my words

this is my college paper on how the money system works.
the REAL DOPE on how money works

THE FALL OF PAPER MONEY

In America today, we have been bombarded with endless discussions about the state of our economy. “Bailouts”, “stimulus packages”, and other financial jargon have become part of our daily vocabularies over night. Consumer spending is down. Unemployment rates are up. The current situation is a serious problem, but exactly how did it get this bad? My research paper for Dr. Roemer’s English 291 class will get to the core of this issue.
My thesis is: In moving from a commodity-backed monetary system to a fiat monetary system, the United States is heading toward an inevitable financial collapse. I will support my thesis by comparing commodity currency and fiat currency and by giving examples of societies where fiat money has led to major problems, such as hyperinflation.
Personally, I have been fascinated with money since I was a small child. I can remember depositing coins into the cold-air return vents and the look on my mother’s face when she had to retrieve them. Eventually, my mother had the epiphany to buy me a piggy bank. From there, I opened a bank account. At that point, I was informed of the differences between the old system I had always used to save my money and the new more sophisticated system that I was to become a part of. My parents explained it to me in very simple terms. I put my money in an account. The bank borrows my money. The bank pays me interest. It didn’t really make sense, but I figured if it was good enough for my parents, it would be good enough for me. The first thought I had was, “Wow, free money!”
During my freshman year at Cincinnati State, I got my first credit card. I quickly learned that the “free money” I had accumulated all those years from the bank borrowing my deposits was nothing in comparison to the amount I had to pay to use the bank’s money. What a scam! I get a measly two or three percent, yet pay an outrageous 18 percent. I really began to miss my pink, plastic repository.
I felt like a fool. I was a very insignificant spoke in a very large wheel. Eventually, I would learn that this wheel is a fiat monetary system. According to an internet article found on http://www.kwaves.com, “In a fiat money system, money is not backed by a physical commodity (i.e.: gold). Instead, the only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it…there is no restrain on the amount of money that can be created. This allows unlimited credit creation.” This explains why I could charge up thousands of dollars on credit cards, yet only have a few bucks in the bank.
On the opposite end of the spectrum is a concept called commodity money. According to a definition found on http://www.economicexpert.com, “Commodity money refers to money whose value comes from a commodity out of which it is made…gold, silver, copper, salt, large stones, shells, and cigarettes.” For the purpose of this research paper, gold will be the primary commodity of focus.
In order to obtain a more comprehensive understanding of the differences in these two notions, I will trace the origins of monetary systems back to some of the first that were recorded in history.
The mighty Roman Empire is the first major example of fiat money gone wrong. Caesar Augustus, the first Roman Emperor, led his people into a period of great prosperity. Seven years into his reign, he decided the best way to expand his empire was to increase the gold and silver reserves. Mines in France and Spain were exploited around the clock. It was a logical idea, but the amount of money soon surpassed the level of production. This led to inflation and eventually caused economic disaster. (gold eagle)
In 910 AD, three years after the Qi Dan Mongols conquered the majority of China, the first emperor of the Liang Dynasty, Zhu Wen experimented with paper money. This lasted for several hundred years but high levels of inflation cause it to be abandoned. (gold eagle)
The Spanish are a great example of people who were too ambitious. In the 1500’s, they plundered huge amounts of gold from Mexico and other unfortunate nations. As the richest nation in the world at that time, they sent gold to trade partners instead of focusing on their own economic development. The broad expansion of their empire in conjunction with their lavish lifestyles quickly depleted their gold reserves. (gold eagle)
The next great historical example of this phenomenon is the plight of the French. In 1716, an economist named John Law persuaded France to adopt paper money. As paper money became more popular than coinage, counterfeiting and other types of fraud quickly ended this system. (gold eagle)
Obviously, the French have very short term memories. In 1791, the French government appropriated land from aristocrats and issued “assignats” which could be used to buy back land at auctions. Due to limitless printing of these notes, France experienced 13,000% interest by 1795. When Napoleon came into power, he displaced the assignats with the gold franc which was used successfully until the 1930’s. At that time, the Socialists abolished the connection between the franc and gold, making it a managed fiat currency. In 12 years it had lost 99% of its value. (gold eagle)
At one time, utilization of the gold standard propelled Argentina to be known as the eighth largest economy in the world. They enjoyed great abundance from 1853 to 1943 when Juan Peron took control of the country. His regime depleted gold reserves and that country has still never recovered. (gold eagle)
These are all prime examples from around the world that support my thesis. During my research, I have yet to find an historical instance where fiat money has had lasting success. The United States has a fiat monetary system, but that has a not always been the case.
The U.S. dollar became the unit for national currency when the Continental Congress adopted it in 1785. This replaced a system of private bank-notes that were issued by a variety of banks. The U.S. Coinage Act of 1792 enacted the Federal Monetary System and established the U.S. Mint, which was responsible for the production of gold and silver coins. (kwaves)
Due to the immense cost of the Civil War, the United States government was forced to use fiat money for the first time in 1862. These “Greenbacks” were redeemable in gold and upheld by the government’s promise to pay in gold.
During the 34 years between the Civil War and World War I, our country enjoyed virtually no inflation. This is a result of the U.S. dollar being “hard pegged” to gold.
The ten year period however, between 1915 and 1925 saw a reemergence of fiat money in this country. The United States needed so much money to finance World War I, there wasn’t enough gold to sustain the paper.
