Money vs Currency
If someone asked you “What is money?”, what would you answer? Do we even know the difference between money and currency? Currently, no country uses money; we all are using currency. Money is something that is used in exchange and holds value. When money was removed from currency, the fall of the world economy started. From youngsters to retirees, everyone feels a sense of uneasiness. The year 2008 was the toughest economic year around the world. Companies and markets came crashing down, even ones that stood tall before. This created a state of panic. But the government assured people that it would be all right, and that they would do everything in their power to avert the crises. And it worked! The crisis was averted, and after some time, the world was back to normal again. But is it normal? Then why the feeling of unease towards the economy?
It’s easy to think that the memory of 2008 is the only thing causing our collective uneasiness, but that is not true. If you ask people how they feel about the economy, they will ask: If the currency is so strong right now, how come people do not have jobs? Why are there fewer opportunities, and why aren’t we moving towards growth? The problem is people cannot see the real problems; they are forced to look at the problems that the government shows them. The answer to all of the above questions is: Because currency is not money.
After the second world war, representatives from allied countries gathered to take part in a monetary and financial conference held by the United Nations. The goal of the conference was to bring about global financial stability after the war. The war had caused suffering and financial trouble throughout the world. This conference allowed nations to hope for a better financial future.
The U.S. dollar became the world’s reserve currency. The Bretton Wood System was created during the Bretton Wood Conference after the second world war in New Hampshire. In this system, instead of exchanging gold, the U.S. dollar would be exchanged and hold the same value as gold. Meanwhile, gold would be reserved in a safe place in the U.S. The dollar was chosen because, at that time, it was as valuable as gold.
In this system, countries fixed their currency according to the U.S. dollar and the U.S. dollar was tied with gold at a price of $35 dollars per ounce. Now, countries could trade their currency for the U.S. dollar, which they would exchange for gold later. Basically, in this system, all currency was tied with gold. This system saved the trouble of shipping gold across the world. It also applied to foreign countries and central banks.
When war and other programs started, the government ran into budget deficits. We were running the Great Society Program under Lyndon Johnson while we were fighting a war in Vietnam. We suddenly started running deficits, and other countries said they wanted to exchange their dollar for gold. First, it was the French, and then it spread to other countries. With all the spending the U.S. was doing, other countries became worried that the U.S. did not have enough gold reserves compared to what it spent. Countries started asking for physical delivery of their gold. They suspected that more dollars were being printed than gold could back.
The Removal of Gold Backlink from Currency
As the demand increased for physical delivery of gold, the U.S. started to panic. On August 15, 1971, President Nixon suspended conversion of the U.S. dollar into gold to stop the outflow of gold from the country.
Whatever monetary issues we face today is a direct result of this decision to suspend conversion. When the gold link was removed from currency, things became bleak. The gold backlink had kept the government disciplined about spending.
When the government ran a budget deficit, gold left the country until there was balance again. Without any gold backing, countries relying on currency would run a perpetual deficit. When we look back at the U.S., according to the graph, the country hasn’t run a surplus since 1971. Since gold has been removed from currency, no matter how good or how bad things are, a country is always going to run a deficit.
Although President Nixon said it was temporary, it’s been 50 years and countries are still waiting. Since that time, countries have been running deficits. In the 1960s, it was the economy of gun and butter. We were fighting a war against Vietnam and funding missions and the space program. More money was created than the amount of gold that was reserved. Countries sensed this and demanded gold. They knew there was not enough gold to back up all that money.
Fiat Currency
When the gold backlink was removed, currencies were not backed by anything. Currency that is not backed by anything is called fiat currency. This currency is not backed by anything except government promises. The word “fiat” is from the Latin, meaning “currency that’s circulating by force.” So, if people trust the government and there is enough force to back up currency, then, for a period of time, it will circulate smoothly. However, there will come a time when people lose confidence and trust in the currency.
Money was used until Nixon cut back the gold link and stated that the U.S, dollar has intrinsic value. The problem is the idea that a government can declare anything valuable, regardless of whether or not it has value. The government said a piece of paper has value, and the public accepted it without questioning it. This is what is destroying the world economy. When currency is not backed by anything, their value is measured against each other. Countries with comparatively cheaper currency can make cheap products and, by doing so, weaken their currency even further. In this way, these countries become desirable trading partners. Currently, countries measure their currencies against the dollar, so when the dollar goes down, the central bank of other countries has to step up and intervene in the exchange market to ensure that the impact of the dollar does not affect their domestic economy.
