solidus – Freeread

This entry is part 15 of 31 in the series 2011B

Successful No interest Fiat Money of the Past

Before we explore fiat money more deeply let us give a definition of it to avoid confusion – as, at present, the term is used in a variety of ways.
The word “fiat” comes from the Latin, which literally means, “let it be done.” The common modern definition is expressed by Dictionary.com as: “an authoritative decree, sanction, or order.”
Fiat money is often defined as unbacked money created by government decree or sanction but technically this extends to any money that is not fully backed by a commodity. So for the sake of clarification and purpose of this treatise we’ll define it as follows.

“Fiat money is any money, paper, coin, substance or digital creation which is not fully backed by a commodity. It exists only because of a decree or sanction made with enough authority to cause the people to accept it as money.”

That said we must now ask if it is possible to create a feasible fiat money system as illustrated in the parable. Many fundamentalists think not and feel that every possible form of fiat money is doomed to failure.

And why is this?

Basically because they look at the surface of a few examples of failed money in the past and lump all fiat money into one category. They pretty much call it the god-awful bad category. This is basically where their analysis begins and ends.

Let us look below the surface and first ask ourselves why fiat money has received such bad press.

Here are three reasons various economies have had problems with fiat money in the past and present.

(1) Too much money is printed or created and placed into circulation. If there is more money in circulation than the value of goods and services needed there will be inflation. If there is a shortage of money there will be deflation. If the right amount of money is in circulation the prices will be stable.

This runs contrary to the party line of some thinkers who believe that all fiat money is inflationary. It is not. It is only inflationary when too much money is added to circulation. For instance, during the Great Depression we had a contraction of the fractional fiat money in circulation and prices went down, not up.

(2) The second problem is the government borrows the fiat money from banks and burdens its taxpayers with paying the accumulating interest rather than creating interest free money itself.

(3) Because the money is easily created the temptation of governments to overspend by borrowing too much money is great. This straps their people with not only high interest payments but a large amount of debt.

These problems may seem significant enough to make us think we should ditch fiat money and go with a gold standard until we look at the problems of maintaining such a gold standard. Earlier we covered the gold standard and we discovered even more problems there.

Some simply state that fiat money is bad because it has always failed in the past. They count as failure every money system that is no longer with us but overlook the fact that money systems have often changed in history, not because they failed but because a new king or power comes to the throne. War and conquest has also greatly altered money systems of the past. Sometimes a good money system has been replaced with a bad one. If a new king saw the system benefitted the people more than himself then the temptation was to install one that was unstable but good for the elite.

Gold and silver backed currencies (as has been previously illustrated) have their own set of problems and one could also argue that they have all failed because they no longer exist. There is not one country in the entire world that has a gold or silver backed currency. The last one was Switzerland which backed its money with 40% gold reserves but in the year 2000 they had a referendum and the people voted to go off it. Now they merely have gold reserves for security purposes just as we do.

One might ask that if gold and silver backed currencies are so great then why has every nation on the planet abandoned them? If they are so stable and bring prosperity (as advocates claim) then why hasn’t one nation seen the light?

With all things considered a growing number of thinkers are considering that interest free fiat money represents the best hope for a permanent money system that allows for unlimited expansion of prosperity. To create this, a definite change from the one in use today is required. That is, instead of our government giving away its power to create money to private banks it will instead reserve that power to itself. It will then be able to create money for the people’s welfare, which will be interest free and debt free.

The Federal Reserve notes of today are a promise to pay. The new notes will not contain any promise to pay but will be real constitutional money.

Has there ever been any such debt and interest free fiat money in the past that we can examine to see how it worked?

Fortunately, the answer is yes. Let us look at a few.

SPARTA

For the first example let’s look way back to the foundation of the ancient Spartan way of life originated by its king Lycurgus around 800 BC. Because his story is almost larger than life some historians believe he was a fabled character but this is not likely as Plutarch wrote in detail, about him quoting historians Eratosthenes, Apollodorus, Timæus, and Xenophon as sources. No less than Plato and Aristotle also wrote of him.

There is no dispute though that an ancient powerful lawgiver created the legendary Spartan way of life along with a most unusual fiat interest free money system.

Plutarch presents Lycurgus as a dedicated spiritual leader who sought not for power but to elevate the minds and hearts of the people in a system of discipline and equality. He believed that riches, especially gold and silver, were a major detriment to the spirit. Plutarch says he banned “ownership of any gold or silver, and to allow only money made of iron. The iron coins of Sparta were dipped in vinegar when red hot to make the metal brittle and worthless. Merchants laughed at this money because it had no intrinsic value, so imports of luxuries stopped. Robbery and bribery vanished from Sparta instantly.

“All useless occupations were banned in Sparta. This law was hardly necessary, because along with gold and silver, all of the evil creatures that accompany them went away too. Who would come to practice fraud, fortune-telling, prostitution, jewelry, or the other trades of luxury and larceny, in a country where there was no gold and silver money? So luxury, deprived little by little of the fuel that fed it, gradually died out. The rich had no advantage over the poor because wealth was useless.”

