Anchors Aweigh: The Transition from Commodity Money to Fiat Money in Western Economies

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.Abstract. In this paper I argue that the transition from commodity money to fiat money in the 1970s was a less dramatic change than suggested by a first glance at monetary history or monetary theory. I show that, historically, the quantity of the commodity-based money was at the discretion of the monetary authority and how, over time, the desire to economize on the commodity backing led to national and international institutions that reduced the extent to which money issues under the commodity standard represented an explicit claim to an intrinsically valuable asset. All use subject to JSTOR Terms and Conditions 778 Angela Redish early 1970s the last tie to the gold standard was broken when the Bretton Woods system collapsed, and the United States suspended convertibility of u.s. dollars into gold. Fiat money (for which I will use Wallace's (1980) definition: money that is inconvertible and intrinsically useless) was to be the basis of the monetary system. This paper analyses the transition from a commodity-based monetary system to the fiat money system. This choice of topic is motivated by both theoretical and historical factors. In theory, there seems to be a vast chasm between a commodity money system, where the quantity of money is determined by nature (possibly at some remove) and the value of money is intrinsic, and a fiat money system, where the determinants of value are puzzling and the quantity of money is a matter of policy. The historical motivation comes from my research into the origins of the Bank of Canada in the course of which I was struck by the confidence with which Canadian policy-makers in the early 1930s anticipated the resumption of the international gold standard (Bordo and Redish 1987). Why the change of heart?What I am going to present is unfortunately not a complete answer; rather, it is the foundation for a case that the process was more gradual than the simple comparison between attitudes in 1930 and 1970or than simple comparisons of economies with fiat money and commodity moneysuggests.The collapse of Bretton Woods has been studied extensively, primarily in the context of the post-World War ii economy, although sometimes in the context of interwar economic problems and even the classical gold standard. Here I study the evolution of the system in a broader context: as part of the evolution from a pure commodity money system to a fiat money system. My view of the collapse of Bretton Woods is the story of a ship on a finite anchor chain, in rising seas: At some point one has to cut the chain to save the ship. I will argue that the seas had been rising not just in the Bretton Woods period, but for many decades previouslyand indeed were the motivating force...

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