I.O.U.S.A. (35 page)

Q: What can we learn from Bretton Woods and the Nixon shock of
1971 and 1972?

Bill Bonner
: As I was saying, people can learn a lot from dead people, and what they had learned in the eighteenth century was that paper money doesn ’ t work. John Law had famously created a big scandal in France and practically bankrupted the French government. But in the nineteenth century, starting with Napoleon, all of the major money systems of Europe were anchored by gold. When countries traded with one another, c08.indd 120

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they traded with gold; and when you had a pound or a franc, it was backed by gold. That system was very, very successful; the prosperity of the nineteenth century was amazing. But that system broke down in World War I; you know, the governments, as they always do, spent too much money. Britain borrowed too much, France borrowed too much, and then they couldn ’ t pay it back because they didn ’ t have enough gold to pay that kind of expense.

That gold - backed system lingered on through a lot of the twentieth century. Governments would still trade gold, and currencies were still backed by gold — not perfectly, but still that system existed. The last stage of it was called Bretton Woods, and that lasted up until 1971. Prior to 1971, we had the Johnson Administration, we had the Great Society and the Vietnam War, and those things were very, very expensive. And somebody told Johnson, “ Wait a minute, you can ’ t have both guns and butter.

You can ’ t have a huge domestic spending program, the Great Society, at the same time that you have a huge war going in Asia.

That won ’ t work; we can ’ t afford that. ” At the time, the Democrats, led by Johnson, said, “ Oh, yes we can. We ’ re a big rich country, we can afford both guns and butter. ” But they couldn ’ t afford that much without raising taxes, and they didn ’ t want to raise taxes because then they wouldn ’ t be reelected.

What resulted from that was a run on America ’ s money, because people, especially the French, led by de Gaulle, saw that the dollar was weakening. France came to the U.S. Treasury building in Washington and said, “ Look, I ’ ve got all these dollars, I want gold. ” Richard Nixon looked at the situation and said, “ Boy, if they take all that gold, we ’ re not going to have much gold left. ” He
closed the gold window
— a phrase said by the Treasury Department — on August 15, 1971, and henceforth no foreign government could trade its paper for gold — trade dollars for gold.

After August 15, 1971, the worldwide fi nancial system no longer rested on gold. From then forth you could just trade paper. The dollar is a faith - based currency now; it ’ s not based on gold, but on the faith that people have that it ’ s worth something. This system c08.indd 121

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we have today is a very funny system, because at the bottom of it there ’ s nothing but air. And we have dollars fl oating all over the world.

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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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. That ’ s the gold standard.

Then there ’ s the other standard, the fi at paper standard or the faith - based standard, which we have today. This is entirely different because there ’ s nothing solid in it; there is no gold in it. Governments create money out of thin air. They create it by c08.indd 123

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spinning the printing press or by just crediting their member banks with a few billion dollars more. This type of money is fi shy, and the boom that this money creates is also fi shy, because it ’ s created from nothing. There are no savings and there ’ s no real money in it. Consequently you get a lot of spending but not much real wealth creation — not in America, anyway.

Q: Can you talk about the fact that Alan Greenspan, who had a
very long and prestigious run at the Fed, was a gold bug at one
point, and that he later embodied the opposite of what the
gold currency was set up to try to do? Is Greenspan a paradox
in some way?

Bill Bonner
: Well, I wouldn ’ t say Greenspan is a paradox.

Certainly, Alan Greenspan appears to us as a paradox, but to me it ’ s not much of a paradox. When he was young, before he had a dog in the fi ght, he was a very keen and smart observer, and he observed that gold was very important to an economic system.

He said that if you take gold out of the system, governments are able to infl ate the currency much more easily. It ’ s kind of a fraud on people who save, because they ’ ve been saving something that they thought was valuable, and when the government just spins up some more of it, all of a sudden it ’ s not worth so much.

Greenspan wrote that it was a fraud: that it was a theft to take that money from them.

But he was a human too, and human beings have their weaknesses. One weakness is that they want power. When Greenspan got power, he realized that his hard money views —

it ’ s called
hard money
when you believe in gold as a basis for currency — don ’ t square with the lust for power. When given the choice between his hard money views and his role with the Fed, he chose the role with the Fed. He always says that he still believes in what he wrote many, many years ago, but he certainly doesn ’ t practice it. During his time at the Fed, more new money was created than under all of the Fed directors and secretaries of the Treasury in American history. And again, this money was created out of thin air. This is just the thing that he argued was a kind of theft, when he was a young man.

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Q: Why was Wilson ’ s presidency and the Federal Reserve Act
important? Was that a watershed moment in economics, and
in the ability for the American soon - to - be empire, to be able to
create money?

Bill Bonner
: When we look at real economics, what we ’ re really talking about is real human beings and what they do. And when you look at real human beings, you fi nd that they have good points and bad points. One of the points about human nature is that they do like power. And the way people get power — this was true in Rome, and it ’ s true in America today — is by giving people something for nothing. Of course it isn ’ t really something for nothing; either they have to steal something from somebody else in order to give it to them, or it really turns out to be nothing at all. But this giving something for nothing is the basis of government debt and is also the basis of a lot of the mischief in foreign affairs. People get the idea that they ’ re going to pull off something really great and it never happens.

We see that over and over again in history. Read the history of Rome, of course, and it ’ s full of blood and guts and gore. But in American history you see it too, and we saw it with Wilson.

Wilson was a professor of government at Princeton. When he got into government, you could just watch his character evolve, and he gradually took on the role of a power broker. When World War I came along, Americans wanted to stay out of that war. It was a European war and they didn ’ t see any point in going to war in Europe. But Wilson managed the public opinion, with the help of the British, to stir up a kind of war fever. Why did he want to do that? Why would America want to get into Europe ’ s war? It was because Wilson himself wanted to be a power broker. If he could get into and be decisive in that war, then he could set the terms by which the war was settled. Sure enough, he went over to France.

And as soon as he got there, of course, all the Europeans, who were as cynical as hell, stabbed him in the back. The poor man had a stroke and never actually recovered. But he set the stage for this next phase of American military and political development.

After World War I, America was ready to play a role on the global c08.indd 125

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stage, because America at that stage was the world ’ s number one military and economic power. It also set the stage for the fi nancial development of America, because by setting up the Federal Reserve, by setting up the institutions which allowed America to go to war, it allowed America to begin social programs. These programs were not invented by America. They were invented by Germany, by Bismarck. But these things created the foundation of the next stage of American growth, which was going from the simple republic of the Founding Fathers to the megalomaniacal kind of empire that we have today.

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