of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.2
— Friedrich A. Hayek, Nobel prizewinner, economist
OVERVIEW: In our last chapter, the topic of fiat currencies was introduced. In this chapter, a brief history of fiat currencies will be provided. A fiat currency, like the U.S. dollar, is a currency that is not backed by any type of commodity. Since an underlying commodity does not give value to the fiat currency, only one thing can determine its value: scarcity. Governments and their central banks, however, have a terrible track record of keeping fiat currencies in scarce supply. No fiat currency has ever succeeded in the long run. Ever. This chapter analyzes some of history’s fiat currencies. Will America follow the same historical pattern?
“O Ye of Little Fiat . . .”
Fiat currencies are faith-based currencies. Individuals who live, work, and transact in a fiat currency system are a people of great faith. Faith, you say? What exactly does faith have to do with a fiat currency system? Faith has everything to do with a fiat currency. As we have already learned, a fiat currency system is one determined by the governing authorities with no backing of any physical commodity. Because fiat currencies do not derive their value from anything tangible, their value is determined by their scarcity. Fiat currency systems, like that of the U.S. dollar, demand an enormous amount of trust from the public in the monetary competency of their governments. Why? Because the future value of a fiat currency is entirely dependent upon the financial wisdom and vigilant oversight of the nation’s monetary authorities in keeping the currency in a limited and strictly measured supply. Those who use and transact in a fiat currency system demonstrate great faith in their government’s ability to make sound monetary decisions.
If the authorities choose to adopt unsound monetary policies, such as massively inflating the amount of currency in circulation, the public will suffer as each fiat dollar becomes worth less, if not worthless! Under such an irresponsible monetary system, the citizenry will seek to preserve their purchasing power by reducing their holdings in the fiat currency as it declines in value. However, the fiat currency is not always the only casualty in such situations, as the public often loses trust in the entire system, including the current political leaders, the central bank, and even the national banking system.
Therefore, it is not a misnomer to call fiat currencies what they truly are: faith-based currencies. The faith expressed by the public is not rooted within the currency itself, but instead, within the ability of the nation’s monetary authorities to properly steward the value of the fiat currency.
Question: Is the U.S. dollar the first fiat (faith-based) currency in existence? And if it is not, what kind of historical track record do fiat currencies have? Are fiat currencies more likely to succeed or to fail?
Answer: The U.S. dollar is not the first fiat currency in history. In fact, the first known fiat currency system was originated under the Song Dynasty in China during the 11th century.3 Since the dawn of fiat creation, governments who have chosen to adopt fiat currency systems have had one unfortunate thing in common: they have abused their money-printing privileges through the overproduction of their national currency until it becomes completely worthless. Interestingly, a cursory examination of the rationale behind many of these periods of currency collapse began with reasonable objectives. In other words, it is difficult to find a historical example of a fiat currency collapse that was initiated with sinister motives to destroy the currency. Instead, history demonstrates that the varied periods of currency overproduction occurred when a government became seduced by the suggestion that their economic misfortunes could be solved through the production of just “a little more” money. But printing money “out of thin air,” as the fiat currency system so easily allows, always comes at an enormous cost. History is clear. Every fiat currency devised throughout history has faced the same embarrassing and miserable death: utter collapse by overproduction. The fact that so many currency collapses throughout history were initiated under the auspices of “good intentions” should be a cause for concern to all who distrust the true motives of the monetary authorities in our modern era.
A comprehensive historical review of fiat currencies also reveals another interesting phenomenon. Often, just prior to the demise of a fiat currency, the nation’s economy appears to be experiencing widespread prosperity.4 Of course, this “prosperity” is simply an illusion. In reality, as more of the fiat currency is produced and circulated throughout the national economy, the average standard of living experiences a temporary increase which creates an illusion of growing wealth in the nation. While this illusion appears real, the “prosperity” that is encountered by the masses of people is of artificial origin, manufactured and fueled by the government’s overproduction of the currency. After a nation experiences this inflation-fueled illusion of prosperity, the death of the currency is not far behind. The irony is cruel.
Economics 101: What They Didn’t Teach You in School
Before we begin our brief excursion through history concerning fiat currencies, consider this brief illustration regarding currency overproduction. Imagine for a moment that two brothers — we will call them Bill and Joe — wake up to find themselves stranded on a deserted island. After several desperate attempts to be rescued, the two brothers soon realize that the tropic island may have become their new home.
There Is Nothing New Under the Sun
According to the Bible, King Solomon was the wisest man who ever lived (1 Kings 4:31). As one of the greatest kings of ancient Israel, Solomon lived a life of luxury and comfort in the upper echelons of his society. History tells us that his riches were immense (1 Kings 3:13; 2 Chronicles 1:12). As a king, he was denied no request. His popularity and fame as a successful ruler were spread throughout the entire region. And based upon his biblical writings, it is obvious that the man was filled with great knowledge, common sense, and wisdom.
But upon a deeper inspection of Solomon's writings, another striking theme emerges: a profound sense of despair. Despite his vast wealth, wisdom, and fame, the great king discovered that a life lived apart from the Creator was futile and that humanity's quest for meaning outside of God would always be fruitless. His observations were summed up best when he said, "All is vanity" (Eccles. 1:2, 12:8). Solomon's sobering realization gives new meaning to the oft-said phrase, "Ignorance is bliss."
Another one of Solomon's famous quotes is found in the Book of Ecclesiastes: "Generations come and generations go, but the earth never changes. The sun rises and the sun sets, then hurries around to rise again. The wind blows south, and then turns north. Around and around it goes, blowing in circles. Rivers run into the sea, but the sea is never full. Then the water returns again to the rivers and flows out again to the sea. Everything is wearisome beyond description. No matter how much we see, we are never satisfied. No matter how much we hear, we are not content. History merely repeats itself. It has all been done before. Nothing under the sun is truly new. Sometimes people say, 'Here is something new!' But actually it is old; nothing is ever truly new. We don't remember what happened in the past, and in future generations, no one will remember what we are doing now" (Eccles. 1:4–11; NLT).
Norman Cousins would later paraphrase King Solomon in his famous quip, "History is a vast early warning system."5 But perhaps George Santayana said it best when he wrote, "Those who do not know history are doomed to repeat it."6 Does this mean that history always represents destiny? No. However, we must admit that while history may not always repeat, it certainly rhymes. And the rhyming of history is what this chapter is about. While each historical case of fiat currency collapse is unique, it is all rooted in
