For a while before the second world war, the world relied on a gold standard currency model which shaped the global monetary system.
By Mugove Chisvo
Most countries, either backed their currencies by gold or by the currencies of countries who did.
Since paper money was at anytime convertible to a fixed amount of gold during this era, problems started arising when the gold in circulation became more that the gold in the reserves of countries.
This was the scenario for the United States of America as observed by Economists like Triffins in what has become known today as the Triffins dilemma.
This scenario led to agitation from quarters within the USA for a more sustainable monetary system which did not have to heavily over-rely on one particular commodity.
This gave birth to the fiat system. Fiat money as observed by Boyce is a currency without an underlying value. Instead, its value is derived by government and the trust people place in its value. In other words, it is a form of currency that only holds value because of government enforcement and trust from people.
The ‘Sarajevo incident’ marking the introduction of Fiat currency was the 1971 Nixon declarations by former US President Richard Nixon.
These declarations were a string of economic measures targeted at addressing the dilemma of limited gold supply and weaknesses of the gold standard as a whole by granting control of the value of money to the federal government. Since then, the global currency system has traditionally been based on two arrangements premised on fiduciary money and commodity money.
Under the two models is when we talk of fiat currency and the gold standard as the two classical models propelling the global economy forward.
The discussion we have today will be guided by two fundamental questions which I have crafted.
Is feasible to separate money from the intrinsic backing of a particular commodity and can this separation be sustained?
Can an entire intricate global monetary system be solely premised on either commodity backing or fiat declaration?
The secret in my view to a successful monetary system would be to inherit this inherent value of money conferred to it by a particular commodity and sustain this value through government decree. Money cannot be separated from the backing of a commodity, be it gold or silver or oil or whatever.
Equally so, governmental decree alone cannot confer value to money. Furthermore precious commodities alone are not the answer to a successful economy. As has been evident and apparent particularly many a time in different episodes across our continent minerals can be prone to mismanagement and give birth to bloody conflicts.
This may lead us to conclude that it is a round robin really. If there is a particular resource backing up the currency in terms of its unlimited supply, people would have trust in it, and government decree would have value to protect. After all, Government when it prints money, does not decree the value of this money out of thin air!
Fiat money and gold standard in essence are bedfellows. I will demonstrate with examples how the two models may complement each other and can each be part of the same sequence, albeit at different phases. Before that is done, it is important to observe that gold is widely considered to be making a comeback due to the current global activity in building gold reserves.
If Chinese activity for the past few years does not bear testimony to this, then I wonder what does? Gold is retaining its value and according to Gold Price Oz gold is currently going for $58 829.44 per kilogram in January 2022. Gold making a comeback would be wonderful news to countries with large reserves, inter alia, African countries in another lifetime, in anther planet.
However, this ability to fully exploit resources has been compromised by many factors around mismanagement, sanctions, corruption and other factors which are deeply colonial in nature and can be traced back to the Berlin Conference or in other words the “Gold Rush in Africa”. Gold has been ‘accused’ for having a rigidity which is where the Fiat system comes in.
In other words, the sequence is have a resource that retains value against which to back up your country. This resource is the backed up by good government policies and relevant decree. This means that gold standard and fiat currency are all part of the same economic system, just at different levels. The answer lies in sophisticatedly utilizing both models such that the weaknesses of another may be compensated by another’s strength.
After all that has been said and done, Zimbabwe does not need to be choosing which system is best but rather we should be agitating towards an interdependence on both models for sustainable economic growth and monetary stability.
I would want to argue that with the complexities and ever shifting dynamics of the contemporary global political economy, there is no need for any our country to rigidly stick to any model. Let us have a reserve currency backed by a precious commodity.
This we have in abundance. One may speak of gold, lithium, platinum, chrome amongst the 40 the minerals that are found in our soils. This value then also needs an efficient and effective management system to The win for our country will lie in proper fiat models to manage the resources our beautiful country is endowed with. I would also argue that for a people to trust a currency, they must also have confidence that it is backed by a strong reserve and will not erode overnight. ‘Golden Fiat’ for the win!
Mugove Chisvo is a Master student studying International Relations and an Independent Analyst.