The History of Fiat Currency

Feb 21, 2023 | Finconomics 101, No Bull Economics

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Fiat currency was introduced to help finance wars & their resulting depressions.  Would a return to the gold standard help support lasting peace by diminishing funding for armed conflict? That would be a good thing…

Fiat Currency Key Points  

From the late 1800s until the 1930s, most countries in the world adhered to an international gold standard which prevented them from increasing the amount of money in circulation without increasing their gold reserves through trade. However, many European countries temporarily abandoned the gold standard during WWI (1914 – 1918) so they could print more money to finance their war efforts & it is notable that the U.S. Federal Reserve system was created at the end of 1913.

The U.S. economy boomed during the Roaring Twenties, driven by the post-war recovery, prompting the Federal Reserve to raise interest rates in 1928 to tame inflation. At the same time, European countries that had borrowed money from the U.S. during WWI had trouble paying off their debts & demand for U.S. exports slowed. Taken together with the stock market crash of 1929, and a subsequent wave of bank failures in 1930 & 1931, resulting deflation prompted the public to hoard gold (as the public could exchange dollars for physical gold at that time).

In March 1933, President Franklin Roosevelt called a special session of Congress immediately after his inauguration and declared a 4-day banking holiday. What followed was the Emergency Banking Act which allowed for the re-opening of banks after examiners determined them to be financially secure. Also known as the Glass-Steagall Act, this law also separated commercial & investment banking and created the FDIC.

In turn, on 5/1/33 Roosevelt signed Executive Order 6102 requiring all gold & gold certificates to be surrendered to the federal government (at a $20.67 per ounce conversion price). The House Joint Resolution 192 (passed by Congress on 6/5/33) then eliminated the gold clause in the constitution and in all public & private contracts. This exchange of gold for fiat currency allowed the U.S. to increase the amount of Fed gold reserves & after the government raised the price of gold to $35 per ounce (buying low & selling high), the Federal Reserve was able to increase the money supply – helping the economy to recover.

Finally, the gold standard for US$ was completely ended in 1973, allowing the dollar to float without any collateral other than American industriousness & the Fed’s reputation. We should be mindful of the value of this collateral as the drumbeat of war threatens not only our physical safety but our economic safety as well.     

US Gold Standard History Graphs
US Gold Standard History Graphs
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