I.O.U.S.A - Addison Wiggin [59]
Nobody wants to really pay any attention to the international money system, but it ’ s important to understand how it works. In the 19th Century, and up until 1971, gold was beneath the paper money fl oating around the world. You can ’ t create gold. You have to dig it out of the ground; it ’ s hard to get; and there ’ s not very much of it. But paper money is different. Since 1971, with no gold to back up the paper, all we have is paper. That means that you can create a lot of paper and you don ’ t have to connect it to gold.
They ’ ve been creating United States dollars like crazy for the last 20 years, and now they ’ re creating them even faster. They ’ re not down in the Treasury Building, with a little - bitty glazier printing press, printing out bills; they ’ re created by electronic transaction.
They can just credit a bank with money and then the bank lends out money. The whole thing now has gotten so out of control.
Money is created all over the world by fi nancial intermediaries, including, hedge funds and investment banks and so on. You have this explosion in what people call money. Is it real money? It ’ s not backed by gold. They ’ re simply pieces of paper and little electronic zeros and ones.
Now our whole society has something like $ 500 trillion nominal value, or face value, of derivative contracts. What is that? Nobody quite knows, because there ’ s nothing real in the system. It ’ s all based on faith that somehow it ’ ll work out and that those mathematicians who created all those derivative contracts know exactly what they ’ re doing. We know from history that it doesn ’ t work out that way. There are booms and there are busts, and when you have a boom, people forget the lessons of the past and start spending too much money. They spend too much money when they buy assets — stocks and bonds and apartment buildings and Monet paintings. And they forget about it when they buy ordinary things too, like when they want to take a vacation or when they go to the store and take out a credit card representing a kind of money.
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William Bonner 123
Money — the money that we keep score in, the money that everybody talks about, the money that everybody cares about — is kind of a fi shy thing. Without gold, or something solid beneath it, we don ’ t know what it is. Since governments don ’ t need gold in the system anymore, they can create as much of this money as they want. This is what has created this big, huge, worldwide boom that we either enjoy or curse today, depending upon your point of view. This boom is making a lot of people rich. It ’ s raising living standards in places like China, India, and even America.
But there ’ s a big difference. In America we ’ re spending debt — you know, we ’ re taking this paper, we ’ re sending it out, off overseas, in a kind of IOU, to foreigners in exchange for goods and services.
In foreign countries they ’ re creating goods and services, building economies, and building factories. They are creating real wealth in China and in India, but in America it ’ s a phony wealth we get by spending money we don ’ t really have for things we don ’ t need. It ’ s putting us in the hole, rather than putting us ahead of things.
Q: Can you tell me the difference between the gold standard and fi at currency?
Bill Bonner : The gold standard is a standard in which money itself is defi ned as a unit of gold. Because gold is very, very limited and rare and hard to get, it limits the amount of money in circulation. There ’ s no magic to gold. It just happens to be provided by Nature herself, and it never goes away. It doesn ’ t melt or corrode or fl ake away. Gold endures. Gold mining traditionally has produced new gold at about 3 percent more new gold per year, and now it ’ s producing 2 percent more. And that happens to be about the rate of GDP growth in the world. So gold is a near -
perfect money, because it increases in supply at about the same rate as the goods and services that it would be used to buy.