Fiat money, that is money without intrinsic value, is a fascinating topic. Only money backed by a commodity that has intrinsic value, such as gold and silver, can be said to be of value. Such money is redeemable in gold or silver, and its quantity in circulation is limited by the amount of gold of silver available.
The money we use today has only government’s say so that it is of “value.” It is not redeemable in anything. Its quantity is at the will of the Federal Reserve, who has control of the money supply via its power to create credit with interest rates and reserve requirements.
Pictured above on the left is a $20 United States Bank Note, which was redeemable in gold until 1971; that can be considered real money. On the right is a $20 Federal Reserve Note, backed by the “full faith and credit” of the federal government. Good luck hoping it will maintain any “value.”
An associate of the Just Vote No Blog editor considers the topic of fiat money the most important one of our day, and provided some insights used by JVN in this article.
The U.S. Constitution has two authorities on “money” (Article 1, Section 8):
* To coin money and regulate the value thereof.
During Colonial days gold and silver were considered “money”. Money was a commodity. “Setting the value thereof” is like making sure a pound is a pound so people can buy the same pound of coffee, for example. A dollar is a dollar is a dollar. This is not the case today. As Consumer Price Index fluctuations show, a dollar today may not buy the same amount of goods as a dollar tomorrow.
* To borrow money on the credit of the United States.
This is the arrangement under which we operate today. There is no actual “money” with intrinsic value in circulation. We are operating under a credit/debit system which is a system of accounts. Under this system, money and debt can be created at will to finance government operations, provide for public assistance, maintain the armed forces, and pay for any other function government decides to undertake. Near-zero interest rates allow for servicing the debt.
All actions, including implementation of government policies, have outcomes or consequences – good and bad. The U.S. monetary/financial model characterized by liberal use of borrowing and the existence of a central bank (the Federal Reserve Bank) is no different. Let’s pick some outcomes at random:
* The Federal Reserve System through debt-issued currency, manipulation of interest rates and steady inflation allows our wealth to be eroded without us even realizing. When government increases money in circulation, consumers will likely use it to purchase additional items they would not have normally bought. Often the supply of goods does not keep up with the increased demand, resulting in a rise in prices. So, if you needed $20 to buy your lunch, now you need $25 or $30. If you were confident your bank savings would help you through a financial setback, you might not be now.
* A central bank’s control of interest rates and bank reserve requirements allow for manipulation of people’s behavior. Near-zero interest rates form the habit of living on credit – why worry about saving or having any cash to pay one’s living expenses or obligations? Cash is anonymous, but credit is not. When you buy with credit, businesses inventory and catalog you, not only so they can stay in touch and collect the debt, but also so that they can try to sell you even more stuff.
* The current U.S. debt was about $21 trillion in March 2018 — the largest sovereign debt in the world for a single country. Debt is necessary to run a country when revenues such as taxes and fees are not sufficient to cover expenses. As debt approaches unsustainable limits, it is logical for government to ensure that every citizen pays his/her “fair share” of taxes. That includes encouraging traceable payments systems. So, it is not only businesses that want you to move towards a “cashless society” so you can be watched.
The Fading Free Society
We cannot preserve our liberty if we cannot maintain our purchasing power and stay solvent as people, as a state and as a nation. We need to focus on the issue of fiat money, and the associated issues of central planning and debt. The Founding Fathers were forced to do so when faced with enormous war debts and worthless currency. Their solution was to include in the U.S. Constitution Article I Section 10, which prevents states from making “any Thing but gold and silver Coin a Tender in Payment of Debts.” But the U.S. Congress was granted power the “to borrow money on credit.” We the People need to be more mindful of that credit card.