Fiat currencies are a currency which governments issue as legal tender, it has no intrinsic value and is not backed by any commodity or asset of any kind and it’s only peoples belief in its worth that gives it value.
The term Fiat is Latin meaning “it shall be” or “let it be done” which refers to fiat currency as being money because government decrees that it so.
Once people lose trust in a fiat paper currency it becomes worthless, it is only paper and costs the government only a few cents to produce and now much of it is digital just on a computer screen.
In 1971 all currencies became fiat currencies when President Nixon took the US dollar which was and still is the world reserve currency off the gold standard. Never before in the history of the world have all currencies been fiat based at the same time, this has been a huge experiment which is near the end of its life.“Those who do not learn from history are doomed to repeat it.” George Santayana This statement is so true, particularly when looking at the historic record of fiat paper currencies.
From an historical point of view every fiat currency since the time of the Romans has failed.
The Romans did not have a fiat currency in the true sense but they massively debased there coins by continually reducing the amount of precious metal in each coin, this ultimately was one of the key factors which brought about the fall of the Roman empire.
China issued paper currency in the 11th century this worked for some period of time but ultimately lead to extremely high inflation and instability within the country and had to be abandoned.
The French issued paper currency in the seventeen hundreds but by 1795 hyperinflation had taken hold. When Napoleon Bonaparte came to power he understood to have a strong country you needed a stable currency so he
issued the gold franc and for some period France had economic prosperity.
Germany’s currency problem was brought about by the huge debt which was a financial punishment that was placed on Germany after World War One. This lead to a hyperinflation episode started in 1922 and by 1923 a loaf of bread cost $3 billion marks and one ounce of silver went to a high of $500 billion marks. If you had gold you could have brought a whole block in Berlin for a little more than 25 ounces of gold.
These are only a few examples of countries in the past which have seen their fiat paper currency fail. More recently Zimbabwe has seen the destruction of its currency and economy and now Iran in 2012 is heading towards hyperinflation. More than often the main reason for these failures is that governments can’t resist the need to spend beyond their means and make up the difference by printing money and eventually the paper currency losses so much of its purchasing power it become worthless. This has happened so many times in the past and this is what’s happening now in the United States, Japan, Euro Countries, United Kingdom, over the last 40 years most paper currencies have lost at least 90% of their purchasing power.
In a world of fiat paper currencies some have become very wealthy namely those connected with financial institutions or the Government, as they have the privilege of creating currency or receive new currency before it has been multiplied within the banking system, commonly known as fractional reserve banking.
Savers are the biggest loses and those on fixed incomes, as the currencies are losing purchasing power every year.What have the bankers and governments done to our money!