Ponzi Scheme
In a legitimate investment, scheme money is used to increase or build wealth in the real estate market or the stock market. Both markets are comparatively low risk. After some time, these methods generate enough income to pay back investors and make a profit, whereas a Ponzi scheme attracts investors by promising low risk and instant returns. In a Ponzi scheme, money is not used to build wealth; it is used to attract more investors. Then the money from these investors is used to pay the previous investors. And this process continues until there are no investors, and old investors have run out of money. The scheme then collapses. At this point, the perpetrators have saved enough money for themselves while the investors are left with nothing. When there is no gold backing up money, the treasury can borrow as much money as it wants in order to invest.
When the U.S. government wants money, they get a loan from the federal reserve. The federal reserve prints money and provides it to the government, and in return, the reserve is given an IOU. These are called government bonds, which have no real value. After taking out this loan, the government pays its bills. Then these IOUs are sold to foreign central bank’s pension funds and individuals. Other countries buy these bonds because loaning money to the U.S, government is a risk-free investment. But the issue is that the government does not use that money to make more money. It only pays its bills and on previous loans, so how will it pay back investors? Basically, investing in U.S, government bonds is one part of a giant Ponzi scheme.
The federal reserve makes money out of nothing. They just print the required amount of money and give it to countries. To pay back previous loans with interest, countries borrow more money. And this process continues without really achieving any real value. There is no real money behind it, and the debt starts to go up and up.
Since 1971, the U.S, government has been running a trade deficit, meaning we buy more from other countries than they buy from us. Japan and Korea sell cars and electronics to the U.S., the Middle East sells us oil, and China sells everything. The government pays for these products in U.S. dollars. If countries decided to convert the dollar into their currency, the value of their money will rise, which would make them less desirable trading partners. So, instead of increasing their value, countries invest in U.S. government bonds.
Countries trade products for the dollar, and that dollar has been borrowed from the federal reserve in exchange for bonds. Then countries get more dollars to buy more bonds. When the U.S. government gets money back, they pay back the previous loans with interest. To do this, they need to borrow more money, which then creates more IOUs. So, the governments of other countries are investing their more valuable money into a Ponzi scheme. If the government did not borrow more money, the whole scheme would crash, leaving countries with nothing. If countries stopped loaning us money, the whole scheme would collapse as the government would not be able to pay them back.
Inflation
Do you remember when you could buy a chocolate bar for $1 and feed a family for $35 dollars? When currency is printed without any stops, the new dollar decreases the value of the old dollar, and every new dollar does the same to the old ones. With time, the dollar loses its purchasing power. The common man gets affected by inflation because the purchasing power of money decreases, and he cannot keep up with inflation.
If we compare the standards of current living with older standards, things are worse than before. Older generations had more kids and hardly any women used to work. Is it possible in today’s world to support a wife and three or four kids with only one income?
When inflation rises, people are forced to take more and more drastic measures in order to maintain their standard of living. When currency was backed with gold, people used to have a better life. In that time of families, the husband used to go to work and the wife stayed at home to take care of the family. Due to 1970s inflation, the wife too had to work to support the family. Two incomes became necessary in order to buy the same goods and services. When the 1990s came, the situation got worse. Having a savings became a thing of the past because people were using it to keep up with their expenses. So what do they do? They borrow money. So, in order to keep up with inflation, it takes two earners and decimating one’s savings.
Everyday people have to borrow money way beyond what it takes to keep up with living standards, causing them to sink deeper into debt. Initially, money was borrowed only to keep up with the living standard, but now it is necessary for survival. This devaluing of money makes it seem as if the government is secretly taxing its people.
Inflation is the first step toward a time when money will not be worth anything. People will lose faith in money, and they will want to buy tangible things instead of getting more paper money. The life of every individual will crumble as they will have nothing to keep them going. Food will be expensive, clothes will be expensive, housing repairs will be expensive, and they will have nothing of value to get it done. So the U.S. dollar might be the biggest scam you’ll ever come across. This scam will not only affect individuals, it will affect whole countries.