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The usual justification for the use of fiat money is the power it gives to governments to smooth out and reduce occurrence of business cycles. Cycles, however, have as stubbornly remained with us since 1932, just as they have before. Stimulus spending proved ineffective in stemming most of the serious contractions, and when it did succeed — in the hands of Chairman Greenspan — in shortening one, the ultimate results was merely postponed and much magnified pain, as we are now witnessing.

In fact, the relationship between growth and inflation has been demonstrated to work only in one direction — that is excessive growth causing high inflation — and we have no experience that demonstrates inflation, particularly monetary (or devaluatory) inflation, engendering real-terms growth. On the contrary, the stagflation episode of the 1970s clearly proved the opposite. As further evidence, we have seen that monetary easing alone was ineffective in reversing severe stagnation in Japan, now well over twenty years old.

A more plausible explanation for the cult of fiat money and the cries for ever-increasing easing — not to mention the dismissive opprobrium heaped upon its few academic detractors — serves mostly to offer a free ride to profligate governments, among whose number, in such stellar company as Greece and Argentina, most prominent today is the United States. The very history of the piecemeal abandonment of the gold standard in the 1930s and the 1970s indicates that both British and American central banks feared redemption mostly because they had been secretly debasing currency and so were unable to meet their promised obligations. It is a sad fact that at no time in history did currency debasement — when used to solve short-term liquidity shortfalls — produce the sought-for outcomes. Instead, the governments who tried it — from certain Roman emperors for instance, to those of Byzantium, and those of China — have all seen their regimes crumble to the tune of far more pain and dislocation caused by opportunistic uprisings, secessions, and invasions than would have been the case if they abstained from this disastrous course of action.