The feeble basis of our monetary system

[helderheid]

DeepJournal interview

Economics journalist Willem Middelkoop on the feeble basis of our monetary system
Willem Middelkoop (right) is an investor and freelance economics reporter for RTL Z. He edits the free email-newsletter Inveztor Nieuwsflash, a column for De Scopist and a column for Inveztor.
The interview was held in Dutch.


By Daan de Wit
Following the two interviews on the precarious state of the economy and the unavoidable fall of the dollar, Willem Middelkoop and I decide to dig deeper into these issues. Middelkoop manages quite well to convey enthusiasm for a subject which on the surface seems to revolve around tedious numbers. For a subject that was so boring in school, Middelkoop brings it to life by placing everyday economic reality into a larger perspective. It's then that the numbers come to life, and it's then that you begin to understand why everything revolves around money in this world. It's also then that you learn how to look beneath the surface.

Years of self-study by someone who out of sheer curiosity wanted to know just exactly what was going on with all that money resulted in an independent, unacademic look at the fundamental elements of our daily existence: money, finances, economics. Middelkoop has been a journalist from the very beginning - before he made his transition to the financial world, he was a photojournalist for the Dutch daily Het Parool. That observant eye makes him a nice partner for a conversation.

It's July 18th, a warm summer evening in Amsterdam, the wine is chilled. I turn on the recorder and begin the conversation with the fundamental question of what money is. Memories from high school Economics 101 float to the surface as Middelkoop talks about bartering. The uncreative cartoons in the study books, the non-communicative teacher, the scribbling on the chalkboard - it all flashes before my eyes. It made the subject of economics inaccessible for me, and I was someone who had more of a knack for language as it was; this didn't exactly culminate in a love of calculations and economic models. But as a result of the first two discussions with Middelkoop I once again find myself on the edge of my seat as soon as the conversation comes around to the economy. By way of the simplistic question of what money is, we quickly find ourselves at the concept of bartering and so that people wouldn't have to trade via the mutual exchange of goods, they went in search of a valuable unit of exchange. Okay, so then what?

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[hobbit709]

1. Our money used to be backed

with gold until 1933
with silver until 1966
and now it only says "In God We Trust"

[helderheid]

2. Indeed!

[Double T]

4. Our money is NOW backed up with trillions of tons of debt..............

and a promissory note that 'WE' will continue buying goods like drunken sailors.

[helderheid]

3. MORE:

Willem Middelkoop: 'Then there is really only one thing that fits the bill, and those are the precious metals. Throughout the last 4000 years, gold has been regarded as having a fixed value in almost all cultures. Whether you look at the Pharaos or the Incas, that gold could be found everywhere. So it seemed to meet all the basic requirements that a unit of exchange had to quite nicely.' Because gold presented practical problems when transporting it (heavy) and with small transactions (pay with gold flakes?), paper money was developed as a logical alternative. 'But of course you had to be able to exchange that paper for gold, and that gold had to actually be stored somewhere, otherwise you'd never accept that paper money. These days we think of it as normal to accept paper money, but back then you wouldn't just go and sell your cow for paper.'

Later on the people who issued those certificates realized that they could distribute more certificates/banknotes than were actually represented in gold. 'Those goldsmiths found out that at the most, five to ten percent of the population came to collect that gold. And that is actually the basis of our current monetary system.' So in order to avoid quickly getting into trouble, you could issue ten times the value of your gold supply - and it's lucrative to boot. 'What we see today - quite a big leap from the year 1200 up until now - is that the entire financial system revolves around this one fundamental idea. Basically, we issue much more money than we can actually answer for. They do this in Japan, they do this in China, we do it here in Europe and they do it in America. Most money is created out of nothing, and in this way we create immense prosperity.'

And so you're thinking, 'that can't be good'. Middelkoop confirms this thought by way of an example from the period around the year 1720, when John Law, 'a clever Scotsman', got the monopoly on the creation of money from the French regent in exchange for the financing of wars. 'That lasted for 12 years. This gave rise to an enormous boom, the greatest prosperity in France. Everything was possible, there was no end in sight - just like today. Law began creating money out of nothing, just like we are doing now, but then at a given moment that system fell apart and he had to flee the country. He reportedly fled across the border with a cart-load of gold.'

Many times monetary systems have broken down. This already happened two hundred and twenty times, says Middelkoop. There have been 220 different monetary systems which were backed by insufficient amounts of gold and silver, which were in fact unsecured, and those systems collapsed at a certain point in time. There comes a point when the confidence in paper money starts dropping in such a way that the system collapses. Middelkoop points to a number of recent examples: the ruble crisis, the crisis with the Argentinian peso, and the introduction of a new peso in Mexico in 1993. The collapse of monetary systems is not a phenomenon limited to any one time period, be it that the period we are living in stands out.

[Rydz777]

5. Middelkoop interview

Bush is literally paying for his Iraq debacle by borrowing money from China (and other countries with savings), and the debts he has piled up will not go away soon. The dollar is sinking and will sink further. Historically, the way governments have dealt with overwhelming debt is to monetarize it, i.e. by inflation, and that's what we can expect.