There was a time, long ago, that people knew the value of a dollar. And this is not in some “pulling yourself up by your bootstraps” sense. I mean, they literally knew what a dollar was worth. For most of 1975, a dollar had a specific value such that one troy ounce of gold was worth $42.22. Exactly. There was a time when banks had to make sure that they had enough gold in their vaults to fund all of the paper money that they had issued. Since the Federal Reserve was established in 1913, that meant that all of this gold was kept in the same place. Safe and sound, and ready to be exchanged at a flat rate for paper currency.
You might remember me mentioning gold and its relative value vis-à-vis anything else. I talked about how Nietzsche spoke of gold’s relative worthlessness. Of course, today we have tons of industrial purposes for it but by and large, most of the gold in the world today is socked away in various hoards because gold’s real value is its exchange value. This is what Nietzsche was talking about. We value it because it’s very, very shiny and has little or no use outside of this fact. So for time immemorial we’ve used gold as a currency itself. Gold (and silver) coins were the most common form of currency. You can’t forge a gold coin because no matter what, you still need freaking gold in order to make the coins. So gold always has intrinsic value.
A friend of mine says that gold used to be backed by grain. Which is an interesting idea that I haven’t backed up with any formal research. Anyone with any further insight into this would be repaid handsomely in honor and accolades.
The problem with gold, of course, is that it is also very, very heavy. So carrying chests of it around is awfully inconvenient and requires carts and wagons (or trucks in today’s world) and a security detail (who must all be paid well in order to make sure they don’t rob you themselves). So paper currency, pegged to the value of such-and-such amount of gold was invented. But this paper currency (usually issued by a private bank) had to be backed up by that gold and had the promise of such an amount of gold upon presenting it at the issuing bank. This is what builds confidence in a currency.
During World War II, the Japanese hoarded tons and tons of gold as part of their plan to create a new, stable currency that would become the standard currency for their entire Pacific empire. As terribly as they lost the war, they knew that if they won, they would need to have the confidence of the consumers in their currency or there’d by no way in hell that it would maintain any sort of real value.
But many, many currencies are off the gold standard now. In particular, the US dollar (the third most valuable and by far the most pervasive currency) is not pegged to any specific value of gold. To make this point really clear, consider that gold no longer has value but instead has a price. What I mean is, gold used to, essentially, be our currency, though it was abstracted through the use of paper banknotes. Now, gold is just another commodity with a price and not a particularly standard price either. It’s continually fluctuating. At the time of this writing, the price of gold is 942.80 USD per troy ounce. The gold itself isn’t changing, however. It’s only the standard price that people would be willing to pay in American dollars.
Here’s the thing. Paper money is worthless. It’s even more worthless than gold (and gold is essentially worthless; I mean, you can’t eat it). Paper money only has value insofar as everyone involved in its distribution can agree that it has value. That’s it. If nobody can agree that it has value, then it has no value whatsoever.
Take for instance, the scene in the novel The Restaurant at the End of the Universe where a bunch of morons (modern humans) have crash-landed on a primitive planet Earth. They quickly decide to adopt the leaf as their standard currency and all assume that they are rich since there are so many trees. But of course this leads to rampant inflation and even simple transactions require the exchange of, say, an entire deciduous forest.
So why is the US Dollar proof that Americans are stupid? Because somehow they have decided to trust the US government and the federal reserve enough to allow them to back the US dollar with–get this–nothing at all. There is nothing backing our currency. It has zero real exchange value. Zilch. Nada. Absolutely nothing.
They have essentially adopted the leaf as a national currency. When the Fed decides we need more, they just print more goddamned money and there’s nothing in the vaults to back it up. They create this crap out of thin air and Americans accept it!
It’s traded on currency exchange markets. It supposedly has an exchange value (and technically does, since people are still willing to exchange it for goods and services) but this isn’t guaranteed by anything except the Fed’s word that the dollar will maintain its value. But what is it worth? We don’t know because it isn’t pegged to anything!
The biggest and most profound evidence of human stupidity is the fact that other countries love the dollar. In a sense, it’s a pretty remarkable currency because, despite its utter worthlessness, it has managed to remain stable (the most important property for a currency to possess) for decades. There has been steady, but not uncontrolled inflation over the years, but it really hasn’t been a huge problem. Most Americans live pretty comfortably in their absurd little fantasies about the stability of the greenback.
Is it going to come around and bite us in the ass? Probably. Is it going to become necessary to peg the US dollar to some precious metal in the future? I have no idea. I’m not an economist. It just seems absurd that people are willing to trust a currency that has absolutely nothing supporting it whatsoever except, what, credit?
Alles dass Glitzern