Fiat Currencies: Worthless?

When people in the precious metals space call fiat currencies ‘worthless’, it is (1) in comparison to sound money (and superior long-term stores of value) and (2) relative to low-risk opportunity costs and asset classes that actually preserve wealth and protect against the threat of inflation. 

Fiat currencies like the U.S. dollar are best utilized as mediums of exchange to cover immediate costs or to meet short-term liabilities. 

In fact, the very reason that so many people are willing to assume long-term debt obligations denominated in dollars is that they expect the dollar to continue to decline toward ‘worthlessness’; the fact that the dollar has lost roughly ninety-nine percent of its real value (more or less, depending on the basis of comparison) since the conception of the Federal Reserve in 1913, and the fact that the Federal Reserve guarantees a minimum level of two percent inflation per annum, the dollar is a guaranteed losing proposition. 

When considering the progressive loss of confidence in the dollar, the continuing decline of the dollar as a global reserve currency, and the delicate relationships (international and domestic) which place an artificial floor beneath the dollar (i.e. the ‘petrodollar’ arrangement with OPEC, the revolving door of credit through foreign buyers of U.S. debt, and the role asserted by the Federal Reserve as the so-called “lender of last resort”), the dollar is not just weak but highly susceptible to forces which can, without any advance notice, drag the dollar down ever closer to true ‘worthlessness’. 

The fact of the matter is that the dollar used to offer assurance through its convertibility to gold or silver. Since the end of the gold standard, however, it offers absolutely no tangible assurances, and it remains valuable in large part due to the arrangements previously mentioned and on the assumption that it will (at least in the short run) suffice to pay the bills; put another way, the dollar went from a matter of substance (based on convertibility) to a matter of faith in arrangements and counterparties beyond the bearer’s control. 

As for this departure from substance to blind faith, let it be known that every currency of the world — except the euro, a uniquely modern creation untethered from any material referent — derives its name from something tangible. Whether the mark, the quetzal, the peso, the pound sterling, the dollar, or any currency under any other name, the currency and the name itself once had their origins somewhere in substance: whether in the composition of the coinage or the guaranteed convertibility into something tangible, each currency’s use was originally tied to the contents which comprised it or the tangible goods it represented through convertibility. It is through debasement or the canceling of convertibility that these currencies of the world have become the kinds of ‘fiat’ currencies which dominate world trade today — the term ‘fiat’ meaning “let it be done” in Latin, and in this case denoting the kinds of currencies which are decreed by governments, and which, in their modern forms, offer little more than a special kind of ‘network effect’ to maintain their value. In this case, the ‘network effect’ is one whereby common usage follows from the prior conventions, the demands made by the state requiring the people to trade and pay taxes in the approved currency (i.e. legal tender), and the elimination of viable alternatives by the same means. 

As for the dollar’s continued place in domestic trade, it is where it is held as legal tender and the unit of account in the payment of taxes and debts, and it is an instance of Gresham’s Law, whereby “bad money chases out good”. 

For these reasons, the currency may never reach a point of complete ‘worthlessness’, but that does not mean that it hasn’t become so in effect. 

For example, consider some of the major hyper-inflationary events in history — from the American Continental to the Deutsche Papiermark (of the Weimar Republic) to the Zimbabwean dollar. 

Even after the currencies have been debased through hyperinflation (the rapid expansion of the money supply) and abandoned for the purposes of savings and commerce, the notes themselves retain some measure of ‘value’ or tradability as artifacts, novelty items, collectibles, or objects of curiosity. 

So, while even in these cases the currencies in question were never completely ‘worthless’, the case of the Zimbabwean dollar illustrates the point: each 100 trillion Zimbabwean dollar bill was worth roughly $30 at the time it was first issued in January of 2009; in February, the 100 trillion Zimbabwean dollar note was worth less than one U.S. dollar, and the Zimbabwean government suspended its use in favor of other currencies; within weeks, the currency would be worth pennies (USD) before the currency was officially abandoned and replaced by foreign currencies. Despite this, one hundred trillion Zimbabwean dollar bills still aren’t completely ‘worthless’, as examples in good condition often fetch a few bucks (USD) as objects of historical curiosity. 

The same is true of the American Continental and the Deutsche Papiermark: as for the latter, by 1923, Germans were using wheelbarrows to carry enough banknotes to buy their groceries; they spent their salaries immediately in order to avoid losing purchasing power in a matter of mere hours; and some Germans eventually even resorted to using the banknotes for kindling or wallpaper, as it was cheaper than buying other materials. 

It is precisely because of this kind of experience that the famous phrase “not worth a Continental” became so popular in 1780s America, after the Continental was thoroughly debased by Congress to pay its ongoing war debts.

And yet each of these currencies retains some ‘value’ today in the realm of collectibles. 

Despite this, however, these currencies are essentially ‘worthless’, and their value (so far as they have any) comes from the occasional buyer who’s willing to pay a few bucks (USD) just for the sake of owning a piece of historical curiosity. 

This is the fate of all fiat currencies — each issued in progressively greater quantities over time in an effort to maintain the illusion of a viable economy that has been sucked dry in servicing the debts of the issuing government; so while it may not be technically correct to call them ‘worthless’, at some point in time the argument becomes purely academic, a matter of curiosity, not unlike the currencies themselves.