widespread currency debasement, eventually led to massive hyperinflation and the fall of the Roman Empire.8
China
Today, China is an economic powerhouse that has gained the attention of savvy investors from around the world. But relatively few know that this Far East nation was the first to develop paper money. The paper notes, known as the Jiaozi, were originated and issued under the Song Dynasty in the 10th century a.d. Ironically, the purpose for introducing the paper currency was to combat inflationary pressures created by an overproduction of iron coins. To counter the declining value of the iron coins, a bank in the Szechuan province began issuing the paper currency in exchange for the devalued coins. Initially, the new paper money system seemed to be successful. However, it did not take long before the monetary authorities began overproducing the paper currency, causing it to decline in value. The currency was eventually abandoned.9
Shortly thereafter, under the Yuan Dynasty, the Chinese attempted another form of paper currency. The Chao, as it was known, lasted for a short time. Its demise came after an extreme overproduction of the currency led to massive hyperinflation.
By the mid-15th century, the Ming Dynasty, apparently unimpressed with the enormous failures caused by their novel monetary experiments, decided this time to completely abandon the use of paper money within the country, choosing instead to return to silver coinage.
France
In 1720, France got a taste of paper money gone awry, thanks in part to Scottish economist John Law and his Mississippi Bubble scheme.
Confronted with massive deficits left to him by his great grandfather (King Louis XIV), King Louis XV was eager to find a way to balance the government’s budget. With the nation teetering on the edge of insolvency, John Law convinced King Louis XV to adopt a paper currency and enforce its usage among the public by making it the only acceptable form of payment for taxes. Soon, the paper money became very popular with the French people. After a few wrong turns economically, including an investment scheme in the Louisiana swamplands, France resorted to overprinting the currency. Within four years of the introduction of paper money into the system, France and its citizens went from being impoverished to being fantastically wealthy (on paper), and then back into poverty again. The paper money experiment conducted by Law and King Louis XV completely destroyed the French economy.
But just one generation later, during the French Revolution, France had apparently forgotten the lessons of the past. In 1791, the nation made yet another attempt at issuing a paper currency called the Assignat. By 1795, just four short years later, as the national inflation rate raged at an alarming 13,000 percent, the Assignat became completely worthless. The French Revolution was eventually brought to an end under the strong leadership of Napoleon Bonaparte. Napoleon re-established a gold-backed monetary system in France to replace its failed paper money system, which led the country into an era of prosperity.
Later, in 1936, France nationalized the Bank of France and removed the gold backing from the French currency. The new fiat paper currency that was introduced became completely worthless just over a decade later.
Weimar Republic (Pre-Hitler Germany)
Our next lesson in the dangers of paper money takes us back to a pre-Hitler Germany. Hyperinflation struck the Weimar Republic of Germany in the post-World War I era of the 1920s. At the Treaty of Versailles, Germany accepted its defeat and was forced to pay war reparations to France. War-torn and humiliated, Germany and its frail economy had little hope of being able to repay its enormous war debts. As Germany’s reparation payments became increasingly inconsistent, France grew impatient.
Determined to make Germany pay, France led a military invasion into the debt-ridden country in January 1923. French and Belgian troops stormed a German industrial area, known as the Ruhr, where Germany was known to hold much of its wealth. Once the Ruhr had been successfully occupied, the German economy faced even further calamity. The German leaders reacted by printing even more of their increasingly worthless paper money, known as the mark, in order to satiate their French overlords. But as the German government continued to print millions of marks to remain solvent, Germany’s citizens began noticing a dramatic increase in their wages. This increase was due to the excess currency that was being created within the system. There are pictures from Germany showing workers being paid with wheelbarrows full of currency. The problem, however, was that the prices of goods and services was growing at a faster rate than wages. For example, in 1922 a loaf of bread cost an average of 160 marks. But by the fall of 1923, the same loaf of bread cost 1,500,000 marks!
As was the case with most nations before them, Germany believed that it could overcome the rising prices by printing even more money. The results, of course, were completely disastrous. Not only did the overproduction of the German mark wipe out much of the German population’s life savings, it also caused prices to rise dramatically on life’s most basic necessities, like food and clothing. Mass hunger in the nation led to starvation in the poorest communities. Soon, poverty spread to the more affluent communities as the prices of goods and services skyrocketed, with no end in sight. As the German currency became completely worthless, many families found that it made more economic sense to burn the stacks of their marks than to use them to purchase firewood. Others used the marks as decorative wallpaper. And while Germany’s bout with hyperinflation was extreme, it provides us with the startling possibilities that can occur when a nation ignores fundamental economic and monetary laws.
In 1924, after their spectacular monetary failure, Germany replaced the mark with a new and improved currency, the “Rentenmark.” In addition, France learned that if it sought to regain Germany as a viable economic partner, it must become more reasonable in its debt repayment schedule. These new arrangements provided some much-needed relief to the German government and its people. The good times would not last for long, however. Later, in the wake of the U.S. stock market collapse of 1929, Germany fell into another deep economic depression. This financial meltdown led to another round of social chaos which would ultimately provide the perfect breeding ground for the rise of another one of history’s maniacal dictators: Adolf Hitler.
Recent Fiat Failures
It has been demonstrated that history is replete with examples of the failure of fiat currency systems. However, let us now turn to the currency collapses that have occurred in more recent years.
Austria, 1922: Poor monetary policies from 1914 to 1923 led to massive inflation in the post-World War I era of Austria. The Austrian government kept the printing presses running day and night to deal with their growing fiscal crisis. Between January 1921 and August 1922, Austria’s currency, known as the crown, suffered a 10,000 percent inflation rate. Eventually, the public’s faith in the crown was shattered. By 1924, the Austrian government introduced a new currency to replace the crown, called the shilling. Austria’s citizens received one new shilling for every 10,000 crowns that it turned in to the monetary authorities.10
Greece, 1944: In 1944, Greece suffered its worst inflation ever. The inflation reached 8.5 billion percent per month! During this period of inflation, prices doubled every 28 hours.
Hungary, 1946: In 1946, Hungary’s fiat currency suffered from 4.19 quintillion (4.19 x 1018) percent inflation. (Prices doubled every 15 hours.) Each morning, millions of Hungarians listened to a radio broadcast just to keep up with how much their money was worth that day. This is one of the worst cases of hyperinflation in history.
Israel, 1984: In 1984, after battling inflation for a decade, Israel suffered an inflation rate of 445 percent, which was later tamed by price controls.
Argentina, 1989: The 20th
