Contrarian Round Table contributors discuss the topic:
“FUN WITH FIAT”
George J. Paulos Editor/Publisher Alternatives for Financial Freedom Proprietor, www.freebuck.com Editor, The Gold Letter
Fun with Fiat
There is a great debate within economics about the nature of currency. This debate has been going on since tokens were first traded for goods and services. The debate is whether a sound currency must be backed by tangible commodities such as gold, or should just be virtual tokens of exchange. These tokens of exchange are called fiat currency. All modern national currencies are fiat. They do not represent any fixed quantity of goods or services and their value is set by the marketplace. In a sense, fiat currencies are like stocks, but currencies are stocks of countries not companies. Unlike stocks, currencies tend to go down in value rather than up. It is unsettling to many people that the value of their money is so ephemeral. Is fiat money inherently unstable and should the world return to tangible money?
All currencies perform three basic functions:
a medium of exchange for making economic transactions
a benchmark of value for determining the relative value of goods and services
a store of value for future transactions
Both fiat currencies and commodity currencies such as gold perform all three functions, but with varying effectiveness.
Fiat currencies are superb as a medium of exchange. Since they can take many forms such as paper, plastic, or electronic, fiat currencies are the most convenient and liquid means of settling transactions. Gold and other commodities are bulky and impede efficient transactions. Fiat currencies offer friction-free transaction settlements that allow economies to grow at the maximum rate.
In contrast, commodity money is far more effective than fiat as a store of value. As a consequence, commodity money also performs better than fiat as a benchmark of value. History has shown that fiat currencies erode in value over time and ultimately become worthless due to the excessive production of new money by governments. Although the purchasing power of commodities can vary over time, they always retain value because the quantity of any commodity is always limited. Is there a way to make fiat currencies stable and reliable stores of value? And is there any way to make commodity currencies more convenient?
One way would be to define all currencies as tokens that represent a base commodity. During the classical “gold standard” era, paper money was gold-backed. The government issued paper money, but with the promise that it could be redeemed at any time with a specific weight in gold. This compromise between fiat paper money and commodity money gave the best of both worlds, offering the convenience of fiat and the reliability of gold. This arrangement worked quite well for many years. Currencies that had a strong gold backing retained stable value over long periods of time.
Unfortunately, a promise to redeem gold for paper is just a promise. Governments are notorious for breaking promises and every gold-backed currency in the world was ultimately repudiated. Governments have always succumbed to the temptation of printing more money than gold. At some point the currency collapses leaving the government and its currency bankrupt. It seems that gold-backed currencies are just a form of fiat after all. A piece of paper always has a net worth of zero in the end.
If governments cannot be trusted, then maybe the private marketplace should take over the issuance of currency. This was also tried by allowing banks to issue their own notes. But bank-issued currencies were a greater failure than government issues. It seems that whenever people are allowed to print money, greed and politics ultimately lead to prodigious money production and eventual failure. Money printing is just too irresistible because it seems to offer something for nothing.
Money printing gives the illusion of increased prosperity, but it is really only the theft of value from all other holders of currency. The total value in an economy is always limited by its ability to produce goods and services. Any increase in the money supply in excess of economic growth will ultimately show up as inflation, a decrease in the value of money.
It is difficult to believe that governments will return to a commodity standard for currency. There is no political constituency for honest money and enormous pressure to inflate. We can assume that the long-term deterioration of all currencies will continue indefinitely. Therefore, people who have wealth in the form of currency must pursue an investment program in order to preserve their wealth. If we consider currencies to be country-specific stocks, then a strategy of currency diversification is appropriate. Diversification should include several strong national currencies along with gold and silver bullion as the commodity currency allocation. Such a program should be considered a wealth preservation strategy rather than wealth enhancement. The goal of wealth in the form of currency is stable value and liquidity.
