 A Modern Dilemma
Addison Wiggin
The
Daily Reckoning
Aug 22, 2005
The Daily Reckoning PRESENTS:
Given the lack of control over how much fiat money is placed
in circulation - after all, it is based on nothing - we can only
expect that the currency will continue to lose value over time.
Addison Wiggin shares the grim truth about the U.S. dollar...
The Great Dollar Standard Era
is a direct result of the removal of gold as the underpinning
of the world's currencies. The vast overprinting of currency
will inevitably debase the value of the U.S. dollar and, because
so many foreign currencies are pegged to the dollar, the currency
of those nations as well. Fiat money, simply put, is created
out of nothing. A future promise to pay has never supported monetary
value for long and the United States is so overextended today
that it is doubtful it could ever honor its overall real debts.
Counting obligations under
Medicare and Social Security, the real debt of the United States
is more than 10 times the reported national debt:
"Taking present values
as of fiscal year end 2002 and interpreting the policies in the
federal budget for fiscal year 2004 as current policies, the
federal government's total fiscal imbalance is equal to $44.2
trillion."
The argument favoring the current
fiat system is that the demand for it grew out of barter, the
need to facilitate ever-higher volumes of trade. If this were
true, there would be a reasonable expectation that a system of
paper drafts would make sense. But the reality is that fiat money
has not grown out of barter, but from the previous gold standard.
Given the lack of control over how much fiat money is placed
in circulation - after all, it is based on nothing - we can only
expect that the currency will continue to lose value over time.
The model of fiat money is supported and defended with arguments
that consumption is good for the economy, even with the use of
vacant monetary systems. But there is a problem:
"The predictions of these
models are at odds with the historical evidence. Fiat money did
not in fact evolve. . . by means of a great leap forward from
barter. Nor did fiat monies ever emerge out of thin air. Instead,
fiat monies have always developed out of some previously existing
money."
Can we equate the problems
inherent in fiat money with the effects of inflation? We have
all heard that saving for retirement today is problematical because,
by the time we retire, we will need more dollars to pay for the
things we will need. By definition, this sounds like the consequences
of inflation. But inflation is not simply higher prices; it has
another aspect, which is devalued currency. We have to pay higher
prices in the future because the currency is worth less relative
to other currencies. That is the real inflation. Higher prices
are only symptoms following the debasement of currency. If we
examine why those prices go up, we discover that the reason is
not necessarily corporate greed, inefficiency, or foreign price
gouging. At the end of the day, it is the gradual loss of purchasing
power, the need for more dollars to buy the same things. That's
inflation. And fiat money is at the root of the problem.
The intrinsic problem with
fiat money systems is how it unravels the basic economic reality.
We know that it requires work to create real wealth. We labor
and we are paid. We save and we earn interest. Government, however,
produces nothing to create wealth so it does so out of an arbitrary
system: fiat money. The problem is described well in the following
passage:
"It takes work to create
wealth. 'Dollars' are created without any work -how much more
work is involved in printing a $100 bill as compared to a $1
bill? Not only are ordinary people at home being deceived, but
foreigners who accept and save our "dollars" in exchange
for their goods and services are also being cheated."
So are we "cheated"
by the fiat money system? Under one interpretation, we have to
contend with the reality that the dollar is not backed by anything
of value. But as long as we all agree to assign value to the
dollar, and as long as foreign central banks do the same, isn't
it okay to use a fiat money system?
The problem becomes severe
when, unavoidably, the system finally collapses. At some point,
the Federal Reserve - with blessings of the Congress and the
administration - prints and places so much money into circulation
that its perceived value just evaporates. Can this happen? It
has always happened in the past when fiat money systems were
put into use. We have to wonder whether FDR was sincere when,
in 1933, he declared that the currency had adequate backing.
It wasn't until the following year that the president raised
the ounce value of gold from $20.67 to $35. He explained his
own monetary policy in 1933 after declaring the government's
sole right to possess gold:
"More liberal provision
has been made for banks to borrow on these assets at the Reserve
Banks and more liberal provision has also been made for issuing
currency on the security of those good assets. This currency
is not fiat currency. It is issued on adequate security, and
every good bank has an abundance of such security."
It was the plan of the day.
First, the law required that all citizens turn over their gold
to the government. Second, the value of that gold was raised
nearly 70 percent to $35 per ounce (after collecting it from
the people, of course). Third, the president declared that currency
printing was being liberalized - but it is backed by gold, so
it's not a fiat system. This may have been true in 1933, but
since then - having removed ourselves from the gold standard
- the presses are printing money late into the night. The gold
standard has been long forgotten in Congress, the Federal Reserve,
and the executive branch.
