Wednesday, April 01, 2009

Fiat Money Is Toilet Paper

Quadrant QED

The monetary collapse

by Ron Kitching

March 9, 2009

There is only one sure method for the final victory of a scientific idea, namely, by letting every contrary proposition run a free and full course. Carl Menger

Fiat monies are money substitutes. When the world was on a gold standard all nations had paper monies but upon demand they could be exchanged for gold at any bank any where at any time.

During the inflation of the 1920’s Keynes made a million pounds. Irving Fisher made $10,000,000 U.S. When the bubble burst Keynes scrambled out with 250,000 pounds. Fisher lost his entire fortune plus another $1,000,000 he borrowed from his sister-in-law.

Keynes declared that gold was a barbaric relic from the past, and advocated a fiat paper monetary system controlled by the state.

The Fiat Monetarist position of Keynes, Irving Fisher, and Fisher student, Milton Friedman has run its full course. We can all see the results today.

Frantic efforts are being made to reinflate the economic bubble, but they must in the end all be in vain. If leaders and their advisers persist with “stimulation”, the world will all end up as Zimbabwe is today.

Keynes was an outstanding speaker who knew how to influence public officials and politicians. And his admirers, Irving Fisher and later, Milton Friedman, showed politicians, that through a “controlled” on going inflation, they can make promises and keep them. But in the end, stones cannot be turned into bread, as Ludwig von Mises was never tired of pointing out in his many writings.

WW1 cost the English seven and three quarters of a billion pounds. The government declined to directly tax the population, as that would have made the war unpopular. So they abandoned the gold standard and inflated the currency.

Inflation is a secret tax. In his saner days, even Keynes declared: “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Instead of that capital being invested in competitive goods and services for which the world scrambled to buy, it was turned into bullets, bombs, shells, and all manner of man killing devices. Also the efforts of millions of men and women on both sides were turned to destruction instead of the usual peaceful competitive manufacture and provision of goods and services for the multitude.

Swiss Banker, Ferdinand Lips, in Gold Wars, stated that if the warring nations of Britain and Germany had been forced to pay for the war by using real capital, directly taxed from the populations of both sides, the war would have ended before Christmas of 1914. He maintained that the populations would have revolted at the taxation required to finance the conflict.

So, both antagonists suspended gold payments and resorted to the secret tax of inflation.

History shows that the depression which follows all inflations, is actually the healing process as the market adjusts to the remaining capital. As is the case at all times everywhere, free of state interventionism, entrepreneurs can then invest capital competitively in goods and or services for which the world will once more scramble to buy.

In their ignorance of Monetary Theory, the politicians and their advisers world wide are scrambling looking for a magic bullet. Keen students of correct Monetary Theory know that there isn't one.

The market oriented restructuring of the economy will be aggravated by the refusal of unions, and politics dominated by the unions, to reduce wages to a level compatible with the available capital resources invested competitively in viable profit making enterprises and services.

In other words in such a situation wages should be allowed to fall to a level that competitive productive enterprise can support.

So, with the National leaders, implementing vast “stimulation” programmes, the Nation is being led up a vast dry gully. It will take followers a long time to abandon state policy and seek the truth of the matter.

The world is now reaping the disaster which has grown from the seeds of fallacy.

AUTHOR: Ron Kitching, who celebrates his 80th birthday in April, was one of the organizers of the month long visit to Australia by F.A. Hayek in 1976. He is the author of Understanding Personal and Economic Liberty.