Silver & Gold: The Coming End of Fiat Currency

September 9, 2013 at 10:33


Fiat currency consists of coins and paper notes whose materials have little intrinsic value. All money in the world today is fiat, based on law and custom. In contrast, commodity money consists of goods such as gold, silver, and copper, which have value as useful items, and for which the face value of the money is close to that of the commodity.

Until 1964, U.S. dimes, quarters, and half-dollars coins were made of 90 percent silver, as were silver dollars until 1965. After three decades of monetary inflation, the market price of silver rose above the face value of the coins, and the U.S. Treasury stopped making silver dimes and quarters. The $1, $5, and $10 bills were silver certificates, which could until 1968 be exchanged for silver dollars or bullion. The U.S. mint now makes silver coins for collectors, but the selling price is based on the metal content, and so these coins are not economic money.

Half-dollar coins from 1965 to 1970 had a 40 percent silver content, as did Eisenhower dollar coins with the S mintmark from 1971 until 1974. Since then, U.S. coins above five cents in face value have been fiat, made of metals of low value, unrelated to the face value.

It now costs the government about two cents to make a one cent piece, so the penny could be considered a commodity coin. The metal in the one cent piece is mostly zinc. The cost of producing the 5c piece is now about 11 cents, so the nickel is also a commodity coin. The nickel is made of 75% copper and 25 percent nickel. Aside from pennies and nickels, U.S. currency today is fiat, the face value being substantially more than the value of the metal or paper.

Gold also served as money in the USA until 1933. The paper currencies were gold certificates that could be redeemed for gold coins of the same face value. Americans were forced to exchange their gold coins and bullion for paper currency by Executive Order 6102 signed on April 5, 1933, by President Franklin D. Roosevelt, on the false pretense that the hoarding of gold was making the Great Depression worse. In fact, the Federal Reserve could have increased the money supply to offset the monetary deflation. The legal basis of the executive order’s unconstitutional gold grab was the World War I “Trading with the Enemy Act” of 1917.

The world has experimented with fiat currency for the past half century. The outcome has been monetary and price inflation, and the manipulations of interest rates by central banks, which have increased instability. But now the era of fiat money is coming to an end.

Paper currency has been plagued by counterfeits for a long time, and governments have kept issuing new versions with ever stronger anti-copying protection such as watermarks and embedded strings of non-paper materials. But advancing technology has also enabled the counterfeiters to produce more sophisticated fake paper and metal currency.

Three-dimensional printing is a technological frontier that lays down successive layers of materials to duplicate goods. The 3D printing can greatly reduce the labor cost of manufacturing, and thus can reverse the tide of outsourcing labor. Manufacturing in the US will become more competitive, and less expensive versions will make 3D printing affordable by households. Among the items that 3D printing will be able to duplicate is currency.

Fake money is already a big problem for governments. North Korea has been making fake American currency. Peru has become the top producing country for counterfeit U.S. dollars, especially the $100 note. The Peruvian counterfeiters insert the special security features by hand, making their fakes superior to those that are just printed. But because U.S. $100 bills are made from cotton “rag paper,” these fakes can be detected by infrared scanners. If counterfeiters can duplicate the cotton material, then fakes will be much more difficult to detect.

The European Union relies more on coins than the U.S., and the eurozone has protected its coins with security features. But counterfeits, especially of the 2-euro denomination, have been a problem. Fake coins are made in several European countries as well as in China.

In the future, 3D printing will become more widespread, and could be used to produce fake coin and paper currency. When the code for programming the machines is perfected, it can then be sold, and those with the machines and materials can literally print money. That will be the end of fiat currency.

Fakes have been a problem also with collectibles, and there are expert services that examine rare coins, stamps, and gems, and certify whether they are genuine. But such an examination is too costly for circulating coins and paper notes.

When mass-produced fake currency becomes common, governments will have to go back to commodity coinage. When a coin is made of a metal whose intrinsic value is about equal to the face value, and whose metallic elements can be verified, then faking becomes more difficult.

But if 3D and printing technology can accurately reproduce paper currency, including all the security features, then paper certificates convertible into commodity coins will also disappear. Paper currency will be replaced by electronic money and commodity coins. The problem will then be to make electronic money secure from fake accounts.