“Paper money eventually returns to its intrinsic value – zero.” (Voltaire, 1694-1778) Often Rather Quickly

June 26, 2012


The value of fiat currencies is entirely based on faith. When I wrote this, as others have, I had no idea just how quickly this process takes place. As Stephen Johnston relays:

According to an interesting study of the 775 fiat currencies that have existed 599 are no longer in circulation. The median life expectancy for the defunct currencies? Fifteen years.  Perhaps the author was being unfair by focusing solely on the failures. Sadly no, the average life expectancy of all fiat currency is running at a truly underwhelming 27 years. Only a select few have managed anything approaching old age. The British pound sterling is one such example at over 300 years and counting. Before we get too excited by this apparent example of longevity, at inception the pound was defined as 12 ounces of silver.  The pound is now worth less than 0.5% of this original value and of course there is no silver involved anywhere. In other words, the most successful currency in existence in terms of life-span has lost more than 99% of its value.

The study also found that 1 in 5 fiat currencies have failed outright through hyper-inflation – a percentage that I must admit surprised me as I was under the impression that hyperinflation was a much less common occurrence.  The following is an excerpt of some of those hyper-inflationary episodes. Full details of each example with precipitating causes can be found here.

  • Angola (1991-1999)
  • Argentina (1975-1991)
  • Austria (1921-1922)
  • Belarus (1994-2002)
  • Bolivia (1984-1986)
  • Brazil (1986-1994)
  • Bosnia-Herzegovina (1993)
  • Bulgaria (1991-1997)
  • Chile (1971-1973)
  • China (1939-1950)
  • Ecuador (2000)
  • Greece (1944-1953)
  • Georgia (1995)
  • Germany (1923-1924, 1945-1948)
  • Greece (1944-1953)
  • Hungary (1922-1927, 1944-1946)
  • Israel (1979-1985)
  • Japan (1944-1948)
  • Mexico (2004)
  • Nicaragua (1987-1990)
  • Peru (1984-1990)
  • Poland (1922-1924, 1990-1993)
  • Romania (2000-2005)
  • Russia (1921-1922, 1992-1994)
  • Taiwan (late-1940s)
  • Turkey (1990s)
  • Ukraine (1993-1995)
  • United States (1812-1814, 1861-1865)
  • Vietnam (1981-1988)
  • Zaire (1989-1996)
  • Zimbabwe (1999-2007)

Regardless how it happens, it certainly appears that fiat currencies have a pronounced tendency to fail in de jure or at the very least de facto terms with time being the only relevant variable. Some argue that fiat issued by a dominant economic/military power is the exception to this rule – eg the pound Sterling and the US dollar. While such status certainly seems to extend the life span of a fiat currency, this conclusion surely misses the point that a relentless loss of purchasing power (even if in the currency of the dominant economy) is just a failure in slow motion.

Stephen Johnston, EuroPacific Capital

Utterly astounding.

Adam Ferguson on Life in Hyperinflation
Deflation as a Leading Indicator of Hyperinflation
Causes and Patterns of Hyperinflation in the 20th Century
Infrastructure Spending Led to Hyperinflation in Bolivia
Long and Variable Lags Between Money Supply and Inflation
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