Currency wasn't suppose to be some sort of magic bill which suddenly became valuable. Gold was valuable. If you exchanged a Car with gold, then it was actually an exchange to the full value of the gold. You paid the value of Car with the equal value of gold. Gold being valuable because of its unavailability and its durability. Iron gets rusted(so it looses its value) plus its too available, diamond is not fungible(one unit of cut diamond isn't of the same value as one unit of uncut, and once diamond is cut you can't remould it in something else).
Basically Gold is the best option for the market currency. But soon it became too cumbersome to keep on carrying gold, plus you had to measure it everytime it was given to you, so some renowned private entities(usually the city goldsmith) issued signed tenders which said that if you bring that tender to him then he will back it up with that much amount of gold. That means if the tender said, 100 gms of gold, then upon the production of that tender "Mannubhai Jewellers" will produce 100 gms gold.
When the democratic governments were formed it seemed really appropriate to have these governments do the job of printing the legal tenders and keeping the charge of gold. So governments then printed what was known as the currency. Indian government would print Indian currency, and if you produce Rs 1000/- bill to Indian government then they will provide you with Rs 1000/- worth of gold. This means that Indian government had always had to keep that much amount of gold in backing. If it turns out that Indian government does not have that much amount of gold then people would stop trusting Indian govt printed money.
Governments then for various reasons(mainly the war) shifted off the gold backed money. That means now government could print money without having that much gold in backing. That means government now CREATED WEALTH. Not even Lord Kuber was able to do that. Dec 5 (2 days ago) Prashant
So basically government now printed money whenever it needed it. Congress wants to promise prosperity to its people for election, fine, when it comes into the power it prints more money and gives it to people.
But you must be wondering if its so convenient then why the hell government does not do that. Why is Pakistani government so poor, why can't they just print more money and buy more weapons from US? The problem is, US won't accept Pakistani currency because US knows that Pakistani govt does not have that much gold its currency claims to have. So the catch here is that if you print too many currencies then people will stop honoring your bill. Right now, how strong or weak is a currency is a direct indication of the fact how much people trust the gold backing of your currency. Or simply how much stuff it can buy from the market.
US dollar has lost its value so much because of Iraq war. The government has printed too much dollar bills and world is not trusting the dollar any more. If it were a 100% gold back currency, then either the govt had gone broke long time back, or ended the war long time back.
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