“If I asked people what they wanted, they would have said faster horses”.
Henri Ford
By comparing and contrasting the key properties of fiat currency against its closest substitutes, you can grasp a clear understanding of their respective strengths and weaknesses, and in turn start drawing some conclusions as to how different money types stack up against one another.
Fiat currency vs. Gold and Sea shells
We present below a comparative assessment of fiat currency (like the USD) against two other money forms used in history: gold bars and sea shells. The assessment is performed by considering some of the key properties of money described in this article.
The comparison examines the strengths and weaknesses of each money form and allows the reader to appreciate some of the main challenges and shortfalls of our current money form, fiat currency.
We assess the 3 money forms against the various properties one by one:
Acceptability
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| Fiat currency | Gold bar | Sea shells |
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While sea shells may have been accepted in the past, modern days are dominated by fiat currency legitimised by governments and central banks. While gold still preserves its appeal due to its intrinsic value it is hardly accepted for everyday transactions.
Medium of Exchange
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| Fiat currency | Gold bar | Sea shells |
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Fiat currency is widely used for everyday transactions. The same can’t be said of sea shells and while some may happily accept gold to settle a payment you will surely agree that it is far from a practical form of money for purchasing everyday items such as bread, milk and petrol!
Store of Value
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| Fiat currency | Gold bar | Sea shells |
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Only gold has maintained its intrinsic value and purchasing power over centuries. Sea shells clearly haven’t and as for fiat currency it is no secret that their value is constantly eroded over time through inflation and decreasing purchasing power. A USD 1 of money just 10 years (let alone 50 or 100 years) ago could buy you significantly more than you can purchase today!
Unit of Measure
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| Fiat currency | Gold bar | Sea shells |
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Fiat currency is divisible in small units including decimal points (cents and pennies) making it convenient yardstick and unit of measure for all goods and services to be priced from small items up to large items such as cars and property. The same cannot be said for gold or sea shells.
Divisibility
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| Fiat currency | Gold bar | Sea shells |
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As per the unit of measure argument, fiat currency is easily divisible into small pieces while it is significantly harder to do with gold. Sea shells lose their value entirely when divided into smaller parts.
Durability
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| Fiat currency | Gold bar | Sea shells |
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Gold has proved to stand the test of time maintaining its intrinsic chemical properties which makes it almost indestructible. Fiat currency on the other hand can be burned into smoke and some of you might even recall seeing an old paper note tear in your pockets making them useless. Sea shells can be nice ornaments if looked after but are destined to decay over time like into dust and scraps.
Fungibility
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| Fiat currency | Gold bar | Sea shells |
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One bar, kg or gram of gold is interchangeable with any other, wherever you are in the world. Sea shells can’t as however similar, they come in different shapes and sizes. Fiat currency is only partially fungible within any given country or economy. One dollar bill is as good as any other but as soon as you cross borders and enter new economies, fiat currencies are no longer fungible like for like. Foreign exchange rates change constantly making the exchangeability of one currency into any other rather cumbersome and subject to change all the time!
Portability
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| Fiat currency | Gold bar | Sea shells |
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Gold is heavy and cumbersome to transport. Imagine going on holiday or paying for a car or a house in gold bars! While lighter, sea shells can get bulky and rather inconvenient to transport relative to fiat currency which are light even in large denominations. These days however portability in physical form is somewhat redundant as we “transport” and use our fiat currency through online banks and digital payment systems such. as Visa, Paypal and so on. Fiat has become portable electronically in the digital age, though this comes with plenty of fees, delays and other barriers along the way. We’ll explore these later.
Scarcity
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| Fiat currency | Gold bar | Sea shells |
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Gold and sea shells are rather scarce in nature and cannot be mined or reproduced on demand. There is only so much of it available in nature no matter how hard you look for them underground or on exotic beaches. This makes them preserve their property of “rarity” which confers their value.
Fiat currency however can be printed at the sole discretion of governments or central banks. The more you print money and increase their total supply in an economy, the less valuable they become in terms of purchasing power or exchangeability into other fiat currencies.
Observations and fiat currency shortfalls
The above assessments shows that different forms of money have been adopted over time with different sets of properties and tradeoffs. As we have progressed from ancient barter economies to the present day, money forms have evolved and adapted to suit the requirements and the prevailing needs of their time.
What this also shows is that all available money forms used throughout history are far from perfect and present various weaknesses.
If we specifically focus on fiat currency – the dominant money form of our current times – we note that it presents a number of shortfalls specifically with respect to the following key properties:
- Store of Value
- Durability
- Fungibility
- Scarcity
As you can see, our current fiat currency is far from perfect! In particular, the ability to manipulate its total supply via central bank expansive (and far more rarely, contracting) monetary mechanisms, has a great impact on the true value of fiat currency over longer periods of time,
We will learn more about Money Supply and Inflation in dedicated articles!
