Sunday, December 12, 2010

Dual and Single Tier Fiat Monetary Systems

Despite all the efforts of governments to substitute irredeemable paper, they have failed to demonetize gold and even though it is not used as legal tender, it still is recognized as money. That is a strange fact considering the immense pressure that has been placed on society by governments to erase the monetary value from gold. In the most widest consideration, given the sum of history, neither men nor governments for that matter, will actually trust anything other than gold as a hedge against economic collapse. That is evident, even today, as we see more and more people purchasing gold, the same is true with many governments and their central banks.
Unlike Fiat Money, notes issued by government, gold needs no endorsements or coercion to be used as money and valued in exchange. Fiat money of any kind always must be forced upon the population, introduced by stealth into circulation by governments who desire to manipulate the power of monetary economics and eventually siphon off the wealth of the productive population. Unlike Fiat Dollars, gold money does not even have to have a government stamp upon it, it does not require legal tender laws or to lay taxation to enforce its use. Gold money does not require the full faith and credit of a government to make it money or to influence the use of it in an economy, there is therefore no compulsion required when gold money is in circulation, it is a desired commodity, whether it is in the form of money or any other form.
Unlike gold money, fiat money is accepted as money as long as there is faith in the government of issue and in the stability of the purchase value of the fiat money itself, the problem, of course, is that eventually the depreciation becomes evident through price inflation, people see their hard labors wasted on a form of money that no longer holds the same value as it did just a few years prior. Additionally, fiat money must rest upon the expectation that the promises made by the government of issue will be kept, once that expectation dwindles through the various foibles of a government that abuses the power of fiat monetary creation, such as the massive deficit spending that usually accompanies all fiat currency regimes, then the currency suffers and people search out other forms of value, particularly gold. History has proven this fact time and time again since at least 20 B.C.; fiat monetary economies always end the same way, collapse. There is evidence however, that fiat currencies were used as far back as the time of the Pharaohs, with equally disastrous results. In a historical context, the Book of Genesis 47: 15 states a very interesting event: “So when the money failed in the land of Egypt and in the land of Canaan, all the Egyptians came to Joseph and said, “Give us bread, for why should we die in your presence? For the money has failed.”
It is indeed a very strange psychological occurrence among peoples and governments who are subjected to established fiat regimes, it tends to make them unwilling to view their irredeemable fiat paper money as anything other than what that fiat paper money really is, nothing more than promissory notes that can never actually be redeemed because the promises of the issuing government always become far too extended for such a redemption. It is strange that people seem to think that government authority and laws can create something out of nothing and call it money, it is this undeserved faith, this belief system that allows fiat money to sustain a degree of value as money, but that too ends when the inflated supply of the fiat regime depreciates the purchase value of the currency and such faith is destroyed.
The degree and depth of faith necessary in government issued fiat money is comparable to the faith necessary in religion, for what else could account for the fact that when people see a piece of paper with the numerals $100 printed on it, that they view it as more valuable as the same piece of paper that simply has $1 printed on it. The ruse is complete, the deception is extensive and the faith that has been built around the fiat monetary system must be of the utmost dedication. The Fiat God commands total faith and allegiance! Talk about idolatry, gold makes no such commands of faith, it is its own promise of payment, and it requires no government seal of approval or legal tender laws to enforce or coerce its usage as money.
The constant hunger of government issues its fiat currency that ultimately devours itself, eating up its own purchasing power. There is no doubt that history teaches from an extensive experience concerning money; perhaps one of the greatest lessons is that government is the premier counterfeiter and can no more be trusted with the power to control money than a thief with the keys to a bank. One must wonder why so few believe the fact that governments and money don’t mix. There is a history however, one of sound money, one which is either completely ignored or partially ignored by most in government and in the population in general. Perhaps the strangest fact is that so many are fooled by the absolute folly of fiat money, even stranger still is the fact that this folly is recurring time and time again without the actual lesson being learned.
