In a fiat money system...www.kwaves.com

http://www.kwaves.com/index.html In a fiat money system, money is not backed by a physical commodity (i.e.: gold). Instead, the only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it. A good primer on the history of fiat money in the US can be found in a video provided by the Mises.org website. In a fiat monetary system, there is no restrain on the amount of money that can be created. This allows unlimited credit creation. Initially, a rapid growth in the availability of credit is often mistaken for economic growth, as spending and business profits grow and frequently there is a rapid growth in equity prices. In the long run, however, the economy tends to suffer much more by the following contraction than it gained from the expansion in credit. This expansion in credit can be seen in the Debt/GDP ratio. We track the bubbles created by this expansion of debt at the inflation / deflation page. In most cases, a fiat monetary system comes into existence as a result of excessive public debt. When the government is unable to repay all its debt in gold or silver, the temptation to remove physical backing rather than to default becomes irresistible. This was the case in 18th century France during the Law scheme, as well as in the 70s in the US, when Nixon removed the last link between the dollar and gold which is still in effect today. Hyper-inflation is the terminal stage of any fiat currency. In hyper-inflation, money looses most of its value practically overnight. Hyper-inflation is often the result of increasing regular inflation to the point where all confidence in money is lost. In a fiat monetary system, the value of money is based on confidence, and once that confidence is gone, money irreversibly becomes worthless, regardless of its scarcity. Gold has replaced every fiat currency for the past 3000 years. The United States has so far avoided hyper-inflation by shifting between a fiat and gold standard over the past 200 years.

1785-1861 - FIXED Gold standard 76 years The founding fathers were concerned about the unrestrained control of the money supply. One thing they all agreed upon was the limitation on the issuance of money, Thomas Jefferson warned of the damage that would be caused if the people assigned control of the money supply to the banking sector, "I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. This issuing power should be taken from the banks and restored to the people to whom it properly belongs. If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered. I hope we shall crush in its birth the aristocracy of the moneyed corporations which already dare to challenge our Government to a trial of strength and bid defiance to the laws of our country" Thomas Jefferson, 1791 Many of the founding fathers experienced the damage caused by fiat currency. Most of the revolutionary war was financed by worthless currency called "Continentals". The Continental Currency ("Not worth a Continental") that American colonists issued for the Continental Congress to finance the Revolutionary War was replaced by the US Dollar in 1785 when The Continental Congress adopted the dollar as the unit for national currency. At that time, private bank-note companies printed a variety of notes. After adoption of the Constitution in 1789, Congress chartered the First Bank of the United States and authorized it to issue paper bank notes to eliminate confusion and simplify trade. TheU.S. Constitution (Section 10) forbids any state from making anything but gold or silver a legal tender. The Federal Monetary System was established in 1792 with the creation of the U.S. Mint in Philadelphia. The first American coins were struck in 1793. The U.S. Coinage Act of 1792, consistent with the Constitution, provided for a U.S. Mint, which stamped silver and gold coins. The importance of this Act cannot be stressed enough. One dollar was defined by statute as a specific weight of gold. The Act also invoked the death penalty for anyone found to be debasing money. President George Washington mentions the importance of the national currency backed by gold and silver throughout his initial term of office and he contributed his own silver for the initial coins minted. The purchase of The US Mint in Philadelphia, was the first money appropriated by Congress for a building to be used for a public purpose. It was purchased for a total of $4,266.67 on July 18, 1792.

1862-1879 - FLOATING fiat currency 7 years The first use of fiat money (called Greenbacks) in the United States was in 1862, it was used as a tool to pay for the enormous cost of the Civil War. Greenbacks were a debt of the U.S. government, redeemable in gold at a future unspecified date. They were circulated along with Gold certificates, backed by the government’s promise to pay in gold.

1880-1914 - FIXED Gold standard 34 years The US dollar was hard pegged to gold resulting in domestic price stability and virtually no inflation. The financial needs of WW1 ended this.

1915-1925 - FLOATING Fiat currency 10 years In order to "pay" for WW1 countries had to print a lot of paper currency which by necessity mandated a delinking from gold because there wasn't enough gold to support the paper.

1926-1931 - FIXED Gold standard, 5 years The gold exchange standard was established wherein each country pegged its currency to the US dollar and British pound which were then supposed to be backed by the dollar. When the depression began countries tried to cash in their pounds and dollars for gold. That "run" on gold forced the end of the gold exchange standard.

1931-1945 - FLOATING Fiat currency, 14 years Fiat currencies reign worldwide leading to huge economic imbalances from country to country and was of the major contributing factors to the beginning of WW2.

1945-1968 - FIXED - Gold standard, 26 years 1944 Bretton Woods Accord (similar to gold exchange standard of 1926-1931) Two main currencies again, the US dollar and British pound. A run to convert pounds to gold collapsed the pound and began the end of the Bretton woods accord. It took 3 years while governments tried to salvage the system and also to determine what to do next. Kind of like having one leg on the boat and the other on shore. 1963 - New Federal Reserve notes with no promise to pay in "lawful money" was released. No guarantees, no value. This is also the year of the disappearance of the $1 silver certificate. Once again, a subtle shift in plain view.  1965 - Silver is completely eliminated in all coins save the Kennedy half-dollar, which was reduced to 40 percent silver by President Lyndon Johnson's authorization. The Coinage Act of 1965 signed by Lyndon Johnson, terminates the original legislation signed by George Washington 173 years earlier (carrying the death penalty) enabling the US Treasury to eliminate the silver content of all currency.  1968 - June 24 - President Johnson issued a proclamation that all Federal Reserve Silver Certificates were merely fiat legal tender and could not really be redeemed in silver.

1971 - FLOATING - Fiat currency, 5 months August of 1971 President Nixon ended the international gold standard and for the first time no currency in the world had a gold backing.

1971-1973 - FIXED - Dollar standard, 2 years The Smithsonian Agreement was passed pegging world currencies to the dollar rather than gold as a fixed exchange rate.

1973-? - FLOATING - Fiat currency, 30 years The Basel Accord established the current floating exchange of currency rates we are operating under today.

A good barometer of the size of a currency's leverage is the percentage of total  Debt to GDP  (Gross Domestic Product). Currently, that percentage (299%) is higher than the level the nation experienced during the depression era 1930's. With budget deficits projected for 2003 and 2004, the US will soon exceed this already inflated level.