March 26, 2007 – For several years there has been an ongoing effort in New Hampshire to re-establish sound money within the state. See for example the legislation proposed a few years ago enabling citizens to require the state to use gold or silver in transactions with them: www.goldmoneybill.org.
This legislation has been bogged down in the Commerce Committee, so several sound money proponents within the New Hampshire House of Representatives have mounted an effort to block the logjam Recently, they have introduced to the House a new bill that will appoint a commission to study the effects of fiat currency.
This bill is presently in the House Commerce Committee for review and public discussion, and I was invited to speak on behalf of the bill. Given my keen interest in sound money as well as my unrelenting, vocal opposition to fiat currency, it was with great pleasure that I went to the State Building in Concord last week to testify before the Commerce Committee.
After providing a brief summary of my background and work experience, I presented a copy of the book that I co-authored with John Rubino, The Coming Collapse of the Dollar. I explained to the Committee that this book analyzes the problems and dangers of fiat currency, that these are real risks, and most importantly, fiat currency threatens the well-being of New Hampshire citizens.
Here’s what I presented to the Committee. Though the personal income data is only for New Hampshire, my conclusion nevertheless applies throughout the fifty states.
Fiat currency is loaded with problems and dangers that unfortunately are not widely recognized or well understood. Thus, I wholeheartedly recommend that the Honorable Members of the Commerce Committee act in favor of HB 853 in order to establish without delay a commission to study the effect of fiat currency on the wealth of New Hampshire citizens.
The US dollar became fiat currency in August 1971 when its formal link to gold was broken, thereby ending the monetary system that had prevailed in this country for 180 years. As a consequence, this act put the dollar on an entirely new course.
There have been hundreds of experiments with fiat currency throughout history, and invariably, they all end badly. The reason is simple – there is no discipline on the process of creating fiat currency. The currency is therefore always issued in excess, which erodes the purchasing power of the currency through an insidious process we call inflation, and I use the word insidious purposefully. Not one person in a thousand recognizes inflation’s pernicious effects.
Fiat currency is a scourge. It is harmful. But fiat currency not only erodes the purchasing power of the currency. To address the point of the legislation now before you, it also erodes the wealth of the citizenry that uses it. As the first step to explain this point, I would like to use the following chart.
This chart presents a base 100 analysis of crude oil prices in terms of dollars and grams of gold (goldgrams). In other words, to establish the comparison depicted in this chart, it is assumed in this analysis that one barrel of crude oil equals $100 and 100 goldgrams as of December 1945. The month-end price is calculated afterward based on the actual dollar price of crude oil and the prevailing dollar-to-goldgram rate of exchange.
The period prior to 1971, when the dollar was still defined as a weight of gold, is labeled on the chart as “Constitutional sound money” as the monetary system was in harmony with the original intent of the framers of that foundational document. After the dollar became fiat currency in 1971, its direct and formal link to gold was broken, and the dollar no longer met the constitutional requirements of Article I, Sections 8 & 10.
We can see that the price of crude oil in constitutional gold-based dollars remains essentially unchanged throughout the 62-year period depicted by this chart. However, the price of crude oil has risen dramatically since 1971, which is the direct result of the inflationary debasement of the fiat currency dollar. I would like to use this inflationary increase to explain why fiat currency has a detrimental effect on the wealth of New Hampshire citizens.
The following table presents the per capita personal income of New Hampshire citizens in 1945, 1971, which as noted is the year that the dollar became fiat currency, and 2006. This data is from the Bureau of Economic Analysis of the US Department of Commerce.
|Per capita personal income||$1,111||$4,098||$39,218|
|Average growth rate p.a.||5.1%||6.7%|
|Crude Oil (price per barrel)||$3.56||$62.03|
|Average growth rate p.a.||8.5%|
We can see from the above table that from 1945 to 1971, per capita personal income grew a healthy 5.1% per annum on average. Also, we can see from the above chart that during this period the price of crude oil remained essentially unchanged. We can therefore conclude that New Hampshire citizens were prospering during this period because per capita personal income grew while energy costs did not. Now compare this result to that of the subsequent fiat currency period.
From 1971 to 2006, per capita income grew even more rapidly than the previous period, at 6.7% per annum. However, one has to consider the impact of rising energy costs during this period of fiat currency. We can see from the above table that a barrel of crude oil rose from $3.56 to $62.03, which is an 8.5% average annual increase. Thus, since 1971 the cost of energy has become an increasing burden to the citizens of New Hampshire because its cost has grown more rapidly than the growth of per capita income.
Many citizens of New Hampshire today struggle trying to make ends meet, unable to understand why they are working harder but unable to keep their head above water, let alone accumulate wealth. The reason for their predicament is the insidious effects of fiat currency. Ever since 1971, even though New Hampshire citizens have been making more dollars, they are actually becoming less wealthy and are not as well off. They have been unable to match the wealth accumulation their parents and grandparents enjoyed up until 1971 because citizens today are suffering the consequences of fiat currency.
I mentioned previously that every experiment with fiat currency throughout history has ended badly. The American experience today will end like America’s previous experiment with fiat currency – the continental. Their disastrous experience with the continental was one of the reasons the framers of the Constitution aimed to create a more perfect union. In 1971 we abandoned their wisdom, and the citizens of New Hampshire are suffering the consequences of the fiat dollar just as the framers suffered the consequences of the fiat continental. It need not be this way.
The Honorable Members of this committee have the opportunity to move forward HB 853, and help make possible its swift passage into law. I wholeheartedly recommend that you do so. It will be an important step leading to a thorough and hopefully widespread understanding of the pernicious effects of fiat currency on the citizens of New Hampshire. Thank you again for this opportunity to present here today.