Rethinking Money Part 1: Our Money is Broken - Economic Monopoly

Government-issued fiat money is the cause of most of our problems today. In fact, it will eventually destroy political democracy.


There are lots of problems in our world and most of them have been around for a long time. In fact, they have been growing for generations–not unlike a slow cancer. A lot of fixes have been tried. Most of them don’t solve anything and virtually all of them cost huge amounts of money.

The reason we can’t seem to solve most of society’s really big problems is because we’re treating symptoms rather than addressing the underlying cause. And the cause of many of our largest problems is our money.

Our Money is Broken

Most of us don’t think about money–other than to wish we had more. But throughout history, ours has not been the only kind of money that people have used. Money is in fact a social contract. We all agree that money has certain features so it does. If we agreed on a different type of money, then money would be something else.

The kind of money we use was invented during the Roman Empire. It was specifically designed to increase the wealth and power of the ruling classes. It still does that to this day-and it does that very effectively.

The kind of money that we use is debt-based, government monopoly money. Every civilization that has ever used this type of money has undergone periodic economic collapses. There has never been one exception for the last 2,000 years. It’s been said that one definition of insanity is to do the same thing over and over and expect a different result. Unfortunately, that seems to be our attitude toward our money. We’re doing the same thing that’s been done for millennia and expecting a different result. It’s an absolute certainty that we have a big disappointment in our future if we don’t do something soon.

It's an absolute reality that the dollar will collapse whether we believe it or not. In the last 100 years since the creation of the Federal Reserve Bank, the US dollar has lost 98% of its value. So here’s a simple question: How long do you think it will be before it loses the other 2%? The collapse may not come today or tomorrow. It may not come this year or next year. But it will certainly come within the lifetimes of most people now living.

You want proof? Do the math. At 3% annual inflation, your money will lose 45% of its value in 20 years. That's right, 45%.

The Effects of Our Money

The kind of money we use causes problems for our economy and our society. To put it simply, our money:

Creates poverty.

Makes government bigger.

Gives advantages to big business.

Drives overconsumption.

Wastes resources.

Creates ecological disasters.

Economic Monopoly

Governments specifically ensure themselves a monopoly on the issuing of currency. This monopoly gives a government total control over the value of the nation’s money. The government then decides what its monetary policy will be.

It’s important at this point to stop and distinguish between monetary policy and fiscal policy. Monetary policy decides how much money the government will print. Fiscal policy decides how to spend the money once it’s printed.

To implement a monetary policy, government must give itself a monopoly over the nation’s currency. Government uses legal tender laws as its main tool for creating its currency monopoly.

Legal tender laws basically say that you must accept the “coin of the realm” whenever it is offered. That means that you cannot refuse to be paid in US dollars in a transaction. As a result, if there is a better currency than the one provided by the government, people will always pay with government money and hold the better currency. In this way, the use of other currencies disappears. Bad government money pushes out other, more stable currencies.

Legal tender laws are written precisely with the intent of pushing all other currencies out of use within a given country. Every national government forces its citizens to use its own currency regardless of whether or not that is the best currency to use. In this respect, government seeks its own interests, not that of its citizens.

The Birth of Economic Monopoly

The Constitution of the United States of America grants no power to the federal government to issue a currency. The America’s Founding Fathers knew well the monetary history of Europe’s monarchies. They saw that whenever they had monopoly control over a currency, all of Europe’s governments eventually inflated their money into oblivion.

In addition, the Founding Fathers watched the American colonies do the same thing. Every state that issued a currency eventually ended with hyperinflation. The same was true of the money issued by the Continental Congress. In order to pay the war debts, the Congress inflated the continental dollar until it was completely worthless.

