Paper Money started on the Gold Standard
Government Paper Money — widely used today — is a “promissory note”, made by a central bank.
Originally, paper money could be redeemed for actual money (usually Gold) on demand when presented to the cashier of the originating bank.
However, as with all centralised systems, it was soon corrupted.
Soon, Governments and Central Banks started printing notes for Gold that they didn’t actually have.
It was at this point that the money became Unsound (or “Easy”) money.
In 1944, delegates from 44 Allied countries met in Bretton Wood, New Hampshire, to agree on a new monetary system.
The delegates decided – for reasons that are not entirely clear – that their national paper currencies should no longer be backed by Gold, but instead by the US Dollar, which in turn was backed by Gold.
The arrangement came to be known as the “Bretton Woods Agreement”.
It established that the central banks would maintain fixed exchange rates between their currenciesand the dollar. In turn, the US agreed to redeem U.S. dollars for Gold on demand.
However…
In 1971, the US Government abruptly took the Dollar off the Gold Standard, meaning that holders of US Dollars – including US Citizens – could no longer convert their paper currency to Gold!
On 15th August 1971, President Nixon announced the fraud. It was known as the “Nixon Shock”:
I have directed Secretary Connally to suspend temporarily the convertibility of
the dollar into gold or other reserve assets, except in amounts and conditions
determined to be in the interest of monetary stability and in the best interests of
the United States.
Notice the use of the word of temporarily. Well, it’s almost 50 years later and the US Dollar is still not backed by Gold. Or any other hard money for that matter.
This was the start of the modern Fiat Currency bubble.
What is Fiat Currency?
“Fiat” is a Latin word which means “by decree”.
A fiat currency is simply one that is mandated by a Government as “legal” tender.
The reason that paper currency started out as being backed by Gold (or in some cases Silver until the 20th century) was that it had to be in order for the population to accept it as money.
It appears from studying monetary history that the people of the past were much more educated about the difference between Hard Money and Easy Money than today’s population, who have for the most part known nothing other than unsound paper money.
Because of this, a fiat currency introduced by a Government that was not backed by hard money would be extremely unlikely to have been adopted, because the population would know that it was inherently worthless, and so not wish to store their wealth in it, even temporarily.
For this reason, fiat currencies throughout history were created first by being backed – usually by Gold – and then became un-backed, often at a time of War when Governments wished to create money out of thin air to pay for their war, once the currency was already widely used.
This was often done by “coin clipping” where a Government would progressively “clip” gold coins to reduce the gold content, reducing their value and inflating the supply.
If anyone other than Governments or Central Banks had done this, it would have of course been considered fraud.
It effectively stole the wealth from the population and funnelled it to the Government as described above.
Many major nations of the World (including the UK and other major European countries) went off the Gold standard in 1914 so that Governments could inflate their currencies to finance their war efforts. They have so far not returned.
It is thought that it is essentially “impossible” to return to the Gold standard, because the fiat currencies of the World have been so inflated since going off it that a return would make it obvious to the population that the paper currency is essentially worthless.
So, is Fiat here to stay?
There is an unequivocal answer to that question, which is… No.
ALL Fiat Currencies Fail …Sooner or Later
Throughout history, there have been thousands of fiat currencies and it appears that they have a 100% failure rate — excluding the most modern versions that have not yet, but will, fail.
In simple terms this is because as the currency inflates more and more over time, usually at an ever increasing rate (called Hyperinflation), people who hold the currency realise that their wealth is being stolen, and so stop using it as a means of exchange. As people refuse to accept it, it’s inherent lack of value becomes obvious to everyone, and the currency collapses.
The French philosopher Voltaire said in the 18th century that…
“Paper money eventually returns to its intrinsic value: Zero.”
As I write this, the Venezuelan population is experiencing hyperinflation of its Peso.
People are buying anything that they can get their hands on because they know that tomorrow, it will cost significantly more.
A few other recent examples of fiat currencies which have hyperinflated are:
Zimbabwe – 2004
Hyperinflation of the Zimbabwe Dollar started in the early 2000’s.
In 1980, one Zimbabwe Dollar was worth around US $1.25. By 2009, a hundred trillion dollar
Zimbabwe paper money note was not enough to buy a loaf of bread…
Ironically, some entrepreneurs collected the worthless notes and started selling them on website such as ebay as novelty items to people in other countries.
I was actually given a 1 Billion Dollar note by a friend as a joke a few years ago. He said “Now you’re a Billionaire!”.
With great irony, the Zimbabwe Dollar was given some value by demonstrating to the World how worthless it was.
Ukraine – 1993
Ukraine experienced hyperinflation in the 1990s because of massive printing of money to finance government spending. In response to this hyperinflation the Ukraine central bank replaced the national currency – called Karbovanets – in 1996 with a new fiat currency called the Hryvnia and promised to keep it stable in relation to the US dollar.
Predictably, this didn’t happen.
In 1996 when the new currency was launched, it took around 1.9 Hryvnia to buy 1 US Dollar.
At the time of writing it takes around 24 Hryvnia to buy 1 US Dollar – which remember is itself being inflated.
Germany – 1929
To finance the costs of the First World War, Germany replaced their currency – the Goldmark – by taking it off the Gold standard, naming the new currency the Papiermark.
They figured that they would win the war, and so would be able to annex the resource rich
territories they would supposedly defeat.
This would allow them to levy large reparations on the defeated countries in order to repay the debt they had taken on to finance the war, and presumably return to the Gold standard.
Of course that didn’t happen.
In order to pay “war reparations” levied against them by the Treaty of Versailles, the German Government hyperinflated the German Papiermark so much in 1929 that people began to use the currency as wallpaper and fuel for fires to keep them warm.
This author counts more than 150 fiat currencies that failed due to hyperinflation in the 20th century
alone.
Their average lifespan was 24.6 years.
Even without the debt based system we live with today – briefly explained below – all fiat currencies fail because Governments have been consistently incapable of financial restraint when there is Easy Money available.
Wouldn’t you be?
