The Achilles Heel in Our Economic System- Part 2

Fiat currency is a medium of exchange that derives its value from decree or by government regulations and law. It has no intrinsic value which means it can only be accepted as legal tender to satisfy a debt. It actually states so on each bill or in our case each Federal Reserve Note on the upper right side of the front of the bill:


“This note is legal tender for all debts public and private.”

The only fly in the ointment here is that every irredeemable fiat currency since the Roman empire has ended in devaluation and eventual collapse. When the currency collapses, so does the economy based upon it because if the medium of exchange disappears so does normal economic exchange. At least until a new exchange medium is established. The economy reverts to barter. The rule of law also becomes the rule of might over right.

Bear with me here as this post is a little longer than normal but still quite a bit more condensed that it could be to explain what is happening in our nation….today.

Commodity Based Currencies vs. Irredeemable Fiat Currencies

The alternative to irredeemable fiat currency is a commodity backed money systems. However, they have not been allowed to gain traction by the powers which control the issuance of our money.

Currencies based on gold and silver, the 2 most commonly accepted types of commodity backed currencies, are attacked as counterfeit or illegal. Some have made the claim that currencies backed by gold and silver have also collapsed (An acknowledgement of where our monetary unit is headed BTW.) Well, kinda sorta but not exactly.

They didn’t really collapse, but rather they were replaced. And as we are discovering, not for a better system of exchange.

You see, commodity based currencies tend to lend more stability to the value of the currency. However, they also provide a limitation that those in power reject. That limitation is one of quantity.

Money Based on a Commodity Cannot Be Created Freely and Without Limit.

Commodity based currency requires the backing of the chosen commodity which in most cases is gold and/or silver. So when demand for the supply of money increases beyond the current reserve capacity of gold and silver, then those who perceive a need (Typically the government) for that money run into a problem. To resolve this problem generally requires 3 solutions

  1. More goods for exchange to generate more gold and silver in the economy must be produced. Government can then acquire some of this increased surplus through taxation.
  2. Inflate the value of the commodity to allow it to be more divisible which also increases quantity. Of course, this can also make goods most costly to export slowing trade.
  3. Restrain government spending while continuing the current taxation level which will thereby accumulate more stores of the commodity.

All of these solutions require measured restraint and patience. Therein lies the rub.

People generally learn to cope with their limitations. Those that don’t are forced to by those they owe through collection efforts backed by law.

Businesses are generally careful about expenditures. Those that are not and spend more than they take in without outside help (such as illegal bailouts) simply go out of business.

However, government is like someone with an eating disorder. Once they get going it is difficult to reverse its direction which is why Jefferson suggested that they be bound down with the chains of the Constitution.

Governments and Central Banks- Partnership of Power

Government wants what money masters call an “elastic” currency. An “elastic” currency can be expanded upon demand or “their” perceived need.

A currency backed by a commodity is not completely “elastic”. It cannot be stretched at will upon demand. It is related to the current reserve supply of the backing commodity. Its overall value is determined by the demands of the marketplace, not a board of financiers.

So what have government’s do to resolve this problem? Well, the modern day solution is to create central banks.

A central bank is actually a bit of Orwellian mind speak. It is not actually a bank. It is really a regulatory authority which controls a nation’s monetary policy. That is to say, the actions of the central bank determines the size and rate of growth of the monetary supply.

The good thing for the government with a central bank in place, which is almost always privately held ostensibly to keep them sheltered from political policy (a specious claim at best), is that the government simply asks the Federal Reserve to issue more money and viola, like Mandrake the magician, the central bank can issue more currency in exchange for IOU’s called Treasury Bills or Bonds.

In simple terms, there are no limits to how much money can be created upon demand. Therein lays the problem for the long term viability of the currency. The more there are of something, the less it is worth.

For example, if we suddenly discovered an island with a beach made up of diamonds. Now, what do you suppose would happen to the value of diamonds?

Money works that way too. If you just keep producing it without a subsequent rise in production, the value of the money declines through a phenomena we call inflation.

What is the Mandrake Mechanism?

Please review the following YouTube based on a portion of a talk by Edward G. Griffin on what he calls “The Mandrake Mechanism” or how our money is actually created. I believe you will find this 10 minute clip quite illuminating or if you already know what is going on reinforcing:

[vsw id=”PdLWA5zlD5Q” source=”youtube” width=”425″ height=”344″ autoplay=”no”]

The bottom line is- Money in any society is a source of power. It fulfills needs or desires when it is exchanged. And fulfilling needs at will is an act of power in society. As Lord Acton stated in the mid 19th century:

“Power corrupts. Absolute power corrupts absolutely.”

So, when one party has a monopoly on the creation of money (Our Federal Reserve cartel) and the other (politicians) have easy first access to that money through the issuance of debt instruments like T-Bills, you have created the instruments to generate a monopoly of power.

Eventually, since absolute power corrupts absolutely as Lord Acton stated, more money gets issued to fill desires and perceived needs than the productive capacity of the economy can support. The result of course is more inflation which is the real Achilles heel of an irredeemable fiat currency.

Since our money is based on debt with no limiting redeemable commodity backing it, the inevitable end is for debt to spiral out of control. As it has in the past for all irredeemable fiat currencies, more and more money is produced to fulfill debt obligations. Eventually, debt exceeds the ability for it to be repaid through production of real wealth (goods that fill a need or desire). The money supply spirals out of control attempting to keep up. The end result is hyperinflation- think Wiemar Republic or modern day Zimbabwe or even Greece and Spain.

Unfortunately, it appears this is where we are headed unless wholesale changes are instituted, hopefully before the currency collapses. We’ll cover a little more on what we can do to respond to this problem in our futures.

The Achilles Heel in Our Economic System- Part 3 (What’s next?)

Meanwhile, a good tool to have in your arsenal would be a clear awareness of how all of this works. If you would like to read more about our debt based Federal Reserve system, please review either or both of the books below (click on the image for reviews and a summary of the book):

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