I feel some people need a lesson in currency floating and why it’s done. From the Roman’s diluting their coins with tin to floating the U.S. dollar.
Suppose we have a hypothetical country called ABC. On the island of ABC live 3 people. They start with gold as their unit of exchange. At the current time, the ABC country has 3 gold bars as their total bullion supply.
Over time, the citizens desire more luxury and more things. One day, citizen number 2 wants a house. Citizen number one knows how to build it. And he quotes 2 gold bars as his fee.
Now citizen number 2 only has one gold bar. But he wants the house bad. He can either:
- Give up the dream of the house
- Borrow a gold bar from citizen 3
- Borrow a gold bar from citizen 1
We know that most people want an opportunity cost or risk premium from buying. So citizen 2 will have to pay back one gold bar from either labor or something else. Obviously, this isn’t sustainable.
So citizen 3 comes up with a new idea…
Float the currency. They’ll use tin cans as the unit of currency with a fractional gold exchange rate. And the 3 citizens will agree on the exchange rate for gold each day.
Now the question fiat currency haters wonder is, why do countries always go fiat to eventually?
And now you have the answers. Most dreams, desires, and economic expansion require capital. And the people who loan this capital want a rate of return in line with the risk they take.
All economic expansion requires this. Like it or not.