Here’s one of the main answers to the question “Why buy gold and silver?” Simply, because no fiat currency lasts forever.
In this article:
- You’ll see just how many fiat currencies have gone the way of the Dodo since only 1975
- What this could mean for the New Zealand Dollar
- Plus some interesting and little known history about the New Zealand dollar over the last one and a bit centuries
- Including the surprising number of times the New Zealand Dollar has been devalued by the NZ Reserve Bank
Why Buy Gold and Silver? Because No Fiat Currency Lasts Forever
Below is an edited and abridged synopsis of an article by Jeff Clark:
You may not know how old your national currency is, or even know what ‘fiat’ means, but all currencies have failed.
That’s the message from Mike Maloney in the first installment of his new video series, “The Top 10 Reasons I Buy Gold and Silver.” Reason #10 is that all the world’s currencies are fiat, and fiat currencies always fail.
Jeff looked through history to provide documentation of Mike’s claim. But he ran into a problem: there were too many currencies to include in the article. So he looked at those that went bust since the beginning of the 20th century. There were still too many. So he looked at those since he was born in 1958 — still too many.
He cut it off at 1975, the year gold was made legal to own again in the US, and still found 17 of them.
Bear in mind that every single one of these currencies is now worthless. They’ve all gone bust, whether they got there quickly or took a century or more. And they’re not all from third-world countries, either.
A fiat currency relies on faith, and if it’s not backed by anything (like gold), leaders eventually succumb to the temptation to create more and more currency to solve their financial problems. And that dilution has always and inevitably led to extinction. What’s scary is that, for the first time in recorded history, all of today’s currencies are fiat.
That’s why Mike believes that before the end of this decade, an economic crisis will hit that will eclipse the Great Depression and the 1929 stock market crash. It could be best thing that happens to you if you own gold and silver.
History has a clear message for us: All fiat currencies eventually go to zero.
With the US dollar backed by nothing, debt piling higher every month, all managed by central bankers and politicians that haven’t learned anything from history, it’s up to us to protect our assets with the one currency that can’t be debased, devalued, or destroyed—gold.Source.
What About New Zealand? How Has the New Zealand Monetary System Changed Over the Past Century?
So what about New Zealand?
New Zealand is a very young country. Surely the New Zealand monetary system surely has changed very little since New Zealand was colonised?
Well, even New Zealand has some interesting monetary and currency history.
Hat tip to A.E. for this link to wikipedia on New Zealand Legal Tender history:
As A.E. wrote to us, “of course, everyone now “knows” that monetary systems are forever ;)”.
New Zealand has a complex history of legal tender. English law applied, as applicable to local circumstances, from either 6 January 1840, when the Governor of New South Wales by proclamation annexed New Zealand, or from 14 January 1840 when Captain Hobson Royal Navy was sworn in as Lieutenant-Governor. The English Laws Act 1858 subsequently confirmed that English legislation passed prior to 14 January 1840 was and had been the law of New Zealand, as applicable to local circumstances. The (UK) Coinage Act 1816 therefore applied and British coins were confirmed as legal tender in New Zealand. Unusually, until 1989, the Reserve Bank did not have the right to issue coins as legal tender. Coins had to be issued by the Minister of Finance.
The history of bank notes was considerably more complex. In 1840, the Union Bank started issuing bank notes under provisions of British law, but these were not automatically legal tender.
In 1844, ordinances were passed making the Union Bank banknotes legal tender and authorising the government to issue debentures in small denominations, thus creating two sets of legal tender. These debentures were circulated but were traded at a discount to their face value because of distrust of the colonial government by the settler population. In 1845, the Ordinance was disallowed by the British Colonial office and they were recalled, not without first causing a panic among holders of the debentures.
In 1847, the Colonial Bank of Issue became the only issuer of legal tender. In 1856, however the Colonial Bank of Issue was disbanded and through the Paper Currency Act 1856, the Union Bank was confirmed once again as an issuer of legal tender. The Act also authorised the Oriental Bank to issue legal tender but this bank ceased operations in 1861.
Between 1861 and 1874, a number of other banks including the Bank of New Zealand, Bank of New South Wales, National Bank of New Zealand and Colonial Bank of New Zealand were created by Acts of Parliament and authorised to issue bank notes backed by gold, however these notes were not legal tender.
The 1893 Bank Note Issue Act allowed the government to declare a bank’s right to issue legal tender. This enabled the government to make such a declaration to assist the Bank of New Zealand when in 1895 the bank encountered financial difficulties that could have led to its failure.
In 1914, the Banking Amendment Act gave legal tender status to bank notes from any issuer and removed the requirement that banks authorised to issue bank notes must redeem them on demand for gold (the gold standard).
In 1933, the Coinage Act created a specific New Zealand coinage and removed legal tender status from British coins. In the same year the Reserve Bank of New Zealand was established. The bank was given a monopoly on the issue of legal tender. The Reserve Bank also provided a mechanism through which the other issuers of legal tender could phase out their bank notes. These banknotes were convertible into British legal tender on demand at the Reserve Bank and remained so until the 1938 Sterling Exchange Suspension Notice that suspended provisions of a 1936 amendment of the 1933 Reserve Bank of New Zealand Act.
