The Fiat Standard Course Notes

Lecture 2 Summary – The Never-Ending Bank Holiday

‍Lecture 2 explores the historical origins and gradual emergence of the fiat monetary system, beginning with the suspension of gold redemption during World War I. In July 1914, the Bank of England faced a surge in gold withdrawals, rapidly depleting its reserves. To finance the war without officially abandoning the gold standard, the Bank orchestrated a quiet but radical shift: it centralized gold holdings, restricted redemption, and began issuing unbacked paper money—effectively inventing a new form of monetary alchemy.

Rather than declare a formal end to gold backing, British authorities used legal and institutional mechanisms to maintain the illusion of convertibility while expanding the money supply. This allowed them to fund massive war spending without confronting the political consequences of abandoning gold. However, this manipulation sparked significant inflation: prices rose cumulatively by 124% from 1915 to 1920.

After the war, governments promised a return to the gold standard. The U.S. kept that promise, accepting a sharp recession in 1920 and resuming gold redemption in 1922. Britain, however, tried to return to prewar gold parity without deflating prices or cutting wages, leading to unemployment, gold outflows, and further inflation. Instead of adjusting its monetary system, Britain relied on U.S. monetary expansion to support sterling, effectively exporting its inflation to America.

By 1922, the U.S. and U.K. introduced the gold-exchange standard, which allowed other central banks to settle trade in dollars or pounds rather than physical gold. This gave the U.S. and Britain greater freedom to inflate, since gold redemption was no longer routinely demanded.

The long-term consequence was a global boom-bust cycle: the inflation of the 1920s led to the 1929 crash and the Great Depression. Governments responded with more centralized control, gold confiscation (notably in the U.S. in 1933), and eventually the complete depegging from gold in 1971.

The lecture concludes that the fiat standard wasn’t the product of careful design, but a series of ad hoc decisions made under financial duress. It evolved into a global model: run deficits, suspend redemption, inflate the currency, and push other nations to adopt your money as reserves. The U.S. did this most successfully, and by 1971, the fiat standard was fully operational worldwide. Over the past century, this system has resulted in massive inflation, loss of purchasing power, repeated financial crises, and increasing political control over money.

Lecture 2 Summary – The Never-Ending Bank Holiday

‍Lecture 2 explores the historical origins and gradual emergence of the fiat monetary system, beginning with the suspension of gold redemption during World War I. In July 1914, the Bank of England faced a surge in gold withdrawals, rapidly depleting its reserves. To finance the war without officially abandoning the gold standard, the Bank orchestrated a quiet but radical shift: it centralized gold holdings, restricted redemption, and began issuing unbacked paper money—effectively inventing a new form of monetary alchemy.

Rather than declare a formal end to gold backing, British authorities used legal and institutional mechanisms to maintain the illusion of convertibility while expanding the money supply. This allowed them to fund massive war spending without confronting the political consequences of abandoning gold. However, this manipulation sparked significant inflation: prices rose cumulatively by 124% from 1915 to 1920.

After the war, governments promised a return to the gold standard. The U.S. kept that promise, accepting a sharp recession in 1920 and resuming gold redemption in 1922. Britain, however, tried to return to prewar gold parity without deflating prices or cutting wages, leading to unemployment, gold outflows, and further inflation. Instead of adjusting its monetary system, Britain relied on U.S. monetary expansion to support sterling, effectively exporting its inflation to America.

By 1922, the U.S. and U.K. introduced the gold-exchange standard, which allowed other central banks to settle trade in dollars or pounds rather than physical gold. This gave the U.S. and Britain greater freedom to inflate, since gold redemption was no longer routinely demanded.

The long-term consequence was a global boom-bust cycle: the inflation of the 1920s led to the 1929 crash and the Great Depression. Governments responded with more centralized control, gold confiscation (notably in the U.S. in 1933), and eventually the complete depegging from gold in 1971.

The lecture concludes that the fiat standard wasn’t the product of careful design, but a series of ad hoc decisions made under financial duress. It evolved into a global model: run deficits, suspend redemption, inflate the currency, and push other nations to adopt your money as reserves. The U.S. did this most successfully, and by 1971, the fiat standard was fully operational worldwide. Over the past century, this system has resulted in massive inflation, loss of purchasing power, repeated financial crises, and increasing political control over money.

Lecture 2 Summary – The Never-Ending Bank Holiday

‍Lecture 2 explores the historical origins and gradual emergence of the fiat monetary system, beginning with the suspension of gold redemption during World War I. In July 1914, the Bank of England faced a surge in gold withdrawals, rapidly depleting its reserves. To finance the war without officially abandoning the gold standard, the Bank orchestrated a quiet but radical shift: it centralized gold holdings, restricted redemption, and began issuing unbacked paper money—effectively inventing a new form of monetary alchemy.

Rather than declare a formal end to gold backing, British authorities used legal and institutional mechanisms to maintain the illusion of convertibility while expanding the money supply. This allowed them to fund massive war spending without confronting the political consequences of abandoning gold. However, this manipulation sparked significant inflation: prices rose cumulatively by 124% from 1915 to 1920.

After the war, governments promised a return to the gold standard. The U.S. kept that promise, accepting a sharp recession in 1920 and resuming gold redemption in 1922. Britain, however, tried to return to prewar gold parity without deflating prices or cutting wages, leading to unemployment, gold outflows, and further inflation. Instead of adjusting its monetary system, Britain relied on U.S. monetary expansion to support sterling, effectively exporting its inflation to America.

By 1922, the U.S. and U.K. introduced the gold-exchange standard, which allowed other central banks to settle trade in dollars or pounds rather than physical gold. This gave the U.S. and Britain greater freedom to inflate, since gold redemption was no longer routinely demanded.

The long-term consequence was a global boom-bust cycle: the inflation of the 1920s led to the 1929 crash and the Great Depression. Governments responded with more centralized control, gold confiscation (notably in the U.S. in 1933), and eventually the complete depegging from gold in 1971.

The lecture concludes that the fiat standard wasn’t the product of careful design, but a series of ad hoc decisions made under financial duress. It evolved into a global model: run deficits, suspend redemption, inflate the currency, and push other nations to adopt your money as reserves. The U.S. did this most successfully, and by 1971, the fiat standard was fully operational worldwide. Over the past century, this system has resulted in massive inflation, loss of purchasing power, repeated financial crises, and increasing political control over money.