To the editor:
Traditionally, currencies have been backed by a physical commodity such as silver or gold. They retain their value and purchasing power because of the constraints of the underlying commodity. By contrast, a fiat currency has no intrinsic value; it is based on the creditworthiness of the government issuing it, and it is merely declared legal tender by government decree.
A sovereign government can declare anything as legal tender, whether it has intrinsic value or not. Once it is declared legal tender, it must be used as a means to settle a public or private debt and meet financial obligations, including tax payments, contracts, legal fines, etc. A valueless token could be declared legal tender; it would then take on the characteristics of a flat currency.
When we look at the three functions of money, “a unit of account, a medium of exchange, and a store of value,” it is clear the U.S. Dollar is merely a fiat currency issued as legal tender by government decree. It is not synonymous with the definition of sound money. It does not hold its purchasing power, and it is not a store of value. If fiat currency is saved, over time it loses its purchasing power. By contrast, money, as defined in our Constitution, is metallic coinage; it has intrinsic value, and it holds its purchasing power over long periods of time.
The following is a brief history of our flat currencies, which have failed to serve the public interest.
The 1700s and the American Revolutionary War
The newly minted units of colonial paper currency during the American Revolutionary War were called “Continentals.” They were issued from 1775 to 1779 to finance the cost of the war, but the paper currency quickly lost value, partly because it was not backed by a physical asset like gold or silver, but also due to the fact that too many bills were printed. These two factors contributed to the disparaging phrase “not worth a continental.”
The 1800s and the Civil War
By the 1800s, the U.S. was ready to try another paper currency experiment. Bank notes had been in circulation for a while, but because banks issued more notes than they had coins to cover, these notes often traded at less than the face value of coins. By the mid-1860s, the greenback was issued to help pay for the Civil War. Congress had limited taxing authority, and this un-backed paper currency was used to finance the war. Greenbacks quickly lost their value and caused inflation in the northern states.
The 1900s and the Viet Nam War
In the 1970s, President Nixon made the decision to finance the Vietnam War while also increasing domestic spending on social welfare programs. There were fiscal constraints on our “guns and butter” spending program. Nixon, therefore, reneged on the Bretton Woods Agreement, severed our currency from its collateral, and began a decade of high inflation. A few years later, a negotiated agreement was reached to have Saudi Arabian oil back our currency, which was later known as the Petro dollar.
The 2000s and the endless wars and domestic spending programs
As General Wesley Clark testified before congress in 2002, “we’re going to take out seven countries in five years, starting with Iraq, and then Syria, Lebanon, Libya, Somalia, Sudan and, finishing off, Iran.” As the U.S. Dollar is the world reserve currency, this would have been highly inflationary. With the push toward globalization, however, we were able to export the inflation to developing countries. Now the Biden regime has proposed a record $6 trillion budget during this de-globalization trend.
Inflation is caused by “an increase in the money supply,” so, under the quantity theory of money, we can expect this multi-trillion-dollar spending spree with no debt ceiling in sight will cause significant inflation here at home in the years to come. Once again, the same two factors are at play that caused the demise of the continental.
“The quantity theory of money (QTM) assumes that the quantity of money in an economy has a large influence on its level of economic activity. An increase in the money supply results in a decrease in the value of that money because it increases the rate of inflation. As inflation rises, purchasing power decreases. Purchasing power is the value of a currency expressed in terms of the amount of goods or services that one unit of currency can buy. When the purchasing power of a unit of currency decreases, it requires more units of currency to buy the same quantity of goods or services.”
As mentioned in my earlier letter to the editor, “The high cost of housing is commensurate with the falling value of our currency,” the dilemma of the high cost of housing is inextricably linked to our depreciating fiat currency. It was noted the median price of a home has risen over 1,600 percent in the past 50-year period to a high of $436,800. During a similar period, Real Median Personal Income has only risen 41.5 percent, or from $26,509 in 1974 to $37,522 in 2021. This dilemma has caused unaffordable house prices when compared to income, as it has required more currency units, or “dollars,” to purchase the same tangible item—in this case, a house. Regrettably, the median personal income of $37,522 cannot mathematically be expected to service the debt on a mortgage for a median house price of $436,800. Clearly, the increase in the money supply to service a $32 trillion debt is unsustainable and will continue to cause inflation in the cost of all tangible necessities.
The push toward globalization has contributed to the disparity between the high cost of a house and the comparatively low median personal income. These public policy decisions—such as the North American Free Trade Act (NAFTA) in 1994 and the World Trade Organization (WTO) in 1995—were made in favor of corporations, yet they have had an adverse effect on United States wage compensation. Many will remember Ross Perot, a presidential candidate in 1992 who coined the phrase the “giant sucking sound” in reference to the reality that our high paying industrial jobs would head south to Mexico under these trade agreements. At the time, Perot was marginalized and ridiculed for what has proved to be an accurate assessment. Clearly our wages have not kept up with our cost-of-living expenses.
In the United States, “Sovereign power is vested in the people and those chosen by election to govern or to represent must conform to the will of the people.” If current legislation no longer serves the public interest, individuals have the right to seek appropriate changes through their representative form of government. An exemplary example of this in neighboring Canada was presented by Victoria Grant in 2012. She was 12 years old when she took the initiative to inform her fellow Canadian citizens on the need to reform the Canadian Banking System. Her six-minute discussion conveys the importance of educating our youth on economic matters of national significance.
The U.S. Dollar has reigned supreme for over a half a century, unrivaled by any other currency. In the coming years, however, this may change as the Basel III Agreement comes into play and nation states accumulate Tier One assets. The prominence of the U.S. Dollar as the world reserve currency rests solely on the full faith and confidence of our government. Yet we have allowed our national debt to escalate to the point where confidence in our solvency has come into question. Any government that issues debt far in excess of what it can realistically collect in taxes is perceived as an excessively risky investment and will likely have to pay increasingly higher interest rates when issuing its securities. Thus, a government’s fiscal policy has definite market constraints. Many foreign countries are divesting from our bond market as we have had to monetize our debt, which is unsustainable.
We have imposed sanctions on other countries and banned them from using the SWIFT system, which has created an unwelcome response. The BRICS Nations are forming a coalition, which will enable them to engage in the trade of oil and commodities outside of the U.S. Dollar system. While our currency is not going away any time soon, it may be marginalized and devalued further as we share center stage with the BRICS currency, which will most likely be linked to a fixed weight of a precious metal. More will be revealed at the BRICS Summit next month in Johannesburg, South Africa.
Lucinda Shmulsky
New Marlborough