In 1964, the Reserve Bank of New Zealand Act restated that only notes issued by the Reserve Bank were legal tender. The Act also ended the right of individuals to redeem their bank notes for coin, effectively ending the distinction between coin and notes in New Zealand. The Act came into force in 1967 establishing as legal tender all New Zealand dollar five dollars banknotes and greater, all decimal coins, the pre-decimal sixpence, the shilling, and the florin. Also passed in 1964 was the Decimal Currency Act, which created the basis for a decimal currency, introduced in 1967.
As of 2005, banknotes were legal tender for all payments, and $1 and $2 coins were legal tender for payments up to $100, and 10c, 20c, and 50c silver coins were legal tender for payments up to $5. These older style silver coins were legal tender until October 2006, after which only the new 10c, 20c and 50c coins, introduced in August 2006, are legal.Source.
A Key Date in New Zealand Monetary History
So a key date in New Zealand monetary history was in 1914. New Zealand followed what had already taken place in much of the rest of the world.
The government “removed the requirement that banks authorised to issue bank notes must redeem them on demand for gold (the gold standard).”
New Zealand currency became fiat currency from this date on. It has remained so until this day.
This was of course as a result of the first world war. There was a huge demand to create vast amounts of currency to fund the war.
Now, consider what would have occurred if this requirement to redeem bank notes for gold had not been removed. As soon as people realised how much currency was being created to fund the war, they would have taken their bank notes to their bank and requested gold coins in return.
But with this ability removed, governments were free to issue all the currency they wanted to fund the war.
Another law was passed 5 years earlier that made this change possible. See this article for more on that: Prof. Antal Fekete: The Ignored Anniversary – Episode 04/17
NZ Dollar Devalued 7 Times in 17 Years!
Here’s another interesting fact about the New Zealand Dollar we stumbled across. We recently published some numbers for the NZ Housing to Gold and NZ Housing to Silver ratios. As part of this we had to convert the USD gold and silver prices into NZ dollars. So we had to track down the NZD/USD exchange rate right the way back to the 1960’s.
We knew that the NZ Dollar only floated in 1985, so exchange rates were fixed prior to this. However we didn’t realise how many times the New Zealand Dollar was devalued in the lead up to 1985.
The Reserve Bank of New Zealand publishes this useful pdf entitled:
This outlines all the changes in the NZ Dollar exchange rate throughout New Zealand’s short history.
Here’s some significant dates:
18 September 1949 – Parity maintained between ₤NZ and ₤Stg although the ₤Stg was devalued by 30.5% against the USD.
(So effectively the ₤NZ was devalued by 30.5% too).
31 August 1961 – The ₤NZ is set at ₤NZ1 = USD 2.7809 (or 2.47130 grammes of fine gold). NZ joined IMF, which required each currency to be quoted in terms of USD or in fine gold. This relationship became a rate of exchange, as IMF required member currencies to be valued in the same terms.
1967 – 1985: Let the Devaluations Begin
10 July 1967 – Decimal currency introduced. NZD 1.00 = USD 1.39045 (or NZD 1.00 = 1.23565 grammes of fine gold)
21 November 1967 – NZD devalued 19.45% against USD. NZD 1.00 = USD 1.12 (or NZD 1.00 = 0.99531 grammes of fine gold)
25 September 1974 – NZD devalued 9% against all currencies except AUD.
10 August 1975 – NZD devalued 15%.
29 November 1976 – AUD devalued 17.5%, trading suspended.
30 November 1976 – NZD devalued 2.73% against basket
20 December 1976 – NZD revalued 2%. Overall, the 1976 adjustments led to depreciation of 0.78% against the basket.
5 January 1978 – Suspension of trading for all currencies except Sterling, US and Canadian Dollar. The suspension followed instability in the exchange market due to the announcement that the US Treasury and Federal Reserve Bank would be intervening the markets to support the US dollar.
21 June 1979 – A flexible exchange rate system (“crawling peg”) is introduced.
8 March 1983 – NZD devalued 6% against TWI currencies, slight revaluation against AUD.
15 July 1984 – the foreign exchange market is closed.
18 July 1984 – NZD devalued by 20%
4 March 1985 – NZD allowed to float against all currencies.
In the space of 17 years the New Zealand Dollar was devalued 7 times before finally being allowed to float against all currencies in 1985. Since then the devaluations have been market driven.
Of course these devaluations have all been against the USD. Which itself has also been devalued against real assets such as gold.
Prepare for the Demise of the New Zealand Dollar
So it may seem like the New Zealand Dollar has been around for a very long time. But the history above shows how much the Kiwi dollar has changed in the last 100 years.
History also shows that the fiat currency that is the New Zealand Dollar won’t be around forever either.
Be sure you have some financial insurance in the form of gold and silver in case that day arrives in your lifetime.
For more reasons as to why to buy gold and silver that are still very relevant today, see these articles:
Editors Note: This article was first published 17 October 2017. Last updated 26 November 2019 with section added: “NZ Dollar Devalued 7 Times in 17 Years!”