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Posts Tagged ‘Fiat Money’

Money: What Is It? The More Important Question: Why Is It?

Posted by M. C. on May 13, 2022

Because the type of money a society uses largely determines whether it will prosper or ultimately falter, an individual, or group of individuals, who prefers justice over injustice, prosperity over poverty, and liberty over tyranny must flatly reject fiat money regimes and embrace sound money.

Manuel Tacanho

Money is not the root of evil as many people mistakenly think. Corrupted money (i.e., fiat money and currency debasement), however, is the root of many economic, social and cultural evils. 

Most people know what money is, superficially, yes. Also, most don’t quite understand the concept of money. Otherwise, as Henry Ford put it “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Indeed, if money was well understood, today’s fiat money system would not exist.

Money is first, foremost, and fundamentally a medium of exchange. A generally accepted good (physical and now digital also) that intermediates transactions within societies and between societies. In his new book Understanding Money Mechanics, which I recommend as it provides an easy-to-digest yet comprehensive overview of the theory, history, and practice of money, economist Robert P. Murphy wrote:

A formal definition for money is that it’s a universally accepted medium of exchange. Menger’s explanation showed how such a commodity could emerge from its peers merely through voluntary transactions and without any individual seeing the big picture or trying to “invent” money.

Besides being a medium of exchange, money can and does function as a unit of account and store of value.

Medium of Exchange

Before the concept of money emerged spontaneously (yes, money is an invention/discovery of the market, not of the state) early humans traded goods directly—the barter economy (direct exchange society). 

Direct exchange means for a trade, a purposeful and voluntary exchange of goods or services to take place, let’s say, between a hunter and a farmer, their wants would have to coincide. The farmer would have to want a piece of meat and the hunter a portion of the farmer’s potatoes. This is what economists call the coincidence of needs. 

Money emerged naturally as the solution to the ‘coincidence of needs’ problem and ushered in a new, more efficient way of trading and a superior social system altogether—the indirect exchange society. Human societies have been indirect exchange economies for thousands of years now thanks to money, a medium of exchange. 

Unit of Account (A Measure of Economic Value) 

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The Federal Reserve: Enemy of American Workers

Posted by M. C. on February 22, 2022

Feb 21 – According to numbers released by the US government, consumer prices have increased by 7.5 percent in the past year, the steepest increase since 1982. The actual price increases are even worse than the government numbers suggest, given that the “official” statistics are manipulated to understate the real rate of price increases. According to John Williams of ShadowStats, prices have actually increased by around 15 percent over the past year.

The fact that prices remain at historically high levels shows that inflation is far from “transitory,” as Federal Reserve Chairman Jerome Powell had described it. The continuing inflation has led the Federal Reserve Board to suggest the Fed will start increasing interest rates earlier than previously announced. The Fed may also break with its practice of only raising rates by 25 basis points at a time and increase rates by increments of up to 50 basis points. However, the increases the Fed is discussing would still leave interest rates at historic lows. Thus, such interest rate increases would do little or nothing to ease the pain rising prices cause for average consumers.

Most policy “experts” and politicians, including President Biden, support interest rate increases to deal with inflation. However, some progressives oppose raising rates. Opponents of rate increases fear that increasing interest rates will slow economic growth, increase unemployment, and depress wages. These progressives believe the old fallacy that workers benefit from easy money. The truth is workers are inflation’s main victims.

Workers may see their nominal pay (pay unadjusted for inflation) increase while the Fed-produced price increases cause real wages to plummet. That is certainly the case today. In contrast, the Federal Reserve’s money creation benefits crony capitalists who receive the new money created by the Fed before the injection of new money causes prices to rise. This increases the elite’s purchasing power, furthering income inequality.

The Federal Reserve’s creation of new money does more than erode the value of the currency. It also artificially lowers interest rates, which are the price of money. This distorts the signals sent to market actors, leading to investment decisions that do not reflect the real condition of the market. The result is a temporary boom, followed by a bust. Workers who find new jobs in the boom lose those jobs in the bust. These workers are then not just unemployed. They are also often saddled with unmanageable debt incurred during the low interest rate, easy money phase of the business cycle.

Progressives could help workers by joining the movement for market-based money. Free-market money will be safe from government manipulation, and thus its value will remain stable. A step toward restoring a free-market monetary system is letting the people know the truth about the Federal Reserve by passing Audit the Fed. Another step is legalizing alternative currencies by repealing legal tender laws and ending all capital gains taxes on precious metals and cryptocurrencies. Congress must also begin to cut spending, starting by making major cuts in our 750 billion dollars military budget and ending all corporate welfare.

Fiat money benefits financial and political elites at the expense of working people whose standard of living is eroded by Federal Reserve actions. As a Texas labor leader once told me, “Gold has always been the working man’s friend.” I would add that fiat money is the worker’s foe.