We can hope that someday governments will be forced by their citizens to manage their currencies honestly. But this assumes an honest and vigilant citizenry. In the end, we get what we want from our governments. People want inflation. They want their wages to go up, they want their homes to go up, and they want their stocks to go up. If this means that the money becomes worth less, then so be it. Government always responds cheerfully to the will of the people through the magic of the printing press.
Who is rich? He that is content. Who is that? Nobody.
Benjamin Franklin (1706 – 1790)
Fiat currency is in reality not as bad or nefarious as it is made out to be. Anthropologists have demonstrated that throughout history there have been many occasions where some form of fiat was used. Some examples are seashells and animal teeth. Granted one could not print them with a press, but they could be picked up from the beach or teeth obtained by killing more animals. Problems always arose because the medium of exchange could be created at will. The only difference being that the process was not localized to one group of individuals as it is now.
That is why at some point in time gold was used. What Gold really does is tie the hands of the central bankers, preventing them from creating money at will. In fact the same effect could be achieved with a head standard. This standard would simply ensure that any central banker who created new money without the consensus of the majority was decapitated on the spot (the majority being the masses and not the bankers). In this way we would never have a problem balancing the budget or have too many dollars circulating around the globe.
Fiat currency creation is a monopoly and we have no say in it at all. In fact the Feds really answer to no one but themselves. They are not even part of the government and effectively now control the Government. I am going to put up an excerpt below to explain my next point.
The key is that, when loans are made, they are not made with the same money that was brought into the bank as deposits. They arise out of newly created money. The deposits remain in the bank’s ledger under the heading of liabilities but they are money to the depositors. If a depositor puts $100 into the bank as a deposit, he has $100 in checkbook money. However, the bank uses that as the basis of making loans ($70 in the case of your father’s bank). So, now there is a total of $170 in the economy whereas before there had been only $100.
The action does not stop there. The $70 loan quickly becomes another deposit and, as such, is the basis for another loan ($49 in the case of your father’s bank). Now there is $219 in the economy instead of the original $100. The $49 becomes yet another deposit — and the process continues until it plays itself out at about seven or eight round trips.
Not only do the Feds create money at will and out of thin air, but regular banks have got into the act too. Then you have credit card companies that are extending credit and assigning huge lines of credit to individuals without the backing of Gold. This boils down to the same thing; creating new money out of thin air. If we all had this ability to magically create money out of thin air, then fiat would not be such a bad thing. We would all basically be in the same boat. If prices rose, we would all–technically–have the ability to print more dollars and pay for the price increases. However, the problem is that only a few individuals have this power and so when they inflate; the average person is robbed blindly as his salary does not keep up with this inflation. A few people are able to get wealthy, while the majority are left to rot and die. This is why inflation is so evil, because its benefits and negative effects are not spread out uniformly.
Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery. Charles Dickens(1812 – 1870), David Copperfield, 1849
Fiat money is not the culprit or the problem; human nature is. It is in our nature to get more for less and then try to take it all without paying a cent that results in untold misery and suffering. If there were a way to tie the hands of the Feds, regular banks and all houses that issue credit, we would not be in such a mess right now. Because of this huge flaw in our nature, a limiting agent such as Gold is needed to tie our hands. Perhaps one day we will advance to the point where not just a few are able to decide the outcome of many.
In the end if the masses were educated properly and allowed to be part of the decision making process when it came to creating new money; things would be a lot better. A simple election process once a year could be held to determine if more money should be created. Before we get to this stage, everyone would have to be familiar with the principles of Austrian economic and Sound money management.
The chance of something like this happening anytime soon: one in a trillion. So for the time being there can be only one solution: back all fiat money with Silver and Gold.
All change is not growth, as all movement is not forward. Ellen Glasgow
Is fiat currency really all that bad? Is the real problem the monopoly that central banks have on the medium of exchange?
