Specie legal tender, as defined in the bills, encompasses “specie coin issued by the Federal Government at any time” and any other specie designated by the Chief Financial Officer (CFO) as legal tender, in accordance with the monetary authority not prohibited in Section 10, Article I of the United States Constitution. Under the proposed law, specie legal tender could be acknowledged for settling private debts, taxes, and fees imposed by the state or local government.

One key provision in the legislation grants the CFO the authority to designate additional specie as legal tender. This move could liberate Florida from potential constraints tied to the use of only U.S.-minted gold and silver coins, providing flexibility and autonomy to the state’s monetary landscape.

The bills also pave the way for online and electronic transactions involving gold and silver. Electronic currency is defined as “a representation of actual gold and silver, specie, and bullion held in a depository account, which may be transferred by electronic instruction.” In practical terms, this allows Floridians to use gold or silver in both physical and electronic forms as money, putting these precious metals on par with Federal Reserve notes.

If enacted into law, Florida would join a select group of states recognizing gold and silver as legal tender. Utah led the way in 2011, where the legal tender law facilitated the development of a gold and silver market. The Utah Specie Legal Tender Act also spawned the creation of Goldbacks, a local, voluntary medium of exchange, representing dollar-denominated notes made from physical gold. This forward-thinking legislation reflects a broader trend among states seeking to diversify their monetary options and promote a more robust and decentralized financial ecosystem.

As economist Herbert Stein once said, “If something cannot go on forever, it has a tendency to stop.” Case in point: fiat money political regimes. Interventionist economies of the West are in a fatal downward spiral, comparable to that of the Roman Empire in the second century, burdened with unsustainable debt and the antiprosperity policies of governments, especially the Green New Deal.

In the global Ponzi scheme, thin air and deceit substitute for sound money. As hedge-fund manager Mitch Feierstein wrote in Planet Ponzi, “You don’t solve a Ponzi scheme; you end it.”

Charles Ponzi and Bernie Madoff made some of their investors a whole lot poorer, but the world didn’t come crashing down as a result.

For that‌—‌for a Ponzi scheme that would threaten to bankrupt capitalism across the entire Western world‌—‌you need people much smarter than Ponzi or Madoff. You need time, you need energy, you need motivation. In a word, you need Wall Street.

But Wall Street alone doesn’t have the strength to deliver a truly cataclysmic outcome. If your ambition is to create havoc on the largest possible scale, you need access to a balance sheet running into the tens of trillions. You need power. You need prestige. You need a remarkable willingness to deceive. In a word, you need Washington.

As Gary North wrote in a brief review of Feierstein’s book, “The central banks have colluded with the national governments in order to fund huge increases of national debt, beyond what can ever be paid off. In other words, [Feierstein] has described government promises as part of a gigantic international Ponzi scheme.”

In a recent interview, Peter Schiff, who was laughed at when he predicted the economic meltdown of 2007–9, said interest on the federal debt alone “will be about a trillion by the end of this year. By the end of next year [it will reach] two trillion dollars—and that’s if interest rates don’t go up. . . . This is a huge debt bomb that’s going to explode.”

Ultra-high corporate and credit card debt, along with bank insolvency sustains his argument for a coming collapse, the polar opposite of Biden’s economic dream.

Along with this, Reuters notes that the spread between two- and ten-year Treasurys is at the deepest inversion since 1981. Rarely has an inverted yield curve not signaled a recession.

Can Jerome Powell and his advisors steer the economy into a soft landing? Not this time. “The only landing possible is a crash, where everyone on board dies,” Schiff recently tweeted.

Ponzi and Madoff went to jail for their schemes, but how do you prosecute governments for theirs? Prosecution implies being a part of government. And with rare exceptions such as Ron Paul, those who go into government believe gold is a barbarous relic and the Fed is a good thing that just needs a little government tinkering. So, the guilty will go unpunished, unless public outrage misguidedly turns to nonjudicial violence. The rest will be too busy trying to survive and protect those they care about.

The War on Being Human

A study of history, including US monetary history, makes clear that the state is not in the business of securing our liberty. As the previous nine hundred plus days have made clear, any defense of “liberty” would likely be regarded as hate speech. Instead, we are inundated with the feel-good words of diversity, equity, and inclusion along with the fear-driven campaigns of climate change and killer covid. Challenge any of it and you’re demonized—or worse.

But the state can’t do anything significant without monopolizing money, and the Orwellian central bank digital currencies (CBDCs) will be the latest installment to control the monetary system. The new FedNow payment system with its emphasis on user convenience is providing the framework and psychological grooming for CBDCs.

The Shadow Superpower

We can stop this from happening. Two states, Florida and Indiana, have effectively banned CBDCs as money in those states. Other states will likely follow. The government will outlaw cash at some point, but those who use it now are casting a vote against CBDCs.

Many people will turn to barter, some using barter metals, and to the shadow economy. If this sounds desperate, consider how the global black market in 2011 was the world’s fastest-growing economy. Sometimes referred to as System D, it features both the usual, small transactions of flea market trades or workers looking for employment in the parking lots of home improvement stores and also larger, international trades. David Obi, a Nigerian, relying on his cell phone and his own initiative, contacted a Chinese firm to have small diesel-powered generators shipped to his home country, where electric power is often scarce: “Like almost all the transactions between Nigerian traders and Chinese manufacturers, it was also sub rosa: under the radar, outside of the view or control of government, part of the unheralded alternative economic universe of System D.”

Friedrich Schneider, research fellow at Johannes Kepler University Linz, Austria, whose expertise is in off-government economies and who coauthored The Shadow Economy, found that System D is growing faster in many countries than the officially recognized gross domestic product. If System D were an independent nation, it would be the second-largest economy in the world.

Conclusion

The future is undecided, but we can help determine the outcome if we take responsibility for it. Wikipedia defines System D as “a manner of responding to challenges that require one to have the ability to think quickly, to adapt, and to improvise when getting a job done.” In this sense success has always depended on System D, with or without government.

The American term for it is life hack, “any trick, shortcut, skill, or novelty method that increases productivity and efficiency, in all walks of life.” Whatever you call it, it describes a spirit all of humanity needs to adopt if we are to survive the coming collapse of government Ponzi schemes.

About the Author

George Ford is a former mainframe and PC programmer and technology instructor and the author of eight books and welcomes speaking engagements. Article cross-posted from Mises.

There is strong evidence that planning for this new trade settlement currency has been in the works for some time and has been properly considered. That being so, we are witnessing the initial step away from fiat to gold backed currencies. Without the burden of expensive welfare commitments, all the attendees in Johannesburg can back or tie their currency values to gold with less difficulty than our welfare-dependent nations. And it is now in their commercial interests to do so.

We have been brainwashed with Keynesian misconceptions and the state theory of money for so long that our statist establishments and market participants fail to see the logic of sound money, and the threat it presents to our own currencies and economies. But there is a precedent for this foolishness from John Law, the proto-Keynesian who bankrupted France in 1720. I explain the similarities. That experience, and why it led to the destruction of Law’s livre currency illustrates our own dilemma and its likely outcome.

It’s not just a comparison between fiat currency and gold. America’s financial position is dire, more so than is generally realised. The euro is additionally threatened with extinction because of flaws in the euro system, and the UK is already in a deeper credit crisis than most commentators understand.

Introduction

On 7 July, news leaked out and was then confirmed by Russian state media that the BRICS meeting in Johannesburg would have a proposal on the agenda for a new gold-backed currency to be used exclusively for trade settlement and commodity pricing. It appears that this is still beyond the comprehension of the mainstream media who have failed to even report on it. But like the fall of the Berlin Wall in the twentieth, it will probably turn out to be the most important monetary and geopolitical development this century.

The very few of us who have followed this story from the outset know that the Russian confirmation is the culmination of a trail of clues dating back to the time of the western alliance’s sanctions on Russian trade. With very few exceptions, among those who don’t understand the whys and wherefores that lead us to this event are the press, economists of all schools, and the western financial community.

