Paper Currency Wrecked Everything

Paper Currency Wrecked Everything. By Stephan Livera.

Can the type of money used change the culture of a society? …

Fiat [paper] money has never arisen through purely voluntary market actions. It has always been coercively imposed via interventions such as legal tender laws, capital gains tax laws, central banking, laws permitting fractional reserve banking, government bailout guarantees, etc. …

To see the cultural consequences, we must first understand the pivotal role money and prices play in coordinating production across society. Entrepreneurs must act under uncertainty to gather the required resources to offer their goods and services. And yet money, their unit of account, for measuring profit and loss, is being manipulated by the government ….

Using money with continual inflation encourages short termism and haste. We live more like animals in the wild. Animals in the wild care mostly about their next meal, rather than thinking, planning, and building for the long term as humans can do when we’re at our best.

Consider the counterfactual world of living under sound money, chosen by the market. In this world, how does the state fund large programs? It must openly tax citizens, and for this, politicians pay a high price in lost popularity, and risk losing their next election. Instead of explicit taxation, politicians inside the government will prefer to use more hidden forms of funding for their programs. In order to do this, they must first remove the check of sound money.

Going one step further, the creation and enforcement of fiat money enables larger and more centralized government. Large government programs become possible that were not possible or sustainable under a market-chosen, sound money standard.

Consider the impact of profligate spending under a market-chosen monetary standard. In the past, this meant that governments spending big and living large were subject to net gold outflows to other countries.

While many like to think of government programs and welfare statism as a “safety net” for society, consider that these programs fundamentally drive the wrong behaviors. Where historically, non-government-based mutual-aid societies promoted a culture of self-reliance and thrift, government welfare states promote the opposite, the end result being that government programs remove the safeguards that a market society would have. In this way, fiat money frees people from the prior “restraints” of polite society, with expectations for productive and civil behavior broken.

Freed of prior constraints that families, religion, and communities used to impose, people often turn to more short-term gratification. They may engage in more reckless behavior that previously would have had economic consequences, such as the cost of raising children. Fiat inflation forces people to invest in just about anything rather than save in fiat cash, driving more money and debt as leverage through the financial services sector than otherwise would be the case.

With cheap fiat debt, governments may more cheaply engage in warfare or sustain warfare for longer than they otherwise could have. Cheap fiat debt essentially provides the government with command over more of society’s resources than it otherwise would have had.

The change from a gold-backed currency to a purely paper currency happened in stages from 1912 to 1971. Notice how that parallels the rise of the welfare state and big government, and then their a-historical domination since 1971. Mere coincidence? No way.

Now with modern monetary theory, ever more printing in response to covid, and permanent low interest rates and high debt, the pace of degeneration is accelerating to warp speed.

Returning the money to a sound basis — where governments and banks cannot create money out of thin air (credit yes, but credit that must be repaid) and the market sets interest rates instead of some bureaucrats — would end much of the modern nonsense in relatively short order.