230: The Gold Standard

Hey everybody and welcome to the classical stuff we should know. We are a podcast about the classical world old books old art old philosophy old things Basically, we're trying to make the classical world accessible to normal people in a way that doesn't feel awful for everyone My name is a j-Hannenberg and I'm joined by grand-a-dolls and how come you mock my intro and that was great I think you for the thought that went into that introduction. I appreciate it Graham do better. Okay I'm here with grand-a-dolls and also here with Thomas Maggie.

Hi, and we do a pop up I used to say we all come from the same school, but we don't know Thomas is catching the bad guys Uh-huh, but you two are still doing a thing too better is such an aggravating phrase You're aggregating or aggravating do better like there's nothing to just put it down. It does really it does I'm gonna find a couple over the course of the steps. I'm gonna find more There's something about that phrase do better that just drives me bonkers. I just find it so insulting are there any others Because I think no, I'm probably I don't know what they are caught in my head, but there's just something about like do better That's just like the and I don't know there's that sort of dig into you a little bit It's like the looking down the nose more.

Oh, it's just it's just grinds my ghost. Hey Graham. I thought you did a great job I know you appreciate that you did better. I mean you did it.

Yeah, you did it, but not last time Okay, I didn't even ask you what your thing is about so I have no pun. It's all right. Oh money. Oh, I did ask you What you think is about I Make sense of it Alright, we do that this whole episode too.

Oh, well, we have so what we're gonna talk about today is it's kind of I've known I'm gonna say I thought experiment. That's blast episode Hey, but it is it is a framework that I give my students to help think about Sort of errors of history and like all frameworks. It's not perfect, but it is kind of helpful and so and it's a framework of thinking about history in regards to major eras of how we have used money in society That's kind of the framework for it and so in classical education I was looking into this in the history of classical education actually the the The queen of the sciences in classical education has always been theology So theology has been the queen of the sciences it was supposed to be the organizing principle of all of education going back to the Middle Ages and whatnot and one of the last things that you would study as a educated person of antiquity was It was politics government and money and economics and the reason for that being was they wanted you to be the moral man The good person before you went into these fields, right? They wanted you to have an all of history and ethics and philosophy and theology and music and astronomy and all and all the the quadrivium Intrivium and then you could go into sort of like the servile art So the practical things of being someone who was going to govern or someone who was going to rule or someone who was going to have the power That money bestows so so economics ends up being kind of like one of the last things that you learn in classical education because it was supposed to be the alright You've got all the stuff you've been formed as a human and now here is the arena that you're going to go into and if you're going to Go off and be in the public sphere kind of thing was the danger that teaching the money too early would make them I think so.

Yeah, yeah, and it's not too much rather than their actual development Yeah, or when you get into something that can now you can go off into the world And you can kind of like make a living doing this the the need of going back and doing Like the primary things that no longer need it because like well I can stand on my own two feet Why do I need to go back and learn about music sure or whatever? Anyway, I don't know if we don't do this on purpose, but at our school we have a their fourth year history Class is a government and economics course and and I've been teaching at this year So I've been having my head all up in thinking about what is a government so we do play So probably can we do but then also the second semester we've been doing economics and when you're designing a course You have a decision to make you go and get a textbook or not. I am someone who's pretty anti textbook I don't like textbooks, but anyway, so what that means that you do need to give some kind of framework to students to sort of think about Whatever concept you're doing in sort of economics. So I came up with this I sort of a it's not like a back of the envelope But it's so easy mental model to think about sort of the eras that human beings have had with basically technological innovations regarding money And it can help sort of frame your understanding of history When I was you guys probably had the same experience when I was learning like a history class Discussions about like money or the economic realities of a people was never talked about it was always like so For example the French Revolution when I was taught the French Revolution It was always this was the culmination of like the enlightenment and all of these new philosophies of you know The like lock and Hobbes and Russo coming together and people getting all geeked up and realizing we don't need kings anymore I was never taught that France had gone absolutely bankrupt 60 years before that Because John law basically lost the entire wealth of France on a stock bubble scheme because he wanted to buy Louisiana Because of Louisiana Right like and you can really trace this line between the bankruptcy of France and then a generation later the cutting off of the king's head But when you know what it's that's I don't know if it's like considered a little bit too difficult or maybe it's like one element too much So when you're in tenth grade history you learn about you learn about the social contract and then all of a sudden you have the French Revolution And you don't learn about John laws Louisiana bubble and the bankruptcy of the French crown for whatever reason anyway I think there's like an over emphasis on the ideas that lead into those I think so or I think when you're making a decision Okay, how do I make how if I'm gonna teach something how do I make it easier?

