Fiat power, fiat money

Unfortunately I was unable to write anything this weekend, as I was quite busy. However, I was only off for two days, which is really not that much in the big scheme of things, and two days is as close to a hiatus as my blog has ever come. But I have devoted this week to discussing topics related to economics, and for the next five days I am going to type out some very interesting posts. Today, the series on economics begins with a discussion of the legality of fiat money.

In these stressful economic times, all eyes are on Obama and his stimulus plan, which just passed through Congress. However, many conservatives are fundamentally opposed to the bill because it requires huge government spending at a time when the government is already very far in debt. Many hold that the government can never engage in deficit spending or even “meddle” with the economy at all. But I believe that economic “meddling” is legally justifiable in the US; whether it is morally justifiable or practical is regardless. Furthermore, I believe that many banks are actually violating US monetary laws with some of their policies. Today, I would like to briefly explain these concepts.

In the US Constitution, there is a line in Article 1 that states, “Congress shall have the power to coin Money, regulate the Value thereof, and of foreign coin.” This is the main piece of evidence on which my argument is based. This authorizes Congress to print as much money as it desires, including fiat money, or currency not backed by gold or any other standard. Furthermore, nowhere in the Constitution is deficit spending forbidden, and I believe it is implied in the phrase “regulate the Value thereof,” as this allows the government to deal with money in any way it wishes. Thus, the government can print as much money as it wishes, and demand that people accept it. 

However, though the government is allowed to do all of these things, banks are not. I take issue with some of the polices of banks, as many of them mess with our economy more than we think. Perhaps the most dangerous is the fact that banks are not required to possess all of the money they loan out; some of it is simply “checkbook money,” not true commodity money. What this means is that banks can give you money that they never really had in the first place; they get away with it by assuming that you are eventually going to pay them this money, plus interest. In doing so, they are coining money, which only the government is allowed to do. Banks also (indirectly) control the exchange rates of foreign currencies. This, too, is technically not allowed as per the quote above; only the government should be allowed to tell people how much of a foreign currency their US dollars are worth (in accordance with the “regulate the value of foreign coin” part).

Of course, these claims sound silly in today’s world, in which our financial system is based on credit, non-commodity money, and imaginary market values. I realize I probably sound like one of those crackpot economists from the 1930s who suggested all kinds of radical schemes, such as printing huge amounts of fiat money or abolishing the stock market. However, remember that credit and the other fundamentals aspects of our economy are what contributed to this crisis in the first place—perhaps it is time to look closely at our economic system and see if it truly works the way we want it to. Also, remember that if we allow banks to have the power to manipulate the economy by being able to regulate the value of currency (directly or indirectly), we are surly headed for disaster—because bankers and capitalists, by nature, serve themselves. The government, however, does not, and allowing it to regulate currency, as it is supposed to, is perhaps our most important weapon against economic disaster. 

Tomorrow, I will discuss my own economic views and their justifications.