Paper Money and Hyperinflation

Paper currency [i.e. fiat money] always fails any country that adopts it--without exception.  It is true now as it has been since the first paper money was issued by the Song Dynasty of China in the 10th cnetury AD:

The Song Dynasty in China was the first to issue paper money, jiaozi, around the 10th century AD. Although the notes were valued at a certain exchange rate for gold, silver, or silk, conversion was never allowed in practice. The notes were initially to be redeemed after three years' service, to be replaced by new notes for a 3% service charge, but, as more of them were printed without notes being retired, inflation became evident. The government made several attempts to support the paper by demanding taxes partly in currency and making other laws, but the damage had been done, and the notes fell out of favor.

The successive Yuan Dynasty was the first dynasty in China to use paper currency as the predominant circulating medium. The founder of the Yuan Dynasty, Kublai Khan, issued paper money known as Chao in his reign. The original notes during the Yuan Dynasty were restricted in area and duration as in the Song Dynasty.

However, in the later course of the dynasty, facing massive shortages of specie to fund their ruling in China, the Yuan Dynasty began printing paper money without restrictions on duration. This eventually caused hyperinflation. By 1455, in an effort to rein in economic expansion and end hyperinflation, the new Ming Dynasty ended the use of paper money.
Source; Fiat Money

Sound familiar?  All you need to do is change a few dates and replace a few names with "Alan Grenspan" and "Ben Shalom Bernancke" and the text would pretty accurately describe the dollar.

Then let's look at America's first attempt at paper money, Continental Currency, issued in 1775:
American colonists issued paper currency for the Continental Congress to finance the Revolutionary War. The notes were backed by the "anticipation" of tax revenues. Without solid backing and easily counterfeited, the notes quickly became devalued, giving rise to the phrase "Not worth a Continenteal."

The French were not far behind, issuing their paper assignats in the 1790's.  The idea was sound: the revolutionary government had confiscated all Church lands and would issue certificates worth no more than the total value of that real estate. Brilliant--paper money that was actually backed with more than promises!  But before long the revolutionaries began to run the printing presses 24/7 and the assignats rapidly hyperinflated into worthlessness.

The whole sorry saga is documented in a fascinating treatise that I had the good luck to read in high school. Its title is Fiat Money Inflation in France by Andrew Dixon White.  Read a summary of it.

The worst example of paper money failing a country in recent times was the Zimbabwean hyperinflation. In June 2008 the rate of price growth was 11.2 million percent per year and the country was issuing banknotes in the denomination of one hundred trillion dollars!

Source: Hyperinflation in Zimbabwe.

So, insofar as the U.S. dollar--or the euro or the Swiss franc or any other fiat money--is concerned, it's not a question of if the death knell will toll, but when it will toll.  And when it tolls, it will toll for thee...and me...

Jagor