At publication, Gold, silver, and other precious metals once provided the backing for national currencies, but that arrangement has changed. Fiat currency became the standard in the modern world. Although central banks and many economists praised the monetary system, it also carried disadvantages. This article explains how fiat currency worked and identifies considerations surrounding it.
What Is Fiat Money?
Fiat currency became the standard in the modern world. Central banks generally issue it as paper notes and coins that are neither made from nor backed by precious metals. Examples of fiat money included the following:
- United States dollars, quarters, dimes, nickels, and similar money
- Mexico’s peso
- The euro
- Britain’s pound sterling
- China’s yuan
Fiat money derives value from government backing and from the agreement of people who hold it that it has worth. Because it is not linked to commodities with value, such as rare metals or oil, governments—or, more precisely, central banks—can restrict currency supply to help preserve value. They may also inflate a currency to try to encourage growth, most often in or ahead of a recession. At the time of publication, the Federal Reserve had nearly doubled its balance sheet since COVID-19 lockdowns began in March 2020.
Loose monetary policy involves creating money to buy bonds in an effort to lower interest rates, and it can help steady markets after an unforeseen crisis. At the time this article was written, every country, including the United States, used fiat money. In the United States, this had been true since 1971, when former President Nixon closed the gold window unilaterally.
Benefits of Fiat Money
At publication, In many developed economies, fiat currency has been relatively stable because inflation, a major factor in its value, usually rose gradually. Mining, minting, and distributing gold or silver coins was no longer practical because intrinsic values exceeded face values. By comparison, printing a $10 $10 bill cost far less. This largely reflected currency erosion or devaluation since the Federal Reserve was created in 1913. Since inflation moves gradually, many people may not notice lost purchasing power under the fiat monetary system.
Shortcomings of Fiat Money
As noted earlier, fiat money also has shortcomings. Because most fiat currencies lack “tethers,” they carry certain risks. One concern is a sharp loss of value through hyperinflation arising from economic crisis or political instability. A well-known example was Germany’s Weimar Republic between 1921-23. Following World War I, Germans burned cash for heat because doing so cost less than buying firewood. More recently, Venezuela’s bolivar had fallen sharply, alongside hyperinflation, serious cash shortages, public anxiety, and civil unrest. At publication, U.S. inflation had also increased, partly following recent Federal Reserve expansionary policies, and had exceeded its annual target of 2%.
What Are the Benefits of a Gold Standard?
Unlike fiat money, gold, silver, and platinum are broadly recognized as valuable regardless of stability in the global economy. Precious metals can cost more to mine and produce than paper currency, yet the planet contains only a finite amount of gold and silver. The article characterized them as stable safe-haven investments with substantial demand during economic and financial crises.
The original article stated that coins and bullion could hedge uncertainty in a fiat-based monetary system and could be wise investments. At publication, Atlanta Gold & Coin Buyers reported competitive, transparent rare-coin and bullion rates and said it was the only Atlanta metro coin dealer publishing rates online. Readers unable to visit in person were invited at that time to mail us your coins instead. The article said its staff could answer questions and invited readers to schedule an appointment for a free appraisal.
