FIAT MONEY: a primer

I admire good writing – writing that is clear, unambiguous and free of clutter.

The Gettysburg Address is a great example, especially the first sentence where Abraham Lincoln states:

Four score and seven years ago our fathers brought forth on this continent a new nation, conceived in liberty and dedicated to the proposition that all men are created equal.”

What a great sentence. Perfectly crafted. Simple, direct and powerful.

Some seventy-five years earlier in our history, the Founding Fathers worked hard on another piece of writing. They ended up carefully crafting the language and meaning of our Constitution. Precision was essential. The document had to say exactly what it meant and mean exactly what it said, and nothing else.

After all, at that time they were writing about some of the most important issues facing a forming country and were aware of the pitfalls that had ruined other countries. They also knew that economics was one of the most important areas for survival and growth of a country and they were very specific about this subject.

In fact, the one thing on which there was no argument was the limitation on the issuance of money, as historically, the unrestrained control of the money supply had inevitably lead to disaster for countries before them. Even Thomas Jefferson warned of the inherent dangers associated with the money supply and the banking sector when he wrote,

“I sincerely believe . . . that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large-scale.” –Thomas Jefferson, 1816

He knew that with a fiat monetary system, there is no restraint on the amount of money that can be created. It’s like playing a game of Monopoly where you can make more money at will. Soon the money has no meaning or value and the game is over.

Now, when money is decreed to exist by fiat, this means it has value because the government says it does – “force” being any government’s ultimate power – and this money can be anything at all, from seashells to coconuts. Further, it doesn’t have to possess any intrinsic value whatsoever. It’s only the arbitrary command from the biggest bully on the block (the government), and that’s what makes it “money.”

It becomes considered valuable by the people only when they have the confidence that others will accept it too. Everyone must agree that it is exchangeable for it to work as money.

When people stop agreeing that it’s valuable – for instance when it’s printed up and spread around like confetti and no one wants to accept it – the confidence is gone and that money becomes irreversibly worthless. History is rampant with examples of money ending up being worth more as wallpaper or firewood than it was as a currency.

Our Founding Fathers knew – as we all should – that the lure of easy money would be irresistible. And that putting the power to create money at will in the hands of ordinary human beings would be a deadly mistake. So, instead of putting the control of the money supply of a country in the hands of bankers, politicians, and other thieves, the writers of the Constitution attempted to avoid this situation by making their intents clear on the subject.

On these two points, they were very clear:

1. It is impossible to increase the money supply – and the inevitable resulting inflation – by printing gold and silver.

2. People and human nature can’t be trusted with the power to print money at will.

Without a secure method of maintaining control over the money supply of a country, certain events inevitably occur – none of them good – and safeguards against this eventuality were addressed in the Constitution.

But lawyers, feeling the need to fiddle with things to justify their billable hours, are able to find ambiguity where none exists and this area of monetary controls has become variously interpreted so that over time, the meaning has become clouded.

The result is that we now are left holding the bag with a full-blown fiat monetary system at work in America today (not to mention in the rest of the world).

Now, it’s common wisdom that economists rarely agree on anything – but they all agree on one this: high rates of inflation are caused by high rates of growth of the money supply.

And when you inflate something, you cause it to expand or increase abnormally or imprudently. Common sense tells us that nothing can inflate infinitely; it eventually gives out and the thing being inflated blows up.

When fiat money is printed recklessly in abundance, the inevitable result is that the money supply of a country is “inflated” and we have a condition termed, “inflation.”

But nothing can go up (inflate) forever. So, incautiously inflating the money supply will eventually lead to disastrous consequences because it is a fiat currency, and all of the other thousands of fiat currencies tried by different countries over the millennia have ALL gone to zero! All!

Simply put, this is where we are right now in America.

The outcome of running the money printing presses 24/7 for decades is that the money supply is growing exponentially faster than we can count it. It is inflating to a point where it can no longer be controlled. When this happens, another condition rears its ugly head. This is called hyperinflation.

Now, we know what it means to inflate something and the prefix “hyper” means excessive or beyond the norm.

Therefore, hyperinflation means that the money supply is expanding excessively to such an extent that it’s out of control, exactly what the early framers were trying to avoid.

So, lets take a closer look at this:

Question: How can you personally tell when you are experiencing inflation?

Answer: Prices of goods and services that you buy keep going up but your income isn’t keeping up with the increases.

Question: How can you tell when hyperinflation begins to show up?

Answer: Prices go up so fast that you take off work during the day to buy a loaf of bread or a gallon of gas because you’re not able to afford it by the end of the day due to price increases.

We’re not there yet. But, we’re heading in that direction at an accelerating rate. And when hyperinflation hits, it hits hard and affects everyone!

Economically, hyperinflation is simply inflation that is out of control. Prices are increasing so rapidly that they can’t be stopped. Prices that double or triple by the week are not uncommon.

Prices are soaring out of control while at the same time your money is becoming worth-less.

Just think of it like this: when prices go up and value of money goes down without any control it’s like a bus speeding along without a driver . . . it’s dangerous!

The currency (fiat money) loses all value because it’s “backed up by confidence.” And when there is no confidence that it can be exchanged for goods and services, it becomes worthless. A sad state of affairs indeed. We’re rapidly approaching that condition right now.

Our Founding Fathers knew intuitively and experientially that man is not to be trusted with unlimited power. Lord Acton’s famous pronouncement rings true in this circumstance:

Power tends to corrupt, and absolute power corrupts absolutely.”

When the actions of a government show disdain and arrogance for the precepts and fundamental basic principles on which the country was founded, the pillars begin to crumble.

When the people of a country choose to remain ignorant in the face of blatant, abusive and greedy self-interest on the part of our “leaders” then perhaps we deserve what we end up with.

The homespun wisdom of Will Rogers might have said it best when he wrote:

“America has the best politicians money can buy.”

In spite of all this . . . I still hold out hope for the best.

daniel w. jacobs
© 2008-2020, all rights reserved

Disclaimer: This article is intended to stimulate critical thought and awareness of the issues involved. The author makes no guarantee of the accuracy of the writings beyond a common sense observation of the obvious.

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