Interesting Article On Fiat Money From 1878

We find, first, the proposition to replace the money system based upon the precious metals by the so-called absolute or fiat money. During the five years of depression and distress since 1873 many people groped frantically about for means of relief, not inquiring into the true causes of their difficulty or not understanding them.

They thought there must be some artificial remedy
to cure it within the reach of human ingenuity. That the
results of the unproductive consumption, the improvident
wasting of wealth, can be cured only by the production of
real wealth in a slow and steady way, did not strike them
as promising in their case.

They wanted some quicker and more ingenious method of getting rich again. Like the alchemists of the middle ages,
they thought there must be some way to make gold out of dross. The first thing that struck them as promising was an inflation of our
greenback currency. But when, from 1873 to 1874 the
volume of the greenbacks was expanded from $356,000,000
to $382,000,000, it had not the desired effect.

The increase stayed in the Eastern banks. Then an expansion of the national-bank currency was thought of, and new facilities
for the emission of bank notes given. But this did not
work. In spite of the new facilities the bank currency
actually reduced itself. It became evident that the
business of the country would not take and circulate any more of that money, for there was no employment for it.

Then some ingenious minds hit upon a bolder plan. You
have probably known persons who, when they are sick,
will think no medicine can help unless it be particularly
strong in color and nasty in taste. They look upon
everything that is natural with distrust. Thus the scheme
of so-called fiat money was brought forward, and many
well meaning innocent people seem to have been talked
into the belief that this at last is the true thing.

What is absolute or fiat money? It is the simplest
contrivance in the world. The Government takes a little
piece of paper and says to it, "Be thou a dollar, " and then
the Government stamp is put upon the paper, and forthwith
it is a dollar, or five, or ten, or a hundred dollars, as
the case may be. Then all other kinds of money — gold,
silver, greenbacks and national-bank notes — are withdrawn,
and the fiat or absolute money put in their places.

It will be the only legal-tender in payment of debts and
Government dues. Now the present greenback bears this
inscription: "The United States will pay the bearer one
dollar" — or five or ten. Will not the fiat dollar bear a
similar promise? Bless you, no. The fiat dollar will not
promise anything, and just that is the beauty of it. According
to the fiat money doctors, it was the weakness of
the greenback, that it promised something. The fiat
dollar does not promise anything, for it is in itself the
performance of the promise — it is a dollar. The fiat
money promises nothing beyond itself, for it does away
with all other things.

Gold and silver are antiquated stuff, entirely unsuitable for this progressive age and country. The fiat money once out, gold and silver will no more be thought of. We shall be entirely
separate and independent from the rest of the world in all financial
and commercial transactions. Our fiat money will not
be exported, for it will not be taken anywhere else; and
so, like the poor, it stays all and always with us; and
inasmuch as it costs almost nothing to make fiat money
and we can make any quantity of it to suit ourselves, we
shall get richer and richer, and there will be no end to
our wealth and happiness. That is what the fiat money
doctors promise us.

It will strike you that this is exceedingly simple and
very fine; but you may have some misgivings, and say: "
Well, this bit of paper may call itself a dollar, but it is,
after all, only a bit of paper. Is there nothing of value
behind it?" Whereupon the fiat money man gravely
answers: "This is a great country. It has some forty or
fifty thousand millions of dollars' worth of property in
it. When the Government of this great country puts its
stamp upon a piece of paper and thus makes it money,
then that money is based upon the whole wealth of the
country."

That sounds magnificently, and you may
think, well, if this country has forty or fifty thousand
millions' worth of property, and all that property is
mortgaged as security for the value of this fiat money, why
should not this security be good enough for a couple of
thousand millions of fiat money? Now let us see how
it will work. Such promises to pay as greenbacks and
national-bank notes are withdrawn to make room for fiat
money. It will not be necessary to make any provision
for the withdrawal of gold and silver, for the precious
metals, finding no further employment, will take leave of
themselves, and go abroad, where they are wanted.

