Paper Money Is Political Money

Populist blogger John Mauldin writes,

The euro never was an economic currency. It is a political currency, and for it to remain a currency or at some point in the future become an economic currency, it will take massive political resolve on the part of the members of the EU.

Unless the US dollar operates on a genuine gold standard or a monetary system based on free banking, then this statement or implied comparison or categorization is patently false.

Although to give credit to Mr. Mauldin for admitting that he has been a “Euro skeptic”, his opinions has apparently been shaped by biases rather than from facts.

So why is the above statement false? Because paper money has always been political money.

ALL paper money, whether the US dollar, Euro, the Yen, the Yuan or the Peso, operates on a platform which is not determined by the market forces but by the judgments of unelected bureaucracy whom are appointed by their respective governments.

Thus, from the organizational structure to the operating “technical” procedures to the underlying incentives of the bureaucracy in conducting administration of these instituted statutes or policies, which are all outside the profit and loss dimensions and whose operations are underwritten by taxpayers, all these represent the political nature of the system.

Importantly, the paper money system is founded from legal tender laws, which according to Wikipedia.org, is “a medium of payment allowed by law or recognized by a legal system to be valid for meeting a financial obligation”.

In other words, a monetary system imposed by the government (by fiat or decree), which has largely been operated by central banks, has always been political.

Yet to speak of an “economic currency” extrapolates to a market based currency from which the legal tender-paper money system is not required.

According to the great Friedrich August von Hayek,

We owe it to governments that within given national territories today in general only one kind of money is universally accepted. But whether this is desirable, or whether people could not, if they understood the advantage, get a much better kind of money without all the to-do about legal tender, is an open question. Moreover, a "legal means of payment" (gesetzliches Zahlungsmittel) need not be specifically designated by a law. It is sufficient if the law enables the judge to decide in what sort of money a particular debt can be discharged.”

Thus, to besmirch a currency without the appropriate consideration of the overall framework of the system would seem misguided if not a flimflam.

Caveat Emptor.