In 1926, we went back to commodity money. An official gold exchange standard was enacted so that foreign countries could link their currencies to the U.S. dollar and British pound. This short lived period ended when the depression started. Many countries tried to redeem their pounds and dollars at the same time, thus leading to a shortfall of gold.
From 1931 to 1945, not only did the United States revert back to fiat money, but many other nations also followed the trend. This led to enormous economic imbalances from country to country and is considered a significant contributing factor to the beginning of World War II.
The Bretton Woods Conference of 1944 was a meeting held in New Hampshire to revitalize the international currency exchange system. All countries who wished to participate had to have their currencies linked to a specific amount of U.S. dollars and British pounds.
The 1960’s were the final years of commodity money in this country. In 1963, Federal Reserve notes with no guarantees or promises to pay in “lawful money” were printed. In 1965, President Lyndon Johnson authorized the complete exclusion of silver from all coins with the exception of the Kennedy half-dollar, which was diminished to a meager 40%. In 1968, President Johnson made the decree that all Federal Reserve Silver Certificates were no longer redeemable in silver.
President Nixon would then put the final nail in the proverbial commodity money coffin in the early 1970’s. In August of 1971, he declared an end to the international gold standard. There have been no changes in our monetary system since then.
For 38 years, the United States has been a totally fiat economy. My late grandmother used to always say, “If it ain’t broke, don’t fix it.” That ideology seems to be shared by most Americans. I suppose the average person is not worried about a decline in the worth of those dollars in their pockets, as long as they retain most of their value. There is so much my grandma didn’t know.
I doubt she had working knowledge of the concept of elastic currency. According to a definition found in the Encyclopedia of Banking & Finance (9th Edition) by Charles J. Woelfel, “elastic currency is money which can be expanded or contracted according to commercial needs.” This is a beneficial property of our monetary system, but financial analysts warn the money may be stretching too far now.
According to Eric deCarbonnel, (who was he) “At the beginning of September 2008…currency in circulation was 833 Billion…583 Billion dollars circulating abroad (70 percent), and 250 Billion dollars circulating domestically (30 percent)…Now compare that to the projected US domestic monetary base for September 2009 which is 3,818 billion…a 15-fold increase in the base money supply.” Essentially, for very dollar in circulation, the Federal Reserve is going to print 14 more.
This will have catastrophic implications. According to Mike Adams, Natural News Editor, “A loaf of bread that costs a dollar right now could cost $15 when all this extra money ripples through the system…We’re talking about a loss of over 93% of the purchasing power of the dollar…a collapse of the currency.”
Adams and deCarbonnel paint a terrible picture, but they are by no means the first to be worried about our futures. In 1791, centuries before any of our current economic woes, founding father, Thomas Jefferson made this prediction, “If the American people ever allow private banks to control the issue of currency…the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered.” (kwaves)
Not everyone has such a fatalistic view of our situation. Britt Gillette, an author and graduate of James Madison University, feels very different about the situation. He obviously is a very intelligent person and his opinion is that the money supply is contracting. He points out the fact that lending institutions are extending less credit, thus offsetting the amount of extra money being created. He also references Biblical principles in order to dispel our fears of financial disaster.
I consider myself a fairly spiritual person, but Mr. Gillette does not present a convincing argument. His stance that the increase in physical currency is, “Nowhere near the pace at which credit and consumer demand are being destroyed,” is absurd to me. He is obviously aware of the dollar’s declining value, but seems to think that God will keep it from becoming completely worthless. I have faith in The Almighty, but if I were to put a religious spin on my thesis, I would say, “God is allowing this financial collapse because of Americans being bad stewards.”
Due to the fact that neither I nor Mr. Gillette can get a direct quote from God on how to solve this problem, I found some insights in an article located in a Steely Library database. Bill Stacey, Chairman of the Lion Rock Institute and Julian Morris, Executive Director of the International Policy Network wrote 12 pages on this subject in November of 2008.
The authors feel the executive management level of these failed financial behemoths should be held primarily responsible. Persons in that tier should be better trained on how to handle risk and manage growth aspirations.
Next, they see the need for financial institutions to be able to fail. The bankruptcy laws that apply to individuals and other companies should apply to AIG also. Losses would be recognized, but the distribution of assets would allow reinvestment opportunities.
Thirdly, in the authors’ opinions, regulations need to be eased in order to promote competition. The capital and regulatory requirements make it almost impossible for new banks to enter the market. They coin the phrase, “A flight of activity to less transparent and less regulated structures.” This sounds like they are describing check cashing and payday loan companies who prey upon people who have been barred from dealing with traditional banks.
Finally, Stacey and Morris blame the mortgage industry for being the primary culprit of this turmoil. They concede that government involvement is inevitably due to the impact of the mortgage market on voters. Nonetheless, shifting to a private system is necessary in order to get back to the right track.
In conclusion, I feel that I have successfully defended my thesis. I have provided historical proof of the 100% failure rate of fiat money, as well as current opinions from some of today’s top experts. The continuing downward spiral of the once “almighty dollar” should be obvious to anyone who can turn on a computer or a television.

Comments
  1. THE SHEEPLE NEED TO WAKE UP!!!!

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