Driving this is a war between the hegemons, with America on one side and Russia in partnership with China on the other. Until Russia was sanctioned, the Asian hegemons appeared to have a policy of sitting on their hands and letting the Americans tie themselves in knots. This has been evident in military strategy — Syria, Afghanistan, and other pyrrhic victories or failures. But it has also been true in the hidden financial war. And it is the financial war which could determine the military outcome, because if the dollar is destroyed, so will be America’s military capability and NATO will fall apart. 

That much should be obvious to independent observers. Therefore, an important question to be answered is under what circumstances would the Asian hegemons drop their generally passive strategy and take the initiative? As well as Russia’s Special Military Operation last year, there is evidence that the time has now arrived. Russia’s trade surplus has now fallen sharply, and the SMO in Ukraine is a drain on otherwise healthy government finances. Because of these factors, President Putin needs to act soon to bring his SMO to a conclusion, or alternatively act to drive global commodity prices higher, which is the same thing as undermining the purchasing power of the dollar.

China sees this and faces an additional problem from the escalation of US hostilities over Taiwan. If Ukraine continues to worsen with neither party being able to backdown, China could be dragged into the conflict, given the common enemy. Furthermore, with much of Africa and Latin America migrating away from America’s sphere of influence and towards Asia, rising dollar interest rates are creating a crisis for those of them owing dollars. China almost certainly believes that in bankrupting these emerging economies by raising interest rates, America is attempting to stop them from joining BRICS, and seeks to take over many of their assets and infrastructure which China has helped create.

This threat is now greater to China’s long-term economic strategy than threats to her export trade with America and Europe. This is why China is now prepared to back the Russian plan for a new gold-backed trade currency, which is bound to rapidly undermine the fiat dollar, as all central banks in the Asian hegemons’ sphere of influence sell off their dollar reserves to acquire physical gold. For a long time, I have described activating gold as being the financial equivalent of a nuclear war — this is about to be tested.

A lesson for us from Cantillon

One of the earliest writers on economics was an Irishman, Richard Cantillon, who went into partnership with his cousin, also named Richard in Paris in 1714, finally assuming control of the bank. It was during this period that John Law befriended the Duc d’Orléans, the Prince Regent for the infant King Louis XV who succeeded Louis XIV in 1715. John Law was a proto-Keynesian, with similar policies for the state expansion of credit as the means by which a government could stimulate an economy, thereby increasing tax revenue. With the royal finances facing bankruptcy due to Louis XIV’s profligacy, the Regent grasped at Law’s scheme like a drowning man thrown a lifebelt.

There were four essential elements to Law’s scheme, which resonate with the monetary regime today:

• The establishment of a bank with the principal function of issuing banknotes to replace gold and silver coins as the medium of exchange. This would evolve his commercial bank into a prototype central bank, appointed by the government to have a monopoly on the note issue. Gold and silver coins were to be driven out of circulation entirely.
• The establishment of a trading entity (later known as the Mississippi venture) as part of a debt management scheme for the benefit of royal finances.  The bank and the venture were to be the only tradable financial assets. This equates with all bond and stock market asset values being inflated currently, for the general enhancement and perpetuity of tax revenues.
• To use his position as controller general of finances to boost the values of both his Royal Bank and the Mississippi venture by expanding the quantity of banknotes and bank credit.
• To merge the new central bank with France’s import and export monopoly embodied in the Mississippi venture to secure income from trade tariffs and duties, significantly enhanced by the wealth created through the expansion of credit.

The similarity of Law’s financial policies with those of today are remarkable. The state’s monetary monopoly over its economy managed by a central bank replicates Law’s design for his fiat currency. The manipulation of today’s fiat currencies has ensured a wealth transfer from savers to the state for the benefit of government finances. The Fed and other central banks believe that a heathy stock market (a bubble?) is essential to maintaining consumer confidence in spending, and therefore sustaining tax revenues. The expansion of central bank balance sheets creates a wealth illusion in bond and stock markets, leading to irrational valuations.

While profiting hugely as a banker by lending credit to wealthy speculators, Cantillon was sceptical of Law’s scheme from the outset. And he was not above the sharp practice of taking in stock as collateral against loans and immediately selling it without informing the borrower. This was to result in legal actions in London’s Court of Chancellery after the bubble burst, all of which found in his favour on technicalities.

In 1720, Cantillon decided the collapse of Law’s scheme was coming. He sold all the remaining shares under his control amounting to 1,742 shares, 573 of which were collateral taken in that year at prices between 8,200 livres prior to 12 March to as low as 4,550 livres in September for a total value of 8,229,786 livres.[i]

Besides clearing out all remaining shares under his control, his choice of action was to short Law’s livres on the foreign exchanges in London and Amsterdam in preference to Mississippi stock in the market. As events proved, Cantillion was right, because between the peak of the bubble in February 1720 and the final quarter of that year, Law’s merged Mississippi venture lost two-thirds of its value, while the livres became worthless in London and Amsterdam.

From his Essai sur la Nature du Commerce en General published posthumously in 1755, it was clear that Cantillion understood the inconsistencies in Law’s actions. In late-February 1720, Law promised to not expand the money supply, but from early March he was forced to do so to support share prices by buying them in the market. In May over the Whitsuntide holiday, with the agreement of the Prince Regent it was decreed that there would be a phased reduction in shares and banknotes to stabilise the shares and the currency, but that failed in both respects. These actions rhyme strongly with the inconsistency of central bank policies today — fighting inflation while still relying on currency debasement to fund fiscal deficits. Furthermore, central banks are raising interest rates in an attempt to control price inflation, without realising that it is the valuation users place on a fiat currency which ultimately sets its value, not monetary policy.

Today, bank credit has stopped growing and is already contracting in a number of major currencies, being driven by a combination of high commercial bank balance sheet leverage and growing concerns over bad and doubtful debts which taken together threaten to bankrupt entire banking systems. Furthermore, like Law’s Banque Royale which did not survive the 1720 crisis, today’s central banks are already technically bankrupt on a mark-to-market valuation basis due to their acquisition of government bonds at inflated prices through quantitative easing.

The one shoe to drop is the switch from raising interest rates intended to stop the general level of consumer prices rising above official 2% targets, to rescuing the entire system through a renewed credit expansion. But as the John Law experience in February 1720 showed, while a switch from supporting currency values to credit expansion to rescue a failing system is inevitable, equally it does not succeed.

The dollar and related currencies are being challenged

So far, few have minded that the dollar is a naked fiat currency. But the proposed BRICS trade settlement currency clothed in gold is bound to expose that nakedness for all markets to see. Not only will we then witness the ending of the fiat dollar regime, but we will see a forerunner of its replacement. In common with the punters at the top of the Mississippi bubble in February 1720, today there are very few commentators who, like Cantillon, detect these dangers ahead.

For fiat currencies it is a problem with two aspects. A properly designed new BRICS trade settlement currency will lead to problems for fiat currencies on a comparative basis. And led by the dollar, the fiat currencies’ credibility is being undermined from within as well. As this becomes increasingly apparent, like John Law’s livre the dollar can be expected to sink towards oblivion valued in real money, which is the gold being adopted as an anchor for the new BRICS currency. 

The first problem the US authorities will face is the falling off of foreign demand for dollars and dollar debt, likely to be followed by outright sales. Of the major foreign holders of US Treasury debt amounting to $7,581bn in April, the largest liquidation in recent years was by China, as the chart below shows. 

But at a pinch, by recycling dollars through financial centres to compensate, such as Cayman Islands, Luxembourg, London and Dublin, non-buying from China and the BRICS tribe can probably be offset. China and others could even be dealt with by the US Treasury refusing to accept transfers of bond ownership, but at a risk that it would seriously backfire.

