The first gold coins appeared around 560 B.C. Over time it became a practice to store larger amounts of gold in warehouses. Paper receipts were issued certifying that the gold was on deposit. These receipts were negotiable instruments of trade and commerce which could be signed over to others. They were not actual currency but are a presumed forerunner to our modern checking system.
Gold is original money. It was money before paper receipts were issued. The paper receipts were not money. They were substitutes for real money. Today, all paper currencies are substitutes for real money.
The term ‘fiat money’ comes up often and is used in financial and economic analysis, commentary. Definitions are offered, but they vary somewhat in accuracy and clarity, and tend to be incomplete. In some cases, the explanations leave us with a vague understanding of the term and its applicability.
The specific definition that I find to be the most accurate and complete is as follows:
“ fiat money is inconvertible paper money made legal tender by a government decree”
There are no less than four separate terms in the above definition, each with its own respective definition, which are critical to a complete, accurate, and clear understanding of fiat money. They are: 1) inconvertible 2) paper money 3) legal tender 4) government decree. Let’s examine each one.
One definition of inconvertible is “not able to be converted into another form of money on demand”. That is mostly accurate but it is not specific enough for our purposes. From “History Of Gold As Money”…
As late as the early twentieth century, the U.S. dollar was fully convertible into gold at a rate of twenty ($20.67) dollars per ounce. You could exchange paper currency of twenty dollars for one ounce of gold, usually in coin form; and vice-versa. The two were interchangeable and the either one was payable on demand.
In 1933 President Roosevelt issued an executive order “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States”.
