It seems when people who know what the term fiat currency means use it, they use it negatively. There’s little in the way of defense of fiat currency, and a number of strong arguments against it - the primary being that of the United States’ Founding Fathers’ goal in keeping the United States a free and prospering union where citizens were free and protected from the flamboyancy of big government. But what does fiat currency do for us?

First of - what is a fiat currency? A fiat currency is the system used to define “money” in North America, and most of the world, where money is an artificial creation, with no intrinsic value or guarantee that it can be converted in to something with intrinsic value (such as, the most common alternative - gold-backed currency). Fiat currency is generally seen as a convenience, or a protectionist system where we dictate power towards the government with regard to the value of currency - those who trust in the government with regard to the ability to implement sound economic and financial policy (of which, little policy is generally the only “sound” policy), are generally fans of fiat currency; though, those people are few and far between when you approach those who truly understand the variables.

Our current fiat currency in both the United States and Canada is something akin to a banking cartel. The Federal Reserve, founded on Jekyll Island, a small private island off the coast of Georgia, a club of New York billionaires including J. P. Morgan, the Rockefellers and a number of other large names in U.S. history. Collectively, the Federal Reserve is not owned by the federal government or the people, rather, it’s owned by it’s member banks; all information about stockholders in the Federal Reserve banks (not the banking system, but the bank itself) is held in entire confidence - everyone, including the President of the United States, except for a small number of controlling elite is prohibited from knowing who holds controlling shares in this system.

That said, in July 26, 1983, a document from the Federal Reserve Bank of New York - the largest Fed bank - citing that 66% of the outstanding shares were held by 5 major stock-holding “member” banks. This controlling interest was made up of Citibank (with the largest individual share), Chase-Manhattan Bank, MorganGuaranty Trust, Chemical Bank and Manufacturers Hanover. This money trust, representing an international number of significant high-value private individuals, was mostly responsible for the establishment of the Federal Reserve, providing a security net and value-hold for the entire banking system - dominated by the money-money groups in the world, designed entirely for the elite.

The establishment of the Federal Reserve provides the government with a form of eliminating necessary direct taxation, for significant funding for large projects, such as the War on Terrorism, the Federal Reserve can allow the Congressional bodies to avoid the unpopular move of rising taxes by supplementing borrowing by simply indirectly printing more money (in reality, it’s simply injected in to a bank, as “cheque-book money”). Unpopular moves such as raising taxes, are in fact, almost equal to that of simply increasing the money supply directly through this “loan” system that the Federal Reserve does provide, both to the government and private banks - as the money supply increases through this, more money chasing the same amount of goods causes the goods to become more scarce (versus money) and, we result in inflation. Real wealth is decreased from anyone except for the original holders of the money, and the banking system - in effect, the bank steals the created inflation, receiving pre-inflation interest and fiat money.

“Inflation wipes out the middle class,” says Congressman and libertarian-gold standard advocate Ron Paul. The effects of inflation pushes prices up for everyone, does not redirect money towards the lower or middle class (and unemployment rises, putting the lower class out of business). Additionally, many hard-money enthusiasts are likely to jump on the important fact, that fiat currency’s legislated exclusiveness in use for paying government taxes is the only variable which keeps it stable against free market economic solutions to the obvious money problem.

Bubbles, market speculations have the problem within fiat economies in that they can grow forever. Loose monetary policy causes major problems like the the most recent housing bubble to be much more significant than they should be, and much more significant than they would, even in a cyclical currency economy, because the money supply is allowed to get entirely out of control. Such a problem of rampant money supply growth is additionally that of a fractional reserve system, not just a fiat currency system - even a gold-standard, if it could be leveraged in a fractional reserve environment, it would inflate in a speculative bubble of monetary growth¹.

Nothing to this point has covered the real purpose of this article - the benefits of fiat currency. There’s real benefit for the use of fiat currency, despite all of it’s problems. Fiat currency is more stable than that of gold-backed currency, not because the government - or in the case of the Federal Reserve, not the government - does a good job of managing the currency, but rather because commodity-based currencies are inherently pro-cyclical, increasing volatility in terms of the regular business cycle and come-and-go recessions.

An additional benefit of fiat currency is that it isn’t subject to the changes of technology and advancement, at least, not as directly as that of cyclical-type commodity currencies can be; that is, finding a new use for gold, perhaps say, in electronics, does not increase the value of our money in an unexpected and unpredictable way if our money is not based on gold. This stability allows investors, capitalists and creditors to make rational, firm decisions based on sound expectations that have little room for uncertainty; and thus, make more risky and subjective investments.

Empirical studies have demonstrated, through historical analysis, that in great falls, such as the famous Great Depression, as well as a number of smaller economic recessions, countries who used a fiat currency system fared more stable and much better off than those dependent on any level of commodity-based currency; exact reasons for this discovery are unclear, however, the findings are solid.

Commodity-based money in a non-fractional system has the problem of constant deflation. As the economy grows at a ever-increasing rate, theoretically, money should be deflating as there are more goods to purchase for the same amount of money - in fact, in our fiat currency world, more money is printed and distributed (through the government, or the banking cartel enterprise) causing a slight inflation - a factor which is probably beneficial in stabilizing the labor market((Because wage cuts are taken as “insulting” to many employees, where as a raise of less than that of inflation is in effect the same as a cut, but without the offense and rash decisions often made by irrational employees. This is often referred to as “wage stickiness.”)) - a limitation of the gold system is that a fractional reserve banking system is much more subject to “gold runs” (much like bank runs) with a gold-based system than with a fiat currency system, for obvious reasons.

Finally, international trade within the Bretton-Woods agreement caused all currencies to be pegged to the U.S. dollar, which, at the time of Bretton-Woods was directly linked to the gold standard. At this time, when a foreign government tried to redeem U.S. dollars for gold, they would be forced to ship gargantuan amounts of gold across the ocean - the epitome of high transaction costs.

In reality, the real value of a fiat currency is unclear. A number of people are strong minded on both sides of the fence, and you can rest assured the banking cartel is right there to hold down the fort regardless of what the resultant in this seemingly increasingly large debate becomes.

1. The primary reason, in this case, is that consumers would borrow money against the fraction to purchase the commodity in speculative growth - such as housing - creating a speculative explosion of the money supply, and in turn, some level of unchecked inflation. [↩]

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