History of Fiat Money

8/3/2019 History of Fiat Money

1/5

12/23/11 3:41 AMHistory of Fiat Money

Page 1 of 5http://kwaves.com/fiat.htm

Fiat Money History in the USOVERVIEW

In a fiat money system, money is not backed by a physical commodity (i.e.:gold). Instead, the only thing that gives the money value is its relativescarcity and the faith placed in it by the people that use it. A good primer onthe history of fiat money in the US can be found in a video provided by theMises.org website.

In a fiat monetary system, there is no restrain on the amount of money that

can be created. This allows unlimited credit creation. Initially, a rapidgrowth in the availability of credit is often mistaken for economic growth, asspending and business profits grow and frequently there is a rapid growth inequity prices. In the long run, however, the economy tends to suffer muchmore by the following contraction than it gained from the expansion incredit. This expansion in credit can be seen in the Debt/GDP ratio. We trackthe bubbles created by this expansion of debt at the inflation / deflation page.

In most cases, a fiat monetary system comes into existence as a result ofexcessive public debt. When the government is unable to repay all its debt ingold or silver, the temptation to remove physical backing rather than todefault becomes irresistible. This was the case in 18th century France duringthe Law scheme, as well as in the 70s in the US, when Nixon removed thelast link between the dollar and gold which is still in effect today.

Hyper-inflation is the terminal stage of any fiat currency. In hyper-inflation, money looses most of its value practically overnight. Hyper-inflation is often the result of increasing regular inflation to the point whereall confidence in money is lost. In a fiat monetary system, the value ofmoney is based on confidence, and once that confidence is gone, moneyirreversibly becomes worthless, regardless of its scarcity. Gold has replaced

every fiat currency for the past 3000 years.

The United States has so far avoided hyper-inflation by shifting between

a fiat and gold standard over the past 200 years.

1785-1861 - FIXED Gold standard 76 years

Cheap Low Fare 2 SporeAmazing Bargain Awaits. Book Your Dream Journey Now!

www.airasia.com/kchsin

Ads by Google Gold Price Gold Coins Fiat Selling Gold


2/5



The founding fathers were concerned about the unrestrained control of themoney supply. One thing they all agreed upon was the limitation on theissuance of money,Thomas Jefferson warned of the damage that would be caused if the peopleassigned control of the money supply to the banking sector, "I believe thatbanking institutions are more dangerous to our liberties than standingarmies. Already they have raised up a money aristocracy that has set thegovernment at defiance. This issuing power should be taken from the banksand restored to the people to whom it properly belongs. If the American

people ever allow private banks to control the issue of currency, first byinflation, then by deflation, the banks and corporations that will grow uparound them will deprive the people of all property until their children willwake up homeless on the continent their fathers conquered. I hope we shallcrush in its birth the aristocracy of the moneyed corporations which alreadydare to challenge our Government to a trial of strength and bid defiance tothe laws of our country" Thomas Jefferson, 1791

Many of the founding fathers experienced the damage caused by fiatcurrency. Most of the revolutionary war was financed by worthless currencycalled "Continentals".

The Continental Currency ("Not worth a Continental") thatAmerican colonists issued for the Continental Congress tofinance the Revolutionary War was replaced by the US Dollarin 1785 when The Continental Congress adopted the dollar asthe unit for national currency. At that time, private bank-notecompanies printed a variety of notes. After adoption of theConstitution in 1789, Congress chartered the First Bank of theUnited States and authorized it to issue paper bank notes toeliminate confusion and simplify trade. The U.S. Constitution

(Section 10) forbids any state from making anything but gold orsilver a legal tender. The Federal Monetary System wasestablished in 1792 with the creation of the U.S. Mint inPhiladelphia. The first American coins were struck in 1793. TheU.S. Coinage Act of 1792, consistent with the Constitution,provided for a U.S. Mint, which stamped silver and gold coins.The importance of this Act cannot be stressed enough.

One dollar was defined by statute as a specific weight of gold.The Act also invoked the death penaltyfor anyone found to

be debasing money.President George Washington mentions the importance of the

national currency backed by gold and silver throughout hisinitial term of office and he contributed his own silver for the


3/5



.The purchase ofThe US Mint in Philadelphia, was the first

money appropriated by Congress for a building to be used for apublic purpose. It was purchased for a total of $4,266.67 on July18, 1792.

1862-1879 - FLOATING fiat currency 7 years

The first use of fiat money (called Greenbacks) in the UnitedStates was in 1862, it was used as a tool to pay for the enormouscost of the Civil War. Greenbacks were a debt of the U.S.government, redeemable in gold at a future unspecified date.They were circulated along with Gold certificates, backed bythe governments promise to pay in gold.

1880-1914 - FIXED Gold standard 34 years

The US dollar was hard pegged to gold resulting in domesticprice stability and virtually no inflation. The financial needs ofWW1 ended this.

1915-1925 - FLOATING Fiat currency 10 years

In order to "pay" for WW1 countries had to print a lot of paper

currency which by necessity mandated a delinking from goldbecause there wasn't enough gold to support the paper.


4/5



1926-1931 - FIXED Gold standard, 5 years

The gold exchange standard was established wherein eachcountry pegged its currency to the US dollar and British poundwhich were then supposed to be backed by the dollar. When the

depression began countries tried to cash in their pounds anddollars for gold. That "run" on gold forced the end of the goldexchange standard.

1931-1945 - FLOATING Fiat currency, 14 years

Fiat currencies reign worldwide leading to huge economicimbalances from country to country and was of the majorcontributing factors to the beginning of WW2.

1945-1968 - FIXED - Gold standard, 26 years

1944 Bretton Woods Accord (similar to gold exchange standardof 1926-1931) Two main currencies again, the US dollar andBritish pound. A run to convert pounds to gold collapsed thepound and began the end of the Bretton woods accord. It took 3years while governments tried to salvage the system and also todetermine what to do next. Kind of like having one leg on theboat and the other on shore. 1963 - New Federal Reserve noteswith no promise to pay in "lawful money" was released. Noguarantees, no value. This is also the year of the disappearance

of the $1 silver certificate. Once again, a subtle shift in plainview.

1965 - Silver is completely eliminated in all coins save theKennedy half-dollar, which was reduced to 40 percent silver byPresident Lyndon Johnson's authorization. The Coinage Act of1965 signed by Lyndon Johnson, terminates the originallegislation signed by George Washington 173 years earlier(carrying the death penalty) enabling the US Treasury toeliminate the silver content of all currency.

1968 - June 24 - President Johnson issued a proclamation thatall Federal Reserve Silver Certificates were merely fiat legaltender and could not really be redeemed in silver.


5/5



1971 - FLOATING - Fiat currency, 5 months

August of 1971 President Nixon ended the international goldstandard and for the first time no currency in the world had agold backing.

1971-1973 - FIXED - Dollar standard, 2 years

The Smithsonian Agreement was passed pegging worldcurrencies to the dollar rather than gold as a fixed exchangerate.

1973-? - FLOATING - Fiat currency, 30 years

The Basel Accord established the current floating exchange ofcurrency rates we are operating under today.

A good barometer of the size of a currency's leverage is the percentage oftotal Debt to GDP (Gross Domestic Product). Currently, that percentage(299%) is higher than the level the nation experienced during the depressionera 1930's. With budget deficits projected for 2003 and 2004, the US willsoon exceed this already inflated level.

TOP OF PAGE

Ads by Google Buy Gold Gold Trading Gold Rates Bullion Gold

History of Fiat Money

Documents

Transcript of History of Fiat Money