Fiat Money and the Bretton Woods Era - dummies

Fiat Money and the Bretton Woods Era

By Ayse Evrensel

The Bretton Woods era (1944–1973) was the last period with a metallic standard. Since the end of the Bretton Woods era in 1973, money is the fiat money. Whenever paper money is just paper and has no convertibility to something of value and is therefore not backed by a precious metal such as gold, it is called fiat money.

Fiat money was nothing new to the world when it was introduced in 1973. The French Revolution probably was the first widespread issuance of paper money. Countries abandoned the metallic standard during wars, revolutions, and other armed conflicts. Until 1973, whenever paper money wasn’t backed by a previous metal, such as during a war, it was fiat money.

Clearly, fiat money has no intrinsic value, which means that it cannot be converted into a specific amount of precious metal. Nevertheless, fiat money is legal tender. It’s also valuable because other people are willing to take the money in exchange for goods and services. Otherwise, it would be worth the value of paper on which it is printed.

Because fiat money isn’t convertible into a precious metal, monetary policy affects the purchasing power of fiat money. In the fiat money system, central banks have the responsibility to promote price stability and, therefore, maintain the purchasing power of money.