So what would be the basis of the ideal money system? Before we can answer that we should list the ingredients of such a system. If we do not know what we are looking for there is not much chance of finding it.
This is perhaps the most desired feature of a currency, but as we study history we discover that no currency has been completely safe from extreme fluctuations, inflation, deflation, stagnation, manipulation, fraud, degradation, theft, etc.
We have illustrated that even gold and silver money has its own set of problems and gives no guarantee of stability. Yes, it is true that actual gold and silver coins will always have some commodity value, but that value is affected by an increase or decrease in the substance as well as speculation. Remember that one action by President Grant reduced the price of gold from $165.50 to $135 in one day. Then another action by FDR increased the price from $20.67 an ounce to $35 in another day of time.
Yes, yes, I know – that if we had some type of purist system in play and men of Jesus type integrity in office this may not happen but that has never been and not likely to be in the future.
Fiat money also has its own set of problems, Unlike gold and silver it has no intrinsic value but represents value. Its value can be manipulated by the amount of money added to or taken away from the currency system. Usually the problem is inflation caused by too much currency being added and if the presses go too wild there can be a collapse of the money bringing its value close to zero. This insecurity causes many to look to metallic currency in the hope of establishing a stable system.
One often hears about the importance of a stable currency, but not so much about the advantages of a flexible one. It is interesting to consider the importance of flexibility in currency, for without this quality stability eventually goes out the window no matter what currency base is used.
Lack of flexibility is one of the major drawbacks of a gold or silver standard. Ironically, advocates tout this lack of flexibility as its major selling point even though this flaw inevitably leads to the undoing of the standard. Let me explain.
Advocates state that a gold system is desirable because it has little flexibility in that the State just cannot magically create additional gold supplies by fiat or out of thin air. New gold has to be mined or acquired from other nations. Since this is a slow process it normally insures against huge bursts of inflation which troubles many fiat systems.
That’s a good thing, right? On the surface it seems so. Advocates simply state that all we have to do is stay on the gold system causing the growth of money supply to be slow and stable thus preventing any major inflation.
That sounds good in theory but the historical results have been far from that reality. And why is this?
Because of the lack of flexibility.
And what are the two situations that demand the greatest flexibility?
The first is war or a situation that threatens the very survival of a nation. If a nation has a choice between survival or a period of inflation – which will they choose? The answer is really a no-brainer that seems to go over the heads of gold standard people in their thinking and calculations. The only response I have seen from them on this point is: “IF all nations stayed on the gold standard then they would not be able to raise large sums of money and would be discouraged from going to war.”
If? If??? When has this “if” ever taken place except in some fictionalized idealistic future?
The hard-core fact is this. If a nation’s survival is at stake, the leaders will seek to raise money by any means necessary, even if the end result is the destruction of the money system. Any people would rather have their currency destroyed than lose their country to a tyranny.
This was the situation in the Revolutionary War. The Colonists had the choice of throwing the gold standard out the window and creating a shaky fiat system that would probably fail or lose their country. There was only one choice for them. If the money system failed they could create another, but if they lost their country all was lost.
The Colonists thus created a flexible money system and won a country at the cost of a currency. BUT the currency problem was temporary and a new start was made. As a result the United States soon became the greatest economic vehicle in the history of the world.
Both the North and the South felt they had to have more flexible money during the Civil War and moved away from gold to fiat money.
In 1914 at the beginning of World War I the international gold standard ceased to function because of its lack of flexibility. During the war the wholesale prices in the U.S., France and the UK more than doubled causing much difficulty in going back on the standard after the war. Attempting to adjust for the deflation caused by returning to a gold standard caused so much economic grief that a full return became impossible and redemption of currency was abandoned a short time later.
These problems caused by the inflexibility of the metallic standard are not peculiar to our age but similar problems have occurred hundreds of times throughout history. During the Roman Empire alone the government faced dozens of economic crises due to a lack of flexibility and this lead to either debasing the currency, plundering other nations or enslaving people to work in government mines.
It is interesting that gold standard fundamentalists place absolutely no blame for currency debasement or economic problems on the inflexibility of the metallic standard but maintain that it is all due to human corruption. If the leaders of nations could have just been pure in their metallic ideology then all would have been well.
While it is true that human frailties do create monetary problems this is far from providing the full explanation. The fact is that every generation or two a nation is presented with a life and death struggle for survival that demands flexibility in currency. If the money is not raised then their way of life will be gone.
It is not human greed or corruption that causes the people of a nation to seek to survive at all costs. It is common sense if their way of life is worth preserving.
The second situation that demands flexibility is a strong economic downturn.
For instance just as the various nations were struggling in an attempt to return to the gold standard we suffered the Great Depression and this pretty much ended the idea of paper money being redeemed for gold.
Powerful economic downturns demand a similar flexibility with currency as does war and if flexibility is not available then war can result. After World War I the winning nations demanded that Germany pay war reparations with gold standard money. This inflexible demand crushed their economy and led to the rise of Hitler.
Spain’s economic problems during the time of Columbus led to the plundering of millions of American Indians for the gold and silver.
This leads us to the irrefutable fact that during war or hard times the nations of the world will demand flexibility in their currency. If it is not there they will devise every possible scheme to create it. If they cannot create it then they will plunder their people or other nations and steal it.
Conclusion: A flexible currency is necessary for a nation to see itself through a major crises.
(3) A Debt Free Currency
A third quality a currency must possess is that its creation should not add to the public debt. If our Founding Fathers could see our national debt and the astronomical interest we pay every year they would roll over in their graves indeed. Had they seen our perilous state I’m sure they would have added a couple new paragraphs into the Constitution in an attempt to steer us on a better course.
We’ve already covered the fact that it is an insane idea for our government to pay private enterprise to create our money and loan it to us at interest when we the people can create debt free money for ourselves through our elected representatives and then owe nothing on it.
Wouldn’t it be great if our nation had a currency that fit in the guidelines of these three criteria: (1) stability, (2) flexibility and (3) debt free?
Is such a currency possible? I think it is.
Read This entire series. Here are the links.
- The Economy – One Last Chapter
- Creating Sound Money
- The Gold Standard, Part 1
- The Gold Standard, Part 2
- The Gold Standard, Part 3
- The Gold Standard, Part 4
- The Gold Standard, Part 5
- The Gold Standard, Part 6
- The Gold Standard, Part 7
- The Fed and Common Sense
- Additional Points
- Alternative Currency
- Giving Away Our Power
- Parable of Money Systems
- To Fiat or Not Fiat
- Fiat Money of the Past, Part 1
- Fiat Money of the Past, Part 2
- Fiat Money of the Past, Part 3
- Fiat Money of the Past, Part 4
- Fiat Money of the Past, Part 5
- Fiat Money of the Past, Part 6
- Examining Fiat Money
- A Flawed Money System
- The Ideal Money
- A Time for All Things
- The New Greenback
- Narrowing the Focus
- People Taking Charge
- Creating Wealth
Copyright 2011 by J J Dewey
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