What is a fiat currency? It’s money that derives its value from government regulation and not backed by a tangible asset such as gold or silver. Virtually all “paper money” today is a fiat currency and as such is a liability of a central reserve bank. In the United States, currency is known as ‘Federal Reserve Notes’ which are not backed by convertibility to any specific commodity (i.e., gold or silver); the only legal requirement is that they are issued against “collateral.”

The U.S. Civil War and the Beginning of a Fiat Currency

In 1862, to pay for the burgeoning debt resulting from its participation in the U.S. Civil War, the Union government issued $50 million (worth over $1.13 trillion in today’s money; more was subsequently issued) in legal tender. Specie payment was suspended to redeem paper money for coin. So-called wartime ‘Legal Tender Acts’ intentionally depreciated currency for ordinary citizens;  inflation ravaged the newly printed “greenbacks” to the point that they were only worth approximately half of their nominal value in gold by war’s end.

Today’s Federal Reserve Note and Debt Monetization

            Federal Reserve Notes today are backed by the assets of Federal Reserve Banks; these assets typically are U.S. Treasury securities and are government debt purchased by the Fed in a process known as debt monetization. When government deficits are financed through debt monetization, inflation occurs as a result of the growth of the money supply. The money supply in the U.S. is further expanded by the use of fractional-reserve banking where deposits are lent and re-deposited as the basis of further loans.

The Inflation Tax

            This term refers to loss of purchasing power by those who hold cash and fixed-rate bonds. It is more accurate to call it a wealth transfer than a tax since debtors and holders of hard assets realize a gain in value of their holdings. Inflation disproportionately affects those on fixed incomes, wages and pensions.

IRAs and Inflation

A study commissioned by the American Society of Actuaries found that retirees consider inflation as the primary risk in retirement. Long-term savers (such as those who contribute to IRAs) should be concerned about inflation, particularly considering that dollar-denominated assets have declined 82% since 1971. Historically, as inflation increases, so does the price of gold.  This is why the long-term investor should consider accumulating wealth in gold IRAs. Converting from a currency IRA to a gold IRA is tax free and penalty free. A gold IRA protects one’s retirement against the erosion of the Federal Reserve Note’s value.

Acceptable Gold Coins for IRAs in the U.S.

  • American Eagle gold coins
  • Australian Kangaroo/Nugget gold coins
  • Austrian Philharmonic gold coins
  • Canadian Maple Leaf gold coins
  • Credit Suisse gold – PAMP Suisse gold bars .999
  • U.S. Buffalo Gold Uncirculated coins (No Proofs)

Note that coins, including the American Eagle, that have undergone “certification” (also known as “slabbed” coins) are not acceptable in retirement plans at this time.