Wednesday, February 8, 2017

From Industrialization in Production to Industrialization in Paper Money

By the time of the Industrial Revolution, new technologies industrialized the economy and money just as it industrialized society as a whole. Money could now be printed en masse through the production of numerous paper bills. The economy also grew exponentially as never before. Thus it became beneficial instead of merely inflationary to grow the monetary supply as became easier than ever before.

Still gold was the basis of money at the start of the Industrial Revolution. At first, the Industrial Revolution and for that matter, the Age of Exploration before, led to gold rushes ballooning the amount of gold in circulation. The paper bill was merely a bank note that entitled its owner to obtain gold and other hard currency from the issuing bank. Yet limits in the growth of the gold supply and the ease and utility of growing the paper money supply led to a detachment of the backing of gold to paper money.

At first, it became more cumbersome to redeem a banknote for its gold. It became necessary to go to a national capital wherein the currency was issued, then only national governments retained the right to redeem their banknotes and finally in its final form the gold-backed paper currency of the Industrial Revolution became a fiat currency when President Richard Nixon declared that foreign nations could no longer trade their money for its set amounts of gold as Bretton Woods had determined (with the American dollar as the standard measurement unit to which foreign currencies were pegged).

While Nixon refused to redeem the bank notes of foreign governments as early as 1971, he did not immediately declare the conversion of gold-backed currency to fait currency. Instead he said that the redemption of currency was suspended and then over the next four years the United States Federal Government shifted to a petrodollar system. The petrodollar system was that the United States Armed Forces would protect the oil wealth of oil exporters, in return the oil exporters would accept only dollars for their oil and would invest their surplus dollars into financial investments in the United States.

Thereupon the peg of foreign paper currency to American paper currency was secured, as foreign corporations depended at least two currencies—their own to do business in their native land and American currency to buy the oil that fueled their industrial technologies. In fact, the main exceptions to this dependency on two currencies were in those minor nations that abolished their national currency in favor of accepting the American dollar as legal tender!

1 comment:

  1. Why did we abandon the gold standard? I discuss that here.