Now that our economies no longer run on sound money, central banks have the power to create money from nothing. We are supposed to believe that this allows them to support the stability of the economy and pursue full employment. However, there’s a saying that goes: “Power corrupts, and absolute power corrupts absolutely.”
Even if central bankers do provide some benefits to the economy, they also answer to the politicians. If you’re like most people, that doesn’t inspire a lot of confidence. In fact, some surveys have found that the public trusts politicians even less than used car salesmen. History shows that these concerns are valid.
Even as early as the days of the Roman empire, politicians have been devaluing currency.
In the past, the most common form of money was silver coins. When times got tough, politicians would dilute coins by mixing lower-value metals like nickel in with it. This allowed the government to quietly cut into everyone’s salaries.
Henry VIII reduced the silver content in British coins from 92.5% to as low as 25% in order to finance his luxurious lifestyle and foreign wars.
Debasement has devastating effects on the economy. Lower confidence in the currency greatly disrupts trade, since it becomes very difficult to know the value of coins in the market. People may resort to barter, but this is much less efficient since it is hard to balance the value of bartered goods.
By the same token, countries that didn’t debase their currencies were at a great advantage. Venice was one of the only medieval states that never debased its currency. Some economic historians believe this is one of the reasons why Venice was one of the most successful business hubs of the medieval period.
The adoption of paper money made it even easier to debase a currency. Debasement often came along with wars— Richard Nixon broke the US dollar’s link to gold in 1973 partly due to debts from the Vietnam war.
In the aftermath of Nixon’s decision, inflation ran unusually high throughout the 1970’s, draining purchasing power from the people.
This inflation was not only caused by war, however. Welfare also played a big role. It was politically very convenient for politicians to be able to pay out welfare entitlements, even if it meant draining additional wealth from everyone else’s pockets.
Mainstream economists argue that fiat currency helps to manage recessions. Franklin Roosevelt, for example, dumped the gold standard in order to fund the New Deal during the great depression. Creating money out of nothing may cause inflation, but it can also help to reduce deflation. During the Great Depression, people started to hoard gold, leading to a decrease in economic activity and high unemployment. The US government’s response was to issue Executive Order 6102, which outlawed ownership “of gold or silver coin or bullion or currency”, under penalty of a $10,000 fine and/or five to ten years imprisoned.
Top economists say that this saved the country by making it possible to create new money for federal job programs. They will also tell us that some inflation is good because it pushes people to spend money, boosting the economy.
In reality, it was simply fixing a problem caused by debt with more debt. Some people compare this to an alcoholic getting rid of a hangover by drinking more alcohol.
The reason people were hoarding gold, to begin with, was a loss of confidence in the economy. This loss of confidence was caused by a big debt bubble bursting— banks didn’t have enough hard currency to honor their obligations, so they collapsed.
People weren’t spending because they were afraid, but if the economy had been based on sound money, to begin with, there would have been no reason for a loss of confidence. So it may be true that inflation helps to solve some economic problems, but many of these problems are based on unsound money. As the old saying goes, “an ounce of prevention is worth a pound of cure”.
Money that can be easily debased makes war easier in many ways. The most obvious way is by making it possible for a government to spend money it doesn’t have.
If war is truly necessary, then the public doesn’t need to be cheated to pay for it— they’ll pay for it willingly. If it’s possible to create money from nothing with no consequences, then it’s possible to finance unnecessary wars intended to increase the personal power of those in charge.
Unsound money also leads to political crises. For example, Hitler came to power in the aftermath of the collapse of the German currency. When people lose their savings overnight, they will naturally look for someone to blame.
Finally, when money has no value in itself, value has to come from somewhere. Since value is determined by demand, getting more people to use an unsound currency can prop up its value. This is why governments create laws to force people to use unsound currencies.
In the case of the US dollar, much of the demand comes from the petrodollar system. Almost every country in the world sells oil for dollars, which boosts the value of the dollar. Some believe that the US interventions in Iraq and Libya were intended partly to prevent those countries from selling oil for other currencies.
With the escalation of the war in Ukraine, Putin announced Russia would be selling oil only for rubles— this was understood to be a direct attack on the petrodollar system.
Economic crises often lead to war, and economic crises are often caused by a failure of trust. When people have no confidence in the economy, spending and investment are constrained, which leads to economic stagnation.
It may be possible to use fiat currency to support some economic policies, but the ability to create money out of nothing is a huge amount of power. This power translates to the potential for abuse.
Sound money is the basis for a sound economy. If people can trust that their money will hold value, transactions flow smoothly.
Highly secure cryptographic blockchain technology is ushering in a new era of money. One of the reasons for transitioning from gold and silver to paper money was convenience. Now, it’s possible to secure the ownership of vaulted precious metals on a decentralized network that is immune from human error and abuse.
SilverToken is working toward a more peaceful and prosperous world based on sound money. SilverToken provides immutable certificates of silver ownership based on the world’s most secure and decentralized blockchain network. Learn today how you can invest in a future based on sound money.