The effect of inflation on the real value of money and government debt denominated in money terms. For example, if the population of a country hold money equal in value to 10 per cent of gross national product (GNP) and government debt equal in value to 30 per cent of GNP, annual inflation of 10 per cent removes an amount equal to 1 per cent of GNP from the real purchasing power of their money balances, and an amount equal to 3 per cent of GNP from the real value of their security holdings. This is equivalent to a tax of 4 per cent of GNP. The government can incur a nominal budget deficit equal to the yield of the inflation tax without increasing the real value of its debts, including issue of fiat money.