How We Got to Use Fiat Currency Over Gold and Silver

Gold and silver have been used as money for millennia because they have intrinsic value, durability, divisibility, portability, and scarcity. However, in the modern era, most countries have adopted fiat currency as their legal tender. Fiat currency is money that is not backed by any physical commodity but by the authority and trust of the issuing government. How did we get to using fiat currency over gold and silver? Here is a brief history of the evolution of money.

Gold coin

The Rise of Paper Money

The first known use of paper money was in China, during the 10th century. The Chinese had a high demand for metallic currency, but they faced a shortage of precious metals. They also had a sophisticated system of credit notes, or paper drafts, that merchants used to facilitate trade. The government decided to nationalise this system and issue paper money that was backed by gold or silver. This paper money was called jiaozi, and it was widely accepted as a medium of exchange1

However, paper money also had its drawbacks. It was vulnerable to counterfeiting, inflation, and over-issuance. The government often printed more paper money than it could redeem in gold or silver, leading to a loss of confidence and value. Paper money also faced competition from other forms of money, such as copper coins or foreign currencies. Paper money eventually fell out of favor in China by the 15th century 2

The Emergence of Fiat Currency

The concept of fiat currency emerged in Europe during the 17th century. The term fiat derives from the Latin word fiat, meaning “let it be done”. Fiat currency is money that is declared by a government to be legal tender, meaning that it must be accepted as a means of payment. Fiat currency does not have intrinsic value or commodity backing, but it has value because people trust that it will be accepted by others3

One of the earliest examples of fiat currency was the continental currency issued by the Continental Congress during the American Revolution. The continental currency was not backed by gold or silver but by the promise of future tax revenues. However, the continental currency suffered from hyperinflation and depreciation due to excessive printing and a lack of public trust. It became worthless by the end of the war4

Another example of fiat currency was the Assignats issued by the French Revolutionaries during the French Revolution. The Assignats were paper notes that were backed by confiscated lands from the Catholic Church and the nobility. However, the Assignats also faced inflation and devaluation due to over-issuance and political instability. They were eventually replaced by metallic coins in 1796.

The Adoption of Fiat Currency

The widespread adoption of fiat currency occurred in the 20th century, especially after World War II. During this period, most countries adopted a system of fixed exchange rates based on the US dollar, which was backed by gold at a fixed rate of $35 per ounce. This system was known as the Bretton Woods system, and it aimed to promote international trade and monetary stability. However, the Bretton Woods system also faced challenges due to economic imbalances, political pressures, and speculative attacks. In 1971, US President Richard Nixon announced that he would suspend the convertibility of the US dollar into gold, effectively ending the Bretton Woods system and the gold standard.

Since then, most countries have adopted a system of floating exchange rates based on national fiat currencies. These currencies are not backed by any physical commodity but by the monetary policy and fiscal policy of their respective governments. Fiat currencies have advantages such as flexibility, sovereignty, and seigniorage (the profit from issuing money). However, they also have disadvantages such as inflation risk, exchange rate risk, and political risk. Fiat currencies rely on public trust and confidence to maintain their value and acceptance.

In conclusion, we got to using fiat currency over gold and silver through a long process of historical evolution and experimentation with different forms of money. Fiat currency has become the dominant form of money in the modern world, but it is not without its challenges and limitations.

Disclaimer: This article is intended as an opinion piece and does not constitute financial advice. Investing in bullion carries risks, and individuals should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.

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