Precious metals like gold and silver were once the standard that backed countries’ currencies, but things are different now. Fiat currency has become the norm in the modern world. Though central banks and most economists sing our monetary system’s praises, it also has some disadvantages. Here are some explanations and considerations for how fiat currency works.
What Is Fiat Money?
Fiat currency has become the norm in the modern world. Typically, central banks issue fiat currency in the form of paper bills and coins that aren’t made or backed by precious metals. Some examples of fiat money include the following:
- Dollars, quarters, dimes, nickels, etc. in the United States
- The Mexican peso
- The Euro
- The British pound sterling
- The Chinese yuan
Fiat currency has value because the currency is backed by a government, and the people who hold it agree to its worth. Since fiat money isn’t tied to valuable commodities like rare metals or oil, governments, or more accurately central banks, can limit the supply of their currencies to help protect their value. They can also inflate the currency in an attempt to stimulate growth. This is most frequently done during a recession or to help prevent the economy from slipping into a recession. As an example, at the time of this writing, the Federal Reserve has nearly doubled the size of their balance sheet since the lockdowns began from COVID-19 in March of 2020.
A loose monetary policy, which involves printing money to purchase bonds in an attempt to reduce interest rates, can help calm the markets following an unexpected crisis. Today, all countries, including the United States, use fiat currency. This has been the case in the U.S. since 1971 when former President Nixon unilaterally closed the gold window.
Benefits of Fiat Money
In most developed economies, fiat currency is relatively stable because inflation, one of the main factors in its value, tends to rise slowly. Also, it’s no longer feasible to mine, mint, and distribute gold or silver coins because they have intrinsic values well above their face values. In comparison, it costs far less than $10 to print a $10 bill. This is due primarily to the erosion or devaluation of the currency since the Federal Reserve’s creation in 1913. Also, inflation is a slow creep, so most individuals don’t realize they’re losing purchasing power due to our current fiat currency monetary system.
Shortcomings of Fiat Money
As alluded to above, fiat money has some shortcomings. Because most fiat currencies do not have “tethers,” they carry a few risks. One pitfall is a dramatic loss of value because of hyperinflation caused by an economic crisis or political unrest. A famous example occurred in the German Weimar Republic between 1921-23. After World War I, German citizens burned their cash for warmth because that was cheaper than actually using the money to buy firewood. More recently, the Venezuelan bolivar has plummeted in value. Venezuela is experiencing hyperinflation and severe cash shortages throughout the country, causing angst and civil unrest among its citizens. Lastly, while far from hyperinflation, we’ve recently seen an uptick in inflation in the United States in part due to the Fed’s recent expansionary policies, and have already surpassed their targeted annual inflation rate of 2%.
What Are the Benefits of a Gold Standard?
Unlike fiat currency, gold, silver, and platinum are widely recognized as valuable regardless of the stability of the global economy. Precious metals may cost more money to mine and produce than paper bills, but there is a finite amount of gold and silver on the planet. This makes them stable, safe-haven investments that are in high demand during economic or financial crises.
Buying precious metals in the form of coins and bullion is a good hedge against an uncertain fiat-based monetary system and can be a wise investment. At Atlanta Gold & Coin Buyers, we offer competitive, transparent rates for rare coins and bullion. We’re the only coin dealer in the Atlanta metro area that publishes our rates online. If you can’t come to our location in person, you can mail us your coins instead. Our knowledgeable and friendly staff is happy to assist with any questions that you might have. For a free appraisal, schedule an appointment with our team today.