Except for a period in the 1860s and 1870s, government relatively kept its hands off money for nearly a century, except for the barest minimum Constitutional requirements of establishing a standard of weights and measures. The laws necessary for various liabilities and for banking were kept to a minimum; the market took care of the rest by awarding the prudent and penalizing the less prudent. It was a century that saw the most incredible increase in widespread prosperity that the world had ever seen before. The reach of government was restricted, its presence in monetary and economic matters was limited and the result of that policy was the unleashing of market enterprise, voluntary and free. Government was not in the money business, it did not create it nor did it control it or the supply, nor did it intrude in the affairs of business except in the case of fraud.
The attempts at fiat money in the early experiences of our country were lessons not soon forgotten, but given the greed of government for both power and spending power it did not take long for those lessons to be laid aside in an attempt to grasp and then unleash the power of monetary creation and control. The first major push toward a government-controlled money came during the Lincoln Administration, the problem of course is that government fiat money cannot compete against gold; the attempt was a complete and utter failure. By the time the Lincoln’s illegal War of Conquest was over the Greenback was valued at 35 cents gold. It represented nothing of value and as a result the market created a two-tier pricing structure, one in fiat money, the other in gold money that continued through the 1870s. Coined money disappeared from the United States, gold was exported for goods while the Greenback swayed with instability and through the process the credit of the government was considered questionable, especially by foreign trading partners.
The search was on and government sought a method to use that would allow it to spend far more than the revenue collected and to do it in a way that would be relatively concealed from the population. Through its search, government also sought to control credit, as the ancillary power of money, for just to control the creation and supply of fiat money would not provide the government with the instrument it really needed and that was a market for its debt. Thus the bond market became the ultimate reality of a managed money supply that would produce a managed economic market to allow the control of the ebb and flow of the economy as needed or in more cases than not, as was politically expedient.
The government, not the market was to become the heart of the economy, with credit money being transformed into the fluidity of economic life-blood. Thus, taking the power of money away from private enterprise and placing its control in the grasp of government as a “proper function of government”. It was government that would determine what the proper supply of money would be, the rise and fall of interest rates and in the process; it would determine the actual beneficiaries of its own managed economy.
The problem, of course, is the ability to trust a government, which sees itself without limitations. To aid government in its unlimited vision, a monetary system was necessary and that system was one that provided few restrictions on the supply of money government could “raise”, the best way around that problem of revenue was a two-tier system of fiat currency since all single-tier fiat systems tend to collapse rapidly from government abuses.
Part of the problem government has always had with gold money is the restrictive character of the money that demands budgetary restraint. Another part of the problem, at least on the part of government, is that a sound money economy punishes abuse, both by government and by businesses. Under a gold monetary system combined with the free-market, there are few places to hide fiscal imprudence. These facts however, while viewed by government and those who are politically connected as problems, are actually beneficial in ways that are really beyond calculation. A sound money free-market economy will always indicate problems of excess and malinvestment, it is essentially the nervous system of a free-market economy and will, when necessary demand a remedy to match the abuses.
While there have always been critics of bankers, there is a huge difference between free-market banking and the type of banking that we are now subjected to under government authority. In the free-market a banker must abide by the necessity of good business practices otherwise the bank and banker will face insolvency. The government, on the other hand, has an unlimited supply of fiat money or at least the power to product an unlimited supply; additionally, the government is not bound by free-market restrictions, nor, as it appears, are the banks chartered by government.
In the free-market, bankers are required to maintain the trust of their depositors, as well as their stock-holders, with the responsibility to keep the bank solvent, the same is not true with government or its banking partners. Under a sound monetary system there is the demand that the banker holds his depositors money in trust, not simply to use it as he pleases under a fraudulent fractional reserve system of divided and unsustainable titles. While it is true that a banker under a sound monetary 100% reserve system can issue credit beyond the deposited funds, he does so at his own risk, for to extend credit beyond the funds held on deposit can ruin his bank and his life, particularly in the cases of outright fraud.
Unlike the current fiat fractional reserve system, under a sound monetary system, integrally linked to the free-market, the banker is limited by the amount of real money he has in deposit, lending at the behest of only those customers who give the banker permission to lend their deposits. If, by either chance or deliberate risk, the banker lends out more than his customers have deposited me must immediately stop lending, but additionally he must call in the outstanding loans. This is one of the benefits of sound money under a free-market banking system, it requires absolute adherence to the highest level of responsibility to the customers of the bank. While such measures are not pleasant, it is a necessary medicine under a sound money free market system of banking.
