Origins of Currency

The use of gold as money has been traced back to the fourth millennium BC when the Egyptians used gold bars of a set weight as a medium of exchange. The British pound was originally defined as a one pound mass of silver.

The term gold standard is often thought to refer to a currency where notes were fully backed by and redeemable in an equivalent amount of gold. The British pound was the strongest, most stable currency of the 19th Century and often considered the closest equivalent to pure gold, yet at the height of the gold standard there was only sufficient gold in the British treasury to redeem a small fraction of the currency then in circulation.In 1880, US government gold stock was equivalent in value to only 16% of currency and demand deposits in commercial banks. By 1970, it was about 0.5%.Through much of the 20th Century until 1971, the US dollar was ‘backed’ by gold, but from 1934 only foreign holders of the notes could exchange them for metal.

Fiat money refers to money that is not backed by reserves of another commodity. The money itself is given value by government fiat(Latin for "let it be done"). In 1971 the United States finally switched to fiat money indefinitely. At this point in time many of the economically developed countries' currencies were fixed to the US Dollar (see Bretton Woods Conference), and so this single step meant that much of the western world's currencies became fiat money based. When governments produce money more rapidly than economic growth, the money supply overtakes economic value. Therefore, the excess money eventually dilutes the market value of all money issued. This is called inflation. So as we are currently seeing in western economies, inflation driven by quantitive easing or money printing.

Fiat currencies nearly always end disastrously. Governments resort to extreme measures to prop up failing currencies. US made gold ownership illegal in the in the 70’s and the French government of the 17th century forced acceptance of its failing currency through fear. Execution was top of the bill for anyone refusing it!