Why Buy Gold? No Fiat Currency Lasts Forever – Even the NZ Dollar. Devalued 7 Times in 17 Years…

Here’s one of the main answers to the question “Why buy gold and silver?” Simply, because no fiat currency lasts forever. The New Zealand dollar is unlikely to be an exception to this rule. It too has had a surprisingly large number of changes in its short existence.

To follow is a complete monetary history of the New Zealand dollar’s descent to a fiat currency…

Estimated reading time: 17 minutes

Why Buy Gold and Silver? Because No Fiat Currency Lasts Forever

How Many Currencies Have Failed Since 1975?

Below is an edited and abridged synopsis of an article by Jeff Clark. It outlines the surprising number of currencies which have failed since only 1975 :

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?

Fiat Currency in New Zealand history - 1 Pound Note
How has New Zealand Currency changed over the last century?

So what about New Zealand?

New Zealand is a very young country. Surely the New Zealand monetary system 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:

https://en.wikipedia.org/wiki/Legal_tender#New_Zealand

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 ZealandBank of New South WalesNational 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.[23]

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.

Why Buy Gold? No Fiat Currency Lasts Forever - What About the NZ Dollar?
The New Zealand One Dollar note no longer exists. Could the New Zealand Dollar fiat currency cease to exist altogether one day?

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.

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

The Return to the Gold Standard

After World War I Great Britain was returned to the gold standard in 1925. The trouble was they went back to the same exchange rate between gold and the pound sterling, even though the pound currency supply had been hugely inflated during the war.

During this time New Zealand ran a fixed exchange rate with the U.K. Pound Sterling. So New Zealand was also returned to the gold standard at the wrong rate leading up to the great depression. This lead to a series of later devaluations:

  • In 1931 the exchange rate was devalued from a fixed of ₤NZ 100 to ₤Stg 100 to a rate of ₤NZ 110 to ₤Stg 100.
  • On 20 January 1933 the exchange rate was depreciated further to be fixed at ₤NZ 125 to ₤Stg 100.

Following the second World War, the Great British Pound Sterling under went a number of devaluations:

  • On 19 August 1948, ₤NZ was revalued by 25%, effectively restoring the exchange rate to ₤NZ 100 = ₤Stg 100
  • On 18 September 1949, parity was maintained between ₤NZ and ₤Stg. However the ₤Stg was devalued by 30.5% against the USD. Hence the ₤NZ was also hugely devalued too.

Then on 31 August 1961, NZ joined the 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. So the ₤NZ was set at ₤NZ1 = USD 2.7809 (or 2.47130 grammes of fine gold).

The New Zealand Currency Is Fiat Once Again

Then in 1971 New Zealand was again returned to being a fiat currency. Just like every other country on the planet. This was when United States President Nixon announced he had “closed the gold window”. Which was a nice way of saying:

“We aren’t going to allow those pesky foreigners to exchange their US dollar reserves (that we have been devaluing over the past decade or so) for our gold reserves”.

The Bretton Woods dollar exchange standard had been created at the conclusion of the second world war in 1944. The US dollar was linked to gold at a fixed rate. All other currencies were then in turn linked and exchangeable for US dollars. This relied upon the US to keep the dollar on an even keel. Which they proceeded not to do. With the Vietnam War and various social programs being funded through expansion of the US currency supply.

However other nations could elect to exchange their US dollar reserves for gold and the French, under De Gaulle, had been doing this throughout the later half of the 1960’s. The US could see their gold reserves would soon be depleted, as other nations started to follow De Gaulle’s lead.

So a very loose gold standard was still in place until 1971. The New Zealand dollar was linked to gold indirectly via its link to the US dollar. Hence when Nixon “temporarily[!]” suspended the US dollar’s link to gold, the New Zealand dollar also became a fiat currency. It has been ever since.

Note: There is more detail on this period in “Module 3: The Gold Window is closed” of our Gold ecourse.

