Posted Jun 24, 2013 by Martin Armstrong
QUESTION: Hello Mr. Armstrong,
In a recent post you write, “HYPERINFLATION takes place not because of any threshold in the quantity of money that has been crossed. It is a matter of confidence.”
Is there any historical precedence for a people losing confidence in a currency, where it is being restricted, i.e., not printed in vast amounts?
In other words – Has a population lost confidence in fiat, that then leads to hyperinflation, where there is no monetary expansion?
Your thoughts would be appreciated.
ANSWER: All money is fiat if you define it incorrectly as intangible money rather than An arbitrary order or decree. As long as money floats in value and it is legal tender meaning government accepts it in return for taxes, then it is not fiat in real terms. The idea that money must be tangible also has no basis in fact. Money has been many things to many people. The entire basis of money is you will accept something as money as long as you have CONFIDENCE that in turn someone else will accept it from you.
This idea that somehow gold coin is not fiat has been so misleading. Here is a Roman tax collector gold bar because the government minted gold coins cheating in quality but refused to accept them in return for taxes. Thus, taxes were imposed based upon weight – not coins! Therefore, the gold coins of the day were not trusted and even government had no CONFIDENCE in them, which is why they were NOT legal tender (acceptable for taxes).
Before “coins” money was always various things in different areas depending upon what people valued. It has been primarily grain, precious metals (mainly silver as noted in the Bible and Babylonian law tablets), and bronze. Pictured above is Roman bronze that traded by weight in lumps before 300BC.
Many have claimed unless gold is money, then we will see a rampage of inflation. I do not understand even the logic of this argument. We had Bretton Woods with gold as money between nations. Yet, inflation was out of control for politicians then refused to revise the “fixed value” of gold when they continued to print money for they would have to make a public admission that they were a bunch of idiots. So “tangible” money did nothing to prevent the increase in money supply. If you want to do something, deal with the issue. Do not fine your wife because the guy next door forgot to take the trash out. Eliminate borrowing and convert our republican representative forms of government to a real democracy where people must vote on every expenditure and then you will deal with the issue. Stop the nonsense that somehow “fiat” is the problem. That is like saying don’t eat carrots because everyone that ever did eventually died.
Money value historically fluctuates with supply and demand and always has – it cannot be fixed. Early attempts at wage and prices controls always failed from Babylonian times right up to the Wage & Price Controls of Diocletian (284-305AD) who attempted to restore silver coinage AFTER the Great Monetary collapse. It did not matter that coinage was restored. CONFIDENCE still collapsed and the coinage was rapidly hoarded and vanished from circulation. So yes, even when the money is of full value, it still will not circulate if people do not BELIEVE government. Indeed, there was still another war and finally Constantine (309-337AD) emerged as Emperor after defeating all rivals. He enjoyed some success but had to abandon Rome and created a new Capital Constantinople and revised the monetary system again. That lasted for some time and once more you find silver vanishing from circulation.
HYPERINFLATION has ONLY taken place in minor peripheral economies. It has NEVER taken place in a major economy. All major economies implode from deflation because as they need money, they attack their citizens destroying their own economies as we are doing right now. So while you wait for HYPERINFLATION, your taxes will rise, your rights will vanish, and you will see tanks on your streets before $30,000 gold that will still be the cost of a men’s suit. Forget this HYPERINFLATION and fiat nonsense. Government began getting involved with money first out of just standardizing the weight to facilitate trade as pictured above. That was it.
Government then began to stamp the image or badge of the city to impress people.However, the first city to “coin” money was also the first to discover “fiat” meaning the value is simply dictated by government (which we do not have today because paper money floats without a fixed value). All money is fiat whenever government is involved if you define that terms as meaning intangible money.
The stater was first issued from electrum a natural alloy or gold and silver with a weight of 14.2 grams. Then King Croisos (KROISOS) separated the gold from the silver creating the first bimetallic monetary system and the gold stater now was standardized in weight at 10.9 grams. When war began with Persia, the weight was reduced to 8.71 grams and the value was raised. Government discovered the power of “fiat” arbitrarily establishing the value of money to make a profit.
Here is a coin from Lydia 7th century BC with 9 moneychanger marks (foreign exchange brokers) verifying they tested the metal. This demonstrated that CONFIDENCE was not present simply because government weighed and valued its coinage by decree. If people trusted government, why test each coin?
Sweden 1666 Note
The whole reason people began to use banks was because the “money” could not be verified. Just because the coins were silver or gold did not mean anything. They could be debased, shaved, or forged. You deposited money in a bank and the bank CERTIFIED you were paying in “good” money. People did not want coins, they wanted the bank paper receipts. Like the moneychanger, the bank was certifying the transaction was taking place with proper value in “money”. Thus, paper money began in middle ages as receipts certifying deposits.
Even the first Bank of England notes were not a fixed denomination but were receipts for deposits. This note in 1694 states a promise to pay with the denomination written in. Notes eventually became standardized denominations enabling them to circulate freely.
Ancient Egypt always had “fiat” money receipts for grain in public warehouses trading as money. They did not have any coinage until Alexander the Great conquered them in 334BC. Virginia also had the same system of tobacco receipts that circulated as money in colonial times.
China and Japan were the same. They never had circulating gold or silver coinage. This nonsense that money has to be tangible is NOT supported by the facts. Money has always been based solely upon what someone else is will to accept. Go to a WaWa or Starbucks and try to buy with a gold coin. They will not accept it. Hell, some places will not even take a $100 bill anymore and want plastic. If they do not BELIEVE gold is acceptable for payment or you hand them $1 in 1964 silver quarters to by a $5 coffee, you are out of luck. They will see it as $1 not worth $5. This is the real economy. MONEY is only valuable based upon what the OTHER person believes – not you!
It is NOT the fiat. It is simply CONFIDENCE. Bank and warehouse paper receipts have circulated as money for thousands of years. Even dollars under Bretton Woods gold standard were simply receipts redeemable in gold in international transactions. It was NOT gold that actually circulated. When people as a whole distrust government, then barter replaces official “money” and that can be a lot of things and the worse it gets the more likely it boils down to food. We have run every possible correlation and have the database to do so. It is just hype! Just as the stock market has never peaked with the same level of interest rates, you cannot find any such evidence that if money is “fiat” then it collapses and going into HYPERINFLATION. Good sales pitch – but’s it.
When Genghis Khan invaded China, which was using paper money, he too accepted it and did not devalue the paper money that was in circulation. He too accepted the paper money from the previous emperors. These stories of fiat are totally unsupported by history and rank up there with less credibility than even sea monsters.
By the time this economic implosion is over, you will PRAY for HYPERINFLATION. What we face is far worse. It is loss of everything with the risk of tanks rolling down your streets hunting money!