Do you think you are going to trade your crumpled up greenback for a lustrous chunk of gold? Think again. Despite this popular notion, we have not been able to swap our paper dollar for a precious metal since the gold standard was nixed in 1971. So what is the value of paper money–well cotton and linen?
Currency has taken on many forms around the world—from shells to rugs to precious metal. But of course, all of this had its drawbacks. Do you want to carry a back-breaking sack full of copper, gold, or silver? I don’t. Neither did our forefathers. Likewise, traveling with rugs and shells could be cumbersome. Thus, the monetary system has gone through many revisions. We will focus on the U.S. currency in order to get a glimpse of monetary reforms across the globe since most of them mirror the U.S. in many ways.
The U.S. dollar was modeled after the Spanish silver dollar in 1786, although the etymology of the word dollar comes from the German language. The dollar was initially silver, but fabricated from gold later on. Of course, the fluctuating inflation rates impacted this practice and by the 19th Century, authentic gold coins we no longer used. That’s right. At one time, we could actually melt our metal coins in order to fabricate luxury items if we had the skill and desire to do so. But over the years, coins were plated with precious metals in order to lighten them or due to price fluctuations. So coins are no longer all that valuable in theory—except for what they can buy.
Then again, the United States congress passed official standards for creating money a few years later which banned us from defacing our coins anyway or altering them in anyway. President George Washington took interest in money alongside his other interests while developing his fledgling government system. By 1792, Washington’s right hand man, Alexander Hamilton, developed the Coinage Act or Mint Act. They stipulated that only the government could produce currency. In fact, only one allotted chief coiner could serve as the artisan to shape and engrave our new silver coin. By the following month, the same standard essentially applied to the newly developed copper cent and half-cent. Shortly thereafter, the death-penalty was actually subscribed to anyone who embezzled the metals used for creating currency or if one defaced the money.
What if we instilled the death penalty for altering the coinage today?
Plenty of jewelers who make necklaces from coins would be running for their lives. I might warn you that this law is technically still on the books. Luckily, there have been many revisions of the coinage act over the years which take precedence over the initial document in some regards. Some changes include transferring the dollar to paper in 1861 as a response to debts incurred during war. In essence, the early dollar was a bank note that could be redeemed for value later—like a paper credit card.
The Fiat System and the fall of the Gold-standard
The dollar was eventually backed by gold starting around 1900 in order to give it value. The gold standard only lasted for about the first third of the 20th century. The 1928 gold standard stipulated that currency would be supported by a specified quantity of gold. Additionally, silver certificates started backing the paper dollar upon complaints about the gold-backing.
The words: “will pay to the bearer on demand” was printed on the United States Note for considerable time.
You might be surprised to the know that the U.S. reserve notes have not actually been backed by gold since 1934 according to some sources. Others sources report that this practice came in waves until 1971 when President Richard Nixon claimed that the U.S. urgently need a new monetary system. Nixon’s claimed that the international dollar was “a hostage in the hands of international speculators.” Therefore, he introduced the import tax in exchange for the ability to trade printed dollars for gold due to “unfair exchange rates.”
But this was not a new idea. During the Great Depression, no one trusted the gold-backing system so the banks were given a “run for their money”—literally. Nearly all currencies dropped the gold-standard (and silver-backing later) when the public started hoarding gold-coins. Moreover, they lost their faith that the paper dollar was actually backed by gold. By 1934, the Federal Reserve Act was amended with section 16. The Federal Reserve note seemed to be only worth the “lawful” value it was given.
And the rest of world followed suit–except for Mongolia. We now have a world-wide fiat system in which monetary systems are not intrinsically useful. Instead, the money only has symbolic value. But this does not mean it is worthless. Instead, the new system is cryptic to most of us, but it is largely based on import/export systems. Currency is measured against goods and services and global exchange rates. Since these rates change daily, we keep our eyes on the numbers in the stock market. When prices fall, our dollar falls with it—and vice-versa. So in short, the dollar is now supported by foreign exchange rates. And its net worth can be a matter of faith.
Please share your opinion. Do you think paper currency is still valuable?