History of Fiat Money
Fiat money, originating in 10th-century China during the Yuan, Tang, Song, and Ming dynasties, evolved as a currency not backed by precious metals. In China, paper drafts emerged as an alternative to metallic currency shortages, eventually becoming the first legal tender. The trend continued in the Yuan Dynasty when paper money became an exclusive legal tender, overseen by the Ministry of Finance in the Ming Dynasty. The West adopted paper money in the 18th century, facing controversies over inflation, notably in American colonies and France. Wars prompted the use of fiat currencies, like the American “greenbacks” during the Civil War. Promises of convertibility in the early 20th century were canceled after the American Civil War due to economic needs. The Bretton Woods Agreement linked gold’s value to the U.S. dollar. Still, in 1971, President Richard Nixon canceled direct convertibility, leading to the widespread adoption of fiat currencies with exchangeability between major currencies. This historical trajectory highlights fiat money’s adaptability to economic, political, and global monetary shifts.
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