Why Fiat Money is bad for everyone but the rich. Permanently transfers wealth from poor to rich. Kind of a reverse Robin Hood. #in

Several of my students have been asking me to clarify why “fiat money” is basically bad in all it’s forms — essentially a tax on the poor. The following article focuses on that most obscene example, the US Federal Reserve system however to a lesser degree fiat money is still bad even where governments create it such as here in Canada and virtually every other western democracy.  I have tried not to make it too complicated, while providing enough detail to actually be useful.  There are several excellent articles on the web with much greater detail and if you have an interest I encourage you to dig deeper.

It might be instructive to start with a few quotes about money from those much smarter than your writer.

“Give me the right to issue and control a nation’s money and I care not who makes its laws.”
Meyer Amschal Rothschild, International banker

“The people must be helped to think naturally about money. They must be told what it is, and what makes it money, and what are the possible tricks of the present system which put nations and peoples under control of the few.”
Henry Ford – American Industrialist

Gotta love that Henry Ford. He really was a man of the people.

What exactly is Fiat Money?

Definition of FIAT

1: a command or act of will that creates something without or as if without further effort
2: an authoritative determination : dictate <a fiat of conscience>
3: an authoritative or arbitrary order : decree <government byfiat>
(Courtesy Mirriam-Webster)

Fiat money is money that has value only because a government or other ruler such as a king or a caesar says it does. There are several historical examples of the failure of fiat money going back to biblical times and they are easily researched so I will let you google the history.  Or read, or watch, Niall Feguson’s “The Ascent of Money”.  I’m going to concentrate on why it’s so obscene in this current incarnation.

Money in general is simply a convenient way to store value, and a medium for exchanging things of value. It essentially replaced barter as an easy way to allow me to exchange my hen’s eggs for a new sword, without having to find a sword maker that needed eggs. I’m sure you get the point…

For centuries the de facto standard was gold (or silver) coinage. The use of a commodity, and a valuable one at that, to backstop the major world currencies, meant that money could not be simply printed willy nilly without risking devaluation. The assurance that the paper could be converted to gold meant that the money supply could not expand faster than the available supply of gold.  Today it might be more appropriate to use a different commodity such as oil (or even food), but the main thing is that non-fiat money has real value due to the fact that people value the underlying commodity.

Under the current system a government, or in the case of the United States, the Federal Reserve (the Fed) which is a cartel of the large banks, has the exclusive authority to create the nation’s money.  Laws must be in place to enforce the use of fiat money otherwise people most likely would reject it (this in itself should get the spidey senses tingling).  There is no limit on the amount the government or banking cartel can print or issue.

The reason it’s especially disturbing is that a private company, the Federal Reserve, which isn’t Federal and has no Reserves, has the power to create unlimited currency at will.  The Americans have given them total and absolute power over almost EVERYTHING in the economy and society at large (have a second look at the Rothschild quote above).  This is why Wall St. controls Washington rather than the other way around.  The politicians come and go but the bankers remain more or less the same.

Creating Money “Out of Thin Air”

In reality the Fed doesn’t really “print” money so much as create it out of thin air.  They do this by “buying assets” (mostly US Treasury bonds, sold by the US Treasury Dept.).  These bonds represent new debt issued by the US government, in return for newly issued currency, issued by the Fed.  The government then gets the money circulating in the economy.  Well… not all of it.

And where did this money come from? Really nowhere.  Literally from “thin air”.  It’s really nothing more than an entry in a computer at the Fed, and on the other side of the transaction, the promise of the federal government (US Treasury Dept) to pay the “money” back at some future date.  And to whom shall they pay it back?  The banks that issued it.  What did the bankers do to earn this?  Nothing.

And who is the “they” that must repay it?  Every taxpayer in the country.  And of course in the meantime, there will be interest payments to the bankers.  This interest (and any eventual repayment, which is nigh on impossible now) represents a tax by the rich on the poor.  The reason it is impossible to repay the money is because of the interest.  If you create $100 and loan it to someone, how can they repay the $100, AND pay interest?  They only have $100!  It’s a downward spiral. Bankruptcy is built into the system and is a foregone conclusion.

