The Weiner Component V.2 #33 – The Concept of Money: Part 1

Various Federal Reserve Notes, c.1995. Only th...

Various Federal Reserve Notes, c.1995. Only the designs of the $1 and $2 (the latter not pictured) are still in print. (Photo credit: Wikipedia)

English: USA annual GDP from 1910-60, in billi...

English: USA annual GDP from 1910-60, in billions of constant 2005 dollars, with the years of the Great Depression (1929-1939) highlighted. Based on data from: Louis D. Johnston and Samuel H. Williamson, “What Was the U.S. GDP Then?” MeasuringWorth, 2008. (Photo credit: Wikipedia)

Perhaps one of the most misunderstood terms in the world today is money.  Practically all people understand it to be what it was one hundred years ago.  Money can be used as a commodity; whereby it can earn more money.  But it has always had that ability.  Mainly, however, it is a means of exchange.  It allows goods and/or services to be transferred into other goods and/or services.  By itself today it has no intrinsic value.

 

Most people think of it as having an intrinsic value that it had up to the end of the first third of the 20th Century when it mainly consisted of precious metal.  The problem with money being a precious metal like gold or silver is that it makes two unrelated entities dependent upon each other.  These two entities are never in balance.

 

For the economic system of a nation or nations to work properly there must always be enough precious metal available to equal the required amount of exchange of goods and services.  This condition has almost never existed.  With the exception of the 16th Century, when there was too much gold available in Europe because of the looting of the New World, there has never been enough precious metals available to match the needs of the business world.  Today all money in every country consists of valueless tokens generally printed by the Government controlling each particular nation.  This allows for a reasonable exchange of goods and services.

 

The wealth of a nation is not its money supply; it is the human productivity of a fiscal year, twelve months.  Since it is a measurement the value of the goods and services are expressed in terms of dollars or whatever the monetary measurement is of the particular country.  It is the Gross Domestic Product, the GDP.

 

Today money is a tool, having no value in itself, that allows for the exchange of goods and services within each nation.  Its effectiveness is determined by the sophistication of the nation utilizing it.  The amount needed within the society is ever changing.  The ability of each particular nation to determine these changes and continually bring them about determines the level of sophistication.  It is not an easy process.

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Little is actually known about the specific origins of money but the probability is that it was first used by the Phoenicians in the pre-Christian era (1500 to 300 BC).  They were one of the first known merchant groups, trading along the shores of the Mediterranean Sea.  Initially goods were traded for other goods (barter) or for valuable metals, gold and silver.  Presumably scales were used to measure the gold or silver that was traded.  At some point, during this period, someone came up with the idea of taking a small weight of the metal and stamping its weight upon it.  Eventually this would be replaced by some sort of image, probably a side view of the ruler.  These would be the first minted coins.  Less expensive metals could be used for smaller amounts.  The development of this process could have taken hundreds of years.  The value of money would be universal and largely equal, making the coins equally usable in virtually any nation.

 

This type of trade would continue into the early 20th Century.  With time and the development of technology, coins would become sophisticated but the methods of international trade would remain essentially the same.  During the 14th and 15th Centuries Letters of Credit would become available with financial institutions having offices or banks in a multitude of countries making international trade easier.  The use of checks would develop later.

 

When the Great Depression began in 1929, the Republican, Herbert Hoover was President of the United States.  Hoover believed in the Free Market making all economic decisions and kept waiting for prosperity to return.  The depression continued, growing deeper.  In 1933, the Democrat, Franklin Delano Roosevelt was elected President.  He had promised the nation a New Deal.  His program was Relief, Recovery, and Reform.  Suddenly in various ways the Federal Government began providing for people who couldn’t provide for themselves.

 

The program had to be paid for.  The GDP had decreased as unemployment increased.  The government couldn’t raise taxes.  What the Roosevelt Administration did was to collect all the money in the country; that is, collect all the gold coins.  Many people objected, the government sued them and won every case.  The coins were melted down into gold blocks and paper gold certificates were issued and kept by the Federal Government.  Presumably, based upon the gold certificates paper money, Federal Reserve Notes, were issued in place of the gold coins.  In addition the government legally changed the value of the gold from sixteen dollars an ounce to thirty-two dollars an ounce.  The Federal Government doubled the money supply and kept half of the newly created money to pay for its programs.

