Currency

Ron Paul strikes again. This time, he's really outdone himself on an issue that rarely sees much discussion: currency. More specifically, why paper money is the root of tyranny.

The people who advocate these various "specie" methods of payment all seem to share a distinct distaste for Federal Reserve Notes (FRNs), which they refer to as "fiat" money. But our current system seems to be working OK from my point of view. If one views FRNs as merely "placeholders" for something else of value (time, service, goods), then they enable commerce. That's not quite the same as equating FRNs with wealth, and I view wealth as being something for which FRNs have become a handy yardstick. Nothing against using precious metals as a means of exchange, or owning gold, silver, etc., but when I look at the premiums and transaction costs for using metal-based transactions, it's hard for me to justify doing so. Obviously, there are other motivations which have more to do with money being, itself "worth something", and lack of faith in the government being able to maintain the "value" of FRNs in the economy, etc.

Now, I'm not an economist; I haven't made any sort of detailed study of the issue. So I can't give you the economic answer. But I can give you the gut answer: fiat money is bad because it has no intrinsic value; all its value is perception, backed by the authority of the government. If you want an example of this in action, go to a third-world country and see how people react to an American dollar versus the "same" amount of their own currency. Most of the time, the dollar will get a much better reaction -- because the local government can't print more dollars to destabilize their value.

In other words, I have a piece of paper from the government that says "This is money". But no one has an obligation to exchange that piece of paper for material goods. I may find that no one is willing to do so, in which case I have only a piece of paper; I cannot go back to my government and ask for whatever material backs the value of that paper, because there is none. Furthermore, if the government decides it needs more money, it can simply print more -- which changes the value of the money already in circulation. In short, fiat money destabilizes the value of currency, placing that value in the hands of the government.

Currency backed by material, on the other hand, has a value that is relatively stable and controlled by the market. You can't print more money without acquiring more real wealth to back it. If you pick your material correctly, then the market will ensure that it doesn't fluctuate widely. No single party can raise or lower the value of money.

The result is simple: fiat money enables the government to control the economy by controlling the value of money. If you trust the government, you should like fiat money. If you don't trust the government, then you want money backed by goods, the value of which is controlled by the market instead.