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The Fiat Money System Essay

1762 words - 8 pages

In a fiat money system money has value because of its relative scarcity and the faith placed in it by the people using it. In this system, there is no limit on the amount of money that can be created. Fiat monetary systems come into existence as a result of excessive public debt. When the government cannot repay its debt in gold or silver, the temptation to remove physical backing rather than to default becomes irresistible. This was the case in 18th century France during the Law scheme, [1] as well as in the 70s in the US, when Nixon removed the last link between the dollar and gold, which is still in effect today.In a fiat monetary system, once the confidence of the value of money is gone, ...view middle of the document...

In the U.S. Constitution (Section 10) states are forbidden from making anything but gold or silver a legal tender. In 1792 the Federal Monetary System was established with the creation of the U.S. Mint in Philadelphia. The U.S. Coinage Act of 1792, consistent with the Constitution, provided for a U.S. Mint, which stamped silver and gold coins. Statute defined one dollar as a specific weight of gold.[6]The first use of fiat money in the United States was in 1862, as a tool to pay for the cost of the Civil War. They were circulated along with Gold certificates, backed by the government’s promise to pay in gold.Later, in order to "pay" for WWI, countries had to print a lot of paper currency. When the depression began countries tried to cash in their pounds and dollars for gold. A run to convert pounds to gold collapsed the pound. That run on gold forced the end of the gold exchange standard. So began the end of the Bretton Woods Agreement. [5]In 1963 New Federal Reserve notes with no promise to pay in "lawful money" was released. No guarantees, no value.The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which is now part of the World Bank Group. [5] These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments.By 1947 the IMF and the IBRD themselves were admitting that they could not deal with the international monetary system's economic problems.[7] Thus, the much looser Marshall Plan—the European Recovery Program—was set up to provide U.S. finance to rebuild Europe largely through grants rather than loans. The Marshall Plan was the program of massive economic aid offered by the United States to many countries in Western and Eastern Europe (including countries belonging to the Soviet block, e.g. Poland) for the rebuilding of their economies.[7]John Law urged the establishment of a national bank to create and increase instruments of credit and the issue of banknotes backed by land, gold, or silver.[3] He had the idea of abolishing minor monopolies and private farming of taxes and creating a bank for national finance and a state company for commerce and...

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