Before delving into the failures of fiat currency, it is important to understand what fiat currency is. Fiat money is a national currency that is not pegged to the price of a commodity, but is instead allowed to fluctuate against other currencies on the foreign-exchange markets. Its value is based on the faith and credit of the government that issues it. Historically, the value of paper money was backed by a precious metal, like gold or silver. The bearer of a banknote could exchange the government-issued paper money for its same value in gold or silver. As time passed, governments needing to pay their bills, decreased the amount of precious material that was required to back their currencies, eventually eliminating the practice altogether.
A classic example of the failure of fiat currency is from the Roman Empire. Originally, the Roman denarius coin was made from approximately 95% pure silver. This made the coin very valuable. Leaders knew that directly taxing citizens to pay increased military expenses would have been very unpopular. In order to pay soldiers wages, emperors gradually decreased the silver content of each coin. This allowed them to make more coins with the same face value. With more coins in circulation, the government could spend more. Two centuries later, the denarius was composed of just a fraction of a percent of silver and it became a worthless token.
France has tried to use fiat currency three times over the course of its existence, each time ending in failure. One example is the paper note issued by the French revolutionary authorities between 1789 and 1796, the assignat. Assignats were initially backed by the sale of national lands. In order to stimulate the economy, more assignats were circulated surpassing the value of the public property backing them. The excessive supply resulted in the massive devaluation of the assignat and hyperinflation. The French economy was only saved by Napoleon who issued a 20 franc gold coin. But the gold standard in France didn’t last. Massive debts during and after World War I forced France to stop the production of gold coins and to print more paper money. As a result, the value of the franc plummeted.
Throughout its long history, fiat currency has never been successful. This includes the U.S dollar which has lost over 96% of its value versus gold since 1972. 1971 was the year the U.S. defaulted on its promise to redeem dollars and debts to foreigners in gold. What was once backed by gold, is now an unbacked paper currency to be printed at will by the government.
Since 2008, the Federal Reserve and the U.S. banking system have created about 2.35 trillion dollars, more than the entire history of the U.S. prior to 2008. The ECB and the European banking system have created 4.31 trillion Euros during the same time frame. Given the history of failed fiat currencies and global governments propensity to excessively print them, which form of money would you prefer to hold - gold or paper?
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