The following article was originally
published by Koinonia House in mid
to late 2010. I thought it a
very well written explanation of
where we have come from, and where
we have arrived at in our current
finacial condition as a country and
as a world.
The question
is,"Where Are We Going?" I
dont't know that.....I only know
that it doesn't look very promising
at the moment.
The only
thing I can be sure of is that God
is in control.....and He knows
exactly where we will end up.
Commodity
Money and Fiat Money:
A Bushel of Wheat for a Penny
by Steve Elwart
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This is Part 1 of a three-part series on
money: where it comes from, how governments
use it to control our lives, and how modern
money policy makes the prophecies in the
Book of Revelation seem very close to
fulfillment.
Everyone reading this article is being
robbed. We all use paper money and every
day, governments are lowering its value.
That value is being stolen from us. To
understand how this is happening, we need to
get to the basics of money. What is it?
Commodity Money
We learn in Genesis that Abram (renamed
later by God to Abraham) was a rich man. How
do we know? We are told that “he had
sheep, and oxen, and he asses, and
menservants, and maidservants, and she
asses, and camels.”1 In
Biblical times, these things were all media
of exchange. No king decided this; he didn’t
call in his magi to decide what the medium
of ex-change would be. Ordinary people, or
“the market” made the decision. Let’s say a
king did decree that rocks could be used as
money. Would anyone use them? Probably not,
because they would not know the value of
those rocks. Unless you are building a lot
of things (or stoning a lot of adulterers),
rocks fail to meet a standard for money:
they have no intrinsic value.
If a civilization was to advance though, it
had to come up with a convenient way to save
and exchange value to buy things. Leather
was used in ancient Rome. (Contrary to
popular belief, Roman soldiers were not paid
in salt. The term salary [from the Latin
salārium] was money given to Roman
soldiers to buy salt.2) Animal
pelts, whiskey, and tobacco leaves were used
in the former British Colonies, wampum
(strings of beads) was used by the American
Indians, dried fish were used in the
Canadian maritime colonies, maize or corn
was used in Mexico, and salt, iron and
farming tools were used in Africa. These
things are called “commodity money.” As
civilizations became more complex, most
forms of commodity money be-came very
cumbersome. (Who would want to give or get
300 sheep to buy a car?) Another medium of
exchange had to be found.
Over the centuries, the answer came to be
the precious metals, gold and silver. These
two metals became the basis for money in
most of the world. Gold and silver were used
as money for very specific reasons and they
were chosen by “the market.” People decided
that these two metals had all the qualities
that made for a good medium of exchange:
• They were easily portable. They had high
value to weight ratios. (So if you want to
buy a car, you only have to bring 16 ounces
of gold rather than 300 sheep.)
• They are fungible. Every ounce is like
every other ounce no matter where they were
mined. People didn’t have to worry about the
quality of the pure metal.
• They are highly divisible. They can be
divided into very small parts or coins. The
term “pieces of eight” came from the
practice of taking a Spanish dollar, a real
de a ocho and breaking it up into eight
pieces or reales to make change. Diamonds
fail the test of being divisible because if
you break up a gem-quality diamond, it loses
its value. (For that matter, sheep aren’t
easily divisible either unless you are very
hungry.)
• They are highly durable; the thirty pieces
of silver paid to Judas are still in
existence today.
• They are naturally scarce. They can’t be
multiplied.
Fiat Money
There is another type of money besides
commodity money, called fiat money. (Fiat
from the Latin fiat, meaning “let it
be done.”) This is an item, usually paper or
low value metal coins, that is decreed to
have value by a government.
A government puts fiat money into
circulation first by connecting it to a gold
or silver standard, but then cuts the link
and says that gold and paper are no longer
convertible, making the piece of paper
“legal tender for all debts public and
private.” It is obvious that debtors would
be very happy if the pa-per money lost its
value because they could pay their debts
with inflated currency. In a letter to
Edward Carrington in 1788, Thomas Jefferson
wrote, “Paper is poverty … it is only the
ghost of money, and not money itself.”
Jefferson died bankrupt because of the early
United States money (monetary) pol-icy based
on paper.
It is not that fiat currency is a new
invention. Fiat currency actually made its
appearance over 1,000 years ago. China was
the first country to issue true paper money
around the 10th century A.D. Although the
notes were valued at a certain ex-change
rate for gold, silver, or silk, conversion
was never allowed in practice. The bills
were supposed to be redeemed after three
years in circulation, but as more bills were
printed with the older notes being refused
redemption, inflation became evident.
