Everything About Government Money And Fiat Money
It was during World War I that the free market came to an end and the age of government money was born. Government edicts, choices, and monetary policy have a much greater impact on the world's monetary reality than any individual option can ever hope to have. When referring to currency issued by the government, it is often referred to as "fiat money" (Latin for "decree money").
First, government money that can be exchanged for gold is vastly different from government money that cannot be exchanged for gold. Using a gold standard, the government simply accepts the task of minting or producing gold-backed paper. The quantity of gold in the economy is not controlled by the government, and individuals may exchange their paper money for actual gold at any moment, as well as employ other forms of gold in their transactions, such as bullion bars and foreign coins. In contrast, the government may freely raise the quantity of its own debt and/or paper in the form of irredeemable government money.
Second, despite its name, no fiat money has ever been created simply by government decree; all of them were initially redeemable in gold or silver or currencies that were redeemable in gold or silver. This is an important distinction that is all too frequently forgotten. In order for government paper money to become valuable, it had to be able to be exchanged for something of value. People may be forced to use paper money, but no government has placed this salability on paper without first making it redeemable in gold and silver.
Money printed by China's Song dynasty in the ninth century. It began as an exchange for gold or silver, but later the government began to control the issue and suspend the redeemability of jiaozi, resulting in an increase in currency printing until the system collapsed. Chao was issued by the Yuan dynasty in 1260 and surpassed the supply much beyond the metal backing, with predictable results. Many peasants were forced to sell their children into debt slavery as the value of their currency plummeted.
In 1914, a little conflict in Central Europe erupted into the first global war in human history, defeating the gold standard for the many opponents of sound money that Mises had fought against. Certainly, no one expected the conflict to extend as long or produce as many fatalities as it did when it began. A simple victorious summer outing for the soldiers in Britain's newspapers, for example, led to the term "August Bank Holiday War" being used. There was the impression that this fight would be brief. A new generation of Europeans had not developed an understanding of the potential repercussions of going to war following decades of relative calm throughout Europe.
With monetary nationalism, each country's money supply and the exchange rate between currencies are subject to international agreements and meetings, as opposed to the free flow of goods and services provided by the international gold standard and a simple conversion between different weights of gold.
German hyperinflation occurred after the Treaty of Versailles imposed enormous reparations on it, and the country attempted to pay them back via inflation. As it tried to preserve a gold standard at a rate that overvalued the British pound and undervalued gold, Britain faced severe difficulties with the movement of gold from its coasts to France and the United States.
The bombs did fall from the sky, along with a slew of previously unfathomable acts of violence and misery. Because of the popularity of the most hazardous and ludicrous of all Keynesian fallacies, the idea that government expenditure on military activity would promote economic recovery, the government-directed economies created powerful war engines.
If you believe Keynesians' nave economics, then no matter how much money is spent to feed your family or how much money is spent to kill foreigners, it all contributes toward aggregate demand and helps lower unemployment! A return to the needless carnage of three decades earlier occurred as more and more people were hungry during the downturn. As a consequence, all major nations spent heavily on arming themselves.
As long as gold wasn't a currency, the only winning political formula was to increase government spending supported by inflation, and every postwar presidential term saw an increase in government expenditures, the national debt, and the buying value of the dollar decline. Fiat money, which is used to fund the government, eliminates political divisions between parties, since there are no longer any trade-offs in politics, and any candidate may support any cause.