The only money left in Sparta were iron discs called Pelanors. They had no intrinsic value as did gold and silver for the vinegar made them useless for anything except fiat money. Lycurgus set their value by fiat and this was their only money for centuries. During this period the Spartan city-state and way of life flourished.

Plutarch gives his reason for the end of this money system:

“For five hundred years, Sparta kept the laws of Lycurgus and was the strongest and most famous city in Greece. But eventually gold and silver were allowed in, and along with them came all of the evils spawned by the love of money. Lysander must take the blame, because he brought home rich spoils from the wars. Although not corrupt himself, Lysander infected Sparta with greed and luxury, and thus subverted the laws of Lycurgus.”

From Plutarch’s Lives of Noble Grecians and Romans, Lycurgus chapter

ROME

When Numa Pompilius came to power as the second king of Rome around 715 BC he contemplated a major problem that lay before him. To facilitate prosperity for his people he needed money and lots of it. The problem was that the authorized money of the world was composed of gold and silver.
Why was this a problem?

Because most of the gold and silver was in the private hands of the various religious temple cults or eastern religions and merchants. These private interests had power over the money and if he wanted an increase in the money supply he had to play the beggar and humbly strike his best bargain while placing Rome as collateral.

What do do?

Numa formulated an ingenious plan. He would decree that gold and silver would merely be commodities in his kingdom. They could be traded as commodities as unmarked coins or bars but the real money would be bronze, an alloy composed of mostly copper which was abundantly available.

Numa monetized bronze and the citizens used this internally for money or nomisma. In early Rome they called it nummi. Because his name was so close to “nummi,” some historians think Numa was his adopted name rather than given one.

Gold and silver was used internally for jewelry, medallions, ornaments etc and for trade with other governments. Since gold and silver were used for money outside Rome their reserves were used for necessary trade but not for internal money.

The brass money took on various shapes at first but eventually evolved into coins bearing an image. As long as Bronze was the designated money gold and silver coins and bars were blank and merely traded by weight with foreign interests or for practical internal use.

From the time of Numa the nummi had more monetary value than the commodity value of the bronze and the fiat value increased over time until the time of the second Punic war (218-202 BC) a one ounce bronze coin was worth 30 ounces of the commodity. In other words, over 96% of its value was fiat rather than intrinsic.

No one complained of being cheated during this fiat money system because the money was based on law and not the product of debasement as happened later in the Roman Empire. When the people expected a certain weight and percentage of gold or silver and the size or content was reduced then the people felt cheated and rejected the money. But because the bronze money was based on the fiat principle from the beginning and the value was established by law the people accepted it from beginning to the end of its dominance.

After war depleted their resources and plunder increased Rome’s supply of gold and silver, silver, and later gold, gained a legal status as money and by 146 BC Rome ceased producing bronze money.

So we had a period of over 500 years where bronze fiat money financed the rise of the longest lasting world power in recorded history.

During this period of time the people had their greatest freedom and were enterprising as they created a great nation state. Then when silver and gold became money hundreds of thousands of slaves were added to the kingdom – many of them mining for gold and silver to increase the money supply.

Then came the money changers which included the likes of which Jesus chased out of the temple.

The ratio of the value of gold to silver in Rome was usually set at 12:1, but in India and Asia it was set around 6:1 or 7:1. This meant that a money changer could take six pounds of silver to India and trade it for a full pound of gold. Then he could return home and trade that pound of gold for 12 pounds of silver and double his money. Then by repeating the process over and over he could become rich without producing anything.

Over time this created instability in the gold/silver money systems in both the East and West.

Contrary to the belief of many inflation was a problem on the gold/silver standard of Rome. Zarlinga tells us that “soldiers in the 2nd century BC got 110-125 denarii per year. A hundred years later, their pay doubled to 225; after another hundred years to 300; and by the 3rd century AD had increased to probably 600 denarii per year.”

Up to about 250 AD the silver content of coins remained fairly consistent but then started dropping. By 270 AD it had dropped to 4% of its original value. At this low point Diocletion instituted wage and price controls in an attempt to force people on pain of death to accept an inflationary currency. In the process many businesses were destroyed.

In 312 AD Constantine began minting the pure gold solidus, which gained the reputation of being the longest circulating coin in history – over 700 continuous years. This period was not immune to inflation as during periods of plunder there were excessive amounts of gold coins added to the system. Some think this contributed to the fall of Rome. The solidus was in circulation beyond 1000 AD long after the fall of Rome during our darkest age. It weighed 4.5 grams and was never debased and desired and accepted by all.

This gold standard did little to save the empire during the time of Rome’s greatest decline. It also did nothing to prevent a descent into the period we call the Dark Ages. It is interesting that during these two periods the world had the purest most consistent gold standard in the history of the world.

BUT… during the period of Rome’s greatest progress and individual freedom they were fueled with fiat currency.

Data on Roman money taken from
Lost Science of Money By Stephen Zarlenga

History of Monetary Systems by Alexander Del Mar, 1895

“The Imperial Foundations”. Coins in history : a survey of coinage from the reform of Diocletian to the Latin Monetary Union. Porteous, John (1969)

A History of Money by Glyn Davies, 1994

Read This entire series. Here are the links.