Government measures to prop up the currency
were unsuccessful and it fell out of favor.3
In Europe, fiat money came into being around
the 12th century. Villagers would store
their gold and other valuables in their
lord’s castle for safekeeping. But during
this time of the Crusades and other European
Wars, noblemen were always strapped for
cash. When times were particularly bad, the
noblemen would confiscate the villagers’
gold and silver and issue notes for it, to
be redeemed later. Needless to say, the
notes weren’t always honored or if they were
redeemed, the holder of the note received
less of their gold back than what they were
promised. This is an early case of price
inflation.
Today, fiat money will always bring on
inflation for two reasons: 1) Politicians
like to induce inflation because it gives
the people the illusion of prosperity and 2)
its declared value is much higher than the
cost of producing it. Whether it is a $1 or
$100 bill in fiat money, it costs only 4
cents to produce. In today’s electronic age,
the production cost for new money is zero
since money creation is just a keystroke and
an entry in cyber-space. On the other hand,
in history, if you had a $20 gold piece, the
cost of that gold piece, less the cost to
produce it, was about $20.
The Gold Standard
If
the relative value of gold is tracked over
the years, one can see how fiat money loses
its value over time.
By the 1400s, most countries that had
complex trading systems were using gold and
silver for transactions. Prices held
relatively steady through the early 20th
century, except for lo-cal shortages and
wars. In the United States the price of gold
and the things it bought held its value with
exceptions for war-time when the government
printed paper money to cover its war debts.
After the emergencies and the country went
back on the gold standard, prices went back
to about where they were. During the First
World War, most countries involved in the
war suspended the gold standard so they
could print enough money to pay for their
involvement in the war. After the war, these
countries went back to a modified form of
the gold standard, but abandoned it during
the “Great Depression.”
In 1941, most countries adopted the Bretton
Woods system, which set the exchange value
for all currencies in terms of gold.
Countries that signed the Bretton Woods
agreement were obligated to convert their
currencies held by foreign countries into
gold valued at $35 per ounce. However, many
countries just pegged their currency to the
U.S. dollar, thus making it the de facto
world currency.
In the 1960s the United States had done
something unprecedented in its history. The
country fought two wars at once. The United
States fought a war halfway around the world
in Vietnam and a second war at home, the
“War on Poverty.” To do this, the United
States started to borrow massively and
brought on double digit inflation. To curb
the inflation, the United States government
started to deflate the dollar. 1963 marked
the entrance of the new Federal Reserve
notes and the disappearance of the $1 silver
certificate. This marked the point that no
longer did the U.S. Government have to pay
in “lawful money.” Finally, in late 1973,
the U.S. government decoupled the value of
the dollar from gold altogether and the
price shot up to $120 per ounce in the free
market.4 Since the United States
went off the Gold Standard, a dollar is
worth only one-sixth of what it was in 1973.
(At this writing, gold is priced at $1,220
per ounce.5)
Inflation Always Follows Fiat Money
The history of price inflation in the United
States is repeated in every country that
uses paper money. Keep in mind, rising
prices are not always bad. If a good becomes
scarce, its price will go up and may provide
the motivation to introduce a new, better
product for the market. The reason petroleum
became so popular so quickly was because of
the rising cost of whale oil. If governments
propped up the price of whale oil to keep
whalers and whale oil processors employed,
it would have taken decades for the world to
embrace petroleum as a substitute. And
someday, petroleum will go the way of whale
oil as long as market forces dictate the
transition.
When a government inflates its currency, it
increases prices by reducing the purchasing
power of the money. The short-term effects
though, can seem to be positive. Like a drug
addict, inflated money gives the illusion of
prosperity, making people feel good. But
like the addict, withdrawal follows the
high.
At first, the surge of more money makes
people feel good be-cause they can pay off
their debts with cheaper money and they seem
to have more disposable income. As prices
catch up, people then find it more expensive
to live. In addition, their tax burden goes
up, since many government taxes are
progressive in nature, meaning the
percentage tax increases as in-come or asset
values (houses, cars, etc.) increase.
Eventually the market will try to correct
itself and a depression will follow.
At this point, people start to feel the
pinch of their money buying less. They
demand that their government do some-thing.
Since studies have shown that voters only
have a memory of one year when it comes to
politics, politicians will make sure that
the economy is good in an election year.6
They will artificially stimulate the economy
to give voters the illusion that times are
good again and reelect the incumbents. This
lasts only so long and inflation, with its
problems kick in again. This cycle of
increasing the currency supply and price
inflation ultimately ends with the collapse
of the currency, sometimes preceded by
hyperinflation. (Hyperinflation and its
cultural effects will be covered in Part 3
of this series.) Surprisingly, the country
has not learned its lesson and the devalued
fiat currency is replaced with yet another
fiat currency. Greece is a perfect example
of this cycle.