The wider problem is liquidation of the dollar itself. In April, foreigners owned short-term securities, including bank deposits, CDs, and T-bills totalling $7,198bn, and long-term securities totalling $24,865bn for a combined total of $32,063bn.[ii] This is considerably more than the US’s entire GDP and does not include Eurodollars, which is dollar denominated credit created between foreign banks abroad not reflected in correspondent banking balances. Worse still, US resident citizens, businesses, and investors hold short-term assets and deposits in foreign currencies to the equivalent of $689bn (US Treasury TIC figures for March), being the only foreign currency available to absorb net dollar liquidation by foreign holders of dollars. And virtually all long-term investments are in ADR form, which means that liquidating these investments does not raise foreign exchange transactions (and therefore demand for dollars) unless they are bought by foreigners.

The crisis phase of Triffin’s dilemma[iii] is rapidly approaching, and there is very limited non-dollar liquidity on the foreign exchanges to avert it. Already, the dollar has breached an important chart support line on its trade-weighted index, as the next chart shows.

As a measure of foreign confidence in the dollar, the TWI has suddenly deteriorated in the wake of the Russian confirmation that a new gold-backed trade currency is on the BRICS summit agenda. And if it is not just deteriorating dollar sentiment, it will be rising interest rates and a securities bear market which will accelerate a dollar liquidation. 

It is universally assumed in global financial markets that consumer price inflation will subside and that central banks will be able to reduce interest rates. But only this week, Russia refused to renew permission for grain shipments from Odessa, giving further impetus to global food price inflation. Falling inflation is the condition for the maintenance of financial asset values, and therefore for foreigners to retain dollar portfolio assets: but rising grain prices and the current renewed strength in oil prices indicate that the inflation dragon is still breathing its fire.

A further error in the hope that interest rates will soon decline is to not realise the consequences of commercial banks restricting credit expansion. In doing so they are sure to drive up the interest cost of credit — it used to be called a credit crunch. This contraction of bank credit, which is only just beginning to be apparent in US banking statistics, will not only threaten bankruptcy for many businesses thereby driving the economy into a slump, but it will increase the government’s funding requirements due to tax shortfalls and increasing welfare liabilities. 

Meanwhile, to the confusion of neo-Keynesian expectations consumer price inflation will continue to be a problem, even accelerating again after the current pause. The error here stems partly from discarding Say’s law, and not realising that a general glut of products arising from falling consumption cannot happen. A further error is to not understand that the fiat dollar will continue to lose value measured in goods, just as John Law’s livre did after May 1720 despite belated attempts to contract the bank note issue. Like spots are to measles, inflation of prices is the visible symptom of all dying fiat currencies.

The essential point is that markets are taking over control of interest rates from the central banks. This is an additional problem for the US authorities. Along with other group-thinking central bankers in the Bank for International Settlements network, they will learn the hard way that interest rates are not the price of money, but the compensation foreigners require to maintain their holdings. And even that assumes that with the correct interest compensation foreigners will continue to be passive holders, rather than deploying credit for better purposes as they seem bound to do.

Now that a sound money alternative to maintaining reserve balances in dollars is emerging, if the dollar is not to suffer a major crisis at the minimum the Fed will have to go along with the markets and raise rates. Another way of looking at this dilemma is that if the authorities attempt to support the dollar by activating swap lines, it will contract the quantity of dollar credit in circulation, worsening the credit crunch. But as John Law discovered in the months following May 1720, contracting credit in a fiat currency does not necessarily save it. The implications for the US Government’s deficit and its funding costs are also dire.

US budget deficits and inflation

The chart above is of US Government debt outstanding daily for the last year, according to the US Treasury.[iv] Besides the period when negotiations to raise the debt ceiling put the outstanding debt level on hold, there are two notable features. The first is that in only a year, government debt has increased by $2,027bn (6.6%), and secondly the rate of increase is accelerating alarmingly. A large part of the problem is that the cost of funding US Government debt is soaring, as the next chart shows.

Congressional Budget Office forecasts are for budget deficits exceeding $1.5 trillion this and next fiscal year. But the interest rate assumption is an average of 2.7% for both years and beyond, which is clearly behind events and overly optimistic.

Put together the two charts above and you have the classic debt trap, whereby US finances are deteriorating beyond control. Furthermore, the US faces the prospect of a severe contraction of business activity due to the slowdown in bank lending and its effects on interest rates. Tax revenues will undershoot current Congressional Budget Office estimates and mandated welfare commitments will increase on the expenditure side. Consequently, government borrowing will accelerate even further and interest payments on it will as well.

Funding this accelerating deficit must be causing the US Treasury an enormous headache. Just as President Biden went to Saudi Arabia to persuade MBS to accelerate oil output unsuccessfully, Janet Yellen visited China’s Vice Premier He Lifeng as this financial crisis is developing. Of course, none of this was mentioned in the press communiqués, but you can bet your bottom dollar that Yellen wanted China to start buying Treasuries again, or at the very least to stop selling them. But the implications for the dollar are still dire, and it becomes something of an open question as to when foreign holders of the dollar will realise how serious America’s finances have become.

Even without a banking crisis, the Fed will be faced with a stark choice: does it try to save the dollar, or does it try to salvage government finances. Welcome to the John Law dilemma.

All fiat currencies are threatened

Gold backing for the new trade currency is bound to create problems for BRICS national currencies, which may or may not be fully appreciated by individual BRICS nations. The solution for them is to secure their own currency values, either by setting their own gold standards or linking them to the new trade currency in some sort of currency board arrangement. While many of these nations have a history of currency mismanagement, theirs is essentially a confidence problem which can be resolved by turning their backs on the dollar-based fiat currency system.

All these governments have finances that can be balanced with a little fiscal discipline, because they don’t have the welfare burdens that the advanced economies have to contend with. The benefits to their economies of sound money and the low level of interest rates that comes with it are obvious, and social and economic progress can be expected to be as miraculous as those enjoyed in Britain under her nineteenth century gold standard.

But the introduction of a new trade currency backed by gold will undermine the major fiat currencies which have survived on Keynesian myths, which like those of the proto-Keynesian John Law are about to be terminally challenged. And the euro will have an additional problem arising from the ECB’s committee-designed structure.

Like other central banks the ECB not only reduced interest rates, in its case to unnaturally negative levels, but it paid top euro for government bonds as part of its “asset purchase programmes” — currency-debasing QE to the rest of us. Consequently, since the mark-to-market losses have wiped out its equity many times over, and also the equity of nearly all the national central banks which are the ECB’s shareholders, the whole euro system is technically bust — a situation which will worsen if Eurozone bond yields continue to rise. Furthermore, there are substantial imbalances in the TARGET2 settlement system between the euro system’s members which remain unresolved.

When a central bank has one shareholder such as its government, recapitalising it is relatively simple and can be done in a heartbeat. On its balance sheet the central bank creates a loan in favour of the shareholder, and instead of balancing the asset represented by the loan with a deposit liability, it enters the balancing item as equity. In many jurisdictions, this can be done and subsequently confirmed by the legislature. But the structure of the euro system requires multiple governments to agree to recapitalise their own central banks as well as the ECB. The recapitalisation of the entire system will be far from a fait accompli and almost certainly will become an embarrassingly public issue.

The ECB takes the view that it will hold the bonds on its balance sheet to maturity, so there is no need to mark to market and recapitalise the system. But that assumes monetary plain sailing for a considerable time and that interest rates will decline from current levels and stay down. Otherwise, the euro system will be called upon to rescue overleveraged commercial banks with mounting portfolio losses and bad debts. 

But we can now see that if the new BRICS gold backed trade currency replaces the dollar and euro for potentially more than half the world’s trade measured by GDP on a PPP basis, it will lead to catastrophic falls in exchange rates for both the dollar and the euro valued in gold. Assuming that priced in gold commodities continue to be stable (which over time tends to be the case), then the implications for Eurozone states are that after the current dip inflation of prices will remain high and potentially rise even further due to the euro’s loss of purchasing power. Similarly, bond yields will rise above current levels, commercial banks will be destabilised, and the euro system’s hidden losses multiply.