There are things you're going to remove and I think for whatever reason a lot of economic history has been the thing that we have said Well, we can superimpose this on history later And that's probably fair in fact if I would um but there's something about when you have a working model of how The monetary side of human society has developed when you can have that and superimpose that over history You do get a lot of some It basically ends up being another harmony that fits into a melody or maybe even is the melody that fits into a bunch of different harmonies When you can take some kind of when you can understand the economic side of human history It does bring some things that maybe have only were able to only be explained by saying they really liked the social contract And that's why they killed the king when there's actually other other factors that play like a generation of bankruptcy Anyway, so there's there's another sort of school of thought about history where you can also look at it in terms of the technological changes of energy consumption That as as the way that societies have used different means of energy that has that has been a driver of the movements of history So as you go from like slave labor of the ancient world to like whale oil of the 19th century to petroleum of the 20th Like you know, there's another way of using that to to superimpose over the study of history So anyway, what I want to do in this episode is just offer up kind of easy little three stages of monetary history and try to give a reason as to why those stages why the second stage came from the first and where the third stage came from The second as another little framework that to understand sort of the grand moves of history That's kind of the idea. All right, is this only excuse for you to talk about crypto in the Bitcoin boys. No, it's the future. No Anyway, it's weird to think of like money as technology or as an innovation That's kind of what it is if there's a man.

I'm just gonna keep talking about thought experiments, but here's the thought experiment like What what came first like the chicken the egg? No, no, like um Is it chicken so technically the chicken is correct? Right? We're gonna bring my work next question I guess it's like what was the first innovation on money was it like well?

I mean money is the first like so in Aristotle's conception you start with bartering and then the fact that you can abstract that bartering into like Some other currency. Yeah, that's the first question. What's the first one? I guess it's like what I mean either someone came up with the idea that we can have that yeah the bartering is too difficult I think that's one way that bartering is too difficult And so we are now going to create sort of an avatar of our barter and and describe value to that and that's money And you've tried you've been to a bartering festival before right rough and that's rough how you can't how wise it was Because not everybody wants what you've got sometimes I take I take pottery and I'm like oh I really want that you know All of oil or whatever it is like yeah, but I don't need pottery.

Oh Okay, bye. Bye. I guess I did learn that if you're taking tools as a big hit acts But if you took like a giant diamond I couldn't I couldn't buy like a pair of sandals Yeah, you know they some guy selling sandals would want to do it Yeah, he'd be he want that trade, but I would never want to be one of that guy sandals and this guy's olive oil and that guy's acts They're not gonna be able to divide that diamond right and that guy's not gonna want to throw in his house Yeah, yeah, right to make the deal whole right to make the deal whole that's right So that could be the the genesis of money is you have that bartering problem So we say oh we need something that is divisible and we all agree that you know we can use money in that sense What was the first one was it shells well the other the other uh, oh it could be shells are I mean at that point doesn't really matter it needs to be rare enough that it's not everywhere I can't just pick it up and but it needs to be We'll be useful it some way well There needs to be a couple of India can't decay so you don't want money that like rusts over time sure It needs to be divisible so you need money that is easily divisible it needs to be easily somewhat verifiable so Hard to counterfeit so that's one of the arguments Why gold was a thing because it has weight and then and you can purify it in fire and all that kind of stuff Mite it to see if you go yeah So that's sort of I think what you say was Aristotle yeah, so Aristotle pauses that the other option is that it wasn't money That was created first, but it was the idea of credit or a futures contract that was created first Oh, so if yeah, so if that guy wants my diamond he can give me a pair of sandals now And then he can be a pair of sandals for the next 50 years and then he can earn either that or probably like more an Agricultural thing like I want to grow a field of corn I have no corn you have some corn seed If you give me a corn like a handful of corn seed to plant an acre of corn I will give you a tenth of whatever I grow and you've now created basically a future contractor You've created credit in a certain sense and so maybe that was the innovative idea where someone was or it came out of Art which everyone came first whether was the idea of money or whether was the idea of a future payment We don't know but eventually the ancient world settled on a that gold was the standard of of exchange Because it doesn't rust because it has those things it doesn't rust you can divide it. It's somewhat verifiable It's rare, but there is enough that it's not so rare that you just have like one little bit of it And so okay, so you had a world that used gold coins and and there's a lot of benefits to this world Let's start Let's think through what are some of the benefits we have of if we have gold coins and then we have to have some sort of other Drivatives with that so there was gold coins and then silver coins bronze iron other and other groups of people had others like Lesser-denominated currencies to put on top of that like like a bronze coin What's really nice storage, right?

