September 20, 2008

Fiat Money

My husband collects these coins from the Roman Empire, which eventually collapsed due to a debased currency. You can clearly see the evidence of inflation just looking at the clipped edges. You can clearly see it in our own coins if you have a quarter old enough. Or, at least you can hear it. Just drop a 1964 quarter onto a hard surface. Take it in your hand and hold it. Look at the edges. Look at the sides. Examine it next to a modern quarter. Drop it too. Hear the difference? Feel it? Look at the sides. We are ensuring our own destruction with debased currency same as the Roman Empire did.

Lew Rockwell has just posted an excellent article about understanding the crisis. It's not what the press passes it off to be, and not what most people think it is, but that's hardly their fault - it isn't like government schools are teaching economic basics despite the desperate need to do so, and if they did, they sure wouldn't be teaching Austrian or Monetarist economics anyway. He's quite right; if it is to be summed up in two words, those words are "fiat money."

"What caused this? It is a simple question, and yet answers are all over the map, as you might expect. Here's mine in two words: fiat money.

The word "fiat" means "out of nothing." Money out of nothing is money that is eventually worth nothing. The possibility of precisely that happening emerged in August 15, 1971. Since Nixon severed the last tie of the dollar to gold, the world's monetary system has not been restrained by anything physical. We've depended on the discretion of central bankers. We can't trust that, and this crisis shows precisely why."

This is a pretty simple concept, and of course it's a huge threat to the powers that be if people start figuring it out. This is why it's essential that we do just that. He's quite right; there is nothing restraining the creation of money anymore. Nothing real. We demand that the government give us more of it, and there's nothing real to give, so we get this debased, inflated currency or a piece of plastic instead. It's bread and circuses time! Turn on the reality television and sit on the couch.

"The first time that people hear this, they find their minds rather boggled, and they want to know more. My whole experience in this area is that once people start digging around the area of monetary theory, they find that (1) it is not as difficult a subject as it seems, (2) it is endlessly fascinating, and (3) it explains far more than they realized before."

Thank you. That is my experience as well. Hell, it happened to me. It happened to my children. Studying economics opened their minds in a way the typical school studies never could. It explains everything. The concept of ownership, the meaning of value, the need for justice - it's all right there in the study of economics. When presidents used to talk about this topic, I would tune out immediately; perfectly sure that economics was so impossibly complex that in reality no one understood it. That was very naive. Thankfully, it is not true. Not so thankfully, once you wake up you realize what a pickle we're in here and there may be nothing stopping our downfall. There's no reason to think we're any better off than the Romans munching their breadsticks and watching their circuses. It could be time to take off for Luxembourg. Maybe Switzerland.

I have always lamented that von Mises' works were not translated in time to stave off disaster here. But then we got the New Deal despite Hayek, didn't we? Ignorance was our enemy then same as now.

"In the American context of the Great Depression, one book captures the whole onset and response. It is Murray Rothbard's America's Great Depression. He shows that it wasn't the 1929 crash that was the problem; it was the response to the crash that created the Depression. Bailouts. Price controls. Wage controls. Government programs. Trade restrictions. Crackdowns on the capital markets. And who did all this? It originated not with FDR but with Herbert Hoover — clear echoes of today. There is no understanding the present crisis without this book."

Tragically familiar, isn't it?

I'm off to buy some books. The greedy government just gave us back some of the debased money we slaved to pay them this year, so no time like the present.


vesta44 said...

I'll tell you what - with the way things are going, and Bush's plan to bail out these failing mega-banks, we're headed for a depression. I don't care what anyone says, things are heading down the toilet and Bush & Co are all to ready to flush us all away to protect their rich-ass friends and themselves. Thing is, what is a billion dollars worth, when $100 or $1000 isn't worth the paper it's printed on? They won't be any better off than the people who don't have millions/billions of dollars. They had just as well use that paper money as toilet paper, because that's all it'll be good for. We need to get back to a gold standard, or it's not just our economy that's going to go down the shitter, it's the whole world's economy that's going to be fucked. Are we going to end up back in a barter situation, where you trade tangible things for tangible things? Back to the dark ages we go, folks, not something I'm looking forward to, but which seems like it very well could happen.

AnnieMcPhee said...