The Greek drachma was minted in gold and
silver in ancient Greece and made its
reappearance as a fiat currency in 1841.
Since then, the value of the drachma
decreased. During the German-Italian
occupation of the country from 1941-1944,
hyperinflation ravaged the country, ending
with the issuance of 100,000,000,000 (100
billion)-drachma notes in 1944. After Greece
was liberated from Germany, old drachmae
were ex-changed for new ones at the rate of
50,000,000,000 to 1. Only paper money was
issued, again a fiat currency. Greece then
went on a program of deficit spending for
social programs and inflation started once
again.
In 1953, in an effort to halt inflation,
Greece joined the Bretton Woods system and
the drachma was revalued at a rate of 1000
old drachma to one new drachma. In 1973 the
Bretton Woods System was abolished; over the
next 25 years the official exchange rate
gradually declined, from 30 drachmas to one
U.S. dollar to a ratio of 400:1. On January
1, 2002, the Greek drachma was officially
replaced as the circulating currency by the
Euro (again a fiat currency).7
Today, Greece is once again is in trouble.
After years of continued deficit spending
and the government’s easy monetary policy,
Greece’s financial situation was badly
exposed when the global economic downturn
struck. Very quickly, the government’s
“creative accounting” practices were
exposed. The national debt, put at €300
billion ($413.6 billion), is bigger than the
country’s entire economy, with some
estimates placing it at 120 percent of gross
domestic product in 2010. The country’s
deficit—how much more it spends than it
takes in—is 12.7 percent.
This time though, Greece just can’t inflate
their way out of the problem. Now that they
are on the Euro (in the “Euro-zone”), they
have little control over their monetary
policy. All their loans are in Euros and
they must pay back the loans in Euros. One
way to balance the national books is to
implement harsh and unpopular spending cuts.
Another way is to default on their debt.
This would seriously damage the Euro as
other countries look at default as a way out
of their financial problems. (In fact,
financial experts are predicting the demise
of the Euro in as early as five years.8) A
third way out is to separate itself from the
Euro, go back on the drachma (fiat currency
again) and then set an exchange rate of the
drachma to the Euro at an artificially high
number. The cycle of fiat money would then
begin again.
As long as a country is on a fiat currency,
inflation is sure to follow. Using a fiat
currency could well reduce a civilization to
work an entire day for a “bushel of wheat.”
In Part 2 of this series we will look at
central banking and how the banks can change
a society.
**NOTES**
1. Genesis 12:16b
(KJV).
2. “The American
Heritage Dictionary of the English Language,
4th edition”. Answers.com. Retrieved 2010
3. Ramsden, Dave
(2004). “A Very Short History of Chinese
Paper Money.” James J. Puplava Financial
Sense.
4. History of the
Gold Standard:
http://useconomy.about.com/od/monetarypolicy/p/gold_history.htm
5.
Monex Precious Metals:
http://www.monex.com/monex/controller?pageid=prices.
6. “Voters Respond
to Economic Woes” Economics and Public
Policy:
http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1668.
7. Greek Drachma,
Wikipedia:
http://en.wikipedia.org/wiki/Greek_drachma#First_modern_drachma.
8.
“Euro ‘will be dead in five years’”:
http://www.telegraphic.com.uk/finance/financetopics/budget/7806065?Euro-will-be-dead-in-five-years.html
A Bushel of Wheat for a Penny: Part
2
The Rise of the Central Banks
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Last month we covered the two basic types of
money: commodity money and fiat money.
Commodity money, such as gold and silver,
are based on something tangible and has
intrinsic value. Fiat money, such as paper
money, is based on whatever a government
says it is worth. Commodity money keeps its
value for years and is stable. Fiat money
loses value from the time it is printed and
eventually becomes worthless.
Though not as long-lived as commodity money,
fiat money nevertheless has a long history
as well. As mentioned in Part 1 of this
series, villagers used to keep their gold
and other valuables in the lord’s castle for
safekeeping. Periodically, when the lord was
short of cash, he would “borrow” the
village’s gold and give them an IOU or
“script” in return. This paper money could
be returned at a later time, frequently for
less gold than was taken from them.
To avoid this problem, villagers started to
give their gold to the local goldsmith and
get a receipt in return. These receipts were
then used as money to buy and sell other
things. These gold notes could ultimately be
redeemed minus a small handling fee.
