Gold and silver were two of the biggest drivers of international economy for the better part of human history. The precious metals dictated the rise and fall of empires, assured a nation’s longevity, and kept allies close. But, as gold started becoming scarce, people realised that they couldn’t support the expanding nature of their economies on physical currency anymore.
Currency and Money
The birth of paper money gave birth to liquefied assets, which allowed individuals and even countries to amass assets to levels never seen before. This puts gold and silver in a unique predicament. The metals still have a high value, but they’re no longer practical as a form of currency.
This is how the FIAT currency came into being, as the Australian Gold and Silver Exchange explains. This is why gold is a safe haven as well, for central banks all over the world.
A FIAT is a form of currency that does not derive its value from the goods it’s able to purchase. Instead, this unique form of currency has a legal or regulated value.
To understand FIAT currency people need to know the difference between money and currency – no these are not the same. Money can store value and maintain it over a long period, while currency cannot. Gold is money, while dollars are the currency. This means that the trust currency built on money will eventually wane and degrade into nothing, unless the trust is restored.
FIAT currency’s value is not dependent on how valuable it actually is, but on what value people give it. For example, a silver coin worth ten dollars will only cost five if the government puts the number five on it. Likewise, a paper note worth nothing can have a high value depending on the number printed on it.
The Rise of Currency
The widespread use of FIAT currency began when the US traded exclusively using dollars with gold as their backing. This is why the world economy uses the US dollar as its base, and every country in the world uses currency.
FIAT currency represents the amount of gold value someone can claim. But, this is not possible as the value of currency circulating in the markets today far exceeds the gold storage of every Central Bank in the world combined. This means people trade paper notes with the confidence that it has gold backing, when in reality there is very little gold behind them at all.