So if I want to buy something like that I have to have say 20,000 chunks of iron I can have a few punks exactly if I want to buy something small I can either have little tiny pieces of gold which is difficult I can have silver or something smaller So that means that all I have to carry around in my pocket is a few of each right a little bit of gold a little bit of iron And that way I can buy whatever I need to see history and of course you definitely you have those benefits for sure It's also the problem from bartering of like you don't need people to be matched on their preferences Exactly. So you don't need to have like a perfect storm of desire in order for the deal to go through in an exact Equal amount goods. Yes, exactly When you and then also it meant that as gold was a Was accepted in multiple places it did open up the possibility for trade to make a lot more sense And it was less risky because you didn't have to say like well I'm gonna bring my shipload of sandals and hopes that I can buy some pepper But if no one wants sandals on your screwed But if you go with a bag of gold you know that you can come back with things that you know We're gonna sell back home So you can go and buy spices and then you can come back with your spices that you pay for with gold And you can be and you know you're able to sell that as opposed to trying to pay for it with sandals So there are definitely benefits you come back with gold that is you come back with you know You're a merchant in Italy and you sell whatever you want in Morocco and you come back with Moroccan gold You can't really go to like you can go to the streets of Italy They may or may not care that that gold coin is stamped with whatever Moroccan government There is but that coin can be melted down and it can be restamped And that's a useful thing with gold is that it has that is slightly fungible in that way that you can recast it So that is a tremendously beneficial thing, but there are some downsides to this to this system Oh actually fun fact if you go back to one of our old episodes where we were talking about the Knights Templar One of the ways that the Knights Templar had such power in the medieval world was that Gold is again is also kind of dangerous to move around if you lose it It's gone and so and if you or if you get killed or if you get attacked Yeah, if you get attacked on the highway and like bandits take off your gold You are like your goals gone and so one of the powers that the Knights Templar had was you could Because they were such a coordinated network if you had a letter from one Knight Templar and say Portugal you could take that letter to another Knight Templar in Jerusalem and you could and the letter could say you Give this guy ten gold coins. He's totally good for it.

Love brother so-and-so with his seal, right? And that so you have this sort of international almost like basic banking network, which is what gave the Knights Templar so much power whereas If you have the king of Portugal say that to the king of Jerusalem you have a layer of doubt That didn't exist in the Knights Templar layer like they were on the same Organization so you almost have this international banking corporation whereas if you're gonna if you're the king of Jerusalem You'll be like well, what do I care with the king of Portugal says? I don't even know if he's good for it I don't know if I give my ten gold coins and I say hey make me whole so that my coffers still have ten gold coins He's gonna do it. No way.

I'm not giving you money, right? But the Knights Templar did that so Sort of that's a great example of like a of a of a sort of old network effect that gave a group their power But there are some downsides to a world of gold coins. Can you guys think of some? Where's some of the downsides?

You know just that some of it like if you if it's stolen and like that money is actually gone if you're like super rich You have to store that gold somewhere and like I'm just imagining like store houses. You just you're just holding money So you got to store it you that's you have to depend on either the person doing the stamping or you have to depend on scales to make sure that The gold is good enough of it. Yeah, you do have a counterfeit problem that needs to be that needs to be solved Right like I put gold around something that's similarly heavy and then try to pass that off Right and the only way you can really figure it out is by melting it down or trusting the stamp is from the actual king But then people can make any kind of stamp down The one and one of the main probably out all of these problems end up being slightly deflationary for gold So gold ends up if you let that system happen over time Gold the gold itself slowly gains in value over time with that. So there's a couple of factors Yeah, so the only thing that would create would have gold be lose its purchasing power is if you find a lot of it all at once and in fact this happened to the Kingdom of Spain when they went and They were the kinkista doors.

They found so much silver in a mountain in I think it's Peru Olivia anyway, they found so much silver in one mountain They're like oh my goodness We're rich that they mined so much silver that they actually had a massive inflation on silver And it actually was one of the things that brought down the Spanish Empire's got so much gold They inflated their currency and they didn't have the tools to be able to deal with that That's a pretty rare problem to have usually when you have a fixed amount of money in a system That money is well If you're if you're on a boat and you have if you're a merchant and you do a massive purchase and you have a boat filled with gold And you're coming back home and your gold gold boat sinks to the bottom of the Mediterranean Not only are you that merchant screwed because all your money is at the bottom the whole system now has Slightly less gold in it now It could be marginal or but how that slight those little chips at the monetary supply happen over time And that means that the amount that the rest of the gold has to do is they it needs to shoulder the burden of the economy So that that gold now needs to sort of There's less supply so the value of that gold goes up Okay, when you live in a system where the value of something has a slow creep upwards It incentivizes people to hold on to it right you don't want to spend your gold because in a couple of months It could be right now You still want to do productive things but generally speaking the gold if you don't need to spend it You're gonna hold on to it because you can probably do more with it later and if you can sink a few ships Gold then your gold for work So that means that you do have a little bit of a headwind against spending I'll be a small not one that's gonna like completely to the scales But there is going to be a bit of a like maybe I don't want to do this risky venture because my goal is maybe going to be worth more in the future Headwind second ship nice. Yeah, I appreciate it is probably now. It is incredibly difficult to do massive Endevers in a gold system a pure gold system if you want to build a giant, I don't know anything a castle If you want to fund a massive war if you're gonna do something that requires that is on a bigger scale It's actually quite a logistical undertaking to do it with gold Moving vast quantities of gold in a war is really dangerous Moving vast quantities of gold in a peaceful building project is super dangerous moving that's going to go ever is dangerous So you have the structure of the monetary system does doesn't put a cap But it makes it harder to do big building projects and some people look at this and they say well Maybe having a gold system like this is something that you know held back Really big advancements for a long time in the ancient world potentially things Rome still did what Rome did and you know Rome used gold So maybe not but it does mean that it's a lot harder It just takes a lot longer to do things because you're actually moving a physical tonnage of gold around to do it gold a gold system also has a problem in that it And this is a debatable point, but I Makes a society have a little bit of an incentive to go to war in conquest Because if you were let's say you were a peaceful society let's say you have a society where you have an era of well-managed government and it is peaceful and it is flourishing and People are wanting to do endeavors to increase their quality of life and people are doing endeavors. They're starting businesses.

