One of the marvels of human reason is the ability to abstract, to see immaterial properties of things, properties that really only exist in our imaginations, and then to use these abstractions to help us navigate our world. An example is the notion of number: if it is a question of 5 cars or of 5 trees, it is still the same 5 but 5 is not a rock or a plant or an insect or anything else in the physical universe. Mathematicians and philosophers debate whether the number 5 actually exists and, if so, where, how, in what form, … ? Many follow Plato’s lead and assign mathematical objects to the world of Platonic forms and ideas – shadows on the cave wall and all that.
A related example of abstraction in action is money: a small car is worth $25,000 and a large car is worth $50,000; the concept of money is thus used to represent the exchange value of each of the cars. Currencies are no longer backed by gold or silver and coin plays a negligible role in commerce – in today’s world money itself can “exist” in almost any form: a piece of paper, a number associated with a bank account or with a credit card or whatever: abstraction at its simplest. The Mighty Euro and the Almighty Dollar have no intrinsic value of their own, but a value assigned in the abstract enables a concrete actual exchange; technically each of these is a fiat currency whose face value is determined by a mix of government decree and what the markets say. Another important thing about money is that it can be stored and only used when needed; in the days of coin and bullion, this could be tricky even dangerous – as attested to by many a film noir and many a western.
Indeed, money wasn’t always quite so ethereal. Modern Western currency can trace its roots back to a modest kingdom in what is now Eastern Turkey called Lydia – Lydian soldiers figure in The Iliad and in the Hebrew Bible; indeed Jeremiah 46,9 in the King James Version reads: “Come up, ye horses; and rage, ye chariots; and let the mighty men come forth; the Ethiopians and the Libyans, that handle the shield; and the Lydians, that handle and bend the bow.”
Successors to the Hittite Empire, the Lydians were the first to produce and circulate gold coins, minted from the ore that could be found in the area (circa 700 BC); the key was that all of these coins had the same amount of gold in them and were of a conveniently manageable size – standardization and portability. To economists, the system they created is known as a commodity currency, one where a valuable item such as gold, silver or copper is minted in a standardized format.
This innovation gave rise to the mythic King Midas and to the historical King Croesus, the richest man in the world. The Midas myth captures a key property of money – it reduces everything to itself: just everything has a price; this reduction of every single thing or activity to a monetary value is essential to trade and commerce and has directly led to the globalized world we live in today.
Click HERE for a map of historical Lydia with entries for the legendary city of Troy and Homer’s legendary birthplace Smyrna.
The Lydian innovation of standardized, portable coinage spread and that spread tracks the history of Western Europe: the drachma of the Greek city states, the denarius of ancient Rome, the écu d’or of France, the Pound Sterling of England, the ducats of Venice, the guilder of Holland, the thaler of the Hapsburg Holy Roman Empire. The acme of European coinage was the Spanish peso coin, which is better known as the “piece of 8” as it was in turn worth 8 reales (called “bits” in English). In the 17th Century this coin, known around the world as the Spanish Dollar, was the currency of global commerce and empire (and “two bits” was a “quarter dollar”); by the 1570s it even circulated in China; it has given its name to the currencies of the US, Canada, Australia, Hong Kong, Fiji and elsewhere.
Paper money that is redeemable in a fixed quantity of a commodity like silver or gold is called a representative currency. Now paper money had been introduced in China in the 12th Century (but abandoned after a financial crisis in the 15th Century) and word of it was brought back famously by Marco Polo in the 13th Century. But in the West it was the Bank of England that first successfully introduced representative currency in 1694 – prodded by the need to deal with war debts naturally: this time it was the Nine Years War (known in North America as King William’s War.) With the rise of the British Empire, the British Pound eventually replaced the Spanish Dollar as the global exchange currency. The Pound reigned supreme until the two disastrous world wars of the 20th Century.
