Fiat Money: History Repeats Itself
For years now, the editors at Casey Research have been warning--nay, shouting from the rooftop--about the danger inherent in any fiat currency, and especially in the modern U.S. dollar, a currency some skeptics have called "funny money."

There is nothing funny, though, about the potential for trouble as today's purely paper dollar declines. It is trouble that has happened before, and history is, or should be, our best teacher. But as we'll see, mankind seldom learns and rarely remembers enough from its mistakes.

One of the most riveting accounts of the catastrophic effects of replacing a gold-based or silver-based currency with paper money comes from Andrew Dickson White (1832 ? 1918), the diplomat, author and educator who co-founded Cornell University.

In the mid-1800s, White started to collect and analyze newspaper articles and documents that had appeared during the French Revolution, especially those pertaining to the Revolutionary issues of paper money. In 1912, he published Fiat Money Inflation in France, an essay that these days, once more, has gained a striking timeliness.

In 1789, on the eve of the French Revolution, the French government found itself in deep trouble with heavy debt loads and chronic deficits. A general lack of confidence in the business world had led to the decline of investment, and the economy was stagnating.

"Statesmanlike measures, careful watching and wise management would, doubtless, have ere long led to a return of confidence," writes White, "a reappearance of money and a resumption of business; but these involved patience and self-denial, and, thus far in human history, these are the rarest products of political wisdom. Few nations have ever been able to exercise these virtues; and France was not then one of these few."

Instead, as politicians tend to do, France's National Assembly looked for a shortcut to prosperity, and soon calls for the introduction of paper money were heard. Some prudent individuals, such as then-Minister of Finance Jacques Necker, urgently warned against it. After all, only 70 years earlier, the country had learned a tough lesson when Scottish economist John Law had presided over a system of fiat money with ruinous consequences.

But Necker and his supporters were shouted down as "the pressure toward a popular currency for universal use grew stronger and stronger." The plan sounded sensible: the government would confiscate the lands of the French Church--which then owned between one-fourth and one-third of all French real estate--and issue a total of no more than 400 million livres in large notes of 1,000, 300 and 200 livres, called assignats, that would be backed by a piece of land. Moreover, every note would bear 3% interest, to encourage holders to hoard them.

The influx of fresh money would give the French treasury "something to pay out immediately. . . relieve the national necessities. . . stimulate business. . . [and] give to all capitalists, large or small, the means for buying from the nation the ecclesiastical real estate." From the proceeds, the nation would pay its debts and obtain new funds for new necessities--a bullet-proof proposal, or so it seemed.

At first, the results of issuing the assignats appeared to be a dream come true, says White: "the treasury was at once greatly relieved; a portion of the public debt was paid; creditors were encouraged; credit revived; ordinary expenses were met. . . trade increased and all difficulties seemed to vanish."

Had the authorities stopped there, White suggests, the effects might actually have been beneficial. Regretfully, though, "within five months after the issue of the four hundred million in assignats, the government had spent them and was again in distress."

Immediately people throughout the country started to cry for another issue of notes. Paper critics cautioned that there'd be no stopping once the nation had stepped onto the slippery slope of inflation, but others dismissed the warning, saying "the people were now in control and that they could and would check these issues whenever they desired."

Here's where the disturbing parallels to modern-day America begin.

By 1790, the paper-pushers had persuaded themselves that specie [precious metals, coins] was an outmoded form of currency... after all, what could be better than money backed by land that would only appreciate in value? It eerily reminds us of the U.S. housing boom and the easy, no-holds-barred mortgage deals that have been sold to sub-prime borrowers.

Or take the Comte de Mirabeau, one of the greatest paper advocates and demagogues, who at that time gave his powerful "Stay the Course" speech, concluding "We must accomplish that which we have begun."

Or Pierre Paul Royer-Collard, who sounded disturbingly like Ben "Helicopter" Bernanke when he told the National Assembly, "If it is necessary to create five thousand millions, and more, of the paper, decree such a creation gladly."

[Read the rest of the 2,500-word article here.]


The printing presses at the BEP must be smoking. And with a "High Noon"-style showdown between Israel, the U.S. and Iran just around the corner, all bets are off when it comes to the U.S. economy.

When Iran is attacked, oil prices will go through the roof. So will gold prices. This may be your last chance to load up on gold, silver and precious metals stocks before the great "Mania" stage starts that Doug Casey has been talking about for years.

Click here to learn more about saving your assets from coming doom.

Posted 01-23-2007 5:02 PM by Shannara Johnson