The world has lived with a purely fiat monetary system for thirty three years since the US abandoned its commitment to exchange gold for dollars at a fixed rate of exchange in 1971. That commitment, enshrined in the Bretton Woods Agreement of 1944, had the force of international law. The Bretton Woods system was something less than fully convertible, since the commitment to exchange gold only existed at the government-to-government level and at the level of the national economy did not exist at all. Indeed, holding gold was prohibited for private individuals, a point I shall return to momentarily.
The abandonment of Bretton Woods was, at the time, simply the latest in a long series of actions intended to create a workable unitary fiat monetary system. The creation of the Federal Reserve, the abandonment of gold in 1933 and the establishment of the Exchange Stabilization Fund in the same year, the creation on of the CIA in 1947 with the express authority to raise money outside the law, and the creation of government controlled oligopolies in housing and heavy industry via the GSEs and the Pentagon respectively were all designed expressly to create an institutional framework to accomplish that end.
What all these actions have in common–besides their purpose–is that they were all based on either illegal or deceptive foundations. The Federal Reserve is nominally a public company, but its equity was sold to the very men and institutions it was supposedly created to regulate and control. Roosevelt’s actions were tenuously based on the Trading with the Enemy Act of 1917 and the abrogation of the gold contract was accomplished over a bank holiday declared for that purpose so that no one could get their gold. The ESF was set up expressly to operate in secret; it is exempt from any reporting to Congress and is answerable only to the president and the secretary of the Treasury. The CIA’s charter amounts to an act of law authorizing the breaking of the law at will, as well as the ability to raise finance in the same manner. The creation of the GSEs was shrouded in ambiguity: are they or are they not guaranteed by the government? This may be less relevant today, but fifty years ago when private corporations could still go to the wall, it was extremely important. And the Pentagon has been since the early 60’s a sink into which taxpayer dollars are poured to enrich contractors with guaranteed margins.
The surrender of the British Empire in 1944 at Bretton Woods, the collapse of the Soviet Union in 1989, and the adoption by the Chinese Communist Party of “liberal” capitalism have made the world economy a unitary dollar financial system–the significance of which is the absence of choice. Irrespective of how poorly managed or exploitative in nature the administration of that system is, there is no alternative. The only government with the chutzpah to attempt to do so was that of Saddam Hussein and the consequence was predictable. The adoption by a statistically significant segment of the world’s population of a gold backed unit of account and reserves supported by sufficient armed force to protect that area would bring about the end of the fiat currency system in a trice, historically speaking. The fact that the only organization talking about doing so is the World Islamic Conference may well inform the War on Terror. The combination of control of the world’s largest oil reserves and a hard currency and lower taxes would be hard to beat.
It is sometimes posited that a little bit of inflation is not a bad thing or that fiat currency is not so bad and it is the monopoly on money creation by the central bank that is the problem. This is to completely misunderstand the issue. Fiat currency can only exist under conditions of monopoly and an absence of freedom. The Roosevelt administration criminalized gold ownership by equating it with a threat to national security, in effect abrogating constitutional guarantees of personal political and economic freedom. In today’s system, you are free to own gold, but not free to know how much of the national gold reserve is even there any more, never mind what the Exchange Stabilization Fund is doing to suppress the price. The question is not so much whether or not fiat currency is bad, but is whether or not the political and institutional accoutrements that go with it are tolerable. That is a personal decision. I believe it was Ben Franklin who was asked after the adoption of the American Constitution what kind of government had been created. “A republic, if we can keep it” or words to that effect was his answer.