They're becoming merchants They are building things they are they are doing things that make human life enjoyable if you have a system that has a fixed amount of Of currency in it. There's already you know, it is we've already said that it's sort of difficult to do big building ventures with a lot of gold But if you have something that's an inherently deflationary it does mean that at some point you can get to the era where you're actually running out gold It if you're especially if you're doing international trade so as the world got more As trade routes became easily accessible as shipping became less and less hazardous like in the later middle ages gold becomes concentrated gold gold gold becomes concentrated and You can have a flow where all of a sudden you there's a society that could have an existential crisis Well, they don't have enough gold and they now they're there they have some incentive to go out and get it So I think it's an overstatement to say that a fixed monetary society like gold incentivizes conflict But I think there's something to that argument that when you have that fixed amount of gold you are well What the Spanish conquistadors did makes a lot of sense there when there's a new continent there was going to be a rush to go get those resources When when there is a hint that there could be gold somewhere else there is going to be a move to go and secure it Because you are gonna be in a better place if you do that so there is a little bit of a Of an incentive to be a to throw down There's a little bit of incentive to be a nation that is willing to conquer an attack for gain the reason I'm over emphasizing it is because You know, there's an argument to be made that our current system the one that's sort of backed by the US dollar for a long time a incentivized nations to actually not go to war but we'll get to that maybe at the end anyway So when you have this fixed system a gold system is slightly deflationary gold exit system over time The only time that it is inflationary is when you find massive when you find massive amounts of it but over time As the world becomes more interconnected and as technology advances and international travel becomes safe You actually don't even have enough gold supply to Support the growth of the global economy. It's just um there needs to be some sort of innovation to make things easier I was gonna say the more of us there are the harder is to have gold be the thing that is the standard That's right. And so there was an innovation that made things easier And that was to still have gold be the basis of money But the innovation was you basically put that gold in a big old box and you keep that box nice and safe And then you create an avatar or a stand-in for that gold in the world and that was paper So you create this gold-backed system and so if you want to put some timelines to it The sort of the gold system was from like antiquity.

So is bartering the first system? Sure, there are three movements. Well, there's probably the pre-movement So that whatever came before the gold system whether it was whether it was the bartering system or whether it was some sort of like Everything is negotiated around like agricultural future contract system. Whatever the pre history system was I don't know.

Maybe there was four there was one pre history system We didn't call the bar system But then you have this gold system and that's basically from antiquity up into around the heyday of the paper system I tend to put it around the 1700s 1600s when gold stopped. No, it's no gold didn't stop, but you had paper It moved you had gold you still had gold so nations still had to have a reserve of gold But they were no longer moving gold around Merchants were no longer doing transacting sales in gold They were transacting sales in paper and that paper had a promise attached to it that paper was good for a certain amount of gold or silver So let's give an example of England The reason it's called the British Pound is because at some point you could exchange one British pound for a pound of silver And that was the exchange full pound of silver. Yeah, geez. Yeah, it's not that much a pound is I mean it was expensive.

Yeah, you don't think pound of how much does a pound silver word? Continue all how much how much how many ounces a pound 16? So you would be like what's 20 times 16 whatever $20 a ounce 320. Yeah, so $320 is a pound is over.

I guess okay. Anyway So you devised a system where every nation had a would have a set amount of gold or a gold or silver depending Sitting in a banks and we're sitting at a vault and then you would have you would create an amount of paper that was a representative of that gold And so then the nation had to keep the same balance You now sort of had this to you had that you had a gold system and you had a paper system So in the United States you had the sort of two railed system where you could buy and sell things with silver coins and gold coins or you could buy things with US dollars and the government made a promise that I think what I think it was 30 US dollars could get you an ounce of gold. That's what it was. Oh, yeah, and so now you enter this new game So you have this technological innovation and so paper money backed to gold solve a lot of problems Let's think through it.

