What Does it Mean to Have a Stable Currency?
Some of the most vocal critics of cryptocurrencies and other emerging forms of money question their stability. But what does it actually mean for a currency to be stable? And what factors contribute to it?
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Throughout the world, there are many traditional fiat currencies that could be described as stable, including the US dollar, pound sterling, Swiss franc, and Japanese yen. What separates these currencies from emerging, often volatile cryptocurrencies isn’t a secret, unknown entity; it’s simply the fact that they’ve been around much longer, and therefore their ability to maintain value is better tried and trusted.
In this guide, we’ll take a closer look at what makes a currency stable, considering how different types of money accrue stability and how the gold standard has contributed to the formation of some of the world’s most stable forms of currency.
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What is a Stable Currency and How Does Money Become Stable?
A stable currency is a form of money whose value hasn’t changed significantly for a long period of time. It’s any currency that is in mainstream use, with a proven track record in sustaining value and providing a trusted form of money for day-to-day consumers.
One of the first things to know about stable currencies is that they take years to reach the point at which they can be defined as ‘stable’. The US dollar, for example, took over a century to reach the stability threshold, while other, older types of money including the British pound sterling have been in circulation – and thus moving towards stability – since the 1600s.
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Secondly, much of what makes a currency stable stems from the fact that they’re backed by strong economies and governments. From the US dollar to the Swiss franc, the world’s most stable currencies are linked to countries with solid economies and governance, which contributes to them being safe, stable, and often used by other countries in a foreign exchange capacity.
As well as benefiting from the backing of a strong economic power, stable currencies often originate in countries that formerly used the gold standard – a system that pegged day-to-day money against a nation’s gold reserves. We’ll talk more about the link between stable currencies later in the guide, but suffice to say it’s no coincidence that the world’s most valuable precious metal has strong ties with currency stability.
How Did the Gold Standard Influence the Formation of Stable Currencies?
Gold has fascinated us for over 5,000 years, but it wasn’t until the 19th century that the gold standard was introduced. First adopted by England in 1821, the system worked by using gold to back the value of money, and was quickly adopted by most developed nations as a means of regulating value and standardizing monetary systems.
Reaching its zenith in the late 19th and early 20th centuries, the gold standard began to decline in the wake of World War One, when global government finances were in a state of disarray. Therefore, an alternative system was developed to reduce countries’ reliance on gold reserves, resulting in the emergence of ‘fiat money’ – currencies not backed by gold but instead defined as legal tender under government decree.
Although the ‘true’ gold standard only existed for 50 years or so, its legacy can still be felt within stable financial currency systems today. Indeed, gold remains a critical financial asset for countries and central banks around the world, and remains one of the most widely used indicators of a nation’s economic health and prosperity. As such, its long-standing affiliation to fiat money means that currencies like the US dollar are viewed as stable since they remain connected to the value of gold – one of the world’s most coveted and easily recognized assets.
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How Could Cryptocurrencies Become Stable Currencies?
When defining stable currencies, it’s worth considering what many people view as their antithesis: cryptocurrencies. With a short history and a volatile value profile, these new digital currencies are far removed from the likes of the US dollar and the British pound. The question is: could they ever achieve stability comparable to fiat money? And what would it take to get them there?
Though becoming increasingly popular, cryptocurrencies like Bitcoin aren’t as widely used or trusted enough to be considered ‘stable’. For them to accrue stability, they would need to be more widely used, both by day-to-day consumers and as a viable form of value exchange between businesses, organizations, and countries.
In short, the more people use cryptocurrencies, the stronger and more stable they’ll become. Just as the US dollar, the Japanese yen, and the British pound grew from nothing over many decades, so too could cryptocurrencies – in theory, at least.
Another way that cryptocurrencies could become stable currencies is through their use as a hedge against inflation. Much like gold has long been used as a line of defense against declines in monetary power, cryptocurrencies could serve a similar purpose.
How? Since cryptocurrencies can’t be easily manipulated, like fiat currencies, they have the potential to bring stability and provide protection against inflation. Like gold, it’s impossible for a single government or entity to make more cryptocurrency, so it has the potential to become an effective inflation hedge.
Time will tell how stable cryptocurrency becomes in the future. Right now, it’s not entirely clear how resistant some digital currencies are to manipulation. And with crypto not yet in widespread, regular use, the likes of Bitcoin aren’t yet building the trust and exposure needed to become true stable currencies.
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Is Gold the Most Stable Currency in the World?
While the era of the gold standard may have ended decades ago, its legacy can still be felt in the world’s strongest economies. And since gold is still recognized as the only international form of currency whose value can’t be debased, manipulated, or altered, it remains one of the strongest, most stable currencies in the world, and one which millions of people look to as a safe, secure, and unwavering store of value.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
To learn more, visit our homepage or give us a call at +44(0)203 915 8111.
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