Consider the scenarios, X is a colony of the Empire. People fight back and they establish the resistance government. The newly-founded resistance government creates its own money for their people. Money is domestic used and replace money of the Empire (who occupied the region). Now, people buy and sell things using resistance money. However, something fishy is happening in inner circle of the government.

  • People are required to donate gold "voluntarily". Government said this gold is used to keep value of money. (At least, people believe so)

  • Government secretly used the "backed gold" to buy weapons for The Resistance but lie that those weapons are "free stuff" from our allies.

As a result, all donated gold used to keep the value of money is gone (with few high office know only).

I would like to ask how can it impact the economic of the X.

  • $\begingroup$ Are you enforcing the gold standard (aka the money has to be backed up by an actual amount of gold) or not (aka "force" people to accept money at their face value)? $\endgroup$
    – L.Dutch
    Feb 27 '18 at 6:59
  • 3
    $\begingroup$ There are many issues with your idea: 1) it is hard to force people to use weak currency, there are countries that use USD internally, mostly ignoring their own currency no matter what government wants them to do. 2) "gold backed currency" means you can always go to government and get your gold back, so forcing people would be pointless, they would just go and get it back tomorrow. Otherwise it is just "force buy", and worthless bonds not gold backed currency 3) it is not possible for only few to know it, but really, if outside world has no reason to keep secrets... $\endgroup$
    – Mołot
    Feb 27 '18 at 7:25
  • 3
    $\begingroup$ required to donate gold "voluntarily" This is a contradiction. If they are required to give it, they are not volunteering. This will make your rebellion short of supporters, but will generate it enemies. And people aren't idiots - gold goes in, paper comes out won't fool anyone for long in a world where gold holds such significance. $\endgroup$
    – StephenG
    Feb 27 '18 at 7:30
  • 1
    $\begingroup$ That said: your "money" will of course keep their value, but only because your government wouldn't be able to convince anyone it was more than 0 in the first place, unless society is really, really stupid. $\endgroup$
    – Mołot
    Feb 27 '18 at 7:32
  • $\begingroup$ If this would be a reality check, I could post an answer based on the above comments. $\endgroup$
    – Mołot
    Feb 27 '18 at 8:21

This has happened frequently in history: a country needs to buy weaponry from foreign arms merchants. The arms merchants, not being bound by the country's laws, can demand that the country pay up-front, using a reliable currency (euros, gold, whatever). The country's citizens, on the other hand, are required to use whatever money the country says they'll use, so they get paid in unbacked paper. The long-term result is that the country's money loses value rapidly, resulting in an economic crisis.

See, for example, the early United States, or Germany during either World War, or republic-era China, or just about any other country on the losing side of a war and many countries on the winning side.

  • $\begingroup$ This does not answer question as asked - it ignores gold requisition, fact that currency is supposedly backed, et cetera. $\endgroup$
    – Mołot
    Feb 27 '18 at 10:17
  • $\begingroup$ Gold requisition? Usually happens (see: war bonds). Supposedly-backed currency? Every one of those countries promised that when they won the war, the gold reserves would be rebuilt. There are some minor differences such as the currency being secretly backed by only promises, rather than being openly backed by only promises, but this scenario has played out hundreds of times in history. $\endgroup$
    – Mark
    Feb 27 '18 at 10:20
  • $\begingroup$ War bonds are voluntary and it is public knowledge money will be spent on weapons. And were never meant to be used as currency, at all. These differences are huge. $\endgroup$
    – Mołot
    Feb 27 '18 at 10:38
  • 1
    $\begingroup$ The biggest difference is that the currency would collapse sooner rather than later. Once knowledge gets out that the gold was spent on weapons, the currency would lose virtually all value in a day or two instead of over a few weeks or months. At its worst Weimer Republic in Germany had inflation rising by the hour, this took a few months to occur. This fictional country would see that happen immediately. Marks answer is pretty accurate. $\endgroup$
    – Dan Clarke
    Feb 27 '18 at 14:59
  • $\begingroup$ @Mołot, war bonds are frequently only nominally voluntary, much like the "voluntary donations" in the question. For example, my local paper recently ran a "this day in history" reprint of a story from WWI where someone was suffering significant consequences for not being sufficiently eager to buy war bonds. $\endgroup$
    – Mark
    Feb 27 '18 at 19:49

You start from wrong assumption money needs to be backed by something material (gold in your case).

This was true in ancient history and throughout a good part of Modern Era, but those times are long gone; US was one of the latest countries to cancel "gold conversion" of their currency (1971).

Today all currencies are "floating", which means their value is not anchored to anything but the "belief" that piece of paper (or numbers in a computer) is actually worth something.

So the answer is: money value has nothing to do with actual gold reserves.

If "Government" manages to keep gold loss secret it won't have any effect (beside not being able to pay in gold, of course).

OTOH the mere suspect things are going for the worse will have impact, even if gold reserves are intact. This is exactly the mechanism used by "big investors" to "attack" a currency for gain: star selling "short" the currency generating the feeling it's worthless and buy it back cheap after value drops. This works better if there are other reasons to believe Nation economy is not really healthy... and has nothing to do with gold (or other material) reserves, despite common knowledge.

  • $\begingroup$ Not strictly true. Currencies are valued based on the country's current FC reserves and future prospects. While the future prospects part is based on belief, the FC reserves had better be material, or the government will find itself begging the IMF for a loan to keep its currency stable. $\endgroup$
    – nzaman
    Feb 27 '18 at 13:18
  • $\begingroup$ @nzaman, exactly. Look at Zimbabwe and Venezuela, they wasted their reserves and have been struggling with out of control inflation and worthless currency. $\endgroup$
    – Dan Clarke
    Feb 27 '18 at 15:02
  • $\begingroup$ @nzaman: I I'm not fully convinced. Worth of a (modern) currency is completely determined by perceived wealth of nation and perceived stability of such wealth. Of course being able to show Fort Knox contributes to such "perception", exactly as having a lot of successful industries (even if most of work is actually done abroad) or having a good record on honoring debts. Having lots of raw materials and little chance to have them robbed by some foreign nation (because of a strong army) also contributes. They are not reason for currency strength, though, they are "reasons for the reason". $\endgroup$
    – ZioByte
    Feb 27 '18 at 15:44
  • $\begingroup$ People will sell to you on credit, if a) they know you have money in the bank, b) they know you have steady prospects and a good repayment record, c) if someone else, e.g., a bank or CC company, vouches for you. For countries, it's really a) or b) that determines the value of their currency, which is essentially credit, since that currency is useless to the seller, who would like to trade it for something it needs. If the buyer can provide that, it's effectively a straight swap or barter; if they can't, the seller would want to trade the earned currency to a third party to get what it wants $\endgroup$
    – nzaman
    Feb 27 '18 at 16:02
  • $\begingroup$ The reason why countries trade in US dollars as the standard currency in intl. trade is because the US made a deal with the Arab oil producers to only accept USD for the purchase of petroleum. As everybody needed to either buy or sell oil, this left the USD as a universally acceptable currency--if the seller in a transaction couldn't pass their dollars on, they could always simply use it to buy oil. The USD is therefore backed by petroleum, not all the gold in Fort Knox, since Nixon took the US off the gold standard. Also why the US has historically shied away from reducing oil consumption. $\endgroup$
    – nzaman
    Feb 27 '18 at 16:09

Not the answer you're looking for? Browse other questions tagged or ask your own question.