This is why the future of the euro system and the fiat euro itself is at stake. Not only will the euro be on the wrong side of the return-to-gold-backing story, but its structure is an additional, fatal weakness. 

Sterling has similar problems to the dollar. London being the centre of financial activities outside the US has led to substantial quantities of sterling accumulating in foreign hands. For now, the increase in interest rates and bond yields has led to the currency recovering against a weakening dollar by 24% since last September. But the increase in rates is causing serious difficulties for residential property, which combined with price inflation is squeezing consumers badly. The UK economy faces the early stages of a nasty credit squeeze, which is clearly evident in the chart below from the Bank of England’s website — the last data point being April.

Interest rates cannot fall while lending is contracting because bank credit becomes increasingly scarce at a time of rising demand for liquidity. This is the consequence of rising input prices and slowing sales volumes. So far, consumers have absorbed much of the increase in prices by extending credit card debt, which increased by 9.5% in the year to April. But with mortgage and other costs now hitting consumers hard, sales volumes of goods and services are set to contract even further, in turn accelerating the reduction in business lending as banks turn increasingly cautious. For nearly all businesses, cash flow is slowing to a halt. And my company doctor friends and insolvency practitioners have never been so busy reconstructing companies with a view to avoiding bank debt write-offs. 

Just as banks fuelled the boom, they are now fuelling the bust. This is a point which is poorly understood by market participants, who have come to believe that it is the Bank of England which sets interest rates. It is a common error behind the state theory of money, which is now being challenged by events in Asia and much of the developing world.

The consequences for gold

Apart from monetary stability, the raison d’être for BRICS adopting a gold-backed trade currency lies in its relationship with commodities. This is illustrated in the chart below, which is of oil priced in dollars and gold.

Oil priced in gold has been considerably more stable than priced in dollars, a fact also reflected in any non-seasonal commodity you care to name. For energy and commodity producers, the volatility of the dollar as a pricing medium plays havoc with the values upon which extraction costs are predicated. Additionally, pricing in dollars has depressed the pricing of oil in gold, which is currently half what it was in 1950. This will have been noticed by Russia, Iran, and Saudi Arabia.

Price stability also benefits manufacturers, who in their business calculations can be more certain over long-term cost assumptions. They also benefit from low level interest rate stability that comes with a gold standard, particularly when compared with the current increasing interest rate volatility under the fiat currency regime. Russia is a case in point: the central bank’s interest rate is 7.5%, and the 10-year government bond yields 11.5%, despite June’s consumer price inflation at 2.76%. If the rouble went on a gold standard, and as confidence in the arrangement becomes established the overnight rate is likely over time to drop below 3% and bond yields should decline to not much more.

This argument is sure to have also persuaded the Chinese and other manufacturing nations in the BRICS community that tying production costs to gold is beneficial, exploding the myths about fiat currency flexibility, which have only led to the weaponization of the fiat dollar by the US government.

The benefits of gold-backed currencies are clear. The problems arising from adopting gold standards principally affect the standing of fiat currencies reluctant to embrace gold. China’s exporters are bound to experience the purchasing power of dollars and euros declining, perhaps collapsing completely. This leads to higher prices for Chinese goods in all major fiat currencies. But by sanctioning a new BRICS gold backed currency, the Chinese are now going along with the less visible benefits of valuing export goods in gold, and along with Russia she now has good reasons to put the renminbi onto a gold standard as well.

In short, we are witnessing the end of the fiat currency era, which in pure form has existed since Bretton Woods was abandoned 52 years ago. Americans, Europeans, and the British will experience gold prices rising against their fiat currencies, possibly at an accelerating rate when foreigners start dumping their currencies in favour of gold. But it won’t be gold rising so much, as their fiat currencies failing, just like John Law’s livre.

• [i] See Richard Cantillon, Entrepreneur and Economist by Antoine Murphy (Clarendon Press, 1986)
• [ii] Derived from US treasury TIC figures for April.
• [iii] Triffin’s dilemma was so named after Robert Triffin, who pointed out that a reserve currency required the nation providing it to run deficits to ensure an adequate supply of currency to provide foreign exchange reserves, but that ultimately these deficits would create a crisis for the nation. We could be approaching such a crisis.
• [iv] https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-pen

Article cross-posted from Lew Rockwell.

[This article is a selection from the March-April issue of The Austrian.]

What if the world’s states were to come together and create a single world currency? From a purely economic point of view, there would be significant advantages if every nation didn’t operate with its own money but with the same currency. Not only for an individual economy, but for the world economy as a whole, the optimal number of currencies is one. Let’s take a look.

The decisive factor is how this single world currency comes about, and who issues it. In a free market for money—in a natural process—a single world currency would emerge from the voluntary agreements of the market participants: the money demanders would decide which commodity they want to use as money. It is impossible to predict with certainty what the outcome of the free choice of currency would be; after all, it resembles a discovery procedure whose outcome is not known in advance. However, it can be assumed that a commodity currency would be created, that gold or possibly a cryptounit would be chosen as the money base.

However, if states monopolize money production, a single world currency cannot develop through voluntary decision-making. In 2023, several national fiat currencies coexist. But this is not a stable equilibrium. Rather, here too, there is a tendency to create a single world currency—because it is optimal for everyone in the world to trade and calculate with the same currency. This is what democratic socialism takes advantage of.

Creating a single world currency is a means to an end for democratic socialism. Its adherents recognize that a single world state cannot be established directly. The national resistance that would have to be overcome is too great. The detour, the indirect way, by which democratic socialism can achieve its goal is by creating a single world currency under state control. The eurozone can serve as a “model” for this process. We’ve seen nations voluntarily give up their monetary sovereignty and accept a single fiat currency that is issued by a supranational central bank. Within the eurozone, money is no longer controlled by individual national parliaments.

The shared euro currency creates major problems in and between the participating countries. But the forced euro marriage has not yet been through the “divorce courts” because of the high costs of a euro exit and also because the democratic socialists fight any attempts to withdraw from the euro with all political means available to them. The problems created by the single currency are increasingly forcing participating countries into communization. As part of the eurozone, some nations must pay for the national debts of others, and the cost of saving ailing banks from collapse is borne by all taxpayers and money users.

All of the problems of imposing one fiat money across many nation-states only became apparent after the euro community was locked into place—the potential problems received little or no attention beforehand. From the outset, it was not economic rationality that inspired the euro, but political endeavors that can be traced back, unsurprisingly, to politics, namely the ideology of democratic socialism. The end of national monetary sovereignty and the adoption of the euro were promoted in public by emphasizing the peace and prosperity effects of a single currency.

In light of the experience gained with the “euro experiment,” the question arises: What are the consequences of creating a single fiat world currency? A state-controlled world currency would bring with it all the negative characteristics and problems of national fiat currencies, and it would cause economic, political, and cultural damage that would eclipse that from national fiat currencies.

What every single state that has fallen victim to democratic socialism wants is also what a community of states wants: to control the production of money and to expand the money supply at will in order to secure and expand its rule. It is a logical step for the states to merge their own fiat currencies into a fiat world currency—especially for small and medium-sized states, whose financial leeway is considerably increased as a result.

The fact that a fiat currency and not a commodity money has been chosen is virtually self-explanatory: the national currencies are already fiat money, and fiat money is the type of money that states prefer because it can be multiplied at any time and in any quantity at the lowest cost.

If the national states agree to accept a single fiat currency issued by a world central bank, then the money users will no longer have any choice or escape options. They will be at the mercy of a fiat world money. The world central bank will not have to fear that dissatisfied users of its money will “migrate” to other currencies because there will be no other currencies anymore. And because the single fiat world currency will have no competition, it will also become a plaything of political interests. Above all, the states will encourage the world central bank to pursue a monetary policy through which they can finance themselves as cheaply as possible with credit.

