What is Fiat Currency?
Take out any note (£10, or dollars or euro’s) and ask yourself, ten pounds of what? What exactly is it ten pounds of? In the case of GB pounds is it Sterling silver? Well no, if it were worth ten pounds of sterling silver in weight, its value would be something like £3,200. It is of reasonable quality paper and ink (it doesn’t smudge easily) and it has a silver strip! Well it’s actually nickel, and it’s not actually worth much, probably less than 1 pence.
What it actually is, is fiat currency, its real value is pretty much zero, its worth pretty much the same as a £10 note in the game monopoly. However, there is a difference, the £10 banknote is legal tender, the monopoly note is not. This means it has a perceived value, you can use it to purchase goods up to the value of £10, or you can pay off a debt of that amount – except actually you can’t. All money issued by a Central Bank (Bank of England, US Federal Reserve, EU ECB) is actually issued as debt, it is as it says a promissory note, a promise to pay (an IOU) at some unspecified time. If I owe you ten pounds, and I give you a £10 note, all I have done is given you a promise to pay, as I have nothing else of value to give*. You may then use the £10 note I gave you to ‘pay’ someone else, my promise to pay has passed onto you, you pass it on to someone else, so who will pay and when? The answer is no-one will ever pay because paper money has no intrinsic value whatsoever – none! Because all we can ever do is pass on promises to pay we are perpetually in debt, and to be in debt is a crime, making us debt slaves. Because we only have fiat currency, we can only discharge our debts, not extinguish them. A monetary note is only a promise to pay, not a payment. Using a note to pay a debt, leaves you still in debt and actually increases the indebtedness of the person you paid; not only that it also increases the national debt, because more debt has been created in the system. The technical term for debt based money (fiat currency) is an hypothecated lien.
* I could give my labour to extinguish the debt, if that were acceptable to you.
Fiat currencies (in use around the World) are based on nothing more than trust, we are told by our governments they have value, and as long as we believe that, they do, however, the time is rapidly approaching when that trust in assumed value will disappear, when that happens you don’t want to be holding large cash reserves.
Right now, wealthy people around the world are using their fiat currency to purchase tangible goods, items of true worth, such as property, gold, silver, jewelry, works of art, collectibles – do they know something the rest of us don’t? We would suggest they do.
The term derives from the Latin fiat (“let it be done”, “it shall be”). So it means it shall be money, which is currency be decree.
Fiat money has been defined variously as:
- any money declared by a government to be legal tender.
- state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.
- money without intrinsic value.
While gold or silver-backed representative money entails the legal requirement that the bank of issue redeem it in fixed weights of gold or silver, fiat currencies value is unrelated to the value of any physical quantity. Even a coin containing valuable metal may be considered fiat currency if its face value is higher than its market value as metal.
99.9% of the world’s population is unaware that we no longer use money… we use national “fiat” currencies. Fiat currencies are totally faith-based. They are national currencies that are not backed by anything of value like gold, instead the government just declares that they have value and, as long as the people keep believing, they accept it… for a while. There have been thousands upon thousands of fiat currencies throughout history, and they have all failed… 100%… no exceptions.
How much is fiat currency actually worth?
Each £5, £10, £20 or £50 note is worth a fraction of one pence, based on the cost of printing paper, printing ink and the thin metallic strip.
A £1 coin weighing 9.5 grams consists of 70% copper (6.65g), 24.5% zinc (2.33g) and 5.5% nickel (0.52g). Based on the spot price of those metals on 4th January 2011 each one pound coin is worth 12.4 US cents, based on the exchange rate at the same time that was 8 pence. By the end of 2013 a £1 coin is worth roughly 6 pence. It is still fiat currency as it is worth much less than its face value, but it has some intrinsic value.
A 50p coin weighing 8g consists of 75% copper (6g) and 25% nickel (2g), value as above is 4 pence.
Contrast those with a 2013 UK Britannia 1 ounce silver bullion coin (32.454g) available from the Royal Mint is worth just under £19.00
A 2013 UK proof full sovereign coin weighing 8g (same as 50 pence), 22 carat gold is worth around £203.00.
