• The article examines the different ways in which fiat money has led to terrible incentives at the individual, corporate and national levels.
• It provides historical context by talking about the Bretton Woods Agreement from 1944.
• It explains how this agreement established a new monetary world order with an indirection of gold redemption and how it led to currency being backed by other currencies rather than gold.
The Incentives of Fiat Money
Fiat money has had a major impact on the global financial system, leading to numerous negative incentives for individuals, corporations and governments alike. This article looks at those negative incentives in more detail, starting with some historical context.
Bretton Woods Agreement
The Bretton Woods Agreement of 1944 was a pivotal moment in setting up what later became known as „a new monetary world order“. The agreement was an attempt to address issues from World War I (WWI) such as reparation payments and loopholes around the then re-established gold standard that had caused so much havoc across economies and eventually led to World War II (WWII). As returning to pre-WWI gold standards were too difficult for countries accustomed to central banking monetary control, a new level of indirection of gold redemption was proposed instead.
Gold Backed Currency
Prior to WWI, most currencies were backed by gold and could be exchanged directly at banks. For example, one ounce of gold could be exchanged for $20.67 USD or £4.25 GBP respectively. Gold-backed currency meant foreign exchange was easy and stable since it was tied directly to an asset that held its value – i.e., gold – making it scarce. The advent of central banking changed this as some central banks began printing their own money without backing it against an actual asset like precious metals such as gold or silver. This resulted in inflationary pressures as more money entered circulation without any real assets behind it creating a devaluation in the purchasing power of fiat currency over time due to increased supply relative to demand – essentially meaning each dollar is worth less over time due to inflationary pressures caused by central banks printing more money than is necessary thus driving down its value relative to other assets like precious metals or commodities such as oil or foodstuffs whose supply remains static relative to demand regardless of market fluctuations..
Global Fiat Money Incentives
As a result of these changes brought about by Bretton Woods, governments have become increasingly dependent on their own national fiat currencies backed by other nations‘ reserve currencies instead of relying on their own assets such as precious metals or commodities like oil or foodstuffs for wealth preservation purposes – essentially meaning that if one country’s currency devalues relative to another’s reserve currency then all other countries will suffer from decreased purchasing power when dealing with said nation’s goods & services even though they may not be actively engaged in any form of trade with them directly – this is known as ‘currency wars’ where nations compete against each other through competitive devaluation policies in order gain competitive advantage over rival nations . Additionally, international debt obligations can only be paid back using either US dollars or euros – no other currency is accepted – thus forcing those countries who owe debts into using either USD or EURO reserve currencies even if they would prefer not using them due their potentially weaker value relative alternative available options..
Conclusion
By incentivizing nations into relying solely on reserve currencies such as USD & EURO alongside actively engaging in ‚currency wars‘ through competitive devaluation policies like quantitative easing (QE), Bretton Woods effectively created global financial incentives which favor certain countries while disadvantaging others based solely upon their ability/inability access certain types reserve currencies– ultimately leading us towards a future where economic inequality between nations increases further whilst political unrest spreads globally unless something drastic happens soon .