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:

Exchange rate changes to the New Zealand dollar before it was floated on 4 March 1985

This outlines all the changes in the NZ Dollar exchange rate throughout New Zealand’s short history. The first two we have mentioned already, but here’s some of the most 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 1967NZD devalued 19.45% against USD. NZD 1.00 = USD 1.12 (or NZD 1.00 = 0.99531 grammes of fine gold)

25 September 1974NZD devalued 9% against all currencies except AUD.

10 August 1975NZD devalued 15%.

29 November 1976AUD devalued 17.5%, trading suspended.

30 November 1976NZD 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 1983NZD devalued 6% against TWI currencies, slight revaluation against AUD.

15 July 1984 – the foreign exchange market is closed.

18 July 1984NZD 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.

The Interesting History of the Pound Sterling

The above history is mostly of the New Zealand Dollar. However the pound that New Zealand used until 1967 traces its history back many centuries.

A well informed reader sent us the following piece which we have been meaning to share for a while (thanks A.E.). So here’s a bonus history of the pound sterling…

Until 1967, NZ used a New Zealand pound (£, or NZ£) as currency. Prior to that, we used British pounds and Australian pounds, among other currencies. But what is a pound? A pound of what?

As I write this, £1GB ≈ $1.95NZ.

At spot, it takes about £14GB to buy 1ozt of pure silver (.999 pure); it takes about £450GB to buy 1kg of pure silver; it takes about £150GB to buy 350g of sterling silver (.925 pure).

But what’s so special about 350g of sterling silver? Who cares how many British Pounds are needed to buy 350g of sterling silver?

〃The pound is 1200 years old, born about 775AD, when “sterlings” or silver pennies were the main currency in Anglo-Saxon kingdoms.〃[1]

The British “Pound Sterling” originated as a commodity currency, and one “pound” of currency was one pound of sterling silver.

〃The pound in use in King Offa’s day, also known as the Saxon pound or moneyers’ pound, remained essentially unchanged until 1527, by which time it had come to be known as the Tower pound,[4] after the Tower of London.
In 1527, the Tower pound was replaced by the English modern troy pound of 373.3 g, which was, by law, equal to exactly 16⁄15 of a Tower pound.[5][6]
The fundamental unit of the pre-1527 English weight system known as Tower weights, was a different sort of grain known as the “wheat grain”.[7] The Tower pound had a mass of 240 × 32 = 7680 wheat grain. The Tower wheat grain was defined as exactly 45⁄64 of a troy grain.[8]:74 Expressed in modern English troy grains, the Tower pound was 7680 × 45⁄64 = 5400 modern troy grains (350 g). The Tower pound was divided into 12 ounces, each ounce into 20 pennyweights, and each pennyweight into 24 barleycorns.
There were thus 480 barleycorns to a Tower ounce, 5760 barleycorns to a Tower pound of 350 g.[9] The Anglo-Saxon pound (Saxon pound, moneyers’ pound or Tower pound) remained in use for silver and gold coinage in England after the adoption of the medieval troy pound of 367.5 g. This pound of 12 ounces was in use in Troyes (Champagne fairs) where the mark of 8 ounces (also the Paris mark) weighed 245 g. The medieval troy pound weighed 240 pennyweights of 1.53 g or 24 medieval troy grains (1⁄5760 of the new pound and heavier than the real barleycorn). The Tower pound remained in use for weighing gold and silver until 1527.[10]〃[2]

From about 775CE until 1717, the British pound was defined by a pound of sterling silver. During this time, the British pound was a commodity currency. Later it would become a commodity backed currency, and ultimately a fiat currency, backed by a promise, and that promise has proven to be not valuable.

