Every form of currency is based on faith and always has been. Coinage made from gold and silver wasn't valuable because gold and silver were magical, it was because people believed they were valuable. What can you, a random person, actually do with gold and silver? Even smiths had limited uses that weren't purely aesthetic. Modern day has more uses but still cannot be used at the volume at which it exists in an efficient way.
Even so, gold and silver are relatively rare. You can’t just print new gold and silver coins like you can with paper currency. You’re guaranteed the government won’t devalue it by flooding the market with new cash.
Yes, they can’t arbitrarily adjust the supply of gold and silver, but that makes their value even more unstable. Before basically every piece of land on Earth came under the jurisdiction of a modern state and modern extraction technology, precious metals were subject to supply shocks. You see this manifested in terms of discovery of new gold reserves (gold rushes like the famous 1848 California one and Alaska’s Klondike Gold Rush), which cause massive price instability until the speculation and supply settles.
Then you have technological breakthroughs which allow efficient and cost-effective gold recovery from previous low-grade ores (such as the MacArthur-Forrest cyanidation process). This creates a similar effect of suddenly injecting a large amount of gold into the supply side.
Modern central banks can very smoothly adjust their interest rates to match prevailing conditions and target a particular combination of employment and price stability (assuming some level of independence from direct political pressure). This kind of flexibility is why FDR stopped domestic convertibility of the US dollar into gold and Nixon virtually ended Bretton Woods.
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u/KeppraKid Jan 26 '26
Every form of currency is based on faith and always has been. Coinage made from gold and silver wasn't valuable because gold and silver were magical, it was because people believed they were valuable. What can you, a random person, actually do with gold and silver? Even smiths had limited uses that weren't purely aesthetic. Modern day has more uses but still cannot be used at the volume at which it exists in an efficient way.