The Future of Money - Part two of seven - Measuring Your Claim on the Wealth of the Nation
WASHINGTON, January 6, 2015 – It all started back when the church was the state and the state was the church and armies were raised to fight over things like how bishops were appointed.
In a brief skirmish called the Second Bishop’s War, King Charles I needed to pay his soldiers. Merchants who had acquired gold in the course of commerce had stored that gold at the Royal Mint. Having spent much of the Crown’s wealth in other fights like the First Bishops War, Charles summarily seized the merchants’ gold as a forced loan to pay for his army.
While the loan was paid back, ordinary merchants who had no ‘dog’ in these perennial fights between religious adherents began looking to trusted goldsmiths to store their gold, safeguarding it from seizure by either side.
But back to the English goldsmiths for a moment. Upon “depositing” their gold, the merchants received “promissory notes” – something akin to a receipt they could redeem if they wanted their gold back. Before long, once they were confirmed as genuine, these notes were exchanged in the economy in place of the gold – they were much easier to carry around. People were happy to accept the “note” as payment, knowing that it was 100% backed by gold deposits.
But the goldsmiths were not immune to temptation. They realized that most of these notes would circulate from person to person without being presented for redemption. So they began to issue extra notes and lent them out at interest. If all of the circulating notes were to be presented for redemption at once there would be a problem, since there were more notes out there than there was gold on deposit to redeem them.
Now open your wallet or purse. Find a bill, any bill, a $1, $5, $10 or $20 bill – hey, even a Benjamin will do. (That’s a $100 bill for all you jocks out there.) Look at the top of the front: It says “Federal Reserve Note.”
But I promised to make all of this relevant and meaningful, right? The story of King Charles I above has been repeated throughout history. Every time the money supply has been ‘confiscated’ it has always been to fund a conflict between two (or more) ‘parties’.
And “the rest of us” would hang on to our gold as a way of staying out of someone else’s fight.
Political ‘parties’ are certainly not exempt from this history.
In my last column I harkened back to the “guns and butter” budgets of the 1960’s. The term “guns or butter” has been used to describe the fundamental choice a country has to make: spend its resources on defense (guns) or domestic needs (butter).
President Lyndon Johnson and the Democrats, who enjoyed a massive majority in Congress, refused to force a choice between guns (the Vietnam War) and butter (the Great Society), and so acted as if we could have both “guns and butter.”
Back then the dollar was still technically redeemable for gold at $35/oz. It is here where we must pull back and recall the Royal Mint, where merchants would store their gold, and King Charles I confiscating it as a forced loan to pay his soldiers after the Crown’s own wealth was exhausted.
The uniquely American idea of not having a ‘Crown’ at all was born very much from this nonsense. It was thought that freedom would be best secured by not having a king who could simply decide to seize the wealth of the nation to fund his next fight.
And so what of Fort Knox? What of the gold owned by the United States Treasury? To whom does it belong? We do not have a monarch, or a “ruling class” more broadly thought of, to lay claim to it.
Or do we?
So the question this column poses is: Whose money is it anyway? In my last column I asked that we consider the two sides of rent: the square foot and the dollar. Hopefully you saw how destructive it would be if a ‘foot’ could be arbitrarily ‘devalued’ from 12 inches to six. Now I will ask you to consider the two sides of money itself: the dollar (as the descendant of the promissory notes of the English goldsmiths) and gold.
Let’s start with gold. Since we have no king to lay claim to the nation’s gold, whose is it? It is ours, of course. It belongs to us neighbors, as a community, as states and as a nation. “OK,” so you say, “you mean I can just swing by Fort Knox and demand my gold?”
In a sense, that is exactly what our money used to mean. If you had $35, you could exchange it for one ounce of gold. It’s your gold, after all, just like the English merchants had deposited the gold in the Royal Mint. The dollars in your wallet used to measure (remember the “Tale of the Tape”?) your claim against the gold in the Treasury – held there on your behalf!
Note how I said “used to.” Now back to “guns and butter.”
The political and ideological questions surrounding the Vietnam War are another topic, but it is important to look at the decision to enter that war in light of the decision of King Charles I to impose his selection of bishops on Scotland. At least economically, we’re really looking at the same thing.
And then we have to look at how the two major political parties compete for power. LBJ sought to preserve the Democrat majority by making domestic promises (butter) that could not possibly be kept while fighting a war (guns) without issuing new “promissory notes” beyond the ability of the nation’s gold reserves to “back” them – a repeat of the English goldsmiths’ dirty little secret.
Imagine the merchants who had gold on deposit. Only they discover the secret and realize there are more notes out there than gold to back them. What would you do? Redeem your “promissory notes” forthwith and demand your gold back! No one wants to be behind the guy in line who ends up getting the last of the gold.
This is what happened in the late 1960s. Other countries that held U.S. dollars in reserve began to question whether the measure of $35/oz. of gold actually meant anything. The U.S. government was issuing dollars to pay for guns and butter to the point that it became quite clear we did not have the gold to back the notes at $35 per. Again, no one wants to be behind the guy who gets the last of the gold, so a “run” on our gold reserves started.
It ended on August 15, 1971. That was the day President Nixon “closed the gold window.” The way this changed the math of the U.S. economy and the nature of U.S. government cannot be overstated. But that’s all quite abstract. What really matters is how it changed the answer to our fundamental question: Whose money is it anyway?
When the dollar was redeemable for gold – held in the Treasury on behalf of its owners, the American people – the dollar represented a measurement of your claim on that gold. The nation’s money supply stood for the wealth of its people – not a king or a “ruling class.” In other words, it was your money. Once removed from that gold standard, the dollar could no longer stand a representation of the nation’s wealth, expressed in gold held in reserve by the Treasury.
It thus had to end up representing someone else’s wealth.
Please stay with me. In my next column I will explain exactly how this changed the U.S. government, and exactly whose wealth our money supply has come to represent. If you are conservative like me, but have friends, family or neighbors who sympathize with things like the Occupy Wall Street movement, please invite them to join this conversation.
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