The State’s Preference for Fiat Currency Systems

[Editor’s note: This article is a part of The Fraudulent and Ruinous Nature of Fiat Monetary Systems]

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The historical record unequivocally indicates that government management of national currencies has been consistently disastrous throughout various periods and locations. In essence, the history of government money management is marked by fraud and currency destruction through inflationary policies.

This was evident in cases of currency debasement during ancient times, such as with Roman emperors, and has persisted through medieval monarchs to the present fiat era of central banking and fractional reserve commercial banking. One common theme in the study of the history of state money management is that political power typically resorts to inflationary policies to facilitate government spending, leading to currency debasement, economic instability, and impoverishment.

Regardless of the reason, currency depreciation tends to become standard practice when the government gains control over money. Another significant observation when examining the history of government money management is the devastating outcome of hyperinflation, which destroys the currency and the economy.

These ruinous outcomes are solely caused by the state’s manipulation and debasement of the currency rather than market forces. There are no recorded cases of market-caused currency and economic destruction through hyperinflation. Market-based currencies have historically been sound forms of money, mainly silver- and gold-based currencies. Bitcoin represents a modern and digital-native form of market-based sound money.

Monetary inflation is a policy choice the state typically resorts to as an alternative to direct taxation, giving governments a source of funds to meet deficit spending objectives by printing money. As demonstrated earlier, this practice is unethical and fraudulent, with destabilizing and impoverishing consequences.

A monetary inflation policy devastates the economy as the money and credit supply is continually expanded artificially, and the currency is debased, gradually losing purchasing power—leading to price increases and economic instability. In other words, the power to create money is the power to destroy the currency, destabilize economic activity, and impoverish society. These are inescapable consequences of a monetary inflation policy.

For thousands of years, the issue of government currency debasement has persisted, a trend particularly more pronounced in fiat currency systems. The presence of a central bank invariably leads to currency debasement, as the essence of central banking is money creation to (directly or indirectly) facilitate government spending. This makes it unrealistic for a government to maintain a monetary system that does not facilitate money and credit creation. The drive for government overspending is insatiable, leading to a vicious and destructive cycle.

A government or central bank cannot sustain a policy of monetary inflation without undermining the currency’s trustworthiness, economic stability, and prosperity. A money and credit creation policy destabilizes and impoverishes economies, irrespective of their size, location, and ethnic makeup. Whether it is a small economy or an enormous one like the United States, the ruinous effects of monetary inflation will reverberate. Differently, but certainly.

As Friedrich Hayek (1988, 103) remarks in The Fatal Conceit:

Though an indispensable requirement for the functioning of an extensive order of cooperation of free people, money has almost from its first appearance been so shamelessly abused by governments that it has become the prime source of disturbance of all self-ordering processes in the extended order of human cooperation. The history of government management of money has, except for a few short happy periods, been one of incessant fraud and deception [emphasis added].

From Roman and other ancient rulers’ continued debasement of silver and gold coins, through medieval monarchs’ debasement of currencies, such as the Great Debasement (1544–1551) enacted in England under King Henry VIII, to John Law and the Mississippi Bubble causing hyperinflation in France, to the German hyperinflation after World War I, to contemporary cases in Brazil, Angola, Venezuela, Lebanon, and many others, the record is clear. The fundamental principle remains unchanged despite time, geography, and cultural differences. Namely, government overspending leads to currency debasement, which destabilizes economic activity and impoverishes society.

Politicians and state officials must recognize and not disregard the immutable fact that money and credit creation violate the universal moral principles of truth, justice, and nonaggression. When a government maintains a policy of monetary inflation, dismissing these ethical standards leads to fateful and ruinous consequences for society.

From the Song Dynasty in 10th century China to the United States government in 1971, fiat currencies have been established and maintained by state intervention. Governments create fiat currencies and enforce their use through laws and restrictions backed by the threat of state aggression. Fiat currency systems are based on the unethical practices of deception and coercion.

This highlights the fundamental difference between fiat currency, preferred by the state, and commodity money, such as gold and silver, and, more recently, digital commodity money, such as Bitcoin, preferred by the market. The state’s preferred monetary system is inherently unethical, fraudulent, and destructive.

In Money Demystified: Understanding Why, How, and What It Is, Tacanho (2024) further points out:

The state’s preferred form of money, characteristically a fiat currency, is imposed upon society and maintained as the primary or only official currency, not because people choose it but because government laws compel and confine them to this detrimental situation.

A free-enterprise approach to money production results in competing yet harmoniously co-existing currencies and other monetary products, thereby effectively solving debilitating issues such as rampant (monetary, asset, and price) inflation, economic distortions, exchange rate volatility, currency crises, and other ruinous issues that characterize contemporary statist economies. The free-enterprise approach benefits individuals, families, businesses, and society tremendously. It does not inherently empower or exclusively benefit the state, political, and other elites. This is fundamentally why governments have historically preferred to maintain a fiat monetary system, adopting a cartelized approach to monetary goods and services production, as this gives the state substantial power and repressive control.

Despite the unequivocal theoretical and empirical evidence showing the destructive effects of monetary inflation and fiat currency systems, central banks are engaged in this policy, and mainstream and other statist economists continue to justify fiat monetary practices, revealing the pseudoscientific nature of prevailing monetary theories and policies. A sound currency system is unlikely to be restored as long as statist thought dominates mainstream economics.

The destabilizing and destructive consequences of artificial money and credit creation are inescapable as such practices violate universal moral principles and economic laws. There will not be a scenario where a policy of monetary inflation does not result in currency depreciation, economic instability, and other detrimental issues.

The persistent choice of monetary inflation and fiat currency systems by governments is concerning when one considers that a primary justification for their existence and a source of legitimacy is that governments protect and serve the people. In the economic realm, the opposite is true. Upon examination of the evidence, it becomes clear that governments have consistently defrauded, dispossessed, destabilized, and devastated economies through currency debasement throughout history.

Since statism and statist economics will likely continue to dominate the world for the foreseeable future, a return to sound monetary systems remains improbable. Yet, a sound currency system is pressingly required in the African context. African policymakers are encouraged to prioritize African economic development and prosperity by shifting from Western economics to Africonomics.

Africonomics offers the nilar, an entirely sound monetary system designed to provide African economies with a much-needed stable and reliable currency. The benefits that African economies would gain from abandoning Western statist models, which have proven repressive and ruinous, and embracing Africonomics are immense and transformative. This shift can be the key to escaping the longstanding economic troubles that afflict them, ushering in a new reality of integrated, stable, and thriving African economies.