Friday, October 26, 2007

Senior Fiat


What is a fiat money system and what can it do for you? Well investopedia put it this way.

"Money that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith."

Currency based solely on faith; so one would assume that if people are kind enough play along and accept the dollar as a legal currency, Then the government would do it's best to make sure the dollar would keep it's value.
Well in a Utopian society that would be the case, but one just needs to look at the news today and read the headlines .
The dollar fell to another new low against the euro
Warren Buffett said he expected the dollar to weaken further

Why is this happening? Well first a little history

The US used to be on the Gold standard, this basically meant the gold was legal currency, and any notes the government printed was backed by gold reserves. At any time the holder of the note could in theory exchange it for it's weight in gold. The main purpose of this was to limit government spending, it could only spend what it had. The founding fathers knew of the dangers of a fiat currency. The founding fathers experienced the damage it caused . Most of the revolutionary war was financed by worthless currency called "Continentals". hence the phrase "Not worth a Continental". They were so concerned that they included the following in the Constitution.

Article 1 section 10 clearly states
"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

So clearly the system we have in place today violates the constitution, Why do we allow this? Next post what led to our current system, why our dollar is inflating and what might happen down the road.

3 comments:

Nerds said...

We are printing and spending money we don't have. Every second the U.S. spends close to $5,000. Thats a lot of money! We are below Canada's currency.

Nerds said...

Opps I meant to say every second the US spend close to $5,000 on the WAR!

Nerds said...

so in 10 seconds we have spent close to $50,000!