Hi,
FIAT (Latin for "let it be") but naturally Politicians can't let anything BE. Somehow it must be changed, improved?, reconstructed, or generally UPENDED. So it's obviously a misnomer but that is what any paper money not backed by any physical commodity (gold, silver etc.) is called. And its value is based on relative scarcity and faith by those who use it. The basis right now is a mite shaky. FIAT is the currently used currency in many countries.
Unfortunately, there is no restraint on the amount of money that can be printed which allows unlimited credit creation. That creates inflation but looks like the economy is great and expanding. When the debt caused by the extra amount of money cannot be repaid (and that's too often the case) that causes deflation (or recession or depression). Clinton and Bush kept saying there was LOW inflation as prices went up and monstrous debt was incurred in the mortgage markets. Hello......??????????
Excessive debt brings FIAT money into existence. We lost our gold standard again in 1971 when President Richard Nixon removed GOLD as the guarantee for our dollar because we were so deeply in debt that printing more was irresistible to Nixon rather than default. Thanks again Ricky!! Truth will out.
You can only print the amount of money that you can back under a gold standard. In other words if one ounce of gold was valued at $10. (don't we wish) then the government could only spend $10. for every ounce in Fort Knox if the dollar was backed by gold. Without the backing the sky's the Idiot's limit.
Hyper-inflation is what destroyed German currency when the money suddenly lost most of its value almost overnight. Since the value of FIAT money is based on confidence when Germany lost that confidence the money became worthless. Shifting to gold can avoid hyper-inflation. Hyper-inflation is the point at which ORIGAMI folding becomes necessary with paper money because that is the only value the paper could offer. Paper sculpture is highly valued in other lands.
One thing all of the founding fathers and framers of the Constitution agreed upon was limitations on the issuance of money. Many of them had experienced financial difficulties because of FIAT currencies. President George Washington thought gold or silver backing was so important that he contributed silver for the initial coin making.
A gold standard resulted in domestic price stability without inflation from 1880-1914until Germany lost its cool. After the first world war was over, a need had been created for a gold EXCHANGE standard which in 1926 was pegged to the pound and the dollar. The Great depression caused a run on gold. And so FLOATING FIAT was agreed upon in 1931 worldwide causing economic imbalances and was a major factor in World War 2. Thanks FDR (President Franklin Delano Roosevelt).
So far GOLD seems to KEEP peace and FIAT ATTENDS war! In 1945 (after the war) a Bretton Woods Accord (similar to the gold exchange standard was tied to the dollar and the pound). When there was another run this time to convert pounds to gold, the pound collapsed. Economists now think the rate for gold was set too low. What do ya know, Prexy Harry Truman, your economist missed the bus! Tremendous consternation was felt in all the country's financial markets including ours.
By 1963 FIAT was back and silver disappeared from coins because of the coinage act of 1965 signed by Lyndon Johnson. This act terminated the legislation signed by George Washington 173 years before. That legislation carried the death penalty for removal of silver but good ole George was not alive to have Johnson shot or hanged. Too bad that the damage Presidents do our country's financial stability is no longer punishable by death.
Nixon ending the gold standard left us with various forms of FIAT. It floated then was fixed (to the dollar) and finally in the mid-seventies the BASEL ACCORD established the current floating exchange of currency.
There is a lot of dialogue today about returning to a gold standard for our dollar particularly with the vast amounts of spending that recent Presidents have done. The debts incurred in the Trillions of dollars are beyond belief.
One of the suggestions that I've read recently is that gold be used as a backing at its current over thousand dollar rate to allow more flexibility. In the past it was brought back at early low rates (as low as $20.67 and $35.) which does not really reflect what has happened to the nation's financial climate.
There is only so much gold in the world and the price has to be realistic if it is pegged to the dollar and/or the pound. We are seeing that we need some financial stability and it would seem the only realistic way that goal can be reached is for the money to have metal backing. If there's no stability in sight, I highly recommend a course in FIAT-ORIGAMI SCULPTURE. I can recommend a good teacher and family member! The green paper is a great color!
Cheers, Connie
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