Fiat Paper Money: the History & Evolution of Our Currency
Fiat money is money that cannot be redeemed for a material commodity such as gold or silver. U.S. paper money was once redeemable for gold or silver, but paper money in the U.S. is no longer redeemable for metals.
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1785-1861
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The Gold Standard was a system of money in which each dollar equaled the value of a fixed quantity of gold. The gold price itself was fixed. From 1785 until 1861, the U.S. had a gold standard. Fiat money was printed beginning in 1861 to pay for the cost of the Civil War. It wasn't purely fiat money, because the government promised to redeem the "greenbacks" in gold at some future date.
War Again
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In 1880, after defaulting on its promise to redeem greenbacks in gold, the U.S. government returned to the gold standard. War again intervened. World War I was so expensive that the U.S. government again issued a "floating" currency, that is, a fiat currency with an unspecified future promise to pay in gold.
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Great Depression
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With the onset of the Great Depression, fiat currency was adopted as one of the anti-deflationary policies of the New Deal. Floating international currency exchange rates created instability in the world economy, and the dramatic devaluation of the German currency was part of the catalyst for Germany's turn to Hitler fascism and to World War II.
Bretton Woods
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In 1945, there was an agreement by an international financial body at the Bretton Woods Conference to stabilize global currencies by establishing a gold standard for the dollar and fixing all other exchange rates to the dollar. One dollar was worth 1/32 of a Troy ounce of gold.
The Nixon Trick
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By 1968, the expense of the U.S. occupation of Vietnam and mounting U.S. external debt denominated in U.S. dollars led President Richard Nixon to unilaterally abandon the gold standard, and fiat money was again issued by the U.S.. By 1973, the world abandoned fixed currency exchange rates.
Dollar Hegemony
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Critics argue that the U.S. is in a position to wield the fiat dollar as a financial weapon now that so much of the rest of the world holds U.S. debt and U.S. dollars as central bank reserves. This criticism was given the name "dollar hegemony" by economist Henry C. K.Liu. The argument is that fiat money can be printed in the U.S. to cover debts abroad, but that creditors cannot sell the devalued dollar off because they would wipe out the purchasing power of their own dollar-denominated collections from the U.S..
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- Photo Credit One Dollar - variations of Crumpled dollar image by PaulPaladin from Fotolia.com
