Throughout the First World, and, particularly in the US, there is an increasing consciousness that fiat currency, far from being the solution to economic problems, is, in fact, a cause of them.
There are even those who, over the years, have predicted that the continued massive creation of fiat dollars may well lead to price controls, destruction of savings, looting, riots and, possibly, even revolution. A decade ago, such predictions were regarded by most as nonsense. Today, all of these eventualities seem more likely, although there still remains a strong contingent (possibly even a majority) who believe that, "It can't happen here."
A Brief History of Colonial US Fiat Currency
At this juncture, with regard to the US, it may be helpful to mention that not onlycan it happen here… it in fact, already has – back when the US was first created.
Much has been said about the American founding fathers having been "visionaries," and this is most certainly true. But how was it that so many people in pivotal positions in late 18th-century America possessed such insight, such inspiration in terms of designing a country whose Constitution was based upon free-market values, and avoided, as much as possible, a central government that had its fingers in the economic pie?
The answer lies in the simple fact that they had not only experienced the outcome of the use of a fiat currency, but had done so in recent memory.
In the 1750s, the use of fiat currency by the colonies (particularly in the financing of military endeavours against the French in Quebec) caused massive inflation. The situation became so dire that Mother England stepped in and called an end to the creation of debt-related promissory notes. There was an immediate return to using coinage.
The result was prosperity. Although the colonies did not yet possess their own coinage, they used gold and silver coins from England, France, Holland and Spain as unofficial currencies. (Note: The word "unofficial" is key here as a free market prevailed and was able to adjust itself, as necessary, with regard to the purchasing value of each form of coinage.)
But this was not to last. When the American Revolution broke out in 1775, the Continental Congress saw fit to "solve" the cash-flow problem by starting up the printing presses. (Once again, war created the incentive to print paper currency.) At that time, the colonial money supply had been some $12 million. Within five years, over an additional $600 million had been created. Whilst this monetary creation initially served as a boost to the economy, the predictable end result was that massive inflation returned, laying waste to the economy.
Then, as now, many people could not understand why the Continental Congress did not simply keep printing until the problem went away.
By the time the war had ended, the newly-formed United States was deeply mired in economic troubles. Although there were those who called for an end to the rolling of the presses, the government did what governments typically do: exert a greater level of force to get the people to use the debased currency. Wage and price controls were created, in addition to stiff penalties for anyone who refused to use the Continental Dollar. Congress declared that, any person shall hereafter be so lost to all virtue and regard for his country as to refuse to accept its notes, such person shall be deemed an enemy of his country.
It may be beneficial to read this simple statement a second time, whilst considering just how timeless and universal it is. It is the position governments typically take whenever they have created a problem that the public have ultimately paid the price for. When the public ultimately realise that they have been victimised, and back off from the government "solution," they (the public) are described by the government as being "unpatriotic." In this case, Congress went so far as to describe the public as "enemies."
This time around (in 2012), Americans have not yet reached this point; however, it should not be surprising if, as the US dollar declines more severely, they are once again described as enemies of the state, should they move away from using the dying dollar in favour of a more stable form of wealth, such as precious metals.
Money in the US Constitution
It was in the immediate aftermath of the 1787 monetary debacle that the Constitutional Committee met to create the Constitution. Having read the foregoing, it should not be surprising to the reader that a primary concern of the American founding fathers was that, in future, neither the state nor the federal governments should have the ability to create fiat currency, period.
Oliver Ellsworth, a Connecticut attorney, stated at the time,
"This is a favourable moment to shut and bar the door against paper money. The mischief of the various experiments which have been made are now fresh in the public mind and have excited the disgust of all the respectable parts of America."
It was under this sentiment that the Committee consciously rejected a recommendation for the federal government to "emit bills of credit." And, instead, allowed the federal government only to "… coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures."
Central Bank Tug-of-War
It is clear that, in 1787, there existed a true "vision" as to a government's rightful role in the economy. However, it should be stated that, as early as three years later, in 1790, a move was afoot to create a central bank, modeled after the Bank of England, and that that bank, in addition to having the power to borrow for national interests, would have the exclusive right to issue bank notes.
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For another century, a tug of war existed over both the wisdom and the Constitutional legality of a central bank that could issue fiat currency, and this struggle waxed and waned throughout the 19th century. In 1913, a cabal of bankers succeeded in creating the Federal Reserve, and, for the last hundred years, the US economy has been subject to its manipulation. Currency is one manipulation, but the Fed's manipulation extends beyond currency manipulation.
Back in the late 18th century, the former colonists found themselves in a disastrous economic situation which was a direct result of debt and fiat currency. In 1787, businesses were bankrupted, looting became commonplace, and there was mob violence in the streets. However, the situation was saved by a small group of people who had been given the responsibility to craft the American Constitution. In my belief, the greatness that the US experienced was due, in no small part, to the rejection of fiat currency and a focus on free-market values.
However, by 2012, the American Constitution has largely been abandoned, and the economic debacle of the late 18th century is being repeated. It is conceivable that the present situation is so dire that the US will again see the currency controls and riots that occurred in 1787.
It is left to the reader to consider whether the present situation will generate a movement to re-establish both the word and spirit of that exceptional document – the American Constitution – or whether the powers that be will dig in their heels in favour of their own ability to control both the population and the economy. The answer could well determine whether the US can rise again as a great nation, or whether it will fall to the wayside.