Fiat Currency or Gold Standard?
When a nation moves off the gold standard and settles for a fiat currency, it increases the amount of money in existence. To add on the commodity money, silver and gold, there exists flourish independent money that is directed by every government that imposes its fiat rule. Just like silver and gold, which have an exchange rate in the free market, the market will come up with an exchange rate for all the various money when it comes to the fiat currency (Taussig 312). In a fiat money world, if permitted, each currency fluctuates freely relative to all the others. For the two systems, the exchange rates are set depending with the proportionate purchasing power of the parities, and this is determined by the respective demands and supply for the various currencies.
When a currency is changed to fiat paper from old-receipt, the confidence in its quality and stability is shaken and its demand declines. In addition, when it is cut off from gold, it has a far greater quantity in relation to its former gold backing (Upton 69). When the supply becomes greater than gold and the demand is lower, both its purchasing power and exchange rate depreciates quickly in relation to gold. Since government is inflationary, it will continue to depreciate with time. The gold existence in an economy reminds people of the how the government paper is of poor quality and in most cases poses a threat to replace the paper and the money of the nation. Even the government backs its legal tender laws and prestige its fiat paper, gold coins used by the public will remain a permanent menace and reproach to the power of the government over the nation’s money (Garrett 20).
Frank W. Taussig. (2011). Principles of Economics. New York: The MacMillan Company. I, 312
Garet Garrett. (2009). The People’s Pottage. Caldwell, Idaho: The Caxton Printers, pp. 15-41
J.K. Upton. (2009). Money in Politics. Boston: Lothrop Publishing Company, pp. 69