Fiat Currency Good or Bad?
PIM of SPAIN | August 3, 2009 at 04:31 amby
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Why would it be different this time? Actuality, it isn’t. In fact, there has been several failed attempts using paper currency, and today’s currencies are nothing different. Fiat currencies have not been successful, and the only aspect of fiat currencies that have stood the test of time is the inability of political systems to prevent the devaluation and debasement of this toilet paper money by letting the printing presses run wild.
Today’s monetary situation has many similarities with the historical stories that led up to the eventual collapse of currencies. The reality of the world’s economy has been obscured by a perceptual illusion. Fiat currency has value based on perception it only can function with proper management and controls. The most obvious thing is that the banking and monetary systems have flaws in their foundation, the base design of fiat currency is related to interest. Inflation could be considered a measure of theft or system leakage. When reality meets the illusion of mismanaged fiat currency the bubble will burst and what was perceived to have value will be seen for the truth.
History’s lessons from the past:
Fiat Money during the Roman Empire, called: The Denarius
Although Rome didn’t actually have paper money, it provided one of the first examples of true debasement of a currency. The denarius, Rome’s coinage of the time, was, essentially, pure silver at the beginning of the first century A.D. By A.D. 54, Emperor Nero had entered the scene, and the denarius was approximately 94% silver. By around A.D.100, the denarius’ silver content was down to 85%.
Emperors that succeeded Nero liked the idea of devaluing their currency in order to pay the bills and increase their own wealth. By 218, the denarius was down to 43% silver, and in 244, Emperor Philip the Arab had the silver content dropped to 0.05%. Around the time of Rome’s collapse, the denarius contained only 0.02% silver and virtually nobody accepted it as a medium of exchange or a store of value.
Fiat Money in China, called Flying Money
When the Chinese first started using paper money, they called it “flying money,” because it could just fly from your hands. The reason for the issuance of paper money is simple. There was a copper shortage, so banks had switched to the use of iron coinage. These iron coins became over-issued and fell in value.
In the 11th century, a bank in the Szechuan province of China issued paper money in exchange for the iron coins. Initially, this was fine, because the paper money was exchangeable for gold, silver, or silk. Eventually, inflation began to take hold, as China was funding an ongoing war with the Mongols, which it eventually lost.
Genghis Khan won this war, but the Mongols didn’t assume immediate control over China as they pushed westward to conquer more lands. Genghis Khan’s grandson Kublai Khan united China and assumed the emperorship. After running into some setbacks with paper currency, Kublai eventually had some success with fiat money. In fact, Marco Polo said of Kublai Khan and the use of paper currency:
“You might say that [Kublai] has the secret of alchemy in perfection…the Khan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must equal in amount all the treasure of the world.”
“This was the most brilliant period in the history of China. Kublai Khan, after subduing and uniting the whole country and adding Burma, Cochin China, and Tonkin to the empire, entered upon a series of internal improvements and civil reforms, which raised the country he had conquered to the highest rank of civilization, power, and progress.”
“Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both…All the beneficial effects of a currency that is allowed to expand with a growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth. These effects were not slow to develop themselves…the best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion.”
Fiat Money in France, called: Livres, Assignats, and Francs
The French have been particularly unsuccessful in their attempts with fiat money.
John Law was the first man to introduce paper money to France. The notion of paper money was greatly helped along by the passing of Louis XIV and the 3 billion livres of debt that he left.
When Louis XV was old enough to make his own mistakes, he required that all taxes be paid in paper money. The currency was backed by coinage, until people actually wanted coins.
The new paper currency rapidly became oversupplied until nobody wished to own the worthless junk anymore and demanded coinage for the currency.
It looks like Law didn’t think that anyone would actually want coins ever again. After making it illegal to export any gold or silver, and the failed attempts by the locals to exchange their paper currency for something of actual value, the currency collapsed.
John Law became the most hated man in France and was forced to flee to Italy.
In the latter part of the 18th century, the French government again tried to give paper money another go. This time, the pieces of garbage they issued were called assignats. By 1795, inflation of assignats was running at approximately 13,000%. Oops. Then Napoleon stepped on the scene and brought with him the gold franc. One of the good things that Napoleon realized is that gold is the way of a stable currency, and that’s what pretty much ensued during his reign.
After Waterloo had come and gone, the French gave it another go in the 1930s, this time with the paper franc. It took only 12 years for them to inflate their currency until it lost 99% of its value.
Weimar Republic in Germany, called: Mark
Post-World War I Weimar Germany was one of the greatest periods of hyperinflation that ever existed. The Treaty of Versailles was essentially a financial punishment placed on Germany to make reparations. The sums of money to be paid by Germany were enormous, and the only way it could make repayment was by running the printing press.
