Fiat Money Systems March 6, 2004
reason that the masses ignore the inevitable failure of fiat money systems,
such as that which is employed by the US and virtually the rest of the
world today, is because just prior to their demise, they have more recently
been remembered for generating a widespread period of prosperity that
has enriched its supporters, if not the masses as well.
Examples of Prior Attempts at Fiat Money Systems
20 BC - Roman Empire - After a highly successful period of empire building, Augustus, ordered mines in Spain and France to be mined 24 hours a day to support his tremendous infrastructure costs. Money was increased faster than production, however, creating inflation. He cut back on coinage, but later his stepson put coinage into government coffers which was eventually abused by emperors that followed him including: Caligula, Claudius, and Nero. Their lavish spending on consumption, (sound familiar?) wiped out most of Rome’s riches when Nero got the idea to debase the currency in 64 AD by putting less silver into coins. This allowed the emperor to continue his lavish spending, building increasingly large trade deficits with Rome’s colonies, and causing the wealthy to either hide their wealth or flee from the confiscating government. This did not have a happy ending as we now know.
AD – China experiments with paper money - It takes several
hundred years but the system is abandoned due to unacceptable levels
of inflation as money printing exceeded production.
- The French Government again tries its hand with a paper currency.
The Government confiscated land from aristocrats and issued “assignats”
which paid interest against the properties. Land was auctioned off in
exchange for these notes, inflation rose to 13,000% by 1795. Napoleon
ended the revolution and replaced the “assignats” with the
gold franc, which set off over a century of prosperity for France. In
the 1930’s Socialists came to power and brought the Bank of France
fully into the Government. They quickly removed gold backing of the
currency and made the franc a managed fiat currency. In only 12 years
the currency lost 99% of its value.
1862 - Abraham Lincoln passed the Legal Tender Act allowing the Government to issue paper money, backed by nothing but government promises. A huge inflation transpired that caused the practice to fall out of favor until the Federal Reserve System was put in place in 1913.
1923 - Weimar Republic - After World War I, Germany, crippled from its loss in the war, was held accountable for its war reparations. The country was destitute so found no other choice but to simply print the money in massive quantities to pay the reparations. The result was the plundering of the entire middle class, wiping out all value of savings, and paving the way for Hitler in front of an angry public.
The US dollar went off the gold standard in stages:
1934 - President Roosevelt revalued gold from its official price of $20.67 to $35 an ounce in an attempt to print more money, with the hope that this would lift us out of the depression.
1944 - The Bretton Woods Agreement was made to treat the dollar as a substitute for gold, since a dollar was defined as 1/35th of an ounce of gold, which was pegged at $35 per ounce. The door was opened worldwide to print money; foreign nations could print if they had gold or US dollars.
1971 - President Nixon closed the gold window, ending convertibility of dollars to gold. This came about because the US was printing too many dollars and living beyond its means. Foreign nations led by France, recognized this and began demanding payment in gold, breaking the system as the US experienced a major gold drain.
Look how long a fiat currency can thrive. Between 1948-1969 world money reserves increased only 55%, since that time they have shot up more than 2000%. See any connection? Also note that after Nixon’s move, gold went up over 25 times in less than ten years. Was it discounting the unprecedented money printing that was about to unfold? A brief perusal of history will show that when a nation went on a gold standard it was the beginning of a very long period of that nation thriving. When a country went to a fiat currency there was a period, as long or longer than 30 years, in which it thrived even more. However, during that period of prosperity on a fiat currency, excesses began to build. Once they have built up to extreme levels, it is a very dangerous time. When levels of debt become too excessive, an increasing amount of the rewards of production; profits, must go to servicing debt. When the servicing of debt consumes all of the profits of production, it finally consumes production itself. This is the real culprit for the loss of jobs domestically. As more of the economy shifts from real production of goods, to the pushing of various forms of paper, citizens lose jobs and live in more dangerous times. We have reached that time.
held its value over very long periods of time, unlike any former or
present fiat currency. Gold and gold stocks can be more volatile than
any asset class; particularly at a time when fiat currencies are on
their last legs. Gold is the enemy of fiat currencies because it eventually
reveals the truth, the fraud behind the fiat currency. As it emerges
in a primary bull market, gold will have to weather the attack of the
proponents of the fiat currency, as they cling to its withering life.
If you look at history, you will understand which will win, and you
should move to protect yourself as the mountains of credit and paper
money, gravitate to their true value.