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How Fiat Money Made Beef More Expensive | Mises Wire

Posted by M. C. on October 5, 2021

As a result, credit is centralized in the system of credit-expanding banks and investment decisions are dictated by the short-term logic of said system. Changing diets is just one consequence of the distortions engendered, albeit one that no one, pace Selgin, has investigated until now.

Kristoffer Mousten Hansen

In my article on the gold standard published in the Journal of Libertarian Studies back in May, I suggested that the destruction of the gold standard led to changing consumption patterns, specifically to a drop in the consumption of beef. The eminent economist George Selgin was kind enough to suggest that this was a novel argument, although in truth, in that essay I did no more than hint en passant at a possible connection between fiat money and changing consumption patterns, without explaining what the causal factors at work are. Therefore, I think the thesis bears restating and expanding upon.

Changing Food Consumption Patterns in the Twentieth Century

The change in meat consumption was a global phenomenon, but for present purposes, I will focus on the American case, although the same causal factors are at work, and probably to a greater extent, in the rest of the world. The US Department of Agriculture’s Economic Research Service (ERS) compiles and publishes copious data on food availability, that is, how much of various foods are available to the American consumer. Various kinds of meat are partial substitutes for each other, as are, of course, other foodstuffs; however, it seems a fair assumption to say that, in general, people would consider beef, pork, and poultry (the top three meats) the closest substitutes. Only in extreme cases would one consider, say, soy a substitute for tasty beef.

The ERS dataset for meats covers the period 1909–2019 and measures availability in pounds per capita. In 1909, there were 51.1 pounds of beef, 41.2 pounds of pork, and 10.4 pounds of chicken available per capita, for a total of 102.7 pounds of all meats per capita. In 2019 the figures were, respectively, 55.4, 48.8, and 67.0 per capita, for a total of 171.2 pounds of all meats per capita. While meat consumption had gone up, the composition of the diet had changed drastically. If we add the fact that veal and delicious lamb, minor components in 1909 at 5 and 4.4 pounds per capita, respectively, had virtually disappeared from the diet in 2019, the change becomes even more noticeable.

The following graph indexes the changing composition of meat availability over the century (1971=100). As we see, there is a steady and drastic rise in chicken availability from about the early 1950s, while the expansion of beef availability peaks in 1976 and then drops steadily back toward the 1909 level. While availability of all meats expands until about 1970, it stagnates thereafter.

Meat availability
Source: Kristoffer Mousten Hansen, “The Populist Case for the Gold Standard,” Journal of Libertarian Studies 24, no. 2 (2020): figure 6. Data from ERS Food Availability (Per Capita) Data System.

If we look at changes in the relative prices of the various foodstuffs over the long run, a similar picture emerges. Beef prices have increased since the middle of the twentieth century, while other prices have fallen.

beef and pork prices
Source: Data from David S. Jacks, “From Boom to Bust: A Typology of Real Commodity Prices in the Long Run,” Cliometrica 13, no. 2 (2019): 202–20, Data on Real Commodity Prices, 1850–present online dataset.

Unfortunately, poultry prices are not listed in the dataset. However, we can approximate them by looking at grain prices, as this is a main input in the raising of chicken.

barley and corn prices
Source: Jacks, Data on Real Commodity Prices, 1850–present.

I have here chosen barley and corn prices, but it does not matter much, since the trend is similar for the prices of all grains. Prices have decreased since midcentury despite some fluctuations in the seventies and are now far below the level that prevailed for decades. Beef prices, on the contrary, have trended much higher and were in 2020 about double the level in 1900 or 1850. If we consider the relative price of beef, it is much, much higher, so we should not be surprised that meat consumption has shifted to cheaper substitutes: pork and especially chicken. It is clear that a fundamental change has happened in modern food production.

The Monetary Causes of Changing Food Production1

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Kristoffer Mousten Hansen

Kristoffer Mousten Hansen is a research assistant at the Institute for Economic Policy at Leipzig University and a PhD candidate at the University of Angers. He is also a Mises Institute research fellow. 

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Why the Fed Is So Desperate to Hide Price Inflation

Posted by M. C. on September 9, 2021

Otherwise, as noted earlier, rising interest rates would collapse the debt pyramid and result in a collapse in output and employment. It is, therefore, no wonder that the Fed is doing whatever it can to hide the inflationary consequences of its policy from the public:

Thorsten Polleit

Speaking at the Jackson Hole meeting on August 27, 2021, Federal Reserve (Fed) chairman Jerome J. Powell indicated that he supported “tapering” toward the end of this year and hastened to add that interest rate hikes are still a long way off. The term “tapering” means that the central bank reduces its monthly purchases of bonds and slows down the monthly increase in the quantity of money accordingly. In other words, even with tapering, the Fed will still churn out newly printed US dollar balances, but to a lesser extent than before; that is, it will still cause monetary inflation, but less than before. 