Unlike free-market money and banking, government is not bound by such limitations, nor is it at much risk since it will rarely, if ever, force a contraction of the fiat money supply, thereby tightening its budgetary belt. Government hates the political consequences of bursting economic bubbles and will always attempt to inflate or re-inflate a bubble. Its ability to create money at will helps the government in its attempt to side step the painful aspects of a collapsing economic bubble. The control of money in the hands of government is the control of society, it is absolutely necessary if government is to retain control and expand its ability to rule without limitation.
Given these facts, it is extremely odd that there are those who laud the Lincoln Greenback or any other single-tier fiat system, for to do so it to laud the government in its unlimited ability to create money for both peace, but especially wartime expenditure. Since wartime expenditures tend to be exorbitant, the ability to wage war under a sound monetary system is limited only to those, which are purely defensive in nature. So too, are internal improvement projects and projects of unlimited entitlement programs, the sound monetary system will simply not allow the novelties of popular political expediency.
Unlike the dual-tier fiat system, sound gold money places limitations on government since the government must abide by the law of the free-market. Sound money prevents the unlimited accumulation of debt always associated with fiat money, additionally, sound money cannot easily be manipulated in terms of supply, nor are interest rates easily manipulated by government for political and social gain, the market determines the rate of interest. Of special note, it should be recognized that under free market sound money system the rate of natural interest is relatively stable compared to the manipulated system of fiat interest rates.
The ability to control government by controlling the money available to government makes perfect sense, it restricts government to revenues raised and since the population is sensitive to taxation, the limitation mechanism is ultimately sound. It also effectively controls the ability of government to accumulate debt, since it must abide by the sound practices of borrowing only that which it is certain of repayment within a reasonable amount of time, the money is, after all, the People’s money, not the governments.
In the early years of the 20th Century, a new innovation was created, the monetization of public debt, this technique unleashed the economic, military and social powers of government in ways never seen before. While it is true that prior to this period the government issued bonds, it did so with the restrictions placed upon it by the limitation that sound money placed on revenues and on its ability to repay those bonds under the sound monetary revenue system. The problem however, was that the government was also limited by the amount of the bond issue the public was willing to purchase. That was another limitation of sound money that government saw as a limitation on its ability to powers, especially when it came to any imperial inclinations of a ruling class of politicians. The solution was to create a dual-tier fiat monetary system that would function through the government’s ability to issue unlimited amounts of marketable monetized securities.
Here is the key to the entire system; the dual-tier fiat monetary system had major advantages to the single-tier system. In a single-tier system the government simply issues fiat money, but that system is extremely unstable and usually collapses within a matter of years. The government required a system that could be sustained for decades and one that would provide it with a virtual unlimited supply of funding and therefore, an unlimited resource of power. In the single-tier system, the government can issue its fiat currency, a piece of paper with all the official seals that promise some sort of redemption, but since such fiat notes represent nothing of marketable value, history has shown that such single-tier systems are usually repudiated as the system deteriorates through rapid inflationary depreciation.
Governments found that they simply can’t issue paper money on a single-tier system, it cannot be sustained nor does it provide government with a relatively stable monetary system on which it can build its empire. It is odd indeed, that there are those who continue to advocate that the government simply replace the current dual-tier fiat system with one where the government simply issues fiat money directly, without the use of debt monetization. The fact is that such a system has been tried throughout history without any success whatsoever.
Thus we come upon the distinct differences between the two types of fiat monetary systems. The dual-tier system provides a degree of stability, but the manner in which it is achieved is ultimately very costly and dangerous. Under the two-tier fiat monetary system public debt is monetized using what amounts to essential two pieces of fiat paper, one being the fiat bond issued by government and the other being the fiat currency note issued by government. The bond is issued and provides a surety of repayment, the problem, of course is that the repayment of the bonds is promised with the very fiat notes the issuance and sell of bonds create. So, the government promises to pay its bonds by the very paper fiat notes created by those bonds. Neither the fiat bonds nor the fiat notes represent anything of actual value in terms of purchasable goods, there is no real asset value to either the underlying bond or the repayment of those bonds with the fiat currency created through the salable issue of those bonds.
