by Phil Marks
Daddy, where does money come from?
In a Stephen L. Carter book, “Palace Council”, the young daughter of one of the characters
poses this question. The plot spans a 40 year period and revolves around a novelist who is close to Presidents
Kennedy and Nixon. The question arose in the context of Nixon possibly withdrawing the United States from the
Gold Standard at the time of the question being posed.
I haven’t set out here to write a book review, but this question did reignite something
that has bothered me for many years. In the context of the so-called Credit Crunch in 2008-2009 it seems
Now, I’m not an economist, but it does seem to me that the dematerialization of money –
specifically the abandonment of the Gold Standard – has enabled rampant printing of money. Witness the £175 billion
“Quantitative Easing” in the UK, which is admittedly and unashamedly the printing of money, with nothing to back it
When a country’s currency had to be underpinned by gold, then the growth of the money
supply was in theory restricted by the production and availability of gold, and a country’s currency lost value
against gold if it was perceived to be performing below par.
So, is that the real reason that we moved away from the gold standard – because leading
economies could not grow their money supply quickly enough when it was tied to a single natural
As I see it, the essence today is that the strength of a country’s currency is underpinned
by the confidence that financial markets have in that country’s economy, and that level of confidence is measured
by nothing more than the international exchange rate of that currency against – wait for it – other currencies. Of
course, the US had vast natural resources beyond gold, especially oil, and that helped to underpin the
The gold standard was abandoned by the UK in 1931, followed by the US in 1933 (partially
restored later with the caveat that US citizens could not exchange dollars for gold, only foreign central banks
could). The abandonment came about because the gold standard had been seen as contributing to the Great Depression
and the run on banks. Since then of course, we have seen major depletion of US oil resources, and the discovery and
depletion of the UK's North Sea Oil.
Anyway, the question is an interesting one, and still puzzles me. The Credit Crunch has
proved that we still haven’t solved the problem. After all, isn’t the Credit Crunch the result of informal (off
balance sheet?) attempts by banks to tie the dollar and the pound sterling to another natural resource – property?
However, a lot of property was transmuted into the form of sub-prime mortgages, which one might now dub ‘Fool’s