The Rise And Fall Of Fiat Currencies
Fiat currency refers to any currency that a government declares to be legal tender. Legal tender in this context means that the money has the full backing of the government that issues it. Throughout history, fiat currencies have had the order of rising and eventually collapsing, often due to devaluation. Initially, paper money gets introduced into an economy whereby it creates an economic boom. Over time, however, it gets overprinted, slowly building inflation and losing value. Eventually, it devalues enough to lead not only to its own collapse but also that of the economy connected to it. Later on, a new form of money is introduced to replace the failed one. While fiat currencies may stay around for a while, History shows us that they inevitably fail at some point. Furthermore, other external factors can lead to the eventual collapse of a fiat currency.
Before we continue on in this article, let us take a look at a couple of paragraphs from an article by Resource Investor, which sums up the situation nicely:
“According to a study of 775 fiat currencies by DollarDaze.org, there is no historical precedence for a fiat currency that has succeeded in holding its value. Twenty percent failed through hyperinflation, 21% were destroyed by war, 12% destroyed by independence, 24% were monetarily reformed, and 23% are still in circulation approaching one of the other outcomes.
The average life expectancy for a fiat currency is 27 years, with the shortest life span being one month. Founded in 1694, the British pound Sterling is the oldest fiat currency in existence. At a ripe old age of 317 years it must be considered a highly successful fiat currency. However, success is relative. The British pound was defined as 12 ounces of silver, so it’s worth less than 1/200 or 0.5% of its original value. In other words, the most successful long standing currency in existence has lost 99.5% of its value.”
History of Failed Fiat Currencies
1. The Roman Denarius
The Roman denarius provides one of the earliest and best examples of a fiat currency that rose and failed. At the onset of the 1st Century A.D., the denarius was a Roman coin made up of pure silver. By A.D 54, during the reign of Emperor Nero, the denarius’ silver content had been reduced to approximately 94% silver. The silver content was further reduced to 85% by A.D. 100, courtesy of all succeeding emperors. By devaluing the silver content of the denarius, the emperors could simultaneously pay off their debts and become rich too.
This idea caught on, and every succeeding emperor wanted to devalue the denarius to increase their wealth. By A.D. 218, the silver content of the denarius was at 43%. In A.D. 244, Emperor Philip the Arab further cut it to around 0.05% silver. By the time the Roman Empire was collapsing, the denarius contained 0.02% silver, and nobody used it as a store of value or medium of exchange.
2. The Chinese Flying Paper Money
China first started using paper money in the 7th century. At first, they used copper coins but made the switch to iron coins as there was a copper shortage. Unfortunately, iron was easy to find, and soon enough, iron coins were overproduced eventually leading to their collapse. In the 11th century, a Chinese bank situated in the Szechuan province of China suggested the use of paper as currency. For a brief moment, this was okay as people could trade the paper currency for silk and precious metals.
China entered into a war with the Mongols that proved to be too costly, eventually leading to China’s defeat and the collapse of the paper money. Kublai Khan assumed leadership of China. As told by Marco Polo, Kublai was able to unite China, and every year, he produced a vast amount of the paper currency. He continued to print vast amounts of the paper money to the point of exceeding demand. It eventually led to the fall of the paper currency that ruined even wealthy families and caused warfare and chaos.
3. World War 1 German Money
After the end of World War 1, precisely 1922, Germany discovered that it was not able to pay its war reparations set forth by the Treaty of Versailles. Due to this, both Belgian and French armies responded by occupying the most productive and industrialized areas of Germany. This step put extra pressure on the already frail economy of Germany. To salvage the situation, the German government put their printers to work to produce extra cash that it could use to pay the debt and also pay German workers.
Soon, too much money was in circulation in the region, which led to hyperinflation that rendered the money worthless. The largest denomination of the currency, Papiermark, was 50,000. In 1923, the largest denomination climbed to 1 Trillion. The money was no longer useful and was instead used to heat furnaces. Burning the currency to keep warm was considered more efficient than using it for trade.
4. France’s Livres, Assignats, and Francs
France has been notably unsuccessful in their attempts to create fiat currencies, failing a total of three times. Sun King Louis XIV left the country with a debt of 3 million livres. His successor, Louis XV needed a way to pay the debt and thus requested that all taxes be made in paper money backed up by coinage. Unfortunately, the currency was overprinted and quickly collapsed.
In the 18th century, France had another go at fiat money by introducing the assignat. However, by 1795, the currency had suffered 13,000% inflation. Just like its predecessor, it collapsed. Napoleon, later on, introduced the gold franc that helped solve the situation in France. However, after 12 years, the franc had lost 99% in value, and it too failed.
Recent Fiat Currency Failures
Argentina was among the top ten largest economies in the whole world back in 1932. However, it dropped down the list as soon as its currency collapsed the same year. In that same year, Italy, Norway, and Finland experienced currency shock that spread throughout the whole of Europe. In 1994, Mexico too went through a currency collapse period whereby the peso lost its value throwing Latin America into economic hardships. In 1997, the Thai baht collapsed spreading its effects to neighboring countries such as the Philippines, Malaysia, Indonesia, Hong Kong, and South Korea.
In 1998, the Russian ruble brought the country into economic recession after its devaluation. Similar effects were witnessed in Turkey when the Turkish lira experienced hyperinflation. Currently, Zimbabwe remains top on the list of countries with the worst fiat currency failures. Through rampant money printing, the state created hyperinflation. The inflation hit 624% in 2004 and then rose to 11,000% per year after that. The Zimbabwe dollar lost value to the point that it became completely worthless.
The US Dollar in Trouble
Unfortunately, the current US dollar has all the characteristics of all previously failed fiat currencies. For instance, since its issue in 1913, the US dollar has lost 92% of its value. Even after revaluation in 1934, the USD dropped another 41% in value. The US has currently been increasing the supply of dollars by 13% every year to pay off its debt. Due to this, the dollar is losing its value at an alarming rate. The USD remains on the cusps, and only the future will tell which direction the currency will take.
Whenever fiat currencies collapse, precious metals such as gold and silver have pretty much always remained as good hedges against inflation and economic recession. Judging by the current fiat currency situation, the future of money looks best in the hands of precious metals. Blockchain technology and asset-backed cryptocurrencies are also of rising interest in this digital age. We have integrated the value and investment aspect of gold with the speed and convenience of the blockchain in our DinarCoins, which are pegged to the worldwide spot price of gold. You can trade DinarCoins for Gold Smart Contracts which are redeemable for real physical gold. Anyone in Malaysia or anywhere else can take advantage of this. Visit our main website for further insight on our gold and blockchain-based products.