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Toilet
Paper Money: The Downfall of Fiat Currency
August 7, 2007
By Nick "Child Prodigy" Jones
 The history of fiat money, to put it kindly, has been one of failure. In fact,
EVERY fiat currency since the Romans first began the practice in the first
century has ended in devaluation and eventual collapse, of not only the
currency, but of the economy that housed the fiat currency as well.
Why would it be different here in the U.S.? Well, in actuality, it hasn't been.
In fact, in our short history, we've already had several failed attempts at
using paper currency, and it is my opinion that today's dollars are no different
than the continentals issued during the Revolutionary War. But I will get into
that in a moment. In the meantime, I will show you that fiat currencies have not
been successful, and the only aspect of fiat currencies that have stood the test
of time is the inability of political systems to prevent the devaluation and
debasement of this toilet paper money by letting the printing presses run wild.
Rome ? The Denarius
Although Rome didn't actually have paper money, it provided one of the first
examples of true debasement of a currency. The denarius, Rome's coinage of the
time, was, essentially, pure silver at the beginning of the first century A.D.
By A.D. 54, Emperor Nero had entered the scene, and the denarius was
approximately 94% silver. By around A.D.100, the denarius' silver content was
down to 85%.
Emperors that succeeded Nero liked the idea of devaluing their currency in order
to pay the bills and increase their own wealth. By 218, the denarius was down to
43% silver, and in 244, Emperor Philip the Arab had the silver content dropped
to 0.05%. Around the time of Rome's collapse, the denarius contained only 0.02%
silver and virtually nobody accepted it as a medium of exchange or a store of
value.
China ? Flying Money
When the Chinese first started using paper money, they called it "flying money,"
because it could just fly from your hands. The reason for the issuance of paper
money is simple. There was a copper shortage, so banks had switched to the use
of iron coinage. These iron coins became overissued and fell in value.
In the 11th century, a bank in the Szechuan province of China issued paper money
in exchange for the iron coins. Initially, this was fine, because the paper
money was exchangeable for gold, silver, or silk. Eventually, inflation began to
take hold, as China was funding an ongoing war with the Mongols, which it
eventually lost.
Genghis Khan won this war, but the Mongols didn't assume immediate control over
China as they pushed westward to conquer more lands. Genghis Khan's grandson
Kublai Khan united China and assumed the emperorship. After running into some
setbacks with paper currency, Kublai eventually had some success with fiat
money. In fact, Marco Polo said of Kublai Khan and the use of paper currency:
"You might say that [Kublai] has the secret of alchemy in perfection?the Khan
causes every year to be made such a vast quantity of this money, which costs him
nothing, that it must equal in amount all the treasure of the world."
Even Helicopter Ben would be impressed. Marco Polo went on to say: "This was the
most brilliant period in the history of China. Kublai Khan, after subduing and
uniting the whole country and adding Burma, Cochin China, and Tonkin to the
empire, entered upon a series of internal improvements and civil reforms, which
raised the country he had conquered to the highest rank of civilization, power,
and progress."
Wait a second, I thought we were bashing fiat currencies here?Can anyone say
crackup boom? Since Marco Polo experienced this firsthand, and has been very
helpful to us thus far, I think I will allow him to finish his analysis of
China's paper money experiment.
"Population and trade had greatly increased, but the emissions of paper notes
were suffered to largely outrun both?All the beneficial effects of a currency
that is allowed to expand with a growth of population and trade were now turned
into those evil effects that flow from a currency emitted in excess of such
growth. These effects were not slow to develop themselves?The best families in
the empire were ruined, a new set of men came into the control of public
affairs, and the country became the scene of internecine warfare and confusion."
I wonder if Keynes read Marco Polo's experiences with Chinese fiat currencies
when he said that the U.S. government should just bury bottles full of money in
old mine shafts to spur economic growth.
France ? Livres, Assignats, and Francs
The French have been particularly unsuccessful in their attempts with fiat
money.
John Law was the first man to introduce paper money to France. The notion of
paper money was greatly helped along by the passing of Louis XIV and the 3
billion livres of debt that he left.
When Louis XV was old enough to make his own mistakes, he required that all
taxes be paid in paper money. The currency was backed by coinage?until people
actually wanted coins.
The theme of the day?the new paper currency rapidly became oversupplied until
nobody wished to own the worthless junk anymore and demanded coinage for their
currency.
Oops. It looks like Law didn't think that anyone would actually want coins ever
again. After making it illegal to export any gold or silver, and the failed
attempts by the locals to exchange their paper currency for something of actual
value, the currency collapsed.
John Law became the most hated man in France and was forced to flee to Italy.
In the latter part of the 18th century, the French government again tried to
give paper money another go. This time, the pieces of garbage they issued were
called assignats. By 1795, inflation of assignats was running at approximately
13,000%. Oops.
Then Napoleon stepped on the scene and brought with him the gold franc. One of
the good things that Napoleon realized is that gold is the way of a stable
currency, and that's what pretty much ensued during his reign. After Waterloo
had come and gone, the French gave it another go in the 1930s, this time with
the paper franc. It took only 12 years for them to inflate their currency until
it lost 99% of its value. History has proven a couple things about the French:
1) They are quick to surrender and 2) They are very talented at making worthless
currency.
Weimar Germany ? Mark
Post-World War I Weimar Germany was one of the greatest periods of
hyperinflation that ever existed. The Treaty of Versailles was essentially a
financial punishment placed on Germany to make reparations.
