Within all the disastrous disadvantages of the fiat monetary system that now infects this country and the world, there is one positive element and that is the assurance of its collapse. This forthcoming collapse will force this country and the world to look, once more, to the single monetary building block of economic production: gold. Just as fiat currencies lead to economic collapse so too do such collapses lead to a return to gold money. The reason for that is that nothing else can form an economic foundation, no other form of money, no alternative fiat currency can reestablished economic viability once that system has imploded and consumed itself.
There are suggestions that the IMF or other agencies are considering yet another reserve fiat currency or even a newly established reserve fiat regime, another fiat regime will do absolutely nothing to reverse the effects of the upcoming collapse. There is simply no way to adequately replace a fiat currency with another similar fiat currency, it does not work. There is a very good reason why governments introduce fiat currencies on the back of sound money and that is because the sound money provides a very firm foundation until the fiat regime can take root and be established economically.
The idea that a sudden introduction of fiat currencies into circulation can be achieved without a sound monetary foundation contradicts monetary mechanics, there must be a foundation of asset value to the currency otherwise the introduction of a new fiat currency will fail for there is nothing that can be used to impart a measurement of valuation to the currency itself.
There is also another major consideration when talking about the introduction of an alternative fiat regime and that is the fact that no fiat regime can prevent massive government deficit spending and the accumulation of debt that accompanies such spending. There are simply no budgetary restraints placed on government under a fiat regime.
There are those who suggest that the current dual-tier fiat system be replaced by a single-tier system; their rationale is that if the fiat currency is not directly associated with debt creation and interest accrual as with the dual-tier system then there would be no accumulation of debt, nor interest, at least that is the simplistic assertion. There would still be a necessity for government borrowing, the only difference under a single-tier fiat system is that there would be a division between the issuance of fiat money and the issuance of government fiat bonds, the two would not have the same close association that it currently does under the dual-tier fiat system, but it would not do anything to prevent the dangerous accumulation of debt. The process of simply printing fiat paper money does not mean that it will be any more effective than the system that we now suffer under; in fact, things could easily get much worse since hyper-inflation is indicative of single-tier fiat monetary systems.
The idea that if the government could only issue our fiat money directly without the monetization of debt then there would be no debt, that is a very dangerous misconception about the mechanics necessary to maintain a single-tier fiat monetary system and an operational government. Under a single-tier fiat system, where the government simply issues currency directly into circulation, there is absolutely no system of economic measurement, no means to determine the level of supply or the level of interest that would be associated with any sub-issue lending.
Essentially, the requirements of supply would be completely arbitrary, it would almost be “throw a dart and pick a number” since the mechanisms of determination of needed supply and even demand would no longer be operational. That is one reason why governments abandoned single-tier fiat monetary systems and replaced them with dual-tier fiat systems, it was that the latter provided a bit more stability and a slight degree of direction and the former bought massive inflationary depreciation combined with massive distortions in the markets.
As earlier stated there is one beneficial characteristic that all fiat regimes have in common, they collapse. Fiat monetary regimes always are consumed by the system itself. Such collapses always give rise to sound money and the manner of its introduction can be very simple and, if necessary rapid. If the government politicians and bureaucrats possess any degree of wisdom they will recognize the collapse for what it is and in response all that is necessary is that the government legalize gold money and get out of the way of the market processes that will naturally follow. There is indeed a high probability that this will happen, but it will not be necessarily through legislative deliberation but desperation, there will simply be no other options left for government to consider the proverbial writing will be on the wall.
As with the rise of fiat monetary systems there will be a similar reversal with the rise of gold money. At first there will be a natural separation of the pricing structure in the economy, this will be disruptive at first however, as the market will express prices in both paper fiat dollars and in a weight of gold. Eventually, the gold money will supplant the fiat paper dollar system as the market determines that asset value is far more efficient in the pricing structure than the depreciating liability value of fiat currency.
There is however, one necessary caveat to the gold monetary system and that is the requirement of a 100% reserve system, without which a fractional reserve gold monetary system would be fraught with similar abuses as the fiat fractional reserve system today. The classical gold system had one problem, otherwise it worked extremely well and that problem was fractional gold reserves. Fractional reserve is a particular problem under a gold monetary system since gold does not behave in the same manner as fiat money, it does indeed lack a certain flexibility, but that is an advantage in that it prevents the abuses of inherent flexible characteristics associated with all fiat regimes.
There are, of course, detractors of the classic gold monetary system, among those detractors are the supporters of the fiat system and also those who, while supporting gold, believe that a gold system must be subject to fractional reserve banking since, according to both groups of detractors there is simply “not enough gold”. What the detractors imagine as a weakness is actually an extremely beneficial strength. The contention is, of course, that a pure gold monetary standard is not possible, nor, according to them was it ever truly possible because of the rigidity of supply verses demand.
