How the US Dollar Came to be a Fiat Currency

Fiat – “An arbitrary order or decree.”

American Monetary AssociationSometimes an organization (AMA is one) that spends its time throwing around lofty phrases like fiat currency should step down off the soapbox for a moment to define exactly what we’re talking about. In modern terms, a fiat currency is one that has no real value to back up its status except the word of the national government that tells us it is worth whatever they say. So much currency passes through our hands in a lifetime; we wonder how many people ever stop to ponder the chain of events that have made those pieces of paper worth anything at all.

In the beginning, precious metals like gold and silver were used to buy and sell goods and services, but we eventually grew weary of lugging around those chunks of metal and decided to substitute pieces of paper with a face value equal to an amount of gold kept in the issuing bank or government. The theory was that any citizen could decide on a whim that he’d rather have the gold than paper and walk up to a bank and demand an exchange. This was called being on the gold standard. It didn’t take our leaders long to figure out that keeping all that gold in reserve was a hassle and people would spend money just as readily if there wasn’t a vault full of gold somewhere guaranteeing that the paper had value.

Thus the fiat currency was born.

In 1933, FDR began fiddling with gold reserve requirements. He suspended the gold standard except for foreign exchange, revoked it as the universal legal tender for debts, and banned private ownership of significant amounts of gold coins. These were all partial measures that set the trend in motion for separating our currency from gold. The final move to turn the US dollar into a complete fiat currency was made by President Nixon in 1971 when he canceled the direct convertibility of the US dollar into gold.

We’re pretty sure the Federal Reserve had been playing fast and loose with gold requirements ever since its formation in 1913 but, after this move by Nixon, there was no longer any necessity in keeping up a pretense. They’ve been driving down the value of the dollar with uncontrolled printing and simultaneously increasing inflation ever since. Once this country is sucked dry, they’ll move onto the next willing victim.

The American Monetary Association

American Monetary Association

Flickr / Tony the Misfit

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