Now the fiat money is master of the field. It goes into circulation,
and for some time it will indeed circulate, for, it
being the only tool of exchange left to you, you will have
to take it and use it ; it will circulate just as wampum-beads
and clamshells and leaden bullets circulated for awhile
as currency in early colonial times. It will also maintain a
certain current value, as long as its volume is kept within
the quantity that would circulate in the form of specie
and paper convertible into specie.

But you must consider that the fiat money plan is brought forward by earnest inflationist, whose principal object is to make money
plenty by issuing enough of it to keep all the boys in
cash — and why should we not? it costs nothing, and we
may just as well have much as little. A thousand millions,
more or less, are no object, as the Government thereby
burdens itself with no promise or obligat1on, and finally
the wealth of the country, fifty thousand millions' worth
of property, stands behind it, mortgaged as security.

But presently, when we have made fiat money plenty, we
shall find that it depreciates, and will depreciate more and
more the more we issue, just as the greenbacks did, and
worse. " How can it depreciate like the greenbacks ? " says
the fiat money doctor, with a smile of superior wisdom. "
The greenback, by the absurd promise of the Government
to pay coin for it, was kept in constant comparison
with coin, and therefore could depreciate as to coin. But
when, by the introduction of fiat money, gold and silver
are utterly banished and forgotten, and our money system
has become entirely separate and independent from all
other money systems of the world, how can the fiat dollar
depreciate as to coin?" Let us see.

In the first place, as your fiat dollars grow more and
more plenty, their purchasing power will grow less, just
as the purchasing power of the clamshell currency in old
colonial times grew less, the supply of them growing
larger, until finally they bought nothing at all. Thus the
fiat dollars will depreciate as to the articles you want to
buy with them. " But what of that? " asks the fiat money
doctor; "that does not mean depreciation, but it means
that things grow dearer in price. When it takes two fiat
dollars to buy an article which cost but one dollar before,
then the Government can issue double the amount of fiat
money for the accommodation of the people, for it costs
nothing, and the wealth of the country will be ample
security for a couple of thousand millions more. " And so
it goes on and on, and in this case under the lead of the
fiat money doctors, it will go on quickly until the story
may be repeated of the wheel barrowful of money carried
to market and the purchase carried home in your vest
pocket.

But the idea that by banishing the precious metals from
our money system we can cut loose from the money system
of the world, and avoid all comparison of the value of our
paper money with gold, is amusingly absurd. We are a
commercial nation and have large dealings with the world
abroad. Our imports and exports go into the hundreds of
millions. They will go into the thousands. Our exports
especially are increasing beyond all anticipation. All we
sell and all we buy abroad is paid and settled for on the
gold basis. The prices of our principal articles of export,
of our agricultural staples, are virtually determined in the
foreign market.

Now, while we are doing this immense
business with the world abroad on the gold basis, must it
not be evident to the dullest understanding that, although
the last gold coin may have been banished from our domestic
transactions, the value of the fiat dollar in comparison
with gold will be quoted just as the greenback dollar was,
and that this comparison will be a matter of daily concern
and anxiety to every farmer, West and East, the price of
whose products depends upon the foreign market? Thus,
whatever expedient you may resort to, gold will be and
remain the standard of value as to the fiat dollar. Your
fiat dollar will be brought up before that tribunal to have
judgment pronounced as to its worth, and the idea that
by introducing here a paper-money system of your own
you can withdraw from the rules that govern the commerce
of the world, and change the real standard of value in your business transactions, will appear as one of the
most absurd and childish conceptions the human brain
has ever been guilty of.

At last, when your fiat dollar, having been made very
plenty to accommodate the people, has run down so low
in its purchasing power, and cut so sorry a figure in the
inevitable comparison with gold, that you begin to grow
uneasy about it, you remember that it is based upon the
wealth of the American people, and that some forty or
fifty thousand millions' worth of property stand as mortgage
security behind it. Of course, with such security, the
fiat dollar ought to be worth its face in gold, and thus you
may think of foreclosing that mortgage on the wealth of
the country. Maybe you are a laboring man who have
some money in a savings bank, which formerly was worth
enough to buy a little house with, but in its fiat condition,
money being plenty, appears just sufficient to pay for a
jack-knife.

