Throughout recorded history, humans have used a commodity as their money.
From approximately 500 BC in the West, the chosen commodities were gold, silver, and copper. Playing a vital role in human economy, money serves society both as its common store of value, and as its medium of exchange.
These metals were selected consistently over the ages by societies for use as money, because they were widely accepted as having economic value, and, most importantly, as holding their relative value over time, as well as being convenient to use, in the form of coins.
Paper money was duly introduced in the West by private banks, because of its convenience, but it was always backed by gold, in a fixed proportion, and was exchangeable for gold on demand.
In the light of past human experience, the first requirement of any material to be used as money by a society was that the value of it could not be manipulated or controlled by any one person, or group of people. Of all the objects on earth, for over 2000 years gold best satisfied this requirement. Among its unique qualities was the relatively high economic value that everybody in all societies had always viewed it as having: its rarity, its durability, its functionality, and the difficulty and cost of mining it.
Most importantly, over that 2000-year period, the actual money in circulation at any time always belonged to the people themselves. The ruler or the state generally collected taxes from the people and sometimes also struck the coinage in order to standardise the weight of the various coins used, but all the money in circulation belonged to the people, and each coin and gold bar was privately owned.
The physical money, as well as the monetary system itself, having been created collectively by the people over time responding voluntarily to the economic pressures of supply and demand, was understood to belong to the individual citizens.
Political power
This fact, together with its corollary that the state did not own or control either the money or the monetary system, was critical, not only for the stability of the financial system, but also for the peoples’ political power, relative to that of the state. And, disturbingly, these two economic facts are particularly relevant today, in regard to the relationship between the people and the state.
In the 17th century in the UK, and the 20th century in the US, a Central Bank, owned by the private banks, but under the control of the state, was created by the state, and subsequently given the sole authority to issue money.
While the state was thereby in a theoretical position through the central bank to issue more currency units per ounce of gold than was economically justified or legally permitted, it could do so only at the risk of being exposed as debasing the currency.
This constraint on the state, however, only existed as long as the state was not in a position to regard the monetary system as falling entirely under its purview; that is, as long as the real money in the form of its gold backing, was generally understood still to belong to the people, and not to the state.
The right duly assumed by the state to control the printing of banknotes, however, gave it significant de facto control over an important part of the monetary system, and the public awareness that the monetary system belonged to the people and not to the state accordingly faded over time.
On August 15,1971, acting on the widely accepted but completely unwarranted assumption that the entire monetary system belonged to the state, the United States government arbitrarily, and with scarcely any protest from either public or economists, repudiated over 2000 years of human wisdom, and mindlessly cut the link between the US dollar and gold.
People’s gold
All the peoples’ gold, held as backing for the dollar by the central bank and by the private banks, was sequestrated by the state. From then on, the entire monetary system was effectively owned by the State, and no longer by the people.
This was an extraordinary thing to have happened, and one for which we have yet to face the full consequences. On August 15, 1971, the course of Western culture effectively altered. Previously, economic understanding had been based upon the perception that resources were scarce, and so needed to be dealt with circumspectly. Subsequently, economic understanding appears to be based upon the ingenuous economic belief that unlimited resources can effortlessly be conjured up from the future, simply by the state exploiting the gratuitous nature of fiat currency and manipulating the monetary system.
With the wide public acceptance of this belief, the political power of the administrative state, created in the 18th century by liberal democracy specifically to serve the people, came to exceed that of the people themselves. The people, in fact, seemed to have no idea that their entire economic system had been expropriated by the state in front of their eyes. And, because of the economic dominance still enjoyed by the US, most other nations uncritically followed suit.
The inescapable consequences of the state expropriating society’s entire monetary system are inexorable and ominous. They are precisely the negative consequences that Western society consciously avoided for 2000 years, by pegging the value of money to gold, rather than allowing politicians to create fiat money out of thin air for their own benefit.
The first consequence is that the primary determinant of the value of money is no longer gold, but rather the money-printing decisions of a few politically directed and self-serving politicians and bureaucrats operating within a very small time-frame, who cannot possibly be aware of all the relevant economic factors impinging on their decisions.
Store of value
Secondly, money, as society’s fundamental means of exchange and store of value, is likely to have no fixed value today, but rather one which fluctuates constantly, while invariably losing value relative to goods and services, as well as complicating economic calculation. At any point in time its value could also vanish virtually overnight, as happens with hyperinflation.
By arbitrarily cutting the rational link between money and gold, the West has turned its back on its own culture and centuries of collective wisdom. It is seemingly reverting to the fantastical, irrational, faith-based, and authoritarian type of thinking from which the scientific-method had raised it.
No longer restrained in the number of currency units that they could issue, the worlds’ governments embarked from 1971 on a money-printing programme that has resulted in a deluge of unpayable debt. No one is so ignorant as to believe that it will ever be repaid, but nearly everyone is content to leave the problem in the hands of the incompetents who created it in the first place.
There is little doubt therefore, that the Western states’ attempted solution to their debt problem will result in the complete dominance of the bureaucratic state over what was once a free liberal democratic society.
[Image: Madison Kaminski on Unsplash]
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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