On Funny Money (Yours and Mine) - Part 1

The United States Dollar - those dollars that so many hundreds of millions of people around the world earn, covet, spend, save, wager, steal, find, donate, invest, and lose - is a fiat currency. A key characteristic of a "fiat currency" is that the value of the currency (measured in purchasing power) does not derive from a relationship between the currency and something having an intrinsic value commensurate with the value the government seeks to ascribe to the currency (e.g., a raw material like gold). Instead the value of a fiat currency depends completely on the people who own units of the fiat currency agreeing among themselves by buying and selling goods and services for quantities of units of the fiat currency as to the value of units of the currency from time to time. Again, value in this case is being measured by the amounts of goods and services that can be bought or sold in exchange for various amounts of units of the currency (i.e., by the purchasing power of units of the currency).

Our bills are also known as Federal Reserve Notes. The current currency regime was commenced in 1913, following passage of the Federal Reserve Act. If you click here you can see a history of paper money in the United States. I won't vouch for the accuracy of the history reported there. But I didn't see anything that was wildly inaccurate in there, based on my limited actual knowledge on the topic.

Ron Paul published this article recently discussing the relationship between gold prices and the United States Dollar and explaining some of the ramifications of fiat currencies in general. All humans living in regimes that have fiat currencies managed by central governments need to understand all the implications of the following two sentences (emphasis mine):

Governments by their very nature want to expand, whether to finance military intervention abroad or a welfare state at home. Expansion costs money, and politicians don’t want spending limited to the amounts they can tax or borrow.

That's the truth, Ruth.

IN GOD WE TRUST.