Financial markets were not alarmed by the Fed’s announcement that it might take its foot off the accelerator pedal a little: ten-year US Treasury yields are still trading at a relatively low level of 1.3 percent, the S&P 500 stock index hovers around record highs. Could it be that investors do not believe in the Fed’s suggestion that tapering will begin soon? Or is tapering of much lower importance for financial market asset prices and economic activity going forward than we think? Well, I believe the second question nails it. To understand this, we need to point out that the Fed has put a “safety net” under financial markets.

As a result of the politically dictated lockdown crisis in early 2020, investors feared a collapse of the economic and financial system. Credit markets, in particular, went wild. Borrowing costs skyrocketed as risk premiums rose drastically. Market liquidity dried up, putting great pressure on borrowers in need of funding. It wasn’t long before the Fed said it would underwrite the credit market, that it would open the monetary spigots and issue all the money needed to fund government agencies, banks, hedge funds, and businesses. The Fed’s announcement did what it was supposed to do: credit markets calmed down. Credit started flowing again; system failure was prevented.


In fact, the Fed’s creation of a safety net is nothing new. It is perhaps better known as the “Greenspan put.” During the 1987 stock market crash, then Fed chairman Alan Greenspan lowered interest rates drastically to help stock prices recover—and thus set a precedent that the Fed would come to rescue in financial crises. (The term “put” describes an option which gives its holder the right, but not the obligation, to sell the underlying asset at a predetermined price within a specified time frame. However, the term “safety net” might be more appropriate than “put” in this context, as investors don’t have to pay for the Fed’s support and fear an expiry date.)

The truth is that the US dollar fiat money system now depends more than ever on the Fed to provide commercial banks with sufficient base money. Given the excessively high level of debt in the system, the Fed must also do its best to keep market interest rates artificially low. To achieve this, the Fed can lower its short-term funding rate, which determines banks’ funding costs and thus bank loan interest rates (although the latter connection might be loose). Or it can buy bonds: by influencing bond prices, the central bank influences bond yields, and given its monopoly status, the Fed can print up the dollars it needs at any point in time.

Or the Fed can make it clear to investors that it is ready to fight any form of crisis, that it will bail out the system “no matter the cost,” so to speak. Suppose such a promise is considered credible from the financial market community’s point of view. In that case, interest rates and risk premiums will miraculously remain low without any bond purchases on the part of the Fed. And it is by no means an exaggeration to say that putting a safety net under the system has become perhaps the most powerful policy tool in the Fed’s bag of tricks. Largely hidden from the public eye, it allows the Fed to keep the fiat money system afloat.

The critical factor in all this is the interest rate. As the Austrian monetary business cycle theory explains, artificially lowering the interest rate sets a boom in motion, which turns to bust if the interest rate rises. And the longer the central bank succeeds in pushing down the interest rate, the longer it can sustain the boom. This explains why the Fed is so keen to dispel the notion of hiking interest rates any time soon. Tapering would not necessarily result in an immediate upward pressure on interest rates—if investors willingly buy the bonds the Fed is no longer willing to buy, and/or if the bond supply declines.

But is it likely that investors will remain on the buy side? On the one hand, they have a good reason to keep buying bonds: they can be sure that in times of crisis, they will have the opportunity to sell them to the Fed at an attractive price; and that any bond price decline will be short lived, as the Fed will correct it quickly. On the other hand, however, investors demand a positive real interest rate on their investment. Smart money will rush to the exit if nominal interest rates are persistently too low and expected inflation persistently too high. The ensuing sell-off in the bond market would force the Fed to intervene to prevent interest rates from rising.

Otherwise, as noted earlier, rising interest rates would collapse the debt pyramid and result in a collapse in output and employment. It is, therefore, no wonder that the Fed is doing whatever it can to hide the inflationary consequences of its policy from the public: the steep rise in consumer goods price inflation is being dismissed as only “temporary”; asset price inflation is said to be outside the policy mandate, and the impression is given that increases in stock, housing, and real estate prices do not represent inflation. Meanwhile, the increase in the money supply—which is the root cause of goods price inflation—is barely mentioned.

However, once people begin to lose confidence in the Fed’s willingness and ability to keep goods price inflation low, the “safety net trickery” reaches a crossroads. If the Fed then decides to keep interest rates artificially low, it will have to monetize growing amounts of debt and issue ever-larger amounts of money, which, in turn, will drive up goods price inflation and intensify the bond sell-off: a downward spiral begins, leading to a possibly severe devaluation of the currency. If the Fed prioritizes lowering inflation, it must raise interest rates and reign in money supply growth. This will most likely trigger a rather painful recession-depression, potentially the biggest of its kind in history.

