A History and Explanation of What Fiat Currency Is

Prior to 1913, the U.S. currency was a representative currency called the U.S. Note (USN).  It is called a representative currency because its value was backed by gold and silver. With the Federal Reserve Act of 1913, the Federal Reserve Note (FRN) was created which was also backed by gold and silver. The USN’s and the FRN’s were circulated side by side, and were accepted by the public as one and the same. Gradually, the USN’s were recalled and destroyed. What remained was solely the FRN and while it was backed by gold and silver, the FRN (called a dollar) remained a representative currency.

What followed was the Great Depression that began in August of 1929, when the United States economy first went into an economic recession. Although the country spent two months with declining GDP, it was not until the Wall Street crash in October, 1929 that the effects of a declining economy were felt, and a major worldwide economic downturn ensued. The market crash marked the beginning of a decade of high unemployment, poverty, low profits, deflation and lost opportunities for economic growth and personal advancement.

While the causes of the market crash are still uncertain and controversial, the net effect was a sudden and general loss of confidence in the economic future of the US society. The usual explanations are generally high consumer debt, ill-regulated markets, and the lack of high-growth new industries, all interacting to create a downward economic spiral of reduced spending, falling confidence and a constantly low GDP. The economy reached bottom in the winter of 1932-33.

The Great Depression brought about a need for the government to add additional FRNs to stimulate economic growth. However, this could not be done if the government didn’t have enough gold to back the newly printed FRNs. This is when, on April 5, 1933, U.S. President Franklin D Roosevelt signed Executive Order 6102, “forbidding the hoarding of gold coin, gold bullion, and gold certificates.” It required all persons to deliver on or before May 1, 1933 all gold coins, bullion and certificates to the Federal Reserve. Although there were a few exceptions to this order, in effect, FDR confiscated enough gold from US citizens to back the printing of new FRNs.

The Treasury was instructed to pay $14.33 more dollars for the same ounce of gold that just the day before was valued at $20.67 per ounce. Americans were led to believe that FDR magically increased the price of gold. But in reality, he had just drastically, with a stroke of a pen, lowered the purchasing value of the dollar.  Not only did the government confiscate the people’s gold, it also stole 41% of their purchasing power by devaluing the dollar.

On August 15, 1971, Nixon removed the FRN/dollar from the gold standard, officially changing them from a representative currency, backed by physical gold, to a pure fiat currency, backed by nothing more than the public’s faith in the US economy.

A fiat currency has absolutely no intrinsic value.  It can’t be exchanged for a physical good that does have value, such as gold and silver.  Instead, it derives its value based on the issuing society’s current and future economic output.   This can be measured in commodities produced, taxes collected, etc.

When confidence in a society’s future economic output is high, the value of its fiat currency is high.  But what happens if that confidence begins to fall as it did during the Great Depression?  It drags down the value of a dollar in the form of inflation.  What you could buy for $5 today could cost $50 next year during periods of extreme inflation (devaluation of fiat currency).

And this is where the real danger is when holding assets in fiat currency.  Buying power can be destroyed, rendering your paper assets nearly worthless.  Gold and silver have always been the antithesis of fiat, and this is why central bankers have been actively manipulating gold throughout the 20th century.

We are now in an era of unacceptable national debt, and unsustainable monetary policies that will eventually lead to the destruction of the dollar’s dominance as the perceived world reserve currency.  Or worse, they could lead to another Great Depression.  Both of these occurrences, or any other negative impact to the US economy would destroy the value of any paper assets through extreme inflation.

To protect ones wealth, it is of good financial reasoning to hold a portion of your wealth in physical gold and silver.  Gold and silver have never in the history of human civilization been worthless.  They always gain in value during periods of inflation.  They will hold their buying power when the dollar does not.

Luckily, the limitation on gold ownership in the U.S. was repealed after President Gerald Ford signed a bill legalizing private ownership of gold that went into effect December 31, 1974.  We can now, without breaking any laws, hold wealth in the form of gold and silver, which will always have a worldwide value that has no counterpart (society) to provide that value.

To put all of your wealth in the faith of a fiat currency may one day (soon) prove to be unwise.

For more information on how a fiat currency, like the US dollar, obtains its value, read this.

If you would like to discuss your options for diversifying some of your assets into physical gold and silver, please call anytime – 1-800-707-7923.

2016-10-31T12:19:53-04:00By |Categories: Invest in Gold, Invest in Silver, Precious Metals Investing|

About the Author:

President and CEO of National Coin Broker
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