Fiat monetary system

History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours. — Saifedean Ammous

A fiat monetary system is controlled through a Central Bank by a state or a group of states. 

A Central Bank has the monopoly over the creation of fiat units either in physical form (notes & coins) or 

in digital form (commercial banks reserves at the Central Bank). 

Those units are considered officially issued once they are allocated, which is done according to a plan called monetary policy, usually justified under the intention of providing monetary stability and financial stability, although the FED has the additional mandate of achieving maximum employment

Central Banks view monetary stability as a constant consumer's price inflation and a non-volatile exchange rate against the main other fiat currencies. 

In order to pursue it, the Central Bank continuously expropriate value from holders of fiat balances, which destroys the ability for money to store value in long-term.  

Financial stability is considered the smoothly run of the financial system, which means that the Central Bank will rescue bankrupted financial entities that are considered “too-big-to-fail” or “too-connected-to-fail”.

It induces moral hazard because those entities are then incentivized to incur in bigger risks or even in disguising capital consumption as profits.

Central Banks also expect to "stimulate" the economy and reduce unemployment in short-term, by distorting the functions of money through monetary inflation, specially when is done at an unexpectedly high rate.

In reality, monetary inflation "intoxicates" the economy "enslaving" people:

-Store of Value distortion: stored value in fiat money is redistributed to the Central Bank, so the easiest way for people to accumulate value, i.e. saving money, disappears. 

When the stored value rots, working forever becomes a necessity. 

-Medium of Exchange distortion: exchange rates between goods and money (aka prices) don't adapt instantly nor uniformly to the new amount of units. 

Goods' providers have an inertia to continue offering their services at the same prices, ignoring that monetary units are more abundant than expected; so they end up obtaining less value for their labour. This mechanism is often referred as Cantillon effect. 

-Unit of Account distortion: each fiat unit constitutes a smaller portion of the monetary system. It is an accounting trick that benefits borrowers and harms lenders.

It tends to temporarily increase the profit of businesses whose capital is intensive on labour at the expense of harming workers with already established contracts because fiat obligations are partially "forgiven".

Nevertheless, despite all those advertised mandates, whenever states accumulate big deficits, Central Banks' first priority becomes to patch them up with new printed units.

When circumstances are "convencional", monetary policy implementation follow the next process: 

1st. Announcement of interest rate policy: the Central Bank makes public its target figure for the interest rate that commercial banks charge each other overnight when lending reserve balances (Federal funds rate, LIBOR, etc.). Market participants will tend to led rates to that figure anticipating the Central Bank move; if not, the Central Bank can always step in through open market operations.

2nd. Open market operations: the Central Bank prints units to purchase government securities in the Money Market (the market for short-term government debt), which influences overnight interest rate. There are outright transactions and repo transactions.

3rd. Standing facilities or Discount window: the Central Bank establishes a lending facility just in case any bank finds difficulties borrowing. The rate charged is usually the interest rate announced plus a small premium.

It is also common for the Central Bank to negotiate other financial assets or treasuries (like gold, bonds from other countries, and foreign currencies) to intervene in the exchange rate or to prepare for it.

"Non-conventional" monetary policy implementations that have been used lately are Quantitative Easing, Credit Easing and Stimulus Programs.

Quantitative Easing is the purchasing of long-maturity government securities. 

Credit Easing is called the purchasing of private sector securities.

The Stimulus Programs allocate fiat units in the form of "stimulus checks" directly to people. Those programs are sometimes refereed as "helicopter money".

The interest that the CB earns through its assets is remitted to the government.

The economy tends to adapt and to restructure in order to capture the new stream of money provided by the Central Bank. 

If for example monetary policy lowers some interest rates, other interest rates tend also to downgrade; so 

the costs of those who take financial risks with borrowed fiat money are reduced and similarly, the cost of incurring in debt for governments decreases, which incentivizes businesses' debt financing and government spending.