This is part of the series on Cultural Consequences of fiat – as laid out by Guido Hulsmann in chapter 13 of his book, The Ethics of Money Production. One consequence of fiat money and inflation, is the comparatively easier issue of credit to individuals. Have you ever wondered why society seems so obsessed with debt? Have you ever noticed people being obsessed with getting the newest thing now, even at considerably high cost? At an underlying level, this is being driven by easier availability of credit in a government controlled fiat money and central banking system.
In the truly free market, the interest rate reflects time preference of individuals and the availability of credit is limited by the level of real savings, which is driven by foregone consumption. In the government manipulated market, the interest rate is influenced by central banks, and given the nature of the fractional reserve and fiat banking system (and associated architecture, such as legal tender laws, bank bailout guarantees) – no such foregone consumption is required. One net effect of fiat money is credit expansion, or increase in the money supply. This leads to easier availability of credit, even where there is no commensurate foregoing of consumption.
Once you combine this easy credit with another consequence of inflation, the constantly rising price level – it becomes nearly irresistible. These conditions act to impose penalties on cash savings. Now while it’s true that gold’s return is ‘barren’, at least its purchasing power does not rapidly decrease over time. So in this way, it was better and more conducive for the average person to save:
“Carpenters, masons, tailors, and farmers are usually not very astute observers of the international capital markets. Putting some gold coins under their mattress or into a safe deposit box saved them many sleepless nights, and it made them independent of financial intermediaries.”
Guido points out that this state of affairs is more beneficial to some than others:
“It is clear that this state of affairs is very beneficial for those who derive their living from the financial markets. Stockbrokers, bond dealers, banks, mortgage corporations, and other “players” have reason to be thankful for the constant decline of money’s purchasing power under fiat inflation. But is this state of affairs also beneficial for the average citizen? In a certain sense, his debts and increased investment in the financial markets is beneficial for him, given our present inflationary regime. When the increase of the price level is perennial, personal debt is for him the best available strategy. But this means of course that without government intervention into the monetary system other strategies would be superior”
Ultimately, this system creates more people who are financially dependent – with very negative consequences:
“The net effect of the recent surge in household debt is therefore to throw entire populations into financial dependency. The moral implications are clear. Towering debts are incompatible with financial self-reliance and thus they tend to weaken self-reliance also in all other spheres. The debt-ridden individual eventually adopts the habit of turning to others for help, rather than maturing into an economic and moral anchor of his family, and of his wider community. Wishful thinking and submissiveness replace soberness and independent judgment. And what about the many cases in which families can no longer shoulder the debt load? Then the result is either despair or, alternatively, scorn for all standards of financial sanity”
If you really want to help people, realise that agitating for a welfare state is targeting the symptom, not the cause.