The sums of money to be paid by Germany were enormous, and the only way it could
make repayment was by running the printing press. (Huge unpayable debt ? that
sounds familiar. I wonder what the solution in the U.S. will be.)
Inflation got so bad in this period that German citizens were literally using
stacks of marks to heat their furnaces. Here is a brief timeline of the marks
per one U.S. dollar exchange rate:
April 1919: 12 marks
November 1921: 263 marks
January 1923: 17,000 marks
August 1923: 4.621 million marks
October 1923: 25.26 billion marks
December 1923: 4.2 trillion marks.
More Recent Times
In recent times, fiat failures have become more common occurrences. For the sake
of time, I won't go into extensive details of all these examples of paper money
failures, because there are SO many. But here you have it:In 1932, Argentina had
the eighth largest economy in the world before its currency collapsed. In 1992,
Finland, Italy, and Norway had currency shocks that spread through Europe.
In 1994, Mexico went through the infamous "Tequila Hangover," which sent the
peso tumbling and spread economic hardships throughout Latin America.
In 1997, the Thai baht fell through the floor and the effects spread to
Malaysia, the Philippines, Indonesia, Hong Kong, and South Korea.
The Russian ruble was not the currency you wanted your investments denominated
in 1998, after its devaluation brought on economic recession.
In the early 21st century, we have seen the Turkish lira experience strokes of
hyperinflation similar to that of the mark of Weimar Germany.
In present times, we have Zimbabwe, which was once considered the breadbasket of
Africa and was one of the wealthiest countries on the continent. Now Mugabe's
attempts at price controls, combined with hyperinflation, have the nation unable
to supply the most basic essentials such as bread and clean water.
Lessons to Be Learned
Here in the U.S., I should say the lessons were not learned. There are many
consistencies from the above-mentioned stories that led up to the eventual
collapse of the currencies.
The scary thing is that the U.S. has some of these above-mentioned
characteristics, the ones that lead to toilet paper money becoming just that.
More on that in just a second. I would first like to give a brief look at the
U.S. attempts with paper money in our short history.
The first attempt with paper money came in 1690 with the issuance of Colonial
notes. The first Colonial notes were issued in Massachusetts and were redeemable
for gold, silver, corn, cattle and other commodities.The other Colonies quickly
jumped on the toilet paper money bandwagon and began issuing their own paper
currencies. Like a broken record, the money quickly became overissued. The
lessons of John Law and others were definitely not learned. It is not good
enough just to say that a currency is backed by commodities. It actually HAS to
be backed by commodities. Essentially, it was still a fiat money, and in a short
period of time, Colonials became as good as toilet paper.
The next experiment came during the Revolutionary War. Big surprise ? the
issuance of paper money was used to finance the war efforts. This time, the
currency was called a continental.
The crash of the continental was spectacular, and the phrase "not worth a
continental" was coined. This brought on a large distrust for paper currency,
and until 1913, toilet paper money in the U.S. wasn't used. Enter the infamous
Federal Reserve and its monopoly on money and interest rates. Now we have the
greenback.
Although the money was "officially" backed by a gold standard until 1971, it
wasn't a true gold standard. When the government found it inconvenient to have a
gold standard, it just made it illegal for U.S. citizens to hold gold or
exchange dollars for gold.
As reported on Strike-the-root.com:
"Under the infallible leadership of President Franklin Roosevelt, it was made
illegal to own gold. On March 11, 1933, he issued an order forbidding banks to
make gold payments. On April 5, Roosevelt ordered all citizens to surrender
their gold ? no person could hold more than $100 in gold coins, except for
collector's coins. He also made it unlawful to export gold for payment abroad,
unless done through the Treasury. The penalty for defying Roosevelt was 10 years
in prison and a $250,000 fine."
But the official demise of the dollar was locked into place in 1971 when "Tricky
Dick" Nixon completely severed all ties between the dollar and the gold
standard. During the decade that followed, the U.S. experienced some of the
worst inflation in its history, only matched by today's U.S. monetary and fiscal
irresponsibility.
The U.S. of A. has all the characteristics set in place that have led to the
collapse of every other fiat currency money in history.
We are currently at war, and the financing of this war is extremely
inflationary. In fact, if you look back at our history, since 1914, the U.S has
engaged in 16 military conflicts. We have been involved in some form of violent
international accord in 44 of the past 93 years. The overwhelming majority of
military conflicts result in monetary inflation. The U.S. has a debt similar to
that of Weimar Germany. All though the reasons for the debt are completely
different, it appears that this Mount Everest of IOUs is going to be impossible
to pay back. I guess the U.S. could just print 10 trillion dollar bills and hand
them out, but the implications of such actions are obvious.
We are currently increasing the supply of dollars at a rate of 13% per annum.
This over-issuance of a currency has been the leading indicator of a currency on
the brink.
So what's in the future for the dollar?
Some, myself included, might say that the dollar has already failed. It has lost
over 92% of its value since its initial issuance in 1913. After the revaluation
in 1934, the dollar dropped another 41%. In my opinion, it already is toilet
paper money, but for the above-mentioned characteristics, which are alarmingly
similar to the circumstances that led up to the eventual collapse of the
dollar's toilet paper predecessors, I believe that we have seen only the tip of
the iceberg of the dollar's inevitable path toward becoming toilet paper money.
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