Why in modern times is Fiat and not Gold the currency in use?

There is little to describe in terms of the benefits of paper currencies, apart from mentioning the obvious fact that they are the dominant mode of exchange for all nations in the world. This sometime skews the view of an individual to believe that if fiat is official currency, then it surely must have been superior to the gold standard to take its mantle?

Fiat is a new innovation, one that cannot afford the stability of neither gold nor silver. Since its establishment there has been no parallel to excessive inflation in the peacetime history of man. Gold, unlike fiat can never overstate its earnings, understate its liabilities or declare bankruptcy. But fiat, unlike gold, can be controlled. Where governments have coveted money, they have coveted the ability to control the supply of money. Whereas in the past with a metallic standard they failed miserably – indeed the attempts of Roman emperors to debase coinage led to the fall of the Roman empire – the establishment of fiat currency have allowed modern governments power and control of which only their forbearers could dream of.

It was in the post World War 2 environment in which the US slowly effaced the practical implementation of the gold standard, to achieve dominance of its own unit of legal tender – the Dollar. Even though in the decades running up to the 1970s, the gold standard was still in use. It was not the real gold standard, but a pseudo gold-backed standard. In this pseudo standard, the Dollar was arbitrarily backed by a certain amount of gold (1/35 ounce). Conventionally this may appear sound, but critically the US undertook two steps that led to the loss of faith in gold: restricting the ownership of gold and making the Dollar the only form of legal tender.

In respect to the restriction of ownership of gold, the US government outlawed the possession of gold for its citizens, and made the Dollar only redeemable for gold to foreign governments. With gold no longer available for domestic use as currency, the effect of this is to ensure that demand only exists for the Dollar. Eventually the effect of doing so, is to displace in the minds of the people that the Dollar – merely the paper tale – is currency and not gold. Henceforth, substantial demand for the Dollar existed which in reality could not in practicality redeemed for gold. When the public could not redeem their gold, then there would be no check on the US government for increasing the production of US Dollars, for previously if the public sensed that Dollars were being produced without backing of gold, they would withdraw gold from banks in fear of currency devaluations.

The US throughout the 1950s and 60s continued inflating the production of US Dollars, it was the enviable position of being one of the dominant superpowers, and thus left relatively unaccounted for its abuse of the gold-backed standard, which it clearly was not adhering to. Eventually, hard currency favoured nations such as the French, Germans and Swiss sensing that the real value of the Dollar was depreciating fast, began to redeem their Dollars for gold. This led to an exceptional outflow of gold from the US, which in a surprise to most of the world, led the US in 1971 to collapse the link of gold to the Dollar via abolishment of the Bretton Woods Accord.

With the US now in total control of its money supply, it began fervently producing Dollars. The natural outcome was to devalue the Dollar, thus making the Dollar cheaper, giving substantial price advantages to the export of US goods. To prevent other national currencies being hugely overvalued compared to the US Dollar every other nation in the world had no choice but to drop whatever hard currency backing they had and adopt a fiat standard. This was the global end of the gold and silver standard.

Governments though learned very quickly that the ability to print money freed them from accountability of their citizens’, and would thus oppose the return of hard currency which would curtail their new found freedoms.
The US ensured that its currency, being the de facto reserve currency of the world, would be used to price international commodities. Through this, it could unreservedly call on the printing presses to finance its imperial ambitions, whilst exporting its inflation across the world to prevent the effects of inflation being felt at home. The US Dollar, as a monetary instrument, would thus become an unhinged political weapon against any nation attempting to resist the ambitions of the US.

Much of the same existed across most of the Western nations. The politicians of the so called liberal democracies could practise a new level of demagogy, where they could make grandiose promises to the electorate and finance these through expanding the money supply. Inflation in its truest guise is just another form of taxation, but because it operates as a stealth tax, it would go unnoticed by the general public, until they realised that the ‘nest egg’ they were building was practically worth nothing. By the time this deception would be discovered, the term of the previous politician would have passed, and conveniently for them to.

As for the Muslim world, its leadership was lost to an alliance of dictators and barely functioning governments after the fall of the Islamic Caliphate. Given that most of these rulers had a penchant for tyranny and abuse, there would be no real wish for them to return to the real Islamic Dinar and Dirham. If its people were kept in a permanent state of weakness, then they would be unwilling or unable to challenge the authorities over them. Controlling the money supply was another tool to the torturers set that the rulers of the Muslim world used to subdue their citizens; they could print money to benefit themselves and their abhorrent power structures, all the while the general public would be drained by increasing living costs though inflation and more often than not – hyperinflation.

In summary, the realisation of the fiat standard in modern times is a construct of governments and especially of those of the West. It was built by slowly destroying the functional credibility of the gold and silver standard, and falsely building a perception of strength in fiat. Now with the current status quo, despite the terrible costs that fiat has bought, these governments are unwilling to abandon the fiat standard, because such a standard has brought them power and control, one which a gold and silver standard would curtail.

Fiat is simple daylight robbery, one though most are still blind to.

This entry was posted on Wednesday, July 15th, 2009 at 2:27 PM and is filed under Islam. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.