Fiat money, by definition, is a currency that is intrinsically worthless and set into precedent by government regulation. The U.S. Dollar is quintessential of this, being used as the official currency of the U.S. for the past 40 years. To truly understand why fiat money is ludicrous, it is important to understand the idea behind money, and it’s beginnings.
There is evidence that even before humans settled, we traded among each other. When someone has something that you need, it is common that you would offer property of your own in exchange for theirs. What happens, however, when you need something of theirs, but don’t have anything that is of their interest? This is where a medium of exchange is needed. A medium of exchange allows the value of goods to be assessed and rendered in terms of the medium, which is most often a form of money widely accepted to buy any other good.
This widely accepted form of money has fluctuated throughout history, changing from cattle, to gold, silver, copper, leather, etc. Something that all of these mediums have in common is that they have worth besides their use as currency.
The Federal Reserve explains the problem with fiat money perfectly in their book called Modern Money Mechanics, saying:
“In the United States, neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper, deposits merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face value. What, then, makes these instruments – checks, paper money, and coins – acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and for real goods and services whenever they choose to do so.”
For a good portion of U.S. history, our currency has either been gold or backed by gold. The transition from this, to our current monetary system, has been one of the worst decisions the U.S. has made. History has proven time and time again that fiat currencies don’t work. Fiat currencies have a 100% failure rate, and almost never last.
The fundamental problem with fiat currencies, aside from their lack of value, is how easy it is to create. Since fiat currencies are paper, more of it can easily be printed, causing inflation. In fact, one of the only reasons to have a fiat currency is to create more of it.
One of the central purposes of the federal reserve is influencing the supply of the U.S. dollar to control interest rates and other aspects of the markets, and print money for the federal government to use. The problem with this, however, is the effect it has on the dollar itself. Since the U.S. dollar’s value is based on scarcity, creating more of it will increase the supply and dilute its value.
When this happens, a few problems occur. For starters, it steals value from the people that saved it. Let’s take, for example, someone who deposited $1,000 into their bank accounts in 1987. Today, that $1,000, would have the same purchasing power as $433.36 in 1987. From 1987 to today–today being 2018–the government essentially taxed $556.64 from the person depositing it.
The problem of inflation doesn’t stop here. When you have too much inflation, you run into the problem of hyperinflation. Hyperinflation occurs when a country rapidly accelerates inflation rates, making a currency basically worthless. The more the value deteriorates, the more the government needs to print to buy the same amount, which in turn causes even higher inflation rates. Inflation is officially considered hyperinflation when the prices of goods rise over 50% percent a month.
One may ask themselves if hyperinflation is caused by the government printing too much money, why don’t they just stop printing money when inflation rates get too high? When people see the value of their money decreasing, they’ll look to spend it as fast as possible, before they lose too much of their purchasing power. When this happens, the velocity of money–how fast money circulates– increases, causing more inflation. At the same time, when people spend their money as quickly as possible rather than saving, there is no money available to fund new business. All of this uncertainty limits foreign investment and trade, lowering production, and in turn driving the prices of goods up even higher.
Popular examples of countries that have run into hyperinflation are Zimbabwe and Germany during the days of the Weimar Republic.
In Zimbabwe, the economy was failing and the government needed money to pay for their war in the Congo. The government had already taxed everything that they could and had no choice but to use their printing press. At first, the government was inflating the currency at a rate of 50% a year, however, when prices kept rising, the government needed to print more money to get the same amount.
Eventually, by 2006 inflation rates had risen to 1000% a year, causing people to spend their money faster, increasing the velocity of money and limiting foreign investment and trade (which was already low to begin with, due to trade sanctions). Inflation became so bad that the price of goods was doubling every day.
At one point the inflation rates had reached 76 billion percent a month, and the currency was devalued so greatly, that the government had to introduce the 100 trillion dollar note. Loaves of bread started to cost what 12 cars did a decade earlier. In 2009, 100 trillion Zimbabwean dollars had been worth $2.80 USD, and inflation had risen eighty-nine sextillion percent. Because of this, Zimbabwe was forced to abandon its currency and use other currencies instead.
Another popular example of the effects of hyperinflation is of the Mark in the Weimar Republic. The German government didn’t have enough money to pay the allies back after World War 1 and decided to print the money they needed instead. Inflation had hit such high rates, that the price of goods was doubling every four days, and people needed to use wheelbarrows to carry enough cash just to buy a cup of coffee. The money was so worthless, it was cheaper to burn the money instead of buying wood for fires. Workers had to renegotiate their wages often and had to be paid twice a day so they could spend it before it lost its value.
There have been many other cases of hyperinflation, but, these were just two primitive examples. In an attempt to avoid inflation, after World War 2, the U.S and other countries met in Bretton Woods, New Hampshire, and came up with the Bretton Woods Agreement.
The Bretton Woods Agreement stated that all currencies around the world would be based around the U.S. dollar, and the U.S. dollar would be based on gold. Because of deficits, the U.S. government had printed twelve times more dollars than there was gold, and the dollar was no longer based on it.
In reaction to what the U.S. had done, many countries–France being the first to do so– started to cash in their dollars for gold. Other countries followed in suit, and the U.S. government realized that they wouldn’t have enough gold to give out. In order to prevent a global financial collapse, Richard Nixon ended the agreement on August 15th, 1971.
Government always finds a way to masquerade what they do as good, no matter how wrong or immoral their actions may be. When the government wanted to move to a fiat currency and institute a central bank, they claimed it was to create a more stable monetary and financial system. This couldn’t be further from the truth, with the fed causing some of the largest economic collapses in recent history.
