A Brief History of American Money - Part Two

America had survived two hundred years of political upheaval that often included intrigue surrounding her currency. In the postwar era, the Bretton Woods system governed the developed world's currencies, but the U.S.'s persistent trade deficits meant that foreigners could redeem dollars spent abroad for gold from Fort Knox. JFK's abortive issuance of silver certificates augmented the money supply at home, but by no means had cured the underlying problem.

It fell to JFK’s political arch-enemy Richard Nixon to deal the death blow to Bretton Woods. In 1971, beset by French demands for delivery of gold, Nixon closed the “gold window,” effectively making the U.S. dollar entirely a fiat currency. His decision roiled the waters of international relations and set the stage for a decade of painful inflation punctuated by Federal Reserve Chairman Paul Volker’s even more painful remedy of crushingly high interest rates peaking in 1982 that resulted in what was to that time the deepest recession since the Great Depression. Many believe that Volker’s decision prevented painful “stagflation” (inflation without economic growth) from becoming deadly hyperinflation. Forced into self-defeating policies like the only post-FDR reintroduction of price controls, Nixon himself paid a high price--a minor burglary conducted by some of his operatives was so magnified by the press that he became the first-ever president forced to resign to avert impeachment. Since it didn’t matter anymore, within a few years Americans were again allowed to own gold. Paradoxically, Nixon’s closing of the gold window did not end the era of the Dollar’s status as reserve currency but cemented it further, and it remained the cynosure of international contract settlements. That status is maintained not by rainbows and unicorns, but by America’s unparalleled ability to apply military force anywhere in the world on short notice.

Another development during the Nixon presidency was little-noticed at the time. In 1969, the International Monetary Fund, a european entity created at Bretton Woods, defined “Special Drawing Rights,” a monetary unit for exchange among governments and based on a “basket” of currencies issued by the nations of the developing world. Thus governments worldwide can settle debts denominated in SDRs by payment of euros, Japanese yen, pounds sterling or U.S. dollars. SDRs are, in effect, a one-world currency, though one that is not yet held by individuals. Despite their exotic nature, researchers discovered in 2010 that the U.S. Postal Service was including a conversion table for them in its regulations, a surprise that set off many observers’ suspicions regarding their future role. Recent events may be accelerating their arrival as day-to-day currency for the masses.

Not long after Ronald Reagan was inaugurated as president in 1981, Volker relented and allowed interest rates to fall. Reagan’s relaxation of regulations that had been imposed on numerous industries and his large tax and budget cuts resulted in the largest peacetime expansion in the history of the U.S. economy, despite his escalation of defense spending and clandestine efforts to overthrow socialist regimes. To pursue those policies though he had to survive an assassin’s bullet fired barely two months into his first term of office.

Reagan was succeeded in office by George H.W. Bush, who took no actions to resolve a recession other than to attempt to “jawbone the Fed” into lowering interest rates and who also involved the U.S. in an expensive action to dislodge Iraq’s Saddam Hussein from Kuwait, which the latter had invaded over a directional drilling dispute. Consequently he was defeated in his quest for a second term by Bill Clinton, who embarked on policies that were given a remarkable boost by Fed Chairman Alan Greenspan’s easy money policies. Interest rates were kept low and international trade--particularly with China and Mexico--was allowed to increase dramatically.

George W. Bush succeeded Bill Clinton in 2001, and seemed poised to largely continue the latter’s economic policies, however the attacks of 9/11 put the country on a path of more expensive and extensive overseas intervention, invading Afghanistan and later Iraq. The national debt ballooned, but the Fed kept interest rates low. Policymakers were determined that the attack by Muslim extremists would not be seen to have caused the American economy to contract. The President urged Americans to respond to the attacks by going shopping. Loans were made easy to get, even for people who had little prospect of paying them back. Banks and major corporations were led to believe they could hedge away the risks of default by buying and selling financial instruments called derivatives that were essentially bets that would be paid off if the business faced a loss from defaults.

The derivatives allowed businesses with questionable balance sheets to show examiners golden lotto tickets that would rescue them if financial harm ever came their way. Meanwhile the institutions selling those tickets became huge repositories of risk, destined to be destroyed by even a slight hiccup in the financial markets. That hiccup eventually came as banks began to withdraw from making more subprime home loans, leading to a decline in housing prices and further losses for banks and mortgage originators as homeowners began to make decisions to strategically default on homes worth less than their mortgage balances.

