In 1716, Scotsman John Law helped the French government establish the Banque Royale, issuing notes backed by the value of France’s land holdings west of the Mississippi. Banque Royale issued too many notes, and the French government went broke—for the same reason the French government is broke today. (Meanwhile, with the fates looking toward bank scandals of the distant future, John Law was created “duc d’Arkansas.”) But the most extensive Western experiment with paper money took place right here. In 1775 the Second Continental Congress not only created paper money but passed a law against refusing to accept it. The Continental Congress issued too many notes and . . . a pattern begins to emerge. All fiduciary money is backed by a commodity, even if the backers are lying about the amount of that commodity. Historically the commodity most often chosen has been gold. By the nineteenth century, the major currencies of the world were based on gold, led by the most major currency: the British pound. This was a period of monetary stability and, not coincidentally, economic growth. There are people who think we should go back on the gold standard, and not all of them have skinny sideburns, large belt buckles, and live on armed compounds in Idaho. Money ought to be worth something, and gold seems as good as whatever. But there’s that endlessly perplexing relationship between money and value. The high value of gold is a social convention, a habit left over from the days when all bright, unblemished things (people included) were rare. Gold may go out of fashion. A generation may come along that, to the surprise of its parents, regards gold as gross or immoral, the way current twenty-year-olds regard milk- fed veal. And gold is a product. Different ways to get huge new amounts of it may be discovered. This happened to the Spanish. When they conquered the New World, they obtained tons of gold, melted it down, and sent it to the mint. It never occurred to them that they were just creating more money, not more things to spend it on. Between 1500 and 1600, prices in Spain went up 400 percent. Presented with the enormous wealth of America’s oceans, fields, and forests, Spain took the gold. It was as if someone robbed a bank and stole nothing but deposit slips. Gold is an irrational basis for currency, but the real problem with fiduciary money—from a government standpoint—is that it’s inconvenient. A currency that can be converted into a commodity limits the amount of currency that can be printed. A government has to have at least some of the commodity or the world
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