China and fiat currency The idea of
fiat currency was established just over a thousand years ago in China during the
Yuan,
Tang,
Song and
Ming dynasties. In the Tang dynasty (618–907) there was a high demand for metallic currency that exceeded the supply of precious metals. The people were already familiar with the use of credit notes, and they rapidly began accepting pieces of paper or paper drafts. A shortage of coins forced these people to change from coins to notes. During the Song dynasty (960–1276), there was a booming business in the
Sichuan region that led to a shortage of copper money. This led to traders issuing private notes covered by a monetary reserve. This was considered to be the first ever
legal tender.
Paper money became the only legal tender in the Yuan dynasty (1276–1367) and issuing of notes was conferred to the Ministry of Finance during the Ming dynasty (1368–1644). On the International stage fiat currencies were not truly relevant until the US removed its currency from the
gold standard in 1971.
Bretton Woods Conference The Establishment of the
International Monetary Fund (IMF) and the
World Bank are one of the most significant turning points in the History of international finance. Through Decades of negotiation between international powers and the persistence of economic superpowers no single event inspired unity of determining the fair rules of trade and monetary policy than the Second World War. In
Bretton Woods, New Hampshire,
delegates from 44 nations gathered to determine what would be the rules for international trade after the war. After the Bretton Woods Conference was completed the framework for the IMF and World Bank were laid out and begun to be developed. As a result, international trade skyrocketed since exchange between countries and between continents finally had a measurable way to determine
exchange rates and fair value of currency. Individual countries' banks were no longer the determining factor in determining a fair exchange rate, removing inconsistencies between individual countries' monetary systems. The Bretton Woods system did not last very long, as after WW2 the United States was the physical owner of most of the world's gold supply. This meant countries' currencies were supposed to be pegged to a resource over which the US had a near monopoly. This state of affairs only lasted around 20 years as most notably in 1971 the French who were skeptical of the US dollar being the world's reserve currency reclaimed most of their gold that they exported to the US for protection. This action was inherently a destabilizing force to the US dollar since at any time before this individuals or businesses were able to exchange their US dollars for gold. Many other nations followed suit in a metaphorical "Gold Rush" to get gold from the US by exchanging dollars. The result of this action was the world's reserve currency, the US dollar, no longer being pegged to gold from 1971, with Richard Nixon removing the convertibility factor of the US dollar. This fundamentally changed international finance as no longer was the world's currency based on anything physical, it transitioned into a
fiat currency (money without intrinsic value that is used as money because of government decree). ==See also==