However, goldsmiths soon learned that not
all the gold would be redeemed at the same
time and started to make up receipts for
non-existent gold that he could use to
purchase other items. This was the start of
what is called “fractional banking.”
It was the Knights Templar that ran the best
known medieval central banking system.1
The Knights ran an innovative system that
utilized the first form of bank checks.
Pilgrims going to the Holy Land were always
in danger of being robbed on their way to
Jerusalem. To make themselves less of a
tar-get, pilgrims would deposit their money
with the Knights at the start of their
journey. They would then be given a coded
piece of paper that only the Knights Templar
could decode. When they reached their
destination, they would turn in their
“check” and be given the value of the check,
minus a handling fee. The Knights Templar
developed a network throughout Europe and
the Middle East and soon became the
wealthiest group in the Western World.
Eventually, their wealth became an
attractive target to the Pope and kings
indebted to them. The Knights were arrested,
their property confiscated and the Order was
disbanded. The Order may have disappeared,
but the financial system they left behind
survives to this day.
After
the Knights Templar, there were other
organizations that functioned
as banks, but in 1609 the Bank of Amsterdam
was formed as the first central
bank. Later,
the Bank of Sweden was formed (1664),
followed by the Bank
of England (1694), with
both institutions still operating today.
While most
central banks are associated with
fiat money, these three banks and the
other
central banks formed through the early
twentieth century operated on the gold
standard. Since they were on the gold
standard, the currencies were stable and
inflation was kept under control.
In the United States, early banking was
carried on by the individual colonies and
operated on the gold standard, but the
economic pressures brought on by the
Revolutionary War caused the colonies to
start printing paper money to cover the
costs of the war. The Continental Congress
also started printing paper money, known as
Continental Currency, to cover its costs.
Both the state and continental currencies
depreciated rapidly, becoming practically
worthless by the end of the war. The term
“Not worth a Continental,” meaning something
of little of no value, came from this
period.
In 1790, at the end of the Revolutionary
War, Alexander Hamilton was the Secretary of
the Treasury and Thomas Jefferson was
Secretary of State. Hamilton wanted a strong
central government bank; Jefferson was
opposed to it. At the same time, Jefferson
wanted the nation’s capital to be on the
banks of the Potomac River in Virginia,
which Hamilton op-posed. So, a deal was
struck. In return for Hamilton’s support in
moving the capital from New York to the new
District of Columbia (Washington, DC),
Jefferson would not oppose the new federal
government assuming the war debts of the
former colonies and the founding of a
central bank. Thus, the First National Bank
of the United States was formed.
This bank didn’t last long. The charter for
the bank was allowed to lapse and was later
followed by the Second National Bank of the
United States. This was the bank that
President Andrew Jackson successfully shut
down. President Jackson thought that a
central bank had no right to create money
out of thin air. In his veto message,
Jackson wrote,
“Congress [has] established a mint to coin
money and passed laws to regulate the value
thereof. The money so coined, with its value so regulated, and such foreign coins as
Congress may adopt are the only currency
known to the Constitution.”2
It was the Panic of 1907 that served as the
reason to create the third central bank,
called The Federal Reserve in 1913. (This
bank is neither a “federal” institution, nor
a “reserve” for gold.)
Other central banks soon followed: Australia
established its first central bank in 1920,
Colombia in 1923, Mexico and Chile in 1925
and Canada and New Zea-land in the aftermath
of their Great Depression in 1934.3
Printing money wasn’t restricted to just
countries. One barrio on the outskirts of
Caracas, Venezuela has created a “popular
bank” and is going to issue a “communal
currency”; currency printed on “little
pieces of cardboard.”4
The Federal Reserve began a course of
inflationary policies by printing paper
money that was not backed by gold but
nonetheless promised to be redeemed for
gold. In 1933, during the administration of
Franklin Delano Roosevelt, it became illegal
for U.S. citizens to own more than $100 in
gold coins or bullion ($1,660 in today’s
dollars), thus making the dollar bills
irredeemable for gold in the United States,
but not for overseas investors.5
On August 15, 1971, President Richard Nixon
officially took the U.S. off the gold
standard.6 From then on, U.S.
currency has been backed by the “full faith
and credit of the United States Government.”
This didn’t seem to be a problem for the
bankers and lenders of the world. The U.S.
dollar was the de facto currency standard
for the world. All major transactions done
around the world was based on the dollar.
“Sound as a dollar” was used as a popular
expression for something of quality.