Against this backdrop, it is difficult to see how we could escape the debasement of the US dollar and the recession. It is likely that high, perhaps very high, inflation will come first, followed by a deep slump. For inflation is typically seen as the lesser of two evils: rulers and the ruled would rather new money be issued to prevent a crisis over allowing businesses to fail and unemployment to surge dramatically—at least in an environment where people still consider inflation to be relatively low. There is a limit to the central bank’s machinations, though. It is reached when people start distrusting the central bank’s currency and dumping it because they expect goods price inflation to spin out of control.

But until this limit is reached, the central bank still has quite some leeway to continue its inflationary policy and increase the damage: debasing the purchasing power of money, increasing overconsumption and malinvestment, and making big government even bigger, effectively creating a socialist tyranny if not stopped at some point. So, better stop it. If we wish to do so, Ludwig von Mises (1881–1973) tells us how: “The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.”1

  • 1. Ludwig von Mises, “Stabilization of the Monetary Unit–from the Viewpoint of Theory (1923),” in The Cause of the Economic Crisis. And Other Essays before and after the Great Depression, edited by Percy L. Greaves Jr. (Auburn, AL: Ludwig von Mises Institute, 2006), p. 44, appendix.


Thorsten Polleit

Dr. Thorsten Polleit is Chief Economist of Degussa and Honorary Professor at the University of Bayreuth. He also acts as an investment advisor.

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The Hidden Link Between Fiat Money and the Increasing Appeal of Socialism | Mises Wire

Posted by M. C. on November 27, 2019

The longer a fiat currency is the coin of the land, the more one is led to believe that nothing should be in short supply, since everything is bought with money and money need not be in short supply.

What causes the seemingly unfounded confidence in socialism we encounter more and more in the news media and among political activists? In the Extinction Rebellion movement, for example, activists are quite certain they have learned that there is an alternative to markets as the means to economic prosperity. It’s a means that does not involve meeting the legitimate needs of one’s fellow men in the marketplace.

It is likely not a coincidence that most people living today have lived most of their lives in a world dominated by fiat money. It has now been nearly fifty years since the United States broke all ties between the dollar and gold. It’s been even longer since other major currencies were tied to gold at all. Consequently we now live in a world where the creation of wealth is seen by many as requiring little more than the creation of more money.

In this kind of world, why not have socialism? If we run out of money, we can always print more.

Unlimited Money Feeds the Myth of Unlimited Real Resources

The world was on a watered down version of a gold standard until 1971 when the US abandoned its solemn promise — the 1944 Bretton Woods Agreement — to back the dollar with gold at $35 per ounce. Gold backing of a currency provided a solid intellectual foundation of reality that few even recognized existed within themselves; (i.e., that we live in a world of scarcity and uncertainty). This reinforced the idea that wealth has to be built. It cannot be conjured out of thin air, just as gold cannot be conjured out of thin air.

But fiat currency can be conjured out of thin air and in enormous amounts. The longer a fiat currency is the coin of the land, the more one is led to believe that nothing should be in short supply, since everything is bought with money and money need not be in short supply. Those who know only unlimited fiat money soon demand free healthcare and free higher education as a right. And why not? Unlimited money will pay for it. Into this never-never land comes demands for scrapping the fossil fuel underpinnings of our modern economy by those who understand nothing of how an economy works. But, apparently one does not need to understand technical limitations, because there are no technical limitations. The “barbarous relic” (gold) had once limited the money supply and thusly seemed to limit the supply of vendible goods. Gold has been replaced by unlimited fiat money. Now it seems that unlimited aggregate demand can be funded by unlimited fiat money, leading to a world of plenty. Designer of the Bretton Woods Agreement Lord Keynes says so in this very insightful short video.

Fiat Money Turns the World Upside Down

The psychological impact of a lifetime within a fiat money economy cannot be underestimated. One’s world is turned upside down. For many, financial success becomes prima facie evidence of exploitation of the masses rather than something to be admired and to which one could aspire also. With more wealth seemingly available at the click of a computer button, only an Ebenezer Scrooge would deny funding the latest demanded government program. If wealth is so easy to create, many conclude only greed and cruelty are what stand between us and far greater prosperity for all.

But that is the very reason that fiat money is so subversive to the social order. In a sound money economy any new spending program can be funded only by an increase in taxes, an increase in debt, or by cutting existing funding. There is a real cost to each of these options. There is a real cost to printing money, too, but the cost is hidden. One does not see malinvestment at the time of money printing. Price increases are delayed and uneven, due to the Cantillon Effect whereby the early receivers of new money are able to purchase goods and services at existing prices. Later receivers or those who do not receive the new money at all suffer higher prices and a reduction in their standard of living. Even then most people do not link higher retail prices with a previous expansion of the money supply.

It would be hard to invent a more effective method for the destruction of modern society. As Pogo would say, “We have met the enemy and he is us.”

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There is No Escaping the History of Fiat Currency Failure ...


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