This means that approximately 4.46% of the U.S. dollars in circulation are “backed” by gold, and the rest are backed by false promises and good will. Fiat money is a currency issued by the government that is not backed by a physical product, such as gold or silver, but by the government that issued it. The value of fiat money derives from the relationship between supply and demand and the stability of the issuing government, rather than from the value of a commodity that supports it.
Most modern paper currencies are fiat currencies, such as the US dollar, the euro, and other major world currencies. Unlike today's foreign exchange market, which is characterized by floating exchange rates between currencies, the world under the gold standard used gold as a universal measure. This national flight occurred because individuals and companies preferred having metallic gold to bank deposits or paper money. Fiat currency emerged when governments minted coins from a valuable physical product, such as gold or silver, or printed paper money that could be exchanged for a certain amount of a physical product.
Thomas's amendment to the Farm Aid Act gave the president the power to reduce the dollar's gold content by up to 50 percent. A gold-linked currency, for example, is generally more stable than fiat money because of the limited supply of gold. The proclamation prohibited gold exports and prohibited the Treasury and financial institutions from converting currency and deposits into gold coins and ingots. These purchases raised the value of gold in dollars and, on the contrary, reduced the value of the dollar in terms of gold and in terms of foreign currencies, whose value in gold remained linked to previous prices.
This is very different from a gold-backed currency, for example; it has intrinsic value due to the demand for gold in jewelry and decoration, as well as in the manufacture of electronic devices, computers and aerospace vehicles. The federal government stopped allowing citizens to exchange currency for government gold with the passage of the Emergency Banking Act of 1933.