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Is Fiat Money Inflation a Fraud?

Economics / Inflation Mar 19, 2012 - 07:37 AM GMT

By: Mario_Innecco

Economics

Best Financial Markets Analysis ArticleThe classical definition of inflation is an increase in the amount of money in circulation leading to a rise in prices of goods and services. In a fiat money system money and credit are imposed by statute on the public and controlled by the central banking cartel and not a free market for money and credit. As Felix Somary once said: “the state alone is responsible for inflation: inflation without government, or indeed against government, is impossible.”(1)


In a free market economic system where the state does not impose a fiat money system controlled by a central banking cartel inflation is only possible when the supply of the commodity or commodities that are used as money increase in a sudden and pronounced fashion. Historically gold and silver have been chosen as money in a free market. One of the reasons these two precious metals have been chosen as money is that they are not consumed like wheat, corn or sugar and as a result their above-ground stocks, especially in the case of gold, never decrease. Silver has taken a second place to gold mainly because it has a great deal of industrial uses so its above-ground stocks do decline but not as much as oil or pork bellies. As gold has been mined for thousands of years and not consumed one finds that gold discoveries have little or no impact on the value of gold in terms of other commodities because, even though gold is difficult to find or rare in nature, its above-ground reserves are abundant. It is this paradox and other qualities like its durability, portability, intrinsic value and its divisibility that make gold money.

There have been historical cases where big gold discoveries like that in California in 1849 have led to higher prices of goods and services but that was mainly a localized phenomenon as the local economy in California was not well developed enough to cope with the flood of new money or gold in the short term. During the 19th century, when Britain was on a gold standard, and the United States did not have a continual presence of a central bank*, the purchasing power of the dollar actually increased in the period between 1810 and 1910. According to the Inflation Calculator (www.westegg.com) what cost $1 in 1810 cost $0.59 in 1910. So as one can see despite the big gold discoveries in California, Australia and South Africa, the purchasing power of the dollar actually increased during the period of those big discoveries.

H.G. Wells published a newspaper article entitled The War to End War in the London newspaper in August of 1914 but in hindsight we would say the best title for his article would have been The War to End Sound Money. (2) With the start of World War I Britain and the other warring countries dropped the gold standard so they could actually finance the war by printing money out of thin air. Efforts were made to re-institute a gold standard in the 1920s but what we actually got was a gold exchange system whereby U.S. dollar and the British pound were the only currencies backed by gold and they could only be redeemed by other central banks. 1914 was also the year when the Federal Reserve Act of 1913 came into effect and established the Federal Reserve System or a U.S. central bank after 78 year absence. By 1933 even Americans lost their right to redeem bank notes for gold as President Franklin Roosevelt criminalized monetary gold with the signing of executive order 6102. (3)

By 1944 and the putting into place of the Bretton Woods system the whole world was now one step further into a fully fledged fiat monetary system as the whole world was now enveloped into a gold exchange system whereby only the dollar was backed by gold and all the other currencies were fixed to the dollar. Gold redemption was a thing of the past for the public as only central banks could now go to the United States Treasury and demand one troy ounce of fine gold for 35 Federal Reserve promissory notes. The public was now forced by statute to accept Federal Reserve Notes for payments of debts and taxes were also only payable in paper or fiat money. (4)(5)

So by the end of World War II the stage was set for governments to start inflating or printing money out of thin air as gold redemption by the public was a thing of the past and the shackles of honesty and propriety were now fully removed from domestic monetary affairs. There were still limits on how much national governments could inflate as currencies were fixed against the dollar and the dollar was theoretically as good as gold at a rate of 35 Federal Reserve promissory notes to one troy ounce of fine gold. Despite these supposedly strict rules major countries like Britain were busy printing money out of thin air and as a result had to devalue sterling twice against the dollar in the period between 1949 (30% devaluation) and 1967 (14.3% devaluation). (6) It was only a matter of time before the United States would have to devalue its Federal Reserve notes against gold as the Great Society project of the 1960’s and the Vietnam War resulted in the Federal Reserve System printing money out of thin air for the United States Treasury. By the early 1970’s the United States had a problem as France was demanding redemption in gold for its Federal Reserve promissory notes. The U.S. could have raised interest rates in order to fight the flight from its paper currency or it could have devalued but instead it actually halted all gold redemption on August 15th, 1971 when President Richard Nixon closed the gold window. (7)