You may go to the next best public building
to see whether you can find any of the wealth of the country
there, which is security for your fiat money, to lay your
hands upon. I would not, however, advise you to seize
upon a specific article of property as part of the wealth of
the country, for you would be in danger of being arrested
and put in jail for larceny. The wealth of the country,
although it is security for your fiat money, cannot be
handled in that way. You may think it best to present
your fiat money to the Secretary of the Treasury who must
be presumed to be a sound fiat man, and knows what the
mortgage on the wealth of the country means. You ask
him to give you good dollars for the bits of fiat paper you
present, or so much of the wealth of the country as required
to make that fiat paper worth something.

What will be the answer? " My dear sir, you desire good dollars ;
these are good dollars ; they are the only dollars we have.
The Government has not promised you anything else.
You want a share of the wealth of this country, upon which
these fiat dollars are based. Why, these fiat dollars are
themselves a part of the wealth of the country. Besides,
you have clothes upon your back; your wife and children
have the same. If you have no house of your own, you
have furniture in your rented dwelling. You have tools
in your workshop. All these things are a part of the
wealth of the country upon which your fiat money is
based. You must levy upon what you have yourself.
Of course I cannot give you what belongs to anybody
else."

Now you begin to perceive that the forty or fifty thousand
millions' worth of property in the country may be
magnificent security to base fiat money upon, but you
cannot foreclose the mortgage upon a single blade of
grass. That may seem queer to you. But it is the
peculiar beauty of fiat money based upon the whole
wealth of the country.

There is nothing more ridiculous than to hear these fiat
money doctors pretend to have made a great original discovery,
and to parade it before us as the most progressive
idea of the age. Why, it is a story a thousand years old.
They had such money in China in the ninth century of this
era. They had it in Persia toward the close of the
thirteenth century. They had it in the American colonies
in the seventeenth century in the shape of bead and clamshell
currency. They had it in France at the beginning
of the eighteenth century, under the management of the
great progressive Scotch financier, John Law. They had
it in France during the great revolution in the shape of
assignats.

They had it in this country again during the
war of independence in the shape of the Continental
money; always in all essential features virtually the same:
a paper money based in some indefinite way upon an
indefinite something, in some cases with a promise of
redemption, in some cases without it; in some cases issued
under the stress of circumstances, in some cases for
financial speculation; and whenever an inflation of paper
money was either a part of the scheme or forced by necessity,
the final result always the same; — depreciation of the
paper money, that depreciation leading to new issues, the
new issues bringing forth more depreciation, and so on;
everybody believing himself rich for a time, until finally
the whole airy fabric broke down in general confusion,
bankruptcy and ruin, when it became apparent that the
grand indefinite something upon which the paper money
was based, the power of the Emperor of China, or the
wealth of the country, practically amounted to nothing
as a mortgage security; and uniformly in the breakdown
the poor people, the laboring classes suffered the greatest
distress.

And in every case after the great collapse,
people came painfully to the old conclusion again, that,
after all, the precious metals were the only safe basis of a
money system; and they gathered up the few coins they
could lay their hands on, and upon the ruins of their
foolish hopes and windy fortunes they began a sensible
business once more, in a cautious and prudent way. And
now the same old scheme, exploded again and again, with a
thousand years' history on its back full of ruin and disaster
is dished up to us as a brand new discovery, and as the
great progressive idea of the century.

Why, gentlemen of the fiat money persuasion, the Chinese, a thousand years ago, were just as wise and progressive as you are
now, and when they had got through with their great
progressive fiat money experience they were a great deal
wiser. It is a matter of wonder, as well as regret, that
at this day there should be so many good people giving,
even for a moment, countenance to a fallacy so hoary
with age and so utterly condemned by the painful and
repeated experience of mankind.