Deficits, Dollar, Federal Reserve, Game Theory, Live and Learn, Trust

Lies, Damned Lies and Statistics: All Fiat Currencies Fail

hyperinflation

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Next in Lies, Damned Lies and Statistics Series: Part 4: Iraq War Casualties
Previous in Lies, Damned Lies and Statistics Series: Part 2: Income Stagnation
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Anyone who’s read my posts can tell I have pretty strong libertarian leanings. So in this post, I’m going to try to remain fair and take on a common libertarian statistic. In the documentary film, Fiat Empire, libertarian congressman Ron Paul restates an oft-cited fact by libertarians, “If you study monetary history, throughout thousands of years, paper money has been tried many, many times and it never succeeds. It always ends badly.” (1)

A fiat currency is simply a currency that isn’t backed by any underlying asset. Fiat currencies derive their value solely from the ratio of money to goods in the economy. If that ratio gets out of whack (say the government prints too much money), the currency will become worth less than the paper it’s printed on. Ron Paul and many libertarians, especially those who ascribe to Austrian economics, believe in the gold standard (where each unit of currency is backed by gold, a proposal I have a lot of sympathy for). And since every fiat currency that has ever existed has failed, all the more reason we should go back to the gold standard. Now, the statement that every fiat currency has failed is completely true. It’s also completely meaningless.

First we have to boil down what these libertarians are actually talking about here. A failed fiat currency is one that hyper-inflates. There are certainly numerous examples of this throughout history. The most famous example is Weimar Germany in between the two World Wars. In 1914, 4.2 marks were worth 1 dollar. In 1923, 4.2 trillion marks equaled one dollar! In case you were wondering, this is bad for an economy. Other examples include the Romans, who experienced severe runaway inflation near the end of their empire, France in the late 18th century, Hungary after World War II, many Asian countries during the Asian Financial Crisis of 1997 and Zimbabwe today. (2)

The moral of the story is all fiat currencies hyper-inflate, while those backed by gold don’t (they can however suffer from high inflation in the short term). (3)  As I said, these libertarians are correct. As the Daily Reckoning puts it: “EVERY fiat currency, since the Romans first began the practice in the first century, has ended in devaluation and eventual collapse.” (4) There are two caveats to their argument, though: 1) if the fiat currency was ended for another reason, say the country was conquered and the currency replaced, then those examples are obviously ignored and 2) if the currency is still around today*, it also doesn’t count, because the currency will presumably fail in the future. The problem with this assessment is simple: What else can happen to a currency?

The answer to that question is nothing. The only possible exception would be the hypothetical hyper-deflation. This isn’t even worth talking about though, since it has never happened in the history of the world and would have to get so out of hand that one unit of currency was worth everything on the planet (otherwise you could just print more or cut the currency up into smaller pieces, like when a stock splits). Other than such an absurd scenario, there are only three options for a fiat currency: hyperinflation, ended by another means or it still exists. So while this statistic/fact is completely true, it’s also akin to saying the sky is blue (and about as useful for determining monetary policy).

There are plenty of reasons to support the gold standard. Gold standards reduce inflation and prevent governments from taxing the population in a hidden way. This thereby makes it more difficult for governments to wage wars or reward their friends in the private sector. The “fact” that every fiat currency has failed (excluding the two obvious caveats) does nothing to help the argument, though. It sounds like it conveys something, but in actuality, it conveys absolutely nothing.

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Lies, Damned Lies and Statistics Series

Part 1: A Primer
Part 2: Income Stagnaton
Part 3: All Fiat Currencies Fail
Part 4: Iraq War Casualties
Part 5: Female-Male College Gap
Part 6: Male-Female Wage Gap
Part 7: Roger Maris’ Asterisk
Part 8: Women Do All the Work but Men Keep All the Money
Part 9: The BMI
Part 10: A College Degree is Worth One Million Dollars

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*Every currency in the world today is a fiat currency.

(1) Ron Paul, Fiat Empire, Matrixx Entertainment, 2006, http://vids.myspace.com/index.cfm?fuseaction=vids.individual&videoid=41426337
(2)  “Toilet Paper Money,” Whiskey and Gunpowder, 4/17/2007,  http://whiskeyandgunpowder.com/toilet-paper-money/#hidehttp://seekingalpha.com/article/127585-the-gold-standard-and-inflation
(3) Stephen Yu, “The Gold Standard and Inflation,” 3/24/2009, http://seekingalpha.com/article/127585-the-gold-standard-and-inflation
(4) Nick Jones, “Fiat Currency – Using the Past to See the Future,” The Daily Reckoning, http://dailyreckoning.com/fiat-currency/

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One thought on “Lies, Damned Lies and Statistics: All Fiat Currencies Fail

  1. Dave says:

    The gold standard was abolished because governments were revenue constrained under the system and were forced to borrow via bonds. In the current system bonds literally don’t fund anything and the goverment is no longer revenue constrained. Going back to gold, while it sounds nice, would be horrific considering the ever growing population and the demand for more currency as poplations grow. Gold just can’t keep up with that demand.

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