The Morality of Fiat Currency

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It was a balmy crisp California winter night when the unthinkable happened. A major 9.5 earthquake, the predicted big one, hit California. Buildings swayed and ever shop in the state saw its inventory crash to the floor. The sparkling pools in the Hollywood hills had its pool water slushed around to and fro like in a glass of water being shaken. Many feared the worst of an apocalyptic disaster movie was unfolding in real life.

After a few strong aftershocks, people began to emerge from their hiding places to assess the damage. Oddly enough, no one was killed. The property damage was limited. Sure there was extensive clean up to be done, but for the most part, California escaped the disaster. However, in the morning after the night’s earthquake, people started to notice something extraordinary, off the Santa Monica beach.

It looked like a mirage of a paradise island. One could see snow-capped mountains and rolling hills. It was the outline of a new land. Since it was only about 40 miles away, a few private planes set off to explore what this was. Photos started to appear in the news of this mirage – it was real. It was an island, at nearly a quarter the size of California itself. It apparently rose up out of a deep ocean crevasse during the previous day’s earthquake. 

Still dripping a bit from the retreating waters, the island appeared intact and beautiful. It had picturesque sandy beaches, mountains fit for the best skiers, rolling hills with majestic vistas, extensive lands for agriculture, gleaming lakes, and bubbly rivers that looked like wild nature had already begun to populate. There were no humans on the island – it did just rise out of the sea after all. The climate was a perfect southern California climate. The U.S. government quickly began to secure its sovereignty as part of America. No other country really disputed this claim due to its proximity to the U.S. mainland. New California was born.

It didn’t take long before politicians wanted to make it the 51st state, though California wanted to make it an extension of its own state – they need the money. Business, real estate developers, and bankers began to postulate how America could exploit New California for-profit; after all, America is a capitalist country. Financial analysts began to postulate its value. They came up with estimates of about $5 trillion, looking at all the possibilities for new cities, hotels on the beach, beautiful homes in the hills, ski resorts, and agricultural exploitation. Still, others wanted to keep its pristine nature and make it a national park. America’s windfall of $5 trillion just poofed into existence. Wow! 

But hold on for a minute. This brings us to an imperative political and moral issue for America: just who owns New California anyway?

Does not New California belong to the American people? Heated debates erupted, even protests on what to do with New California. In the end, it was decided that no one really owned New California; it just poofed into existence. At the same time, the powers to be decided that, though preserving some areas like national parks, yes, it should be exploited. But how? And how best to do it equitably? A national referendum was envisioned, and here were the three choices on the ballot:

  1. Deed the land to individuals, based upon their current wealth. Since the wealthy in America have shown in the past that they know best on how to exploit resources, we should give them the land. Hence, the “1%” will get 50% of the land. The next “10% will get an additional 20%, and the upper-middle-class will get most of the rest (you already know the wealth curve in America). The poor who had no wealth will get virtually none. They were the unproductive of society anyway. 
  2. The Government will auction off to the highest bidder each parcel of land. The proceeds of this auction would then go into the national treasury for general-purpose spending. To bid, one would need a certain amount of means to even participate in the auction. More wealthy bidders could easily crowd out those who have no money – giving them the advantage in the bidding process. Most financial analysts indicated that this would only allow the top “10%” of society to effectively participate in the auction.
  3. Divide up the land into equal parts and deed one parcel of land to each American citizen. Assuming one could divide the land in parcels of equal land value, each citizen could sell, lease, or keep their parcel of land, in accordance with their individual choice.

For sure, there would some tactical issues and variations to each plan choice, but lets for the moment assume that all three basic choices would be possible to do. Which choice in the referendum would you choose? Maybe you would have preferred a modern-day Oklahoma land rush – let the people stampede for New California. Is one choice more moral than the other?

Yes, this may be an amusing fictional story and most likely will never happen. But is this story or the principles any less valid today? Today public and private debts are around $50 trillion. Remember, debt is money. Add in other debts (states, municipalities, SDRs, and a host of other debt instruments for example) and the actual monetary supply, total money is very roughly around $80 trillion in the U.S. It would be difficult to determine but close enough for our purposes and conservatively speaking, this total money is growing at least by 5 to 10% a year (example). Again, using very rough calculations, this means about $5 trillion “poofs” into existence almost every year – though crises seem to make this vary widely from year to year (for example, COVID19 stimulus programs). 

The $5 trillion “poofs” in existence through the magic of a fiat currency system and fractional reserve lending. Oddly enough, this is about one New California every year. One may say, monetary expansion via new debt creates jobs – in other words, it can create these New Californias. Perhaps partially, but the lion share of debt today is to cover budget overruns of government, stock buy-backs, and other financialization of markets – a lesser portion actually goes into job-creating assets. Of note as well, whether New California exists before or after new money is created, does it really matter? 

Let’s get back to the issue of ownership of assets created via fractional reserve lending, offered by our current fiat currency systems. Who owns the monetary system anyway? The citizens, should they not? Central banks should be mere administrators of that system. Go back to the New California referendum cited in our story above. Today, the choice we have used to expand our monetary system is choice one; Deed the land (assets) to individuals, based upon their current wealth – i.e., the rich can borrow, the poor mostly can not. One could envision other ways – such as choice two – auction off the “license” to expand total money (current rates paid today do not do this). Or even choice three. The latter choices (choices 2 and 3) would dramatically change the ownership structure of assets – flattening the wealth inequality curve. 

Under a fixed monetary system, none of these choices would be possible. Economies (GDP) could still grow with a fixed monetary system – they have in the past. A fixed or non-fixed monetary system could work. However, in a non-fixed monetary system, how one grows the total money can favor one group (rich) over another (poor). It can be a distortion in the free market if not done honorably. In a non-fixed monetary system, which choices should we make? The rules of the game do matter.

We have seen over the past few months, America experience horrific protests and riots seemingly over race. Many people believe that it is more about class struggles – the elites preferring to make it about race rather than class, in order to mask their own positions. The financial, moral injustices and inequalities are at the core of many of these struggles. One can understand that the thoughts here could be controversial. But, is the monetary system at the core of many of these moral injustices and inequalities?

 RWR original article syndication source.