Wednesday, July 29, 2015

Fiat Currency and Politics

"At the very moment when the manipulation of purchasing power is declared to be a legitimate concern of currency policy, the question of the level at which this purchasing power is to be fixed will attain the highest political significance. Under the gold standard, the determination of the value of money is dependent upon the profitability of gold production. To some, this may appear a disadvantage; and it is certain that it introduces an incalculable factor into economic activity. Nevertheless, it does not lay the prices of commodities open to violent and sudden changes from the monetary side. The biggest variations in the value of money that we have experienced during the last century have not originated in the circumstances of gold production, but in the policies of governments and banks of issue. Dependence of the value of money on the production of gold does at least mean its independence of the politics of the hour. The dissociation of the currencies from a definitive and unchangeable gold parity has made the value of money a plaything of politics." - (Source: Ludwig von Mises, The Theory of Money and Credit, 1953, pp. 17-18) 

Not many people today are aware that the existing monetary system called the "managed fiat currency standard" is actually not a result of the decision of the market, but of the political class. That's why it's difficult to understand intellectuals who blame the market for the present economic chaos. This only shows that mainstream education has been successful in its goal of mind control. 

As we've seen already in previous post, government's use of inconvertible notes leads to currency devaluation. In reality, this political act is a manipulation of the purchasing power of the consumers. It is not the fault of the market that prices of goods and services are increasing unnaturally. Politics play a big role in it.

Prior to 1971, though the value of US dollar in relation to gold had already declined dramatically, at least, some measure of limitation on politics was still maintained. After President Nixon disconnected the US dollar from gold, the political control of money has been completed. The present turmoil both in the larger economy, the stocks and the financial markets are just inevitable consequences after more than four decades of ignoring sound money. 

Ludwig von Mises was emphatic that what endangers the value of nations' currencies are "the policies of government and banks of issue." In order to discontinue this subtle erosion of the value of money, the way is to return to the gold standard. This will stop the "value of money a plaything of politics". Only under the gold standard that the manipulation of the purchasing power of consumers by politicians can be terminated. Understanding therefore this "old monetary system" is the way to arrest the monetary devaluation that is continually destroying the people's purchasing power. This will liberate money from political control.