So what are the problems that it solves? I want around like storing that much gold. Yeah, it's easier to store paper So it's the storage plus like the transport ability of it. That's right Definitely the transport ability if your ship sinks and it was like filled with bank notes of the of your British crown You can reprint the bank That sucks for you You're out the money But the system is not going to be out the paper like it was if the gold sink because the bank of England can be like well We just lost basically a million dollars of paper But we still have the goals We'll just print the paper and now the system is not going to be deflationary in that way because we can make the money That's right.

Okay. Yeah transport ability He's gonna break it down into like pieces again So you have to like melt down your gold totally you can just you get a sense for the dollar It is easier to do bigger projects because it's easier to it is easier to have a transport cash or even to have promissory notes about cash It makes All of a sudden you can you have things tied to paper You can do derivatives off of that paper a lot easier So you can have a thing like a bond that pays out a note pays out a coupon in a way that was hard to do when you were doing that With actual physical gold But it does mean that you that you're basically you've moved from a Show me the actual gold game. You're now in a bit of a confidence game Because and you've moved from a system that is more of a deflationary system to a move that is very easily inflationary because if more dollars are printed It's the gold to back up the dollar not necessarily you could say you have it You don't right so that's the confidence game just like in Faust when they do that They tell the king issue issue paper money saying that the gold is in the ground and all we have to do is go and fish it out of there Mm-hmm, and that's easy so the goal the papers obviously worth something and eventually people want their gold and they can't fish That's right So you have this confidence game where you as a nation say well at any point you can come and you can take your French francs or your British pounds or your American dollars and we're gonna give you an equivalent of a gold coin or an ounce of gold or a pound of silver or whatever and You and then the population and the world can kind of run with that confidence But then you get into the point where then you start getting panics and you get these kind of financial panics that you never really had in the ancient world You would get panics where? Where you could change the game you could change the ratio well We said before actually think for a long time the US was $23 an ounce and then they were like Well actually it's gonna be $30 an ounce people were like whoa do not like where this is going Was that the one that one that one of them is when FDR is president?

It's like this huge event. He's confiscates the gold during yeah Yeah, you do you change the exchange rate Right? FDR during the Great Depression or lead up to the Great Depression changes the exchange rate of what gold is from I think $23 an ounce to $30 an ounce and People start freaking out and when that happens well There's gonna be less confidence in the paper and more confidence in the gold And so people start like trying to find as much gold as they can and then FDR ends up confiscating Gold and paying a fixed amount for that gold by force and people are still salty about it Oh people are still salty about it. Oh, yeah, it's ridiculous And there's it has us like cool name like order 1066 like almost like Palpatine 6102 and it was a it was a confiscation of private citizens gold Under the guise of bringing stability to the financial system So this is in the early 20th century geez and this is before we get to the new system But this is sort of those are the I don't super crank yes people are yeah super cranky about that They've been the hoarding of gold correct crazy.

Yeah, but anyway So you have some problems with this yes the problem is is that you've now moved society into a bit of a confidence game You now the government says we have this much gold we're totally good for it And we but you can print paper and you can get this problem where Governments could print paper based on the hypothetical gold they could be getting and this is what happened This is what bankrupted France before the French Revolution You had a Scotsman named John law who became the prim who became the financial head of France He was a notorious gambler and he ended up being the basically like the prime minister of France and he convinced He created a stock a joint stock company called a Louisiana company and he convinced everybody that hey Louisiana He actually owned a third of the United States of America the France owned basis like Louisiana all the way up to Montana Yes, and he convinced the world that hey, there's a lot of good stuff over there Which we're basically good for we haven't monetized it yet, but we're going to and so since we're going to I am going to create The shares of this company are basically going to be good for all of those resources that exist in Louisiana And people were willing to pay whatever they wanted for the shares of that company He then had that company end up being the entire government Basically like turn the shares of a company into the currency of France Okay And then when it turned out that the colony of Louisiana was not producing the goods as fast as people wanted Everybody dumped their shares and it bankrupted the nation of France sixty years later the king lost his head Those kinds of crazy things could not have happened in the gold system when you have this paper system That's tied to a hunk of gold real or theoretical And then you have derivatives that you can derive from those from that paper with like a joint stock companies Well, you end up getting this sort of like these sort of silly things like that So you have the mismanagement of France you can have this massive blow up or you can have England who actually manages their paper Money really well and ties it well to their the store houses that they have of currency But it also limit the wealth growth of the nation like we have to have the gold to issue the money You still have the incentive for conquest you still have embedded into the entire system the need to go and secure The underlying thing which is going silver. Yeah, so you still so you still so this is you have the British Empire needing to go and Having India and taking over India and a lot of the Caribbean and so you still have a a monetary system that incentivizes the securing of goods around the world even more so because if you've printed a lot of paper that the people don't know it But we know that we actually don't have as much gold as we say we do and if everybody came in exchange to their paper for silver And gold we don't have enough to do it hot dang boys We need to go get some more gold if we're gonna keep this the balance of this thing and the confidence of society afloat So you've moved from like physical gold to this two prong system We're all of a sudden the confidence in the system ends up being a factor that we didn't really need is Which wasn't really as much a factor in the in the the Boolean the gold system from before and so this opens up whole new realms of thought about Like market confidence and now you get into psychology and now you get into Thinking about well How do groups of people act because if we can figure out how groups of people act you know that all of a sudden is a factor that we need to Factor into the confidence that we have in our system right so you just it opens up It gives incentive for going down those different kinds of like schools of human interaction because it's you've now got a system that that Is predicated on a lot of confidence There are some benefits we've talked about and there's drawbacks inflation being one of those drawbacks is that some people learn the hard way that you can't That at some point confidence breaks and if you print too much paper and you don't have the goal to back it up All of a sudden people lose total confidence in that paper and they hoard the gold or they get they They turn their paper into gold and get their gold out of that country so like so you have new problems And that is definitely one of them and you still have the incentive for nations to to try to get the goals from other people There's arguments to be made that you know a lot of Why Germany became a belligerent power in the 20th century is that they were definitely behind the curve when it came to being a colonial power They only have one kind of good harbor in the north So they're not going to be a maritime power like England was or like France could be Or like the Dutch could be So they're behind the eight ball when it comes to being a colonial power when they're behind the eight ball and France and England Have become these big colonial powers and they are some reaping the benefits of having a global economy as opposed to a local economy And Germany sees their power waning well then they say you know This is an argument that can be made for the militarization of Germany in the later 19th century earlier 20th century same kind of argument can be made for Japan Japan being a closed society for a long time that didn't have a lot of natural resources Especially as technological advances happen. They didn't have a lot of iron ore during the industrial revolution. They don't have any oil during the new petroleum revolution and so you know They now need to send and they've never had a colonial empire Well, they now see the need well are maybe very existences threatened if we don't have If we can't go out and get more resources and gold on top of that So you still have when you have a system tied to a fit that physical thing There is going to be that incentive for for conquest for war And then we live in let me move over into this third system that we have and the third system that we have is we now have a system That is no longer tied to gold that so that gold standard ended in 1973 71 with Richard Nixon severed the gold standard the United States And so we are now in a system right now where the the money of the world is no longer tied to a physical asset So what are our areas?