After all, debt financing is particularly attractive to every state: the possibility of easy borrowing is a very important motive for states to adopt a fiat world currency. Unlike with taxation, savers usually give their money voluntarily to the state, because they expect it to be repaid to them plus interest. A world central bank has a free hand to set the market interest rate as it sees fit. It does not have to fear that capital will migrate away from an extremely low market interest rate—after all, the interest rate that it determines will prevail all over the world.

A world central bank, which has a monopoly on the fiat world money, facilitates the worldwide debt economy to an extent probably still unknown. The relatively bad state debtors—i.e., those who have so far only been able to finance themselves at relatively high interest rates—particularly benefit from a single fiat world currency. If there is only one currency left in the world, there will be a single large, transparent, and liquid capital market in which there will be no exchange rate fluctuations, which helps to reduce credit costs. The improved debt opportunities in such a market favor the expansion of state influence and thus promote the nationalization of the economy and society.

A single currency will put governments in a favorable position to buy votes. The states will lure voters with money, and more and more citizens and entrepreneurs will become transfer recipients and beneficiaries of the state. They will benefit from state-financed jobs, social benefits, and contracts. States’ involvement in economic and social life will increase. The culture of collectivism will be promoted, and individualism will be repressed. What is left of the free market economy will inevitably give way to a command economy in which states play a decisive role in determining who produces what, when, and where. Although this transformation is already progressing under national fiat currencies, it will be uninhibited under a global fiat currency.

With a single fiat world currency, it will be possible for a world central bank to set an artificial boom in motion worldwide and to protect itself from a bust for a long time. Thanks to the global currency, the boom will affect all the world’s economies: the prices in all labor and factor markets will be distorted—after all, there will no longer be any exchange rate movements between the economies that could shield a region from the monetary policies in other regions; all economies will thus be “monetarily aligned.”

Companies and investors will continue to favor some regions of the world over others, just as investors in the eurozone see the “northern countries” as less risky than the “southern countries” and the “northern countries” continue to be the most attractive region for investors within the eurozone. If, however, the economic developments of the participating nation-states vary too much, the world central bank can be expected to take political countermeasures: it will support weaker countries. For example, it will buy up weak countries’ government and bank bonds; the eurozone’s many “rescue policies” are an example of this eventuality.

In this way, the world central bank will weaken or eliminate the market’s remaining corrective forces, which could put an end to the boom. The boom set in motion by the world bank will therefore be able to last a long time. However, the longer the boom lasts, the greater the damage (overconsumption and bad investments) will be. And the longer the boom progresses, the greater the costs of the corrective crisis will be, which will intensify the political incentives to keep the boom going by any means—after all, states shy away from recession and unemployment and the associated social and political consequences.

In order to avert the corrective crisis, the states will continue to intervene in the market with bans and prohibitions, laws, price controls, subsidies, and labor and expenditure programs. Above all, however, they will make use of the world central bank. If it is politically desired, the world bank will keep any stumbling debtor afloat with newly created money and delay the arrival of the crash. This leads to the question: Will a single fiat world currency be more inflationary than national fiat currencies? The answer is yes.

States’ primary goal with a single fiat world currency is to be able to pursue a controlled inflationary policy with as little punishment as possible. Controlled inflation benefits states and politically connected groups.

However, even under a uniform fiat world currency, there are limits to inflationary policy. The world central bank does not have to reckon with the fact that money users will switch from its fiat money to other currencies when inflation is high, as there will be no other currencies left. But if the inflation of the fiat world currency is too high, its users will lose confidence in it. In an extreme case (hyperinflation) people will start to escape from the fiat world money by taking desperate measures. They will no longer want to use the money at all, and this could seal the fate of the fiat world money.

Of crucial importance for the inflation of the fiat world currency is which forces gain the upper hand in the decision-making body of the world central bank. There are two possible scenarios. In the first case, the governments of the states have a direct influence on the world central bank. In democracies, rulers are known to have short-term goals: their power is only temporary. Therefore, they are anxious to maximize their income during their term of office. Those in power do not participate in the long-term prosperity of the community and consequently have no great interest in making decisions that maintain or increase its net present value beyond their term. In other words, the cow is not milked but slaughtered. Inflation will be comparatively high in this case.

In the second case, the decision-makers on the council of the world central bank are closely connected to those in the financial sector and big business. Such a world central bank council’s interest is that its “product,” its currency, remains permanently marketable. It will not frivolously jeopardize the world currency by implementing an exaggerated inflation policy. The world central bank council would therefore not want to slaughter the cow but milk it for as long as possible. In this case, an oligarchic democracy will prevail in the world central bank council.

In this scenario there is a high probability that the world central bank will above all serve the special interests to which the council oligarchs are closely linked (these are, of course, big banks and big businesses). The interests of the general public take a back seat and are only taken into account if they do not jeopardize the continuation of the world central bank’s special-interest monetary policy. The world central bank will therefore endeavor to keep inflation from becoming too high so that the population does not become dissatisfied and rebel.

Under a self-referential oligarchic democracy, in which councilmen recruit their own successors, the fiat world money is even granted a particularly long stay. The oligarchs will make every effort to ensure that the fiat world money system can continue to exist for as long as possible, that crises, when they occur, are tackled in such a way that the fiat world currency does not suffer and a “flight from money” is avoided.

In view of the overindebtedness problem that fiat money necessarily creates, we cannot exclude the possibility of negative interest rates. Under a policy of negative interest rates, the central bank might set the interest rate at, say, −4 percent per year. This means that a bank balance of €100.00 is reduced to €96.00 one year later and after ten years is only €66.48. What harms the saver benefits the debtor, who makes a profit by taking out a loan! Savers and investors will not tolerate this. Wishing to avoid the losses, they will go to the bank and demand that their assets be paid out in cash and coins. Therefore, as long as there is cash, the effectiveness of a negative interest rate policy is limited.

However, a world central bank can easily enforce the abolition of cash by shutting down cash production. Without cash, the money is “trapped” in bank accounts and can no longer be withdrawn from the banking sector. The negative interest rate policy can then be implemented unchecked. Money holders no longer have the opportunity to evade the devaluation of money and savings. Individual states welcome the abolition of cash for another reason: they will be able to track the financial dispositions of citizens and companies, who will only be able to make payments electronically: banks will be required to provide full information on the payments and financial assets of bank customers at all times. As a result, the taxation possibilities of states will be increased immensely.

As long as there is still cash, there are limits to taxation: if market participants feel that the tax burden is too high, they can carry out their transactions anonymously with cash. This in turn encourages states not to tax citizens and businesses too heavily. But when the taxpayers no longer have this alternative because there is no more cash, the political reluctance which still stands in the way of increased taxation in a world with cash decreases. And if the financial privacy of citizens and businesses is lost, states can easily subject citizens and businesses to full monitoring.

A global central bank will undertake the supervision of the banking and financial sector. It will want to prescribe how commercial banks operate; for example, what liquidity and capital requirements they must meet and how they must assess their credit risks. The world central bank will also want to decide whether and under what circumstances failing banks will be aided or allowed to close. The right of national governments to have their say will increasingly dwindle in favor of the supranational world central bank and supranational supervisory authorities and bodies. The consequences will be far reaching.

The pressure for a body of regulation to which all banking and financial enterprises are subject will increase—and will come from the large and powerful interest groups. National or regional peculiarities will not be taken into account if the large and powerful interest groups have asserted themselves in the political negotiation of the regulatory provisions. For many small countries, this will force far-reaching adjustments—not only in their banking and financial economies but also in their production structures. There will be winners and losers in this process: adjustment costs will be higher for some regions and lower for others. This will create conflicts of interest between the nation-states.

