All Fiat Money Systems Fail, Right? Wrong.

[Gumby]

Interesting perspective...

MYTH BUSTING
All Fiat Money Systems Fail, Right? Wrong.
One thing we constantly hear all over the media is how “all fiat money systems in history have failed”?.  This is just not correct.  By my count, there are several hundred fiat regimes in existence today.  What has failed and will always fail is fixed exchange rate regimes and commodity based monetary systems.  As far as I know, there is not a single one around today that has stood the test of time.  The gold standard has always failed.  And it will always fail due to inherent constraints that make it a very poor monetary design.

Now, you might not agree with the reasons why commodity systems fail (I explain the simple unsustainable trade trends that generally results in the collapse of such monetary regimes here), but when someone says “all fiat monetary systems fail”? they are forgetting to also mention the fact that all commodity based monetary systems have also failed.  Oh, and they’re ignoring the fact that hundreds of fiat systems still exist.  So no, all fiat monetary systems have not failed.  And if you live in any developed nation your bank account or wallet is living proof of this fact.

And yes, saying all fiat systems will eventually fail is pointless.  One day the Earth will explode in a ball of fire also.  But that doesn’t tell us much about how to benefit from or utilize the current monetary system during our lifetimes….

Source: http://pragcap.com/all-fiat-money-syste ... ight-wrong

[Pointedstick]

Seems kind of like a bunch of semantic niggling to me. All monetary regimes will eventually fail. I agree with the last sentence: the important part is how these systems facilitate exchange and affect the structure of our society.

[notsheigetz]

One thing we constantly hear all over the media is how “all fiat money systems in history have failed”?.

Say WHAT? I don't recall ever hearing the words "fiat money system" in the media, let alone whether they fail or not.

[RuralEngineer]

Is it just me, or is that article junk?

The gold standard has always failed?  There was a time when I couldn't trade a gold bar for a chicken or bowl of rice?  Because I can think of quite a few times when the local fiat currency wasn't worth the cost to print it.  Unless I'm misunderstanding what he's saying, gold as a currency has been going strong for several thousand years now.

Several hundred fiat money systems around?  How old are they?  I don't see anyone trading in wampum any more.  Certainly none of them even come close to gold as a source of value/currency.

[Tortoise]

What has failed and will always fail is fixed exchange rate regimes and commodity based monetary systems.  As far as I know, there is not a single one around today that has stood the test of time.  The gold standard has always failed.

That is an extremely misleading statement. Gold has in fact stood the test of time as money. It has never failed. An ounce of gold still has roughly the same purchasing power in goods and services that it had a couple thousand years ago.

What have failed time and time again are government promises to honor gold-backed money. That's the government's failure, not gold's. Huge difference.

[moda0306]

Not really all that misleading.  The gold standard and actually using raw gold in transactions are two very different things.  People can hold gold in a fiat economy just as well as a gold standard economy.  Further, I'd probably add that from 1981-2000 gold lost tons of real value.  Of course, within the PP, that's just fine, but to say it's the ultimate store of wealth is very misleading.

The author is pointing out that having a government link its currency to a commodity is a mistake.  I agree with that.  There isn't a widely used commodity-based currency today if I'm not mistaken.  Holding commodities, especially gold, will obviously have a certain amount of security to it, but our economy appears to be a few centuries beyond being able to efficiently trade raw gold for goods and services.

[Gumby]

Exactly. Nobody said gold failed. I love gold. But, the gold standard clearly has failed the test of time. It was flawed for the same reasons that the Euro is flawed.

[hoost]

I don't understand the point of the article.  True, not all fiat monetary systems have failed...yet.  Why is it that they have not yet failed?  Is there some sort of difference in the design of these modern-day systems that makes them fail-safe, or is it just a matter of time?  I would argue it's the latter.

[Gumby]

I don't understand the point of the article.  True, not all fiat monetary systems have failed...yet.  Why is it that they have not yet failed?  Is there some sort of difference in the design of these modern-day systems that makes them fail-safe, or is it just a matter of time?  I would argue it's the latter.

All monetary systems fail, eventually — much like the sun will eventually wipe out the Earth. The point of the article is to acknowledge that the gold standard did fail (for the same reasons that the Euro is flawed). Obviously fiat money can fail, but we shouldn't waste time wishing we had a gold standard. Better to spend time understanding the fiat monetary systems we have.

