"Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money." — Daniel Webster
In the same chapter of Deuteronomy where flogging and amputation are specified for various offenses, the Old Testament insists upon “perfect” weights and measures. Taking Biblical admonition to heart, the authors of the U.S. Constitution granted the new government the power to “To coin Money, regulate the Value thereof… and fix the Standard of Weights and Measures.” The Founders knew the value of honesty in trade. They recognized the role that government should play in keeping everyone honest.
Uncle Sam did a fine job with bushels, pecks, gallons and gills. And at first, dollars were set up as honestly as yards, feet and inches. The world’s most enduring monetary units, including the dollar, all began as measures of weight, generally a weight of gold or silver.
The English pound was 5400 grains of sterling silver. The Coinage Act of 1792 defined the Dollar as 371.25 grains of fine silver. That law has never been repealed, but try walking into a Federal Reserve Bank to demand your silver. You won’t get any. They may offer you some copper clad coins, but will more likely look at you like you just stepped out of a flying saucer. Even the world’s most famous bureaucrat, Alan Greenspan, won’t give a straight answer to the question “What’s a dollar?”
Today, despite the law, dollars are not an honest measure of silver, gold, or anything else. We would never allow inches, pounds or gallons to be reduced in size year after year, eventually to become whatever you thought they should be. But monetary units are mysteriously immune from common sense. As long as we have more of them than we once did we seem not to notice their steadily declining value.
Debased money takes on a mythical, magical quality. Dollars, like fairies, sprites and the wee people, are whatever we think they are. They are articles of faith. And if we lose our faith, they are also “legal tender,” meaning that by law you have to take them in payment whether you want them or not. You might as well keep the faith.
The first U.S. Congress paid for the Revolutionary War with a paper unit called the Continental. A rapid depreciation spawned the saying “not worth a Continental,” and an early American disdain for paper money.
But that was long ago. The lessons of the Continentals are long forgotten. Historically, like the Continental, paper currencies have been short lived, collapsing quickly in economic disaster for the issuing country.
The twentieth century is heavy with excellent examples. The Pengo of 1940’s Hungary was issued in denominations of 10,000,000,000,000,000 before the collapse after just 4 years of inflation. The Reichsmarks of early 1920’s Germany jumped from tens to trillions to the dollar in a few years. At the end, a truckload of them wouldn’t buy a pair of shoes.
Argentina, Zaire, and Yugoslavia more recently had spectacular inflations that flared like rockets before dropping to earth and winking out amid smoldering ruin. The economic pain that followed each collapsing paper currency was directly proportional to the time and volume of its issue.
In 1933 Franklin Roosevelt set the stage for the world’s most spectacular inflation. Private American citizens started to exercise their legal right to honest measure by exchanging their Federal Reserve notes for gold. Roosevelt suspended the conversion and ordered Americans to exchange their gold for Federal Reserve paper. He made it a crime to own gold.
To prevent escape from his New Deal he not only broke the government’s pledge to convert notes into gold on demand but criminalized the suckers who had believed the promise. After buying up all the gold in the country for twenty paper dollars an ounce, he raised the price to $35, suckering the suckers once more.
In 1971 Nixon did to the world what Roosevelt had done to Americans in 1933, he repudiated the dollar’s convertibility to gold. Since then America has done with dollars what no country in history has been able to do with a paper currency. We have exported our inflation to the world. We’ve put the globe on the Dollar Standard.
To keep everyone on board, International Monetary Fund rules forbid member nations from establishing a currency convertible to gold or any other precious metal. By bringing in the entire world we’ve been able to expand the paper money game to a colossal, unprecedented size. Today America is in the eye of a paper money hurricane.
Economic wizards pulling levers and turning dials behind the curtains may well keep the wind blowing for many more years, but as Voltaire once remarked, “All paper money eventually returns to its intrinsic value.” We will probably have to wait until the paper dollar returns to its intrinsic value to enjoy an honest monetary measure once again. When that time comes an ounce of gold
will still be an ounce of gold and a dollar may once again be 371.25 grains of pure silver.