An article regarding fiat money

Saw this article below regarding fiat money. Hope the author is
wrong....

FIAT MONEY: History Repeats Itself
- The Casey Files -
by Shannara Johnson
Editor, International Speculator
December 28, 2006

I suspect that 98% of investors - and maybe more -- have little to no
understanding of monetary history. Yet, failing to understand the past,
in this case, leaves a black hole in your ability to understand the
implications of the current tenuous condition of the U.S. dollar.

While no one can easily imagine all the many ways the end of U.S.
dollar hegemony might affect complex and deeply intertwined global
financial markets, you can, however, better prepare for what's coming
by looking back at just one of the many examples of a fiat currency on
its way into the trash bin of history.

The following article by Shannara Johnson, an editor for the
International Speculator, examines the monetary roots of the French
Revolution and, in the process, provides a compelling parallel to the
current state of the U.S. dollar. Read it and pass it along.

Doug Casey

For years now, the editors at Casey Research have been warning-nay,
shouting from the rooftop-about the danger inherent in any fiat
currency, and especially in the modern U.S. dollar, a currency some
skeptics have called "funny money."

There is nothing funny, though, about the potential for trouble as
today's purely paper dollar declines. It is trouble that has happened
before, and history is, or should be, our best teacher. But as we'll
see, mankind seldom learns and rarely remembers enough from its
mistakes.

One of the most riveting accounts of the catastrophic effects of
replacing a gold-based or silver-based currency with paper money comes
from Andrew Dickson White (1832 - 1918), the diplomat, author and
educator who co-founded Cornell University.

In the mid-1800s, White started to collect and analyze newspaper
articles and documents that had appeared during the French Revolution,
especially those pertaining to the Revolutionary issues of paper money.
In 1912, he published Fiat Money Inflation in France, an essay that
these days, once more, has gained a striking timeliness.

In 1789, on the eve of the French Revolution, the French government
found itself in deep trouble with heavy debt loads and chronic
deficits. A general lack of confidence in the business world had led to
the decline of investment, and the economy was stagnating.

"Statesmanlike measures, careful watching and wise management would,
doubtless, have ere long led to a return of confidence," writes
White, "a reappearance of money and a resumption of business; but
these involved patience and self-denial, and, thus far in human
history, these are the rarest products of political wisdom. Few nations
have ever been able to exercise these virtues; and France was not then
one of these few."

Instead, as politicians tend to do, France's National Assembly looked
for a shortcut to prosperity, and soon calls for the introduction of
paper money were heard. Some prudent individuals, such as then-Minister
of Finance Jacques Necker, urgently warned against it. After all, only
70 years earlier, the country had learned a tough lesson when Scottish
economist John Law had presided over a system of fiat money with
ruinous consequences.

But Necker and his supporters were shouted down as "the pressure
toward a popular currency for universal use grew stronger and
stronger." The plan sounded sensible: the government would confiscate
the lands of the French Church-which then owned between one-fourth
and one-third of all French real estate-and issue a total of no more
than 400 million livres in large notes of 1,000, 300 and 200 livres,
called assignats, that would be backed by a piece of land. Moreover,
every note would bear 3% interest, to encourage holders to hoard them.

The influx of fresh money would give the French treasury "something
to pay out immediately. . . relieve the national necessities. . .
stimulate business. . . [and] give to all capitalists, large or small,
the means for buying from the nation the ecclesiastical real estate."
From the proceeds, the nation would pay its debts and obtain new funds
for new necessities-a bullet-proof proposal, or so it seemed.

At first, the results of issuing the assignats appeared to be a dream
come true, says White: "the treasury was at once greatly relieved; a
portion of the public debt was paid; creditors were encouraged; credit
revived; ordinary expenses were met. . . trade increased and all
difficulties seemed to vanish."

Had the authorities stopped there, White suggests, the effects might
actually have been beneficial. Regretfully, though, "within five
months after the issue of the four hundred million in assignats, the
government had spent them and was again in distress."

Immediately people throughout the country started to cry for another
issue of notes. Paper critics cautioned that there'd be no stopping
once the nation had stepped onto the slippery slope of inflation, but
others dismissed the warning, saying "the people were now in control
and that they could and would check these issues whenever they
desired."

Here's where the disturbing parallels to modern-day America begin.

By 1790, the paper-pushers had persuaded themselves that specie
[precious metals, coins] was an outmoded form of currency... after all,
what could be better than money backed by land that would only
appreciate in value? It eerily reminds us of the U.S. housing boom and
the easy, no-holds-barred mortgage deals that have been sold to
sub-prime borrowers.

