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The Failure of Fiat Currency |
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To assess success or failure, fiat currencies effectiveness should be filtered through the prism of history. Early civilizations established a method of value exchanged for value. A specific symbol of value was created: stones, shells, beads, etc. Other more sophisticated forms of currency appeared as traders began to recognize the need for a mutual form of payment for goods exchanged in trading. The recognition of the symbol of specific value amounts, i.e., coins of copper, gold or silver were largely determined between buyer and seller of traded goods. Before the advent of paper currencies, money changed hands in coins. The weight of coinage determined its value. These weighty coins proved cumbersome. A simpler means of payment was paper certificates worth the same value as coins. |
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Rome: Cheaper Coins One needs a closer look at Roman civilization during the first century to know for certain if fiat currencies caused its demise or whether other circumstances such as plague impacted the Roman economy. However, the Denarius coin was originally pure silver: it was a reliable currency for the exchange of goods because essentially the coins were carefully measured pieces of a valuable mineral. In 54 C.E, Emperor Nero was in need of money, and came up with a surreptitious way to earn it: decrease the amount of silver used in the coin, and use this silver for funding. This was the world's first currency devaluation. As time went on, future emperors removed more and more silver from the Denarius until by the end of the Roman Empire the coin was only .02% silver, and consequently inflation was rampant. United States: Funding the Revolutionary War At the start of the Revolutionary War, the Continental Congress created the Continental Dollar, this was to be a standard bill of credit for paying for supplies. Its denomination was based on the Spanish Milled Dollar, also called a "piece of eight" because it was worth eight Spanish Reales. Initially, there were to be two million dollars worth of these Continentals printed, but it was soon apparent that much more would be needed to fund the war. By the end of 1775, six million Continental dollars were in circulation, which, if valued as intended, would be half of the total money supply in the colonies. The Continental ceased printing in 1779, with the total official value of $242 million, plus much more in counterfeit currency issued by the British in an attempt to destabilize the currency. By this time $1 in real currency was worth $26 in Continentals. The use of Continental Dollars ended completely in 1781: it took $168 in this fiat currency to get $1 in coin, creating the phrase "not worth a Continental." Germany: War Reparations After World War II, Germany was ruled by the newly-established Weimar Republic. The "London Ultimatum" issued in 1921 required Germany to make sixty-six annual payments of two billion marks, plus twenty six percent of all exports: in that year, the total payment was 132 billion marks, which was more than all of Germany's gold or foreign exchange. This debt essentially made the mark worthless. Despite negotiations, the allies eventually took control of the Ruhr valley in an attempt to get the payments in goods like coal. Eventually the German Mark was replaced with the Rentenmark, whose value was tied directly to real estate. Argentina: Corruption Despite continued loans and deferments by the International Monetary Fund, tax evasion and money laundering prevented this money from being used to boost the economy. In 2001, a congressional committee started an investigation of the Central Bank of Argentina, trying to determine why they had not looked into accusations of money laundering and massive off-shoring of funds. Like the early United States, Argentina issued a sort of pseudo-currency, both nationally and at local levels, to use in place of available hard currency. Because they were issued so widely without backing, the value of these certificates plummeted. Combined with the banking scandal, Argentines lost faith in their currency and began converting their pesos to U.S. dollars, much of which was moved to overseas banks. To prevent this, the government passed laws that prevented all but the smallest withdraws from savings accounts. People took to the streets in protest, eventually vandalizing anything related to the crisis, including banks and foreign companies. Despite an attempt to create a new currency backed by federal lands, the government eventually ended the 1:1 ratio linking the peso and the dollar. The value of the peso collapsed, and by the end of 2002, it was valued at about $.25. There was still a money shortage, and quasi-currencies continued to be used, although it was feared that the government would declare them illegal and would not redeem them. The economy started to turn around in 2003. With prices so low, Argentina's agriculture and industry were revived by exports. The newly elected government made a concentrated effort to stop tax corruption and improve social welfare programs. By the end of the year the peso was valued at $.33. Zimbabwe: Modern Hyperinflation The Zimbabwean dollar had experienced inflation since it was first issued in 1980, but the modern hyperinflation can be traced back to early 2006, when the government issued ZWD 21 trillion to pay on loans from the International Monetary Fund, and later an additional 60 trillion dollars to pay government officials and soldiers. This unbacked money, combined with the oncoming global economic slowdown, paved the way for the massive devaluing of the ZWD. In an attempt to stop inflation, the government made it illegal, fixing prices for staple goods. This proved unenforceable, and by the end of the year, inflation was at about 100,000% annually. The new ZWD 10 million note issued at the start of 2008 was worth about $4 U.S. By January of 2009, a newly announced ZWD 100 trillion bill was worth $30 U.S. Use of the Zimbabwean dollar had become so impractical that the government was allowing businesses to officially use foreign currencies. At its peak, the annual inflation rate of 231,000,000,000%, or 100% each day. Finally, the Zimbabwean dollar was discontinued, although it still sees use unofficially. The lack of hard currency shrunk the economy from a GDP per person of $720 in 2002 to $265 at the end of 2008. |
By Buysilvercoins.org.uk Monday, August 17, 2009 - Site map - Privacy policy |