The Value of Money


  This week on Facebook: In ‘The Coming Dark Ages?’ I criticised all the articles for failing to point out that (in my view) the prevalence of an economic global hegemony by Western Philosophy relied on a reserve currency in a fiat money world. Money at the centre of globalisation, whether it is trade or war that is the dominant driving force for global economic growth. I was especially critical of the article America enters the dark ages concluding that in my opinion money, war and a rising nationalism, are the most likely harbingers in any coming of a new dark age.

The 1944 Bretton Woods system established what Valery Giscard d’Estaing, a French finance minister, called an exorbitant privilege claiming that it resulted in an asymmetric financial system where foreigners supported American living standards and subsidising American multinationals. France called it “America’s exorbitant privilege” and in 1965 French President Charles de Gaulle announced his intention to exchange its USA dollar reserves for gold at the official exchange rate and sent the French Navy across the Atlantic to pick up the French reserve of gold, following that lead Spain quietly exchanged its dollar reserves for USA gold—the biggest such transaction of the Franco era.

America’s exorbitant privilege was seen in the Bretton Woods System and 1944 Agreement establishing the USA dollar as a reserve currency gold standard, effectively making the USA dollar a global gold exchange standard. After the 1944 agreement was signed the USA was the only country with the ability to print dollars, giving the USA a dominant power in the world economy. Despite the 1944 Bretton Woods agreement making the USA dollar the primary gold exchange standard, in 1971 the USA dollar deflated its value in gold.

In 1973 the dollar was removed from any parity with gold and introduced the USA dollar as a global fiat currency, an action by the USA that ended the 1944 Bretton Woods Agreement and introduced the subsequent floating exchange rates. These floating exchange  rates freed the signatories to the Bretton Woods Agreement to exchange their money (including USA dollar reserves) at official exchange rates. This fiat currency world changed the value of money making the free market an indicator of a nations wealth, but more importantly a free market economy, with State caveats, predicted the economic growth of a country giving value (or not) to its money.

As the world followed the USA with introduction of fiat currencies and despite a floating exchange rate, the USA dollar maintained its position as the preferred global reserve currency (2). That is until now, when the economic hegemony of the USA is being challenged¹. The introduction as a reserve currency of the Chinese Yuan (Renminbi) by the International Monetary Fund has pushed the Euro into second place (3) and has the potential to become the premier reserve currency.

Whether or not introducing a floating exchange rate led to currency speculation and systemic financial crises is — perhaps — a moot point. What is not moot are the increases in deficit financing that fiat money has enabled a State to indulge in, nor the quantitative easing that it has allowed a State’s fiscal policy to implement. The Austrian school of economics hold the view that not only is deficit financing (specifically government debt) a moral issue (4), but that government fiscal policy should not increase debt², which it does every time it issue a government bond (in the case of the UK a gilt) to finance budget deficits.

In the first place, when the State spends more money than it receives in taxes — a fact indelibly written into the bond — it is deliberately committing an act of bankruptcy.  Don’t Buy Government Bonds

There an ever rising global inequality that is accompanied by an ever increasing indigence at the bottom of the economic pyramid. The era of fiat money kept productivity growing and while the economy as a whole did, the average worker’s pay package did not³.  The increase that resulted in global economic growth may have lifted many in the third word out of poverty but it has dramatically increased the indigent of the industrial nations.

The-Wealth-Paradox

The Wealth Paradox: click image

In their social background, education, and occupations, elites are almost always more privileged than non-elite populations. ‘Elites — Sociology’

The video above leads to the conclusion that while the value of money has an essentially economic dimension it remains, as it always has done, to serve the purposes of the political elites. A conclusion that I would draw from the last article (5) and the massive economic anomaly that reminds me of the 1972 film Cabaret set in the 1931 Weimar Republic of Berlin.

The Weimar Republic of Germany is known in history for its hyperinflation, giving rise of Adolf Hitler and the Third Reich, which led to World War II. The following is a video of Liza Minnelli and Joel Grey that I used previously in my 2013 post Money money money….


1. What Is the History of the Gold Standard?  The first king to use gold for coins was named Croesus.His name lives on in the phrase “rich as Croesus.” In those days, the value of the coin was based solely on the value of the metal within. Therefore, the country with the most gold had the most wealth.

2. A Primer On Reserve Currencies:  For nearly a century, the United States dollar has served as the world’s premier reserve currency, taking the crown once worn by the pound sterling. The future of the dollar as the most popular reserve currency is less certain.

3. Reserve Currency Status—A Mixed Blessing: I was recently invited to give a talk in China on the topic of reserve currency status for the Chinese currency, the Renminbi or Yuan. I had to decline, but the invitation got me thinking about what I might have said in such a speech. The predominate thought that came to mind was probably not what the Chinese would want to hear, which was, watch what you pray for.

5. We’ve spent our entire lives in a massive economic anomaly: In other words, the only economic environment that almost all of us alive today have ever known. For example, between 1800 and 1938, consumer prices in the UK were pretty much flat. Since then, they have risen 50-fold. In the US, from 1800 to 1913, prices rose by about 52%. Since then, they’ve risen 24-fold. So inflation has positively exploded during all of our lifetimes. And not just general price inflation — asset prices have surged too.


Referenced Articles & Books:

  • A text subscript above and preceding the title here, refers to a book, pdf, podcast, video, slide show and a download that is usually free.
  • Brackets containing a number e.g. (1) are used above to reference a particular article (1-5).
  • A long read url* (included below) is followed by an asterisk.
  • Occasionally an Open University (OU) free courses is cited.
  • JSTOR lets you set up a free account allowing you to have 6 (interchangeable) books stored that you can read online.

¹Reserve Currency Blocs: A Changing International Monetary System? (url/pdf) Our analysis suggests that the international monetary system has transitioned from a bi-polar system – consisting of the U.S. dollar and the euro – to a tri-polar one that includes the renminbi. The dollar bloc is estimated to continue to dominate, having the largest share in global GDP (40 percent), followed by the renminbi (30 percent) and the euro blocs (20 percent).

²Why we shouldn’t Increase Borrowing (pdf): Although interest rates are historically low, this is not a legitimate excuse to increase borrowing. Furthermore, although they are currently very low, there is no reason to assume that they will remain so. It is frequently argued that as the UK has had high levels of national debt in the past such as after the Napoleonic and world wars, that the current high level of national debt is not a cause for concern. Despite attempts by the coalition and Conservative governments at reducing the UK’s national debt, it has continued to increase.

³You’re not imagining it — the rich really are hoarding economic growth (url*): Something changed in 1973 or thereabouts. While productivity kept growing, and the economy as a whole did too (with some temporary setbacks during recessions), the average worker’s pay package did not. The implication is clear: The economy broke at a certain point, and now workers are getting screwed.


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The Bulletin

This site was created for members and friends of My Telegraph blog site, but anyone is welcome to comment, and thereafter apply to become an author.

TCWG Short Stories

Join our monthly competition and share story ideas...

The Real Economy

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Public Law for Everyone

Professor Mark Elliott

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