The Wonderful Advantages of Fiat Money [Republicae]
Through the decades, it is well known that unlike gold, fiat money holds certain advantages that simply cannot be duplicated with gold money. Unlike gold money, fiat money is not subject to the scarcity of quantity, thus the supply of fiat money is not subject to the same limitations of as the supply of gold. Gold money requires the costs of production, it usually requires labor, private companies and employees to mine the ore; on the other hand, fiat money is relatively cost-efficient, requiring no real production, no refinement, but it does create huge numbers of government employees paid through its creation, as well as massive amounts of hard-earned tax-payer dollars.
Fiat money has no asset value; there is no actual difference in the valuation between a $100 Dollar Bill and a $1 Dollar Bill except in the minds of us who must be coerced through legal tender laws to use them. The surprising advantage to fiat money is that people are willing to accept the same piece of paper and think that just because the printed image on the paper denotes $100 Dollars that it is actually of more value than the same type of paper which denote simply $1 Dollar. Gold does not possess that advantage, since gold is a commodity, each unit value is expressed in a given weight and there is no way for the government to create a ruse within the minds of the people that a coin weighing the same amount could be valued differently as with fiat money. This advantage allows the government and banks to transfer wealth in massive amounts from those who are productive to those who are unproductive, with very little effort. That, on top of the advantage of monetary inflation is a boon for the government in its efforts of massive wealth redistribution.
Recently, there have been several episodes of the government’s fiat money being counterfeited. $5 Dollar Bills have been bleached and the image of a $100 Dollar Bill has been printed on the bleached out $5 Dollar Bill. What an advantage, unofficial counterfeiters can do the very same thing as the official government counterfeiters, making the same type of paper more valuable by simply changing the printed image. These counterfeited bills are accepted at the higher value, goods and services are exchanged for the higher value even though it is printed on a bill that was previously considered a less valuable $5 Dollar Bill. There is really no difference between the two Bills in terms of actual value, only perceived value based upon an image that bears not actual asset value.
Gold holds a particular disadvantage for the government and banks; since it is an asset it conveys a property title to the bearer of that money. Fiat money on the other hand holds no inherent asset value; it does not convey title to the bearer and remains nothing more than a note expressing a government liability. Given that fact combined with the amazing system of fractional reserve banking, fiat money, being free of property title, can be so flexible that only a fraction of it needs be held in actual reserve. This frees up both the government and the banks to get the benefits of full reserve without actually having the full amount of fiat money on hand. Fractional Reserve Banking also gives fiat money the advantage of maintaining the pressures of inflation, for without fractional reserve banking it would not be possible for fiat money to exist, inflation would simply destroy the currency without the mechanism of fractional reserve.
Gold does not require coercive laws to enforce its use as money, this is a particular disadvantage for the government since the degree of social control cannot be maintained as easily under a gold monetary system as it can under a fiat monetary regime. The act of voluntary market exchange is hampered through the fiat monetary system, this gives the government the advantage of manipulation, not only of the fiat money itself, but also of the markets and rates of interest. Since the government can control the supply of the money it can also control the demand, shifting market forces into politically expedient directions; through this process the economy can be relatively managed based on policy rather than allowing it to self-regulate through market forces. The more control the government has over the markets the more control it has over the public, fiat money presents this advantage to government in ways that are simply not possible under a gold monetary regime.
Perhaps the primary problem with gold money is that of public indebtedness, there is a restriction on the amount of public and indeed private debt that can be accumulated under a gold monetary system, especially one that is subject to the requirements of a 100% reserve, thus there is a limitation of credit expansion under a gold monetary system. Since the utilization of public debt has become essential to our modern society, there would be no way for the extension of credit/debt to be expanded to such a degree under a gold monetary system.
While it now appears that expansion of credit associated with public or government debt is natural, the fact is that it is simply a reflection of underlying political expediencies, but not social necessities. Public or government debts are nothing more than anticipated taxes. At one time, government debt was governed by the amount of tax revenues and if the distribution of the holding of such public debt were equal to the distribution of the weight of taxation then any public debt would pose no burden on the society. The problem is that such a view of public debt was always very restrictive on government under a gold monetary system, but that is not the case under the wondrous fiat monetary system, which is not subject to such restrictions.
Under a very restrictive gold monetary system, government debt was very limited and any expansion of government debt beyond the measure of anticipated revenues always resulted in an increased burden of taxation. Since the imposition of such excessive taxation hampers and places a real check on private enterprise there is a very real economic cost associated with higher accumulations of public or government debt, thus diminishing any socio-economic dividend within the economy.
