Question

What is the difference between ‘fiduciary money’ and ‘fiat money?’

What happened to gold in 1933/1934 in the US?

Answer 1

Fiat money is paper Money which is intrinsically worthless. This money has value because government says so, and are backed by government. Eg:- Coins and notes

Fiduciary money refers to money that is backed by trust between payer and payee. For eg:- Cheque

During the financial crisis of 1933, there was outflow of gold in large quantities from the Federal Reserve. There was both domestic and foreign drain of gold from federal Reserve. In 1933, inorder to tackle this problem Roosevelt's administration made policies, which had three phases.

In the first phase, the administration suspended the gold standard. They also used emergency banking act which provided the president with power to control gold movements and treasury the power to compel srrender of gold . This was further follwed by a proclamation by Roosevelt that formally suspended gold standard. This prohibited exports of gold and conversion of currency. Together , with these actions dollars link with the gold weakened and the dollar started to retain its value.

The phase started with gold purchase plan . This phase deliberately aimed at devaluing the dollar. This was done by authorizing the Reconstruction Finance Corporation to buy gold at increasing prices. This raised the value of gold in terms of dollar and reduce the value of dollar. This was done to increase to increase the price of commodities and create reflation to revive business and bank. This would encourage exports and decrease imports.

The third and final phase began in 1934 with Gold reserve act and financial stability. This re established the gold standard and financial link between America and rest of the world.