The Failure of Fiat Currencies

By: Ian Gordon, Long Wave Group / GoldSeek.com

Introduction

Fiat currencies are paper monies issued andcirculated by government legislation and decreed as a country’s legal tender tofunction as a medium of exchange for all transactions of goods and serviceswithin its economy.  Only the federalgovernment has the power and the authority to issue currency notes fordistribution throughout the nation.  Fiatcurrencies, such as those currently in circulation within the world’s majoreconomies, such as the United States (Dollar), the United Kingdom (Pound),Japan (Yen), China (Yuan/Renminbi) and the European Union (Euro) are ‘promises to pay’, backed solely by ‘the full faith and credit’ of theissuing country, or countries.  They arebased upon an elastic and constantly expanding money supply, as compared to acommodity system where the currency is backed by a definitive supply ofgold.  Over the centuries, all papermoney systems have eventually collapsed amid economic chaos, or, reverted to acommodity based system in order to avert economic disaster.  In this Economic Winter, we will argue thatthe current monetary policies of some of the world’s central banks – led by theU.S. Federal Reserve – are misguided by employing extensive quantitative easing(money printing) programs and facilitating an inexorable rising trend inoutstanding global debt. 

TheNext Global Financial Crisis  

In the most recent issue of Grant’s Interest Rate Observer, publisher James Grant warns: “Tumbling commodity prices over recent weeksare a warning sign to investors that China’s economic miracle is actually agross manipulation of markets that eventually have a nasty ripple effect acrossthe world.  Something has changed andmore significantly, people have noticed the change.  The world’s major central banks have beendistorting the true price of assets, such as stocks and commodities, bysuppressing interest rates and printing trillions of dollars’ worth of currencyin an effort to stimulate demand.  Suchpolicies by the People’s Bank of China will prove particularly harmful giventhat they are layered on top of the central planning policies of the CommunistParty.  Efforts by the U.S. FederalReserve and other central banks to jump-start demand have failed.  Each new dollar or yuan added to the economyis having less and less of a stimulus effect and is instead further inflating assetand consumer credit bubbles.  As China’seconomy continues to slow, commodity prices will decline further and it’spossible that China will even slip into a recession.  Today, financial crises arrive faster andmore furiously.  While it took 25 yearsfor stocks o rebound from the Great Depression in the 1930s, it took only fouryears for stock markets to recover from the financial crisis of 2009.  The accelerated cycles are the result ofdistorting policies and they leave governments and markets more accidentprone.  Investors should respond bykeeping large amounts of cash, looking for buying opportunities in depressedsectors … Keep in mind that the price of gold is the reciprocal of the world’sfaith in management of the world’s central banks.  Accordingly, investors should own some gold.”      

JohnLaw: The Father of Paper Money

As a young Scottish financier, John Law wasbrilliant, daring and unusually ambitious. For killing a man in a duel over a woman he was forced to flee toAmsterdam in 1695, where he became a close student of Dutch trade and bankingpractices; then the most advanced in the world. Eventually, he sought out opportunity in Paris, where he soon becameknown to many of the foremost figures of French finance.  Capitalizing on the weak and vulnerableFrench economy, he was able to persuade Philippe II, duc d’Orleans, Regent forthe child King Louis XV, to support his extraordinary scheme for issuingunsecured paper money.  Under his fiatcurrency system, anyone could get rich quickly, including Law and the Regent,who did.  Law founded his own royal bankand soon controlled all of France’s improving finances.  To bolster the resulting orgy of uncurbedspeculation, Law advertised the fabled riches to be found in the Frenchcolonies of the Mississippi Valley, particularly Louisiana, described as a landfilled with mountains of gold and silver, plus precious gems to be plucked fromthe river’s shoreline.  In 1720, the ‘Mississippi Bubble’ burst, ruiningthousands of investors.  Law’s wholemonetary system quickly collapsed, so he fled to Venice. 

TheFrench Assignat

While France had been deceived by John Law and hiscurrency magic, it didn’t learn from the lesson.  In his book, The Demise of the Dollar, authorAddison Wiggin recounts: By 1791, France was ready to try paper currencyagain.  The government, in ananti-aristocracy mode, confiscated property and other assets from the wealthyin exchange for assignats, noteswhich paid interest and operated like land mortgage notes.  Far from solving the problem of economicdisparity among the classes, the extreme measures only made matters worse.  Within four years, inflation had risen by13,000 per cent.  Few instruments havedeclined to zero value as quickly as the assignats. 

In a foreword to a book about the historicalimplications of French monetary policy, John Mackay described France’s attemptsat a fiat money system as: “the mostgigantic attempt ever made in the history of the world by a government tocreate an inconvertible currency and to maintain its circulation at variouslevels of value.  It also records what isperhaps the greatest of all government efforts … to enact and enforce a legallimit of commodity prices.  Every fetterthat could hinder the will, or thwart the wisdom of democracy had beenshattered …But the attempts failed.  Theyleft behind them a legacy of moral and material desolation and woe.” 

continue article at GoldSeek.com:

http://news.goldseek.com/GoldSeek/1369117863.php