During the Continental Congress, the founding fathers deliberately forbid the nascent federal government from issuing "bills of credit. But paper issued by the federal government would get its chance, thanks to the Civil War and its economic fallout. They may have been un-constitutional, but they worked, making it possible to buy equipment and pay soldiers. War has a habit of quieting concerns about currency's backing.
The end of the war, however, brought with it inflation and renewed attention to the constitutionality of paper money. It was Salmon P. Chase who, first as the secretary of the Treasury Department, made the greenbacks possible. Then, as a Supreme Court justice less than a decade later, he made one of history's most famous flip-flops, ruling that currency notes were illegal. He made this determination despite the fact that the face printed on them was none other than his own.
A reshuffled Supreme Court--two new justices were appointed by President Ulysses Grant the same day of that initial verdict against paper money--would quickly reverse the ruling.
Two subsequent decisions in what became known as the Legal Tender Cases sealed the deal: the Constitution may not explicitly grant the federal government power to issue bills of credit, but it had the implicit right to do so be- cause governing over a country, or at least this one, would be flat-out impossible without it.
Before the advent of a single circulating national currency, though, thousands of private banks issued their own notes, sometimes backed by bullion or coinage in a safe, but just as often backed by nothing at all.
This was a monetary free-for-all, and--considering the greenback's universal acceptability now--it's strange to imagine how, less than years ago, money in America was a smorgasbord. Countless varieties of paper money circulated throughout the land, most issued by unchartered "Wildcat" banks, and much of it of questionable authenticity and unstable value.
Even during that chaotic time, however, the paper's value always depended, at least in theory, on the idea that you could exchange it for a weight of gold or silver. The conviction that precious metals are value incarnate was still as strong as it had been 2, years prior. It was inconceivable that currency could have value without this link to metals-- that currency value might be fluid.
That too would soon change, during what was the final stage in this metamorphosis from ancient money to the cash in your wallet. The first step was in , when President Franklin Roosevelt called in the public's gold supply as part of a radical effort to rebuild the economy during the Great Depression. Then in , representatives of the major economies of the free world anointed the U.
Other world currencies, instead of having their own correspondence to gold, would fix their value to the dollar, and wouldn't be allowed to change their exchange rates without special permission from the newly minted International Monetary Fund. The fiat currency system lets central banks print money out of thin air as they see fit. They usually do so to access more funds without raising taxes. Governments of countries whose economies are large, strong, and stable also resort to borrowing in order to spend beyond their means.
The world has seen several monetary systems over the centuries. Many have failed, some worked, and a few are either on the brink of collapse or in the position to change the financial system forever.
This monetary system uses physical commodities as currency. Precious metals, especially gold and silver , have been the most successful examples. The properties of gold and silver share some traits with fiat currencies. Because of their lengthy and solid track records, the whole world believes in their value. Scarcity is the reason why gold and silver never lose their financial worth. Like in a fiat economy , the entity that controls it can intentionally devalue to expand the currency supply.
Back then, governments melted gold and silver coins and mixed them with less valuable commodities like copper to produce more money. But once consumers and merchants caught on, the purchasing power of the newly minted coins dropped.
Also known as commodity-based money , this monetary system allows the use of items with no intrinsic value like paper bills as currency , as long as a commodity with unquestionable value backs them.
Holders of representative money could exchange it for the commodity supporting it on demand. The gold standard was a product of the representative money system. It eliminated the need to use gold coins for everyday transactions.
Instead, people could use bank-issued gold certificates, which served as claim checks for the physical gold they owned.
After the first and second World Wars, European countries lost their gold reserves by financing their military efforts and importing foreign goods. To help stabilize the post-war global economy, delegates from 44 allied countries agreed to set fixed exchange rates between their national currencies and the US dollar.
This arrangement allowed the world to economically recover, while Uncle Sam enjoyed favorable exchange rates on its own currency. However, the role of gold as a currency stabilizer diminished as the US exploited its unique privilege to print money.
It flooded the market with more greenbacks than its gold reserves could support. The world has been out of the gold standard for 50 years now. But representative money is still in use in the form of financial instruments like checks. So, what is fiat money? Up until that point, the Bretton Woods Agreement of established that the value of most national currencies would be tied to the greenback. Back then, the US dollar was backed by gold. Therefore, the US could print more money to create additional fiat cash.
It enabled the country to borrow by offering US Treasuries to investors without accumulating more gold. The world took notice and realized that the additional US dollars could destabilize the financial system. As a result, other countries converted their greenbacks into gold to build up their reserves.
Since there were more US dollars in circulation than bars of gold in the vaults, the States would have run out of gold before it could pay all of those who wanted to redeem their US dollars.
President Nixon had to untie the US dollar from gold to prevent the international financial system, along with the US economy, from collapsing. Floating currency exchange rates have become the norm.
And gold has been adopted as a hedge against inflation and downgraded as a safe haven. Under the current money system, free-market forces determine the value of this type of currency relative to one another. Cryptocurrency is a digital currency that is created and stored on the blockchain. It lives on a decentralized network, keeping it out of government control. Cryptocurrencies are either coins or tokens. Coins have their own blockchains, whereas tokens are built on top of existing ones.
The government began printing banknotes with higher values in order to keep up with inflation. The country's central bank had to stop printing money, causing the Zimbabwe dollar to officially lose value in the foreign currency market. The country eventually turned to the U. Representative money is government-produced money backed by a physical commodity such as precious metals.
Other forms of representative money are still in place, including financial instruments like checks and credit cards. These forms of payment are used today in place of traditional money, with the intent to pay at a later date. Representative money has a long history. In the 17th and early 18th centuries, furs and commodities like corn were used in transactions. This was followed by precious metals like gold and silver. Up until , the world followed the gold standard, where a person was able to exchange the money they held directly for gold.
A country that followed the gold standard set a fixed price for gold, buying and selling gold at that price. That fixed price was used to determine the value of the currency. The major appeal for representative money was that it was not influenced by inflation—governments were only able to print enough money for the amount of gold they held in their vaults. While fiat money doesn't have intrinsic value —that being through an objective calculation—its value is set by the government that issues the currency.
Most modern currencies around the world are forms of fiat money. Fiat money can be used to buy goods and services since both parties involved in a transaction agree on the currency's value.
Representative money, on the other hand, is valued based on the instrument backing it, whether that's a commodity, asset , or another financial instrument such as a check. A single dollar may, for instance, be worth a specific amount of gold. Most currencies are no longer backed by commodities. But there are still other forms of representative money, such as checks, money orders , and bank drafts. They can be exchanged for the value listed on the instrument. As mentioned above, the United States severed its ties with the gold standard in , turning its currency into fiat money.
That led all national currencies to be valued against the U. Instead of using gold as the power behind the money, the government is the strength and the reason fiat money has value. The money has value because the government says it does. In turn, people want to have fiat money.
If the government falls on hard times or if people everywhere suddenly did not want a form of currency such as the U. But many governments end up printing too much paper money, which leads to inflation. A dollar is no longer worth a dollar in gold. When this happens, the money becomes fiat money. Fiat money is a form of currency that is backed by a country's government. As such, this form of money retains its value through the stability of the government and the national economy.
Yes, fiat money does have value. Its value is determined by the government, not by the material from which it is produced. The term is derived from the Latin word fiat, which means a determination by authority—in this case, it's the government that decrees the value of the currency and isn't representative of another asset or financial instrument such as gold or a check. Bitcoins aren't backed by commodities, so they're not necessarily a form of representative currency.
They are, though, backed by the faith of investors and—to some degree—governments, so they may be considered a form of fiat currency.
Federal Reserve History.
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