Or take the Comte de Mirabeau, one of the greatest paper advocates and
demagogues, who at that time gave his powerful "Stay the Course"
speech, concluding "We must accomplish that which we have begun."

Or Pierre Paul Royer-Collard, who sounded disturbingly like Ben
"Helicopter" Bernanke when he told the National Assembly, "If it
is necessary to create five thousand millions, and more, of the paper,
decree such a creation gladly."

It was a done deal, and France began its slide into inflation. Soon
calls for small-denomination notes grew louder. "The cheaper currency
had largely driven out the dearer," writes White," paper had caused
small silver and copper money mainly to disappear; all sorts of notes
of hand, circulating under the name of 'confidence bills,' flooded
France-sixty-three kinds in Paris alone."

Everything was tried to supply small-denomination silver and copper
coins and hold them in circulation. Laws were passed that forced
citizens to send their silverware and jewels to the mint. Churches and
convents had to give up most of their silver and gold vessels, and
church bells were melted down to supply the mint with copper. Still,
silver and copper grew scarcer and scarcer-and eventually the
government gave in and printed smaller notes, starting out with five
francs and finally going down to one single sou.

When inflationary pressure grew, says White, "there cropped up a
doctrine old and ominous. . . that all currency, whether gold, paper,
leather or any other material, derives its efficiency from the official
stamp it bears, and that, this being the case, a government may relieve
itself of its debts and make itself rich and prosperous simply by means
of a printing press: fundamentally the theory which underlay the later
American doctrine of 'fiat money.'"

And just like today's Americans, who happily spend money they
haven't yet earned, "Frenchmen now became desperate optimists,
declaring that inflation is prosperity. . . The nation was becoming
inebriated with paper money. The good feeling was that of a drunkard
just after his draught; and. . . as draughts of paper money came
faster, the successive periods of good feeling grew shorter."

Yet more and more signs of the coming cataclysm started to appear. Even
though the amount of paper money had increased, prosperity had faded.
Business became stagnant, and manufacturers starting laying off
workers. In one town, 5,000 workmen were discharged from the cloth
factories, but people still didn't recognize the real cause. Exports
were too cheap, they claimed, and heavy tariffs were placed on foreign
goods.

A collapse in manufacturing and commerce was inevitable, says White,
"just as it came at various periods in [France], Austria, Russia,
America, and in all countries where men have tried to build up
prosperity on irredeemable paper."

Faced with the prospect of a continuing devaluation of paper money, the
public began to see saving and caution as foolish, and the naturally
thrifty French turned into a nation of gluttons and gamblers. People
started to throw their money haphazardly at the stock market and "in
the country at large there grew a dislike of steady labor and a
contempt for moderate gains and simple living."

The tumor, as White calls it, spread to business circles, journalism
and politics; indulgence was followed by corruption growing "as
naturally as a fungus on a muck heap."

One economic perversion bred the next. The Comte de Mirabeau's
previous claims that patriotism and enlightened self-interest of the
people would maintain the value of the paper money couldn't have been
more wrong. In fact, a vast debtor class, consisting mainly of those
who had purchased the church lands from the government, proved to have
a vested interest in the depreciation of the currency. Since only small
down payments had been required, with the balance to be paid in
deferred installments, land buyers were hoping for a devalued currency
to diminish their debt.

"Before long, the debtor class became a powerful body extending
through all ranks of society. . . all pressed vigorously for new issues
of paper. . . apparently able to demonstrate to the people that in new
issues of paper lay the only chance for national prosperity. . .
[While] every issue of paper money made matters worse, a superstition
gained ground among the people at large that, if only enough paper
money were issued and were more cunningly handled, the poor would be
made rich. Henceforth, all opposition was futile."

In December of 1791, a new issue was ordered that diluted the value of
the 100-livres note (whose value had already fallen to 80 livres) to 68
livres. As values fell, official rhetoric became even more adamantly
optimistic and upbeat. Newspapers, political speeches and pamphlets
proclaimed that "a depreciated currency is a blessing; that gold and
silver form an unsatisfactory standard for measuring values. . . that
commerce with other nations may be a curse, and hindrance thereto may
be a blessing. . . that the laws of political economy, however
applicable in other times, are not now so in France; that the ordinary
rules of political economy are perhaps suited to the minions of
despotism but not to the free and enlightened inhabitants of France at
the close of the eighteenth century," and so on.

