The history and properties of FIAT money – 1st part

The eternal enemy of gold was authority, since the difficulty of its production prevented the increased wealth confiscation by increasing the money supply and causing the Cantillon effect to siphon taxpayer savings. Thus, many bankers and politicians tirelessly searched for a way to gain control over the issuance of money without jeopardizing their business. Many banks, which in exchange for keeping gold, issued notes to people that they could trade, since they were tied to the amount of gold, tried to cheat by increasing the issuance of notes that did not have the correct amount of gold backing them.

Fractional reserve banking was one of the many attempts to increase the profitability of banking, and this has repeatedly led to the collapse of banks with this type of business model. When a bank had insufficient reserves compared to the number of banknotes issued, it was hanging on by a very thin thread. When a sufficiently large number of customers simultaneously demanded the withdrawal of gold in exchange for banknotes, the cover fell and the bank was found to be insolvent. This mechanism prevented the artificial inflation of banknotes by bankers and maintained the central role of gold as reliable money.

Because of the advantages brought by the use of banknotes in trade as substitutes for gold, people gradually kept larger sums of gold in banks and used banknotes for trading. Thus, a large amount of gold ended up in the safes of many banks, which presented an increasing temptation to bankers and encouraged them to find new ways of exploitation at the expense of depositors. Having someone else’s gold in your safe was like the plight of children who find presents under the tree on Christmas Eve but are not allowed to open them until morning. The desire to seize foreign assets was too tempting for the bankers to silence. This led to the escalation of fractional reserve banking, which caused more and more bank failures, and bankers demanded from politicians to establish an institution that would prevent their bankruptcies and stabilize the economy.

1913 – CREATURE FROM JEKYLL ISLAND

The first germs of ideas about a central bank began to appear in the United States already at the beginning of the 19th century, and the American Federal Reserve Bank finally materialized in 1913, after a suspicious conspiracy on the part of banking moguls and politicians. The central bank is an institution that has the exclusive right to issue banknotes in its geographical area of operation, and at the same time manages monetary policy and ensures the stability of the economy. It plays the role of a lender of last resort, providing liquidity to illiquid banks, under the pretext of preventing economic crises.

With the creation of the American Federal Reserve Bank, the era of the fiat system began, where the authorities forced people to use their monetary substitutes and prohibited the issuance of banknotes on the free market. The word “fiat” comes from Latin and means “order”, and it refers to the order of the authorities. This is how a cartel was created, in which bankers and politicians participated, and which enabled them to have a monopoly over the money market.

The era of easy money, mass-produced by central banks, was not coincidentally also the era of total war. As the authorities were able to increase the amount of monetary substitutes in circulation, they indirectly seized a share of the residents’ property, with which they could finance warfare. Thus, the Bank of England issued military bonds, which did not receive enough interest, so they made a secret decision by which two government employees bought a majority of the war bonds financed by printing money at the expense of savers. Thus, it seemed that interest in warfare in the heart of Europe was very high on the part of the British, who then became involved in the First World War. The infamous economist of the 20th century, John Maynard Keynes, called this scheme “a masterly manipulation”.

THE INTERWAR PERIOD

After the end of World War I, the world entered a new era; the era of easy money. Instead of Britain adjusting the ratio of sterling to gold to new circumstances, the authorities demanded that the old ratio from before the massive inflation of notes for war purposes be observed. Thus, this once mighty empire experienced a mass flight of gold to American banks, where it was valued better.

In order to prevent the bankruptcy of the English government and the collapse of the financial system, the American and English authorities agreed to devalue the value of gold expressed in dollars in the United States, thus helping Great Britain regain part of its lost wealth.

With this, the United States experienced accelerated inflation in the 1920s, which in 1929 caused the collapse of the world’s largest stock market. This greatly weakened American power and led to the confiscation of gold in 1933, when President Franklin D. Roosevelt signed Executive Order No. 6102, which prohibited the ownership of gold by Americans.The confiscation of gold allowed the US government to restart the cycle of inflation that crippled the US economy just before the start of the bloodiest war in history.

BRETTON WOODS SYSTEM

Towards the end of the Second World War, world leaders gathered at the Bretton Woods Conference, where they made a plan for the post-war order of the world. The fruit of the conference was the creation of international financial institutions, such as the World Bank and the International Monetary Fund, which were supposed to ensure the stability of the new global financial system based on the American dollar. The result of the negotiations was that the United States gained a monopoly over the world money market, when the remaining currencies became only national branches of the dollar, which was the only currency whose price was tied to gold.

This privileged position of the American financial system has allowed their government to increase waste at the expense of both domestic and foreign taxpayers. When the dollar was devalued, part of the consequences were borne by the entire world economy, which relieved domestic taxpayers, since the dollar was the reserve currency of the world’s central banks. This allowed the US to export domestic inflation during the Bretton Woods period. Accelerated inflation of the dollar led foreign central banks to demand the purchase of dollar reserves for gold. Because the US did not have a sufficient amount of gold compared to the number of artificially created banknotes, doubts arose about the stability of the US financial system. An increasing number of central banks demanded the rise of gold at the expense of devalued dollars, which forced President Richard Nixon to take an extreme move in 1971, the consequences of which are still felt today.

THE YEAR 1971

When inflation in the United States got out of control and an increasing amount of gold reserves began to flow out of American safes, it dealt a severe blow to the American dollar and the stability of the global financial system. Central banks around the world quickly demanded the acquisition of their gold, stored in the American fortress Fort Knox and the branches of the American central bank Federal Reserve, in exchange for devalued dollars.

In 1971, France sent its navy into New York City harbor to demand the return of gold stored in a local branch of the central bank. This increased the threat of the collapse of the US dollar, forcing the US government to intervene. When Germany wanted to do the same, the US government had had enough. Thus, on Sunday, August 15, 1971, President Richard Nixon announced on public television that he had issued a temporary order ending the purchase of gold in exchange for foreign dollar reserves. The event became known as the Nixon Shock, and the temporary order eventually proved to be permanent, as on that day the era of the gold standard finally ended and the gold window closed.

The consequences of Nixon’s decision are massive, and a group of bitcoin enthusiasts has created a website to honor this turning point, which shows statistical graphs of various areas of life that have undergone a complete turnaround after this tragic year. At www.wtfhappenedin1971.com we can clearly see the detrimental effects on prosperity of abolishing sound money and replacing it with a light, inflationary, fiat standard. At the bottom of the page is a famous excerpt from an interview with Nobel laureate and Austrian mainstream economist Friedrich A. Hayek, who gave his opinion on the importance of abolishing fiat money and inventing something that the government cannot confiscate.