fiat currency

Is Our Fiat Money Backed by Gold?

When my son was in third grade, I joined his class field trip to watch fiat money being printed at the U.S. Treasury.

fiat moneyAs I observed them printing dollars I wondered if his teacher knew what gave our dollar its value. When asked, to my surprise, he knew!  “The fact that we believe it has value. Because it’s no longer backed by gold or silver.”

Over 20 years later, people still give me a puzzled look when I ask them what gives our dollar value. Our fiat money has value because people believe that they will be able to exchange it for goods and services in the future.

The world operates under this paper currency system called fiat money. While fiat money itself has no fixed worth, its value is backed by a government’s promise that it is legal tender and therefore has value based on that country’s government and economy.

The next time you visit your U.S. bank read the FDIC sign next to the teller. It says “Backed by the full faith and credit of the U.S. government”.

 

If the U.S. government is $18 trillion in debt how much faith do you have in it?

 

There was a time when a “dollar” was simply a term for a set weight in gold.

How things have changed:

  • In 1913 the Federal Reserve, a independent banking system, replaced the national bank system.
  • From 1914 to 1933, every Federal Reserve note was redeemable in gold and silver.
  • In 1934, the Gold Reserve Act gave the Federal Reserve title to all the gold which had been collected. Citizens could no longer redeem their dollars for gold.  The Gold Reserve Act outlawed most private possession of gold, forcing individuals to sell it to the Treasury. This act also changed the price of gold from $20.67 per ounce to $35 per ounce, which meant that all of the silver certificates the people had recently received for their gold now lost 40 percent of their value.
  • Between 1933 and 1963, all Federal Reserve notes were promised to redeem in “lawful money,” which meant silver.
  • In 1944, the Bretton Woods system fixed international exchange rates based on the U.S. dollar, which was redeemable for gold by the U.S. government at the price of $35 per ounce.silver certificate
  • By 1957, the last silver certificate dollars were issued.
  • In 1968, Federal Reserve silver certificates were merely fiat legal tender and could not be redeemed in silver.
  • In 1973, the U.S. dollar was officially devalued, changing the price of gold from $35 per ounce to $42.23 per ounce. Congress set the American dollar completely afloat with nothing to back it up but the declaration of the government that it was “legal tender,” or fiat money or more appropriately, fiat currency.

 

Without gold or silver backing, there is little to stop the government from printing more and more paper money. This means a government can create billions out of thin air and pump it into circulation… which makes the dollars already out there worth less and less.

It’s like adding water to lemonade… the more water you add, the less lemon flavor you taste. At what point is it no longer lemonade?

 

This captioned video by a George Mason University professor does a good job explaining the gold standard.

 

What’s next?

The best investment you can make is in your financial education. 

Look at what wealthy people and other countries are doing as a safe haven… a hedge.. an insurance against a potential local or global fiat money devaluation.

Then diversify your portfolio. Begin saving a small amount in physical gold … most financial planners suggest anywhere between 5% – 10% of your net worth.

It’s not only an insurance against a devaluation of our fiat money, but it’s leaving a financial legacy for your family.

 

Believe in the best. Prepare for the worst.

Let’s talk.

good money

 

 

 

757-310-9175

jameslawson.ws@gmail.com

P.S. Check out the Bureau of Labor Statistics Inflation Calculator. As an example, something that cost $100 in 1971 would cost $587.25 in 2015.

Try it out and leave a comment below!

 

 

Disclaimer:
I am an independent affiliate and not a financial planner or investment advisor. The information on this site is for educational purposes and not intended to give financial, investment, legal, or tax advice. The postings on my blog are my personal opinions and do not represent the positions, strategies and opinions of any company.

 

 

 

 

 

11 Comments

  • Fonda Waddell

    Reply Reply November 2, 2013

    Great post James, I just read another post about Fiat- Currency, where they were preaching the “Financial Armageddon” So far they’ve been wrong, but I rather be prepared than caught off guard. It is probably a smart idea to diversify out of U.S. dollars so that you’re not vulnerable to inflation or a potential collapse of the dollar. So glad Karat Bars makes it affordable for the little guys.
    “You can ignore reality but you cannot ignore the consequences of ignoring reality”
    Unknown
    Your post was Spot-on, look forward to your next post.

  • kelcey graves

    Reply Reply November 8, 2013

    “In 1934, the Gold Reserve Act gave the Federal Reserve title to all the gold which had been collected. Citizens could no longer redeem their dollars for gold.”
    What about gold “collected” after this time period? & what caused this need for a “Gold Reserve Act n tha first place?

  • Eric Lawson

    Reply Reply January 4, 2014

    What’s even more interesting is that as of 2012 if you took Gold left to you by ancestors the Government will still confiscate it…check out the link.

  • Dr. Lisa Thompson

    Reply Reply December 11, 2015

    Great post! I just got a great education on the value of the dollar! Thank you!

    Dr. Lisa

    • jameslawson.ws@gmail.com

      Reply Reply December 12, 2015

      Glad this was informative. Thanks for reading! James

  • Christi Johnson

    Reply Reply December 12, 2015

    Great post! The thing that makes fiat money so dangerous is that, at any time, the government can decide what money is worth and make decisions that are not at all in our best interests. That is terrifying…and what is more terrifying is that the average citizen doesn’t know or care about the reality of fiat money. Keep posting! I will be sure to share with others!

    • jameslawson.ws@gmail.com

      Reply Reply December 12, 2015

      Thank you for your insightful comments Christi. Like you I feel it is alarming and the only real protection we have is to diversify our assets into something more stable than fiat currency.

      It’s obvious that our education on global financial issues is not being clearly taught for the masses to understand. That’s why I am trying to break down some complex economic topics so the average citizen can be informed and think deeper.

      James

  • Tracey Rose

    Reply Reply December 12, 2015

    This is very interesting … but it worries me about how the actual banking system works. Great post – thanks for sharing 🙂

    • jameslawson.ws@gmail.com

      Reply Reply December 12, 2015

      Thanks Tracey! I’m going to be posting more articles on how the banking system works. And you’re right for having concerns… but there are solutions.

      So hope you check back later.

      James

  • Hilary De Freitas

    Reply Reply December 12, 2015

    You know a little knowledge can go a very long way. This was quite an eye opener for me. I was wondering how come we were seeing all these ads for purchasing gold and silver recently?
    Living on small island you can be a little “myopic” in your understanding of the global economy but it’s just as important. Here in Trinidad our Central Bank just delcared that our country is in a recession. Which really means we’ve been in one for a while, we can just make it “official” now, but for the most part people haven’t felt the effects. I guess now we will as our economy isn’t that diverse as some other countries.
    Great info James.

    • jameslawson.ws@gmail.com

      Reply Reply December 12, 2015

      You’re right. Not only is Trinidad in a recession but the entire global economy is slowing down.

      Good looking out… keep reading… hope to hear more from you soon.

      Our neighbor is from Trinidad and we hope to visit one day.

      James

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