Monday, December 1, 2014

There Is No Fiat Currency

I’m going to put forth a hypothesis about economics that many economists will argue is utterly untrue.  My hypothesis is that fiat money is a myth and that currency will always be backed by some commodity.

Fiat money is basically money without any value other than what the government says it is.  So, for example, a dollar is a dollar because the Federal government, along with the Federal Reserve, say it is.  One American dollar used to represent a fraction of a gold bar back in the day.  But now it merely represents a medium of exchange with not backing.

Technically, it is backed by the full faith and credit of the Federal Reserve (for whatever that is worth) and by the full force of the US government.  But those are merely threats of violence and fraud.  I think that the American dollar is backed by a commodity, despite the best efforts of the elites to dislodge money from the market.

The American dollar is backed by oil.  I guess a more accurate term is that it is backed by oil production, since oil is a commodity that is used up.  Kind of like how power plant companies trade with distribution companies in terms of Watts, even though those Watts are generated in real time.

Oil is traded in American dollars, primarily.  I know that Russia is starting to buck that standard and encouraging others to do so, but the fact remains that oil is traded using the American dollar.  No other commodity, as far as I know, is traded in such a manner at an international level.

And there are so many wars fought over oil or in oil-rich nations these days.  While oil is not the primary cause, and rumors are that certain countries were trying to abandon the petrodollar, is it not like the gold rush days of the 1800s?

You cannot say that a thing has a certain value and demand that people follow suit.  Currency requires that it be measured against something as a standard so that, in turn, it can be measured against other goods and services.  This is whole point of gold-backed currency: you have a piece of paper that signifies a piece of gold and things you buy are worth this much in gold.

Creating an arbitrary standard of measurement for value is impossible, even in a Socialist economy.  This is because people determine the value of something based on supply and demand.  Supply and demand is a fundamental economic law that no sane economist will deny.  Yet fiat currency is an attempt to buck that fundamental law, which is why it is an impossible thing save for abstract theories.

This is why I propose that fiat currency doesn’t exist and that the American dollar is backed by oil.  In other nations where there is fiat currency, their money is backed by the most commonly traded item on their markets.

Don’t get me wrong, I think the current monetary policies of the Federal Reserve and the US government are doomed to failure in the near future.  I don’t support fiat currency and would prefer a free banking system where banks issue currency based on their asset holdings, but that is a pipe dream at best.

In any case, my hypothesis stands for now.  I will have to do a considerable amount of research in order to prove it, however, so keep in mind that it is just a hypothesis right now.