What happens though when people have little
faith in a currency and the country has no
credit? The United States is about to find
out. The United States has run a budget
deficit every year, except for a four-year
period during the Clinton and G.W. Bush
administrations, since 1968.7 The
total federal debt this year will exceed the
total gross domestic product of the entire
country.8 Over 18% of all
government payments will go to interest on
the debt.9
The states of California, Illinois,
Michigan, and New York are all close to
defaulting on their obligations and are
looking to the federal government to bail
them out. The price of gold is at an
all-time high and people continue to buy
gold no matter how much it costs. Moody’s
Investor Service has warned that if the
situation doesn’t change, the United States
will lose it AAA credit rating.10
The “faith and credit” of the United States
is shaky at best.
Normally, when a country expands its money
supply, it will offer bonds to other
countries. The lending countries will buy
the bonds and then the borrowing country
will use that money to issue paper currency
to the lending banks at a set interest rate.
The problem many countries have now is that
lending countries are not buying. This puts
the borrowing country in a bind. Since
slowing the rate of increase of the money
supply will invite a recession (a way for
the economy to readjust itself back to
reality), politicians will want to “boost”
the economy by increasing the money supply.
With no one buying a country’s debts, the
debtor country is reduced to printing money
that is backed by nothing. This is called
“monetizing the debt.”
Ben Bernanke, the chairman of the United
State’s central bank, the Federal Reserve,
has been accused of gearing up the printing
presses. Of course, in these days of
electronic funds transfers (EFT), a printing
press isn’t even required. A simple computer
entry into a balance sheet will suffice.
In the last two years, the United States has
put $2.5 trillion into the world’s
economy.11 Continuing to expand
the money supply in such a manner could
cause a hyperinflation only seen in recent
history in developing nations and post-World
War II Germany. (We will visit the topic of
hyperinflation and its effects on society in
the third and final section of this series.)
Monetizing the debt does have a short-term
advantage in the opinion of those who favor
manipulating the money supply to regulate an
economy, the so-called “Keynesians”12;
you can set an interest rate to be whatever
you want it to be.
When the Federal Reserve lends money to the
member banks, the lending interest rate is
at least equal the borrowing rate, plus
additional percentage points to account for
inflation and profit. If you monetize the
debt, you don’t even have to charge
interest.
That is where the United States is now. The
Federal Re-serve is lending money to banks
at 0% interest. Some economists ask, “What
does that even mean”? Lending money at 0%
interest in an economy with an inflation
rate of 2.3% means the borrowing banks are
actually being paid to take the money. Some
economists feel that this is the best way to
“stimulate” the economy. Others feel this is
a terrible idea.
The “housing bubble” that the United States
experienced over the last few years is an
example of what happens when the money
supply is increased. While the problem in
housing started in the late 1970s with the
Community Reinvestment Act in the Carter
Administration,13 the problem
went into overdrive in the last few years.
When housing prices in major metropolitan
areas began to “soften” (read that “return
to a realistic level”), the Federal Reserve
increased the money sup-ply by lowering the
interest it was charging for its money. This
in turn lowered the interest rate offered to
home owners, often to people who could not
afford to buy the homes. These people were
told that they could actually afford these
homes, by “creative financing.”
People were offered short term (3-5 year)
loans with low interest rates and payments
not even covering the monthly interest. The
thinking was that when these loans came due,
the equity in their homes would increase
enough that they would be able to get
another mortgage and catch up on their
payments, because the increased value of
their home would help pay down the original
loan balance.
Others used their homes as a personal piggy
bank, taking out second mortgages to buy
consumer goods such as a second home, a car,
a boat or to pay off credit card debt. This
frenzy in the housing market would not have
occurred had the monthly payments bore some
semblance to reality. Once the housing
market was saturated, home prices became
stagnant and then began to fall as demand
began to fall. Home owners found themselves
in “upside-down” mortgages where they owed
more money on the house than it was worth.
Many people then did what they thought was
the only rational thing—they walked away
from their mortgages. Mortgage holders
(usually investment funds used for
retirement savings, etc.) quickly found out
that the AAA bonds they held, backed by home
mortgages, were nothing more than junk
bonds. The monetary policy of the central
bank, put in place for political purposes,
was a house of cards that started to
collapse.
That house is still collapsing today. The
credit collapse in the United States caused
a ripple effect around the world. We are
seeing the effects in Europe with the
bailout of Greece (and possibly Portugal,
Italy and Spain), the austerity programs in
Britain and Ireland, and the calls from
China, Russia, and others to move away from
the U.S. dollar as the world’s re-serve
currency. This last event could have
devastating consequences.
The politicians in Washington, of both
parties, don’t seem to realize just how
serious the problem is as they are
continuing to spend money they don’t have.
