The gold standard was in place until 1971, when US President Richard Nixon, faced with surging inflation and high unemployment, ended it as the amount of foreign-held dollars exceeded the amount of gold in the US reserves. International balances were settled in dollars, which were convertible to gold at a fixed exchange rate. When the Great Depression and two world wars severely affected the global economy, world leaders created an international monetary system positioning the US dollar as a global currency. By the 18th and 19th centuries, paper currencies began to take hold, although many of them served as promissory notes to pay specific quantities of gold and silver.Ĭountries like the UK and the US went on to embrace the gold standard, a monetary system tying a standard unit of currency to the value of a certain amount of gold. Coins made from precious metals like silver and gold were the standard for thousands of years. The use of commodity money has been common throughout history. And it allows central banks to have a lot of influence on the economy because they can control the money supply. Its value can be largely determined by how the issuer's economy performs. In essence, it has value because the authorities that issued it say it does.
This money is legal tender, but it has no intrinsic value. Note: The term fiat is derived from the Latin word meaning an authoritative determination or order. Those are two of the most well-known fiat currencies. The European Central Bank controls the supply of the euro common currency. In the US, the Federal Reserve controls the supply of dollars. Today, most money in the world is fiat money. Commodity-backed currencies, on the other hand, get their value from the underlying price of the gold, silver, or other materials they're linked to. It gets its value based on the trust people place in the authorities that issue it.
FIAT MONEY FULL
You've probably heard the expression, "Backed by the full faith and credit of the US government," in reference to the dollar.
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