“Fun With Fiat”– Is fiat currency really all that bad? Is the real problem the monopoly that central banks have on the medium of exchange? It’s the Pox Americana by the FED! Entering Through Exit Only for Center Stage
Gold and Silver, aka Heavy Metal, not to be confused with Metallica or Evanescence, which are heavy metal rock bands, aren’t legal tender fiat paper funny money, and a Ponzi Shell Game. Nelson Hultberg, describes our one party political system as DemoPublican, a concept of one party governance. The current Federal Reserve, aka the American central bank, has a synergistic or symbiotic role with Congress as espoused by the author of The Creature from Jekyll Island, G. Edward Griffin. When one combines the concept of a DemoPublican one party governance and the symbiosis to print money out of thin air for the politicos inside the Beltway, including the GSEs and the White House, the Creature becomes a nine-headed hydra Pox Americana, which aids and abets the politicos shredding the last vestiges of The Constitution and the Bill of Rights, the foundation stones of a once Republic.
Pre-emption, Playing God, Walking on Federal Reserve Notes from Off-Shore
It is only through legal tender fiat that the United States under Baby Bush II could invoke a pre-emptive strike against Iraq. It is only through legal tender fiat, that Congress could be bamboozled, as the ultimate Ship of Fools that they are. It is only through legal tender fiat paper funnie monie that Franklin Delano Raines, has more power than God to inflate real estate values in the USA. In the meanwhile, Mr. Greenspan evokes visions of the next Jesus Christ walking on a sea of paper One Dollar denominated Federal Reserve Notes, which are not Constitutionally Defined as 371.25 grains of fine silver, based on the Spanish Piece of Eight – A central bank such as the Federal Reserve, based on the prototype of the Bank of England, under the House of Rothschild, has the ability to wage war, create all sorts of mischief, sink the Lusitania, profit from warfare and globalization, move American industry off-shore, and select target markets and professional groups for destruction to cover its tracks. Bankers profit from war. It is my view that those 700 sum odd and growing numbers of coffins draped with the Stars and Stripes returning from Iraq are the workings of a legal tender fiat monetary system gone mad. Coin clipping abounds!
When in Rome… Burn the Magna Carta! And Buy a few repos to spark the DOW!
This fiat money system is responsible for not only financing an illegal war costing the blood of our American Youth, but financing the final destruction of The Republic through Unconstitutional Patriot Acts, Homeland Security (Gestapo), and the shredding of The Constitution, the Bill of Rights, and our justice system established by the Magna Carta from our English Heritage of Common Law and Jurisprudence. A central bank has the ability to manipulate free markets and select target groups for centralization, control, and profit making, thus destroying an industry. The Fun with Fiat is that the politicos and the bankers profit in their Ponzi Shell Game, whilst they erode and steal the wealth of a People and a Nation. The ability of the FED to rig Wall Street propping up the DOW and NASDAQ using repurchase agreements is well documented by the work of Mike Bolser in the www.gata.org and www.lemetropolecafe.com circle of friends. The workings of the Plunge Protection Team or the Working Group on Financial Markets is well known and documented in financial circles on the Internet. We are in the largest real estate markets bubble in economic history using debt-backed mortgage instruments to finance the so-called increased wealth effects in housing and commercial property. Debt-backed real estate and debt-backed money and financial systems in our view are a very dangerous situation in the global scheme of things in Mr. Greenspan’s financial house of cards.
Total Banking Consolidation Through a Controlled Burn (Real Estate Recession… Or, the Full Blown Bastard Depression?)
Mr. Greenspan’s and Mr. Raines’ targeted destruction of the real estate valuation industry, which is now wrought with mortgage and realty appraisal fraud, will most likely be a curse on the American Landscape when the financial system melts down – imploding from one micro realty market to another, taking with it the banking system, which will be forced to merge and be taken over by the large players and banking families on Wall Street. However, that’s the plan anyway under the prime directive, as I call it, which is identified by Larry Becraft, Jr., an attorney friend of mine down in Huntsville, Alabama. Becraft calls it total banking consolidation. This is centralization of the banking industry and I call it the prime directive of the Federal Reserve fractional reserve banking system, which can easily be accomplished upon a real estate implosion.
