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There is no need to for the monetary authorities to keep gold or anything
else as a reserve. Some people say that money which is not backed by gold or
something like gold is fiat money and has no value. This is not true. Most
currencies should be called tax-backed money. The currency has value because
you can use the currency to pay your taxes. There is a description of how
taxes give value to paper money in the description of the Mississipi scheme
in the book Extraordinary Popular Delusions and the Madness of Crowds
by Charles Mackay. After the death of king Louis XIV, the government of
France was bankrupt. The government paid the army in paper money, but
demanded that taxes be paid in gold. The army was mutinying because the
paper money was worthless. John Law advised the government to accept paper
money as payment for taxes, and this made paper money valuable. Farmers were
willing to trade their produce for paper money because farmers needed paper
money to pay their taxes; and this meant that anyone could buy stuff with
paper money.
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