We have the gold standard the gold era? So there's a gold standard era. No, the way you can call it the paperback era So they the you have paper backed by gold and now the paper back era now We would have the fiat era the era where we have paper that is no longer backed by one thing It's now an open question. You can either say it's backed by everything You can say it's backed by nothing except confidence or you can say it's backed by the might of the United States Navy Do we call this the pot head era because it's always like money's not even a thing It's the fiat era.

I mean so okay, which I know it by calling the Fiat area makes me sound like like crypto bro Just stupid. I I've actually come around and I think crypto is dumb. I'm gonna put that out there. What?

Yeah, I do. I don't think it's gonna work. I don't think it's gonna last me That's a new between talk about in the in between yeah, I've lost confidence in crypto projects Okay, let me give you a defense for sort of the system that we're in now and this is you know So After World War two There was only one functioning economy that came out a modern economy that came out on skates and industrialist coming That was the United States Europe was decimated England had spent all of its basically all of its colonial power barely surviving World War one and and choking to death the the World War one Germany and barely survived World War two They had spent all their blood and treasure France was decimated Germany was definitely decimated Russia is behind the curve on becoming a major industrial power at Japan was destroyed at the end of World War two United States Is the only game in town when it comes to an economy? and the United States makes a decision at that point they They have they what they entered the war having essentially a crappy Navy and they end of the war having the world's strongest Navy And the United States makes a decision at the end of the war and the decision is We don't want another conflict like this and we think that the way to keep a third world conflict from happening is We if we secure the ocean in order to have trade be as safe and easy as possible This was an ideological position that the United States took at the end of World War two Some people you know There's some historians look at and say that it was a very high-minded position for the United States Some people look at and say it was it was a sort of a cynical thing that the United States was playing a winning hand It's probably somewhere in between I think there was a lot of high-minded individuals that looked at the end of World War two and said We have the opportunity to put a high-minded ideal of by basically putting stock in trade And if we can guarantee that trade can happen seamlessly and easily we can keep a Germany from needing to attack neighbors for space and resources if Germany can actually Trade for the things that they don't have they don't need to militarize to go and take for the things that they don't have And so the United States basically said then they had another and then they also had that the enemy they have this new enemy of communism of the iron curtain coming down and they also saw that if we can have a Sphere of influence that has the freedom of trade we can create a system where we can hopefully limit the need for conflict because there is a There is a there is a financial way out of the conflict and we can and we and so we can maybe enrich ourselves and also in rich nation so this is and we will we will Effect this by the force that we have an uncontested global naval power and essentially United States did this if you play by the US rules in essence if you let us Basically dictate your military policy regarding the Soviet Union let us have bases and you are on our side and you join NATO or whatever We will guarantee your trade even if your trade doesn't materially benefit the United States So all of a sudden you can have South Africa Shipping a boatload of copper to Brazil and it is going to be protected by the United States Navy and the United States is not They're not taking a cut.

