Fiat Money In The 20th Century

It was only during the 20th century that Fiat money became a serious issue. With the outburst of WW1 when governments began spending enormous amounts of money on armaments and soldiers, most governments suspended the citizens rights to redeem their money for Gold, but still kept on printing money.

This resulted in huge inflation, so in 1945 many governments signed the Bretton-Woods agreement when the USA pegged their dollar to a fixed amount of gold. US$ could then be redeemed for gold, and this helped set international balances of currency and provide stability.

26 years later President Nixon removed the gold standard and declared the US$ legal tender. Fiat money is virtually a government promise to honour the value of their money. In pre-1913 USA, gold WAS money, and the pieces of paper (cash or promissory notes) were receipts for gold, redeemable for golds on demand at banks.

Between 1913 (when the Federal Reserve was created) and 1971 (when Nixon broke the link between the US dollar and gold) the US and other western countries gradually changed in a series of steps to a system of fiat currency, where paper cash IS money and it can no longer could be exchanged for any other physical thing. Only private banks and central banks can create money in the current fiat system.

In WWI the western countries suspended the gold standard, so notes were no longer redeemable. The warring countries issued vast amounts of war bonds, for more gold than they had, which is why the world could never return to the pre-WW1 gold standard -- as soon as anyone tried, the bond holders would show up and ask for their gold. Bretton-Woods was the best they could manage, and that only lasted to 1971 before too much paper and not enough gold meant the US gold reserves were depleting quickly as governments (especially France) redeemed US dollars for gold. A political economy now exists.

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