The Latin term “fiat” roughly translates to “there shall be”. When we refer to fiat money, we are referring to money that exists because the government declares it into existence. It is not based on production or earnings, and not backed by any commodity. It is solely based on trusting the government.

Fiat money is exchanged in the economy as long as there is faith in the government that issues it.

Some are blaming the recent shakeup in the markets to “whining” or financial fear-mongering, which misses the whole point. History has shown that fiat money, or “faith-based currency” always fails, because when governments claim this power, they always behave irresponsibly.

When government has the ability to create and spend all the money it wants, priorities shift, and the concept of budgeting, as most Americans know it, loses all meaning. Hand a teenager a credit card, and tell him there is no limit and no accountability for what he spends, and the effect would be the same. You see, this problem is not unique to our government.

It is a predictable outcome based on human nature, and we’ve seen variations of what we are experiencing now happen over and over throughout history. I didn’t have a crystal ball or a fortune teller when I predicted this 3, 7, or even 30 years ago. Actions have logical consequences. The government becomes the reckless teenager with the credit card, and in the end, the taxpaying citizens get the bill. What happens after that is never pretty.

This is why our founding fathers considered, but decidedly rejected the creation of a national central bank. They understood that governments, even the best of governments, cannot control spending. Even the current administration, which promised strict fiscal responsibility, has had to increase the national debt limit by 65 percent to keep up with its spending sprees.

Every dollar created and spent by government makes the dollars in your pocket worth less and less. Eventually any currency controlled by government will be debased to worthlessness, and will wipe out the savings of the citizens who put faith in that currency.

Hard currencies, on the other hand, force governments to remain in check, strictly limited to the revenues they can raise from the country’s economic health. This is also an incentive for government to stay out of the way of productivity. The hyper-regulation in today’s economy demonstrates that this is no longer the case. What does it matter if the economy is crippled and the tax-base eroded, if government can create whatever dollars they need to keep the special interests happy?

We have been building economic castles on the sand, and the tide is coming in. The answer is not to bring in more sand, but to move to more solid foundation.

So yes, it is true that many are complaining about our economic trouble, but our economic trouble is not caused by their complaining. Many are being forced to wake up to the predictable troubles associated with faith-based currency. As more people notice the hardships, more will lose faith.

We are long overdue for a course correction and I can only hope that this awakening translates to a solid approach to currency reform.

Ron Paul is a republican member of congress from Texas.

Oil prices are on the minds of many Americans as gas hits $4 a gallon, and continues to surge.  How high can prices go?  How can we solve these problems?  What, or who, is to blame?

Part of the answer lies in understanding bubbles and monetary inflation, but especially the Federal Reserve System.  The Federal Reserve is charged with controlling inflation through interest rate manipulation, however, many fail to realize that creating money, and therefore inflation, is really its only tool.  When the Federal Reserve inflates the dollar as drastically as it has in the past few decades, the first users of the newly created money go in search of investments for their dollars.  They must invest this money quickly and aggressively before it loses value. 

This causes certain sectors to expand beyond what would naturally occur in the free market.  Eventually the sector overheats and the bubble bursts.  Overinvestment in dotcoms eventually led to a collapse of the NASDAQ.  Next we had the housing bubble, and now we are seeing the price of oil being bid up in the creation of another new bubble.  Investors are now looking to commodities like oil, for stability and growth as they pull capital out of real estate.  This increased demand for investment vehicles related to oil contributes to driving up the price of the actual product.

If the Fed continues with its bubble blowing policies of the past, the new commodities bubble will continue to grow, gas prices will continue to go up, as the value of your dollars go down.  We will see an overinvestment in these commodities as solutions are desperately sought for a supply shortage, which is only part of the problem.

Make no mistake, though, this is not the free market at work.  Government manipulations have added levels of complication and unintended consequences to the marketplace.

This is not the time for members of Congress to take political potshots at each other, or to imagine that the free market is somehow to blame.  This is the time to understand and fix problems.  That begins with making sure the decision makers have a firm grasp on the causes of the problems and possible effects of their decisions.  This is absolutely crucial if we want to get it right this time.  That is why I am in the process of calling for hearings on Capitol Hill on how the falling value of the dollar affects energy prices.

Governments need to get out of the way and let the people get back to work so that we can get our economy back on stable footing.  Our destructive regulatory environment, confiscatory tax policies, and managed, rather than free trade have chased many businesses overseas.

The bottom line is average Americans are being seriously hurt by these flawed policies, and they are not getting good information about the true dynamics at work.  The important thing now is to get the diagnosis absolutely correct so we can administer the appropriate treatment and move on to a healthier economic future. To do this it is absolutely necessary to address the subjects of central banking and fiat money.