They're not like saying we'll do this but you got you know You got to pay us like mobsters like you know, it's a nice copper boat You got the shame if anything were to happen to it. No, they're not taking a cut on this But they are securing that shipping from happening in so far as those nations are sort of playing ball with this free trade Free world that the United States envisions after World War two. Okay, so that's one side of it And if you don't well, then you can play the Russia game and there's no guarantees of what's gonna happen And there's a lot of nations that went with the Russia game What's one of the big questions? Okay, why didn't it feel confident that he could get off the gold standard?

Well, when you had that system set up where you basically had nations that were guaranteed a safe trade Eventually people gravitated towards settling those transactions with the United States dollar and the reason being so imagine Let's use our example of South America South Africa You're South Africa and you got a bunch of copper and you're wanting to sell copper to Brazil You let you call them up you're like hey Brazil. I hear you want some copper We got some copper what you got for us and the Brazil's like what's the Brazilian currency? The rail is the rail And Brazil's like hey, we will buy that copper for a bunch of Brazilian rayol Well, South Africa the only reason South Africa would take Brazilian rayol is if there was something from Brazil they wanted later And that's possible maybe like fine. We'll do it or South Africa could say You do it with gold that's not a way to do it or they could say Would you would you buy our currency and then would you like keep a reserve of our South African currency and then buy our copper with that?

And Brazil's like I guess but then you got to print the currency just to sell it just to buy it back And that does that's not a net benefit for South Africa And so basically it's like as time goes on and as trade becomes easier these nations are like listen Can you do you have like us dollars? Yeah? We use dollars okay, let's just settle in that because they know that they can take those us dollars and they can trade with America They can trade with anybody over time because the United States was offering that was the safest game because they they were the safety of the seas And so over time trade ended up gravitating towards being settled in us dollars up to the point where even today today the amount of Global transactions that are settled that are us denominated is 80% of global trade is Denominated in the US dollar that is insane that means that that's not like number of transactions That's the overall total volume of transactions So that means that if you are South Africa and you're building a nuclear power plant and you're buying all that stuff You are probably doing all of those deals in the US dollar even if you're buying nothing from the US So that all of a sudden the United States gets in this point where the entire world needs the United States dollar Everybody needs the US dollar. Okay, go back to the US The US has their dollar tied to the amount of gold that they have and the world is crying out for the US dollar Because it is the easiest way to settle their international trade that is now easy and safe to do because of the US Navy And you have these nations that are going to buy as much you get their hands on as much US dollars as they can So the United States dollar knows that for every dollar they print there is somebody who needs it in the world There is a market that can absorb that US dollar But if you have your currency tied to a big hunk of gold and people are crying out for the US dollar You now have this new strain in your system that because you basically have a fixed amount of gold and you have a massive Global demand for the US dollar for this new trade Paradigm that's existed that's never existed in history before and so you get to this point where Nixon basic I don't know if Nixon realizes it but you get to this point where you can sever the United States dollar from the gold standard and let gold trade for Whatever it's going to trade to and gold went from famously $30 announced $800 announced in like a decade after the gold standard Yeah, she was canceled but and everybody was thinking oh my goodness It's going to be inflation inflation inflation United States is going to print all this money and it's not tied to anything Who's going to buy this who's going to believe in this but the world is?

Is doing the vast majority of its trade in the US dollar the world is absorbing all of the dollars that are put out there Because it's backed by a bullet not back because it's because it's backed by the safety and of this system Right, so it's backed by the fact that that your you can put basically back on the fact that you can plan You can plan that your copper is going to go from South Africa to Brazil with a with a degree of certainty that you could not plan when it was The age of pirates on the high seas right and you're sending out You're sending like sugar from from the Caribbean to France and like a British boat's going to blast it out and steal it like all of a sudden That injects a certain dynamic into trade that is now gone because you can almost Guarantee by clockwork that as boats get you know are no longer Sess as susceptible to weather events you can guarantee that trade we got to the point where before COVID we could have just in time shipping Which meant that you could not have to keep like Amazon didn't even need to keep like storehouses of things like you could anyway I don't know how just in time shipping works logistically, but it's essentially The system was so predictable that you could you didn't have to build redundancies into this Classic example is you're building a laptop but the components for that laptop come from across the world You can ship that the product in progress around the world and as it gets there the next piece that it needs is ready And then you keep moving it on you don't you don't need any inventory. Yes, and are we still police in the high seas? Oh, yeah, yes, there's no and there's no we haven't I mean there are some life There's not really not how it's not gonna happen. I'm sorry.