Gagged Pigs Don’t Squeal
One such professional group targeted for destruction and centralization is the realty valuation gig or the realty valuation profession. The FED has infiltrated through professional realty valuation organizations and their management companies a cast of Goons, Buffoons, and Storm Troopers with links to the banking cartel, Wall Street, high powered money on Wall Street, and the GSEs. The intent was to inflate the holy Be-Jesus out of American commercial and residential real estate values to support the FED, the GSEs, and the GSE money pump to Gay Paree, holding up the consumer as the US Economy. In order to do that, they (the FED and its cronies) had to castrate the realty valuation profession through centralization and control under the mechanism of the 1989 FIRREA Act, which they did completely. Credit Scoring, AVMs (Alternative Valuation Models, now from Pakistan and India), drive-by appraisals, lender client coercion, and mind games (The Delphi Technique and Cognitive Dissonance) in the Appraisal Institute and its REAS (Real Estate Appraisal Services) akawww.aidirectconnection.com, the AI’s appraisal mis-management subsidiary, are all part of the plan, and the Fun with Fiat at the FED.
A Conflict of Interest So Bold and Blatant, Even Joseph Goebbels Would Blush!
REAS is owned by Charter One Financial Corporation home based in Ohio, very close to the General Headquarters of the Appraisal Institute in Chicago, Illinois. REAS operates as a Gestapo. They crush honest appraisers who try to expose mortgage and appraisal fraud for Washington Mutual and their other big service lenders. REAS is owned by Charter One Financial Corporation, the 25th largest bank holding company in the USA. That, simply put, is a conflict of interest. Royal Bank of Scotland is in merger and acquisition negotiations with Charter One for a takeover to become the 8th largest bank holding company in the USA. The conflict of interest intensifies, yet no one in the general membership of the Appraisal Institute seems to give a Rat’s Behind and certainly the general public could care less! Propaganda from the Appraisal Institute and it’s Propaganda Mechanism using the Delphi Scam or Technique and Cognitive Dissonance is most excellent. The AI Membership at large are asleep at the switch, as are Ma and Pa Kettle on Main Street America, including their son Joe Six-Pack and their daughter Sally SUV… Folks just don’t want to know what’s really going on! Mention an overheated or over-built market, mortgage fraud, or appraisal fraud in connection with a realty valuation practice in the Appraisal Institute, and you find yourself on a very long Blacklist, however, “Complacency is no reward.” – Chevalier Harry Schultz
Complacency is never a reward… An ARM Pour Vous?
Understanding the money system and real estate as a professional and as a global markets guru who has learned Wall Street to protect my families’ wealth, when I hear the word Democracy substituted by Presidents and Politicians for The Republic, I cringe. When I look at “Ashcroft’s hellish vision” of concentration camps for citizens as documented by George Washington Law Professor Jonathan Turley, I cringe. Are these debtors’ prisons for us when the collapse comes or are they just the pretext of all those anti-patriots Mr. Ashcroft is going to round up stripping away their Constitution and Bill of Rights? — Your guess is as good as mine! However, I do know that This Republic would be a much safer place to live, if we had a sound monetary system that protected civil liberties, property, and the freedom suggested in our Founding Fathers’ documents, deeds, and actions. However, we don’t have sound money. We have lived with Fun with Fiat and the Creature from Jekyll Island since 1913 – it having destroyed at least 95% or more of the value of the Constitutional US Dollar at 371.25 grains of fine silver. For the past 40 years or so, since the GSEs were created, the Creature in conjunction with the GSEs have used real estate as a leading mechanism for increased debt and the destruction of the American Monetary System. This debt will never be repaid. Some wealth effect, Mr. Goebbels….eh, I mean Greenspan! – you sure suckered in a lot of Folks! Grin! That poppycock about the savings and benefits of ARMs really takes the cake, Alan!
How to End the Federal Reserve Fun with Fiat? Or, one is never too old to die for their country… Or, the Fed Ex solution to the Creature from Jekyll Island?
