Fiat Currency: Using the Past to See into the Future

The Daily Reckoning ^ | 9 13 2010 | Nick Jones

[An Old Man]

Fiat Money -Toilet Paper Money

The history of fiat money, to put it kindly, has been one of failure. In fact, EVERY fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well.

Why would it be different here in the U.S.? Well, in actuality, it hasn’t been. In fact, in our short history, we’ve already had several failed attempts at using paper currency, and it is my opinion that today’s dollars are no different than the continentals issued during the Revolutionary War. But I will get into that in a moment. In the meantime, I will show you that fiat currencies have not been successful, and the only aspect of fiat currencies that have stood the test of time is the inability of political systems to prevent the devaluation and debasement of this toilet paper money by letting the printing presses run wild.

Fiat Money -Rome — The Denarius

Although Rome didn’t actually have paper money, it provided one of the first examples of true debasement of a currency. The denarius, Rome’s coinage of the time, was, essentially, pure silver at the beginning of the first century A.D. By A.D. 54, Emperor Nero had entered the scene, and the denarius was approximately 94% silver. By around A.D.100, the denarius’ silver content was down to 85%.

Emperors that succeeded Nero liked the idea of devaluing their currency in order to pay the bills and increase their own wealth. By 218, the denarius was down to 43% silver, and in 244, Emperor Philip the Arab had the silver content dropped to 0.05%. Around the time of Rome’s collapse, the denarius contained only 0.02% silver and virtually nobody accepted it as a medium of exchange or a store of value.

Weimar Germany — Mark

Post-World War I Weimar Germany was one of the greatest periods of hyperinflation that ever existed. The Treaty of Versailles was essentially a financial punishment placed on Germany to make reparations.

The sums of money to be paid by Germany were enormous, and the only way it could make repayment was by running the printing press. (Huge unpayable debt — that sounds familiar. I wonder what the solution in the U.S. will be.)

Inflation got so bad in this period that German citizens were literally using stacks of marks to heat their furnaces. Here is a brief timeline of the marks per one U.S. dollar exchange rate:

• April 1919: 12 marks

• November 1921: 263 marks

• January 1923: 17,000 marks

• August 1923: 4.621 million marks

• October 1923: 25.26 billion marks

• December 1923: 4.2 trillion marks.

Fiat Money -More Recent Times

In recent times, fiat failures have become more common occurrences. For the sake of time, I won’t go into extensive details of all these examples of paper money failures, because there are SO many. But here you have it:

1. In 1932, Argentina had the eighth largest economy in the world before its currency collapsed. In 1992, Finland, Italy, and Norway had currency shocks that spread through Europe.

2. In 1994, Mexico went through the infamous “Tequila Hangover,” which sent the peso tumbling and spread economic hardships throughout Latin America.

3. In 1997, the Thai baht fell through the floor and the effects spread to Malaysia, the Philippines, Indonesia, Hong Kong, and South Korea.

4. The Russian ruble was not the currency you wanted your investments denominated in in 1998, after its devaluation brought on economic recession. In the early 21st century, we have seen the Turkish lira experience strokes of hyperinflation similar to that of the mark of Weimar Germany.

5. In present times, we have Zimbabwe, which was once considered the breadbasket of Africa and was one of the wealthiest countries on the continent. Now Mugabe’s attempts at price controls, combined with hyperinflation, have the nation unable to supply the most basic essentials such as bread and clean water.

Fiat Money -Lessons to Be Learned

Here in the U.S., I should say the lessons were not learned. There are many consistencies from the above-mentioned stories that led up to the eventual collapse of the currencies.

The scary thing is that the U.S. has some of these above-mentioned characteristics, the ones that lead to toilet paper money becoming just that. More on that in just a second. I would first like to give a brief look at the U.S. attempts with paper money in our short history.

The first attempt with paper money came in 1690 with the issuance of Colonial notes. The first Colonial notes were issued in Massachusetts and were redeemable for gold, silver, corn, cattle and other commodities.

