Fiat Currencies Versus The Gold Standard

For over 600 years, the Roman Empire had a largely, silver backed currency. When the Denarius was introduced in 211BC, it was largely pure silver and 4.5g in weight. By the time the Emperor Aurelian undertook currency reform in 274AD, the Denarius had virtually no silver in it and was replaced with the 5% purity, Double Denarius otherwise known as the Antoninianii. For the Roman Empire, this was devastating because their currency was meant to hold an intrinsic value and ultimately the debasement of their currency charts the fall of the Empire.gold bar

By comparison, our modern currencies are largely based on the promise of the government to honor the notes that they produce. These currencies have no intrinsic value and are referred to as fiat currencies. In our connected world, the value of our currencies are largely floated against the currency of other countries which represents effectively supply and demand for the existing money supply of the country in question.

In the current economic climate, there are many people in parts of the world demanding a return to the gold standard or using other precious metals to deliver an intrinsic value to the country’s currency. If the US currency was based on how much silver is in a silver dollar, the world would be a very different place. Inflation would not solely be based on the growth of wages, the increased cost of supply or anything that we think of largely today, it would be bound in many respects by the availability of a base metal like gold and the ability to extract it and process it.

For countries like Canada, Australia, South Africa, Russia and the United States, this might not be such a significant problem. As countries that have a supply of gold available in the ground or at the base of alluvian streams it would be relatively east to increase your country’s wealth by simply digging up some more of it. For smaller countries like Singapore that have done well in recent years by establishing a strong, knowledge based economy that provides favorable conditions for companies to operate there, a return to a gold standard would be difficult. The inherent value of their currency would be nothing, they simply wouldn’t have the resources needed to acquire the gold necessary to maintain their wealth.

Again for countries that are large-scale manufacturers like China, Brazil, the United States and Germany, the gold standard could make some sense because it would eliminate the vagaries of foreign exchange manipulation. For countries like Canada, Australia and Russia that not only have gold reserves but are massive primary resource producers, exchanging in gold could be a boon.

Depending on which side of the argument you fall on, the gold standard will always become more favorable when economic conditions are not great because countries like the United States could always just go “dig up” some wealth. For large portions of Americans, the gold standard would be a way of preventing their government from running up large amounts of debt. The problem is, that during healthy economic conditions, the gold standard is an anchor on growth and prevents smaller countries from growing through proper fiscal management. The gold standard for its proponents invokes a discipline through scarcity that should be invoked by common sense and that’s probably the debate that these people should be having.

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