This is actually very satirically simple and doesn’t require a vote of Congress to abolish the FED, since these Politicos are the consummate Ship of Fools and have no spine for The Republic anyway. You simply draft all of the current governors and their support staff, including Mr. Greenspan, and all surviving ex-Governors from the FED, and put them in the Marines. Two weeks of basic training should be enough, since they have all that experience manipulating what were supposed to be free markets and money systems. Age isn’t a problem in today’s Marines – they just want a few good men (and women!) We also need to toss in all of their economists as privates or the grunts to wait on the Governors and the Chairman – eh, Generals! We will make all of the Governors 4-star generals and we will place a fifth star on the Chairman. Everyone gets fatigues, a pretty helmet, and voice communicators. They each get their own AK-47, a Colt 45 sidearm, and K-rations. We Fed Ex ’em all to the front lines in Iraq. Baby Bush II issues an Executive Order for all other American Troops to withdraw to the ships and air troop transports! One is never too old to die for one’s Country, are they?
Denouement to a Nightmare
Over 700 American Families have learned that their Sons and Daughters WERE too young to die for their Country and This Republic. Until they understand the Fraud of the Federal Reserve fractional reserve banking system… their tears will never be understood in their Souls…. and in their Hearts. May God Bless the Quick and the Dead, that they might see. May the Good Lord Bless This Republic, so that we can get our Assets out of Hock from the Pawnbrokers and Charlatans of Monetary Destruction and the Monopolistic Banking Cartel!
Debt-backed money and debt-backed real estate are merely the illusion of wealth and prosperity. Pre-emptive wars financed by the American central banking cartel must surely have the Founding Fathers of This Republic shaking their heads at what the Pox Americana can do.
With a title of “Fun With Fiat” and a international readership, I shall try not to be serious. (I said, “TRY,” but don’t hold me to it.)
So let’s begin by first listing the questions: Is fiat currency really all that bad? Is the real problem the monopoly that central banks have on the medium of exchange?
And now for the answers; (Yes, Yes), (No, No), (Yes, No), (No, Yes).
With the four possible ways that you can answer the above two questions, you have now enjoyed the fastest lecture on the planet and it didn’t even Hurt. That’s because I have left out the 8 Whys?, which are the supporting commentaries that are plugged in between the questions and the answers. We are having fun and therefore, “we don’t need no stinking whys?, facts, charts, history, future,” to burden our brain. Just plug in your own whys? and choose an answer set. If that is too much work to muster up a couple of whys?, then hopefully, the other Round Table writers will have produced a sufficient number of explanations that support all four possible combinations.
If they have not, then it is still O.K. Just Fake up a bunch of whys? (You need 8 of them.) and plug them in between the questions and the answers. Whatever 8 reasons you plug in, you will ALWAYS SELECT only one answer set.
What is nice and easy about this approach is the answer will always be right; regardless of what answer set happens to pop out!! WOW. Clear Eyes. Instant Truth. The fun reason for this is because of the definition of fiat money; provided below with a web link.
Noun 1. fiat money – money that the government declares to be legal tender although it cannot be converted into standard specie
We might make a public moan in the newspapers about the decay of conscience, but in private conversation, no matter what crimes a man may have committed or how cynically he may have debased his talent or his friends, variations on the answer ”Yes, but I did it for the money,” satisfy all but the most tiresome objections. Lewis H. Lapham 1935-, American Essayist, Editor
Men make counterfeit money; in many more cases, money makes counterfeit men….Sydney Harris, quoted in Johannesburg Business Daily
I wanted to regale with you some stunningly brilliant insights into the meaning of life as it pertains to money and how you see and experience yourself in the world of money. But, I don’t feel particularly brilliant right now.
I wanted to tell you that money is the last great taboo. Twenty-five years as a practicing psychiatrist have taught me that people will share the starkly intimate details of their lives, but will not tell you how much money they have, how much they want, what money really means to them and the lengths to which they would go to get it.
