Why the Dollar is Called a Fiat Currency

fiat currencyThe concept of a central bank has not always existed in the world and didn't appear on the scene in America until 1913, allegedly created by an act of Congress but surreptitiously organized by a wealthy group of bankers at a clandestine meeting off the coast of Georgia, gathered at a place known as Jekyll Island. The events which transpired around that particular time period in the United States should be of interest to all citizens, since it has much to do with the economic disaster we're currently mired in the midst of – but that's a topic for another today.

For now, let's get our heads around the idea of “fiat currency.” The word “fiat” is Latin in origin and refers to an arbitrary order issued by a government or other authoritative figure. When applied to paper money, fiat currency refers to the scary notion that our dollar has value only because the government says it does. The whole system works fine in a vacuum, but what if the creditworthiness of a nation is called into question or stupendously short-sighted, out-of-control printing of currency threatens us with the prospect of inflation or even hyperinflation?

Then, Houston, we have a problem.

Prior to the advent of central banks and fiat currencies, which exist in every country around the world today, governments would create currency by placing their official stamp on small chunks of precious metal, mostly gold and silver, which came to be called coinage. Since gold and silver could always be melted down to its core metal content, people didn't worry that their money would become instantly useless if the government collapsed. The economic power wielded by a nation was measured by how much gold and silver it had socked away in the national treasury.

As worldwide idiocy prevailed over the centuries, political leaders began to wander far afield from this monetary system, collectively referred to as the “gold standard,” as the idea of paper money began to manifest itself. Soon, someone came up with the bright idea of increasing the paper money supply without putting any more gold or silver in the national treasury and inflation was born. The United States was officially taken off the gold standard in the early 1970's by President Nixon and the American dollar became a fiat currency, possessing no intrinsic value but carrying worth in different denominations only because the government declared it to be so.

The American Monetary Association is convinced that our country will eventually end up back on the gold standard but it's going to be a hideously painful trip getting there.

The American Monetary Association Team

American Monetary Association

Flickr / brownpau

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