City AM: Elastic money is folly

From an interview with City AM:

I’m absolutely convinced that this system will collapse. Nobody can say when we will reach the endpoint, but I think in the next two to five years some big things will happen. That is a judgement call and needs to be distinguished from the fact that fully elastic fiat money is – on a conceptual level – suboptimal, inherently unstable and ultimately unsustainable.

Historically all paper money systems have collapsed. For 900 years they all ended in failure. There is either a voluntary return to commodity money, apolitical money that is not under government control (Britain in 1821, the US in 1879, the Ming dynasty in the fifteenth century), or you keep printing and ultimately suffer inflationary breakdown (US continentals in 1781, French assignats in 1803, German reichsmarks in 1923, and many others).

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  • Paul Marks says:

    Sir I actually hope the collapse is quicker than “two to five years”.

    I know I sound like a monster – but to have this mess drag on and on will do great harm, so better to have it end quickly. Even though, yes, the end will be terrible.

    If the mess drags on and on…..

    Then, for example, a new “free market” American Administration (which may be elected in November 2012) will get the blame.

    And the longer the mess drags on in Britian – the more the “free market” British government (we all know it is not free market at all – but it is presented as such by the media and the education system) will be blamed for the collapse.

    The collapse can not be avoided (perhaps it can be avoided in strict theory – but it can not be avoided in terms of the political reality of what actually will be done) so better that it the end comes quickely – so that Marxists (and others) can not blame “capitalism” (or at least have less of a foundation for blaming “capitalism”) for the collapse.

    Let people such as Barack Obama take the blame for the collapse of policies of “monetary and fiscal stimulus”.

    After all, whilst Karl Marx himself mocked such policies (long before Keynes was even born – see Hunter Lewis “Where Keynes Went Wrong”), Marxists since the Italian P. Straffa have endorsed them.

    So they deserve to go down with them.

  • joebhed says:

    1. ALL non-existent money systems have ‘collapsed’, MOL by definition. Thereby, all ‘paper’ fiat money systems have collapsed.

    2. This present system, that which IS indeed “suboptimal, inherently unstable and ultimately unsustainable.” is such NOT by its fiat nature, but by its “debt-based”, fractionally-reserved origin. It is the debt-based money systems that are very soon a-crashing down.

    3. The breakdown of both the Assignat and the Continental were primarily due to “counterfeiting” of the currency, and not their ‘fiat nature.

    4. The German Reichsmark hyper-inflation was by a private bank and private printing presses, any governmental authority having been removed by the Versailles Treaty implementers.

    Modern fiat money systems have served to elucidate a welcome degree of comfort, if not largesse, in our standard of living. Were it not for their failed design of being debt-based, we would not be facing our present economic, financial and monetary debacle.

    What is needed is a new debt-free-at-issuance monetary system. Yes, with fiat money.

    • Robert Sadler says:

      What is needed is money production returned to the market. Ethical money production cannot be practiced by the Government.

      Fiat currency is merely a way for governments to secretly expropriate resources from the population to itself. It will result in ruin for the population and the government.

  • Gary says:


    who issues this debt free money and can they be trusted ?

    The only thing gold does is a) take the creation of money out of any one entity’s hands, and
    b) ensures that you cannot inflate it.

    those are two BIG victories.

  • waramess says:

    @joebhed Surely paper based money is the cause of this leveraged debt based economy, without which you would be unable to operate a fractional reserve system. It’s collapse will lead to a more sustainable matching of savers with borrowers.

    Paper is the root cause of this collapse and not fractional reserve banking.

    The prospect of having a politically controlled fiat system, without there existing the temptation of ultimately operating a fractional reserve system sounds a bit like trusting hungry mice to look after the cheese store.

    • Robert Sadler says:


      I was not quite clear on your point. Fractional Reserve Banks, in the absence of fiat currency and central banks would issue paper money (i.e. banknotes). When these banks start to fail (as a result of the recession they cause) between them and in collusion with the Gov’t, they will institute a central bank.

      When the central bank fractional reserve system starts to fail, the government will institute a fiat currency system.

      When the fiat currency system fails… as Mr Schlichter says we will find out in two to five years what happens next.

      I would argue that the root cause of this collapse is FRB.

  • chuck martel says:

    If fiat money actually makes sense, why do central banks buy and own gold? Why did the US suspend dollar for gold redemption if the gold standard was a “barbaric relic”? Wouldn’t it be more logical to just ignore and forget gold as a repository of value if fiat money served that function more effectively? But we don’t see people pitching sovereigns in fountains or using maple leafs to steady wobbly table legs, do we?

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