Thomas Jefferson is reputed to have said,
“If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.”
Fiat money: money that the government declares to be legal tender although it cannot be converted into standard specie (gold or silver)
*Notice the date of this article.*
September 6, 2001
Congress has a constitutional responsibility to maintain the value of the dollar by making only gold and silver legal tender and not to "emit bills of credit."
This responsibility was performed relatively well in the 19th Century, despite the abuse the dollar suffered during the Civil War and despite repeated efforts to form a central bank. This policy served to maintain relatively stable prices, and the shortcomings came only when the rules of the gold standard were ignored or abused.
In the 20th Century, however we saw the systematic undermining of sound money, with the establishment of the Federal Reserve System in 1913, and the outright rejection of gold, with the collapse of the Bretton Woods Agreement in 1971.
We are now witnessing the effects of the accumulated problems of thirty years of fiat money-not only the dollar but also all the world currencies-something the world has never before experienced. Exactly how it plays out is yet unknown. Its severity will be determined by future monetary management- especially by the Federal Reserve. The likelihood of quickly resolving the deeply ingrained and worldwide imbalances built up over thirty years is remote. Yielding to the addiction of credit creation (as has been the case with every market correction over the past thirty years) remains irresistible to the central bankers of the world. Central planners, who occupy the seats of power in every central bank around the world, refuse to accept the fact that markets are more powerful and smarter than they are.
The people of the United States, including the US Congress, are far too complacent about the seriousness of the current economic crisis. They remain oblivious to the significance of the US dollar's fiat status. Discussions about the dollar are usually limited to the question of whether the dollar is now too strong or too weak. When money is defined as a precise weight of a precious metal, this type of discussion doesn't exist. The only thing that matters under that circumstance is whether an honest government will maintain convertibility.
Exporters always want a weak dollar, importers a strong one. But no one demands a stable sound dollar, as they should. Manipulation of foreign trade through competitive currency devaluations has become commonplace and is used as a form of protectionism. This has been going on ever since the worldwide acceptance of fiat money thirty years ago. Although some short-term advantage may be gained for certain manufacturers and some countries by such currency manipulation, it only adds fuel to the economic and financial instability inherent in a system of paper money.
Paper money helps the strong and hurts the weak before it self-destructs and undermines international trade. The US dollar, with its reserve-currency status, provides a much greater benefit to American citizens than that which occurs in other countries that follow a similar monetary policy. It allows us to export our inflation by buying cheap goods from overseas, while our dollars are then lent back to us to finance our current account deficit. We further benefit from the confidence bestowed on the dollar by our being the economic and military powerhouse of the world, thus postponing the day of reckoning. This permits our extravagant living to last longer than would have otherwise occurred under a gold standard.
Some may argue that a good deal like that shouldn't be denied, but unfortunately the piper must eventually be paid. Inevitably the distortions, such as our current account deficit and foreign debt, will come to an end with more suffering than anyone has anticipated.
The monetary inflation of the 1900s produced welcomed profits of $145 billion for the NASDAQ companies over the five years between 1996 and 2000. Astoundingly this entire amount was lost in the past year. This doesn't even address the trillions of dollars of paper losses in stock values from its peak in early 2000. Congress has expressed concern about the staggering stock-market losses but fails to see the connection between the bubble economy and the monetary inflation generated by the Federal Reserve.
Instead, Congress chooses to blame the analysts for misleading investors. The analysts may not be entirely blameless, but their role in creating the bubble is minimal compared to the misleading information that the Federal Reserve has provided, with artificially low interest rates and a financial market made flush with generous new credit at every sign of a correction over the past ten years.
By preventing the liquidation of bad debt and the elimination of mal-investment and overcapacity, the Federal Reserve's actions have kept the financial bubble inflated. Of course it's an easy choice on the short run. Who would deliberately allow the market tendency to deflate back to stability? That would be politically unacceptable.
Talk of sound money and balanced budgets is just that. When the economy sinks, the rhetoric for sound policy and a strong dollar may continue but all actions by the Congress and the Fed will be directed toward re-inflation and a congressional spending policy oblivious to all the promises regarding a balanced budget and the preservation of the Social Security and Medicare trust funds.
But if the Fed and its chairman, Alan Greenspan, have been able to guide us out of every potential crisis all the way back to the stock market crash of 1987, why shouldn't we expect the same to happen once again? Mainly because there's a limit to how long the monetary charade can be perpetuated. Now it looks like the international financial system built on paper money is coming to an end.
Modern-day globalism, since gold's demise thirty years ago, has been based on a purely fiat US dollar, with all other currencies tied to the dollar. International redistribution and management of wealth through the IMF, the World Bank, and the WTO have promoted this new version of globalism. This type of globalism depends on trusting central bankers to maintain currency values and the international institutions to manage trade equitably, while bailing out weak economies with dollar inflation. This, of course, has only been possible because the dollar strength is perceived to be greater than it really is.
Modern-day globalists would like us to believe they invented globalism. Yet all they are offering is an unprecedented plan for global power to be placed in the hands of a few powerful special interests.
Globalism has existed ever since international trade started thousands of years ago. Whether it was during the Byzantine Empire or the more recent British Empire, it worked rather well when the goal was honest trade and the currency was gold. Today, however, world government is the goal. Its tools are fiat money and international agencies that believe they can plan globally, just as many others over the centuries believed they could plan domestically, ignoring the fact that all efforts at socialism have failed.
Last edited by FIGI on Mon May 12, 2008 4:39 pm; edited 1 time in total