4.1 Brief History of Fiat Money

1. Early Monetary Systems: In the 19th century, global trade relied on sound money backed by precious metals like gold and silver due to their scarcity, durability, and recognizability. As trade expanded, carrying large amounts of metal became impractical, leading to the establishment of gold and silver warehouses. These warehouses issued paper certificates redeemable for specific amounts of gold or silver, marking the early roots of modern banking.

2. Emergence of Central Banks: Banks initially focused on safeguarding clients' metals but eventually engaged in risky practices, issuing more certificates than the gold reserves held. This fractional reserve banking system raised concerns about bank runs. In 1913, the Federal Reserve was established in the United States to stabilize the banking system and manage the money supply by issuing new paper certificates.

3. Executive Order 6102 and Gold Confiscation: In 1933, President Roosevelt issued Executive Order 6102, requiring US citizens to surrender their gold holdings to the government at a set exchange rate of $20.67 per ounce. This move aimed to bolster government control over monetary policy during the Great Depression.

4. Gold Reserve Act and Devaluation: The Gold Reserve Act of 1934 allowed the government to revalue gold to $35 per ounce, effectively devaluing the dollar by 40%. This shift negatively impacted savers and workers, reducing the value of their savings held in paper dollars.

5. Bretton Woods Agreement and Nixon Shock: After World War II, the Bretton Woods agreement in 1944 established the US dollar as the world's reserve currency, pegged to gold. However, in 1971, President Nixon ended the dollar's convertibility to gold (Nixon Shock), marking the transition from a gold-backed system to a fiat currency