They are continuing to say the only cure for
an economy sick from borrowing too much
money is to borrow more. This was the same
thinking that brought disastrous
consequences to Germany in the 1920s and
ultimately to the entire world.
In the third and final part of this series,
hyperinflation and its effects on a culture
will be investigated.
**NOTES**
1. Sanello, Frank
(2003). The Knights Templars: God’s
Warriors, the Devil’s Bankers. Taylor
Trade Publishing. pp. 207–208.
2. “President
Jackson’s Veto Message Regarding the Bank of
the United States; July 10, 1832,”
http://avalon.law.yale.edu/19th_century/ajveto01.asp.
3.
http://en.wikipedia.org/wiki/Central_bank.
4. Venezuela slum
takes socialism beyond Chavez,
http://www.alertnet.org/thenews/newsdesk/N04171136.htm.
5. Executive Order
6102,
http://www.presidencey.ucsb.edu/ws/index.php?pid=14611.
6. It is an
interesting sidenote that a country cannot
be a part of the IMF (International Monetary
Fund) if its currency is on the gold
standard.
7.
http://www.coneofsilence.info/img/blogs/deficit(7-11-07).gif.
8.
http://shadowstats.com/article/issue-number-50-overview.
9. GAO Audit Report
2007-2008 Schedules of Public Debt.
10. Moody’s Says U.S. Debt Could
Test Triple-A Rating,
http://www.nytimes.com/2010/03/16/business/global/16rating.html.
11.
http://www.marketskeptics.com/2009/03/fed-is-planning-15-fold-increase-in-us.html.
12. Keynesian economics was
purposed by 20th century British economist
John Maynard Keynes (1883 – 1946).
13. Avery, Robert B.; Raphael W.
Bostic, Glenn B. Canner (November
2000). Lending.” Economic Commentary.
Federal Reserve Bank of Cleveland. Retrieved
2010-07-05.
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A Bushel of Wheat
for a Penny: Part 3
Hyperinflation and
its Effect on
Cultures
|
|
In part one of this series,
we covered the difference
between fiat and commodity
money. As countries moved
toward a fiat currency, the
money supply increased and
started to lose value. Part
two of the series explored
the rise of the central
banks. It covered how
central banks came into
being and how they
contributed to the
destruction of a nation’s
currency by creating a false
business boom, then the
final economic collapse.
This article, the third and
last of the series, will
cover the endgame of an
irresponsible fiscal policy,
hyperinflation. Economist
Ludwig von Mises warned us
in 1912:
The [business] boom produces
impoverishment. But still
more disastrous are its
moral ravages. It makes
people despondent and
dispirited. The more
optimistic they were under
the illusory prosperity of
the boom, the greater is
their despair and their
feeling of frustration. The
individual is always ready
to ascribe his good luck to
his own efficiency and to
take it as a well-deserved
reward for his talent,
application, and probity.
But reverses of fortune he
always charges to other
people, and most of all to
the absurdity of social and
political institutions. He
does not blame the
authorities for having
fostered the boom. He
reviles them for the
inevitable collapse. In the
opinion of the public, more
inflation and more credit
expansion are the only
remedy against the evils
which inflation and credit
expansion have brought
about.1
Mises is warning us about
the same thing that the Holy
Spirit through Paul cautions
of in the Book of Romans. In
Romans, Paul writes of the
importance of a man’s faith,
rather than his works. When
man takes the center of his
being away from God, he
tends to attribute his
success to his own efforts
and his failures to others.
So, what happens to a
society when the ravages of
hyperinflation start to
consume an economy? What
happens when the money dies?
Hyperinflation in a country
is more common than we
think. Israel went through a
period of inflation in the
1970s and ’80s.2
Prices in Israel went from a
13% increase in 1971 to 445%
in 1984. People would hoard
phone tokens since their
value would not change as
prices rose. At the time,
there was a joke going
around that it was better to
take a taxi from Tel Aviv to
Jerusalem rather than a bus
because you could pay the
cab fare at the end of the
trip when the shekel was
worth less.
A major contributor to
inflation was the government
expanding the money supply.
The Israeli government tried
to automatically raise wages
as the inflation rate went
up. This move was meant to
keep the people from feeling
the effects of inflation,
since their incomes rose
with their expenses, but
indexing just added to an
inflationary spiral. As the
chart above shows, while
Israeli inflation was bad,
other countries have
experienced much, much
worse.
Money has several
characteristics. Its value
is stable, it has a high
value per unit (meaning you
should not have to bring
wheelbarrows full of money
to the store to buy things),
and it is durable; it lasts
over time. You try to
acquire it because you know
it will be useful in the
future.
