Monetary System Flaws
Although printed currency constitutes a clear claim on real goods in an economy, there is no automatic linkage to guarantee there will be a corresponding increase in real goods to match the magnitude of the printed claims.
“Although printed currency constitutes a clear claim on real goods in an economy, there is no automatic linkage to guarantee there will be a corresponding increase in real goods to match the magnitude of the printed claims.”
Throughout history, the vast majority of economic crises have has a monetary cause and were not due to a breakdown of production or demand for real goods.
The collapse of societies on the other hand is related to the breakdown of the fundamental real good creation system (usually environmental asset collapse) and the health of those systems is something that money has served to obscure.
Removing the kaleidoscope lens of fiat money from the national policy formation process will allow societies to focus on real issues.
There have been a large number of commodity monies where the currency is an actual form of commodity. Examples of currency and credit systems based on a commodity are far more rare. Nails, knives, rice, wheat, hoes and low grade coins made from base metals created inflation and distortion proof trading mechanisms early on in the history of money.
The later stages of history are all about token or fiat currencies which sprang up in a every jurisdiction with a huge variety of sources. In England, anyone with something to sell may have been inclined to issue their own currency to secure both sources of supply and customers. Lawyers to ironworkers created their own banks and currencies due to the shortage and low quality of the coins of the realm and as often as not the lack of faith in same.
Cash was created to match the increase in output that the economy was experiencing both at home and abroad. But it also was needed to grease the increase in the monetization of the economy. Moving barter and unpaid labour (family etc) into the scope of the commercial economy required huge amounts of currency even if the work being done and total output was no greater.
In terms of clean transactions with no time related distortions, barter was the perfect system. But barter doesn’t have the liquidity or the flexibility to support a sophisticated society and hence money was invented.
In 1880 there were still 157 banks printing their own notes in Britain. As banking regulations grew more sophisticated and governments realized the need for control of the money supply, printing bank notes became the sole privilege of national governments by the early 1900s. However, over the past 30 years given the complex financial instruments now in use, effectively printing money has again become a lucrative activity practiced by many financial institutions.
Although token and fiat money have been useful in allowing the complexities of modern economies to develop, they are fertile ground for fraud and abuse and inherently unstable. An infinite variety of frauds and Ponzi schemes are possible and in scales from simple counterfeiting to the national policy level. One of the latest is “the wealth effect” where the entire country and perhaps a good part of the world, bought into the concept of debt and asset inflation begetting prosperity.
Fiat currency monetary systems are open to abuse by government and private interests alike. Currency inflation is both the invisible tax of government and the large scale fraud of private financial institutions. It is far easier to print more money than to serve up doses of fiscal reality to the masses. As long as fiat money is controlled by special interests, abuse and crisis will be constant.
Inflation is typically associated with the money supply only but the fluctuations in the money supply mask the fluctuations in availability of real inputs. Eliminating money supply induced inflation will allow the actual supply issues of the real wealth creation process to be dealt with clearly and efficiently by market forces.
Although the adoption of fiat money has allowed incredibly rapid economic expansion, it has never been able to evolve past its inherently unstable roots. Clearly a more stable, more illuminating currency system is required.