from The Burning Platform:
Debt represents moral issues that transcend its economic role. The heart of debt is a promise: to pay the agreed upon interest and repay the principle at an agreed upon date in the future. The name of one class of debt—bonds— carries an unmistakable moral connotation: one’s word is one’s bond. Creditors must assess character—the willingness to repay—before they evaluate borrowers’ incomes, assets, and future prospects—the ability to repay. That formulation looks quaintly anachronistic, which tells you all you need to know about contemporary morality. As debt has become the centerpiece of global economics, so too has it become emblematic of global ethics, or more properly, their absence.
In 1913, a perceptive few recognized the political and economic dimensions of the new income tax and central banking legislation; fewer still recognized the philosophical and moral implications.
Under a real money standard (money defined as: a medium of exchange, a store of value, and a unit of account, with intrinsic value, and not a liability of an individual or entity, e.g., a gold standard), the creation of debt hinges on the supply of real money and its value relative to goods and services. So limited, most debt will be incurred for productive uses that have a prospective return greater than the cost of debt service.
When governments and central banks are not so limited, they can create fiat debt at will. In 1971, President Nixon completed the transition begun in 1913 away from the convertibility of dollars for gold. Since then, the dollar has been a fiat debt unit. The government and the Federal Reserve can produce an unlimited amount of fiat debt units, not just Federal Reserve Notes, but member banks’ reserve balances at the Fed, and Treasury bills, notes, and bonds.
Deacon Bainbridge, a fictional character, was right on the money, so to speak. The quality of a government’s money is an infallible moral bellwether. A moral government would not be involved in the monetary system at all. Production of fiat debt amounts to fraud and counterfeiting. Its only “backing,” implicit at that, is the government’s ability to steal from its productive citizens. General acceptance of such intrinsically valueless debt requires legal compulsion. Fiat debt depreciation and devaluation steals from creditors for the benefit of debtors, which invariably includes the government doing the depreciating and devaluing.
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