The Fall of Commodity Money

While gold succeeded for thousands of years, its reign wasn’t without challenges. Rulers and governments quickly recognized the power of controlling money, and history is littered with attempts to manipulate and dilute gold for short-term gain.

Coin Clipping and Devaluation

In ancient times, rulers would clip small amounts of gold or silver from coins, melting the excess to mint more. Although the face value remained the same, the intrinsic value dropped. This subtle theft caused inflation and eroded trust in the currency.

• Rome’s Fall: The Roman Empire devalued its coins by reducing their silver content, leading to rampant inflation and economic instability. This loss of trust in money contributed to the empire’s decline.

• Weimar Germany: After World War I, Germany printed excessive paper marks to pay reparations, causing hyperinflation. At its peak, prices doubled every two days, and citizens resorted to bartering goods because money became worthless.

These are stark reminders that when money is manipulated, the consequences ripple through society, often ending in economic ruin.

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Gold’s Strengths and Weaknesses in the Modern Age

Gold remained dominant until the 20th century but faced challenges in an increasingly interconnected and fast-moving world. Its physical nature presented issues:

• Portability: Transporting large amounts of gold across borders became cumbersome and expensive.

• Storage: Securing gold required vaults and guards, centralizing control in banks.

• Centralization: Over centuries, people trusted banks to store their gold and issue paper money in return. These IOUs eventually replaced gold in daily transactions.

The centralization of gold culminated in a significant event: the U.S. Gold Confiscation of 1933. President Franklin D. Roosevelt ordered Americans to surrender their gold to the government in exchange for paper dollars, severing the direct link between the people and their wealth. This act exposed a critical flaw: gold’s dependence on centralized systems made it vulnerable to seizure and control.

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The Rise of Fiat Money

With gold centralized in banks and governments, paper money—originally backed by gold—took center stage. But in 1971, the U.S. abandoned the gold standard entirely, transforming the dollar into fiat money—currency with no intrinsic value, backed only by trust in the government.

Fiat money is imposed by decree (“fiat” means “let it be done” in Latin). Its supply can be expanded at will by central banks, making it radically different from commodity money. While fiat offered convenience, it introduced significant flaws:

• Unlimited Supply: Unlike gold, fiat money isn’t scarce. Governments can print as much as they want, leading to inflation.

• Manipulation: Central banks adjust interest rates and money supply to influence the economy, often creating unintended consequences.

• Erosion of Wealth: Fiat money loses value over time, punishing savers while benefiting borrowers and asset holders.

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Hyperinflation: The Fiat Failure

The most extreme consequence of fiat money manipulation is hyperinflation, where a currency becomes so devalued that it loses all functionality. We’ve seen this happen in countries like:

• Zimbabwe: In the 2000s, the government printed trillions of Zimbabwean dollars to fund expenditures, leading to hyperinflation. Prices doubled every day, and the currency became so worthless that people used it as wallpaper.

• Venezuela: Excessive money printing caused inflation to spiral out of control, wiping out citizens’ savings and forcing many to flee the country.

In developed countries, hyperinflation may seem like a distant problem—something that happens “over there.” But fiat money devalues everywhere, just at different speeds. In the U.S. and Europe, inflation is often described as “moderate,” but it still erodes purchasing power. A dollar in 1950 could buy what now takes more than $11. This isn’t stability; it’s slow-motion theft.

Over time, this gradual erosion gains momentum, especially when governments resort to excessive money printing during crises. Once that momentum builds, hyperinflation is the inevitable outcome. Fiat money, by design, is a system that rewards short-term fixes over long-term stability. Every fiat currency in history has failed, and modern fiat systems are no exception—they’re just on a longer timeline.