A fiat currency used by people in many countries will fuel further conflicts. It is well known that the expansion of the money supply means that a few are made better off at the expense of many others: the first recipients are the beneficiaries, the late recipients, the disadvantaged. This is already resulting in disputes in nation-states that are relatively homogeneous in terms of culture, language, and tradition. The conflicts over redistribution will become even more acute when the effects of redistribution are felt across borders, when people in one country realize that they are being bled in favor of people in another country.

A world central bank has a free hand to set the world interest rate at will. Not only can it keep it artificially low to set a boom in motion and keep it going for a long time, but it can also bring about a negative world interest rate, a political “solution” to the overindebtedness problem caused by a fiat world money. Another motive for forcing world interest rates into negative territory is the democratic socialists’ desire to better steer and control the economy and society, or to shatter what is left of the free market economy.

The fact that this is possible with a negative interest rate policy becomes apparent when one considers the consequences of a negative interest rate for the credit market. Commercial banks receive credit from the world central bank at, say, −2 percent, on the condition that they lend the money to consumers and companies. If they borrow €100 at −2 percent and lend the money at −1 percent, their profit is €1. Under these circumstances the demand for credit grows enormously: after all, everyone wants to profit from the negative interest rate loans.

The world central bank must ration the loans so that the creation of credit and money does not get out of hand. It is no longer the market interest rate that balances supply and demand, but the world central bank, which gives a certain amount of credit and allocates it. But what criteria should be used to allocate the loans? Should all those who ask for loans get them too? Or should labor-intensive economic sectors be preferred? Or should the loans go only to sunrise industries? Or should weakening branches of industry be supported with additional loans? Or should the south get more than the north?

The world central bank has a decisive influence on who can finance and produce what, when, and where. Like a central planning authority, it—or the interest groups who control it— determines the fate of the economies in all the regions of the world: which industries are promoted or pushed back; which economies grow stronger and which weaker; which banks are allowed to survive in which countries and which are not. Welcome to the centrally planned economy! However, a negative interest rate policy would not be possible in the long term; it would lead to the end of the division of labor in the economy.

First, lowering the interest rate inflates the prices of existing assets: stocks, houses, and land— everything becomes more expensive. The lower the interest rate, the higher the present value of future payments and thus also the market prices of the assets. The speculative bubble, which is inflated, initially provides investors with high returns. At the same time, the outlook for future returns deteriorates. The reason? Zero and negative interest rates cause the prices of stocks, houses, etc., to rise until the expected yield that these asset classes promise has approached the low or negative interest rate set by the central bank. In extreme cases, the expected market returns will fall to or even below the zero line.

But once the world central bank has pushed all returns to or below the zero line, the free market economy (or what is left of it) is on the verge of collapse. Without a positive market interest rate, without the prospect of a positive return, saving and investing cease: after all, every consumer and entrepreneur has a positive originary interest rate. And when there is no more return to earn, there is no more saving and investment, only consumption. The economy based on the division of labor comes to a standstill. Replacement and expansion investments fail to materialize, capital consumption begins, and the modern economy falls back into a primitive subsistence economy. An extreme example. Or is it?

The very process by which the world central bank lowers the world market interest rate to or below zero (something it can do as a monopolist of money production) is extremely problematic. It artificially pushes people’s time preferences up. As Friedrich Nietzsche put it, there is a “revaluation of all values,” a devaluation of the future. The here and now is made even more important than tomorrow. The consequences are far reaching. Life on credit is promoted. The virtue of thrift goes out of fashion. “Permanent debt” becomes morally acceptable. Achieving short-term goals becomes more important to people than achieving longer-term goals. The willingness to achieve decreases, because, compared to the disutility of labor, leisure time rises even higher in value. Divorce also becomes more attractive as a “solution” to marital problems; efforts to overcome relationship difficulties are increasingly shunned. The quality of education suffers: if the here and now is so important, then we will also spend less time cultivating and maturing for the future. Morals decay: consideration and manners are costly activities in interpersonal relationships and often only pay off in the long term. Aesthetics degenerate: it is easy for passing fads to find buyers; breaking away from “proven classics” is made easier. A world central bank that issues fiat money has decivilizing consequences worldwide.

The idea that states could remain sovereign and independent once they participate in the fiat world money system is illusory. If the same money is used in different countries, this will help to make the best possible use of the efficiency potential offered by the international division of labor. The commodity and factor financial markets of the national economies will increasingly dovetail. And the closer the ties between those markets, the stronger will be the incentive of the nation-states to surrender sovereignty to supranational authorities. This applies both to economically good times—then the willingness to share, to make compromises, is relatively high—and to economically bad times— then a way out of the economic problems is seen in moving closer together, in jointly pursued “emergency policies.”

A fiat world currency promotes political centralization. The “urge” to establish a unified government, a world state, is strengthened, especially under the ideological leadership of democratic socialism. If economic and financial ties become ever tighter, why not create a single world state that can more effectively implement the desired policies—such as policies for prevention of economic and financial crises as well as tax fraud, environmental protection, counterterrorism, etc.? The world central bank, which issues the fiat world currency, becomes a particularly sought-after political power and control center in this concentration process.

Drawing on Robert Michel’s iron law of oligarchy, it is to be expected that a relatively small, assertive group of people which originates from the party and government structures of the participating states will try to put the world central bank under its control and make it serviceable for its own purposes. Against this background, it would be unrealistic for something to emerge that could be described as a “democratic world central bank.”

The representatives of the participating states may initially endeavor to “chain” the world central bank—i.e., to design the rules and regulations to which the world central bank is subject in such a way as to prevent abuse of power. However, what happens in the hierarchy of parties also happens in the hierarchy of a community of states: the most determined, tireless, ruthless, and relentless advocates of democratic socialism prevail. The aim of the oligarchy will be to make the world central bank serviceable and, above all, to enable the creation of a world government, a world state, which democratic socialism must necessarily strive for.

A world state, equipped with its own global fiat money monopoly, would open a dark chapter in the history of humankind and lead to a civilizational catastrophe. The world state would have no competitors to fear. No one could escape from it. Emigration would be impossible; the world state would be everywhere. The hope that the expansion of the power of the world state could be effectively curbed by democratic electoral acts would prove to be illusory as soon as oligarchization set in—and this is to be expected, of course, as already impressively illustrated by the expansionist drive of the nation-states in recent decades.

It is downright absurd to think that a world state with its own fiat world currency would not sooner or later mutate into a totalitarian tyrant.

But are there perhaps good forces that could challenge the money monopoly and thereby effectively prevent the ideas of world money and a world state from being put into practice? One possible good force is technological disruption, which could revolutionize the global monetary system or show people that better money than that offered by states is both necessary and possible. There is no doubt that cryptocurrencies hold such potential for disruption.

Technological Disruption: Cryptocurrencies

The cryptounit bitcoin holds out the prospect of something revolutionary: money created in the free market, money the production and use of which the state has no access to. The transactions carried out with it are anonymous; outsiders do not know who paid or who received the payment. It is money that cannot be multiplied at will, whose quantity is finite, that knows no national borders, and that can be used unhindered worldwide. This is possible because bitcoin is based on a special form of electronic data processing and storage: blockchain technology (distributed ledger technology), which can also be described as a decentralized account book.

Think through the consequences if such a “denationalized” form of money should actually prevail in practice. The state could no longer tax its citizens as before. It would lack information on the labor and capital incomes of citizens and enterprises and their total wealth. The only option left to the state would be to tax the assets in the “real world”—such as houses, land, works of art, etc. It could try to levy a “poll tax”: a tax in which everyone pays the same absolute tax amount— regardless of the personal circumstances of the taxpayers, such as income, wealth, ability to achieve, and so on. But would that be practicable? Could it be enforced? This is doubtful.

The state could also no longer simply borrow money. In a cryptocurrency world, who would give credit to the state? The state would have to justify the expectation that it would use the borrowed money productively to service its debt. But as we know, the state is not in a position to do this and is in a much worse position than private companies. So even if the state could obtain credit, it would have to pay a comparatively high interest rate, severely restricting its scope for credit financing.

