Fiat Currency Failures

Fiat currency failures are common. A government’s power to print money creates the danger of fiat currency failures.

When a government has the power and will to print unlimited monies; there is a sense of prosperity for awhile.

At the same time the government is increasing its own power base (because it doles out the money).

Eventually though excessive currency creation (especially of great magnitude) usually (if not always) leads to waste, corruption, and currency debasement.

What is Fiat Money?
Fiat money (usually paper, or coinage) acquires its value from government decree. It has no commodity value.

In other words the only reason it is valuable is because people trust in their government and are willing to use it for financial transactions.

The money is valueless if the populous loses all faith in the government.

You can see this yourself by visiting a local coin shop. Ask to see fiat currencies from around the world from failed governments, currencies or both. The coin shops usually have a box of worthless paper fiat currencies, and a bin of essentially worthless coins.

Below are some examples of key nations that debased their money to a fiat currency system and how they fared afterwards.

Athens - The First Fiat Currency Failure
Athens was the world’s first democracy. It was the strongest city state in Greece for a time. Athens developed free enterprise and a tax system.

When gold and silver become coinage in Athens it helped the city flourish for many years. Like many great civilizations they lost their way and became involved in a power struggle with the Spartans called the Peloponnesian War (from 431 to 404 BC).

After twenty two years of war they started to finance the war by debasing their currency. They mixed copper with their gold and silver. This deficit spending had disastrous results.

Over the next couple of years the once strong commodity money became practically worthless as it devolved into a fiat currency. People who were wise enough to employ Wealth Management techniques and put some of their wealth into gold and silver fared much better.

The economic costs were staggering and felt throughout Athens and Greece. Athens was devastated and never become a significant power again.

The Roman Empire – Fiat Currency Failures
For over 750 years The Roman Empire used currency debasement to pay for wars, public works programs and social programs. There were various methods including:

• Coin Clipping - The clippings were melted down to make more coins.
• Lesser metals were used – Metals such as copper were mixed into the gold and silver.

• Redenomination – The same coins were minted, but at a higher face value.
• Minting more coins without commodity backing.

Over time inflation in the Roman Empire went out of control.

Note: The first documented hyperinflation was recorded from the Roman Empire. A pound of gold was worth 50,000 denarii in 301AD. By mid century it was only worth 2.12 billion denarii. The price of gold had risen approximately 42,000 times. In other words, the currency had become worthless.

Currency debasement and deficit spending for the military, public works and social programs condemned the Roman Empire to the scrap pile of failed empires and nations.

The Weimar Republic Collapse- Fiat Currency Failures
During the early 1920s after World War 1 the German Weimer Republic government had no goods to trade and their gold reserves had been depleted paying war reparations.

The government cranked up the printing presses to deal with the crisis. Hyperinflation occurred because of the worthless paper money that the government printed to help the formally great industrialists pay back their loans from the war.

The bank notes were printed to a thousand times their normal value. The value of the Papiermark declined from 4.2 per U.S. dollar from the beginning of WW1 TO 1 Million to one by August of 1923. By then the German Papiermark was essentially worthless.

Not worth a Continental – Fiat Currency Failures
The saying: “Not worth a Continental” has its roots at the start of this great nation.

Wars are rarely funded out of the existing treasury, nor are they financed from excessive taxes. The massive amounts needed would curb the enthusiasm of even the most ardent supporters.

The Revolutionary War was no different. At the beginning of the war in 1775 the total money supply was around $12 million. Over the next several years the Continental Congress issued a total of $425 million more in fiat money.

That is an increase of the money supply of over 3500%. The states also increased their money supply by 5000%.

In 1775 paper Continentals were traded for $1 in gold; however by 1779 they were worth less than a penny. For example, shoes sold for $5,000 a pair. A suit cost a million continental dollars!

Arguably this is one of the rare times that debasing a currency was the right thing to do. The birth of an powerful and prosperous nation was the result.

Almost all of the other Fiat Currency Failures have had disastrous financial results for the populous afterwards—many times leading to a loss of liberty, and to eventual tyranny.

Final Thoughts on Fiat Currency Failures
The theme is clear. Fiat currency failures occur when governments irresponsibly get into a vicious cycle of debasing the money supply and creating massive inflation. This monster eventually gains a life of its own and can’t be controlled. This is a disaster to an economy.

Governments never seem to learn that the fundamentals of a strong economy require a commodity backed money supply. Otherwise the temptation for politicians to debase the currency to fund wars, social programs, and public works with fiat currency is too great.

Also, the leaking of moneys seems to go hand in hand with currency debasement. When huge sums of money are being printed the difficulty of tracking the money increases significantly. Too much money is siphoned off to political graft and unscrupulous people.

Like bad cooks politicians can’t seem to figure out the correct mixture of financing to:

• Help people who work hard to have the opportunity to prosper if they do a good job, and fail if they don’t.

• Provide adequate food, shelter, housing, and medical assistance for the very young, the very old, the very sick and the very crippled.

• Not leak huge sums of monies to the growing number of freeloaders.

• Not leak huge sums of moneys to political corruption.

This has only been a sampling of fiat currency failures. There are many more than have occurred throughout history.

Note: All of the civilized countries today (including the United States) currently use a fiat money system. See any problems here?

Further Reading
See: United States Currency Devaluations for a look at how the United States has fared when its currency has been debased.

“The farther backward you can look, the farther forward
you are likely to see.” ~ Winston Churchill

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