You're quite right about the debased currency; it's the same when any "money" is exchanged for nothing, by fiat. From people's demands to be given money or services for nothing, right up to the highest levels and bailouts. But the problem isn't limited to any party or administration; it's been this way for the better part of a century now. There was some relief with Kennedy, and with Reagan, who at least understood the basic principles, but I can think of very few wise economic decisions that have been made on that level otherwise, since before Roosevelt. A lot of the problem is plain ignorance - I've seen what they teach in the colleges (micro and macro), and it isn't pretty. The principles don't change, but people's knowledge of them is so sorely lacking there is little chance for meaningful change in the right direction, towards liberty and prosperity.

AnnieMcPhee said...

At least with barter the power is in the hands of the people who should have it - the buyer and seller. The law is then relegated to its proper place, which is to interfere only when contracts are broken or a person's rights are violated (such as with theft.) Also, in that system, the money that emerges (and money does emerge from barter) is based on reality, not on fiat and force. The right to make money, granted to the government, might be the only flaw in the constitution. But they knew what it meant, and it didn't mean the system we have now.

Doc Holliday said...

The present crisis has been mostly made by Congress. There was a time when mortgage lenders were obliged to use some intelligence with lending money. Congress got heat from minority constituents and required that banks lend money to minority borrowers who had no income or credit history which suggested they were good risks. It was CONGRESS which loosened the laws and allowed banks to sell trash mortgages to bigger fish. Plenty of CONGRESSMEN also acquired cushy sub-prime loans.

This was given to us by Congress, and Bill Clinton was right there when this scene was set.

I suggest that this would have hit the fan regardless of who was in office this month.

Now, it sounds real righteous from a libertarian POV to say that the US government should have just let all this sort itself out, without any Federal intervention.

I am no more thrilled about a sudden acquisition of a TRILLION dollars of debt.... but what was Bush's alternative? Letting the financial chaos cascade and take down more financial entities? 401K funds crashing and burning? union retirement funds completely vanishing? TIAA-CREF going bust? You think it isn't possible?

If you are presently paying 14% on credit cards would you like to see that bumped up to 24%? If you have SUPERB credit? If you have been saving for a down payment on a house, would you like to see any lender demand that you lay down a 65% down payment? Would you like to see the real estate market so monumentally screwed that every single piece of real estate in the country has 25% of it's equity disappear? And would be sellers still unable to sell to buyers who cannot find financing?

Think it isn't possible?

There is plenty to be anxious about, these days. But it is just political masturbation to blame everything on Bush.

AnnieMcPhee said...

That's all true, no doubt - and Obama can't say much because either party would do the exact same thing in this instance. And you're right that it all could have and might have gone bust, which is the time wise investors can make a fortune for themselves. But the answer to a depression is not new deals and government interventions. I'm not saying it wouldn't cause devastation to real people because it would; but if you don't let a depression ride its course and work on reforming the system while it's down, you never have a shot at a real, free market in that case, and you end up stacking the deck to make it far worse in the long run.

john said...

failing mega banks COULD lead to a chain reaction of failures and people running for cash which the banks do not have enough of, which causes more panic, more withdrawal from the system, and finally; worldwide economic system disintegration. Along with this would be starvation and death.
however, it is estimated that the derivatives bubble has well exceeded 1 quadrillion u.s. dollars. so what is a 1 trillion bailout going to do against such a large nugget of derivatives? probably not much in the long run. what im guessing it will do is help perpetuate the system for a little longer. this is so the bankers can loot as much money as possible from the system and then transfer that wealth into commodities which will be the only things of value in the case of economic disintegration.

Stephen T. McCarthy said...

I definitely recall this blog bit from when you first posted it - I read at that time, in 2008.

I'm a little surprised that I didn't submit a comment, but then maybe that's because I would have had little to add other than "Hear!-Hear! Bravo!"

But I do remember that when I first read this, I had the thought: Anniee knows her Economics!

It was because of blog bits like this one that I began "Following" your blog and never stopped.

~ D-FensDogg
'Loyal American Underground'

Anniee451 said...

Sweet - I didn't know you then! Well I'm glad you finally spoke up :D These have always been my very favorite posts, but seldom do they garner any real replies; to know someone was reading from afar is most awesome.

I'm not even going to address the post above yours - it came in the meantime and it annoys me anyway. I'm sure you can see why LOL.