Bankruptcy of Our Nation (Revised and Expanded). Jerry Robinson
decides to unleash the printing presses and overproduce its fiat currency? Does everyone suddenly become wildly rich due to all of the newly printed currency? Does printing fiat currency solve problems or just create more problems? In our next chapter I will answer these questions with a historical examination of fiat currencies. Sadly, fiat currencies, like the U.S. dollar, have led every nation that has abused them to the brink of economic disaster.
Quick Summary
Our own personal view of money is shaped and influenced by three factors: 1) the economic system we are born into, 2) our family’s financial philosophy, and 3) our instilled spiritual and moral values.
Money is morally neutral. It can be used for positive or negative reasons. Financial morality is found in the intentions of the user, not in the money itself.
Three forms of money have been used throughout history: 1) commodity money, 2) receipt money, 3) fiat money
Commodity money took the form of exchangeable commodities often with intrinsic value such as salt, livestock, and crops.
Along with the advance of civilizations came the need for a form of money that was relatively scarce, portable, easily divisible, and durable.
Precious metals, such as gold and silver, fit all of these requirements, making them the obvious choice.
Over time, goldsmith banking allowed individuals a safe place to store their gold in exchange for a paper receipt that was considered as “good as gold.”
These paper receipts, or receipt money, were extremely popular due to their ease of use.
The governing authorities eventually saw a need to monopolize the money creation process in order to ensure economic stability.
This government intervention led to the rise of central banks and fiat monetary systems that have ultimately proven to be disastrous, as we shall see in upcoming chapters.
Fiat money has no intrinsic value. Instead, its value is derived from legal tender laws and a public perception that the monetary authorities will keep it in a limited supply.
Today, every currency on the planet is considered to be fiat.
Endnotes
1. Dallas D. Johnson, Consume! The Monetary Radical’s Defense of Capitalism (New York: Dynamic American Press, 1940), p. 89.
2. Charles Francis Adams, The Works of John Adams, Second President of the United States (New York: Little, Brown & Co., 1853), p. 447.
3. Nathan G. Goodman, editor, A Benjamin Franklin Reader (New York: Thomas Y. Crowell Co., 1945), p. 288.
4. More in-depth explanations of the various types of political and economic systems can be found outside of this book. My purpose here is simply to point out that a person’s view on money is often directly tied to how his government teaches him to view money.
Chapter 2
A Short History of Fiat Currencies
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.1
— Sir John Maynard Keynes
With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.2
— Friedrich A. Hayek, Nobel prizewinner, economist
OVERVIEW: In our last chapter, the topic of fiat currencies was introduced. In this chapter, a brief history of fiat currencies will be provided. A fiat currency, like the U.S. dollar, is a currency that is not backed by any type of commodity. Since an underlying commodity does not give value to the fiat currency, only one thing can determine its value: scarcity. Governments and their central banks, however, have a terrible track record of keeping fiat currencies in scarce supply. No fiat currency has ever succeeded in the long run. Ever. This chapter analyzes some of history’s fiat currencies. Will America follow the same historical pattern?
“O Ye of Little Fiat . . .”
Fiat currencies are faith-based currencies. Individuals who live, work, and transact in a fiat currency system are a people of great faith. Faith, you say? What exactly does faith have to do with a fiat currency system? Faith has everything to do with a fiat currency. As we have already learned, a fiat currency system is one determined by the governing authorities with no backing of any physical commodity. Because fiat currencies do not derive their value from anything tangible, their value is determined by their scarcity. Fiat currency systems, like that of the U.S. dollar, demand an enormous amount of trust from the public in the monetary competency of their governments. Why? Because the future value of a fiat currency is entirely dependent upon the financial wisdom and vigilant oversight of the nation’s monetary authorities in keeping the currency in a limited and strictly measured supply. Those who use and transact in a fiat currency system demonstrate great faith in their government’s ability to make sound monetary decisions.
If the authorities choose to adopt unsound monetary policies, such as massively inflating the amount of currency in circulation, the public will suffer as each fiat dollar becomes worth less, if not worthless! Under such an irresponsible monetary system, the citizenry will seek to preserve their purchasing power by reducing their holdings in the fiat currency as it declines in value. However, the fiat currency is not always the only casualty in such situations, as the public often loses trust in the entire system, including the current political leaders, the central bank, and even the national banking system.
Therefore, it is not a misnomer to call fiat currencies what they truly are: faith-based currencies. The faith expressed by the public is not rooted within the currency itself, but instead, within the ability of the nation’s monetary authorities to properly steward the value of the fiat currency.
Question: Is the U.S. dollar the first fiat (faith-based) currency in existence? And if it is not, what kind of historical track record do fiat currencies have? Are fiat currencies more likely to succeed or to fail?
Answer: The U.S. dollar is not the first fiat currency in history. In fact, the first known fiat currency system was originated under the Song Dynasty in China during the 11th century.3 Since the dawn of fiat creation, governments who have chosen to adopt fiat currency systems have had one unfortunate thing in common: they have abused their money-printing privileges through the overproduction of their national currency until it becomes completely worthless. Interestingly, a cursory examination of the rationale behind many of these periods of currency collapse began with reasonable objectives. In other words, it is difficult to find a historical example of a fiat currency collapse that was initiated with sinister motives to destroy the currency. Instead, history demonstrates that the varied periods of currency overproduction occurred when a government became seduced by the suggestion that their economic misfortunes could be solved through the production of just “a little more” money. But printing money “out of thin air,” as the fiat currency system so easily allows, always comes at an enormous cost. History is clear. Every fiat currency devised throughout history has faced the same embarrassing and miserable death: utter collapse by overproduction. The fact that so many currency collapses throughout history were initiated under the auspices of “good intentions” should be a cause for concern to all who distrust the true motives of