Value
"Not worth a Continental."
- Anonymous.
Before the US or its dollar even existed, a different currency was used in America - the Continental.
Continentals began being issued in 1775, at the start of the American Revolutionary War. Being fiat currency (a form of currency not backed by a finite physical commodity, such as gold), Continentals could be printed with reckless abandon to finance the war, and they were. Within several years, the Continental inflated to the point of being worthless, giving rise to an often-used expression at the time, "Not worth a Continental," used to refer to something of no value. By 1781, Continentals were so worthless that they ceased to circulate as currency.
|
This piece of paper was worth 20 Continentals, part of a fiat currency backed by nothing. |
Following the birth of the US in 1776, the founding fathers drafted a constitution that ensured the US could never, ever be exposed to a fiat currency again, explicitly writing in Article 1, Section 10 that it was not permitted to "emit Bills of Credit; or make any Thing but gold and silver Coin a Tender in Payment of Debts." (1) They knew fiat was a disaster waiting to happen, and they wanted the new US dollar to be different. Thus, they chose to "back" every dollar in existence with a defined weight of gold held in reserve. This gold-backed dollar could not be printed with reckless abandon, nor its value destroyed, as US gold reserves were finite.
Over the next 150 years, bolstered by its gold-backed dollar and geographically isolated from Europe and its wars, the US rose in economic prominence. By the mid-1940s, following World War 2, the US had emerged as the dominant economic force on the planet, with its dollar backed by 20,000 tonnes of gold reserves (two-thirds of the world's gold at the time) (2). With such a strong US dollar and the rest of the world in dire financial straits, 730 delegates from all 44 Allied nations met in Bretton Woods, New Hampshire to establish a new system of financial relations between the US and the rest of the world. Many ideas were discussed and implemented, but the most important was the creation of the Bretton Woods system, an international gold-backed monetary standard in which all these countries pledged to tie their currencies to the gold-backed US dollar, with 35 US dollars equal to one ounce of gold. Since the US promised to continue not printing more dollars than they could convert to gold, the new world reserve currency was said to be "as good as gold."
The Bretton Woods system worked for a while, yet as the years rolled by the US government could not resist the temptation to print and spend more US dollars than even their huge gold reserves allowed. By the late 1960s, with the US over-spending in the Vietnam War, it was obvious to many other countries that the US government had printed vast numbers of dollars into circulation without the gold to back them. Naturally, these countries began exchanging their own US dollars for US gold such that by 1971, the US gold supply had dwindled from 20,000 tonnes to just over 8,000 tonnes (2). Given these alarming figures, the US government decided to default on their promise to back their dollar with gold and in that same year, in an event termed the Nixon shock, US President Richard Nixon cancelled the direct convertibility of the US dollar into gold (3). The Nixon shock killed the gold standard, turning the gold-backed dollar into a fiat currency - just like the Continental. Predictably, foreign demand for US dollars rapidly plummeted, as did the dollar's purchasing power.
|
Delegates attending the 1944 Bretton Woods conference.In 1971, President Nixon ended the convertibility of the US dollar into gold, in an event termed the Nixon shock. |
After the Nixon shock, the US government knew that if they were to retain their status as the world reserve currency, they had to change the game by once again giving foreign countries a compelling reason to buy and use US dollars. However, they could no longer do it honourably like before, as they no longer held the majority of the world's gold reserves. What they did next was nothing short of brilliant, and nothing short of diabolical.
From 1972 to 1974, the US government completed a series of agreements with King Faisal of Saudi Arabia, the most powerful nation in the Organization of Petroleum Exporting Countries (OPEC). The agreement was simple - all Saudi Arabia had to do was agree to sell all their oil in US dollars. In exchange, Saudi Arabia would receive US weapons and military protection against its powerful neighbours; being a large country with vast oil reserves, surrounded by stronger countries such as Iraq and Iran, this was a good deal for the corruptible Saudi rulers. Thus, from the ashes of the Bretton Woods system arose a new financial system, later dubbed the Petrodollar system. By 1975, the remaining OPEC countries had joined this Petrodollar system, selling all their oil in US dollars and receiving US weapons and military protection in return.
It is impossible to overstate the overwhelming economic advantage conferred to the US when the Petrodollar system came into being. The rest of the world was forced to obtain US dollars to buy oil, the lifeblood of their economies, and to do so many countries had to crank up their manufacturing and product exports to the US. In contrast, since the dollar was still a fiat currency backed by nothing, the US could simply print more dollars for oil. Where the rest of the world had to work for their dollars and oil, the US essentially printed (conjured) them up.
|
By forcing all oil transactions to occur in US dollars, the Petrodollar system created a global artificial demand for dollars that exists to this day. |
Essentially, the Petrodollar system has created a world-wide artificial demand for US dollars from the early 1970s until today, with the US acting as a middle-man in all oil exchanges, contributing nothing of value while forcing all others to make their oil transactions using their currency. Without the Petrodollar system and the artificial demand for dollars that it creates, there might be another saying now, "Not worth a US dollar," but the system has saved the dollar from its inevitable fiat demise - for a time.
