Gold was the original basis for currencies around the world but as the years passed, many countries shyed away from this system in favor of a more stable base for their money. In 1971, the U.S. Dollar was officially no longer based upon the price of gold, instead basing itself purely on market value. This form of money is known as fiat currency and countries around the world have adopted this system. [1, 5]
Fiat Currencies Today
The Canadian dollar, along with the U.S. dollar, the Euro, the British pound, the Australian dollar, and the Japanese Yen, account for over 80% of currencies on the exchange today. [1] On average, fiat currency is expected to live for 27 years, though the money with the shortest life span only managed to survive for a month. [2]
The longest living currency, however, the British Pound Sterling, has managed to stay alive for the past 318 years. Since its inception, the Pound was originally valued purely off of the price of 12 ounces of silver. Today it is 0.5% of its original value, meaning that over the course of its lifetime, it has lost 99.5% of its worth. [2]
In a study of 775 currencies by DollarDaze, 77% of those currencies had failed. In fact, 95 currencies were destroyed as a result of World War II alone. In July of 2008, 71.7 billion dollars of U.S. currency was held as banknotes, though by December of that same year, it had soared to 782.3 billion. The sheer value of banknotes represented 47% of the total U.S. monetary base. [4]
How Do Currencies Lose Value?
Many factors influence the devaluation of a currency, though inflation plays a major role. The countries with lower inflation rates that have currencies with more buying power, are Germany, Japan, Switzerland, and Canada. Central banks also have a great deal of control over the value of a currency by way of interest rates. [3]
By raising the interest rate of a central bank, foreign currency traders are enticed to invest their money, ultimately raising the foreign exchange rate of that specific monetary system. A country’s trade debt will also drag down its currency value if the amount it spends on trading is greater than the money it earns. A system, called the terms of trade, compares the import price to the export price of various goods, either devaluing or improving upon the fiat currency. [3]
Public debt is similarly unattractive to foreign investors and it could scare away those who fear that a country may default on its deficits. Some companies gauge the value of a currency and give it a value, referred to as a country’s debt rating, which may ultimately determine a monetary system’s value. [3]
There are currently only 176 of the aforementioned 775 currencies alive today. [4] The most recent currency death occurred in Zimbabwe when its monetary system fell victim to hyperinflation. At the time of its death in 2009,100-trillion Zimbabwe Dollars was equal to only $1 U.S. Dollar. Now a collector’s item, the 100-trillion-dollar bank note that was printed for a brief time by the Zimbabwean government can be purchased for around $5.
Conclusion
Many economists say that what happened in Zimbabwe stands as a reminder of what hyperinflation can do to a country under the right circumstances. A number of currencies today have outlived the 27 year time span, though many have failed along the way. Perhaps countries can gain from seeing other currencies collapse and correct their flaws. [3]
Courtesy of ServeUCash.ca
[1] http://money.howstuffworks.com/exchange-rate2.htm
[2] http://www.resourceinvestor.com/2011/01/24/is-this-time-different-for-the-dollar
[3] http://www.investopedia.com/articles/basics/04/050704.asp#axzz1urFKAXwA
[4] http://dollardaze.org/blog/?post_id=00405
[5] http://www.investopedia.com/terms/f/fiatmoney.asp#axzz1urFKAXwA
