Douglas Carswell's Blog

Are fiat currencies doomed?

Here is a graph showing the price of an ounce of gold in British pounds over the past 30 years.  In the past few days alone it has spiked from under £1,000 an ounce to over £1,100.

Is the massive rise in the price of gold a hedge against instability and a global downturn?  Or does the rise also tell us something more profound about the nature not of gold, but of the currency in which its price is denominated? 

Up until 1971, Sterling was linked to the US dollar, which was linked to gold.  That meant that the British state - alongside most Western governments - was constrained as to the amount of money it could put into circulation.  Since then, Western governments - with the notable exception of the Swiss - have been able to print off as much money as they like. 

We have seen what is in effect a giant, forty-year long experiment with fiat money.  Could it be that like various other "progressive" ideas that came out of the 1960s - high rise tower blocks and child-centred learning - the fad for fiat money is flawed?

Once the only constraint on how much currency government printed off was government, policy swung between those who wanted the government to restrict the amount of money - so-called "monetarists" - and those who wanted to let rip - the "Keynesians".  Since the financial crisis, the later have had their way, and governments have put a lot more money into circulation. 

An ounce of gold today is still an ounce of gold.  But you now need an awful lot more of the paper currency government issues in order to buy it.   

It might be that as a store of wealth, fiat currencies are ultimately doomed?  If so, perhaps the internet might allow us to shop around and use different currencies?  Rather than have to use a badly managed currency where we happen to live, perhaps people should be able to shop around and use better managed ones?   

As soon as Parliament returns in September, I will be proposing a change in the law to allow precisely that.

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