Mankind has used money for more than 2,500 years. For most of history, money was a commodity of limited and practically inelastic supply. Occasionally, over the past 1,000 years, state authorities introduced paper money, the supply of which was elastic and under complete control of the state. Today we live again in a complete paper money system. Since the dollar was taken ‘off gold’ internationally in 1971, the entire world has been – for the first time in human history – on a global standard of irredeemable paper money.
The book ‘Paper money collapse’ demonstrates that paper money systems are not inevitable, not advantageous and not sustainable. Contrary to common belief, a growing economy does not require an expanding supply of money. None of the benefits that elastic paper money is supposed to have, relative to inflexible commodity money, stand up to critical examination. Importantly, systems of elastic money are inherently unstable and must destabilise the economy.
Eminent economists suspected long ago that an expanding money supply had disruptive effects. But only the Austrian School of Economics, in particular Ludwig von Mises, provided, in the first half of the twentieth century, a satisfactory theory of money-induced instability. All paper money systems in history ended in failure. Either they collapsed in chaos, or a voluntary return to commodity money was accomplished before this happened.
What is the endgame? Either the authorities abandon further money printing and allow the undoubtedly painful liquidation of misallocations of capital, or they print ever more money in an attempt to postpone the correction, and, in the process, accumulate ever more debt. In the latter scenario, the public will ultimately lose faith in the system. Paper money systems are confidence games. When the public realizes that the printing press is increasingly used to keep states and banks solvent, this confidence will evaporate quickly. The endgame will then be sovereign default, hyperinflation and economic chaos.
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By Detlev Schlichter