Fiat Money and the Gold Standard

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

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

“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 Plan had been

formulated in a secret meeting on Jekyll Island in November 1910, which Aldrich and

other well connected financiers attended” (Alexander Pope, 3, Freedom School)

Since the plan essentially gave full control of the system to private bankers, there was a

very strong opposition to large banks and the fear of the banks overruling all the other banks.

The actual Act was passed by congress by accident. Everyone agreed that it would never be

passed but it defined the odds and in October of the 25th, it was passed and moved to the

president’s desk. Here is the first part of the Act;

“The plan adopted in the original Federal Reserve Act called for the creation of a System