I.O.U.S.A - Addison Wiggin [58]
Q: Do you think they will get away with it forever?
Bill Bonner : Eventually what happens is that people don ’ t take their IOUs anymore. When people spend too much money, for a while they ’ d get away with it, but eventually people would begin to wonder what their IOUs were worth. They ’ d begin to ask themselves whether you were actually going to pay off that debt, and pretty soon they ’ d begin to be wary of lending you any more money and begin to say, “ Those aren ’ t worth what we thought they were worth. ” Then the whole system falls apart, and you then have to earn a living and pay people off and save money. That ’ s one of these lessons that dead people have learned, and we haven ’ t.
Q: What can we learn from Bretton Woods and the Nixon shock of 1971 and 1972?
Bill Bonner : As I was saying, people can learn a lot from dead people, and what they had learned in the eighteenth century was that paper money doesn ’ t work. John Law had famously created a big scandal in France and practically bankrupted the French government. But in the nineteenth century, starting with Napoleon, all of the major money systems of Europe were anchored by gold. When countries traded with one another, c08.indd 120
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they traded with gold; and when you had a pound or a franc, it was backed by gold. That system was very, very successful; the prosperity of the nineteenth century was amazing. But that system broke down in World War I; you know, the governments, as they always do, spent too much money. Britain borrowed too much, France borrowed too much, and then they couldn ’ t pay it back because they didn ’ t have enough gold to pay that kind of expense.
That gold - backed system lingered on through a lot of the twentieth century. Governments would still trade gold, and currencies were still backed by gold — not perfectly, but still that system existed. The last stage of it was called Bretton Woods, and that lasted up until 1971. Prior to 1971, we had the Johnson Administration, we had the Great Society and the Vietnam War, and those things were very, very expensive. And somebody told Johnson, “ Wait a minute, you can ’ t have both guns and butter.
You can ’ t have a huge domestic spending program, the Great Society, at the same time that you have a huge war going in Asia.
That won ’ t work; we can ’ t afford that. ” At the time, the Democrats, led by Johnson, said, “ Oh, yes we can. We ’ re a big rich country, we can afford both guns and butter. ” But they couldn ’ t afford that much without raising taxes, and they didn ’ t want to raise taxes because then they wouldn ’ t be reelected.
What resulted from that was a run on America ’ s money, because people, especially the French, led by de Gaulle, saw that the dollar was weakening. France came to the U.S. Treasury building in Washington and said, “ Look, I ’ ve got all these dollars, I want gold. ” Richard Nixon looked at the situation and said, “ Boy, if they take all that gold, we ’ re not going to have much gold left. ” He closed the gold window — a phrase said by the Treasury Department — on August 15, 1971, and henceforth no foreign government could trade its paper for gold — trade dollars for gold.
After August 15, 1971, the worldwide fi nancial system no longer rested on gold. From then forth you could just trade paper. The dollar is a faith - based currency now; it ’ s not based on gold, but on the faith that people have that it ’ s worth something. This system c08.indd 121
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122 The
Interviews
we have today is a very funny system, because at the bottom of it there ’ s nothing but air. And we