As a result, the Founding Fathers decided that neither the US federal government nor the states would have the power to issue a legal tender currency. They knew that whenever a government has monopoly control over a currency, it eventually devalues the currency for its own gain. So they wanted to prevent the constitutional government from doing the same thing. To accomplish that, they put the US mints under the Department of Weights and Measures. This was so that the Department of Weights and Measures could determine how much gold or silver should be in a $1 coin. The government’s only place in the money creation process was to figure out how much gold or silver was required for a $1 coin and certify that the coins produced by the mint actually had that much gold or silver in them.

Anyone who owned gold or silver could bring it to the mint. It would then be refined and pressed into $1 coins. The coins were not owned or issued by the government. The owner of the gold or silver was the owner of the coins. The seals and insignias on the coins simply verified that the coins contained $1 worth of gold or silver. That was the only involvement the constitutional government could have in coinage.

For the first 70 years of US constitutional government, that pattern was followed. Private banks were freely able to issue their own currencies. These currencies competed on an open market. Because of the difficulties in that era of time, distance, and the burden of handling many different types of paper and metal currencies, the free currency market was much more limited and cumbersome than the digital markets that are possible now. However, for that entire time, government-issued currency was seen as neither necessary nor desirable.

It is true that in those days there were so-called “wildcat” banks that manipulated their currencies for their own benefit. This was not the result of free competition in currency. Instead, it was caused by government interference in free markets. The government passed a law that prohibited large banks from opening branches in small towns. The intent was to protect local banks. However, this protectionism backfired. Because local banks often had no competition, they got away with things that would have been impossible had there been an alternative bank for people to use.

The Reinterpretation of the Constitution

If the Constitution prevents the US government from issuing a currency, what happened to change that?

The answer is the Civil War. Economist E. C. Riegle explains it thus.

The Civil War emergency, however, induced Secretary of the Treasury Salmon P. Chase to recommend to Congress the issuance of United States notes, popularly called "greenbacks," and Congress obliged. This was the first [money] issued by the United States Government, and it was frankly recognized as unconstitutional. It was justified on the ground of national emergency by Chase, although later, as Chief Justice of the Supreme Court, he condemned it in a majority report as unconstitutional. By a still later decision, however, with Chase this time in dissent, the Court sanctioned the practice and thus read into the Constitution what the founders had deliberately voted to keep out. (Flight from Inflation, p. 41: E. C. Riegle, The Heather Foundation, Los Angeles, CA)

By reinterpreting the Constitution–essentially treating it as a “living document” rather than a set of guiding principles that preserve the rule of law–the political wonks of the late 19th and early 20th Centuries made it seem like the Constitution said the exact opposite of what it actually did say.

It is most notable that the person who wanted to issue a currency to see the nation through the emergency of the Civil War was adamantly opposed to allowing government the same power in peacetime. He knew as well as the Founding Fathers that such a power corrupts the government.

The Advent of the Federal Reserve and the Abolishment of Private Currencies

To facilitate the creation of a national currency, the US government also created a central banking system called the Federal Reserve on December 23, 1913. Over time, the Federal Reserve, often referred to as the Fed, has expanded its powers over nearly all aspects of economic life.

Private currencies issued by banks are called bank notes. Bank notes used to be common in the US and many other countries. The last bank notes in the US were withdrawn from circulation in 1957. It’s interesting to ask why bank notes are not used today. If they caused no damage to the economy from the adoption of the US Constitution to 1957, then why were they abandoned?

The answer of course is control. The creation of the Fed provided the government with the ability to consolidate its power over the economy in a way that was never possible before. But this can only be accomplished if there is no alternative for the citizenry. Therefore, it was necessary to have a complete governmental monopoly over currency in the United States to attain the degree of power the Fed offered. If the citizens of a country have access to a currency that does not inflate, they will cease to use a national currency that does. The reason for this is simple; they do not want the value of their paychecks and life’s savings to be diminished by inflation if they can avoid it.

The Fed issues money and controls the value of the US dollar. Under the Fed's control, the US dollar has lost 98% of its value over the last 100 years. That is because the Fed constantly inflates (devalues) our currency. To understand why, we must examine why government wants a monopoly on currency.

