Is Fiat Money Better Than Gold?

Gold and fiat money represent two fundamentally different, almost opposite philosophies of money. One is anchored in scarcity, permanence, and trustlessness; the other in flexibility, innovation, and sovereign authority. It is worth a strategic examination and exploration of the differences between their roles, history, strengths and weaknesses, and the future of both.

Fiat vs Gold Standard

Fiat money is currency issued by a government with no intrinsic value or backing by a physical commodity. Its worth is derived from legal decree and collective trust. Fiat systems allow for monetary stimulus and debt-financed growth. Central banks can adjust interest rates, engage in quantitative easing, and respond rapidly to market disruptions. This flexibility, while beneficial in the short term, often leads to long-term currency devaluation and asset bubbles.

Under a gold standard, by contrast, each unit of currency is convertible into a fixed amount of gold, which limits money supply expansion and ties monetary value to a tangible asset. The gold standard imposes discipline: governments can only issue currency proportional to their gold reserves. This system, in effect from the 19th century until its final dismantling in the 1970s, curbed inflation and ensured long-term price stability. Critics of this system argued that it restricted central banks’ ability to respond to economic crises and constrained liquidity during periods of stress.

History of Gold

Gold has served as money for well over 10,000 years. Sumerian, Egyptian and Mesopotamian antiquity, the Roman Empire and the British Crown - all have universally recognised gold for its enduring beauty, rarity and intrinsic value. It functioned as a medium of exchange, a store of value and a representation of one’s wealth and status.

During the 19th and early 20th centuries, most developed economies adopted the gold standard. This period saw unprecedented monetary stability and global trade expansion. Even during wartime disruptions, gold remained the final arbiter of value.

Gold’s appeal has always been what could be termed as trustless permanence, meaning it doesn’t require proof of its value. It can never be printed, hacked, or defaulted upon. It has no counterparty risk. It consistently preserves value and purchasing power and has done so for centuries.

History of Fiat Money

Fiat money is a much more recent development in the financial timeline. The earliest known fiat system and the virtual invention of paper money was China’s Song Dynasty (960-1279) paper currency called ‘Jiaozi’ - promissory notes that eventually failed due to government over-issuance and inflation. Modern era fiat gained full dominance after the collapse of the Bretton Woods system in 1971, when the US dollar uncoupled from gold.

And ever since 1971, the global financial system has been underpinned by fiat currencies, not backed by metal but by ‘confidence’ in sovereign institutions. Yet according to data from monetary historian Mike Hewitt, of approximately 775 fiat currencies throughout history, over 600 have failed catastrophically – that’s 87%. The average fiat system endures for just 27 years before undergoing major transformation or collapse. This record and the continued diminishing value of money is one of the biggest red flags in relying on fiat. Fiat opens the door to mismanagement, chronic inflation, loss of purchasing power and a limited lifespan, and so calls into question the long-term reliability of fiat money for wealth preservation.

Fiat Money Advantages and Disadvantages

Fiat is accepted everywhere and is essential for our modern commerce; it’s flexible and easy to transact with and doesn’t require the physical carrying of metals in order to transact. Fiat enables governments to stimulate economies and somewhat manage recessions, with ready integration with digital and banking infrastructure.

But fiat money is dependent on the trustworthiness and competence of the governments that issue it, and is subject to expansionary monetary policies that dilute purchasing power over time. The production of fiat money is easy, too easy. Government control of fiat means that it’s inflated beyond reach, and there are dire long-term consequences for printing money out of mere thin air. It is debt-dependent and encourages unsustainable debt cycles and financial instability.

Gold Advantages and Disadvantages

Gold has inherent physical properties and universal recognition of its value. It maintains value during times of currency debasement or world events. There is no counterpart risk with gold, meaning it is completely independent of third-party accountability or creditworthiness. Gold needs physical protection, insurance, and safe custody – but so does fiat. Although it is non-yielding and does not produce income, dividends, or interest, gold may be less convenient than fiat for everyday transactions, but it certainly lives up to the true definition of money.

Invest in Gold

For modern investors in bullion, gold is a strategic asset, not currency. It’s vital in a diversified portfolio as it is a direct hedge against currency debasement, geopolitical turmoil, and ongoing financial crises.

Gold outperforms during market downturns. During the 1970’s inflation and economic stagnation, the price of gold soared. During the 2008 global financial crisis, gold preserved capital while equities were crushed. And more recently, after the pandemic, gold reached all-time highs as fiat currencies were debased through massive fiscal and monetary stimulus.

The correlation between gold with equities and bonds is typically low or negative, making it a valuable diversification tool. The World Gold Council recommend an allocation of 5-15% in gold within balanced portfolios. Although gold can be held in various forms - physical bullion, ETFs, or mining stocks – for investors concerned with long-term wealth protection and generational transfer, physical gold remains the gold standard.

A Question of Trust and Time

Is fiat better than gold? Most definitely not. Fiat has proven itself historically to be doomed to failure in most instances. Fiat may be effective in the short term - fluid, functional, and essential for economic activity. But it is inherently inclined toward devaluation and carries risks tied to political decision-making,

Gold, on the other hand, may seem passive or dated by modern standards, but its value is found in its timelessness, scarcity, and resilience. It does not promise returns; it promises stability. While not a full replacement for fiat – or until such time as a potential return to a gold standard - it complements and protects against the inevitable weakness of fiat money.

As bullion investors, it’s not about a choice between fiat and gold, we understand the role of gold in an age where inflation and debasement reign. While digital fiat balloons to the point of collapse, gold remains the final line of defence. It is the ultimate form of money when all others fail.