Such restrictions on public debt posed a severe problem for government, in that it did not allow for the expansion of that debt beyond the anticipated tax revenues. Since a gold monetary system poses such restrictions on government due to the necessity of balancing the extension of spending with that of anticipated tax revenue, the budgetary restraint on government proved very prohibitive on any expansion of government and the services it is able to provide. Government was so limited by gold money that there is a long history of political contrivances to evade such limitations.
The economic limitations of gold are very well known; the lack of flexibility in the supply of gold does pose many problems that restrict the expansion of economic growth beyond a certain point. Unlike fiat money, there is the requirement of good business practices under a gold monetary system, where credit is limited and responsible decision-making is necessary.
Gold, unlike fiat currency is not very convenient; it also does not provide a protectionist system where the value of the currency is managed by the government itself or the banking system the government employees to maintain the system. While gold money does not allow for many variables in both usage and derivatives of financial instruments, fiat money does provide both government and banking with a vast array of financial derivative instruments on which to draw wealth. Perhaps on of the greatest advantages of fiat currency is that it allows for the expansion of deficit spending by government without regard to the possible burden of overt taxation on the people and the private sector, thus there are no such restrictions under a fiat monetary system. There is the ability for a government to set a course of unlimited growth and expansion of its reach, its power and its services under a fiat monetary regime, which is simply not possible under a gold monetary regime.
It can be easily determined that the creation of the Federal Reserve System, as well as the eventual elimination of the gold monetary system provided the government with an instrument that completely extinguished the necessity for direct taxation and the social and economic limitations of such taxation. Essentially, the fiat monetary system allowed for Congress to avoid all the unpopularity associated with the burden of rising taxation. At first, the avoidance was achieved by supplementing borrowing by increasing the supply of fiat money, this form of hidden taxation simply diverted productive wealth from the private sector into the public coffers.
Gold monetary systems hindered the ability of government to borrow and would not allow for the expansion of the money supply, which is absolutely necessary to implement the hidden taxation of monetary inflation, thus the advantage of the fiat monetary system is evident. Through the creation of the Federal Reserve System, the government was able to divert monetary power away from the producers into the hands of government, this allows for an almost unlimited degree of monetary power to be concentrated in the government and in the hands of those who are politically connected to that government through the system.
Another advantage to the fiat monetary system, as opposed to a gold monetary system, is that real wealth under a fiat monetary system is siphoned from all except those who are the original holders of the fiat money as it is issued. Thus, the government and those connected to the government though their patronage systems are the primary beneficiaries of the fiat monetary system. This form of hidden wealth redistribution is very essential to the expansive power of the government, for it does not involve the necessity of the consent of the People in order to achieve any socio-political goals desired by the government.
Another distinct advantage of fiat currency is that the government can expand its military might and the scope of that might without regard to budgetary restraint. It would be impossible for this government to have expanded its military or engage in military intervention under a gold monetary system. There would be no possible way for this government to spend as much on its military as all the countries of the world combined on the far less advantageous gold monetary system. Thus this advantage is of supreme importance to the offensive imperialism and intervention of this government. Without the fiat monetary system there would also be extreme restrictions on the government’s ability to provide entitlement programs to various sectors of the population, this gives the political structure a natural support system within the voting public, which allows politicians to retain their seats in Congress since nearly 50 percent of the population receives the benefits of government entitlements.
The advantages of the fiat monetary system also extend to the fact that the irredeemable notes require no real assets to back them, thus the government is relatively free to pursue its policies without the restrictions redeemable currencies pose. Since modern fiat notes are IOUs that make no promise of actual payment, it amounts to little more than a forced loan from the people to the government.
Additionally, since gold monetary systems rarely involve the necessity of a permanent market for government debt, the government cannot reap the benefits normally associated with the government bond market. Fiat money, unlike gold money, is issued solely to meet the fiscal needs of government, and unlike gold money, fiat money has no real relationship to the actual monetary needs of the business sector. In fact, gold money almost always involves good business practices, forcing good decision-making on business as well as government, the lack or distortion of such business practices always tend to be revealed quickly under a gold monetary system while being relatively concealed under a fiat monetary system.
Such restrictions pose a definite problem that is easily diverted through the fiat monetary system, unlike the gold monetary system. Historically, of course, the issue of fiat money usually meets with general popularity, and is politically expedient, because it makes the issuance of credit relatively easy since there are far fewer restrictions on the ratio of actual savings to loans extended, thus the appearance of wealth generation is widely spread throughout the country.
On the other hand, gold money does not allow for the build up and maintenance of illusionary wealth creation, which is based in the fiat system on the extension of easy credit instead of actual wealth creation. Gold money rarely lends itself to the illusion of paper wealth generated by the extension of credit debt accumulation, instead it requires a strict regiment of fiscal discipline in order to create and maintain wealth.