A prime example of failure and recession at the hands of the fed is when the subprime mortgage bubble popped in late 2007 and 2008. It is highly misconceptualized that it was deregulation that led to this recession, when in fact, that could not be any further from the truth. In the wake of the dot-com (bubble) bust, the head of the Federal Reserve—at the time—Alan Greenspan decided to lower interest rates to 1%. This, coupled with the failure that is Fannie Mae and Freddie Mac was ultimately what led to the 2008 recession, not deregulation, and not lack of government intervention. Even after all of the failure being caused by the fed, people like the Occupy Wall Street protestors were calling for more intervention and more regulation, once again showing how government masquerades itself as the cure to its own disease.
This is very similar to the situation we are facing as of right now. When the real estate bubble collapsed in 2008, the Fed’s response was to set interest rates to zero for multiple years. This put the housing and stock market back in a bubble, the same one that we are currently facing. The housing market hit pre-recession rates in August of 2018, housing inventories are going up, and homebuilder stocks are collapsing. It is only a matter of time before the housing market collapses, and the stock market along with it, this time being far worse than the Great Recession of 2008.
This repetitive cycle of creating bubbles to fix economic recessions can only last so long, and will eventually end in the crash of the dollar. While uncertain as to when the dollar will crash, it is highly likely that it will be due to the inflation that will ensue the upcoming recession.
The free market works, but the fed feeds off of the belief that it doesn’t. These failures: the subprime mortgage bubble, Zimbabwe and Weimar Republic hyperinflation crisis, the failure of the Bretton Woods agreement, and the impending doom of the collapse of the bubbles that our economy is currently rapped in, were all caused by fiat currency and failed government intervention. Problems like these are inevitable when you use fiat money and allow the government to intervene on behalf of the market.
All fiat money systems are illogical, for the simple fact that it is merely trading pieces of paper for things that are not of equivalent value, and gives the government power over it. Government is terrible at everything they do, and giving them a monopoly on creating money is a death trap. The truth is, the government does not, and will never know what is best for the market, or what currency is best. The best market is that which regulates itself.
As Ron Paul explains, “It is no coincidence that the century of total war coincided with the century of Central Banking”. Allowing the federal government to be in control of the monetary system, control inflation, and print an endless supply of money for the government to use as they will, would be the equivalent of giving a gambling addict an unlimited line of credit. Without a central bank, the federal government is limited in spending and power.
Under our current system, the supply of money is set by the standards of the Federal Open Market Committee (FOMC). Because of this, there is no self-correcting market tendency to prevent the creation of too much money. The system causes instability, the exact opposite of its proclaimed purpose.
After abolishing the federal reserve, the next reform would be changing the definition of money. There hasn’t been a definition of “dollar” since 1968 when the redemption of silver certificates ended, and silver coins were removed from circulation. In 1971, as explained earlier, the international definition of “dollar” as 1/42 of an ounce of gold was dropped by Richard Nixon. Whether the dollar is defined as gold or silver isn’t of importance. If the definition of “dollar” changes from day to day, long-term contracts denominated in “dollars” become traps, and people will look to avoid it. If the unit of account is not defined, no rational economic activity can be conducted.
Setting the dollar to a gold standard would control its inflation, create a more stable monetary system, and allow citizens the opportunity to cash in their dollars for gold. Private mint companies and banks would be the main denominators of this gold.
The purchasing power of gold and silver have always been fairly stable, proving themselves to be some of the best forms of sound money. A gold standard guarantees the value of money. The inflation of gold has averaged about zero to one percent inflation rates per year over the long term, unlike the U.S. dollar which has seen its fair share of double-digit inflation.
Many people claim that there can random changes to the supply or demand curves of metal, making the purchasing power of forms of money like gold unstable. Historically, however, this has never been a problem. In 1849, there was a major shock to the supply of gold due to the California gold rush. As gold dispersed across the world, even an event like this only resulted in approximately 1.5 percent annual inflation rates. This, only lasting for eight years, soon leveling off due to the production of goods growing faster than the stock of gold.
Many people scoff at the idea of carrying around bullions of gold everywhere they go, instead of carrying easy money such as the U.S. dollar. For those that deem paper money more convenient, checks and receipts for gold would still be in use. From 1863 to 1933, gold and silver certificates were used as a form of currency. People were allowed to go into banks and redeem these certificates for whatever amount was specified.
For those that chose to use certificates, although still being fiat money, are backed by gold and redeemable for commodities that hold real value.
A gold standard wouldn’t mean that only gold is allowed to be used as a currency. A medium of exchange is a commonly shared asset used as an intermediary. If the market deems silver, for example, to be the best currency, people would be allowed to switch to silver. Getting rid of legal tender laws is a fundamental step in allowing this change to occur.
Legal tender laws make it illegal to pay taxes or any form of debt, public charge or due using anything other than the Federal Reserve Note. Once the dollar is returned to a gold standard, abolishing legal tender laws will encourage the competition between currencies. Legal tender laws didn’t exist until 1862 when the Congress (in violation of the constitution) enacted them in order to ensure the acceptance of Lincoln Greenbacks, the paper note printed by the U.S. Treasury during the wartime emergency. This has lasted since then.
Bitcoin is a perfect example of how competing currencies would work. If a new medium of exchange is created or discovered and is more stable, the abolition of legal tender laws would allow these currencies to potentially replace gold, depending on its support by the people who are using it.
Where government is, prosperity and freedom aren’t. The process of money, which largely controls our life, is best if the government is left out. Allowing an institution to have power over an entire monetary and economic system is antithetical to the idea of freedom. Bringing government in, as presented earlier almost always fails, with fiat currencies having a failure rate of 100%. Adding real value to money controls inflation, creates a sound money system and stops the government—or any institution for that matter— from incessantly growing beyond its means.