Zimbabwe created a gold-backed currency in an effort to shore up its financial system. Just six months later, the government has already devalued the currency. It goes to show that the problem isn't the money - it's the government that issues it.
In this episode of the Money Metals Midweek Memo, host Mike Maharrey explains why government fiat currencies aren't worth the paper they're printed on, why governments constantly devalue their currencies, and how to protect yourself from the pernicious effects.
Mike opens the show remembering a few years back when Venezuelans were using bank notes as napkins.
"You might say the bolivar wasn’t worth the paper it was printed on.
"Could the same thing happen to the dollar? It’s not as likely as some might think, but it’s also not out of the realm of possibility.
"And it will always be a possibility with a fiat currency."
Mike goes on to explain what a fiat currency is and reviews several poignant warnings about paper money by the founding fathers.
"But nobody heeded these warnings and that brings us to today’s reality. We are buried under a deluge of paper, to borrow a phrase from Jefferson. While America might be the most powerful country on the planet, its money is nothing but smoke and mirrors."
Mike recalls a poll from 2019 that revealed most people have no idea what backs the U.S. dollar. Almost a third of the people surveyed thought it was still backed by gold. Meanwhile, 30 of those polled answered that the dollar is backed by the U.S. government. While technically correct, that’s a distinction without a difference. When you strip away the semantics, this still means it’s not backed by anything.
"No wonder it’s such a struggle to explain price inflation to the average person in even a rudimentary way. And no wonder so many people think prices keep going up because of corporate greed, or Putin’s price hikes, or because of viruses. No. It’s the money printing, stupid!"
Mike dives into a short overview of U.S. monetary history and explains how FDR and Richard Nixon took the dollar off the gold standard.
Why did they do it?
"Gold or silver-backed money poses problems for governments, they cannot easily inflate the money supply. There always has to be a sufficient amount of metal to back the currency in circulation. But governments and central banks can print fiat currencies at will. In a nutshell, fiat currencies allow governments to create money out of thin air to fund their vast expenditures. The warfare and welfare state in America would be impossible without the fiat currency and the central bank facilitating debt monetization."
Mike then pivots to a comment economist Paul Krugman made a few years ago, disparaging cryptocurrency because they "aren't tethered to anything."
Krugman went on to explain that fiat currency always has value because the government requires it to pay taxes. With the help of economist Bob Murphy, Mike shows that this is nonsense.
"The 'lack of tethering' argument Krugman makes against crypto applies equally to fiat dollars. Despite men with guns, the dollar’s value can still decline to virtually zero. Again, we just have to look at countries like Venezuela and Zimbabwe and their bouts of hyperinflation to see this truth. Government backing does not guarantee value."
Mike then uses recent developments in Zimababwe's experiment with a gold-backed currency to drive home the point that even a currency backed by gold isn't immune from government meddling.
"In April, Zimbabwe introduced a gold-backed currency in an effort to stabilize the country’s financial system. Less than six months later, the Reserve Bank of Zimbabwe has already devalued the new money."
Mike notes that this is the sixth government attempt to "fix" Zimbabwe's money since 2009.
"Maybe the currency isn’t really the problem, eh?"
Mike sums it up.
"Merely pegging a currency won’t do the trick if the government can’t resist the temptation to arbitrarily change the peg. A gold standard only works when government officials leave it alone. As I’ve already mentioned, Americans learned this lesson in the 1930s -- governments can and will quickly unravel a gold standard when it suits their purposes.
"So, a gold standard is only as good as the government’s commitment to maintain it. But since governments have a vested interest in inflating the money supply to sustain borrowing and spending, the government’s commitment will never be worth – well – a dollar!"
How can we minimize the impact of government monetary malfeasance on our own lives?
"You want to have real money – gold and silver. And I mean in physical form. Not paper that some government people say is backed by gold. Maybe it is. Maybe it isn’t. But don’t settle for anything other than the real thing."
That leads to a call to action - talk to a Money Metals precious metals specialist today. Call 800-800-1865.
About the Author
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