Of course, this is the excuse that, in contemporary times, led to the rise of fractional reserve banking in the first place and then to the fiat fractional reserve system later. They claim the need for “elasticity” that can be readily adjusted to meet the needs of a growing economy, yet what they always fail to understand is that even under the fiat monetary system the quality of fiat money is drastically depreciated through such “elasticity” thereby completely diminishing the beneficial effects such “elasticity” is intended to have on the economy.
In other words, inflationary depreciation completely defeats the purpose of “elasticity” of supply. There is no productive economic benefit in the constant expansion of the fiat money supply, in fact the opposite is true, there is a detrimental effect on everything from pricing to wages, from profit to decision-making within an economy subjected to fiat regimes. The degree of distortions created by the system are beyond calculation, even worse is the fact that those distortions interrupt normal economic market processes and therefore, require government intervention and manipulation to maintain the entire system. Without government intervention and manipulation, a fiat monetary system would simply not exist! It is not natural money, and there is no recognition of any asset value other than that which is mandated by government decree.
If we can conceptualize a system under a 100% gold reserve, then we should also be able to conceptualize the restrain that such a system would have on the political economy and the government's concern about that political economy. Government would find not only find a gold monetary system confining, but the idea of a 100% gold reserve banking system horrifies the corrupt inclinations of government politicians why do you think we have a fiat monetary system today instead of a 100% gold reserve system? Government hates gold money, but it hates the idea of a 100% gold reserve system even more. A 100% gold reserve system would not only require a high degree of budgetary restrain on government but it would deprive government from the ability to artificially manipulate the credit markets to its socio-political advantage.
The fractional reserve banking system, which is more advantageous to fiat money than it is to gold money, allows the drastic increase of credit creation without the limitations inherent in a gold system, especially a 100% gold reserve system. Additionally, the fractional reserve system allows for the manipulation of interest rates, which, in turn, allows for the manipulation of economic and wealth distribution. This fact is especially true under the fiat regime, but would be almost just as effective if there was a gold monetary system subject to fractional reserve banking. The lower the reserve requirements the greater latitude in credit creation.
Therefore, the greater latitude in the amount of credit creation the greater latitude in the manipulation of interest rates under a fiat monetary system. Thus the government has the instrumentality to manipulate economic “feel-good” booms. There is, within such a system, a very definite illusion created from the idea that an increase in the nominal supply of money always provides the economy with productive gain. What most people are unaware of however, is the fact that as there is an increase in the nominal supply of money there is also a decrease in the nominal effectiveness of the money. The decrease in nominal effectiveness always cancels out the gain associated with the increase in the nominal supply of money.
Unlike government mandated fiat paper currency, gold money is sound for a number of reasons; it cannot be over-issued at will or political whim, because it actually increases and contracts, not by government monetary management, but with the volume of economic activity. In terms of credit/debt, gold money is self-liquidating since it is a double asset on the credit side and the debt side. The supply will always meet the demand within a free market. There is no way that a supporter of government mandated fiat paper money can be a supporter of the free market or the economic freedom for the people associated with such a market. Fiat paper money is controlled and managed; there can be no free market in such a monetary regime because of the manipulative characteristic of the fiat regime.
The disadvantages of a government mandated fiat paper regime far out-weight any possible advantages it may possess, which I can think of none. The combination of a fiat regime with the requirement of a fractional reserve banking system makes the system ripe for massive credit expansion, debt accumulation and ultimately the inevitable collapse of the system. Fiat credit based on a fiat monetary system simply cannot raise all prices simultaneously or uniformly; since the tendency of all fiat regimes is to constantly require the lowering of interest rates to achieve capital growth, the problem becomes a temptation to borrow “easy money”, thus leading to mounting distortions in the economy and massive mal-investments. It appears that one common trait within all fiat monetary systems is that when the mal-investments are finally recognized there is a collapse of the artificial bubble created by the fiat “easy money” credit influx into the market.
The idea that the government can or should be in the money business is not only absurd, but also very dangerous; the consequences of such a government-mandated system always end badly. This government abandoned gold very casually, not actually knowing the consequences of such abandonment. People have seen dramatic results from such abandonment, none of which can be considered in the long-term as beneficial. While it is doubtful that this government would consider returning to a convertible currency regime, it may well find itself with no other option but returning to a redeemable currency system.
While I believe the role of government is very limited when it comes to money, any money, I also believe that the best option at this point is to allow for the private minting of gold coin and the free-market in those coins. It may the only transition that would allow for an abridgement of the inevitable collapse under this fiat monetary system.Tweet
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