Another distinct advantage that the fiat monetary system has over a gold monetary system is that the fiat monetary system allows the construction of a view of short-term benefits through inflation as a means of artificial stimulation of business; this, combined with the fact that the fiat monetary system allows for the eventual transference of wealth generated in the boom portion of the business cycle to those positioned to benefit from the burst portion of the business cycle. This is of particular importance to those well-positioned business interests closely associated and connected to the government’s patronage. We recently witnessed just such a transfer as the government sought to “save” certain large corporations and commercial banks during the recent Panic of 2008.
In terms of the Federal Reserve System, there would simply be no way for the FED to expand its balance sheet by over 100% within a time frame of a few weeks under a gold monetary system. Additionally, under a gold monetary system there is simply not the flexibility to manipulate the system as it is under the fiat monetary system. There would have been no way possible for the government and the Federal Reserve to bail out the various troubled banks and industries under a gold monetary system. Thus the advantages of the fiat monetary system can be clearly seen in this most recent economic dislocation. It should also be of note that a gold monetary system would not allow for the increased concentration of power and wealth into the political center of Washington, D.C. or the financial center of New York. Gold money would not allow this government to support the privatization of profit with the socialization of risks as does a fiat monetary system, another distinct advantage to fiat money.
Gold money would also not allow for the concentration of power normally associated with money into the hands of those who are closely related to and therefore highly influential on the members of Congress who are generating political and fiscal policy. In other words, the fiat monetary system has the advantage of opening doors and keeping them open, while doing so under the radar of ethical scruples. This is of particular advantage to those within banking and government, for it allows for the most intricately based accounting practices that can be manipulated to conceal almost anything since the entire system is not based on any actual asset valued commodity, but on a paper system of money that was created to be manipulated.
In the book entitled The Economic Consequences of Peace, John Maynard Keynes stated: “Lenin was right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
Since it is almost impossible for gold money to be debauched without the public noticing, it is a distinct disadvantage to those in government and since gold money does not allow for the artificial manipulation of the money supply through inflation, the government cannot steal massive amounts of productive wealth as it can through the fiat monetary system, thus the advantage to government is clear. Based on the government’s own calculations, since 1913, the government has siphoned off nearly 2105.2% of the productive wealth of this country through fiat money inflationary depreciation. That has been very advantageous to the government, filling its coffers, allowing for unbelievable government expansion, making this government the largest employer in the history of the world and it is all made possible through the fiat monetary system.
Perhaps one of the greatest advantages of the fiat monetary system is the fact that it provides the people with the impression that the government generally manages the economy well. Inflation tends to bolster confidence that government can and will do what is necessary when necessary to ensure a stable increase in the value of assets. Thus an increase in the prices of real estate and stocks are viewed as positive aspects of the management skills of the government and the FED. In general when people see the price of their homes increase they feel good, that feeling is a direct result in the inflationary policies of the government, it allows the government to continue stealing them blind through the very policy that they perceive as good economic management.
To correspond to that advantage another advantage of fiat currency is that it appears that wages are increasing, at least the face amount of wages are increasing. It matters not if a persons real wages are decreasing as long as it appear they are earning more dollars per hour, the governments ruse effectively continues. This little advantage also provides the government with a tax benefit, for the more a person makes per hour in the amount of face value currency the more of that money is taxed at a progressive rate, thus this form of double taxation is a distinct advantage to the government since it has directly taxed the earnings of a person and it also indirectly taxes it through fiat monetary inflation. So, a person may feel good to have received a $100 dollar raise a month, but calculated in terms of real wages that $100 dollars only represents an increase of approximately $4.52 per month in purchase value while it is being taxed at a given rate based on the face value of the increase.
Another distinct advantage fiat money has for the government over gold money is that, unlike gold, the fiat money supply available to the government can be increased in order to pay for goods and services without any real cost to the government itself. It is important to remember that this advantage is made possible, not only through the issuance of fiat money, but also through the manipulation of that fiat monetary regime. None of that would be possible without the very close relationship build between government and banking.
Factually, the government is at the center of monetary manipulation, the banks; under government charter operate as both the essential agents of the government, but also as the servant of the government’s political agenda. The government has, through the utilization of the fiat monetary system, created a monetary monopoly, a cartel that simply would not be possible without the direct legislative intervention of the government. The reason for the cartelization of banking is to provide government with a direct advantage in every aspect of political, economic and social spectrums. In fact, along with these advantages, it is not uncommon for those in government to move into banking and those in banking to move into government positions they are now almost interchangeable.
Through the fiat monetary system the government has created a very effective parasite system of monetary economics, keeping the host alive while continually feeding upon it. Thus, with all the disadvantages of gold money is it any wonder why the government has chosen to create and enforce the legal tender of a fiat monetary regime?