Fiat currency

The decade was the 70ís. The US economy was severely strained by the pressure of the Vietnam conflict. The United States was winning the war by means of pacification but lost its momentum during the later stages of the conflict. It was an unpopular war, conscription was mainly its means to acquire additional ground forces to sustain its ailing forces an ocean away. On top of this, as the public grew wary of what seems to them as an unnecessary war, Congress was hesitant on funding the effort. The Vietnam conflict was fought on two fronts but this time around, its home front is what dragged it to its withdrawal. Raising taxes was not a very good idea as Americans were throwing tantrums left and right. Nixon and Johnson had none but one way to sustain the war effort, by borrowing.

The 70ís was a decade of record high inflation for the United States, the war was a contributing factor to this phenomenon. As the government kept spending money, prices kept surging up. The United States government repeatedly printed US dollars as a way to sustain the ongoing war effort in Vietnam. However, since the Dollar is supposed to be redeemable on demand by a certain commodity, the flood of US dollars used for the Vietnam war sent the country into a payments and trade deficit. Some countries began redeeming their newly received payments in US dollars to gold.

Because the US can no longer fulfill its obligation to support the Dollar with gold, on the 15th of August 1971, Richard Nixon delivered the ultimate shock by imposing a freeze in prices of goods, wages and rent. To offset the trade imbalance, Nixon levied at 10% surcharge on imports and finally shutting the gold window, severing its ties with gold forever. This implied that the US government can now finance its pet projects using a seemingly unlimited potential to create money without the backing of gold.

Under the Bretton Woods accord, the US and other nations collaborate in an effort to maintain the dollar fixed at 35 dollars per ounce of gold. But since, inflation is a naturally occurring phenomenon; the gold standard had difficulties in finding a rightful place in an age where population growth and an ever increasing demand for goods fueled by the technological revolution are rampant. It does not make good sense to still try to maintain the value of the dollar at $35 per ounce of gold if the US keeps printing money to comply with the rising demand in the economy. As a consequence, the dollar was devalued from $35 to $38 an ounce all the way to $42 per ounce of gold.

The twentieth century showcased innumerable innovations from machines to currencies. In the case for economic revolutions, the fiat system gave governments a sort of a thermostat that can be fine tuned to adjust to an economic anomaly. By setting interest rates or even by regulating banks regarding foreign exchange activities, a rational and methodical way to control the economy is now at hand.
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