That brings us back to the
question, what happens in a
society where this is no
longer true? A society that
does not have a strong faith
in God has the lives of
their citizens turned
up-side-down. A person
without God in their life
will call their entire value
system into question. The
facts represented in the
chart, however, demonstrate
that in the last century,
many societies fell into the
trap of inflating their
currency.
From previous experience,
these societies should have
learned that inflation is
folly, yet they kept doing
it. The reason is that
inflation is not just an end
in itself; it serves
ideological goals as well.
Goals like expanding the
State, favoring debtors over
creditors, and funding wars.
Governments actually favor
inflation and the social
upheaval it causes.
Ben Bernanke, the Chairman
of the United States Federal
Reserve, said in a speech,
“…the U.S. government has a
technology, called a
printing press, that allows
it to produce as many U.S.
dollars as it wishes at
essentially no cost. By
in-creasing the number of
U.S. dollars in circulation,
or even by credibly
threatening to do so, the
U.S. government can also
reduce the value of a dollar
in terms of goods and
services, which is
equivalent to raising the
prices in dollars of those
goods and services. We
conclude that, under a
paper-money system, a
determined government can
always generate higher
spending and hence positive
inflation. 3
At first the effects of
inflation are masked to us.
Sometimes you have to think
about it. For example, oil
prices went up because of
the inflation of the
benchmark U.S. dollar. As a
result, airlines’ fuel costs
went up. The airlines
started to charge more to
passengers. Not only did
they increase the ticket
price, but they also started
charging for bags. Now
airlines call maintenance
delays “Acts of God” so they
don’t have to pay for
overnight stays at hotels. A
delayed plane will keep
their passengers on the
plane for hours, rather than
go back to the gate and pay
an additional fee.
Post
World War I Germany (known
as the Weimer Republic)
serves as an example of what
happens to a country that is
going through
hyperinflation.
Germany used inflation to
pay reparations, abolish
their national debt and
build up the regime. Just as
today, the effects of this
monetary policy were not
obvious at first.
In 1918, the inflation rate
in Germany ranged from 1% to
6%, lower than many other
countries in Europe. By
1923, the Deutschmark had
fallen to
1/1,000,000,000,000
(one-trillionth) of its
value from the previous five
years. Bank policy had not
changed too much, but the
German people began to lose
faith in their money and
began to act differently.
It
was like a forest fire that
raged out of control. The
entire society went into
upheaval because the money
died.4
At the time, no one really
understood that it was the
Central Bank that was
causing the problem. Foreign
exchange problems were
blamed as well as other
things like the weather (as
is being blamed in Zimbabwe
now), but above all,
speculators. Speculators
were at the top of the list
of evildoers. The Central
Bank was seen as the main
problem only in retrospect.
After the hyperinflation
started in Germany, the
National Socialist Party
(Nazis) took power. There
was a connection between the
two. Bernd Widdig, the
author of the book
Culture and Inflation in
Weimar Germany, had an
interesting theory. He said
that money helps shape our
values and what we do. When
the money dies, what do you
turn do?
The argument of the National
Socialists was: “Your money
has failed you, the
speculators and the money
lenders (as they described
the Jews) have failed you.
You can’t depend on
capitalism anymore. You need
something else, something
that is going to last. That
is Germany. That is what
lasts, not money, not
capitalism. You need order,
order rooted in blood.” The
German people accepted what
the Nazis said only because
the money had failed. When
the money fails a society
starts to fall apart and
people will accept ideas
they never would have
accepted before.
There are other effects from
inflation as well.
It fosters the expansion of
government
– In the early 1960s,
cautioning that federal
spending had a way of
getting out of control,
United States Senator
Everett Dirksen observed, “A
billion here and a billion
there, and pretty soon
you’re talking real money.”5
Today, that statement is
almost laughable. In the
first year of the Obama
administration, over $1
trillion dollars (one
thousand billion) was added
to the United States
national debt. This set a
new record in spending,
surpassing the previous
record set by the George W.
Bush administration.
Politicians soon forget that
the rights of the government
come from the governed, not
the other way around. One
U.S. representative is
quoted as saying in a town
hall meeting, “The federal
government can do most
anything in this country.”
6
It gives politicians an
“unrestrained vision”
– Going hand in hand with
the expansion of government
is its “unrestrained
vision.” Recent
administrations thought they
could conduct two wars and
then have free healthcare
for everybody. Politicians
want to promote that an
education for everyone is a
“right.” They want to give
each child born a $5,000
trust. They say everyone
deserves their own home, and
at least one car along with
a myriad of other things.