 

One dollar and five dollar bills were silver certificates, ten dollar bills up were Federal Reserve Notes.  The question arises: Did the Federal Government carefully monitor the amount of paper money it issued to perfectly match the gold certificates it held.  The answer, I suspect, would be, No.  I remember, as a child, in the late 1930s hearing how good the money was because of the gold certificates.  But I never heard of anyone questioning the issue.  It was just assumed.  In point of fact, the probability is that money was issued as needed.  The gold certificates, while they did exist as the basis of money were essentially a fiction.

 

World War II ended the Great Depression.  The United States became the “Arsenal of Democracy;” it essentially supplied all its allies with the materials they needed to fight the war.  Initially the allied nations sent their gold to the United States for safe keeping.  But as the war continued they used that gold to buy food and materials to fight the war.  In time they spend all the gold and were still fighting the war.  Roosevelt came out with his “Lend Lease” plan, which was to continue to supply the Allied Nations in their fight against Germany, Japan, and Italy; the Axis Nations.

 

Actually the U.S. wanted to avoid the mistakes made during W.W.I.  Then, America lent money to the Allied Nations in its war against the Central Powers, Germany and Austria Hungary.  Most of that money was never repaid and led to bad feelings between the U.S. and its war allies.  Lend Lease was actually a gift to the Allied Nations.

 

It is estimated that the United States spent 1,075 trillion 1945 dollars in fighting W.W.II.  Where did all this wealth come from?  The answer would be from the Federal Reserve printing presses.  The amount of money merely denotes the productivity that was needed to win the war.

 

The Federal Government raised taxes and sold war bonds to raise money.  It rationed almost everything so that there was very little upon which to spend money.  After the war ended there was a burst of spending upon almost everything.  That and the government paying for many veterans to finish their education avoided the recession that followed W.W.I.

 

Basically what the government did was to print money as needed.  The gold certificates still existed even though they were basically a fiction.  No one questioned the situation because economic prosperity existed throughout the country.  The so-called process of paying for the war got the country out of the depression and brought about economic prosperity.

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When World War II ended in 1945 those areas where the war had been fought were a shambles.  They had undergone massive destruction from bombing and battles fought during the war.  Their infrastructure and much of their cities of Europe had been destroyed during the six years of warfare.

 

Politically the world emerged in 1945 with two political systems: one largely capitalistic led by the United States and one communistic led by the Union of Soviet Republics or Russia.  Russia was attempting to dominate the world by spreading its influence over non-communist countries.  It was felt in the United States that Russian efforts could be successfully countered by helping the war-torn countries return to prosperity.

 

The Marshall Plan or European Recovery Program (ERP) was introduced by George Marshall, the United States Secretary of State in June 1947 in an address at Harvard University.  It came into being by law on April 8, 1948.  Its objective was to rebuild war-devastated regions, remove trade barriers, modernize industry, make Europe prosperous once more, and prevent the spread of communism.  The United States gave over $13 billion.  This would be $130 billion in 2016 dollars to help rebuild Western Europe.  Approximately 26% went to the United Kingdom, 18% went to France, and 11% went to West Germany.  18 countries received Plan benefits.

 

In the United States taxes were not increased.  It did not increase the National Debt.  Where did this money come from?  The United States printed and issued it.  Actually what they issued to the different European countries were checkbooks with amounts of money that could be spent in the United States.  The Marshall Plan lasted four years.  Its result was to not only return Western Europe to prosperity it was also to maintain prosperity in the United States where most of this money was spent.

 

By arbitrationally issuing this money the United States brought prosperity to Western Europe and expanded it in the United States.  There were no financial upsets and no real inflation.  The basic money supply of U.S. currency was simply increased.  The conclusion this leads to is that this money was needed not only by the United States but also by the rest of the world.  It allowed for a massive expansion in national and international production.