The Failure Of Fiat Currencies

Authored by Tom Lewis via GoldTelegraph.com,

We work hard for our money, as we think it has long-lasting value. That value can buy us other things that we want. It seems like a good exchange. However, few of us consider how extrinsic the value of money really is. In reality, we are dealing in valueless fiat currencies. 

At one time, our money was backed by the tangible value of gold or other precious metals, legal tender for anything of equal value.

That is not the case any longer. The value of a dollar bill these days is what the government says it is. This arbitrary value is dependent on the whim of the government. And the government can print money like a copy machine run amok. There are no limits to how much money can be put into circulation. That is because this money isn’t backed by any real value, it’s called fiat currency.

The US dollar became fiat currency when it stopped being backed by gold over 46 years ago and it has lost 97 percent of its value since the establishment of the Federal Reserve in 1913.

Apart from cryptocurrencies, all the world’s major countries are using fiat currency.

Since Roman times, fiat money has failed spectacularly throughout history due to the same pattern of rapid devaluation and then total collapse. The Romans used a 100 percent pure silver coin called the denarius at the start of the first century. By mid-century, during Nero’s rule, the denarius only contained 94% silver. By 100 A.D., the silver content had been reduced to 85%. The value of the coin was decreasing steadily. This worked well for Nero and his followers, who no longer had to pay their debt at the full, actual value while additionally increasing their own wealth. During the next century, the coin was made of less than 50% silver. By 244, Emperor Philip the Arab had reduced the amount of silver in the denarius to 0.05%. When the Roman Empire finally fell, the denarius contained only 0.02% of silver.

The devaluation of currency invariably is the precursor to economic ruin.

China was the first country to use paper money in the 7^th century. Until that time, they used copper coins but switched to iron due to a copper shortage. The easy availability of iron caused it to be overissued, until it too, collapsed. During the 11^th century, a Szechuan bank began to issue paper currency in exchange for the iron currency. This worked briefly since the paper could be traded for rare, valuable metals, such as gold and silver, or for valuable silk. Then, China entered into a costly war with Mongolia and was eventually defeated by the Mongol leader, Genghis Khan. In an effort at expansion, Genghis’s grandson, Kublai Khan, started to flood paper money throughout the empire. As China’s trade increased, the influx of fiat paper – currency backed by no value – caused even the wealthiest of families to be ruined.

France may be the only country that has been defeated by fiat money three times. The Sun King, Louis XIV, left his successor heavily in debt. Poor Louis XV took the advice of the Scottish economist John Law and simply flooded the country with paper currency instead of the previously acceptable coins. The paper money devalued the actually valuable coins, causing the heir to the Sun King to bankrupt his own country. Yet France didn’t learn its lesson well the first time. More than 100 years later, France gave paper money another try, creating an inflationary spiral of 13,000 percent. Napoleon, and the introduction of a gold-backed Franc came to the rescue. Was France now convinced of the negative effects of fiat currency? Not quite. In the 1930’s, paper currency was again issued, causing inflation to devalue the paper Franc by 99% in 12 years.

Another country faced with huge, unmanageable, and unpayable debt was post-WWI Germany. Germany did not learn from history. Instead, it created a state of unheard of hyperinflation. One hundred and thirty printing companies churned out paper money as fast as they could, devaluing the German Mark so much that its only real value was to be used as kindling.

America has a long history with fiat currency, starting with the Massachusetts Colonial notes of the 1600s. Other colonies quickly followed suit. The notes were to be redeemable for tangible goods, but they weren’t backed by any tangible commodity. Repeating a long, historical sequence of events, too many printed notes soon made the currency worthless. America’s next venture into unbacked paper currency was to finance the Revolutionary War. It, too, crashed.

It seemed American might finally have learned a lesson. Up until 1913, American currency was rigorously backed with actual gold. The establishment of the Federal Reserve Bank that year reduced the amount of gold officially backing the dollar. Owning gold became illegal. In 1971, any gold standard was eliminated as the US dollar officially became another piece of paper. Its value has decreased by 92% since 1913.

With history being the best indicator of the future, America is primed for another currency collapse.

We are facing a debt as out-of-control as Weimar Germany while the government keeps the printing presses busy. At this time, China and Russia are supporting their respective currencies with gold. In addition, both countries are using a new money transfer system, CIPS (China International Payment System), to replace the western SWIFT (Society for Worldwide Interbank Financial Telecommunication) system.

Western countries, all of whom use SWIFT for money transfers, have had a monopoly on the manipulation of international money transfers. With Washington and SWIFT’s help, hedge fund billionaire Paul Singer was able force a debt-ridden Argentina to pay 20 cents on the dollar for his bonds, valued at $3 billion, making it virtually impossible for Argentina to pay its other debtors.

The current Argentine President Macri reopened negotiations for the long-time debts, settling at 30 cents on the dollar. The manipulation of fiat money can quickly result in the manipulation of fiat debt, benefitting a select few and ruining the rest.

In the meantime, China and Russia’s use of gold-backed currency and the use of their own money-transfer system have improved both economies. The possibility of CIPS being used worldwide and serving as an alternate monetary transfer method offers hope that the Western fiat money scheme may soon be halted. Western fiat money manipulation has turned into an unsustainable Ponzi scheme that is holding on by a thread. Approximately 97% of the Western money is printed randomly as needed, in effect creating play money.

If the system falls, it will be the fall of a monster. When banks try to call in their huge fiat debts, it could cause an avalanche of repercussions. The elite will be safe, but the vast majority will be left in dire straits.

Perhaps digital payments will take the place of paper currency. The global monetary future is still developing, but drastic changes are inevitable.