In view of cryptocurrency’s financial disempowerment of the state, the question arises: Could the state as we know it today still exist at all, could it still mobilize enough supporters and gather them behind it? After all, the fantasies of redistribution and enrichment that today drive many voters into the arms of political parties and ideologies would disappear into thin air. The state would no longer function as a redistribution machine; it basically would have little or no money to finance political promises. Cryptocurrencies, therefore, have the potential to herald the end of the state as we know it today.

The transition from the national fiat currencies to a cryptocurrency created in the free market would have consequences for the existing fiat monetary system and the production and employment structure it has created.

However, bitcoin has not yet developed to the point where it could be a perfect substitute for fiat currencies. For example, the performance of the bitcoin network is not yet high enough. Another problem with bitcoin transactions is finality. In modern fiat cash payment systems, there is a clearly identifiable point in time at which a payment is legally and de facto completed, and from that point on, the money transferred can be used immediately. However, distributed ledger technology consensus techniques (such as proof of work) only allow relative finality, and this is undoubtedly detrimental to the money user (because blocks added to the blockchain can subsequently become invalid by resolving forks).

The transaction costs are also of great importance regarding whether bitcoin can assert itself as a universally used means of payment. In the recent past, there have been major fluctuations in this area. In addition, the time taken to process a transaction has also fluctuated considerably at times, which may be disadvantageous in view of the emergence of instant payment options for fiat money.

Another important aspect is the question of the “intermediary.” Bitcoin is designed to enable intermediary-free transactions between participants. But do the market participants really want intermediary-free money? What if there are problems? If someone made a mistake and transferred one hundred bitcoins instead of one, he cannot reverse the transaction. And nobody can help him! The fact that many hold their bitcoins in trading venues and not in their private digital wallets suggests that even in a world of cryptocurrencies there is a demand for intermediaries offering services such as storage and security of private keys.

As soon as intermediaries come into play, the transaction chain is no longer limited to the digital world, but reaches the real world. At the interface between the digital and the real world, a trustworthy entity is required. Just think of credit transactions. They cannot be performed unseen and anonymously. Payment defaults can happen here, and therefore the lender wants to know who the borrower is, what credit quality he has, and what collateral he provides. But if the bridge is built from the digital to the real world, the cryptomoney inevitably finds itself in the crosshairs of the state. However, this bridge will ultimately be necessary, because in modern economies with a division of labor, money must have the capacity for intermediation.

It is safe to assume that technology will continue to make progress, and that it will remove many remaining obstacles. However, it can also be expected that the state will make every effort to discourage a free market for money by reducing the competitiveness of alternative money media such as precious metals and cryptounits vis-à-vis fiat money through tax measures (such as turnover and capital gains taxes). As long as this is the case, it will be difficult even for money that is better in all other respects to assert itself.

Therefore, technical superiority alone will not be sufficient to help free market money—whether in the form of gold, silver, or cryptounits—achieve a breakthrough. In addition, and above all, it will be necessary for people to demand their right to self-determination in the choice of money or to recognize the need to make use of it. Ludwig von Mises has cited the “sound-money principle” in this context: “The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.” And he continues: “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”

These words make it clear that in order for a free market for money to become possible, quite a substantial change must take place in people’s minds. We must turn away from democratic socialism, from all socialist-collectivist false doctrines, from their state glorifying delusion, and no longer listen to socialist appeals to envy and resentment. This can only be achieved through better insight, acceptance of better ideas, and logical thinking. Admittedly, this is a difficult undertaking, but it is not hopeless. Especially since there is a logical alternative to democratic socialism: the private law society with a free market for money.

A Free Market for Money

A free market for money means two things. On the one hand, those demanding money can freely choose what they want to use as money—for transaction and saving purposes. On the other hand, every market participant has the freedom to try to offer his fellow human beings a good to demand voluntarily as money. But wouldn’t that lead straight to “money chaos”? Wouldn’t hundreds, maybe even thousands of types of money circulate and thus make financial calculation impossible in the economy? And wouldn’t that undermine the efficiency of the economy? This concern is unfounded.

The money demander plays the decisive role. In a free market for money, anyone who asks for money will, out of self-interest, ask for a good that has the greatest possible marketability, a good that is recognized by its trading partners as the generally accepted medium of exchange. What do you offer the baker? It is best to offer something that the baker can use to buy shoes from a cobbler or shirts from a tailor. In a free market for money, people will demand as money a good that finds the widest acceptance, which is regarded by the largest number of people as a medium of exchange. The choice of the good that serves as money is based on the wishes of the trading partners.

But what if Mrs. A offers colorfully printed paper slips and says that these are “good money”? The answer is that no one would accept her paper slips as money. Why not? Quite simple: you wouldn’t know what these colorful notes are worth, or what you could get for them in exchange. That’s why no one would demand them as money. This is exactly what Mises has shown with his regression theorem: money must arise from a good that already has a nonmonetary market value before it is used as money. This is not the case for colorful and arbitrarily printed paper slips. They would not be able to compete against other goods such as gold and silver.

In a free market for money, people will demand a good that possesses the physical qualities that “good money” must have: be scarce, storable, transportable, divisible, malleable, and transferable and be regarded as valuable. If we take into account currency history, it seems quite probable that money would still be chosen in the form of precious metals—notably gold and silver—today. But cryptounits could also possibly assert themselves as money in the future. The choice people will ultimately make in a free market for money cannot be predicted with certainty.

Precious metals as money is an improvement compared to unbacked fiat money. No one has to carry jangling coins around in their pockets. The use of gold and silver can be digitalized. All kinds of payments that are common today could be carried out easily and problem-free with gold and silver. If cash is desired, precious metal coins can circulate or banknotes can be used that can be exchanged 100 percent for physical gold at the storage facility that issued the banknotes. Cashless payment transactions are also possible in the usual way when using gold money: bank transfer, direct debit, crossed check, payments by credit and debit card, mobile payment, bills of exchange, etc.

In a free market for money, in which a good that cannot be multiplied at will (by granting credit) is chosen as money, the credit market can exercise its intended function undisturbed: the supply of and demand for savings create a market interest rate that ensures that sufficient savings are available to make investments. This puts an end to the chronic economic disruptions of boom and bust caused by the issuance of fiat money. Because the banking business is not inflationary, the nonmarket (antisocial) redistributive effects of fiat money cease.

In a free market for money, there is no central bank and no state supervisory or regulatory authorities. All that is necessary for the functioning of a free market for money is a functioning legal order, which ensures that the contracting parties fulfill their obligations and that infringements of contractual agreements are effectively sanctioned: for example, that the stored commodity money is not embezzled, that banknotes can be exchanged for the money base at face value at any time. In order to guarantee that contractual obligations are fulfilled, there is no need for state monopolies of law. Jurisprudence and law enforcement can also be organized in the free market.

A free market money system—with free choice of money and bank freedom—is not a national but an international concept. If trade takes place internationally, across national borders, the market participants select the good to use as money with the same calculation as is used at the national level. Every user of money has an economic incentive to demand as money that good which he thinks is the most attractive means of exchange from his trading partner’s point of view. The idea of a free market for money is thus global in the truest sense of the word: just as free trade knows no national borders, a free market for money extends globally.

A free market for money is incompatible with the state as we know it today; namely, as a territorial compulsory monopolist with ultimate power of decision over all conflicts in its territory. There is no question that a free market for money requires far-reaching changes in people’s thinking. This insight was formulated by Mises in 1923:

The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.

The Private Law Society

The alternative to the state, in its present form, is the private law society. It is characterized by the fact that the same rules apply to all people always and everywhere: that everyone has self-ownership and that everyone has ownership of external goods acquired lawfully—i.e., nonaggressively. And since the same law applies to everyone, there is no public law apart from private law. A private law society is by no means synonymous with anarchy. Far from it! Rather, the private law society is characterized by a very clear distinction between mine and yours, and violations of property are punishable and sanctioned.