Shortly after the Normandy Invasion, in July 1944, a Soviet observer and delegates from 44 nations gathered in a town in the White Mountains of New Hampshire, Bretton Woods; they were there to participate in a conference to formulate a monetary system that would enable their economies to re-build after the war. John Maynard Keynes was the most eminent economist there but the US representatives dominated the proceedings and a system was created where other currencies were henceforth to be pegged against the US Dollar; the Dollar itself was linked to gold at the fixed rate of $35 per once. This made those other currencies fiat currencies meaning, in effect, that the currency’s value is then goes up and down according to the supply of the currency and the demand for the currency. Furthermore, the International Monetary Fund (IMF) and the World Bank were founded at Bretton Woods, US dominated institutions which still play a determining role in the fates of nations.
So by war’s end, the US Dollar had replaced the British Pound Sterling much as the Pound Sterling had replaced the Spanish Dollar.
At this point in time, for international exchange, the US dollar was still redeemable in gold; so world commerce was still run in terms of a representative currency. Drolly, most of the European nations’ gold stores of gold bullion were kept in Treasury Department vaults in New York and gold would be moved around physically as accounts were brought up to date.
But once again, the gods of war interfered. To deal with the financial train wreck that was the War in Vietnam, President Richard Nixon completely detached the US Dollar from gold in 1971, making the dollar itself a fiat currency. This was done by presidential directive and effectively gutted the Bretton Woods accord – but it was important to Nixon’s re-election campaign; surely it helped pay the Watergate burglars – justification enough!
Nixon’s presidential diktat ushered in a revolution. Now the world currency is a fiat currency worth only what the markets say it is worth – abstraction gone mad. (BitCoin only makes this worse.)
But this move had a huge side-effect in that it made the dollar a much more flexible and usable medium and, importantly, it increased the supply of money available for trade, commerce etc. It created a monster by making the Almighty Dollar a yet greater force impacting the lives of people all over the planet in ways more and more creative, more and more powerful and potentially more and more insidious.
The impact in the US itself was felt quickly. America pivoted from Industrial Capitalism to Financial Capitalism in Ronald Reagan’s time: there were tax breaks for the wealthy as income taxes and capital gains taxes came way down; unions were broken; manufacturing was outsourced overseas; bankers and finance people replaced industrialists as the “art of the deal” replaced actually making anything. Wall Street became ever more a true casino – trading in derivatives bedazzled the market makers: more money to be made gambling than banking. And new forms of capital investment emerged – the hedge fund, private equity, venture capital. With all this, income inequality now dwarfs that of the Gilded Age and continues to grow; rockets ships have replaced yachts as the symbol of conspicuous consumption.
Money has always played a role in American politics. But things accelerated in the post-WWII era as activist billionaires such as the Koch brothers funded right-wing projects in support of candidates and in support of influential think-tanks like the Heritage Foundation. And already by 2007, it was estimated that some 15,000 registered lobbyists were busy prowling the halls of Congress (per Washington Representatives, an annual report on the lobbying industry and other things governmental).
And if that weren’t bad enough, the Roberts Court came down with Citizens United (2008), one of the worst Supreme Court decisions ever (and that list is horrific) when it declared that corporations and unions had a person’s right to free speech and could spend freely on political campaigns. In short, to quote private equity magnate Mitt Romney, “corporations are people, my friend.” This lamentable decision has simply inundated American politics with corporate money as it arbitrarily overturned the McCain-Feingold Act of 2002, a law governing campaign finance voted for by Congress and signed by the President.
Just recently, President Biden’s Inflation Reduction Act was compromised by manipulations concerning “carried interest,” a financial dodge that profits an infinitesimally small number of people – but people who control almost infinitely large sums of money. This is another example of how the abstractness of money makes it chameleon-like and evasive. Here’s the story: investors put money into an investment fund (hedge fund, venture capital fund, private equity fund) which is then handled by a fund manager; the value of the investment goes up and the manager is paid a commission, a small percentage of the gain but in practice a large amount of money; however, while a used-car salesman’s commission is taxed as income by the IRS, the fund manager’s commission is treated as a capital gain and is taxed at 20% rather than being taxed at a rate like 39.6% as income. A marvelous tax loophole; in fact, a loophole too marvelous to lose – it virtually doubles the fund manager’s income. We just witnessed Senator Kyrsten Sinema’s sabotaging the provision in Biden’s Inflation Reduction Act that would have ended this loophole in kinky obedience to her lobbyist handlers.
And in the international arena, the US Treasury wields its power with force and precision. Affaire à suivre. More to come.