"I ain't saying she's a Gold Digger..." The fiat system versus gold standard

So, if the US needs cash, why don't we just print more? We have little bureaus that do that, right? 

Well, the US could print more money at one of those cute little bureaus, but that would be a very bad idea. I am talking white shoes after Labor Day bad. Linen slacks at a dirt bike race bad. Red lipstick without lip liner bad. REALLY, really bad. 

The United States uses a monetary system that is very closely aligned with a fiat system. Some will argue that a fiat system is fictional, like perfect competition and complete markets. While the concepts are sound, these theories often do not exist in real world scenarios. Monetary economists will not tell you that the fiat system is fictional. I'll let you make your own judgement. 

A fiat system is a monetary system in which the "money" is not backed by anything. I have run across several sources who claim that the U.S. dollar is backed by the "full faith and credit of the United States." (I giggled. I know what we owe China.) By definition alone fiat money is money that has no intrinsic value and cannot be converted into anything else (Goldberg, 2005). I'm thinking: I can convert that money into a pair of shoes! Watch me!  No one is forced to accept our money. It is used on general good faith that it is valuable and accepted by others. Well, this is where it gets interesting. Yes. Really.  I promise. Get a snack. This is going to be EPIC. (If you believe that I have a ponzi presentation for you...)

Once upon a time money was actually pieces of precious metal. Gold, silver, bronze, etc. As you can imagine, this got rather heavy. Could you image trying to cram pieces of gold into your Prada evening bag instead of just a debit card? This was global. Yes. Really. A long, long time ago a global monetary system did exist.  Oh, yeah, before there was money, there was a bartering system. You could trade extra squirrels for beans and stuff. (Yawn). The appearance of money helped with financial planning. Now, we could use money as storage. Our extra squirrels were given a monetary value by a central bank, converted into a currency,  and we could use that currency to buy more land, shoes, or food without worrying that the seller of those things had enough squirrel. So, our money was backed by squirrel, or gold, or whatever. When our currency was backed by gold, it was called the gold standard. The US dollar is no longer backed by gold.  It's backed by "the full faith and credit of the United States government." (See above). 

Coal companies used a fiat money system. The workers were paid with coal company credits. The workers lived in company owned homes. They paid their rent with the coal company credits. They bought groceries with these credits at the company store. These credits were worthless outside of the coal company, but within those constraints the credits were perfectly acceptable monetary tender. 

Some evidence suggests that a change in the value of gold and the US's use of the gold standard led to the Great Depression. Economic conditions in England (read: fear) led to people trading in their paper money for gold. England was in grave danger of running out of actual, physical gold to give in exchange for its paper currency - which was backed by gold (Gold Standard). This fear spread like a kitten video on Facebook. England broke from the gold standard.  In 1931, roughly $20.67 bought an ounce of gold. This was changed to $35 for an ounce, which decreased the value of a dollar and started inflation. Inflation, in a nutshell, means it takes more dollars to buy the same pair of shoes.  In 1933 Roosevelt made the break from the gold standard. (Roosevelt was a democrat). If your currency system is not backed by gold, you can adjust interest rates and attempt to control inflation.  You can control the amount of money floating in your economy. Now, roughly 90% of economists agree that this decision is what pulled the United States out of the Great Depression. In 1971, Nixon officially ended the gold standard for the United States.  (Nixon was a Republican for those keeping score.) 

So, when the most recent recession hit, why did we not just make more money? Inflation. Yes. If the government prints more money and just hands it out - what would the general public do with it? Some people would save it, or pay off a loan (which decreases interest payments and therefore the money banks have to lend). Me? Even with my understanding of economics, I'm going shoe shopping!  Suppose all my fellow shoe-addicts do the same? It's almost fall...the new Ugg line is out. Heck yeah! I need some new "UGG"ly boots!  So, now there is a rush on Uggs. Our local shoe store has a limited stock. What do they do? Do they leave the price the same and not have enough boots or do they raise the price to control the supply and demand?  I'm betting the prices go up. The supply is limited. The demand is high. Here we go... the demand is up, the boots cost more, the factory workers are working more hours, the company has to pay more wages, etc. Productivity is down. If you suddenly had extra cash, how motivated would you be to work more? Suddenly, prices on everything go up. Inflation. Simplistic, but inflation nonetheless. 



Goldberg, D. (2005). Famous Myths of 'Fiat Money'. Journal Of Money, Credit, And Banking, 37(5), 957-967.