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24/September/2012

Reflections on the effects of War as compared to the effects of Fiat Money

Hugo Salinas Price

Modern warfare is highly destructive. A couple of centuries ago, wars involved fighting between armies; civilians were spared. Cannons were directed at the opposing army.

Today, war means general destruction; civilians on the losing side can expect to be plundered, killed or raped. Cities are targeted for mass destruction. We rode a bus through post-war Germany in 1948, and recall that the city of Bremen was simply miles of rubble piled up on either side of a road cleared for traffic.

WW II leveled some cities of Europe in the countries which were part of the Axis, and killed millions of soldiers and civilians.

After the war, both the winners and the losers turned to re-building their countries. The devastated cities began to heal; new, modern factories were built. People went back to doing what they had been doing before the war. By 1970, a traveler could hardly tell there had been such terrible destruction and loss of life just twenty-five years earlier.

Now let us consider fiat money and its consequences.

At Bretton Woods in 1944 Henry Morgenthau and Harry Dexter White outmaneuvered John Maynard Keynes, the British Delegate to the Monetary Conference, and the Conference ended by accepting the American “diktat” for the post-war monetary structure of the world: the dollar was to be as good as gold for purposes of international payments, and the US promised to redeem for gold dollars held by other national central banks at the rate of one ounce of gold for each $35 dollars tendered for redemption.

This was a structure doomed to failure from the start, and men such as Jacques Rueff of France understood this quite clearly.

The US promptly began to abuse its “exorbitant privilege”, as France’s General de Gaulle called it, and to send dollars abroad in payment of its trade deficits. However, the promise of redemption of dollars for gold did act to restrain somewhat the expansion of credit in the US. There was a general respect for the dollar and its relative scarcity produced only mild inflations in the countries that received dollars.

The post-war US ran a mild but constant fever of credit expansion. In the 60’s, the credit expansion fever surged to finance the Vietnam war and the loss of US gold in payment of dollar-redemption accelerated to an unacceptable pace.

Came the fateful day, August 15, 1971, and the US had to default on its promise to redeem dollars for gold – it was going to be only a “temporary” suspension, Nixon assured the American people. Alas, in politics nothing is more permanent than a temporary measure. The dollar became the full-fledged fiat currency of the world.

Thus the world entered into the era of Globalization; torrents of dollars inflated the reserves of the Central Banks of the world; world trade boomed because trade deficits were now easily “settled” with fiat dollars.

World trade had heretofore been an exchange of goods for goods, with gold only moving to settle transitory differences. That was now not the case: goods were no longer paid for with goods; in international trade, imported goods were now paid for with exported goods and with dollars, of which the supply was abundant.

Here we begin to see the effects of fiat money as the world’s currency.

Cheap goods from the under-developed countries began to flood the economies of the developed countries, with insufficient compensating purchases of goods on the part of the under-developed countries. Industries began to move out of the developed countries and into the under-developed countries which enjoyed burgeoning export sales.

De-industrialization of the West set in under globalization, which was constantly extolled as the new, modern and progressive structure of the world’s economy. Old industrial buildings were transformed into structures harboring cafés, restaurants and art shops.

The de-industrialization was masked with credit expansion facilitating consumption, not production, which was un-economic under the globalization scheme. Stagnant or falling wage earnings were supplemented with easy credit for the masses.

This all happened because the money the world has been using since 1971 is fiat money, not real money. But still, at this date, you hear very few voices recognizing this fundamental fact.

Modern war means destruction and death for masses of people. When WW II was over, the destruction began to heal. The cities were rebuilt, the survivors went back to what they had been doing when the war broke out: they returned to earning their livings with work, doing what they knew how to do. Normality returned, generally speaking.

But consider the effect of fiat money on the whole world.

The whole productive structure of the world has been overthrown. The factories that have vanished in the developed nations cannot be rebuilt. Globalization makes them un-economic.

The apparent prosperity of the developed nations of the world today has been sustained by credit expansion, not by savings. The West has been living like an heir to a great fortune, wasting away its inheritance. It is now bankrupt. The continuance of a whole way of life is now in danger of collapse, because it is becoming impossible to expand credit any further. The Chinese are in no better situation: their supposed prosperity will crumble when the policy of expanding credit in the West has to come to a halt and the markets which China has supplied fade away.

The Welfare State, funded with fiat money, has produced millions upon millions of humans who have grown accustomed to a good life based on credit and welfare.

After WW II, the people of Europe went back to doing what they did before the war. Today, to what can the unemployed of the West return? There is nothing to which they can return, because the factories are gone. The people of the West have largely forgotten the accumulated productive know-how that was built up over centuries. City-dwellers and suburbanites cannot go back to farming, to raising live-stock, or to the thousand trades and manufactures that used to exist. And even if they could, they would not do so; the millions of unemployed in the West are no longer used to working hard to keep body and soul together; they no longer accept the proposition that life implies struggle.

Fiat money has destroyed humanity’s normal way of life; a way of life in which men and women could find their places and were thankful to have them. That old way of life is gone; the old attitudes toward life and work have been erased.

This is destruction many times worse than the worst destruction of any war. That is where we are today. This is what fiat money has brought to the world. Fiat money is the child of the arrogance of human intellect, which has sought to invalidate the laws of human nature which have regarded the precious metals as money for thousands of years, and sought to substitute an intellectual construct for the real thing. Now we are going to pay for that arrogance.

What now? Nobody knows. Unquestionably, we are headed straight into fearful problems never seen before. At least, owning physical gold and silver may be help some of us survive.

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Hugo Salinas Price, World Riba Conference, Kuala Lumpur, Malaysia, Nov. 26, 2012.
Hugo Salinas Price, World Riba Conference, Kuala Lumpur, Malaysia, Nov. 26, 2012.
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