Governments Use Monetary Policy to Play Santa Claus

It is the nature of democratically-elected governments that elected officials must get votes. They do this by giving special interest groups what those groups ask for. The special interest groups, in turn, provide the votes of their members to the politicians that gave them “gifts” from the public coffers.

Over time, people begin to think of the money they receive from the government as a right. What people once saw as a great boon from a generous elected official is now taken for granted and demanded. When the next election rolls around, voters will not even consider a politician who does not support the handouts they are currently receiving..

The amount of money spent on government programs becomes larger because politicians have to create new “gifts” to give voters to encourage their votes. The previous gifts are long forgotten. Therefore, the number and variety of government handout programs increases. Noted economist F. A. Hayek observed:

If governments are to remain in office in the prevailing political order, they have no choice but to use their powers for the benefit of particular groups—and one strong interest is always to get additional money for extra expenditure. However harmful inflation is in general seen to be, there are always substantial groups of people, including some for whose support collectivist-inclined governments primarily look, which in the short run greatly gain by it. (Choice in Currency, F. A. Hayek, p. 42, Ludwig von Mises Institute).

What Hayek is saying is that politicians will always buy votes from the powerful special interest groups that can provide them. They will do this by spending public money on those special interest groups. Like junkies turning to crime to sustain their drug habits, politicians will sell out their country’s long-term interests in order to serve their own short-term interests. They will do this regardless of the long-term damage they do to the economic lives of their citizens. As long as they have the opportunity to give gifts to special interest groups, they will.

The money for all this gift giving must come from somewhere. The amount that the US government receives in taxes was long ago exceeded by the amount it spends on its programs. To cover the difference, it just prints money.

When the government prints more money than the market can handle, it devalues the money in your savings account. That value goes somewhere. And of course, that somewhere is right into the extra money printed by the government. Without decreasing the amount of money in your bank account, the government has stolen from you just as if it had robbed you at gunpoint. This process is summarized in the following illustration.

Once the government prints excess money, it can then spend the money on making payments on the loans it contracted in order to give money to special interest groups. The special interest groups–whether they be farmers, bankers, corporate executives, people on welfare, and so forth–get the big payoff. Or so they think.

Surprisingly, people getting government handouts actually think they are getting something for free. They do not seem to realize that in order for government to give them something, it has to take something away first. And it does. Politicians in the government take away the value of the money in our bank accounts, and then they pretend that they are handing us something for free. The reality is that we all pay for everything the government hands out. Inflation is universal. It is not selective. It does not discriminate. It does not give anyone a break. It has no mercy or compassion for those who are struggling. It hits everyone in the economy. No one can escape because of the government monopoly over money.

Governments Use Monetary Policy to Temporarily Suppress Unemployment

It is actually possible that overprinting money can temporarily help the economy. According to the well-known Phillips Curve, which is used by all economists, inflation can temporarily decrease unemployment.

While decreasing unemployment sounds good at first, it ignores the reason for the unemployment. In a functional free market, unemployment normally occurs when there is a change in the market. Specifically, if the market is producing too much of a product or service, the competition drives the price down. That means that some of the individuals or companies producing that product or service can’t make enough money to survive. The result is unemployment.

The solution to this problem is that individuals and companies should change to doing something else. If there are too many bakers, then some of the bakers should go get a job doing something else–cooking in a restaurant for example. If there are too many companies making hats, some of them should switch to making coats or whatever there is a demand for. This is how the free market solves the problem without government intervention.

Elected officials look bad if unemployment goes up while they are in office. They must fix the problem–at least until the next election. An easy solution is to print more money. This makes money less costly so more loans are made. Businesses invest in producing more of what they already produce. This makes unemployment go back down.