The other Colonies quickly jumped on the toilet paper money bandwagon and began issuing their own paper currencies. Like a broken record, the money quickly became overissued. The lessons of John Law and others were definitely not learned. It is not good enough just to say that a currency is backed by commodities. It actually HAS to be backed by commodities. Essentially, it was still a fiat money, and in a short period of time, Colonials became as good as toilet paper.

The next experiment came during the Revolutionary War. Big surprise — the issuance of paper money was used to finance the war efforts. This time, the currency was called a continental.

The crash of the continental was spectacular, and the phrase “not worth a continental” was coined. This brought on a large distrust for paper currency, and until 1913, toilet paper money in the U.S. wasn’t used. Enter the infamous Federal Reserve and its monopoly on money and interest rates. Now we have the greenback.

Although the money was “officially” backed by a gold standard until 1971, it wasn’t a true gold standard. When the government found it inconvenient to have a gold standard, it just made it illegal for U.S. citizens to hold gold or exchange dollars for gold.

The U.S. of A. has all the characteristics set in place that have led to the collapse of every other fiat currency money in history.

We are currently at war, and the financing of this war is extremely inflationary. In fact, if you look back at our history, since 1914, the U.S has engaged in 16 military conflicts. We have been involved in some form of violent international accord in 44 of the past 93 years. The overwhelming majority of military conflicts result in monetary inflation.

The U.S. has a debt similar to that of Weimar Germany. All though the reasons for the debt are completely different, it appears thatthis Mount Everest of IOUs is going to be impossible to pay back. I guess the U.S. could just print 10 trillion dollar bills and hand them out, but the implications of such actions are obvious. We are currently increasing the supply of dollars at a rate of 13% per annum. This overissuance of a currency has been the leading indicator of a currency on the brink.

So what’s in the future for the dollar?

Some, myself included, might say that the dollar has already failed. It has lost over 92% of its value since its initial issuance in 1913. After the revaluation in 1934, the dollar dropped another 41%. In my opinion, it already is toilet paper money, but for the above-mentioned characteristics, which are alarmingly similar to the circumstances that led up to the eventual collapse of the dollar’s toilet paper predecessors, I believe that we have seen only the tip of the iceberg of the dollar’s inevitable path toward becoming toilet paper money.

Until Next Time,
Nick Jones

[An Old Man]

Is Nick right?
Is he wrong?
Does it make a difference?

[tired1]

Depends on whether you took the blue pill or the red one.

Everyone’s distracted by the mosque or whatever the distraction of the day is while the treasury has been looted. But don’t worry - new breed of locusts will soon descend upon Washington to fix everything.

[GeronL]

I think he’s right and I call it the Great Fall that is coming. It’s going to make the Depression look like a picnic and all those post-apocolyptic films look like good times.

[ChildOfThe60s]

He’s right.

It matters if you have the ability to prepare for it. Which most of us don’t.

I’ve got some silver and I am stockpiling canned goods and ammunition. Probably not enough, but I’m doing what I can.

[Sawdring]

EVERY fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well.

Hasn't nearly every economy since the Roman's collapsed?

[Errant]

He is mostly right. Only keep what wealth you can afford to loose in dollars.

[justa-hairyape]

Hasn't nearly every economy since the Roman's collapsed?

The issue is fiat currency. When economies that exchange fiat currency collapse, their fiat currency also collapses. Economies that exchange gold and silver currency can collapse, but the currency retains its intrinsic value. Most economies that existed back in the Roman days have collapsed due to various reasons. The number two causes are probably corrupt leadership and poor warmanship. We have both problems right now. We should be destroying the enemies Mosques, not helping them build more. And our debt is the largest in world history due to corrupt leadership.

[blam]

Prepare now.

[jiggyboy]

I say hyperinflation is inevitable. I think there were some threads here on FR not too long ago that showed that there’s just no way to keep the national debt from going parabolic. Not cutting spending by 90%, not increasing taxes ten-fold across the board, not the combination, nothing.