Answer to Ross Harrison's Question: How much longer will our present fiat currency last?
Official Report on the 2008 Financial Meltdown
Will Fiat Currency Ever Go Away?
[The Hub Page monitor said my answer to Ross' question was too long and I needed to make a hub of it or shorten it; I did both. My apologies for what end up being somewhat long-winded, technically-oriented hubs. I think it is a result of my desire to educate ... often myself, but also anyone else who might have the interest. I find I need to research most things I write about now since I am well past the brashness of youth where I was certain of my facts. Too often, my memory has made a fool of me and unfortunately my readers must suffer the consequences by wading through numbers and statistics and long explanations, those that stick with me anyway as I hope you do.- My Esoteric]
I had researched this subject years ago but went back for some quick refresher. I don't think anybody is advocating going back in time when trade was done in the actual metal; that, I believe, would be a physical impossibility. So, what the proposal is, is to go back to the Austrian school of thought which is to use the gold standard once more.
The form that took was the Bretton Woods system that began in 1945 where the value of the dollar was pegged at 1/35 of a troy ounce of gold, regardless of what the market price of gold really was, and then all other currencies were fixed relative to the dollar. In effect, the U.S. promised to redeem the dollars they held in real gold at the rate of $35 per troy ounce; should they wish to do so. As a result, relative value between currencies did not fluctuate with changes in the market.
Unfortunately, this only works when inflation is steady. Starting in the late 1960s, with the Vietnam War and then the Oil crises, America was forced to print money which caused inflation to start climbing. America ended up not having enough gold reserves to honor it's commitments. So what did President Nixon do? He unilaterally broke our promise and untied the dollar from gold. As a consequence, once again America had a true fiat currency.
History has since shown that if you have a strong central bank that is quasi-independent from the politicians, as Americas is, fiat currency works fine. When it isn't, like in the Wiemar Republic in the 1930s or Argentina in 1989, it is disaster in the making. Having the capability to print money in the governments hands is not, in and of itself evil. Just like many people believe owning a gun is not dangerous, per se. It is what you do with that power. Like with anything else, if you use that power responsibly, it works, if you don't, it doesn't. We can find examples throughout history where each type of economic system has failed and led to economic collapse and hyperinflation. We are using the current system of fiat currency because all of the systems based on using species of one sort or another or barter ultimately failed.
Also, everything is cyclical. Using the GOX index for gold over the last 14 years or so, in nominal dollars it sank from a high of $140 a share in 1996 when the effects of the Bush-Clinton tax increases were being felt on the deficit and good times were beginning, to a low of $30 per share in 2000, just before 9/11 and the war on terrorism, the war in Iraq, and the war in Afghanistan. It climbed steadily until 2005 and then leveled off before a steep increase in 2007 when the first signs of economic collapse were being noticed. It topped out at $220 per share.
Then came the recession when you expect a huge increase in gold prices. I don't have a good reason for what followed. It might be the election of the Democrats to the Presidency and Congress with the expectation of stability or the ending of the Iraq war, but from early 2008 to late 2008 the price of gold plummeted and the value of the index that it follows it fell as well, down to $70 per share! Since then, of course, reality has set in and the price of gold has sky-rocketed to somewhere around $1,400 a troy ounce and the index is now $252 per share.
So, what will happen to the price of gold when the world economy stabilizes and things improve again? It will plummet as it has always done once people feel somewhat safe again. So, long story not so short, I don't suspect fiat currency to ever disappear.
© 2011 My Esoteric