There is real and there is fake. There is real money and then there is fiat money. There is Disneyland and then there is the real Disney castle nestled in the southern German Alps of Bavaria. Amidst the spectacularly wild setting of the surrounding craggy peaks, Bavaria’s King Ludwig II decided to build one of the several new castles he planned.
Ludwig disliked people — especially family members — as much as he loved opera and architecture. Taking the throne at 18, Ludwig declined to spend time in Munich where the Wittelsbach family had both a in-town Residenz and a suburban Nymphenburg, modeled on Versailles, where Ludwig was born in 1848. But these buildings were not designed to the eccentric Ludwig’s tastes – which included financing the construction of special theater for Richard Wagner’s operas at Bayreuth.
The extravagant building plans of “Mad King Ludwig” eventually led to the reclusive monarch’s removal from power in 1886. The Wittelsbach family admittedly had some mental health issues. Ludwig’s brother Otto was declared insane. Their aunt, Princess Alexandra Amalie of Bavaria, thought she had ingested a glass piano.The result in Ludwig’s case was a series of royal castles and palaces such as the fairy-tale style castle of Neuschwanstein – itself a monument to Wagner’s operas with many of the rooms’ murals featuring a single favorite operate. Ironically, Ludwig wrote to Wagner that he had decided to recreate a medieval castle – one that reflected Ludwig’s romantic imagination. In creating a decidedly ersatz castle with little claim to medieval character, Ludwig destroyed the remnants of the two very real medieval castles that stood on the site. From his parents’ Hochenschwangau castle nearby (itself built upon the ruins of a medieval castle), Ludwig could focus a telescope on the progress of the building. Ludwig thoughtfully arranged for construction of a special guest room for Wagner near his own – although Wagner never got to visit before his death. On the top floor, a special auditorium was built so that Ludwig could enjoy concerts, but Ludwig never lived to hear a single one. When the political elite of Bavaria got fed up with his building sprees, they declared the king insane and had him arrested at Neuchwanstein. Two days later, Ludwig and his doctor were discovered — drowned in a lake.
The Bavarian government had Walt Disney’s eye for a buck and immediately converted Neuchwanstein into a tourist attraction that helped defray Ludwig’s construction debts. Eventually, virtually all of Mad King Ludwig’s architectural enterprises became part of Bavaria’s tourism appeal. In death, Ludwig did more for Bavaria’s economic well-being than he ever did in life.
Neuschwanstein remained unfinished (and unfunded) at Ludwig’s death. But he had already constructed Marienbrucke across a gorge above the castle in a location designed to give an extraordinary view of the castle below. Ludwig didn’t like people but he created what they would like and pay for years in the future.
Neuschwanstein – and Disney – have proved that there is a market for the ersatz. But sometimes the old is better than the fake. So it is with fiat money. It just isn’t the same as money backed by gold – which the Nazis stored at Neuschwanstein at the end of World War II. It disappeared.
Such it is with faux reality. Neuschwanstein has a throne room – with no throne. It has a Hall of Singers – where no singers ever sang in Ludwig’s lifetime. And it has a guest bedroom for Wagner that he never visited.
David Wolman, author of the recently released The End of Money: Counterfeiters, Preachers, Techies, Dreamers—And the Coming Cashless Society, predicts the fall of the dollar to some sort of purely electronic alternative whereby payments will literally be made without money…at least without money as we currently conceive of it.
Wolman began a recent column writing, “There are no atheists in the modern economy. You may not have God or Buddha in your life, but you very much have faith—in money. … You have faith in its value. Your trust in it depends on everyone else’s, which means that our faith in money’s value is really about trust in each other—a belief in shared purpose, or at least a shared hallucination.”
But it wasn’t always this way. Until 1971, people trusted the value of a dollar because it was tied to gold—not because of their faith in one another, government bureaucrats, or hallucinations. Why did people trust gold? Gold has inherent value which it maintains for long periods of time.
Wolman continues, “a number of developments are ganging up on physical money like never before: mistrust of national currencies, novel payment tools, anxiety about government debt, the triumph of alternative currencies, environmental concerns, and growing evidence that cash is most harmful to the billions of people who have so little of it.”
Here, Wolman taps into the economic instability which arose from having a world dollar standard and through floating exchange rates. Lewis Lehrman and John Mueller have extensively documented the ill-effects of these policies, collectively describing them as the “reserve currency curse.”
Lehrman and Mueller and Wolman agree that national currencies, manipulated as they are by central banks, are faltering and that ever-growing government debt is problematic. Too, they agree that there are new technologies which will improve transaction efficiency. And, they agree on looking at alternative monetary regimes. On the particulars of this final point, however, the authors depart from one another.
