Endgame Concepts: Your Dollars Are Worthless–Understanding Fiat Currency

Posted: February 20, 2012 in General

Discuss this with a room full of fifth-graders, and they will understand it in about 30 seconds.  Talk about this with a class of seniors in high school, and it will become clear to them with time–then they’ll get really mad.  But, review this with most adults, and they will either a) not understand or b) ignore what you are telling them.  What is this concept, so difficult for adults but clear as crystal to anyone under 12?

U.S. Dollars themselves are worthless…

(Ditto for Euros, Yen, Yuan, Rials, etc…)

Today, as a public service, American Endgame risks its integrity and credibility to explain a concept that, until very recently, was reserved for the Kook’s Corner of the Internet.  Rest assured, I am not going to take this discussion too far afield.  There will be no diatribe on how FDR sold Americans as debt slaves to the Federal Reserve, or anything of that nature.  This is meant to be a serious discussion about an important topic that adults in the United States know almost nothing about, but which has everything to do with understanding the house of cards upon which our society has been built.  Follow along, and please feel free to post questions below…

  1. The U.S. Dollar is an example of a fiat currency.  So, what is fiat currency?  Quite literally, it is a currency that derives its value, not from its intrinsic worth, but because of a government law that says it has value.  How else could a piece of cotton and linen be worth a dinner?  Or a set of golf clubs?  Or anything?  And what makes a $1,000 bill worth ten times a $100 bill?  Adding a zero?  Other than the factor of ten in ink, they are identical objects.  You’d think a $1,000 bill would be ten times larger–but its not.  Again, the only thing that makes fiat currency worth anything is a government edict.  Hence the name “fiat,” which comes from Latin and means “let it be done.”  In other words, “let it be money!”  [Reminds me a lot of “let there be light,” which also seems like an inadequate explanation of other examples of creation from history.]
  2. The value of the Dollar used to be linked to precious metals. While the history of the relationship between gold, silver, and the Dollar is long, complex, and beyond the scope of the discussion, we can pick it up for today’s purposes in 1933, when President Roosevelt officially set the value of gold at $35 per Troy Ounce.  This meant, conversely, that one Troy Ounce of gold was worth $35, two $70, three, $105, etc.  By this time, it wasn’t to say that $35 could be exchanged for a Troy Ounce of gold, but there was an explicit “peg” in place.  The value of the Dollar was anchored to gold in a particular ratio, or standard.
  3. The value of other currencies was linked to the value of the Dollar.  While the Bretton Woods System may be the subject of a future post, suffice it to say that after World War II, the major global powers agreed to link the value of their currencies to the value of the Dollar (the world’s only major, stable currency), and the U.S. in turn agreed to (more or less) fix the value of the dollar to a standard of $35 per Troy Ounce of gold.
  4. Eventually, however, this linkage was abandoned, and the Dollar became officially worthless.  Of course, when an economy grows, the need for more Dollars increases.  Without an equally expanding supply of gold, this standard would be difficult to maintain for very long.  Therefore, over time, the ratio of U.S. Dollars in circulation to Troy Ounces of gold began to increase.  In turn, the value of other nation’s currencies began to decline.  You can imagine how well this went over in, say, France or Great Britain.  Nations around the globe began to abandon the Bretton Woods System, which forced the United States to “float” the Dollars value.  In other words, the Dollar was no longer “pegged” to the value of gold.  Instead, the value of a Dollar was determined by a series of formulas, and was essentially equal to whatever the U.S. Government and the Federal Reserve decided it was worth.  Finally, after nearly 50 years of erosion, the U.S. Dollar officially had no intrinsic value, nor was its value tied in any way to anything that had any intrinsic value.  The Dollar was finally, officially, a fiat currency.

Why does this matter to the average American?  Stay tuned for a future exploration of the fiat concept…

~DS

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