But, maybe you already know that.
I wanted to call your attention to the litany of in-your-face reality television programs where people lie, betray friendships, live in subhuman conditions, marry those they detest, and eat live insect larvae and raw animal brains to win money. You may have noticed that Who Wants To Be A Millionaire has now morphed into Who Wants To Be Super Millionaire. A million dollars is not enough. You may have caught reruns of a series where contestants have the opportunity to “terminate” each other as they climb the Tower of Greed.
But, there’s nothing new here. You already have seen these things and will draw your own conclusions.
I wanted to discuss the anthropological symbolism of money whereby the physical act of accumulating money is transformed into a cultural symbol.
But, Donald Trump (among others) already showed you that, so it isn’t even an original idea.
I wanted to tell you that money permeates every aspect of every minute of every day of your life and is the basis for a continual struggle between the want/need for personal reward and the desire for spiritual transcendence. But, no one could present this in a more scholarly manner than Jacob Needleman in “Money and The Meaning of Life.”
I wanted to recite, in a modern context, the poignantly horrific story of the Fisherman and His Wife, but I couldn’t do it any better than the original by The Brothers Grimm.
So, what can I tell you about money that you don’t already know?
Perhaps it all comes down to the origin of the word “pecuniary,” which derives from the Latin meaning pecus or cattle. That’s it! This is all about cattle, bulls and oxen. Why didn’t I think of it at the outset?
Because Alan Greenspan already did, as demonstrated clearly in the last sentence of his 2002 Speech to the American Numismatic Society Exhibition. I could not have said it better—even on my most brilliant day.
Remarks by Chairman Alan Greenspan At the Opening of an American Numismatic Society Exhibition Federal Reserve Bank of New York, New York January 16, 2002
The History of Money
The other day I told a spendthrift friend that I had to deliver a short address on the history of money. He responded, “I understand the history of money. When I get some, it’s soon history.” Fortunately, not all market participants are as spendthrift as my friend. Savers have been in sufficient abundance since the beginning of the Industrial Revolution to enable investment to further material well being. Money, as a store of value, was an early facilitator of savings and one of the great inventions of mankind. Saving and investment is very difficult in a barter economy.
The history of money is the history of civilization or, more exactly, of some important civilizing values. Its form at any particular period of history reflects the degree of confidence, or the degree of trust, that market participants have in the institutions that govern every market system, whether centrally planned or free.
To accept money in exchange for goods and services requires a trust that the money will be accepted by another purveyor of goods and services. In earlier generations that trust adhered to the intrinsic value of gold, silver, or any other commodity that had general acceptability. Historians, digging deep into the earliest evidence of human practice, link such commodities’ broad acceptability to peoples’ desire for ostentatious gold and silver ornaments.
Many millennia later, in one of the remarkable advances in financial history, the bank note emerged as a medium of exchange. It had no intrinsic value. It was rather a promise to pay, on demand, a certain quantity of gold or other valued commodity. The bank note’s value rested on trust in the willingness and ability of the bank note issuer to meet that promise. Reputation for trustworthiness, accordingly, became an economic value to banks–the early issuers of private paper currency.
They competed for reputation by advertising the amount of capital they had to back up their promises to pay in gold. Those banks that proved trustworthy were able to broadly issue bank notes, along with demand deposits, that is, zero interest rate liabilities. The profit that accrued from investing the proceeds at interest was capitalized in the banks’ market value. In the mid-nineteenth century, equity capital/asset ratios were often several multiples of today’s ratios.
In the twentieth century, bank reputation receded in importance and capital ratios decreased as government programs, especially the discount window and deposit insurance, provided support for bank promises to pay. And, at the base of the financial system, with the abandonment of gold convertibility in the 1930s, legal tender became backed–if that is the proper term–by the fiat of the state.
