I have no idea where you got the idea that history proves fiat money leads to loose fiscal policy. Fiat money first existed in 74 and it has worked fine. The only problem with fiat money is that most people do not understand it and still cling to ideas and concepts based upon gold or metals backed currency. For instance, if the government can create money at will, why doe it bother with treasury bills? What is the point? Another issue is that in metals backed currency, you have a zero sum game. Since the supply of money is tied to reserves and reserve ratios, your supply of money is limited to how much of the metals you hold. Tell me how you increase wealth in this system? Find more gold? Take it from the other guy? This is one of the reasons why we gave up on gold standard.
Wolleybugger: I do not profess to be an economist, and I have said so before, but every country in the world that has utilized fiat money has embraced a loose fiscal policy. Look at Europe and what has happened to their economies. They are in debt up to their eyeballs, and are begging one another for assistance. Their people are out of work, and their middle class is shrinking. If fiat money was such a good thing, why is there a crisis in Europe? And why is that crisis raising its ugly head here?
It is true that the government can print as much money as it wants, without borrowing, but truth is, the government does not print its own money now. It must borrow at interest from the FED, no choice, according to
Federal Reserve Act. It issues bonds and borrows from other nations because this borrowed money is from existing, circulating currency, not from newly printed currency. Newly printed currency merely aggravates the debasement situation. That is how the government prolongs the life of fiat currency, by keeping the printing presses running as slow as possible. But sooner or later, time runs out on fiat currency. It becomes so debased that people do not want it anymore in trade. They start searching for some other medium of exchange. It becomes a case of too much money chasing too few goods. The new medium that people around the world are looking at today, to replace the debased U.S. dollar, is the Chinese Yuan. They want to start trading in Yuan, not the U.S. dollar, and only because China has a favorable, healthier balance of trade situation, and is not up to its ears in debt. Ultimately, the Yuan will face the same problem as the dollar, if China does not anchor its currency to something that has intrinsic value.
We do not have to base our currency on gold alone. It could be a basket of precious metals, or mixed commodities, or some other item of value that is not so finite. I agree that gold alone today will not get it. People, and governments, need to know that the currency they hold is anchored to something that can be traded quickly for something of value in a crisis, besides just the paper it is printed on.