Monday, February 09, 2009

Carlos Lara on the Economic Crisis, Part 3 of 9: Fiat Money

(Read Part 1 and Part 2 of Carlos Lara on the Economic Crisis.)

We learned in part 1 that Keynesianism, statist encroachment, and fractional reserve/central banking are grave dangers yet underlying pillars of the world's economic, social, and political systems. As we saw in part 2, the solution, according to Mr. Lara, is personal economic education. We learned about scarcity, the importance of private property, and the fallenness of human nature.

Next, Mr. Lara provided some important insights regarding our economy's fiat monetary system:
  • Fiat means "a declaration by a supreme commander," as in, "Let there be light"
  • Paper bills are legal tender and the only money in our economy, according to the fiat dictate of the state
  • Our nation had fiat money twice before the present system: 1) during the War for Independence we had the Continental (from which derives the phrase, "not worth a Continental," as this form of money was rapidly inflated and depreciated out of existence), and 2) during Lincoln's reign, we had the Greenback; in both these instances, gold circulated alongside fiat paper money, and gold tended to be driven out of circulation due to Gresham's law (bad money drives good money out of circulation when the state artificially imposes a price control to coercively equate the values of specie and paper money)
Mr. Lara went on to talk about FDR's confiscation of gold during the Great Depression because people tended to hoard the good money (gold specie) and spend the bad money (paper). Now, we have come to the point when our so-called "money" says "Federal Reserve Note," as the Fed controls the money supply. Mr. Lara pointed out that there is nothing federal about it, and it has no reserves. Yet, we now have "legal tender" laws, as indicated on the notes, which force us to take the notes as money.

The old Silver Certificates, one of which Mr. Lara displayed, did not say "Federal Reserve Note." They were simply payable in silver to the bearer on demand. After World War II, the U.S. created a worldwide banking and currency system, backing the dollar with gold and convincing foreign banks to simply back their currencies with dollars that were redeemable in gold. This system was established in 1945 by the Bretton Woods Agreement.

In 1970, the dollar lost its value and foreign countries got worried as the U.S. was inflating the currency to meet statist welfare and warfare obligations. Foreign countries, especially France, redeemed their dollars for gold, and gold flowed steadily out of the U.S. as we lost our reserves. Nixon closed the "gold window," where foreign banks could redeem U.S. notes for gold specie, in 1971 and said "we are all Keynesians now," which meant we would accept floating paper against paper -- with no gold backing -- in currency markets. Mr. Lara went on to explain exactly what inflation is, which we will discuss in the next installment.

One of the best resources I have found that traces the history and problems with statist interference in money is Rothbard's What Has Government Done to Our Money?, which I referenced in one of my blog posts from last year. I also wrote a post tracing the theological implications of the state's fiat money assertions, and here is an excerpt:
Sound Christian theology asserts that God alone is sovereign. He transcends the limits of time, space, and matter. God is not constrained by the boundaries and laws He has imposed upon creation, such as the inability of creatures to make something out of nothing. Ex nihilo, nihil fit -- out of nothing, nothing comes -- a law that governs mankind, does not apply to God and God alone.

Not content with this arrangement, the state asserts fiat -- the power to create ex nihilo, out of nothing. When applied to monetary schemes, money created out of nothing is eventually worth nothing, as Lew Rockwell points out.
For a helpful analogy drawn from a fabric store and applied to statist inflation, which debases the fiat money currency, read my post from three years ago. And read this post, which discusses constitutional money vs. the foundation of the modern welfare/warfare state, fiat money. Almost four years ago, I wondered how long this country could sustain its real estate boom, trade deficits, and fiat money inflation.

It seems that the day of reckoning is now here. Fiat money has wrought havoc, and now we are reaping an economic whirlwind. Stay tuned for the next installment, in which we will delve more deeply into the nature of inflation. And in future installments, we will discuss solutions.

(Read Part 1 of Carlos Lara on the Economic Crisis: Three Pillars of Modern Social, Economic, and Political Systems.)

(Read Part 2 of Carlos Lara on the Economic Crisis: The Importance of Economic Education.)

posted by C.S. Hayden @ 6:00 AM

1 Comments:

At 2/13/2009 2:23 AM , Anonymous toronto realtor said...

"In 1970, the dollar lost its value and foreign countries got worried as the U.S. was inflating the currency to meet statist welfare and warfare obligations." You can't really blame the US (not that you do - just a figure of speach), but they were in great disadvantage compared to all others. Any other state could devaluate their currency if they needed to help their own exporters. The USA couldn't do it since the WWII and finally in 1971 they had to. Paper bills not backed up with anything surely isn't the best system, but what else was there to do back in 1971?
Julie

 

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