It’s a sorry state of affairs when the three main economic players in the world are all on a razor edge of disaster. America has a debt problem; the Eurozone has a budgeting problem; China has an inflation problem. Such are their trading interconnections, however, that blunders by any one of them would inevitably — and immediately — have devastating effects on the others (including the writer and the readers of this piece). What makes it even sorrier is that each of their governments (quasi government in the case of the Eurozone) spends a lot of energy telling the others what their faults are and how they ought to correct them rather than get on with solving their own.
It’s a case of: “Why beholdest thou the mote that is in thy brother’s eye, but considerest not the beam that is in thine own eye?” (St Matthew, ch7, v3). [Translation: “mote” is a speck of dust; “beam” is a larger intruder.]
Actually, the “motes” and “beams” in the present case are the same things — large financial imbalances both within each of the players and between them — as all of them strives for more economic growth. America wants more growth because it needs to regain the prosperity for all that seemed close to taking place until 2007. The Eurozone needs to do so in order that its southern member nations can reach the prosperity of its northern members. China needs to do so because two-thirds of its population are still living in poverty.
The situation is that all three main players have too much money and are short of it at the same time. So far, the fact is that the economic growth of the last 300 years or so has involved an explosive leap in the number of transactions. These, in turn, have needed more and more money. Thus the original world-wide currency (gold coins) has had to be vastly expanded in subsequent Stages. These are: 1. banknotes (printed by banks), 2. personal cheques, 3. banknotes (printed by governments), 4. house mortgages/hire-purchase/personal credit cards, and finally 5. derivatives. Each stage of new money involved a distinct quantum leap upwards in the total amount that was available to be exchanged as prosperity proceeded from the few to the many.
For example, the growth of wider prosperity would have ground to a halt in the late 19th century if personal cheques had not taken over the main burden of transactions. In England (preparing the way for all other aspiring nations) there were far more personal cheques than banknotes in circulation. It was only the marginal balances between cheques going to and fro that needed to be settled up at bank level with banknotes. In turn, the still large number of banknotes (at Stage 1) could be exchanged for gold coins if necessary. However, most people didn’t bother; banknotes were much more convenient and safer to carry around than gold coins.
Similarly all of the above Stages, can be referred back to a preceding Stage and then ultimately to gold coins. Yes, even now. Despite the immense pressure that America put on its Allies in 1944 (Bretton Woods Agreement) to get rid of their gold and use only the dollar for international trade balances, the European central banks did so very reluctantly. When America cut the link between the dollar and gold in 1971 (President Nixon’s fiat), the European central banks still valued the gold that remained in their vaults for the sake of their own currencies. At end-1999 when America hauled the central bankers up to Washington as though they were naughty schoolboys and gave them yet another warning that they must continue to sell their gold until there was none left for currency purposes (the Central Bank Gold Agreement), the European central banks slowed down sales even more and, finally, by 2009 had stopped completely and had started buying it again.
This is the underlying reason why the price of gold has been going up since 1999 (fivefold so far) and continues to do so. Among the central bankers there are those (particularly the Swiss and the Germans) who well enough know the history of finance during the 19th century. They know that gold was the foundation for no inflation at all in that century even though man was then taking economic strides bigger than ever before in history. And then there is an exponentially growing number of individuals who are now buying gold coins. Gold mines are now re-opening (even ancient Greek and Roman ones). Mints are working overtime. Gold shops and exchanges are opening in the more prosperous cities of Asia. Gold cash machines are now being installed in Europe and America for those who are frightened of where the dollar and the euro are heading.
In summary, all the Stages mentioned above came about naturally. They were not planned. They were quirky ideas that happened to fit a big need at the time (unfortunately, Stage 3 was money for warfare). If so, what is the next stage beyond derivatives? Is there one which will get us all out of our present scrape. If so, there’s no sign of it yet. And there have never been so many economists and financial whizzkids and journalists in the world as now — millions of them — quite besides eccentric bloggers on the Net (of whom I may be one. It’s for you to decide!).
However, the chances are that, in the course of the last century, we have now come full circle and are once more reverting to the useful bedrock that will prevent governments from continuing their money-printing games. Once the price of gold reaches the necessary level — and no-one can guess what this might be — then it will regain its natural place. Whether this takes place by agreement between the three main players or via a catastrophic breakdown in one of them remains to be seen.
What I would recommend to, say, Bernard Bernanke, the Chairman of America’s central bank (the ‘Fed’) — and President Barack Obama, for that matter — is to take a week off work and read the great classic work, The History of England by Thomas Babington Macaulay wherein he will read how the first central bank got accidentally started and thus why money has had to go through so many gyrations since then.