pay more, usually with a lag and not always in full. To take an illustration of our own: on a $300,000 variable-rate loan, a quarter-point rise adds about $750 a year in interest (0.25% of $300,000), before the balance shrinks with repayments.
The aim is not to punish borrowers. Dearer credit cools spending and investment, which, months later, slows price rises. The central bank cannot change the price of oil. It can try to stop an energy shock from becoming a lasting rise in all prices and wages.
Independence: why governments hand the interest rate to a committee
An elected government faces a temptation: cheap money before an election, inflation after it. The United States learned what that costs. The Federal Reserve’s history of the Great Inflation runs from 1965 to 1982, with consumer price inflation peaking close to 15% in March 1980. It took Paul Volcker’s Fed, from 1979, and a deep recession to bring it down. The conclusion widely drawn afterwards was that a central bank needs credibility, a commitment to price stability that people believe will outlast any government.
Hence independence. In the European Union, the treaty itself forbids the ECB and the national central banks from seeking or taking instructions from EU bodies or national governments, and governments must respect that, as the ECB summarises. The Eurosystem also may not lend to governments. In the UK, a letter from the Chancellor to the Governor dated 6 May 1997 set up the Monetary Policy Committee to decide rates, and the Bank of England Act 1998 gave it a statutory basis. The Fed’s governors serve long, staggered terms.
Independence is not freedom from control. Lawmakers write the mandate and can change it. Central bankers testify to parliaments, publish minutes and forecasts, and, in the UK, explain themselves in public letters. Pablo Hernández de Cos, General Manager of the Bank for International Settlements, the central banks’ own bank, put the logic this way in a speech in Madrid on 28 January 2026: “A clear price stability mandate specifies that monetary policy must protect the value of money.” He called accountability to lawmakers and society the counterpart of independence.
Quantitative easing and tightening, without the printing press
When the policy rate is already near zero and the economy still needs support, a central bank can buy bonds on a large scale. That is quantitative easing (QE). It pushes down longer-term interest rates, which the policy rate does not reach directly.
In the United States, QE started during the 2008 crisis. On 25 November 2008 the FOMC announced purchases of up to $500 billion of mortgage-backed securities and $100 billion of debt from housing agencies, and on 18 March 2009 added up to $300 billion of longer-term Treasury bonds, according to the Federal Reserve Bank of New York. The Bank of England began QE in March 2009 and bought £895 billion of bonds in total, £875 billion of them UK government bonds. The ECB started its asset purchase programme (APP) in October 2014.
Did they “print money”? Not in the literal sense. The Bank of England explains that it paid for its bonds with central bank reserves, created digitally on the accounts that banks hold with it. No banknotes were involved. Those reserves can only be held by banks; what reaches the public is lower borrowing costs and higher prices for bonds and other assets.
The debate around QE is real. Critics argue it inflated asset prices and helped those who already owned them, and that it blurs the line between monetary policy and financing governments. Defenders argue that without it, the recessions of 2008 and 2020 would have been deeper.
The reverse is quantitative tightening (QT): letting bonds mature without replacing them, or selling them. The Bank of England began reducing its stock in February 2022. The ECB ended net purchases under the APP on 1 July 2022 and stopped reinvesting maturing bonds from July 2023.
The lender of last resort keeps a bank run from spreading
A bank keeps only a small part of its assets as cash and central bank reserves; the rest is tied up in loans and securities. If every depositor asks for their money on the same day, even a healthy bank cannot pay, and fear of that can start a run that spreads to other banks. The lender of last resort is the central bank’s answer: it lends to solvent banks against good collateral so they can pay depositors.
The US version is the discount window. Banks and US branches of foreign banks can borrow from a Reserve Bank once they have signed the agreements and pledged collateral. Sound institutions use “primary credit”, whose rate has sat at the top of the federal funds target range since March 2020; weaker ones can use a dearer “secondary credit”. In the euro area, national central banks can provide emergency liquidity assistance; the Banca d’Italia lists it among its tasks.
The objection is moral hazard. If banks know they will be rescued, they may take more risk. Central banks answer by lending only against collateral, at a cost, to institutions that are solvent, and by leaving shareholders of failed banks to lose their money. The line between a short liquidity problem and a bank that is simply broke is hard to draw in the middle of a panic.
Who issues the dollars, euros and pounds in your wallet
Banknotes are the most visible form of central bank money. Federal Reserve notes are printed for the Fed and put into circulation through the twelve Reserve Banks when commercial banks order cash for their customers. In the UK, the Bank of England issues the notes used in England and Wales.
Euro banknotes are a joint product. The ECB says their production is a combined effort of the euro area’s national central banks and the ECB, and that more than 30 billion euro notes are in circulation, with a value above €1.5 trillion. A note printed for one country’s central bank circulates in all 21. The Banca d’Italia, founded in 1893, became Italy’s only note-issuing institution in 1926, long before the euro; it now shares that job inside the Eurosystem.
Cash is produced on demand. When customers withdraw more notes, banks order them from the central bank and pay with their reserves. The printing press answers demand for notes; it is not where most new money comes from.
Central bank money and bank money: two layers of the same dollar
There are two kinds of money in the economy, and they behave differently. Central bank money is the first: notes and coins, plus the reserves that commercial banks hold on accounts at the central bank. Only the central bank can create it.
The second is commercial bank money: the balance shown in your banking app. It is a claim on your bank, not on the central bank. The ECB’s explainer is direct about which layer matters most: “Commercial bank money makes up most of the money that people actually use.” It is created when a bank grants a loan, for example for a car, and disappears when the loan is repaid.