The Nixon Shock marked the beginning of the Global Fiat Monetary system that has been with us for almost 41 years. Prior to that, monetary devaluations were taboo as they exposed the fact that politicians and central bankers were inflating the money supply out of thin air and thereby cheating the public. (8) The monetary inflation of the 1960’s and early 1970’s led to major price rises in the 1970s and early 1980s and after a market induced devaluation of the dollar from $35 to over $850 and double digit interest rates in 1980 the Global Fiat Money system was barely saved by then Federal Reserve chairman Paul Volcker.

With the system saved governments were free to inflate once again and best of all they did not have the shackles of a gold standard to contend with. For the last 30 years our policy makers and politicians have changed the definition of inflation and now almost everyone thinks that inflation is the CPI indices published by national statistics offices. These statisticians, under the leadership of the BLS (Bureau of Labor Statistics) in the U.S., have adjusted the way they calculate CPI many times over by processes such as hedonics and substitution which has meant that the CPI measures has been kept as low as possible even though most of the public know that the basic necessities of life like food, energy, education, health care and transportation keep rising in prices continually. Shadowstats thoroughly looks into how the BLS adjust U.S. economic statistics and they also look at how today's statistical releases would be if they were calculated the way they were back before all the changes and adjustments in the 1990s.

So the definition of inflation has been changed to mean rising prices or the consequence of inflation! That is like saying that the wet road is rain instead of saying that the rain made the road wet. This change in definition and also the exclusion of food and energy from the measurement of price indices has fooled many for a long time but as Abraham Lincoln once said: “You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time.”(9) You only need to look at the Inflation Calculator and see that in 2010 what would have cost $1 would only have cost $0.04 in 1910! (10) “In criminal law, a fraud is an intentional deception”(11) so it is up to the reader to decide whether the policy makers and central bankers of the last hundred years have intentionally transferred wealth from the unsuspecting public to those who are in the know or as we call today the 1%. Is it difficult to understand why the value of the dollar has dropped from 1/20.67th of an ounce of gold in 1910 to the present level of 1/1660th of an ounce today when one truly understands what fiat money inflation is? Make sure you have your umbrellas handy!

(1) “The Raven of Zuerich - The Memoirs of Felix Somary.” C. Hurst & Company, London, 1986, pg 98

(2) http://en.wikipedia.org/wiki/The_war_to_end_war

(3)http://en.wikipedia.org/wiki/Executive_Order_6102

(4) http://en.wikipedia.org/wiki/Federal_Reserve_Note

(5) http://www.buildfreedom.com/tl/rape2.shtml

(6) http://www.telegraph.co.uk/news/1399693/A-history-of-sterling.html

(7) http://en.wikipedia.org/wiki/Nixon_Shock

(8) http://books.google.co.uk/books?id=kdXVqWtfyLMC&pg=PA272&lpg=PA272&dq=monetary+devaluation+was+taboo&source=bl&ots=opcqgFtiTh&sig=MUaUPtonYrVEib6-asSAOxBSV78&hl=en&sa=X&ei=jBJnT9v2JOvP4QSbxOipCA&sqi=2&ved=0CB8Q6AEwAA#v=onepage&q=monetary%20devaluation%20was%20taboo&f=false

(9) http://www.quotationspage.com/quote/27074.html

(10) http://www.westegg.com/inflation/infl.cgi

(11) http://en.wikipedia.org/wiki/Fraud

*1st Bank of the United States- 1791-1811 and 2nd Bank of the United States- 1816-1836. http://en.wikipedia.org/wiki/History_of_central_banking_in_the_United_States

By Mario Innecco
ForSoundMoney.com

At ForSoundMoney we stand for a hard currency. We believe in a monetary system based on commodity money and a free-market banking system where central banks are non-existant.

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