A pseudo-macro viewpoint

sources of this post include Lyn Alden and others that i have merged in with my own words.

Fiat currency is a monetary system whereby there is nothing of value in the currency itself; it’s just paper, cheap metal coins, or digital bits of information. It has value because the government declares it to have value and that it is legal tender to pay all things including taxes. 

For over 50 years now, virtually all countries in the world have been on a fiat currency system, which is the first time in history this has happened.  Never before, in thousands of years of human history, has the entire world been using a money that has no resource cost or constraint.

Switzerland was an exception that kept their gold standard until 1999, but for most countries it has been over 50 years since they were on it.  

Back in 1912, Mr. J.P. Morgan testified before Congress and is quoted as having said the famous line:  “Gold is money. Everything else is credit.”  Unlike a dollar, which is an asset to you and a liability to someone else… gold is an asset to you and a liability to NOBODY else.  You may not want to think of the banks like this, but you are actually lending to a bank when you deposit into a savings account.  they take your money and lend it out to other clients, and pay you a very small interest rate in return.

We could define currency as a liability of an institution, typically a bank, that is used as a medium of exchange and unit of account. Physical paper dollars are a formal liability of the US Federal Reserve. consumer bank deposits are a formal liability of that particular commercial bank (which in turn hold their reserves at the Federal Reserve, and those are liabilities of the Federal Reserve as well).

Beginning in 1971 after the breakdown of the Bretton Woods system, currencies around the world all became fiat currencies, and the global monetary system became less ordered.

Will it last?