Interestingly, around the world, it is estimated that only 3% of all fiat currency actually exists as notes and coins, 97% of all currency in existence is nothing more than numbers in accounts, computer digits effectively, so ask yourself, how much is that worth?
Gordon Brown sells off gold cheap 1999 – 2002
The UK government’s intention to sell gold and reinvest the proceeds in foreign currency deposits, including euros, was announced on 7 May 1999, when the price of gold stood at US$282.40 per ounce. The official stated reason for this sale was to diversify the assets of the UK’s reserves away from gold, which was deemed to be too volatile. The gold sales funded a like-for-like purchase of financial instruments in different currencies. Studies performed by HM Treasury had shown that the overall volatility of the UK’s reserves could be reduced by 20% from the sale.
The advance notice of the substantial sales drove the price of gold down by 10% by the time of the first auction on 6 July 1999. With many gold traders shorting, gold reached a low point of US$252.80 on 20 July (euphemistically referred to as the Brown Bottom – well he was a complete arse). The UK eventually sold about 395 tons of gold over 17 auctions from July 1999 to March 2002, at an average price of about US$275 per ounce, raising approximately US$3.5 billion. By 2011, that quantity of gold would be worth over $19 billion. Please, do not insult anyones intelligence by suggesting Gordon Brown was a good or wise Chancellor, at the very least you don’t inform people of your intent to sell. In total he sold 394 tons of UK’s gold reserves.
The following conversions for weights (approximations) may be useful:
- 1 long ton (UK) is equal to 2,240 pounds or 32,666.67 troy ounces.
- 1 short ton (US) is equal to 2,000 pounds or 29,166.67 troy ounces.
- 1 metric tonne is equal to 32,150.75 troy ounces
- 1 troy ounce is equal to 31.1034768 grams.
Since 1971 the entire world has been operating on Fiat currency only.
In 1945 at the Bretton Woods meeting in New Hampshire, USA, the major world economies agreed to make the US dollar the global reserve currency, pegged to gold at a fixed value of $35 per ounce.
In 1971 President Nixon removed the US from the gold standard, as the US was unable to make good on other nations demands to fulfill gold requirements. From that point the world was now on a paper (fiat) standard, a debt based standard.
So why do we have fiat currencies?
Intrinsic money, as opposed to fiat currency has real value, it is usually tied to a commodity of real value, typically gold or silver. One of the most important qualities of gold (and silver to a lesser extent) is that it has a scarcity value, there is a finite amount of it. If a government has a currency backed by gold, on a 1:1 ratio, then it can only create as much currency as it has gold to back that currency. Governments tend to find this restriction bothersome, it means they can’t run deficits, they must run balanced budgets.
The UK (7th largest economy) does not have a particularly large gold reserve, we have only the 17th largest at around 310 metric tonnes, which is around 10 million ounces. As of 2nd May 2015, gold is valued at around £775 per troy ounce. If the UK economy were to be based on the gold reserve holdings, we would only have £7.75 billion in our economy. Our current stated national debt is £1.24 trillion, our interest payments on that debt this year is around £58 billion, and we will borrow around £120 billion.
So one of two possibilities must exist in the UK right now:
- We are not on a gold standard
- If we are, then the ratio of currency to reserves must be vastly greater than 1:1
So which is it? Any guesses?
The truth is that in 1925 Britain came of the gold standard, and our money became fiat currency. However, until 1971 the pound was referenced to the dollar, which was pegged to gold at $35 per ounce.
Prior to 1925 notes of various values were redeemable for an amount of gold held in vaults. After 1925 new notes were introduced which were (and are) promissory notes, it says on them “I PROMISE TO PAY THE BEARER ON DEMAND THE SUM OF”. If you take a £10 note to a bank, they will redeem it for another £10, or the equivalent in smaller denominations. You cannot demand an equivalent amount of gold or silver, they are not classed as Legal Tender, normally you can’t use them to make purchases, you can only use Bank of England notes, or minted coins of the realm.
Watch the video below to see how the global monopoly fiat money system really works: