Fiat Money


Lately, a lot of buzz, cries and shouting out there that the world should go back to using gold as money.  The purpose of this article is to show what will actually happen to us, to our ‘gold money’ if gold is actually being used as money, to replace our existing fiat paper standard.  Let’s assume that we started to use gold as our money beginning in 1996, which is exactly 15 years ago.

First a little bit of history.  Gold was widely used before but was removed by our grandfathers.  Perhaps today’s generation forgot as to why gold was removed.  Gold was found to be inherently unstable, difficult to be used as money.  So it was removed and replaced with a better kind of money, our existing paper money.  Paper money was so successful, it was the most successful kind of money ever.  It is cheap, easy and almost counterfeit proof.  Gold money possesses none of those ideal characteristics.

Now on to gold.  In order to get the true value of gold, independent from the changes in paper money’s value due to inflation, we have to filter out the effects of inflation on gold.  Once removed, the mask that hides the true value of gold will disappear, revealing the actual price of gold, its true price, due to its own supply and demand.  The graph is shown below.

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