The Global Currency Plot

[H]istory … provides the most vivid illustration of the direct link between a state’s internal powers of counterfeiting and its policy of external aggression, as well as the banking and business elite’s conspiracy with the state in its expansionary desires.
– HANS-HERMANN HOPPE

The state has only one source of finance: the income and assets of its subjects. But how can the state acquire these funds? It can rob openly by levying taxes. But that quickly reaches its limits. The robbed realize that they are being looted and rebel if they feel the tax burden is too high. It is much more convenient for the state if it can create money at its own discretion and buy the desired goods and services on the market in return. But how does the state find such a favorable position for itself?

As shown in chapter 6, money can only come from a tangible asset. Even a state cannot create money simply by decree. If the state wants to become the absolute ruler of money, it must first make do with what is there already: commodity money in the form of gold and silver.47 To gain full sovereignty over money, the state must work over the long term. As a first step, it will monopolize the coin business: coins may be minted from now on only in the national mint. A fee is charged for minting gold and silver coins. The mint profit (seigniorage) goes to the state.

The coins are given the state stamp, a symbol that is acceptable to the state. The state will ensure that the name of the coin is separated from its physical material. For example, “gold gram” or “silver ounce” become “US dollar,” “mark,” or “franc.” In this way, the commodity money in circulation is most closely linked to the ruler or the state.

Once the state has the monopoly over the minting of coins, it sets about reducing the precious metal content of the coins. Put simply: one mark, which previously equaled 0.50 grams of fine gold, now contains only 0.25 grams of fine gold. This allows the outstanding amount of money that can be extracted from a given stock of precious metals to be increased (in this case doubled). The state earns by reducing the precious metal fineness of the coins. But such a coin debasement quickly reaches its limits: if the coins literally become too light, the fraud is noticeable and the acceptance of the coins in trade dwindles. The state will therefore look for more effective measures.

In a commodity money system, the state can take a major step toward its objective of enriching itself by allowing banks to operate with a fractional reserve. In other words, it allows banks to create their own money by granting loans: banks issue banknotes and sight deposits on credit that exceed the amount of gold and silver that customers have stored with them. The increase of money by credit serves the interests of the state and the banks. The state can borrow from the banks and pays an interest rate that is lower than the interest that would normally have to be paid. The banks benefit because lending in a fractional reserve system gives them high profits.

But there’s a catch: if customers realize that banks can’t convert all the banknotes and bank balances they’ve issued into precious metal at any time, as they promised, panic can easily break out. Then the customers storm the bank counters (bank run) and demand the exchange of their banknotes and sight deposits for precious metal. If the banks are unable to do so in full, their insolvency becomes apparent. If one bank fails in a fractional reserve system, it is very likely that all other banks will also become insolvent.

Consequently, if a bank run occurs in a fractional reserve system, the state uses a trick: it suspends the banks’ obligation to in redeem precious metals. Owners of banknotes and sight deposits will be informed that their claims will no longer be exchangeable for gold, at least temporarily. Such a suspension of the gold redeemability of banknotes and sight deposits is, however, awkward for the state and banks. Those affected, who no longer have access to their gold, protest, and the trick cannot be repeated too often. Suspending the promise to exchange bank money for gold is therefore not a satisfactory solution for the state and the banks.

For them it is much more advantageous if the money is dematerialized and thus can be multiplied at will, and if there is a central authority that directs the fate of the dematerialized money—in favor of the state and the banks. In other words, the state and banks want a central bank that has a monopoly on money production. Such a central bank, which enjoys great prestige and trust—after all, the state stands behind it—reduces the likelihood of a bank run, and thus increases the inflationary potential of the state and the banks.

With a central bank, the backing of money by gold can be ended. And this is exactly what in the meantime has happened in all countries of the world. It has taken a long time to get there. But in the end the states were successful: they have gained the monopoly over money production and replaced the material, or gold, money with their own unbacked paper money. Let us look at the example of the United States. The Coin Act of 1792 defines the US dollar in gold and silver fine weights.48 The United States thus has a bimetallic system: gold and silver are officially money. In 1873, silver is demonetized, and the dollar is de facto defined only in gold. From now on, $20.67 equals one troy ounce of gold.

On April 5, 1933, President Franklin D. Roosevelt (1882–1945) bans Americans from owning gold. The gold stocks stored in banks must be handed over to the US Treasury Department. In return, customers receive dollar banknotes and sight deposits at US banks. Americans will no longer be able to exchange their banknotes or bank deposits for physical gold. The yellow metal disappears from daily payment transactions. Only large-volume, international payment transactions between central banks are carried out with gold.

In early 1934, the Roosevelt administration decide to devalue the dollar against gold (the Gold Reserve Act). For that purpose, the previous price of gold is raised from $20.67 to $35 per troy ounce. As a result, gold rises by 69 percent against the dollar—and accordingly the purchasing power of the US dollar, measured in gold, drops by about 41 percent. Since this measure increased the amount of dollar money, goods prices subsequently also rose markedly. By the way, it was more than forty years before President Gerald Ford (1913–2006) decided in August 1974 to lift the gold ban: it was not until 1975 that Americans were allowed to own gold again.

But gold does not lose its money status as a result. In 1944, an agreement is reached in the form of the Bretton Woods system to restructure the world’s monetary relations.49 The US dollar is chosen as the world reserve currency. Thirty-five dollars is equivalent to one troy ounce of gold. The other currencies (such as the British pound and the French franc) are pegged to the dollar at a fixed exchange rate. Thus, they are indirectly anchored to gold. However, we should not jump to the conclusion that the Bretton Woods system was a gold standard. It was only a pseudo–gold standard;50 chapter 16 explains this in more detail.

The Bretton Woods system fails due to its faulty design. On August 15, 1971, President Richard Nixon (1913–1994) proclaims that the gold redeemability of the US dollar is temporarily suspended; this is the largest act of monetary expropriation in currency history. As a result of this unilateral decision by the Americans, the US dollar and all other important currencies of the world are deprived of their gold cover. Thus the world monetary system loses its anchorage in gold. The currencies are turned into fiat money by a coup de main. The following chapter explains in more detail what fiat money is and what it causes.

• 47For this explanation see Murray N. Rothbard, What Has Government Done to Our Money?, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2010).
• 48371.25 grains of fine silver and 24.75 grains of fine gold equaled $1; 1 troy ounce of gold (31.10347 grams) equaled 480 grains. Because the dollar was defined as 371.25 grains of silver, 1 troy ounce of silver was about $1.2929 (480 grains divided by 371.25 grains per troy ounce), and the price of 1 troy ounce of gold was about $19.3939 (480 divided by 24.75). See also Milton Friedman, Money Mischief: Episodes in Monetary History (San Diego, CA: Hartcourt Brace, 1994), pp. 53ff.
• 49See for example Ben Steil, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Princeton, NJ: Princeton University Press, 2013).
• 50See also Thorsten Polleit and Michael von Prollius, Geldreform: Vom schlechten Staatsgeld zum guten Marktgeld (Munich: FinanzBuch Verlag, 2014), pp. 247 ff.