How We Up Ended With Fiat Money

Posted: March 22, 2023 in Economics, History
Tags: , , ,

By Richard Martin

An acquaintance asked me how money backed by gold or any other commodity can be more stable than fiat currency. Here is part 1 my answer.

Money started as commodities that were used in exchange to resolve the coincidence of wants problem. If I have apples and you have oranges and someone else has bananas, but the quantities, qualities, and timings don’t match, we can use a neutral commodity as a medium of exchange. That commodity then becomes independently valued for its saleability and marketability and eventually is considered a monetary good.

Commodities that have served as money include seashells, quipu (Peru), wampum, beads, tools, jewelry, iron, bronze, glass, copper, silver, and of course, gold. And also livestock, which is reckoned as heads — caput in Latin — whence the words cattle, chattels and capital. In other words, commodity moneys are nothing but  liquid wealth.

In the early modern period in Europe, banks developed as money warehouses. People deposited their holdings of precious metals for safekeeping and convenience. Banks would issue certificates of deposit, letters of credit, and banknotes, all of which could be used as money substitutes or fiduciary media. Depositors could also draw funds by writing checks. 

But that was too enticing to bankers, who started issuing banknotes and various certificates on credit under the assumption that they would not all be exchanged for physical money on deposit. They were then commandeered by governments, primarily in Great Britain, or set up various private rackets and cliques to issue loans to friends and family without full backing.

Through a series of factors including influence peddling, bribery, fraud, jurisprudence, and legal chicanery, over 400 or so years we have gotten to the current monetary system where all official currencies in the world are entirely fiat and we have a full fractional-reserve banking system. This leads to credit bubbles and the cycle of boom and bust.

More to follow.


Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.