Course: English IV
FIAT Money and the Gold Standard
During the 19th century, the United States was based on the gold standard. For a definition, the gold standard was the idea that our currency was back by gold. The issue is that it was switched during the early 20th century and we were placed on a monetary system backed only by trust. The economic status of our country shifted after the US government switched from the gold standard to what we now call “Fiat Money” or “Federal Reserve Notes”. To actually understand why the government shifted to a currency “based solely on faith” instead of an actual type of backing you must first understand the actual idea of the gold standard.
The United States first began with a “Bimetallic Standard” or “System of money backed by an object recognized as valuable”. The Dollar was defined as both the trade of gold and silver at the weight on a ratio of 15:1. To put into human words gold and silver was traded at about 1 dollar for roughly every 0.32oz. In 1834, gold was switched as the primary traded item . In 1853, silver was used to make coins so the public could have coins to make change. During the Civil War, the government issued a legal tender that could not be restored back to gold or silver. This was the first of its kind but not the last. The country had been moved to a Fiat system so the government could pay for war supplies with money they did not necessarily have. After the war, the US was switched back to their original metallic standard. This was the very first time the money system had been switched from the gold standard but not the last. After the release of the Gold Standard Act in 1900, the US government had its money based directly from gold. The Gold Standard Act was, "An act to define and fix the standard of value, to maintain the parity of all forms of money issued or coined by the United States, to refund the public debt, and for other purposes. United States notes became redeemable for gold at the historical rate of $20.67 per ounce. While the statute continued to allow for the use of silver coinage and urged an international agreement on bimetallism, this Act secured the primacy of gold in United States’ monetary policy.” (Mike Moffait Citation 3 ) The Gold Act insured that The United States’ monetary system was based on the amount of gold an individual had and the value of it.
Now its time to look at the development of Fiat money and its effects it has. One of the first things to change the US currency was the Federal Act of 1913. The Federal Reserve Act Of 1913 created and set up the Federal Reserve System, the central banking system of the United States of America and granted it the legal authority to issue Federal Reserve Notes and Federal Reserve Bank Notes as legal tender. The act was signed into law and put into effect by Woodrow Wilson. To understand the reason why it was put into effect we must first find out why they decided it was necessary.
For almost 8 years, the United States was without a central bank after the charter for the Second Bank of the United States was allowed to expire. After various financial and risky panics, most Americans wanted the country to adopt some sort of banking and currency change that would provide as a backup to the economy and allow for the spread of currency and credit to move with the economy. Some of the proposed laws were “The Aldrich Plan” named after the creator, Nelson Aldrich.
“The Plan called for the establishment of a National Reserve Association with 15 regional district branches and 46 geographically dispersed directors primarily from the banking profession. The Reserve Association would make emergency loans to member banks, print money, and act as the fiscal agent for the U.S. government. State and nationally chartered banks would have the option of subscribing to specified stock in their local association branch. It is generally believed that the outline of the…