[craigr]

The author doesn't seem to understand that fiat systems failing usually go along with governments failing.

So saying that you have all these fiat systems around as proof it works misses the point. The real point is how many governments still exist today that existed 100 years ago out of hundreds of countries along with their fiat systems?

By my count, maybe six? (US, Canada, Britain, New Zealand, Australia, Switzerland?)

So what happened to the money by the ones that vanished? That's what matters most.

If you're playing the odds (and if you invest you are), then a catastrophic currency problem in one's lifetime is quite high.

In fact I'll just come out and say that the older a country gets, the more likely it is to have problems, not less. The US is well over 200 years old. It is the outlier. It's never good to be the outlier. So in terms of the dollar having serious problems the odds of it happening go up each year, not down. 

[Gumby]

The author doesn't seem to understand that fiat systems failing usually go along with governments failing.

Actually, he does understand that. He wrote a paper saying exactly that...

http://papers.ssrn.com/sol3/papers.cfm? ... id=1799102

[craigr]

The author doesn't seem to understand that fiat systems failing usually go along with governments failing.

Actually, he does understand that. He wrote a paper saying exactly that...

http://papers.ssrn.com/sol3/papers.cfm? ... id=1799102

Then why did he write that article that indicates the opposite?

FWIW. I just blogged about this whole debate:

https://web.archive.org/web/20160324133 ... ways-fail/


The author is wrong in the original post. Fiat currencies get more unstable the longer they are around. They don't become more stable. They may not "always" fail, but in the overwhelming number of cases they fail right along with the government that issues them. The figures are quite high.

In fact, the older a country gets, the more likely it is to have problems, not less. The U.S. is well over 200 years old. It is the outlier. It’s never good to be the outlier. So in terms of the dollar having serious problems the odds of it happening go up each year, not down.

I’m not being Chicken Little here, just looking at what history shows us so it’s best to be diversified.

I would argue that each year the dollar doesn’t have a problem is another year that it’s more likely to have problem going forward. I guess you’d call it a fiat currency paradox. At least, that’s what I’m calling it.

[Gumby]

The author doesn't seem to understand that fiat systems failing usually go along with governments failing.

Actually, he does understand that. He wrote a paper saying exactly that...

http://papers.ssrn.com/sol3/papers.cfm? ... id=1799102

Then why did he write that article that indicates the opposite?

He didn't. Where in that article does he say that fiat governments don't fail? Besides, even if a government was on a gold standard, its currency would still fail the moment the government failed. Governments fail. Either way — fiat or not — the currency fails. So, what's your point?

The author is wrong in the original post. Fiat currencies get more unstable the longer they are around. They don't become more stable.

Where exactly does he say that fiat currencies become more stable over time? All he said is that a gold standard will always fail due to its design flaw.

[craigr]

He didn't. Where in that article does he say that governments don't fail? Besides, even if a government was on a gold standard, its currency would still fail the moment the government failed. What's your point?

He's arguing in circles.

There are maybe *six* governments that still exist today that existed 100 years ago. That means most of the rest of the countries on this planet have had one (or many more) governments come and go over this time and likely one (or more) fiat currencies along with them.

I have a pile of money from the Weimar Republic of Germany worth "millions" back then that of course are worth nothing. But I can also buy a silver coin from that same time that is still marked with the government's logo and it's still worth the weight in silver. Nobody cares who minted it.

So the fiat currency failed and the specie currency did not. I'm sure there are many more examples I can pull up.

If the U.S. goes the way of the Dodo the same thing will happen. The paper will be worthless, but those gold double eagles will still be worth the weight in gold.

Fiat currencies are not stable in the long-term. There is nothing in the history of humanity to show anything different.

[craigr]

All he said is that a gold standard will always fail due to its design flaw.

If I have to choose sides, even with the known problems, I'll take the gold standard any day of the week. It may have flaws, but it's not likely I'll wake up one day to find it's worth nothing. That's the biggest flaw of fiat money of them all.

[Gumby]

There are maybe *six* governments that still exist today that existed 100 years ago. That means most of the rest of the countries on this planet have had one (or many more) governments come and go over this time and likely one (or more) fiat currencies along with them.

That has nothing to do with the monetary systems. Those governments failed for exogenous reasons.

So he's wrong about fiat currencies not failing and the gold standard is worse. There is no other way to argue the point.

You're building up a straw man. All he said is that the gold standard always fails, due to a flaw. He never said that fiat currencies don't fail. You've literally imagined him saying that.