The problem here is that the market is already overproducing in that area. Generating cheap money means that the market will increase its overproduction. That is, if the market was producing too many hats already, printing more money means that even more hats get produced. For a while, people will buy the cheaper hats because more of them are working and have money to spend. The price has not gone up–yet.

Overprinting money means that eventually, inflation will occur. That is, the price of everything will go up. When it does, the supply in the market is even more out of whack with respect to the demand.

To continue the hat example, hats are now more overproduced than before. But inflation makes prices go up so people stop buying hats again. Even more people get laid off. The economic impact is worse than if the government had done nothing at all. However, politicians don’t see it that way. They panic and intervene once again. The whole cycle starts once more. This process is illustrated in the figure to the right.

If the government did not cause inflation, then the market would sort itself out. Yes, some hat makers would not be happy for a while. But the market would remain healthy, correct itself automatically, and employment would go up in other areas (such as making coats).

Overprinting money creates a permanent cycle of economic boom and bust that gets worse each time we go through it. The end result can only be complete economic collapse. It doesn’t happen immediately, but it does happen. It is unavoidable as long as government has a monopoly on currency.

Government “Fixes” Trade Imbalances

If a country’s goods and services are priced too high, other nations can’t afford them or won’t buy them. The result is a trade imbalance. Trade imbalances make the federal government look bad. Politicians think they can fix this, so they devalue their currency by printing too much of it. This means that everyone else’s currency buys more in your country. It is a way of forcing businesses to price their good lower to meet the needs of the government rather than the needs of the free market.

The result of such a policy is stagnation within the nation. Japan is a perfect example. These days, the Japanese speak of the “lost decade” and the “lost generation” that have resulted from the constant devaluation of their currency and the resulting economic slowdown.

The “lost decade” is the 1990’s. It’s now stretched into two decades of limited economic activity, limited growth, and limited opportunity for the young. It’s very common in Japan for people under 35 to be single, living with their parents, and working two part-time jobs. They have become the “lost generation” because they are not moving forward in life. They are also not reproducing, so there is another sense in which Japan has lost a generation–the generation that should have been born. Japan is on the verge of a population implosion that is directly traceable to the nation’s economic policies. Most specifically, it is directly traceable to its policy of long-term inflation. We are beginning to see the same thing occur in the West.

It is Impossible for Democracies to Survive a Governmental Currency Monopoly

All governments overprint money. Therefore, all nations are caught in the worsening boom-bust cycle. Eventually, all currencies will become worthless.

When this cycle iterates, the typical action for politicians is to blame the rich to obscure the fact that they themselves are the cause of the problem. They then pass laws that give the government more control over the economy so that they can be seen to be doing something and so they can get more power for themselves. This leads to dependency on the government, which in turn creates a centralization and solidification of their power base.

As centralized control of the economy increases, democracy perishes. No democracy can survive a centrally controlled economy because a centrally controlled economy leads to control over virtually every other aspect of life. In such an environment, political freedom cannot last.

There is no lasting political freedom where economic freedom does not exist. Economic freedom cannot endure if economic democracy does not exist. And an economic democracy requires that government cannot have a monopoly over the creation and governance of currency.

Where Do We Go from Here?

It is perfectly possible and legal for businesses, nonprofit groups, local governments such as cities and states, and even individuals to issue their own currencies. You just have to know how it can be done and why you would want to do it. We'll deal with these issues in the coming weeks in our blog posts.

At Cognisaya, LLC, we're creating software that makes this process secure, reliable, and safe. People can use the new digital forms of cash that our software creates in easy and intuitive ways. In fact, using our digital cash is no harder than using a credit card or writing a check.

As we go forward, we'll be posting blog entries that will explain how we can solve our economic and societal problems by rethinking our money and our economy. We'll show how proven techniques that are legally used right now can be widely applied to create a stable and prosperous economy where people are able to meet their own needs without handouts. We'll also show how this can be done without government regulation, government intervention, or redistributing people's hard-earned wealth.


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