Fiat money consumes our culture. How many quotes, songs, and essays have been written about money or concepts surrounding it? You can probably name a few right off the top of your head. And yet, the more you drill down into the concept of currency, the flimsier it appears. How can our society be so obsessed with a fancy sheet of paper? And can that paper really keep our economy running smoothly? These questions have entangled fiat currency and gold for decades.
How Did We Get Fiat Money?
Fiat money is any form of currency that does not have the backing of a physical resource. Instead, it depends entirely on the government that issues it. In the United States, we use fiat currency all the time, sometimes without understanding what that means. But in order to understand fiat vs the gold standard, you have to first understand how the U.S. dollar came to be fiat in the first place.
From Bartering to Gold
The general concept of money has existed long before the United States. Back in the B.C.E. era, before the days of both fiat currency and gold, you could give your friend Joe some bushels of wheat for a new horse. In many cases, simple bartering was all you needed - after all, it’s not all that different from times today when you bake cookies for your friends in exchange for them helping you move into a new house.
But what if you didn’t actually want a new horse, and your friend Carol wanted it in exchange for some boots? Now, you have to give Joe your wheat so you can give Carol your horse so you can get some boots. This can become quite complicated, so it’s no surprise that as early as the 7th century B.C.E., people were already inventing coins to solve this problem. Now, you give Joe some wheat in exchange for bronze coins, and you can use those coins to get whatever you want from whoever you want.
From Gold to Gold Standard
Metal works well as a currency because it is a limited resource. It doesn’t work quite as well when it comes to larger-scale trading. Before paper currency turned into fiat money, it was used as a more convenient way of carrying around gold. You might give Carol a satchel of gold coins for some new boots, but what if you were a wealthy trader traveling the Silk Road? You’d have to carry heavy trunks of gold thousands of miles. Wouldn’t it be easier if you could give someone a slip of paper promising that you had a treasure trunk of gold, and they could come collect it whenever they wanted?
This marked the creation of something that is between fiat currency and gold: the gold standard, where paper currency is used to represent a physical amount of gold that the holder can presumably get in return. It would later spark the fiat vs gold standard debate.
There were, of course, other reasons for switching to paper money. For example, traders had trouble converting different currencies from different empires, and metals were also in high demand for more practical purposes. However, the general purpose remained the same when paper currency was later used by the United States: every paper note represented a precious metal such as gold or silver that was “owed” to that person. If you lived in the 1800s, you could turn in your gold standard to your nearest bank and receive its equivalent value in precious metals.
Fiat money vs. the Gold Standard
The gold standard worked well - for a while. The 1930s to the 1970s were a golden age where countries around the world relied on the United States’ gold-backed dollar. The price of gold was fixed to thirty-five dollars per ounce, which worked in theory. But when more and more countries wanted dollars, leading the United States to print more and more banknotes, the value of that gold decreased.
When President Nixon entered the scene, he realized that the United States was handing out more dollars than it could redeem. He prompted the fiat vs. gold standard discussion that ended in 1971, when Nixon ended all ties between gold and dollars. This officially turned the US dollar into fiat money, untethered to any physical resource. The dissociation between fiat currency and gold also freed up gold to rise and fall in price like any other asset.
The Free-Floating Dollar
What makes this currency unique is that it has no intrinsic value beyond what we as a society agree upon. This is, in some ways, important - after all, China stopped using bronze coins because so many people needed bronze for other important activities. However, this means that the dollar is susceptible to the whims of society. If both of us agree that an apple is worth $3, I can sell you an apple for $3. But if enough people agree that an apple is worth $3, I might see if anyone will buy it for $5. Suddenly, the value of your dollar has changed in respect to the apple.
You might recognize this as simple supply and demand, which is an important part of our economy. In fact, the fixed price of gold was one of the reasons Nixon started considering fiat vs. the gold standard in the first place. But what if the very thing upon which the economy spins has an infinite supply?
Fiat Money Gone Wrong
The difference between fiat currency and gold becomes clear in the example of hyperinflation. You may be familiar with the story of the Soviet Union, which used fiat money in the form of the ruble. In 1921, the early Soviet Union issued a little over 16,000 rubles. In 1923, the same government issued over 176 million rubles - a 1,100,000% increase. You might be happy if you suddenly gained a million dollars - but what if everyone around you also gained a million dollars? Those dollars become worthless. In the Soviet Union, people went back to bartering for basic goods or using other materials like vodka as currency.
Of course, governments have systems in place to try to prevent this exact thing from happening. If the Federal Reserve wanted to, it could easily amp up its currency production - in fact, it wouldn’t even need to make more paper. It could change the label on the $1 dollar bill to $100, and that would suddenly be the standard (consider currencies like the Chilean peso, where the smallest possible paper value is one thousand pesos). But the government is unlikely to do something like that anytime soon, because in order to make the fiat vs. gold standard resolution work, the government needs to create an artificially limited supply. This artificial wall is what keeps the United States dollar afloat.
The Perseverance of Gold
The dangers of fiat currency are part of why gold is still relevant today. In times where Americans are well aware of the illusion of fiat money - such as when global inflation reached a high in 2022 - people turn to gold. The premise is simple: paper money’s supply is infinite with artificial limits. And when people feel uncertain about the firmness of those artificial walls, they look for a resource with real, physical limits.
Replacing fiat currency with gold is a solid choice in this regard, partially because of the metal’s long-standing history with the United States. Before the fiat vs. gold standard debate, Americans indirectly used gold as currency, which makes it a realistic leap to once again use it as an asset. Its properties also give it some advantages over other historic currencies. For example, its various industrial uses keep it relevant as opposed to, for example, cowrie shells. At the same time, it isn’t as commercialized as goods such as spices, which are mass-produced and have significant everyday uses. It’s not so rare that it’s impossible to find, but it’s not so common that you can buy it at your local supermarket.
In other words, gold fits a lot of middle grounds that make it a powerful store of value. And because people turn to it in times of economic turbulence, the price of gold tends to match inflation. So while your dollar bill loses value due to inflation, gold’s value stays relatively the same. This, of course, fluctuates just like any other asset. However, unlike fiat money, gold’s limited physical supply keeps it grounded, especially over long periods of time. Just look at the history - gold has persevered as an asset for thousands of years. That kind of track record doesn’t vanish overnight.
Turning Fiat Currency Into Gold
When you buy gold with fiat money, there might initially seem to be no difference in your assets. You used to have $3,000 in cash. Now, you have $3,000 worth of gold. But there’s an enormous difference in the solidity of that three grand, as shown by the fiat vs. gold standard debate. You certainly don’t want to keep all of your monetary value in gold - after all, you can’t fill up a tank of gas with a gold coin. However, when it comes to long-term savings, you want an asset with a sturdy foundation. The type of foundation that precious metals provide.
If you’re ready to start tethering your money to the real and physical world, Safe Haven Metals has your back. We provide all of the common metals used for asset protection, including gold, silver, palladium, and platinum. Interested in a specific coin? Looking for some good old-fashioned bars? We have just what you need! We even insure shipping for orders over $199 so you can rest easy.
Start saving with an asset you can depend upon. Call Safe Haven Metals now, and you can unlock the enduring power of gold.
