Fiat money has a less-than-flattering nickname: “toilet paper money,” or, essentially, paper money.
The less crude definition of fiat money is any money that is declared to be legal tender by a government. It is also money issued by any state that is not convertible by law to any other form of currency, such as gold. It is also defined as money with no intrinsic value.
Looking back on history, every fiat currency, from the Roman denarius right up to the paper money that has been used in the U.S. since the Revolutionary War, has collapsed eventually, with the country or state’s government often being to blame for this.
Fiat money was used in China in the eleventh century and received widespread use in the Yuan and Ming dynasties. It was known as “flying money,” since it would easily fly out people’s hands. The notes eventually fell out of favor, with an attempt to resurrect them during Kubla Khan’s dynasty. Marco Polo praised the currency in his book, The Travels of Marco Polo.
Tally sticks were used in as fiat money in England in the eleventh century when there was a gold shortage during the reign of Henry I. The fiat money became paper bills from 1661 on, but these bills quickly lost value too. Fiat money was also unsuccessfully used in France during the reigns of Louis XIV and Louis XV during the sixteenth and seventeenth centuries, becoming useless due to debt and an overabundance of paper money.
Lest anyone think that the current economic situation in America is new, there have been numerous examples of failed fiat money throughout U.S. history, going right back to the colonial era, when bills of credit were issued. Throughout America’s history, fiat money has failed either due to a lack of gold or silver or inflation. The most recent example in the U.S. is the Bretton Woods system that saw the conversion of $35.00 to one troy ounce of gold; the system came to an end in the 1970s, after the U.S. had experienced some of the worst inflation in its history.
And speaking of inflation, governments printing fiat money can lead to hyperinflation; just look at the example of Weimer Republic in Germany following the end of World War 1, where a loaf of bread cost 1.0 billion marks due to hyperinflation.
Argentina, Russia, and Mexico have undergone economic crises due to fiat money in recent times, while Zimbabwe is currently experiencing hyperinflation due to President Robert Mugabe’s attempts at price controlling. And we know all too well about the current situation in Europe due to the collapsing Euro.
Speaking of inflation after wars, America has always experienced inflation after all the wars it has taken part in. The current debt the U.S. is experiencing has been compared to the debt in the Weimer Republic following World War 1. Printing more paper money isn’t an option, and with the supply of U.S. dollars growing at a rate of 13% annually, this is a worrying sign that the dollar may be on the brink of collapse.
Like other fiat money, the U.S. dollar is on a downward spiral, losing 92% of its value since it was issued in 1913—42% of its value was lost in 1934. This alone is evidence that this form of fiat money is on the way out.