Essentially the government states that it will repay its bond issues, but repay it with what? Certainly not anything holding any more value than the bond issue itself. It promises to repay its bond obligations with nothing more than the very Federal Reserve Notes created from the security of those bonds. Thus, in the simplest sense, one piece of worthless paper is serving as security for another piece of worthless paper. The Governments Treasuries secures the fiat money and the fiat money secures the Government Treasuries…have you recognized the folly yet? Thus, the fiat bonds secure the fiat money and the fiat money secures the fiat bonds. Who is the greater fool, the debtor or the creditor? They are equally foolish in their conceit of the system.
The government has no worries as long as the ruse continues to deceive the buyer of its bonds, but it can only last so long before the over-issuance of bonds, combined with massive deficit spending rips the veil from the fiscal Ponzi scheme.
In order to complete this dual-tier fiat monetary system it was absolutely necessary to attempt to demonetize gold. It was essential for Gresham's axiom to be circumvented; otherwise the new dual-tier fiat monetary system would not work. As long as money and credit were related and thus restricted by gold money, the government would not be free to pursue unlimited power; it could not manipulate the sound money supply to an extent that would satisfy its insatiable appetite for domination over the economic and social arenas. The government, if it were to be successful in its powerful desires, would have to eliminate gold money from the economy. History proves that governments hate the restriction of gold money and have, through the centuries, attempted to contain the power of gold money, without much success. You see, there was no way for the system to function while gold was considered and used as money; not only that, but to implement this dual-tier fiat monetary system it was absolutely necessary for the government to outlaw gold altogether until the fiat monetary system was firmly established.
To accomplish this there had to be a stratified repudiation of all debt payable in gold. The first step began, of course, during the Administration of FDR when the domestic public debt was repudiated and private ownership of gold declared illegal in this country. The second step came when Nixon repudiated all foreign debt of this country when he declared that no U.S. Government debt obligations would be paid in gold, at which point private ownership of gold no longer posed a real threat to the pure dual-tier fiat monetary system. This was the crucial moment in time when there was an almost complete seizure of the entire financial economic system of money, banking and credit. With such a seizure, the ability to control and thus manipulate the social policies needed to create a welfare/warfare state was achieved. No longer would the restrictions of gold or the flaws of a single-tier fiat monetary system limit the powers of government. Public debt could be monetized and the repayment of that debt could be achieved through a slight-of-hand structure that paid debt through the very same instrument used to create it in the first place.
The dual-tier fiat monetary system avoided all the pitfalls of a single-tier system, such as the Greenback system, or all the other single-tier systems throughout history that failed within a short period of time. This government fiat money, like all before it, had to be the only legal money allowed in the country, there could be no competition, especially from the most powerful and liberating money in the hands of the People, which is gold money. Governments are limited and thus controlled, when its ability to spend is restricted. Such a restriction came from gold money, its quantity could not be easily increased, nor could it be easily manipulated once in circulation and it became titled money when in the hands of a private individual.
There is such a delusion created by the entire system that government must continually promote the impossible, and that is a perpetual boom through its inflationary fiat monetary policies. While it appears that cheap money and credit offer some sort of immunity from the laws of economics, the truth is that eventually the system is consumed from government excess. It is evident that the last thing our government ever wants to experience is the pain of economic realities created by the system it uses to stay in power and it will use the fiat monetary system to the extreme, if necessary, to maintain its power even if it means such policies will ultimately cause the entire foundation of the economy to crumble.
All the proper functions of money have been suspended, and economic law delayed, by the government’s dual-tier fiat monetary mechanism. It can continue for a while, but eventually all the principles of economic law will bear down upon the fraudulent system. As those principles press against the system, its structure will be exposed, its flaws manifested in economic pain and ultimately economic disaster. At this point in our fiat history the government is attempting to postpone the inevitable and the system itself is exposing the helplessness of the government and, in all its folly, its own insolvency and corruption. The government, with its debased currency, is facing its final repudiation of debt and, in the process, an actual repudiation of the fiat monetary system. The government’s seal, its promises, beautifully engraved on all its fiat obligations cannot prevent the catastrophe that faces this country, and indeed the world. There is no trust in the promises of this government, no matter how the words are engraved on its fiat paper money, no matter how its engraved bonds are promoted as a safe-haven from economic distress.

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