Lately there are more and more alarming articles about the fall of the dollar and the fiat monetary system in general, and how the problem could be solved by a gold standard or a cryptocurrency like bitcoin. But is it true?
It is generally accepted that the problem with fiat is that it has no value. So let's start with that. In simple terms, the U.S. Congress issues debt in exchange for the Federal Reserve Notes. Critics insist that the Federal Reserve Notes are created out of thin air. In reality, the U.S. Treasury Bills are converted into the Federal Reserve Notes that are used as money. Since the Fed Notes indirectly represent the U.S. debt, they are backed by the full faith and credit of the United States.
It all sounds great, but many would point out that this is only true in theory, and in reality we are on the verge of a monetary collapse. This is why many profess gold backed money, while the cryptocurrency enthusiasts insist that their digital gold is even better. Yet the value of these assets is not constant since their value is mostly speculative, because scarcity is not of value in itself.
“It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” - Warren Buffett
What is needed is a security, rather than a scarce commodity like gold or a property like bitcoin. A security that can maintain its value independently of the fractional-reserve monetary system and the economy. A security that is tied to a value that remains stable in terms of goods and services. Clearly, it is the value of work needed to produce these goods and services. Such a security is debt.
“Goods are wealth which you have, while money is a claim on wealth which you do not have. Thus goods are an asset; money is a debt.” - Carroll Quigley
But that is where we started. The debt based money is the problem we have now, unless something else is the problem, and if we don’t fix it then switching to a different type of money by itself will not help.
If money were issued as debt to the productive economy there would be no such problems. But asking the financial sector to get out of the business of money is a nonstarter. The solution to this dilemma is currency that is verifiably tied to the underlying productive debt. To issue such a currency would require an independent monetary system comprising a set of institutions by which money is maintained in an economy, including a bank, a currency exchange, and a dispute resolution system.