The second and equally egregious effect of this system is that the printing of money leads to devaluation of the the currency, and it’s big brother, inflation.  Inflation hurts poor people more than anyone as most if not all of their income is spent to buy goods and services.  Rich people can purchase non-currency-based assets which will keep their value through the inflation (houses, cars, gold, etc), and in many cases they have borrowed a fixed amount to buy these assets.  The real, inflation-adjusted, value of this debt is going to go down in value as the currency devaluates, creating a bonanza for those that owe the money.  So in effect the rich get their assets protected and a form of debt relief through the devaluation of their debt.  Click here for an article by Ron Paul written in pretty simple English that explains the inflation tax in greater detail.

This is the reason fiat money is a problem in other countries.  Even though there is a central bank rather than a private bank issuing the currency, the very regressive inflation tax remains.  It still benefits those who own non-financial assets, especially if they have borrowed to acquire them.

The Fed buying “private” assets

When the big banks got into a huge mess four years ago, the Fed bailed them out by buying their toxic assets, rather than letting them fail.  This was the largest transfer of wealth from the poor to the rich that has ever been perpetrated.  It was done under the guise of ensuring that the world economy didn’t suffer from a liquidity crisis, but in my opinion the only ones that would have been hurt would be the banks’ shareholders.  For some reason Lehman Brothers was alone among the group and allowed to fail.  Why only them?  If they had all been allowed to fail, and the $700 Billion was instead just given to the public (it was THEIR money) then every man, woman and child would have had $2,500 to spend in the economy.  That would have absolutely been the jump start the economy needed, but instead, Treasury Secretary Hank Paulsen, engineered a bank bailout which put the money into the hands of the banks’s shareholders.  Where did Paulson work immediately prior to being appointed Secretary?  He was CEO of Goldman Sachs.  Another option would have been to give the money to the banks SPECIFICALLY to cover the toxic mortgages, so that homeowners wouldn’t have lost their houses in such numbers, rather than just give them the $$ to shore up their balance sheets.

So how SHOULD it work?

Nobel Prize winner Joseph Stiglitz is an Economist and professor at Columbia University.  He’s also an ex Senior VP at the World Bank.  He knows of what he speaks.  His opinion — and it makes perfect common sense — is that a a good, healthy financial system is a small financial system, especially in a purely fiat money system.  His position is that because of the amount of monopoly-like power and responsibility they have been given, they should be the most regulated industry on the planet and “operate like utilities”.  If not the banks, then which industry, pray tell?!  Their role, albeit long forgotten, is to help the economy by creating liquidity.  When did it become ok for them to be bloodsucking parasites that leech from the good people working in the “real” economy?  Actually… it was in the early 1980’s under Ronald Reagan.  He was generally understood to be a very hands off President, leaving a lot of decision making to his cabinet.  One of them was Donald Regan, appointed Secretary of the Treasury in 1981, and later Chief of Staff (making him the most influential civil servant on earth).  Guess what his job was immediately before that?  CEO of Wall St. giant Merrill Lynch.

Banks (all banks) don’t really create anything of value.  They do provide a service, but they don’t CREATE any new wealth.  Not the way manufacturers do (by transforming labour and raw materials into things of value).  Or frankly, even governments!  Yet, as of this writing (6/11/12), the Market Cap of the entire S&P 500 is $11.84 Trillion, and of this, banks make up 14.1%.  Only Tech at about 19% is higher.  So the banks have market capitalization that exceeds the Energy, Consumer goods and Health Care sectors, yet they create very little of value.  How did this happen?

Easy, we put the fox in charge of the henhouse…

Here’s a video of a 12-year old Canadian girl who is starting to get the message out.  She is light on details and evidence, but as she’s 12 I will cut her a bit of slack in the articulacy department.  She does seem to “get it”.