The Coming Fiat Money Cataclysm and the Case for Gold
26 Pages Posted: 6 Apr 2013
Date Written: June 15, 2012
A recurring theme in monetary history is the conflict of trust and authority: the conflict between those who advocate a spontaneous monetary order determined by free exchange under the rule of law and those who wish to meddle with the monetary system for their own ends. This conflict is perhaps most clearly seen in the early 20th century controversy over the “state theory of money” (or “chartalism”), which maintained that money is a creature of the state. The one side was represented by the defenders of the old monetary order — most notably by the Austrian economists Ludwig von Mises and Friedrich Hayek, and by the German sociologist Georg Simmel. The other side was represented by the German legal scholar Georg Friedrich Knapp and by John Maynard Keynes. They argued that on monetary matters the government should be free to do whatever it liked, free from any constraints of law or even conventional morality. States have claimed the right to manipulate money for thousands of years. The results have been disastrous, and this is particularly so with the repeated experiments with inconvertible or fiat paper currencies such those of medieval China, John Law and the assignats in 18th century France, the continentals of the Revolutionary War, the greenbacks of the Civil War, and, most recently, in modern Zimbabwe. All such systems were created by states to finance their expenditures (typically to finance wars) and led to major economic disruption and ultimate failure, and all ended either with the collapse of the currency or a return to commodity money. Again and again, fiat monetary systems have shown themselves to be unmanageable and, hence, unsustainable.
The same is happening with the current global fiat system that has prevailed since the collapse of the Bretton Woods system in the early 1970s. The underlying principle of this system is that central banks and governments could boost spending as they wished and ignore previous constraints against the overissue of currency and deficit finance; implicitly, they could (and did) focus on the short term and felt no compunctions whatever kicking the can down the road for other people to pick up. Since then loose monetary policies have led to the dollar losing over 83 percent of its purchasing power. A combination of artificially low interest rates, loose money, and numerous incentives to take excessive risks — all caused, directly or indirectly, by state meddling — have led to an escalating systemic solvency crisis characterized by damaging asset price bubbles, unrepayable debt levels, an insolvent financial system, hopelessly insolvent governments, and rising inflation. Yet, instead of addressing these problems by the painful liquidations and cutbacks that are needed, current policies are driven by an ever more desperate attempt to postpone the day of reckoning. Consequently, interest rates are pushed ever lower and central banks embark on further monetary expansion and debt monetization. However, such policies serve only to worsen these problems and, unless reversed, will destroy the currency and much of the economy with it. In short, the United States and its main European counterparts are heading for a collapse of their fiat money regimes.
Keywords: financial crisis, upcoming economic crisis, fiat money, monetary policy, currency debasement, money supply, government and money, central banking
JEL Classification: G01, N12, N14, E42, E52
Suggested Citation: Suggested Citation