An interesting story from the Adam Smith Institute this morning shows how poor monetary policy leads to unchecked inflation, resulting in the paper fiat currency being used for, well, other purposes:
The hundred trillion dollar note is literally not worth the paper it's printed on, and the city authorities in Harare had to put up notices in the loos forbidding people to use banknotes in the toilets (since they are cheaper than tissue, albeit still, by comparison, 'hard' currency).
The U.S. Treasury is now auctioning its paper 12 times a year. Recently it was only 4 times year. The Federal Reserve is buying the paper and, in effect, loaning itself money. Even a six-year-old can see through this fallacy: Take a piece of paper and write a "1"on it. Now put a "0" next to the "1," and the paper is worth 10 times as much as before. Each time the process is repeated, the value of the paper is increased by a factor of 10! Incredible!
Unfortunately, this is how a large number of people, especially in our government, view monetary policy. It is not based on anything but perceived value.