The huge un-payable debt owed by the U.S. is an invitation to repeat the Weimar experience.
Inflation got so bad in this period that German citizens were literally using stacks of marks to heat their furnaces.
A brief timeline of the marks per one U.S. dollar exchange rate:
• April 1919: 12 marks
• November 1921: 263 marks
• January 1923: 17,000 marks
• August 1923: 4.621 million marks
• October 1923: 25.26 billion marks
• December 1923: 4.2 trillion marks.
Fiat Money failures in recent times:
In 1932, Argentina had the eighth largest economy in the world before its currency collapsed. In 1992, Finland, Italy, and Norway had currency shocks that spread through Europe.
In 1994, Mexico went through the infamous “Tequila Hangover,” which sent the peso tumbling and spread economic hardships throughout Latin America.
In 1997, the Thai baht fell through the floor and the effects spread to Malaysia, the Philippines, Indonesia, Hong Kong, and South Korea.
The Russian ruble was not the currency you wanted your investments denominated in 1998, after its devaluation brought on economic recession. In the early 21st century, we have seen the Turkish lira experience strokes of hyperinflation similar to that of the mark of Weimar Germany.
Nowadays in Zimbabwe, which was once considered the breadbasket of Africa and was one of the wealthiest countries on the continent. Mugabe’s attempts at price controls, combined with hyperinflation, have the nation unable to supply the most basic essentials such as bread and clean water.
In the U.S. the first attempt with paper money came in 1690 with the issuance of Colonial notes. The first Colonial notes were issued in Massachusetts and were redeemable for gold, silver, corn, cattle and other commodities.
The other Colonies quickly jumped on the toilet paper money bandwagon and began issuing their own paper currencies. Like a broken record, the money quickly became over-issued. The lessons of John Law and others were definitely not learned. It is not good enough just to say that commodities back a currency. It actually HAS to be backed by commodities. Essentially, it was still a fiat money, and in a short period of time, Colonials became as good as toilet paper.
The next experiment came during the Revolutionary War. When the issuance of paper money was used to finance the war efforts. This time, the currency was called a continental.
The crash of the continental was spectacular, and the phrase “not worth a continental” was coined. This brought on a large distrust for paper currency, and until 1913, toilet paper money in the U.S. wasn’t used. Enter the infamous Federal Reserve and its monopoly on money and interest rates. Today the U.S. has the greenback.
Although this ‘money’ was “officially” backed by a gold standard until 1971, it wasn’t a true gold standard. When the government found it inconvenient to have a gold standard, it just made it illegal for U.S. citizens to hold gold or exchange dollars for gold.
Strike-the-root.com says: “Under the infallible leadership of President Franklin Roosevelt, it was made illegal to own gold. On March 11, 1933, he issued an order forbidding banks to make gold payments. On April 5, Roosevelt ordered all citizens to surrender their gold — no person could hold more than $100 in gold coins, except for collector’s coins. He also made it unlawful to export gold for payment abroad, unless done through the Treasury. The penalty for defying Roosevelt was 10 years in prison and a $250,000 fine.”
But the official demise of the dollar was locked into place in 1971 when “Tricky Dicky” Nixon completely severed all ties between the dollar and the gold standard. During the decade that followed, the U.S. experienced some of the worst inflation in its history, only matched by today’s U.S. monetary and fiscal irresponsibility.
Nowadays the U.S.A. has all the characteristics set in place that have led to the collapse of every other fiat currency money in history.
The financing of the war in Iraq is extremely inflationary. In fact, since 1914, the U.S has engaged in 16 military conflicts. The overwhelming majority of military conflicts resulted in monetary inflation.
Today’s U.S. debt is similar to that of Weimar Germany. All though the reasons for the debt are different, currently it is increasing the supply of dollars at a rate of over 13% per annum. This over issuance of a currency in the past has been the leading indicator of a currency on the brink.
So what’s in the future for the dollar?
Some might say that the dollar has already failed. It has lost over 97% of its value since its initial issuance in 1913. After the revaluation in 1934, the dollar dropped another 41%. It already could be qualified ‘toilet paper money’, while the dollar inevitable is on the path toward becoming toilet paper money.
At risk is the confidence in the US financial system. If creditors sense that a flood of new money supply puts their reserve holdings at risk, placing a threat to their wealth, a mass exodus might occur out of the US$-denominated securities. After all, a fiat currency has as its basis foreign confidence in its value from prudent management.
Reference: History of money
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