In March 1792, after the fifth, 300-million-livre issue of paper money,
the government decided that payment to all public creditors for any
amount over 10,000 francs would be suspended. This was hailed as a boon
for the poorer classes, but the result was just the opposite.
Capitalists began to quietly withdraw their money from labor and locked
it up "in all the ways financial ingenuity could devise. All that
saved thousands of laborers. . . from starvation was that they were
drafted off into the army and sent to be killed on foreign
battlefields."

We know from contemporary accounts that flour rose from 2 francs in
1790 to 225 francs in 1795, a pair of shoes from 5 francs to 200.

While the prices of all products had increased enormously, wages for
the laboring classes stagnated. Paper issue followed paper issue, until
the money in circulation reached 3 billion francs in 1793... and there
was still no end in sight. Unrest in the general population grew, and
more and more working-class people called for capital punishment for
price gauging and a 400-million-franc tax on bread for the rich.

On February 28, 1793, a mob of men and women in disguise began looting
200 stores in Paris, seizing everything they could get their hands on.
Order could only be restored by buying off the mob with a
7-million-franc grant.

Shocked out of their complacence, the French government implemented new
measures to raise money. One was the Forced Loan, a tax on anyone with
an income over 1,000 francs. For lower-income earners, the tax was
fixed at 10%, for everyone over 9,000 francs of income at 50%.

Another panic measure was the Law of Maximum, consisting of four rules
which, again, supposedly served to help the working class. "First,
the price of each article of necessity was to be fixed at one and
one-third its price in 1790. Secondly, all transportation was to be
added at a fixed rate per league. Thirdly, five per cent was to be
added for the profit of the wholesaler. Fourthly, ten per cent was
added for the profit of the retailer."

The first result of the Maximum law was that sellers did everything to
evade the fixed price-farmers, for example, would sell as little as
possible, and so supplies became scarce, so urban citizens were put on
an allowance and could only buy limited quantities of goods. Foreign
goods, whose prices were much higher than the fixed upper limit,
couldn't be legally sold by merchants, many of whom went out of
business. Others ended up on the guillotine for violations of the
Maximum law.

"To detect goods concealed by farmers and shopkeepers, a spy system
was established with a reward to the informer of one-third of the value
of the goods discovered. To spread terror, the Criminal Tribunal at
Strassburg was ordered to destroy the dwelling of anyone found guilty
of selling goods above the price set by law. . . [If a farmer] tried to
hold back his crops or cattle, alleging that he could not afford to
sell them at the prices fixed by law, they were frequently taken from
him by force and he was fortunate if paid even in the depreciated fiat
money-fortunate, indeed, if he finally escaped with his life."

Discriminating between paper and specie in any transaction became a
felony punishable with death, as did selling gold or silver coins. At
the height of this insanity, in 1794, the Convention decreed that
"the death penalty should be inflicted on any person convicted of
'having asked, before a bargain was concluded, in what money payment
was to be made.'" All commerce in the precious metals was
suppressed, until the "Maximum" was abolished one year later.

The currency nightmare ended on February 18, 1796, when under a new
government the machinery, plates and paper for printing assignats were
ceremonially broken and burned on the Place Vendome in Paris. Final
calculations determined that the overall amount of paper money in
existence was 40 billion francs. In comparison, a gold louis d'or had
climbed from a value of 920 paper francs in August 1795 to 15,000
francs less than one year later. One franc in gold was worth 600 francs
in paper.

While the assignats had hurt the rich, they had absolutely devastated
the working class. According to historian Heinrich von Sybel,
"Financiers and men of large means were shrewd enough to put as much
of their property as possible into objects of permanent value. The
working classes had no such foresight or skill or means. After the
first collapse came up the cries of the starving. Roads and bridges
were neglected; many manufactures were given up in utter
helplessness."

Unbelievable... and a great lesson for us. Interpreting and comparing
the signs-the stagnation in real wages, the public's unfettered
euphoria about the already faltering economy, the nearly word-for-word
pep talk spanning centuries--we may be closer to the point of no return
than we think.

And don't make the mistake to think those French politicians were
morons, warns Andrew Dickson White. "[The] men who had charge of
French finance during the Reign of Terror and who made these
experiments, which seem to us so monstrous. . . were universally
recognized as among the most skillful and honest financiers in Europe.
.. . [which shows] how powerless are the most skillful masters of
finance to stem the tide of fiat money calamity when once it is fairly
under headway; and how useless are all enactments which they can devise
against the underlying laws of nature."


© 2006 Shannara Johnson
Editor, International Speculator
Editorial Archive


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