One of my readers sent the following question. It touches on some of the irrationality and outright foolishness that follows when a nation gives up it gold- or silver-based money and replaces it with a fiat (paper or digital) currency:
“I’m having a hard time understanding how Detroit or anyone can have a debt; if there is no real money, how can there be a debt?
“Without real money, how could there even be a bankruptcy court, or bankruptcy protection? If all we have is debt paper for currency, that debt paper is lent into existence, backed by nothing, how can there be a debt? I’m not trained in finance/accounting but this whole system is insane and makes no sense to dummies like me.”
First, your premise that our “debt paper for currency” is “backed by nothing” isn’t quite true.
It’s true that our fiat dollars aren’t back by anything tangible, like gold or silver. However, since A.D. 1971, paper dollars have been backed by the American peoples’ “full faith and credit”. “Full faith and credit” is fancy language for asserting that the American people will make good on the debts created and denominated in fiat dollars.
Thus, the national debt and the value of the fiat dollar are backed by your signature; by your presumed or implied promises to pay that debt.