My car is in the shop, which is no fun. But on the shuttle ride back home, the driver told me a wacky conspiracy-theory story which was fun. It doesn’t make up for the car repairs, but I’ll share it for entertainment value.
In 1929, the western world shifted from a value-based banking system to a debt-based banking system. In order to set up the Federal Reserve, the Americans borrowed tonnes of gold from the Chinese White Dragon society. This is a secret cabal of financiers whose assets derive from the Qing (Ching) Dynasty. After many efforts to secure repayment of the original loan, with interest, the White Dragon society took the Federal Reserve to international court in The Hague, and the Fed defaulted on their loan because they can’t get their hands on that much gold. The White Dragon society, whose number of investors has multiplied over time is now poised to for the West to revert from a debt-based to a value-based banking system. Unfortunately, the shuttle driver didn’t define what he meant by those terms.
While that story could provide a gripping plot for a novel, it’s full of holes. The most glaring flaw, in my mind, is that I don’t expect to learn “what’s really going on” from a driver at a car dealership. But it does raise the idea that debt isn’t sustainable. A more realistic (although simplified) history of debt and credit shows alternation between credit and coinage. That is to say, some societies used only money (often precious metals such as silver and gold) while others used credit (virtual money such as a tally stick or bills of exchange to record debts).
Up until 1971, the US used a gold standard. Each dollar printed was backed by $1 worth of gold that existed in a vault. This forced government restraint in printing new money, and it bolstered trust in the monetary system. If someone didn’t believe that a US dollar was worth accepting, they could exchange the bill for an equivalent amount of gold, leaving only those who trusted the system to exchange dollar bills. Since 1971, the US government has decoupled the money supply from the gold stock, printing money (or removing it from circulation) as needed. This approach works, as long as citizens continue to have trust in the government.
In Greece, we can see what happens when people lose trust. The government has taken on an untenable debt load. When lenders demand larger interest payments and capital repayments, the government tries to impose austerity. In response, the people feel ill-treated and riot. It seems likely that the government will default on the loans. The government has lost the trust of its citizens, and also of its lenders. Euros may be accepted for trade, but if Greece leaves the EU, it’s unlikely that they could institute new banknotes that would be acceptable to its citizens. Likely, they would require that the money be backed by value, such as gold.
The question is: could this happen elsewhere in the West? There is concern that Italy, Portugal and even Spain might be heading in the same direction. The US government has printed so much money recently that there’s a chance businesses and governments around the world will lose trust in US dollars. Central banks continue to own thousands and thousands of tonnes of gold, and could revert to requiring gold in foreign exchange transactions. But as long as computers and networks maintain and facilitate virtual accounts and payments, I think it’s very unlikely that our society will revert to coinage.