The two layers stay at one-for-one because you can turn a deposit into cash at any time, because deposits are insured up to a limit (by the FDIC in the US) and because banks settle among themselves in central bank money. How banks create deposits, and what limits them, is the subject of a later lesson in this path on how banks create money.
CBDCs: the digital euro, the digital pound and the US ban, as of October 2026
Central bank digital currencies (CBDCs) would add a third form of central bank money, a digital claim on the central bank open to everyone; today only banks hold central bank money in digital form. A CBDC is not a cryptocurrency. It would be issued by one institution, on a system that institution controls, with no open network of validators.
The euro area is furthest ahead among the three economies covered here. The ECB describes the digital euro as a digital form of cash, issued by the central bank and available to everyone in the euro area, usable online or offline with a phone or card, free of charge, and meant to sit alongside banknotes rather than replace them. Its timeline, per the ECB’s progress page: an investigation phase from October 2021 to October 2023, a preparation phase from November 2023 to October 2025, then a decision in October 2025 to keep preparing. The ECB says the digital euro could be issued during 2029 if EU lawmakers adopt the regulation in 2026.
As of 22 October 2026, that law does not exist. The Council of the EU agreed its negotiating position in December 2025, the European Parliament adopted its own in July 2026, and the three-way talks known as trilogues began on 13 July. We found no report of a political agreement since. The main dispute is the holding limit, how much digital euro one person could keep, and who would set it; fees for merchants and privacy rules are also open. In her statement of 17 October, Lagarde said the Eurosystem will run a 12-month internal pilot in the second half of 2027.
The United States has gone the other way. A presidential executive order of 23 January 2025 prohibits federal agencies from taking any action to establish, issue or promote a CBDC. The House of Representatives passed a statutory ban, the Anti-CBDC Surveillance State Act, in July 2025 and voted it again in April 2026 inside another bill. The latest tracker we found, checked in June 2026, showed it waiting for the Senate, and we found no sign that it had become law by 22 October 2026. There is no US CBDC.
The UK sits in between. The Bank of England’s digital pound page says it is in a design phase and has not decided whether to introduce one; the Bank and HM Treasury expect to decide on next steps in 2026, the earliest launch would be in the second half of this decade, and Parliament would have to vote before any launch.
Bitcoin was built around the trust problem of state money
Bitcoin’s first block, mined on 3 January 2009, carries a headline from that day’s Times of London about a second bank bailout. Our history lesson covers that block in detail. What it does not settle is why Satoshi Nakamoto chose it: as proof of the date, as commentary, or both. Nobody knows.
Satoshi was clearer a few weeks later. In a post on the P2P Foundation forum dated 11 February 2009, the founder wrote: “The root problem with conventional currency is all the trust that’s required to make it work.” The post goes on to say that people must trust a central bank not to debase the currency, and trust banks to hold their money and keep it private, and argues that the history of fiat currencies is full of broken trust.
Bitcoin’s design answers that with a rule instead of a committee. New coins appear on a fixed schedule written into the software, which halves the issuance every four years or so (the bitcoin halving). No one can decide to issue more in a crisis, and there is no lender of last resort. That is the point for its supporters and the problem for its critics.
What Bitcoin did not change matters as much. It has no central bank to absorb shocks, so its price in dollars swings widely; almost nobody prices rent or wages in it; and El Salvador, the first country to make it legal tender, amended its law in January 2025 so that businesses no longer have to accept it, as part of a loan deal with the IMF. Our guide to what Bitcoin is and the Bitcoin coin page cover the network itself.
What central banks say about crypto: not money, but stablecoins matter
The central banks’ line has barely moved since 2018. That year the BIS gave a chapter of its annual report, published on 24 June 2018, to cryptocurrencies and concluded that they “do not work as money”, while saying the technology might be useful elsewhere. Its reasons included prices that swing because supply cannot adjust to demand, networks that cannot scale like sovereign money, and trust in a decentralised ledger that can break, for example when a chain forks.
The attention has shifted to stablecoins. A dollar stablecoin is a private token that promises one dollar, backed by reserves held by its issuer. It sits closer to the old bank note than to Bitcoin: a private promise in fiat terms, worth what the reserves and the issuer are worth. Central banks worry about what happens if such tokens grow large enough to pull deposits away from banks. A BIS working paper of 13 October 2026 looked at the link from the other side and found that higher US deposit rates go with slower stablecoin growth. Our guide to stablecoins explains the types and their risks.
In Europe, the MiCA regulation now sets rules for crypto-asset service providers and for stablecoin issuers; our MiCA explainer covers who supervises what.
What fiat money means when you use crypto
Even a reader who holds only crypto lives in a fiat world. You buy your first coins with dollars, euros or pounds through an exchange, and you sell back into them to pay rent. In the US, each sale or swap of crypto can be a taxable event, calculated in dollars, because the IRS has treated virtual currency as property, not as currency, since Notice 2014-21. In the UK, HMRC can charge capital gains tax when you sell, swap or spend crypto-assets at a gain, in pounds. Your gains and losses are measured in fiat money whatever you think of it.
Dollar stablecoins such as Tether (USDT) and USD Coin (USDC) bring the dollar onto blockchains, so the Fed’s decisions travel there too. When US rates rise, cash in a bank or a money market fund pays more, while a stablecoin pays its holder nothing directly. That is one reason often given for crypto prices reacting to US inflation data, as they did on 14 October, when hotter-than-expected core inflation revived bets on another Fed hike. None of this is investment advice.
The dates to watch are close. The FOMC meets on 27 and 28 October 2026, the Bank of England announces its next decision on 5 November, and the ECB’s 2029 timetable for the digital euro assumes the EU law is adopted before the end of 2026. The next lesson, on inflation and what it does to purchasing power, starts from the 2% target and shows what a few points of inflation do to a salary, a savings account and a loan.
