When Will the Australian Dollar Disappear?

History provides a rather sobering perspective about the value and longevity of fiat currencies. Their average lifespan is surprisingly around 27 years. Unlike the ones backed by physical commodities such as gold or silver, fiat currencies are based on the trust and stability of the governments that claim to issue them. This exposure usually comes with different economic and political pressures, most times resulting in devaluation or collapse. Although in use by global economies for centuries, fiat currencies have a nearly 100% failure rate (of course, the only exceptions being the current ones).

The Australian Dollar: Stability or vulnerability?

The 'Australian dollar' was introduced in 1966 and has proved unusually stable and resilient compared to most other fiat currencies, even after its value became free-floating. Contributing factors have been a robust economy based mainly on natural resources and sensible monetary policies. However, several factors could potentially challenge the longevity of the AUD.

One of these reasons could be economic dependency. The economy of Australia is heavily dependent on commodity exports, especially to China. Any marked slowdown in global demand or trade disputes will likely have material downside consequences for the AUD. We have already seen this twice recently during 2020 and during the recent recession.

Another contributing factor could be global financial instability. With the integration of world markets, an obvious factor is that financial turmoil within other parts of the world can impact the AUD. For example, a severe global recession or the failure of a primary currency could have significant repercussions. War is one of the most prominent creators of instability and we currently have multiple theatres of war between various powers around the globe.

Last, but not least, the RBA: Australia's central bank. The Reserve Bank of Australia has become quite active when it comes to quantitative easing, yield curve control and interest rate manipulation to manage the country's economy. Australia, like almost all other countries, has its currency consistently inflated in cycles which lead to snowballing debt which simply cannot be paid under the current system.

Let's have a look at a few recent examples of fiat currencies hyperinflating or disappearing:
 

Assignat (France)
1790s: This currency was introduced during the French Revolution. The assignat quickly depreciated due to overprinting and lack of trust, leading to hyperinflation and economic instability.

Continental Currency (United States)
1775-1781: the Continental currency was issued during the American Revolutionary War. It suffered from massive inflation due to overprinting and counterfeiting. This is where the phrase 'not worth a Continental' comes from.

Confederate States Dollar (Confederate States of America)
1861-1865: This currency was issued during the American Civil War. It became worthless by the end of the war due to overprinting and lack of backing.

German Papiermark (Weimar Republic)
1921-1923: Severe hyperinflation following World War I, driven by reparations payments and economic mismanagement, led to the collapse of the Papiermark.

Hungarian Pengő
1945-1946: Hyperinflation after World War II led to the replacement of the pengő with the forint. Prices doubled every 15 hours at the peak of the crisis.

Chinese Yuan
1930s-1940s: During the Republic of China era, severe hyperinflation occurred due to overprinting to fund wars, leading to the collapse of the currency.

Greek Drachma
1940s: Hyperinflation during and after World War II led to significant devaluation and replacement of the drachma several times before stabilization.

Argentine Peso
1980s-2000s: Multiple episodes of high inflation and devaluation, with several currency reforms, including the austral and the return to the peso.

Brazilian Cruzeiro
1980s-1990s: Chronic inflation led to multiple currency reforms, replacing the cruzeiro with the cruzeiro real and eventually the real, which stabilised the economy.

Zimbabwean Dollar
2000s: Extreme hyperinflation in the 2000s, with rates reaching 89.7 sextillion percent per month, led to the abandonment of the currency in favour of foreign currencies.

Venezuelan Bolívar
2010s-2020s: Hyperinflation caused by economic mismanagement and political instability led to multiple redenomination’s of the currency, with inflation rates surpassing 1,000,000%.

Notice that much of the time, there was an attempt to replace the failing currency, or 'reset' it. A simple reset or change of name was not usually enough to remedy the underlying issue. Economic pressures, often times combined with war, have sped up the inevitable demise of each fiat system. Our current form of fiat requires every unit of currency created to be paid back with interest, which builds an engine into the system that requires almost constant money creation and even higher debt. So far, the AUD has stuck around, though it has lost roughly 80% of its value against gold in only the last 17 years.

It is timely too to revisit one former Aussie currency to drive home what real money is.  today. The round fifty cent coin was the highest-denomination and largest diameter coin of the Australian decimal coins, introduced in 1966. Due to the large number minted in 1966, and the rising cost of silver, it was not made in any other year. It was replaced by a dodecagonal 50 cent coin in 1969, which retained its reverse of the Australian Coat of Arms.

The round fifty cent coin contained 80% silver and 20% copper but, because the value of silver quickly increased after the coins were issued, their bullion value became higher than their face value, so they were withdrawn from circulation. A total of 36.45 million coins were minted, with 14 million being put into circulation.

Pointedly, in 1966 that one coin could buy your lunch. Today that coin is worth around $16 which can still buy your lunch, but the purely Fiat version 50c piece will barely buy the sauce packet to put on the lunch bought with the real money.