But if he wants an argument I can make one for him. I have a pile of money from the Weimar Republic of Germany worth "millions" back then that of course are worth nothing.

Big deal. Governments fail. And with their failure, so goes their currency.

But I can also buy a silver coin from that same time that is still marked with the government's logo and it's still worth the weight in silver. Nobody cares who minted it.

A government's gold-backed paper currency becomes worthless when a country fails. So I guess you're just arguing against all paper and electronic money. You want everyone to carry a bag of coins around with them??

So the fiat currency failed and the specie currency did not. I'm sure there are many more examples I can pull up.

You're conflating gold-backed currency with coins. That's not what we're talking about.

Fiat currencies are not stable in the long-term. There is nothing in the history of humanity to show anything different.

True. But, neither is gold-backed paper currency. And the entire point of the article is that the gold standard always fails due to a design flaw that it shares with the Euro.

[Gumby]

All he said is that a gold standard will always fail due to its design flaw.

If I have to choose sides, even with the known problems, I'll take the gold standard any day of the week. It may have flaws, but it's not likely I'll wake up one day to find it's worth nothing. That's the biggest flaw of fiat money of them all.

A gold-backed paper currency would be worthless if its government failed. It's no different.

[craigr]

The author just has an axe to grind.

[Gumby]

But, seriously, craig. Don't you see that gold-backed paper currency would become just as worthless as fiat paper money when a government failed? In both cases their value is linked to a particular government existing.

[craigr]

But, seriously, craig. Don't you see that gold-backed paper currency would become just as worthless as fiat paper money when a government failed? In both cases their value is linked to a particular government existing.

Yes. But if that paper currency is convertible to specie on demand this becomes much less likely. That's what ultimately broke the gold standard is the fact that FDR didn't allow conversion on demand and that manifested itself as inflation for the next 40 years to put pressure on the true gold price. Without convertibility then a "gold backed" currency is just as problematic as any fiat. It needs to be convertible to exert control.

[craigr]

Silver species didn't fail then because there was an arbitrage opportunity.  However, today gold nor silver are currencies.  They're Tulips now. 

No, I assure you they are currencies. Banks don't hold tons of gold on their books because it's Tulips.

On the bright side, with the collapse of the U.S. you'll have some luck offloading that gold since someone is bound to have fond memories of the 'gold standard'.  But that's playing the greater fool theory, not finance.

[/quote]

Then central banks must be the biggest fools of them all, because they store tons of the stuff in their vaults.

What do they know that all these Fiat Wizards don't? These are the guys printing your money and they hold gold in reserves.

[Pointedstick]

But, seriously, craig. Don't you see that gold-backed paper currency would become just as worthless as fiat paper money when a government failed? In both cases their value is linked to a particular government existing.

Yes. But if that paper currency is convertible to specie on demand this becomes much less likely. That's what ultimately broke the gold standard is the fact that FDR didn't allow conversion on demand and that manifested itself as inflation for the next 40 years to put pressure on the true gold price. Without convertibility then a "gold backed" currency is just as problematic as any fiat. It needs to be convertible to exert control.

Doesn't that only work if 100% of the gold-backed notes actually have gold backing them? Don't governments usually lever up the amount of banknotes without increasing the gold supply commensurately? Even in the days of pure gold coin money, governments clipped and alloyed coins. How is the gold standard system any more trustworthy or safe if it's ultimately backed by the very same government promises? In this case, it's the promise of 100% precious metal convertibility, but it's still a breakable government promise.

[craigr]

Governments on a gold standard are less likely to fail?  Why would this be?  Or do I misunderstand your point?

Yes they are less likely to fail because when you wreck a currency you kick of revolutions. When you kick of revolutions the governments tend to go away.

[craigr]

Guys I'm not going to argue against a negative.

I can't prove Santa Claus doesn't exist.

I can't prove the Easter Bunny doesn't exist.

I can't prove that some fiat currency somewhere now or in the future won't work going on indefinitely.

I can only look at history and evidence to strongly suggest that these things aren't true.

[Gumby]

I can't prove that some fiat currency somewhere now or in the future won't work going on indefinitely.

But we can prove that gold-backed currency fails when a government fails. So, unless you are advocating that everyone carry a bag of coins in their pocket at all times, it really doesn't make a difference if a government is on a gold standard or not. Either way, the government can fail just as easily.