What is Money?
Money is any object or verifiable record that is accepted as payment for goods and services as well as for repayment of debts in a particular country or socioeconomic context.
The main functions of money are (1) a medium for exchange of value (2) a unit of account for exchange of value, and (3) a store of value. Any kind of object or verifiable record, which fulfills these functions, can be considered as money.
Before invention of central banks, several objects such as gold and silver fulfilled this function. The system was quite simple and reliable. People brought their gold to the local smith and in exchange, they got a “note” certifying that the owner of the note has deposited the indicated amount of gold with that Smith.
In other words, the Smith was issuing an “I Owe You” note, which certified that he owes the owner of the note the amount of gold indicated on the note. The holder of the note could then exchange it for the indicated amount of gold at any time with that same Smith or even with other smiths, depending on reputation of the issuing Smith.
With the note certificates in hand, the holders could also buy or borrow the needed products and services from anyone who trusted the “note.” In exchange for the service of safely storing the deposited gold, the Smith was earning a commission.
With this monetary system, people and countries had to work in order to sell their products and services to obtain in exchange, the physical gold or gold certificates. In turn, they could purchase their own needed goods and services.
In this case, the gold certificates had the same “perceived” value as the physical gold itself. In other words, the total amount of gold, as indicated by the available number of certificates in circulation, was the same as the quantity and quality of physical gold deposited in safes of the various smiths.
Consequently, any holder of a gold certificate could exchange it for physical gold, at any time. The US dollar was backed by gold until 1971, with a fixed rate of $35 for an ounce of gold.
Until 1933, the US citizens had the right to own gold legally and to exchange it at any time with a price of 20.68 dollars per ounce. Thereafter, the government made it illegal for US citizens to own physical gold.
As a result, the US citizens were forced by law to sell their gold to the Federal Reserve with a rate of $20.68 per ounce. Once the citizen’s gold was collected, the federal government raised the price of gold to $35 in January 1934.
In 1971, President Nixon abolished the US dollar backing by gold definitely. Since then, the USA and nearly all of world countries, live with the so-called fiat monetary system. Therefore, gold or any tangible asset no longer backs the Federal Reserve’s Notes (dollar) since 1973. Currently, only the US laws determine the purchasing power of US dollar.
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