It may be the view of some
people that a perfect monetary system may include changes in
value based on purchasing power and on the demand for money itself.
Thus, rich nations would become richer and control the cost of
goods, while poor nations would remain poor. In spite of the
best efforts under the Bretton Woods Agreement, it has proven
impossible to simply let money find its own level of value. Unlike
stocks and real estate, the free market does not work well with
monetary value because each country has its own selfinterests.
Furthermore, today's post-Bretton Woods monetary system has no
method available to prevent or mitigate trade imbalances. Thus,
trade surplus versus deficit continues to expand out of control.
The United States ended up accumulating current account deficits
totaling more than $3 trillion between 1980 and 2000.This perverse
twist on world money has had a strange effect:
"These deficits have acted
as an economic subsidy to the rest of the world, but they have
also flooded the world with dollars, which have replaced gold
as the new international reserve asset. These deficits have,
in effect, become the font of a new global money supply."
This is what occurs when international
money supplies become unregulated. We need a firmly controlled
world banking system if only to stop the unending printing of
money. If, indeed, U.S. deficits continue as a form of subsidy
to the rest of the world, that can only lead to a worldwide economic
collapse like the one seen in the 1920s and 1930s.
If it were possible to create
a controlled international monetary unit, its effectiveness would
demand ongoing regulation to prevent the disparities between
nations with varying resources and reserves. Ludwig von Mises
wrote that:
"The idea of a money with
an exchange value that is not subject to variations due to changes
in the ratio between the supply of money and the need for it
. . . demands the intervention of a regulatory authority in the
determination of the value of money; and its continued intervention."
Mises concluded that this need
for intervention was itself a problem. It is unlikely that any
government would be trustworthy enough to property ensure a fair
valuation of money, were it left up to them; instead, governments
are more likely than not to fall into the common fiat trap. Without
limitations on how much money can be printed, it is human and
governmental nature to print as much as possible. Mises observed
that fiat money leads to monetary policy designed to achieve
political aims. Mises:
"The state should at least
refrain from exerting any sort of influence on the value of money.
A metallic money, the augmentation or diminution of the quantity
of metal available which is independent of deliberate human intervention,
is becoming the modern monetary ideal."
To an extent, the enactment
of a fiat money system is likely either to be politically motivated
or to soon become a political tool in the hands of government.
We have to see how government attempts to influence economic
health through a variety of means and in tandem with Federal
Reserve policy: raising and lowering interest rates, enacting
tax incentives for certain groups, legislating tax cuts or tax
increases, and imposing or reducing trade restrictions or tariffs.
All of these moves invariably have a pro and con argued politically
rather than economically. The argument in modern-day U.S. politics
is between Republican desires to reduce taxes as a means of stimulating
growth versus Democratic views that we cannot afford tax cuts
and such cuts are given to favored upper-income taxpayers. The
arguments are complex and endless, but they are not just political
tools; they are part of overall monetary and economic policy
trends as well.
This has become our modern
entry in the history of money. The belief on the part of government,
rooted in an arrogant thinking that power extends even to the
valuation of goods and services and monetary exchange, has led
to a monetary policy that makes utterly no sense in historical
perspective. Having gone over entirely to a fiat standard, government
has chosen to ignore history and those market forces that ultimately
decide the question of valuation, in spite of anything government
does. This has always been true, as Jeffrey M. Herbener observed:
"The use of the precious
metals was historically the choice of the market. Without interference
from governments, traders adopted the parallel standard using
gold and silver as money."
If monetary policy were left
alone and allowed to function in the free market, what would
happen? Perhaps governments ultimately do follow the market by
adopting the gold standard, as we have seen repeatedly in history:
going on the gold standard, moving to fiat money, experiencing
a debasement, and then returning to the gold standard. Herbener
continued by observing,
"The fly in the ointment
of the classical gold standard was precisely that since it was
created and maintained by governments, it could be abandoned
and destroyed by them. As the ideological tide turned against
laissez-faire in favor of statism, governments intent upon expanding
the scope of their interference in and control of the market
economy found it necessary to eliminate the gold standard."
 Today, we live with that legacy. While
historians marvel at the "end of history" and the triumph
of free market economics, the Fed maintains "price controls"
on the very symbol of economic freedom - the U.S. dollar itself.
Regards,
Addison Wiggin
The Daily
Reckoning
Addison Wiggin is the editorial
director and publisher of The Daily Reckoning. Mr. Wiggin is
also the author, with Bill Bonner, of the international bestseller
Financial Reckoning Day and the upcoming thriller Empire of Debt.
Mr. Wiggin is frequent guest on national radio and television
programs.
The above essay was taken from
Mr. Wiggin's newly-released book, The
Demise of the Dollar... and Why It's Great for Your Investments.
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