Out Of Thin Air
If the Petrodollar system allows the US to remain mega-rich, why is the average citizen not rich? It's no secret that the wealth gap between rich and poor in the US rises with each passing year. Clearly, many US citizens do not gain from the Petrodollar system - in fact, very few do. So who actually benefits from this artificial global demand for US dollars? Who benefits from the creation of dollars out of thin air? Before we answer these questions, we must understand how dollars are actually created by the Wizard of Oz that controls the US financial system.
We'll start with elections, where politicians routinely make more promises than they can deliver on, though we like to hear them anyways. When elected, politicians use deficit spending (spending in excess of revenue) to pay for those promises using a government department called the Treasury that issues bonds (glorified IOUs that pay for the US government's borrowing needs); a bond allows the government to spend currency it does not have, yet promises to pay back over time, plus the interest on the bond. Essentially, bonds (short for "bondage") allow the government to spend currency they don't have at the expense of taxpayers, including future generations of taxpayers. Bonds are the US national debt.
|
Politicians routinely use deficit spending to deliver on their election promises - to pay for it, the Treasury issues bonds (glorified IOUs). |
Next, the Treasury hold a bond auction where the world's largest banks compete to buy the bonds that let politicians institute deficit spending. Naturally, when they buy a bond, the banks earn interest on it. Many of these bonds are then sold to the US Federal Reserve, or Fed; it is essential to realize that the Fed is a private corporation, owned by a closely guarded secret list of stockholders (most likely the bank-owners) who are paid 6% of all its profits. Moreover, when the banks sell bonds to the Fed, they make a further profit on the sale.
|
When the Treasury sells bonds to the banks, the Fed buys them by writing a cheque on an account with nothing in it (another IOU). |
Throughout this to-and-fro between Treasury and Fed, the bank-owners take their cut at every step: (1) when they earn interest on the bonds they buy from the Treasury, (2) when they earn 6% of all profits earned by the Fed (since they likely own it), and (3) when they make a profit on the sale of bonds to the Fed. Yet when the banks sell their bonds to the Fed, it has to actually buy them. How? By writing a cheque on an account with nothing in it (another IOU) - out of thin air. The banks then take this currency and use it to buy more bonds at the next Treasury auction. Repeat.
This is how deficit spending stimulates the Treasury and Fed to swap IOUs, using banks as middle-men, to create the US currency supply. It's not difficult to see who profits the most from this system - the bank-owners. As long as there is a global demand for dollars - and the Petrodollar system ensures there is - the process repeats over and over, enriching the bank-owners and indebting taxpayers, including generations of future taxpayers, by constantly raising the national debt. That's not all - actually, the above process only explains how <10% of US dollars are created out of thin air. Let's press on to see how the rest are made; this is where it gets amazing, where we really perceive the Wizard of Oz in action.
Ultimately, the Treasury accumulates currency which the US government uses to deficit spend on public works, social programs, and military purposes, including war. Nearly all the employees employed by these government sectors deposit their earnings into a US bank. This may come as a surprise, but US banks may, within certain legal limits, do what they want with most of each customer's deposit, such as gambling with it on the stock market or loaning it out. This is called a fractional reserve system (a banking system where banks are only required to hold a fraction of each bank deposit in reserve, and do what they want with the rest of it), a system that is truly spectacular in its absurdity.
To understand the fractional reserve system, let's use an example where a bank is required to hold 15% of the currency left by a depositor in reserve. If you loan 100 US dollars to this bank, it must hold 15 dollars in reserve, but may loan out the other 85 dollars. When this happens, the bank types into a computer 85 dollars worth of bank credit (an IOU) and lends out the "real" 85 dollars to a borrower, perhaps someone who is buying a home. It is essential to realize that from the original 100 dollars, there are now 185 dollars in existence, merely from the bank typing the additional 85 dollars into a computer - conjuring them out of thin air. Yet it gets even more fantastical. When the loaned 85 dollars goes to a borrower, who pays a seller, the seller deposits the 85 dollars into a bank, and the same process repeats - redeposit, relend, redeposit, relend, redeposit, relend - with currency typed out of thin air every step of the way; through the fractional reserve system, the original 85 dollar loan can easily create over a thousand dollars more.
This is how fractional reserve lending allows banks to type US dollars into existence and multiply the currency supply many times over. Once again, it's not difficult to see who profits from this system - the bank-owners. This process explains how >90% of US dollars are created out of thin air.
|
Collectively, the bank-owners are the Wizard of Oz in the US financial system; they rig the system yet remain hidden, such that their crimes go unnoticed. |