Your Money Is Worthless

Celebrating 100 years of our global reserve currency

Your Money Is Worthless

Did you know that 30% of Americans still believe to this day that the U.S. dollar is backed by gold?

Let me tell you what money used to be, what it is now and find out why that 100$ bill in your pocket is actually (almost) worthless.

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Money as a store of intrinsic value

The problem

Around 5000 years ago in Mesopotamia, some smart minds figured out a way to trade their goods better.

Say I was a sheepherder back then, needed a new pair of shoes and went to the shoemaker to get me some. Probably not shiny white sneakers but some leathery somethings that protected my feet when herding.

I offered the man a sheep but unfortunately, my old rival sheepherder-Jack went to him yesterday in need of a new pair of shoes and had already sold him a sheep. So my shoemakers sheep-needs were met. What he needed though, was somebody to fix his leaking roof.

So in order to get me those nice new kicks, I had to find somebody who knew how to fix leaking roofs and needed a sheep. Not the most convenient thing in the world.

The solution

So some smart minds figured out a way to do it better.

What did everybody need back then? Right. Food. So the shekel was invented. It was a standardized unit of weight for a certain amount of barley. Smart move, because now I could go to the market, sell my sheep for 3 shekels and buy me a new pair of shoes with one.

And this is just one example where money was based on a commodity. Other regions of the world used cowry shells for example. These units of trade had an inherent worth on their own. Money was invented.

Money as a voucher

Let’s make a tiny little leap in history. Say… a few thousand years.

During WWI the dollar had already started to rise to power due to Europe emptying their gold chests in order to fund the war as well as borrowing money from the U.S. in the form of dollars. Until that point, the British pound had been the world’s reserve currency.

Another small jump.

It’s the Second World War. In 1944 and the allies meet in Bretton Woods, New Hampshire. They agree on making the U.S. Dollar the new global reserve currency.

The gold standard

In the past, global currencies were backed by gold. That means the issuing governments held a certain amount of gold and issued paper money according to the gold’s worth.

That means — to make it easy — that money was a voucher for gold held by the government.

Let’s continue to make difficult things as simple as possible: Back in ‘44, the U.S. had the biggest gold reserve, that was the reason why the allies agreed to make the dollar the global reserve currency.

The idea was as a government to have a certain amount of dollars ready for the case that the own currency was devalued. If that were the case, the countries could use their dollar holdings to buy back their own currency on the market, decreasing the amount in circulation which meant an increase in price.

Money as an idea

So far so good. So now we either had currencies that have had an intrinsic value (meaning they had worth on their own) such as cowry shells or golden coins or we had vouchers representing the value of something, like gold or silver, held by the issuing entity.

Let’s fast forward again but not that far this time.

After WWII Europe and Japan were rebuilt with the help of the U.S. The Marshall plan (Europe) and the Dodge plan (Japan) helped the losing countries in simple terms by printing dollars that the countries could use to buy imported goods and rebuild the economy.

“PAYABLE TO THE BEARER ON DEMAND”

In 1959 the U.S. faced a problem: The number of dollars in circulation for the first time exceeded the U.S. gold reserve.

So the U.S. did what they had to do. They abandoned the gold standard.

Now, this is where it gets interesting. We have a global reserve currency that has no intrinsic value (like a shekel of barley that you could eat or a rare cowry shell) and is no longer redeemable (like a voucher).

Up until 1963, every dollar note had the imprint “PAYABLE TO THE BEARER ON DEMAND” because, in simple terms, the Federal Reserve had the measures to pay out every single dollar in gold. In ‘71 Nixon issued Executive Order 11615 and finally put an end to that.

Yes, before a riot breaks loose due to inaccuracies: For the U.S. people redeeming gold from the Federal Reserve with a dollar bill wasn’t possible from 1933 onwards but at least, the Federal Reserve, in theory, had the means to do so.

Money had become an idea. A promise if you will. A promise by the U.S. government that if I receive 1$ today, somebody somewhere else will give me something in exchange for it tomorrow. And our global monetary and economic systems run on that idea.

“Federal Reserve notes are not redeemable in gold, silver, or any other commodity. […] They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve bank. […] The Congress has specified that Federal Reserve Banks must hold collateral equal in value to the Federal Reserve notes that the Federal Reserve Bank puts in to circulation. This collateral is chiefly held in the form of U.S. Treasury, federal agency, and government-sponsored enterprise securities.” — The Federal Reserve

The question remains: What is “lawful money” if it’s not the dollar, gold or any other commodity?

Money backed by debt

To put really complicated things in as simple terms as possible: Our monetary and economic system are backed by debt.

The Federal Reserve needs to inflate the money in circulation in order to keep the economy going. If it didn’t the economy would collapse. So the U.S. basically “buy” the money with collateral like U.S. Treasuries. That means money is being printed on the promise that the U.S. states debt will be paid back.

