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Biography of the Dollar (1792 - ? )

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You and I have never known a time when we couldn't buy foreign-made goods at bargain prices, or travel the world and pay with dollars wherever we go. Historically, the US Dollar was backed by gold for the first 150 years of its existence. Off the gold standard in 1972, the Dollar was backed by America's might as a manufacturing hub of the world. After factories moved to Asia, it was backed by oil cartels, and most recently by coups d'etat and by military force. Now there are signs that the Century of the Dollar may be drawing to a close. We imagine with difficulty what life might be like if our dollars are no longer welcomed by travel destinations and trading partners.


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Like Wile E Coyote after he runs off a cliff, the Dollar will stay suspended for awhile, though there's no longer anything to hold it up.


The birth of the USA and the birth of the Dollar are interwoven stories. A lot of the conflict that led to the Revolutionary War had to do with the right of the colonies to issue their own currency. Benjamin Franklin promoted the advantage of a generous fiscal policy that would promote commerce in the colonies, but the British interest was to keep the colonies dependent on trade with England at an advantageous rate. Issuance of paper money in the form of "Continentals" (1775) was taken as an affront to the Crown.

Paper money issued by the nascent USA during the the Revolutionary War lost most of its value to inflation. Part of the problem was that the Brisish were counterfeiting Continentals to undermine the colonies' war effort. Nevertheless, this inflation supported a belief that only gold and silver could hold their value, and this principle was enshrined in the Constitution of 1789.

"No State shall"make any Thing but gold and silver Coin a Tender in Payment of Debts;"

A controversy divided the Founding Fathers, whether the power and responsibility for issuance of money should be a public asset of the Federal Government or a privilege of a private Central Bank, modeled after the Bank of England. Thomas Jefferson and the democrats lost; Alexander Hamilton and the privatizers prevailed.

The (public) US Treasury and Hamilton's (private) First Bank of the United States were both established by acts of Congress in 1791. Robert Bows notes the irony that shares in the First Bank were quickly bought up by the Bank of England, so that the new country's finances were once again governed by the same powers from which they had just fought a war to free themselves.

Already when the first Dollars were minted in 1792, they required an excessively complex and opaque set of transactions with the Central Bank, a practice which survives to this day through the Federal Reserve. Neither the Federal Government nor the private banks in fact had enough gold to cover all the Dollars that were issued, but it was still required that the government nominally borrow from private banks to issue money.

The value of the first Dollar was pegged at about 1/20 ounce of gold and, remarkably, that exchange rate was maintained for more than a century, during which time the country underwent all the birth throes of industrialization, a Civil War, and several wars of conquest against Britain and Spain.

During the Civil War, Lincoln balked at the high interest rates demanded by New York bankers, and to pay for the war, he authorized printing of "Greenbacks", which were not convertible to gold or silver, but whose value rested only on faith in the Federal Government. The idea of paper money had not been established, and the bills were thought of as a contract, an instrument of debt like a mortgage note that obligated the Government to pay the person who owned it.

Pay with what? The notes were not backed by gold. Nevertheless, the bills held their value remarkably well through the war. This was a success for fiat money, or faith-based money, The concept threatened the bankers, and some say it was the bankers who assassinated Lincoln to force a return to dependence on the Central Bank.

By the end of the 19th Century, the United States was established in the world, recognized as a secondary power in the shadow of the British Empire. Consequently, the dollar had value all over the world, but traded at a discount to the British Pound, when the two currencies were represented as equivalent quantities of gold.

In 1900, Congress officially pegged the Dollar to gold at $18.60 per ounce--very close to the rate established in 1892. The controversy that had begun with Hamilton over the role of private banks was resolved by chicanery in 1913, when the Federal Reserve Act was slipped through Congress at midnight on Christmas Eve. The virtue of private money was supposed to be restraint against inflation, but inflation began almost immediately with the Federal Reserve, pushed forward by the Great War. Several times, the gold standard was suspended.

But the gold standard poses an opposite risk of deflation, and economists see deflation as the more serious issue. With expanding commerce comes a need for more and more money, and there is not enough gold in the world to mediate all the transactions that people want to engage. Deflation is a shortage of money that constrains economic growth artificially, leading to stagnation and imbalances. Willing partners in trade cannot get their needs met because there is not enough money to lubricate their exchange. All this was apparent during the Great Depression.

Roosevelt was elected in 1932 with a mandate to pull the country out of depression. He began immediately by decoupling the Dollar from gold, allowing the price of gold to float. Depression continued, however, for another 8 years. Some say that Roosevelt's liberal monetary policy didn't work. Others say he didn't go far enough.

In practice, the concept of fiat money, not backed by gold or any commodity, had gradually proven its viability. Economic theory had to play catch-up to validate the idea. Today, there is still no consensus among economists, but in practice people need a medium of exchange, and are willing to put their faith in whatever others are putting their faith in.

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Josh Mitteldorf, a senior editor at OpEdNews, blogs on aging at http://JoshMitteldorf.ScienceBlog.com. Read how to stay young at http://AgingAdvice.org.
Educated to be an astrophysicist, he has branched out from there to mathematical (more...)
 

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