In a private legal system, security is offered in the free market. On the supply side, there are insurance companies that offer security services (insurance against theft, personal protection, etc.) in competition with other companies. In insurance contracts, the security service is specified precisely and the mutual rights and obligations are contractually laid down (such as the exclusion of negligence by the insured from compensation in the event of damage). The insurance contracts specify independent conciliation bodies—which also compete with each other for customers who pay voluntarily—to be called upon in the event of a dispute between the policyholder and the insurer.

Under competitive conditions, it is to be expected that prices for insurance coverage and dispute resolution will fall (while they will rise chronically in today’s state-monopolized security and legal apparatus). And it is not only that the insurance services in the free market for security are more geared to the customer’s wishes (in terms of scope and pricing); peaceableness and conflict avoidance are also promoted. Those who demonstrably behave well and are friendly toward their fellow human beings represent a smaller risk and are rewarded with comparatively low insurance premiums.

Since an insurance company is contractually obliged to indemnify the policyholder in the event of a loss (e.g., burglary), it will make a great deal of effort to prevent the occurrence of a loss. And if the damage has nevertheless occurred, the insurance company will do everything in its power to track down the perpetrator and make him liable; otherwise, it will have to pay the compensation, which in turn will reduce its profit. The free market for security discourages crime because potential perpetrators face highly efficient private insurance providers and police agencies. Such insurance and legal contracts can be established not only nationally, but of course also internationally, for private households as well as companies.

In a private law society, a free market for money is a natural phenomenon in the truest sense of the word: a free market for money is people’s right to self-determination when choosing money. The voluntary agreement of the people involved in the global division of labor would result in a single world currency. A freely chosen world currency differs categorically from a single fiat world currency, which is the passion of democratic socialists. A world currency chosen in a free market for money would literally be economically and ethically good money, which best serves humankind and best promotes the peaceful and cooperative coexistence of people in this world.

The Challenge

Understanding and practicing economics is the key to destroying the foundations of the driving force of democratic socialism, which for decades has been working toward establishing a world state with a world currency and has already made considerable progress along this path. Bad experiences, undesirable developments, and crises will not be able to deprive democratic socialism of its power and overcome it. This can only be achieved by insight into better ideas, and by the struggle of arguments of reason. The Global Currency Plot is meant as a contribution to help the better ideas prevail.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

About the Author

Dr. Thorsten Polleit is Chief Economist of Degussa and Honorary Professor at the University of Bayreuth. He also acts as an investment advisor.

The first presentation was given by economist Keith Weiner, a leading authority on gold, money and credit and President of the Gold Standard Institute USA. He is a fervent advocate of rational monetary policy and addressed the ever-worsening inflation of energy and food. Central banks are under increasing pressure to take action, i.e. raise interest rates. The Fed has already started to do this, and the ECB has at least announced an initial rate hike. Because if interest rates are not raised, the political mood could soon change, according to Weiner.

Citizens are not happy about energy prices and when people can no longer put food on the table, the situation could finally escalate.

The second speaker, Thorsten Polleit, has been an honorary professor of economics at the University of Bayreuth since 2014 and has been chief economist at Degussa since April 2012. He focuses on money and capital market theory and the Austrian School of Economics and is the author of numerous articles and books.

Central banks: An ingredient from the Marxist witches’ brew

According to Polleit, behind climate change and the lockdowns during the Corona crisis was an attempt to finally smash capitalism or what is left of it. The central banks have become more and more powerful almost unnoticed in recent years and determine which government is to be removed or not. The central banks are also able to control whether and which companies receive loans. This corresponds directly to the centralization of credit according to Karl Marx. Therefore, for the economist Polleit, central banks are the main driver of the current economic mess.

He emphasized that the representatives of the Viennese school, such as Ludwig von Mises or Friedrich von Hayek, already foresaw this. For example, Hayek wrote of the central bank monopoly on money: “There is less reason than ever to hope that states will become more trustworthy as long as the people have no choice but to use the money that the state makes available to them.”

Fiat money [money printing, ed.] is inflationary, Polleit maintained. So it loses its purchasing power because it can be increased simply by printing money. It favors the few at the expense of the many. This unequal distribution is called the Cantillon effect.

The redistribution is particularly nefarious, because the state benefits from inflationary money as it is able to pay its debts more easily. On the other hand, fiat money causes the market interest rate to fall artificially. This in turn leads to society living beyond its means and becoming over-indebted.

Fiat money thus inevitably leads to a debt economy in which debt increases faster than income. The result: global debt has grown to a total of $350 trillion by 2021, according to Polleit. The money supply has been increased by 43 percent in recent years by the US central bank, the Fed, and by 20 percent by the European Central Bank, the ECB. The euro has therefore lost around 40 percent of its purchasing power over the past five years.

A system of economic dependence: Fiat Money

Supply bottlenecks, lockdowns and the war in Ukraine have caused a shortage . The “negative price shock” now meets a money supply hangover. Because this expansion of the money supply by the central banks has been leading to extreme inflation. According to the economist Polleit, the fiat money system is a unit made up of different actors. And these actors have an interest in the economic dependence of companies and the population. The majority is made dependent on what Polleit calls “collective corruption”. This is an existential interest for banks and the financial sector. Because they are known to print new money out of thin air.

In order to prevent the system from collapsing, trade bans are imposed or interest rates are manipulated. People are now noticing the rising prices of consumer goods. Terms such as “green inflation” are intended to hide who the actual scapegoats are. Because supply chain problems, greedy entrepreneurs or “Putin’s war” are not responsible for this, but solely the central banks.

When inflation rises, confidence falls

High inflation lowers confidence, Polleit explained. Central banks are therefore raising interest rates to maintain confidence in hiding the swindle. When hyperinflation occurs, as happened in Argentina, Brazil and Ukraine, for example, fiat money is destroyed. High inflation, on the other hand, can be used for years (5-15 percent per year), which Polleit has shown using the example of Turkey since 2008. The higher money supply led to sharply increased prices for goods. Inflation has fluctuated between 10 and 24 percent over the years and is now over 70 percent.

We are facing a serious crisis

The world is currently on the way to a particularly serious crisis. The “Western redistribution democracies, as Polleit calls them, are particularly badly affected. He considers a future hyperinflation similar to that in Weimar in 1922 quite possible. As a result, the unemployment rate rose from 2,8 percent in just a few months to 19 percent and then to over 28 percent.

Today’s markets are not free due to regulations, laws and also the high taxes, according to Polleit. People are controlled centrally via central bank money. This is a kind of collectivism. That is exactly the Great Reset and the great transformation that Klaus Schwab has in mind. According to Polleit, these are neo-Marxist ideologies and the fiat money is necessary for this agenda to hide the costs of this total social restructuring. To do this, the free market must be restricted more and more, ultimately ending in a command economy. A “Chinafication” is taking place, he said.

The worst recession of the post-war period is imminent

For the time being, Polleit fears that the situation will deteriorate and, due to the anti-capitalist mood in politics, anticipates the worst recession of the post-war period. Because interest rates will not be increased massively, purchasing power has nevertheless fallen by 40 percent, which means that savings are also shrinking. For Polleit, therefore, the end of the Fiat system has begun and the euro zone will be the big loser.

State money monopoly must be overcome

Politics will not be able to solve the problem, but only a free market for money. Inflation is the result of misguided policies. A change of mindset is needed, said Polleit. The “collective corruption” must be overcome because fiat money is a “horror without end” and will not abolish itself. The state money monopoly must be actively stopped.

Reflecting on ideas that have been neglected so far could help find a solution in the future, Polleit said. Thankfully, the term “fiat money” has now become a mainstream notion, and such a positive development can no longer be stopped. If a new and well-functioning system were to be established in a country, this could lead to a chain reaction, he opined.

Image by 2211438 from Pixabay. Article cross-posted from Free West Media.

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