〃From 1717 the UK defined sterling’s value in terms of gold rather than its original silver〃[1]

〃The UK suspended the gold standard in 1914 bowing to the necessaries of war. Wartime manufacturing caused inflation and helped enliven trade unions and the Treasury, rather than the Bank of England, printed some banknotes itself during the war years. After the war Britain sought to return to its former pre-eminence, ignoring the consequences of the war.
Winston Churchill returned sterling to the gold standard in 1925 at the pre-war rate of $4.86 to the pound. However, the pound was overvalued by 10 per cent. The rate of exchange for sterling had been unchanged since Sir Isaac Newton set it in the 18th century, when he was Master of the Mint. The value was very out of date.〃[1]

〃This economic slide culminated in an irresistible run on sterling in 1931, effectively ending its role stint on the Gold Standard. The standard broke down globally between 1930-1933, under pressure of slump and the huge cutbacks in lending, which led to an era of economic protectionism and limited international trade. The pound remained afloat until 1939 and the outbreak of World War Two.〃[1]

For well over a thousand years, the British pound maintained value as a commodity currency. During most/all of that time, one British pound was worth ≈350g of sterling silver.

〃The gold standard was suspended at the outbreak of the war in 1914, with Bank of England and Treasury notes becoming legal tender.〃[3]

Between 1914 and 1940, the British pound maintained a tenuous tie to some form of a gold standard. In 1940 the Bretton Woods Agreement pegged the British pound to gold via the US dollar, but in 1971 the US effectively defaulted on that obligation, pushing the world’s currencies off a cliff.

So for over a thousand years the value of a British pound was very stable, and worth about 350g of sterling silver, but now it takes about £150GB (plus premiums!) to buy 350g of sterling silver.

And what does the future hold? With NZ (and pretty much all governments around the world) printing or typing new currency units at a much faster rate than anyone is printing new silver or gold, it’s inevitable that dollars, pounds, and other currencies will not only continue to lose value, but (possibly after a brief deflationary period) they will lose value at an accelerating rate.

Be your own central bank” with gold and silver to protect your wealth.

1- https://www.telegraph.co.uk/news/1399693/A-history-of-sterling.html

2- https://en.wikipedia.org/wiki/Anglo-Saxon_pound

3- https://en.wikipedia.org/wiki/Pound_sterling

Other sources:

https://en.wikipedia.org/wiki/New_Zealand_dollar

https://teara.govt.nz/en/coins-and-banknotes

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.

Related: 4 Reasons You Should Store Some Precious Metals Outside of New Zealand

For more reasons as to why to buy gold and silver that are still very relevant today, see these articles:

Why Buy Gold? Here’s 14 Reasons to Buy Gold Now

Why Buy Silver? Here’s 21 Reasons to Buy Silver Now

Editors Note: This article was first published 17 October 2017. Updated 26 November 2019 with section added: “NZ Dollar Devalued 7 Times in 17 Years!” Last updated 25 May 2021 with the following sections: The New Zealand Currency Is Fiat Once Again, The Return to the Gold Standard, & The Interesting History of the Pound Sterling.

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9 thoughts on “Why Buy Gold? No Fiat Currency Lasts Forever – Even the NZ Dollar. Devalued 7 Times in 17 Years…

  1. Pingback: Why Buy Gold? Here's 14 Reasons to Buy Gold Now

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  7. Phil Ingle says:

    Hi David, Thankyou so much for the articles, very informative.
    We are so manipulated, at least the money supply is.
    Now President Biden is goibg to inject a further 6 trillion, going to have a massive effect. Gold going to be worth much more, can such a currency continue or could this massive injection cause it to fail? Frightening stuff.
    Phil Ingle
    Oxford.

  8. Glenn says:

    Hi Phil, Who can know how long things can continue? The US Dollar could continue as the world’s reserve country for a while yet. $6 trillion is a lot but other economies are doing similar things relative to their size anyway, so they could just all continue falling against the likes of tangible assets like gold. But at some point the chickens will come home to roost. It’s just an unknown as to when…

  9. Pingback: Why it Will Be Very Difficult for the RBNZ to End Currency Printing - Gold Survival Guide

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