Wolman argues that alternative currencies such as Ithaca HOUR, BerkShare, Facebook Credits, and Bitcoin will move us towards the non-national currency of the future. Meanwhile, Lehrman and Mueller suggest that gold, a non-national currency and devoid of manipulation by central bankers, will be the currency of the future. Lehrman proposes to
While Wolman describes the transaction-based financial problems of the world’s poor such as access to banking services, Lehrman and Mueller are more concerned about the declining value of the dollar and its effect on the working class. Lehrman argues that under a true gold standard, “the future purchasing power of wages, salaries, savings, and pensions is preserved. Security of the most vulnerable in society is assisted by maintaining long-term stable purchasing power of the currency for those on fixed incomes” (emphasis original).
Although Wolman convincingly argues that today’s monetary regime is inefficient at best and harmful at worst, the currency of the future isn’t likely to be Bitcoins or Facebook Credits. Wolman himself acknowledges the challenges of these sorts of alternative currencies. He writes, “the hazards are just as real, too. For alternative currencies, the risk of a mismanaged money supply is alive and well, and a misstep, or a crisis in confidence…could cause the [currency’s] value to plummet.”
Wolman concludes, “A closer look at the long history of cash, its present-day costs and the flood of emerging technologies suggests that we may very well be on the brink of a monetary revolution.” On this final point, Lehrman and Mueller might agree that we are, in fact, on the brink of a monetary revolution—one that is long overdue. For Lehrman and Mueller, however, the monetary standard of the future will be gold-based rather than the fictitious currencies that Wolman imagines.
When Pakistan gained independence, it entered a financial system in which the odds were stacked against it. As the financial system changes almost every 40 years, it is vital to analyse its history and mechanism in order to understand the dynamics that influence Pakistan.
During the classical gold standard (1817-1914) currencies were pegged to gold, and the elasticity of the currency was determined through it. A gold standard impels governments to be responsible: Investors that hold bonds can redeem gold if politicians run unsustainable deficits. It equally maintains open international trade equilibrium as gold is exchanged: When nations with comparative advantages experience an economic boom via exports they accumulate gold and are able to expand their currency supply to support it. With the economic boom the demands for imports accelerates, and gold begins to flow out leading to money supply contraction (deflation). Falling prices make the country attractive to foreign buyers and boosts exports again, the process restarts. In the long term, gold ensures a cyclical process.
History shows us that all fiat money (just paper, or base-metal coins; no precious metal ‘backing’) always fails by losing its purchasing power, usually due to excess creation of new money; this is called ‘monetary inflation’ (which leads to ‘price inflation’ because the currency becomes worth less).
We saw it recently in the hyperinflation in Zimbabwe. Germany did it in 1919, and France in 1716 and 1793, and there are many others. Now the Euro currency is failing due to excess spending and borrowing of many European Union (EU) members, but especially Portugal, Italy, Iceland, Greece, and Spain (the PIIGS!). Governments and bankers love fiat money and central banks because they can spend and bail themselves out with new money or loans, rather than use unpopular taxes or suffer defaults.
Since the USA cut all ties to gold in 1971, all nations have ‘gone fiat’ (‘floating’ exchange rates) and borrowed and spent to excess.
The endless supply of money funds the welfare-warfare state (wars are expensive) and creates a ‘moral hazard’ (perverse incentive) for greedy bankers and Wall Street firms to take excessive risks (including 40 to 1 leverage, rather that 5 or 10 to 1) because they know they will be ‘bailed out’.
Casey Research interviews economics professor, author, and columnist Walter Williams:
From Wikipedia: Reason has called Williams "one of the country’s leading libertarian voices." In 2009, Greg Ransom, a writer for the Ludwig von Mises Institute, ranked Williams as the third most important "Hayekian" Public Intellectual in America, behind only Thomas Sowell and John Stossel.
CR: Will we ever return to fiscal responsibility when there is no constraint on how many dollars can be produced?
Walter Williams: The gold standard is a discipline for the monetary authorities. It restricts their ability to print money. Without a gold standard, the only restriction is the political arena’s restraint that has been shown around the world to be insufficient. Our founders feared fiat money.
CR: Americans seem to have forgotten that.
Walter Williams: Not so much forgotten as just observed that such a restraint on government limits my ability to live off my fellow Americans. At the Democratic National Convention in 1896, William Jennings Bryan, one of the first so-called “progressives,” gave a speech – the “Cross of Gold” speech – condemning the high rate of silver-to-gold convertibility. [Bryan called for the inflationary free coinage of silver at a ratio of 16:1 to gold. His answer to the demand for a gold standard: “You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”] At that time, we had presidents like Grover Cleveland, who fought against the weakening of the dollar and against moving away from the gold standard.