The Short Life of the Average Fiat (Paper) Currency
September 12, 2019
Most Americans are so accustomed to spending U.S. government paper currency today that they probably assume it has always been that way in this country. Even many numismatists don’t realize that, because of the scar on the national psyche from hyperinflation of Continental Currency during the Revolutionary war, the U.S. government did not issue paper currency until 1861.
The paper currencies that circulated for the longest number of years tended to be those that were redeemable upon demand for physical gold or silver. Any nations that once issued gold or silver-backed notes that later removed such backing, often found that the currency value eventually plummeted. After the Bretton Woods Agreement in 1944, where many nations tried to support their own currencies by fixing their exchange rate to the U.S. dollar (which at the time could be redeemed by governments to the U.S. Treasury to obtain gold), this fiscal restraint proved to be too onerous for many governments. Despite several declared good intentions at the outset, many of the currencies issued in 1944 by the signatories to the Bretton Woods Agreement are no longer legal to spend.
A few years back, some researchers analyzed the track record of national paper currencies over history. What they found was that the mean average lifetime of a paper currency was 40 years before it failed. Also, the median average lifespan of a paper currency was about 25 years.
Back in the early 1970s when I was a student at the University of Michigan Business School, Marina von Neumann Whitman, while she was a member of President Nixon’s Council of Economic Advisers, came to deliver an address. When she finished, she took and answered some written questions from the audience. It was my good fortune that she read and responded to my inquiry.
I asked what would happen if a nation created a monetary system where it only used physical gold and silver as money, denominating them by the weight and purity of the coins rather than giving them a name such a dollar, peso, franc, yen, etc.
Her somewhat strident response to the audience after reading my question was that no government would ever do such a thing, with the reason being that such a monetary system would be too much of a restraint on government spending. She then said that if any nation adopted such a form of money that every other currency around the world would collapse.
Physical gold and silver have been used as money for several thousands of years, and never failed. In contrast, every fiat (paper) currency that has been issued throughout history has eventually failed, except for those circulating today. Perhaps the closest to a successful paper currency were the notes issued by the Republic of Texas up to the time it joined the United States in 1845. As I understand it, almost all outstanding Texas currency was redeemed and paid off with deeds to land.
The odds are, that sooner or later, all currently circulating paper currencies will fail. When I say that I definitely include the U.S. dollar.