The value of fiat money can be inferred only from the values of the present and future goods and services it can command. And that, in turn, has largely rested on the quantity of fiat money created relative to demand. The early history of the post-Bretton Woods system of generalized fiat money was plagued, as we all remember, by excess money issuance and the resultant inflationary instability.
Central bankers’ success, however, in containing inflation during the past two decades raises hopes that fiat money can be managed in a responsible way. This has been the case in the United States, and the dollar, despite many challenges to its status, remains the principal international currency.
If the evident recent success of fiat money regimes falters, we may have to go back to seashells or oxen as our medium of exchange. In that unlikely event, I trust, the discount window of the Federal Reserve Bank of New York will have an adequate inventory of oxen.
Money doesn’t mind if we say it’s evil, it goes from strength to strength It’s a fiction, an addiction, and a tacit conspiracy. Martin Amis 1949-, British Author
Yeap, they’re breeding!!! I just saw it!!! It’s a fact!! If you take Mrs. Greenback and put her in the same room as Mr. Press then wait 10 minutes, you will end up with lots and lots of little Greenbacks. So many in fact, Mrs. Greenback has to number them to keep track of them all. Perhaps that’s their social security number. Maybe I should try it? I will have to find an undamaged little Greenback and a little Press, after that fling the two into a dark room together with instructions about the numbering of the litter.
I’m beginning to like the idea. I could pay everyone I owe with something that costs nothing to produce for very little effort. Ha Ha, such fools they are, they will be so happy. They will then go and pay their accounts and everyone they owe will be happy. I would be helping the Fed to put money into the system, so I can’t see any problem with the law. In fact I think I would be in line for a knighthood for such genius and innovation.
With a little more effort I could start to sell breeding pairs, then everyone could help the Fed with their task of reflating the economy. Boy, all that extra money, the things I could have…….. a wonderful house on the coast, two SUVs in the garage, a TV in every room (made in China of course) AND I would contribute to the candidate of my choice for the Presidential elections. Then after that, the surplus I could invest in the share market and help keep it at its lofty level or maybe buy some GSE debt. Yes, there are so many things that the money would allow me to have and do.
There is one problem I would have though. I would have to find a way of putting an extra zero on the end of the number. Or perhaps two zeros, maybe three, because at the rate I would have them breeding, their usefulness would diminish, so I would need ever more just to stand still. I could even change the dimensions to a more useful size, maybe 4 inches by 4 inches. But that is a problem for the future.
I wonder how long I could keep this confidence game going before everyone I dealt with became suspicious about the value of my money. Would they start to discount it for transaction purposes or would they reject it totally in favour of someone else’s breeding pair? Especially if that other pair were not so prolific. There are alternatives, but it is figuring which is the best one. Since the Euro is closely related, old man Press could divorce from the Greenback side of the family and remarry into the Euro side. You know, it’s good to spread things around. That would make amends with the Oil family, perhaps stopping another family feud in the process.
Maybe I should keep the whole deal to myself and quietly buy up as much gold and silver as I can, while no-one is watching. Wouldn’t that be a joke, using something valueless to buy something with intrinsic value that is still cheap? Problems, problems, problems.
Fiat money by its very nature is subject to excess. Compound that with the fractional reserve banking system, it is doomed to eventual worthlessness and failure. How it will fail is a matter of speculation, it could be in the flames of inflation or it could be by sudden overnight popular rejection. Whatever replaces it will have lasting value. Humans are odd creatures. But like lemmings when the herd moves, it is an en masse stampede for the exit, be it the panic selling of shares or the fiery withdrawal of deposits. Once the process starts, there is nothing anyone can do until the theatre has been emptied. This is the game the Fed is playing and up until now they have had the cards in their favour. Who, I wonder, is holding the Queen of Spades?
We would like to thank Mary Puplava of www.financialsense.com for helping put all the articles from the various writers together and producing a coherent piece of work. Without Mary the Contrarian round table series would not exist