by Phil Marks
Daddy, where does money come from?
In a Stephen L. Carter book, “Palace Council”, the young daughter of one of the characters poses this question.
The plot spans a 40 year period and revolves around a novelist who is close to Presidents Kennedy and Nixon.
The question arose in the context of Nixon possibly withdrawing the United States from the Gold Standard at the
time of the question being posed.
I haven’t set out here to write a book review, but this question did reignite something that has bothered me for
many years. In the context of the so-called Credit Crunch in 2008-2009 it seems particularly apposite.
Now, I’m not an economist, but it does seem to me that the dematerialization of money – specifically the
abandonment of the Gold Standard – has enabled rampant printing of money. Witness the £175 billion “Quantitative
Easing” in the UK, which is admittedly and unashamedly the printing of money, with nothing to back it up.
When a country’s currency had to be underpinned by gold, then the growth of the money supply was in theory
restricted by the production and availability of gold, and a country’s currency lost value against gold if it was
perceived to be performing below par.
So, is that the real reason that we moved away from the gold standard – because leading economies could not grow
their money supply quickly enough when it was tied to a single natural resource?
As I see it, the essence today is that the strength of a country’s currency is underpinned by the confidence
that financial markets have in that country’s economy, and that level of confidence is measured by nothing more
than the international exchange rate of that currency against – wait for it – other currencies. Of course, the US
had vast natural resources beyond gold, especially oil, and that helped to underpin the dollar.
The gold standard was abandoned by the UK in 1931, followed by the US in 1933 (partially restored later with the
caveat that US citizens could not exchange dollars for gold, only foreign central banks could). The abandonment
came about because the gold standard had been seen as contributing to the Great Depression and the run on banks.
Since then of course, we have seen major depletion of US oil resources, and the discovery and depletion of the UK's
North Sea Oil.
Anyway, the question is an interesting one, and still puzzles me. The Credit Crunch has proved that we still
haven’t solved the problem. After all, isn’t the Credit Crunch the result of informal (off balance sheet?) attempts
by banks to tie the dollar and the pound sterling to another natural resource – property? However, a lot of
property was transmuted into the form of sub-prime mortgages, which one might now dub ‘Fool’s Gold’?
Anyway, I enjoyed the book - lots of nostalgia if you were a child of the sixties! It was a Richard and
Judy Summer Read recommendation.
© 2009 Phil Marks