Ultimately, newly inaugurated president Barack Obama was faced with a string of major financial institutions that had failed, including AIG, Bear Stearns, Lehman Brothers as well as by automakers like GM and Chrysler having gone bankrupt. Congress and outgoing president Bush had authorized a huge fund of money to tide over the remaining giant banks and companies, but expensive wars were also ongoing. Obama has had to embrace policies that made millions of Americans dependent, directly or indirectly, on government largess, including extended unemployment insurance payments.

With the financial crisis of 2008, historical self-restraint by the Federal Reserve evaporated in the face of a panic that saw home values crushed, massive job losses and bankruptcy of some of the largest names in U.S. industry. For the first time major corporations were allowed to borrow, secretly, directly from the Federal Reserve, and major names like GE, McDonalds and Harley Davidson were later learned to have done so. The crisis was so large that the Fed could not manage it solely by lowering interest rates (which it had effectively driven down to zero), and instead Fed Chairman Ben Bernanke has embarked on a series of injections of dollars into the economy known as “Quantitative Easing.” These moves, telegraphed well in advance so that analysts can predict their amount almost to the penny, are conducted over a series of months. We are presently anticipating the third round of QE.

Ours is now a centrally-planned economy dependent on periodic injections of newly-created money. Each time the Fed provides these funds, a corresponding debt is created that must be paid by the U.S. Treasury. The funds are provided not to American citizens but to the banks, who are permitted to sell assets such as defaulted or shaky mortgages to the Fed at above-market prices. The banks are supposed to make new loans with the money, but they do not do so, rather the money props up the balance sheets of banks that should otherwise have been closed as insolvent. Meanwhile, the real economy is starved of capital and small businesses continue to decline nationwide. And added strain can be expected when Europe soon demands trillions of dollars from us to help bail it out of what is going to be the mother of all financial crises.

Whenever the expansions happen, foreign sellers of raw materials, finished goods and petroleum are not fooled. They raise their prices in response to expansions of the money supply, resulting in higher costs to Americans. In turn, America applies force or subversion against countries that take actions that would seriously disrupt our access to raw materials and energy. In fact, the Second Gulf War, the overthrow of Libya’s Gaddafi and the prospective attack on Iran share a common denominator: a ruling individual determined to have his country price its oil in something other than dollars. Meanwhile the First Gulf War and the war in Afghanistan strongly involved our current or future access to petroleum. Likewise, areas like Darfur and the Falkland Islands also implicate access to petroleum being permitted to some and denied to others. For foreigners who may never have even set eyes on even a single dollar bill, the value of the American dollar can be not an inconvenience, but a  life-or-death proposition. And the moment one of our enforcement excursions fails, the dollar’s status as reserve currency will be history.

Back home, technically Americans remain as free as they have always been to exchange whatever they like amongst themselves for goods and services instead of dollars. In practice though, the authoritarian anti-terrorism mindset in the wake of 9/11 has resulted in existing laws being used to stymie that option.

Take the case of Bernard von Nothaus. In 2011, he was convicted of what was essentially counterfeiting and fraud for issuing and circulating coins made of silver and gold. The coins did not look like those issued by the federal government, and he didn’t claim them to be U.S. currency. They even had intrinsic value, unlike U.S. money. Nonetheless, he was found guilty of those coins mimicking the appearance of U.S. money and was denounced by prosecutors as having practiced "a unique form of domestic terrorism” that was trying “to undermine the legitimate currency of this country.”

Wikipedia now lists more than one hundred alternative community currencies in circulation around the U.S. We must ask ourselves: Are all these people destined to being thrown in the maw of the Justice Department?

Von Nothaus’s conviction came at the same time that states such as Virginia, Utah, Georgia, Indiana, Montana, New Hampshire, and South Carolina have been actively debating and even passing resolutions authorizing their governments to issue silver and gold coinage in the event of a disruption of the national currency. If that comes to pass, the U.S. will have come full circle, returning to something like the days before Colonial scrip in an effort to survive a failed currency regime that no longer serves the interest of the people.