With the online payment options replacing the flow of cash in the market, researchers predict that fiat money may collapse at some time in the future. Experts also believe that precious metals like gold and silver will soon be occupying the mainstream money market, just like the old times when they were used as the primary medium of exchange for goods and services. But what is leading to the collapse of fiat money in the future? Why is only gold and silver considered as future money? Let’s find out.

What is Fiat Money?

Fiat money is a type of currency that does hold any intrinsic value and is made a legal tender by the government. In the past, currencies were backed by physical objects like precious metals but then the government-issued fiat money based on its own creditworthiness. Paper-based fiat money is largely accepted by people as a mode of payment. It can not be converted into any other form of currency.

History of Fiat Currency

Fiat money was first introduced in China as an outcome of the shortage of metallic currency. The shortage arose out of a limited supply of precious metals. This forced the government to issue paper-based fiat money to keep the trade and economy going. Then the traders in China began issuing private notes which were supported by a monetary reserve. This was the first legal tender.

The concept of fiat currency spread towards the West in the 18th century and the American colonies started issuing paper-based bills of credit that would help the holders to pay taxes to the governed authorities. Also, during the Civil War, fiat currency was used to preserve the value of gold and silver.

Drawbacks of Fiat Money

While fiat money acts as a medium of exchange and is widely accepted by people, there are some disadvantages of fiat money that make it slightly less desirable.

• Fiat money is extremely susceptible to inflation rates. For example, in times of hyperinflation, the purchasing power of fiat money falls significantly in a short period of time.
• Fiat money is likely to lose its value in case the central bank, which has the sole monopoly in printing the currency notes, refuses to guarantee the value of fiat money. If the government starts printing too much money, it will lead to hyperinflation.
• Counterfeiting is a major problem with fiat money. There are people who counterfeit currency notes and scam other people. It is extremely difficult to differentiate between real currency notes and fake ones.
• Fiat money forces the money holders to rely on different parties for its issuance, storage, and evaluation. Additionally, there are several costs attached with fiat money like taxes, handling costs, etc.
• Fiat money isn’t backed by any physical commodity so it has no exchange value. Also, there are various crimes related to fiat currency like illegal payments, theft, tax evasions, and so on.

Why is the Fiat Currency Headed for a Collapse?

There had been many incidents in the past in multiple countries where the fiat currency collapsed due to various reasons. Let’s look at them and understand what led to their downfall.

Venezuelan Bolivar

Venezuela has been facing increased hyperinflation, a shortage of food and basic supplies since 2010. As a result, the US President put an end to the new debt dealing from the Venezuelan Government in 2017. So, the president of Venezuela had to switch its digital currency, “the petro” for dealing in sales of oil.

Argentinian Peso

Argentina is the third-largest economy in the Latin American region. However, in 1970 after the OPEC Oil embargo, there had been a lot of political and civil disturbances in the country. Also, the budget and trade in the country were at their record lows, posing a threat of a bad recession. The government tried printing more money but a military coup pushed the country towards increased inflation and economic downfall. By the year 1982, Argentinian Peso dropped by 12%.

Turkish Lira

Only in 2018, did the Turkish Lira witness the worst depreciation in its cost when compared against the US Dollar. This is again attributed to the debts taken by Turkey from other countries.

Icelandic Króna

The Icelandic financial crisis occurred between the years 2008 and 2011 when the country nationalized three of its largest banks. This happened because the banks, Kaupthing Bank, Landsbanki Bank, and Glitnir Banks defaulted a foreign debt of about $62 billion. As a result, people started losing their faith in the banks, leading to the decline of their currency.

Given these historical events of currency collapse, there is a significant likelihood of the fiat currency collapsing again for reasons like a pandemic, geopolitical tensions in Russia, Ukraine, Afghanistan, the increasing popularity of digital currencies, and payment options. In such a case, the future of money comes back to precious metals, that is, gold and silver. Here are the reasons why.

Why Future Money is Gold and Silver?

As we can see, the current situation is indicative of the collapse of fiat money in the future. So, in the future, gold and silver may be replacing fiat money and may act as a medium of exchange. They will be much more valuable because of the reasons given below.

Accepted by Global Public

Gold and Silver have been used as a medium of exchange in Europe and Asia in the past. They have been constant and extremely suitable to act as a medium of exchange for goods and services. Therefore, when the fiat currency collapses, gold and silver are most likely to become future money. Moreover, gold and silver as money is widely accepted and thus, will be very effective.

Demolition of the State Theory of Money

When the fiat money collapses, it demolishes the state theory of money, leading to the government being unable to fund its own obligations. It will lead to the abandonment of fiat currency and search for a more trustable replacement. Since gold and silver had been a medium for exchange in the past, these precious metals are the ideal replacements for fiat money.

Monetary Flexibility of Gold and Silver

Gold and silver have a huge scope for monetary uses. If gold and silver are used to convert fiat money into trustworthy substitutes of gold, the purchasing power of these precious metals will become the deciding factor for the quantity of arbitrage between its uses. The quantity of gold required will be easily fulfilled with the available supply of gold.

Financial Flexibility of Gold and Silver

The prices of gold and silver are generally stable, which helps in increasing the purchasing power of gold and silver-based money. When compared to fiat currency which is generally limited in its supply, gold and silver will gain the confidence of the holders as it guarantees the improvement in their standard of living.

Conclusion

All these indicators of gold and silver being the future money are pushing investors to put their money in gold. It is the right time and the need of the hour for people to begin accumulating gold and silver as assets. There are several ways of doing it, like gold bonds, ETFs, and digital gold. However, digital gold is the best way to invest in gold as you can start with as much amount as you want.