Fiat Currency: What it is, how it affects Gold prices and its history

Fiat currency is currency that has been declared legal tender by a government entity that is not backed by a physical commodity such as Gold or Silver. The value of fiat money, like the U.S. dollar, is generated through supply and demand interactions. There still exists a certain relationship between fiat currency and Gold and other commodity prices.

1923 $1 United States Note

History of Fiat Currency and the Gold Standard

The use of Gold as currency throughout history has been well documented. The value was derived from the metal within the bullion. Following the California Gold Rush of 1849, the United States government began to print paper money backed by Gold deposits. This goes to say that the more Gold a nation possessed, the wealthier they were.

During World War I, many countries suspended the Gold standard in order to print more money to support the wartime economy. Over the next few decades, the disparity between U.S. Gold reserves and their increased dollar spending amidst a strengthening economy led to the eventual severance of the Gold Standard and movement to a purely fiat money-based economy. Today, all of the world’s currencies are in a fiat, non-commodity backed system. APMEX carries a great collection of world currencies including Gold exchange notes and legal tender fiat money.

Why Fiat Currency?

Some still debate whether or not a fiat currency system is the best option. International adoption has taken place for a number of reasons. One obvious reason is there is only a finite amount of Gold. This would be extremely limiting to every country in the world in terms of what kind of economic stimulus and bailout money governments could provide. Fiat currency allows governments to provide stimulus, take on debt and provide investment.

Fiat currency and Gold maintain an inverse relationship. When the value of the U.S. dollar decreases, purchasing power of other countries increases. While Gold prices increase during a time of a weak dollar, Investors tend to seek a store value in Gold. APMEX provides current Gold prices, as well as Silver, Platinum and Palladium prices.

Hyperinflation

The Hungarian pengö

Source: www.globalfinancialdata.com

Hyperinflation is essentially extremely high inflation rates. This term has come to be associated with fiat currency and can be detrimental to the monetary system. Usually hyperinflation occurs during periods of political and civil unrest. In these times, people lose confidence in their governments and currencies. Hyperinflation also occurs during situations when there is an oversupply of money printed. This can be right after a war, or in extensive public economic programs. The most serious case of hyperinflation was in post-World War II Hungary. The government printed money in order to stimulate the economy, but they injected so much money into their economy, they created extreme hyperinflation. An item that cost 379 Hungarian pengö in September 1945 cost 1 trillion trillion pengö in July 1946. Some use hyperinflation as an argument against fiat monetary systems, but the pros tend to outweigh the cons.

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