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why the currency is'nt tied to the price of gold ?

how do they sets the value of the currency ?

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This entry was posted on Monday, January 12th, 2009 at 6:59 am and is filed under Currency Trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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5 Responses to “why the currency is'nt tied to the price of gold ?”

  1. Cthulhu fhtagn! Says:
    January 12th, 2009 at 6:59 am

    Value is currency is value of stuff you can buy with it.
    And there is not enough gold in the world to match that.

  2. Jon h Says:
    January 12th, 2009 at 6:59 am

    Currency is on a market itself, like the stock market, and other foreign currency purchase our dollar and vice versa. The Federal reserve controls the money supply (how much money is available) through interest rate control. The higher the interest rate, the more benefit people have to invest which removes money from being available for purchase. The interest rates have been at record lows lately, which has increased the money supply by a lot. This explains the higher gas prices, and higher food prices. Thats called inflation. The value of currency depends on what you have to give up to hold a dollar. If interest rates are high, lets say 10%, then every day you have that dollar in your pocket it costs you that interest rate.

  3. DiDi Says:
    January 12th, 2009 at 6:59 am

    The government took our currency off of the "gold standard" (when a dollar could be redeemed for a dollar worth of gold upon demand) in 1933. Although I don't know the government's "official" answer to this, I would assume that it was related on some way to the war effort, and the necessity of having more purchasing power (for all of those tanks, warships, ammo, planes, GI gear, fuel, etc.) than that which existed in our coffers at Fort Knox at the time. I am not crazy about this idea, because since the, we have basically been just printing money as we see fit to print it and that is kind of crazy when you think about it: if we print too much money, the money that is out there will be worth less and less, proportional to how much excess money is printed (think about counterfeiters). There used to be silver certificates, also, that were redeemable for silver. Those have also been discontinued.

  4. Aaron G Says:
    January 12th, 2009 at 6:59 am

    The currency is no longer tied to gold because we are no longer on the gold standard. Instead, we adopted a "fiat" monetary system where the paper itself is legal tender. If you look on a bill, it says "this note is legal tender."

    The reason is simple: By making the currency itself legal tender, the government has the ability to create money out of thin air. Obviously, you cannot just print $1,000,000 worth of gold, but you can print money.

  5. meg Says:
    January 12th, 2009 at 6:59 am

    If you look at this graph showing the monetary history of the US, http://www.visualizingeconomics.com/2008/05/27/us-inflation-annual-percent-change-1774-2007/
    you can see that the gold standard produced alternating periods of inflation and deflation. The US abandon the gold standard in the 1930's because Britain had, and there was a run on US gold reserves. Economist finally figured out and convinced policy makers that deflation produced recession which were becoming more frequent and damaging as people moves to cities and worked for wages, so we did not restore the the gold standard and adopted fiat currency. The graph also shows that after WWII the economy has been more stable and we have had no deflation. However we are now showing a small amount of deflation which is one of the reasons people are so worried.

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