fiat currencies are not physically backed up by a particular commodity such as gold, they have no intrinsic value. (By intrinsic value, I am referring to the actual value of the physical piece of paper itself.) Using this definition, fiat currencies are technically worthless. Governments and central banks are fully aware of this and some even understand the inherent danger of fiat monetary systems. To overcome the potential hurdles faced by an intrinsically worthless currency, the U.S. government required acceptance of the U.S. dollar in nearly all domestic financial transactions through the passage of legal tender laws. Due to this legal binding, Americans willingly accept the fiat U.S. dollar because they believe it has value. It is true that the dollar has value, but this value is not of an intrinsic nature. Instead, the dollar’s “value” is derived from a carefully managed perception by the nation’s monetary authorities. This belief, or faith, in the dollar’s value, despite having no real intrinsic value, is a common trait shared by all fiat currencies. Interestingly, if the public were ever to lose faith in the value of the currency, the entire house of cards would fall.
Through the use of constitutional contortion, the United States has created a national demand for a fiat currency. Maintaining the illusion of the dollar’s value requires that the monetary authorities avoid a reckless increase of the U.S. money supply. Historically speaking, such increases have had disastrous effects upon the purchasing power of the underlying currency. Avoiding a dollar collapse requires a perpetual faith among the American public in the Fed’s willingness and ability to keep the currency in a limited supply.
Understanding Intrinsic Value
Many different commodities have been used as money throughout history. Take silver, for example. In addition to being used as money for centuries, the shiny metal also has many industrial uses such as photography, dentistry, jewelry, mirrors, optics, and medicine. With so many varied uses, it is no wonder that silver was widely adopted as money throughout history. Silver, and other similar types of commodity money, has intrinsic value. That is, it has value outside of its role as money.
Compare this to the U.S. dollar. How many uses does a dollar have? Paper money is different from commodity money in that it has no intrinsic value, although some have argued that in enough quantities, the dollar bill could be used as firewood, thereby giving it some intrinsic value. In fact, that is exactly what happened to paper money in Germany during the 1920s! You can read more about that monetary nightmare in chapter 3.
Conclusion
Today, all global currencies are issued by fiat and are controlled by an arrangement between governments and their central banks. For the first time in history, no currency on the planet is backed up by a physical commodity. And why have individuals been willing to accept these fiat paper currencies in exchange for goods produced and services rendered? Ironically, the answer is rooted in the public’s faith and trust in their respective government. The reason that the American public, or any society for that matter, is willing to accept a fiat currency in exchange for goods produced and services rendered is due to the belief that the government will maintain the currency’s value by keeping it in limited supply.
At this point, some readers may wonder why governments should strive to keep their fiat currency in limited supply. After all, couldn’t we eradicate global poverty by printing excessive amounts of currency and giving it to the world’s poorest citizens? If it were only that easy!
While some readers may understand why this is impossible, it is nevertheless a very important question because we have several examples of economically ignorant leaders throughout recent history who have attempted this very thing. Other leaders have attempted to grow their economies out of tough situations by printing excessive amounts of currency.
What happens when a government decides to unleash the printing presses and overproduce its fiat currency? Does everyone suddenly become wildly rich due to all of the newly printed currency? Does printing fiat currency solve problems or just create more problems? In our next chapter I will answer these questions with a historical examination of fiat currencies. Sadly, fiat currencies, like the U.S. dollar, have led every nation that has abused them to the brink of economic disaster.
Quick Summary
Our own personal view of money is shaped and influenced by three factors: 1) the economic system we are born into, 2) our family’s financial philosophy, and 3) our instilled spiritual and moral values.
Money is morally neutral. It can be used for positive or negative reasons. Financial morality is found in the intentions of the user, not in the money itself.
Three forms of money have been used throughout history: 1) commodity money, 2) receipt money, 3) fiat money
Commodity money took the form of exchangeable commodities often with intrinsic value such as salt, livestock, and crops.
Along with the advance of civilizations came the need for a form of money that was relatively scarce, portable, easily divisible, and durable.
Precious metals, such as gold and silver, fit all of these requirements, making them the obvious choice.
Over time, goldsmith banking allowed individuals a safe place to store their gold in exchange for a paper receipt that was considered as “good as gold.”
These paper receipts, or receipt money, were extremely popular due to their ease of use.
The governing authorities eventually saw a need to monopolize the money creation process in order to ensure economic stability.
This government intervention led to the rise of central banks and fiat monetary systems that have ultimately proven to be disastrous, as we shall see in upcoming chapters.
Fiat money has no intrinsic value. Instead, its value is derived from legal tender laws and a public perception that the monetary authorities will keep it in a limited supply.
Today, every currency on the planet is considered to be fiat.
Endnotes
1. Dallas D. Johnson, Consume! The Monetary Radical’s Defense of Capitalism (New York: Dynamic American Press, 1940), p. 89.
2. Charles Francis Adams, The Works of John Adams, Second President of the United States (New York: Little, Brown & Co., 1853), p. 447.
3. Nathan G. Goodman, editor, A Benjamin Franklin Reader (New York: Thomas Y. Crowell Co., 1945), p. 288.
4. More in-depth explanations of the various types of political and economic systems can be found outside of this book. My purpose here is simply to point out that a person’s view on money is often directly tied to how his government teaches him to view money.
Chapter 2
A Short History of Fiat Currencies
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.1
— Sir John Maynard Keynes
With
