Fiat Money in History

Fiat money gradually poisons any economy it invades. The corruption of money always begins the complete corruption of a nation.


I have collected examples of paper money from previous inflations. Andrew Dixon White’s wonderful little book, Fiat Money: Inflation in France, recounts the inflation during the French Revolution. The French revolutionary government seized all of the church lands. They needed money, so they decided to sell all of the church land. But someone said that if you sell it all at one time you will flood the market and drive down the price of real estate. So, all the real estate brokers in the National Assembly said, "No, we will issue these notes as a liquid mortgage on that 'national domain'—all of the lands seized from the church." To make a long story short, the assignat destroyed the wealth of a nation, and ends with Napoleon. Fiat money inflation’s usually end in a dictatorship. The middle class in France was ruined. They even passed the infamous Law of the Maximums, which decreed the death penalty for anyone who asked for payment in gold or silver.


Before the French Revolutionary inflation we had our own inflation in the United States. The Continental Congress had the power to issue its own money, but unfortunately (or fortunately, depending upon your viewpoint), congress did not have the power to tax. Rather, they just kept issuing these bills of Continental Currency. until they finally sank into worthlessness. The people who trusted the promise of this paper money were ruined.


When the War Between the States started, both the north and the South decided to finance with inflation. In the north they passed the Green Back Act in 1862, and in 1863, to ensure a market for government bonds, the National Banking Act. In the South a lot of expedients were tried. Notice the Arkansas treasury warrant because you are liable to see something like this again.

What is a treasury warrant? A promise by the treasury to pay you . . . sometime. The warrant reads, "The state of Arkansas will pay to the bearer $5.00 to be paid in the order of their number." Inflationary notes often offer interest to help them circulate. It was interesting that in August the Federal Reserve Spokesman Clyde Farnsworth said, "Don’t worry. The Fed is printing up lots more money. There will be plenty of currency." He also said, "I think that consumers are smart, and they will leave their money in the bank because if they don’t, they will be losing their interest." You remember, that’s the three dollars a year we talked about elsewhere. That trick is so old it is on the face of this 1862 note. By the way, this note has never been paid. Whoever the first sucker was, they still owe him the money.


Here is a German note dated 1910. This is a thousand mark note. In 1910, Germany had the soundest, most scientific monetary system in all of Europe. In 1907, when a commission was sent by the United States Congress to study European banking systems and methods, what country’s model do you suppose they adopted? Germany’s. It enjoyed the strongest economy in Europe, without doubt. It was the most advanced. It was the most industrialized.

This note traded against the gold dollar at 4.20 gold marks to one gold dollar (a mark was worth 23 cents in gold dollars.) This was a $420 bill, so to speak, the largest note that German banks issued.

When WWI started the German government decided they would finance by inflation. And there was a terrible inflation during the war, about 800%, but that was nothing to the inflation that came after the war. Then German authorities began to inflate and the faster they issued currency, the faster they had to issue currency because everyone expected the currency to go down (Andrew Dixon White’s Law of Accelerating Issue and Depreciation). Factory workers were paid twice a day and would rush out to the gate and give the money to their wives so the wives could rush out to the market and buy something, anything, before the value of the currency sank to nothing.

I could show you many more notes as the inflation progressed. They started with big notes, they went to little notes to save paper, they started printing them only on one side, the notes got littler, finally they were depreciating so fast they just took old notes and began overprinting. One thousand mark note pictured was overprinted "Eine milliard," one billion. In November 1923, when the end came, the exchange rate of the Reichsmark to the dollar was pegged at 4.20 trillion marks to the dollar, one trillion time the gold exchange rate.

During the height of the inflation, an Englishman went into a bank in Berlin. He threw a sovereign (0.2354 troy ounce of fine gold) on the counter and said "I want to exchange that for marks." The clerk reached around for his coat, pulled it off the hook, and yelled "Come on boys, let’s go home. This Englishman just bought the bank." Although the German stock exchange rose hugely during the inflation, it didn’t keep pace with the mark’s loss of purchasing power. Municipal and federal bonds became worthless.

What happened to the middle class in Germany? Germany had the most developed economy and the most scientific monetary system in Europe. People in Germany invested in mortgages, government bonds, stocks, municipal bonds, and they knew those would be good. They were wiped out. The entire middle class was wiped out. Stock market investors, even though the stock market rose and rose, were practically wiped out. Resentment and bitterness over that loss that paved the way for Adolf Hitler, just as the assignat paved the way for Napoleon, and the Chinese Nationalist inflation paved the way for Mao Tse Tung, etc., etc..


Speaking of Napoleon and Hitler, we come to our own Great Depression and New Deal. In this country during the cities and states and counties issued warrants. This one warrants that the treasurer sometime will pay $5.00 for salary. Remember the 1862 warrant from Arkansas? One of my aunts was a teacher in Arkansas during the Depression and she got paid with these. You probably know people who did, too. Counties and states paid with these warrants because they had no money. You had to take them to someone who had money and he would discount them. For a $5.00 warrant he might pay $4.00.

The money in the United States used to be backed by gold and silver. The best way to prove this is to look at this photocopy of five $10.00 bills. They all look alike until you look closely at them. The first one says, "Federal Reserve Note (a note is what you give to someone if you owe them something) Redeemable in Gold on Demand at the United States Treasury or in Gold or Lawful Money at Any Federal Reserve Bank." It’s dated 1928. The same bill from 1934 has a much smaller legend. It’s harder to read, and says "This Note is Legal Tender for All Debts Public and Private and is Redeemable in Lawful Money at Any Federal Reserve Bank." No gold. We will not give you gold any more. About 1950 they made this legend smaller still, and in 1963 they changed it to read "This Note is Legal Tender for all Debts Public and Private." Notice that on the bottom of the bill where it used to say "Will pay to the bearer Ten Dollars", they took that off. The change is very, very subtle. There is also a silver certificate on here and you will notice that it says, "This certifies that there is on deposit in the Treasury of the United States $1.00 in silver."

It always works this way. History doesn’t show any exceptions. The more things change, the more they stay the same.