The first paper money in America came not from banks but from the governments of the new colonies. In 1690, Massachusetts issued paper money, but it had no tangible asset to back it up, only a promise to redeem it later. That privilege was soon abused, and the market was flooded with the junk paper money trying to purchase any available goods. Prices soared.
The paper money drove the metal coins out of circulation simply because everyone began hoarding the metal coins. By 1751, Britain demanded that no more paper money could be issued. The Mint Act of 1792, that has survived almost intact until the present, adopted the dollar as the standard unit of currency and the decimal system of counting. But what has backed up the U.S. dollar and given so many people the confidence in it as a secure store of wealth?
Some folks would tell you that the reason for the confidence is that there is one dollar worth of gold in Ft. Knox, KY for every dollar that is placed into our money system by the Federal Reserve Bank. Sorry, but that hasn’t been the case since the U.S. abandoned the gold standard in 1933. By August, 1971, we had sloughed off over $12 billion of the gold reserve in Fort Knox.
Saying that our currency was backed up by the equivalence of gold in Fort Knox was a sick joke. To make things even worse, it was agreed that if we owed a debt to any sovereign government, they could demand and receive our payment in gold from our reserve. In 1971, President Nixon realized that when the U.S. had trade imbalances with other countries, and we bought more from them than they bought from us in traded goods, they could and were demanding payment from us in gold out of our reserves in Fort Knox. We possessed less than one penny at that time in reserves for every dollar issued.
On August 15, 1971, President Nixon closed the gold window. That severed the critical link between international currency and real gold. From that time on the U.S. would pay their balance of international payments in dollars. That was the first time that link had been broken in 1,500 years! Since that time the world has accepted the U.S dollar as the international standard of payment.
Other countries are now demanding to know how much real gold the U.S. has stored in Fort Knox to back up our standard of currency. That’s another sick joke. There isn’t enough there to even make a quantifiable difference. There is really only one thing that gives any form of money acceptance and usability: confidence! People will only accept U.S. dollars as long as they believe that someone else will have confidence enough in the currency to take it from them in true form of payment. That national and international confidence is very quickly melting away.
(Research Ideas from Dr. Jackson's new writing project on Cultural Economics)