This is the point where we go from “interesting” to “concerning”.

No, this is not going to be a doomsday prediction but it is something to think about.

The problem with paying back debt is that the U.S. actually has a lower GDP than it has debts. Some would go as far as to argue that the U.S. is actually already bankrupt or at least heading there but let’s not get too crazy now.

In the graphic above one can easily see that since 2012 the U.S. debt has constantly been equal or higher than 100% of its GDP.

In simple terms, currently, each year the economy generates less money than the state generates debt. Therefore more debt is being piled on. More debt means more interest.

That is also the reason why we currently have a time of historically low-interest rates. If the interest rates were higher, the country’s problems with paying back debt would even worsen.

Zero to negative interest rates are not just not impossible anymore. They are actually here.

So things don’t look too bright when it comes to paying back debt if we think about the fact that in 2025, interest on the debt of the U.S. alone will be higher than its defense budget.

So where do we go from here?

Money in the future

For most of us (I assume anybody reading this), the dollar has been the global reserve currency in all of our lifetimes. We always assume that this is forever going to be the case because… well… we don’t know it any other way.

But looking back in history global reserve currencies have had a certain lifespan.

So since the Renaissance, every global trade or reserve currency had a lifespan of around 100 years. The shortest lifespan being 80 and the longest 110 years.

If we say that the U.S. dollar became the global reserve currency at around 1920 in post-WWI that would mean that it’s been pretty much exactly 100 years.

So what’s next?

Well, hard to say. Especially for me because I’m definitely not an expert on the field but I guess for pretty much anybody out there as well.

I personally don’t believe in doomsday, global-meltdown kind of scenario. We’ve always figured out a way to prevent these things and this time will be no different. History repeats itself.

But if we stick by that statement that history repeats itself then we also have to think about the fact that the U.S. dollar has roughly been our global reserve currency for 100 years. And history has taught us that this is roughly the lifespan of one.

So if it’s not going to be a global meltdown, what is it going to be?

Well, option one is that everything keeps on going the same direction, we have negative interest rates for a while, the debts somehow work themselves out and the dollar remains our global reserve currency.

Not impossible but probably not the most plausible of all scenarios.

Another option would be that the next big crash that’s possibly around the corner (we’re in the longest bull market in history) hits us and a different currency will take over the place in the spotlight.

There are a few contenders for this spot. The Euro, of course, comes to mind. China’s Renminbi or it’s planned cryptocurrency-like DCEP would be possible.

Or maybe the next global reserve currency was actually already invented in 2009.

The real worth of 100$

I promised you the answer, here it is. If it’s not backed by gold, nor backed by silver and not redeemable in any way…

What’s a 100$ bill actually worth?

If it’s not backed by anything, the real value of a 100$ bill consists of the production costs of 14.2 cents per note and the general agreement of the people that the 1$ I receive today will be spendable tomorrow.

It’s 14.2 cents plus the agreement that if I receive 100$ today, tomorrow someone else will gladly take it from me and give me something for it in return.

It’s 14.2 cents plus the idea, the general agreement of the people and the U.S. government that the debt will be paid back at some point.

Now there’s only one question that remains:

“How?”

https://usdebtclock.org/

Nobody knows what the future holds. Our economic system has become far too complex and too dependent on too many factors to certainly say which direction we’re heading and how we could solve these emerging problems in the future. Especially for a layman like me.

I’ve tried to write this article as easily understandable as possible. The problem is that the whole topic is *immensely* complex and to explain it better you’d need to be an expert on the field who writes about a thousand articles of this one’s length to paint a clearer picture.

This is a topic of great interest to me though and I think that it is something that people should hold in the back of their minds or should at least have heard about at some point. That’s why I wanted to share it with you.

What I believe is that we should not treat the possibility too lightly that the dollar could lose its value. Hyperinflation has happened to other fiat currencies before and there’s no reason why this would be impossible for the U.S. dollar as well.

Do I think that doomsday is upon us and we’ll soon all sit around the bonfire, singing songs about how great the days were when we still had electricity? No.

But do I think we’re at an uncertain time with uncertain directions and we should make sure that we’re not caught off guard when things don’t figure themselves out?

Oh yes.

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Find me on my blog at www.anewpathblog.com or on Twitter or Instagram. You can also sign up to my newsletter to stay connected here: http://eepurl.com/gMzA-9

This article was first published here on February 1st 2020.

finance
Dr. Arthur Kroisel
Dr. Arthur Kroisel
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Dr. Arthur Kroisel

I used to be an anesthetist. Now I'm happy instead. Constantly pursuing the improvement of my life and the lives of the ones around me.

Find me at www.anewpathblog.com, or sign up to my private newsletter here: http://eepurl.com/gMzA-9

See all posts by Dr. Arthur Kroisel