When you have the printing
presses running 24 hours a
day, 7 days a week,
every-thing is possible.
It crushes charitable
institutions
– In the 1930s, in
preinflation Vienna, there
were huge non-profit
agencies with money to care
for widows, orphans and the
poor. Organizations that
would rival charities today.
These organizations were all
wiped out in the inflation.
These were the institutions
that stood between the
people and the Welfare
State. The uncertainty of
hyperinflation provides a
ready excuse for people not
to support charitable
institutions and they will
fall into decline.
It turns people against
capitalism
– This is a dangerous
aspect. Just as in Weimar
Germany, people blamed the
“greedy fat cats” for the
nation’s woes. In today’s
Greece there is a pent-up
resentment towards corporate
executives. They blame “the
bosses” for Greece’s
economic troubles rather
than the rampant government
spending. In the United
States, even though the
present tax code will hit
taxpayers at all levels, it
is being purported as only
affecting “the rich,” those
with annual incomes over
$250,000. The rationale is
that after a while, “you
have made enough money.”7
The administrations of
several western countries
are turning towards
socialism even as socialist
countries (i.e. Russia &
China) are lecturing them on
excessive government
spending and control.
It teaches people to live in
the present
– When the value of money
starts to rapidly decrease
in value, people tend to
live more “in the moment.”
There is no incentive to
save and to anticipate,
since it doesn’t pay to deny
yourself now for some
benefit later. Eventually,
those that practice “old
time” values of saving and
investing are seen as fools
and losers since any-thing
you have today won’t be
worth as much tomorrow.
These effects are especially
strong among the youth. They
learn to live in the present
and scorn those who try to
teach them “old-fashioned
morality and thrift.”
Inflation thereby encourages
a mentality of immediate
gratification that is
plainly at odds with
Biblical principles of
stewardship.8
It subsidizes debt and
addiction to credit
– When the value of money
decreases over time, it
doesn’t make sense to people
to save money for
everything. If you are going
to “live in the present,” it
seems reasonable to buy on
credit and pay the debt back
with cheaper money. People
become addicted to credit.
People will max out their
credit cards even as the
banks tighten down on
credit. Today, there is
actually an organization
called Debtors Anonymous, to
help people with credit
addition. Debtor-support
groups have sprung up around
the country to help combat
the problem.
The result is a rampant
materialism
– As people have to dwell
more on money and finances
because of inflation,
society becomes more
materialistic. More and more
people will trade their
spiritual well being and
family relationships for
more money to make ends
meet. People will work
longer than they planned
because their savings have
been wiped out. They may
have to take a job far away
from their home and family.
This inflation-induced
geographical mobility
weakens family bonds and
loyalty to their country.
People who take their eyes
off God and turn them toward
the things of this earth
fall prey to sin.9
The biggest danger here lies
in people’s focus turning
away from the things of God
towards the things of man.
The Book of Ecclesiastes
provides wise council about
money. “He that loveth
silver shall not be
satisfied with silver; nor
he that loveth abundance
with increase: this is also
vanity.”
While we need to be good
stewards of the material
goods the Lord provides us,
being too concerned about
the things of this world can
lead to a cancer in the soul
as James said.10 Throughout
these uncertain times, we
need to be mindful of the
things of God, rather than
the things of this world. If
we keep Christ in the center
of our lives, we will keep
our time here on earth in
perspective and better
weather the coming financial
storm.
**NOTES**
1. The
Moral Ravages of Inflation,
http://blog.mises.org/8289/the-moral-ravages-of-inflation/.
2. Senor,
Dan and Saul Singer.
Start-up Nation: The Story
of Israel’s Eco-nomic
Miracle. New York: Putnam,
2009.
3. Remarks
by Governor Ben S. Bernanke,
Before the National
Economists Club, Washington,
D.C., November 21, 2002,
www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm.
4.
Hyperinflation: Money to
Burn,
http://millennium-notes.blogspot.com/2009/08/hyperinflation-money-to-burn.html.
5.
www.senate.gov/artandhistory/history/minute/Senator_Everett_Mckinley_Dirksen_Dies.htm.
6. Excerpt
from Congressman Pete
Stark’s Town Hall Meeting
7/24/2010, Hayward, CA,
www.breitbart.tv/congressman-at-town-hall-the-federal-government-can-do-most-anything-in-this-country/.
7. Obama:
You’ve Made Enough Money,
www.youtube.com/watch?v=k0JkyZx1LdQ.
8. The
Cultural & Spiritual Legacy
of Fiat Inflation,
http://mises.org/daily/1570#_ftn3.
9. Ibid.
10. James
5:3.
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