Ever since the creation of money, when society disengaged from barter (trading goods with one another) and introduced a medium of exchange (money), humanity has most commonly tied the value of money to a commodity. For most of the first millennia, money was tied to silver or bimetallic standards. However these systems posed a significant number of problems, especially in times of economic crisis. As a result, in 1717, the UK switched to the gold standard, meaning that the currency had a fixed value directly linked to gold and could be converted into gold. The UK adhered to this gold standard until 1931, when it became the first country to adopt fiat money, which is a government-issued currency that is not backed by a commodity such as gold. After the UK switched, many Western countries followed suite with it now being the main form of exchange. As debt increases and economic structures become more fragile, the world’s economies are made to reconsidering the gold standard as a viable system or exploring alternative economic solutions. 

Firstly, let’s look at why the West initially decided to switch from the gold standard to fiat money. One of the key reasons for this transition was the fact that increasing economic activity was nearly impossible when money was tied to gold. Unless new gold was discovered through mining or acquired via foreign trade, a country’s money supply was fixed and could not be increased. This posed a significant problem for the growing economies of the Western world, as there simply was not enough gold in the world to sustain their economic expansion. After World War I, governments needed more money to rebuild economies and pay for damages, but the gold standard limited how much currency they could issue. This constraint became even more evident during economic downturns, as countries struggled to respond effectively to recessions. Over time, these challenges led to the gradual adoption of fiat money, which allowed for more flexible economic policies. 

The main reason for the abandonment of the gold standard, however, was its limitations on economic policy and governments’ ability to use the money supply as an economic tool. In the wake of the Great Depression in the 1930s, new economic theories supported greater government spending to help economies recover and to address appalling levels of unemployment. Under a fiat money system, monetary policy can be used to respond to financial crises by lowering interest rates during a recession, raising them during periods of inflation, and injecting money into the economy when necessary. However, with the gold standard, policy action was severely restricted, as money supply could not be easily adjusted. Thus, it was rigid in how the amount of money in circulation could be manipulated. 

Before fully transitioning to fiat money, the Western world briefly relied on the Bretton Woods system, established in 1944. This system pegged major world currencies to the U.S. dollar, which in turn was backed by gold at a fixed rate of $35 per ounce. It was designed to provide monetary stability while allowing for controlled expansion. However, as the U.S. economy experienced inflation and trade deficits in the 1960s, confidence in the system deteriorated. In 1971, President Richard Nixon ended the dollar’s convertibility into gold, effectively marking the collapse of Bretton Woods and the full transition to fiat money. 

Fiat money has many benefits compared to the gold standard. It addressed many of the problems that came with the gold standard, such as the inability of monetary policy to help with issues like recession, and it allowed governments to grow their economies without needing gold to print money. It also helped enable globalisation and the integration of international economies by removing the need to hoard gold, allowing greater economic specialisation (and hence higher global efficiency and output) and fewer restrictions on travel and capital movements (for example, under the gold standard, individuals leaving the UK could take only £50 abroad). 

The adoption of fiat money resolved many of the serious issues that came with the gold standard; however, it also introduced problems of its own. One of the largest concerns is the risk of a debt crisis due to excessive borrowing. This issue has become increasingly alarming, especially in the wake of COVID-19, as governments around the world borrowed significantly more than predicted and have continued to do so without making efforts to reduce national debt. The UK, in 2019, projected borrowing of just £55 billion in 2020, but due to COVID-19, actual borrowing skyrocketed to £313 billion. This large increase was seen globally, with national debts rising even more rapidly than before. An example of continual excessive borrowing can be seen in the U.S., whose national debt climbed by nearly $11 trillion (from $22.7 trillion in 2019 to $33.2 trillion in 2023). This level of debt accumulation is unprecedented and unsustainable and  questions are being asked as to what will happen next.  

The most alarming potential problem arising from uncontrolled expansion in the money supply by governments is the risk of hyperinflation or significantly higher inflation than under the gold standard. Since a central bank can print as much money as it wants without a cap, large amounts of inflation can occur. This can devalue the currency significantly and, in extreme cases, lead to hyperinflation—defined as rapid and unrestrained price increases exceeding 50% per month. A notable historical example of this occurred in Germany in the early 1920s, when excessive money printing led to hyperinflation, rendering the German mark practically worthless. More recently, Zimbabwe and Venezuela have experienced similar economic disasters due to uncontrolled money supply expansion. 

With the glaring issues of both the gold standard and the fiat money system, we must consider whether there is a better way of managing currency on a global scale. While reverting to the rigid constraints of the gold standard is not a viable solution, continuing the uncontrolled expansion of fiat money could lead to major economic shocks. Therefore, a new middle ground must be found—perhaps a hybrid system incorporating elements of both commodity-backed stability and modern monetary flexibility or the further integration of central bank digital currencies (CBDC).