There's one possible career down the ground So the United States almost like like accidentally fumbles its way into this system where there is such demand for the global dollar that they can safely Decouple it from gold without the confidence game going away and now the rest of the world Basically controls their currency with a reserve of dollars as opposed to their currency with a reserve of gold So in many ways the rest of the world is still on that middle system They have their ray all they have their their their their currency And it is in relationship to the dollar and the United States is in this weird system where they have their system They have the dollar and they have the fact that the world is used the world basically runs on the operating system of the dollar And so that has meant that the United States can run budget deficits And without inflation because that money is going to be absorbed by the global system because there's always going to be people that need that To function so there was there has not been a point where people are like oh man There's just too much United States dollars in there We don't need this garbage and then the purchasing power rapidly goes away now We're living through a period of inflation right now, and that's kind of a different a different situation, but the United States kind of in the system that we're in now we've yeah We've created this this system where everybody uses the United States dollar It's like the operating system It's like the the computer operating system that one and it's too much of a pain in the butt to try to port over to some Completely different system. It's too expensive. You would need to you would need everybody to be true believers in the new system and accept a lot of like Loss of potential wealth before the before the other system got enough sort of like flywheel momentum to to supplant the United States dollar And so you've kind of That free trade system that was born out of We want to make sure that global wars don't happen So we are going to make trade as easy as possible and this is sort of like the Milton Friedman He's like the acolyte he's like the big you know the evangelist of the free trade model Basically the United States fumbled its way into this position where their dollar ended up being the Settlement rail for the world and so that it meant that there was going to be a break with a goldback system eventually It became this thing where it was kind of an absurd thing The other fact is like we don't even know how many us dollars are in the world Right like if you are a French bank and you loan American dollars to a Belgian business and they promised to pay you back in us dollars well Those dollars need to exist at the time that they're paying you back and like when you make when you basically enter a credit Agreement you have created an asset and a liability but that asset that's created the amount of money may or may not exist Right like if AJ says hey, I'll sell you my light phone for a thousand trillion dollars and I agree to that AJ has to find a thousand I have to find a thousand trillion dollars to pay AJ well that money doesn't exist so this deal is eventually not going to work but But we don't know how many like the thing is when it comes to when it comes to people who are issuing credit It creates, you know Hypothetical dollars out there that need to be paid back in the future So if you know the United States if they wanted to keep their money on the gold standard They actually don't even know how much you promised United States dollars exists in the world So they there was going to be a break at some point it couldn't there was not enough gold in the world to Or it didn't have because it couldn't be just the money that currently exists to be the money that's currently exist And the money that's promised to pay back a lot of things right let's say that you and I came into an agreement For a business venture and I promised I was gonna pay you a million dollars over the next ten years for this and you gave me the money now To do it and let's just say that that money the United States just there was no more million dollars that money was gone And I can do the problem I can do the venture you've given me the money But there's like I can't even go into the world and find a million dollars to pay you for it And I go to the United States government I go to the government I say hey if you don't put more US dollars in the world Things are gonna grind to a halt and then the US and so the US says okay Well, we put money into the world and so the things can go again Well, if you do that but your money is tied to gold then you're gonna have to like the flake a little bit Yeah, so you're gonna have to basically or have to find more no longer makes sense to have your currency tied to the physical rock of gold because If everybody is using the dollar to be useful in the world Arbitrarily tying it to a set amount of money is no longer a thing that needs to happen It's essentially tied to the might of the nation So it's tied to the might of the nation and it's tied to the sort of the the agreement It basically like stumbled its way into being the operating system of the global economy And that rubs some people the wrong way and people and you know it does mean that like When the United States makes a decision about their dollar it affects the rest of the world when Canada makes a decision about the Canadian dollar Nobody in Texas cares right but when long as it's named something cool like a loony or a duney That's right. Yeah, you guys have great dollar names Dollar sounds silly your son of me Ladies and tonies but when the when the federal reserve or when the American government makes some sort of decision about them about How much us dollars are in the world that can have a material effect on use back a stand and all of a sudden He's back stands like well crap and so that can be we're basing our currency on your dollars and other worthless because you put it A whole bunch of more and our purchasing power is gone You know like it can so that can rub people the wrong way that that bit it can cause Nations around the world to feel like they are under this power that they have no say in okay that they have a That they have decisions that are materially affecting their lives and they have No enfranchisement in that system right?

Washington's making decisions and all of a sudden it is causing Food prices in Libya to go up and that is you know like and that can be over time that can that can create a you know Grumpy views towards the US because the United States will make decisions that benefit the US they have maybe political expediency decisions I need to make and During covid the United States pours in a ton of money into the system to keep the thing going But that's got these like tail lip effects when you put in lots of United States dollars can have all these sort of tail lip effects on Nations that are really sensitive to the amount of dollars in the system You know and they don't have a say in that and that but I can have that can have real life or death consequences for their country And that can really benefit that can really it doesn't feel good. Is there a way we can maybe this is for the episode Is there a way that we could have like a voting system for the other countries like a little enfranchisement? I got it Never thought about it Probably not it'd be an easy way to solve sort of that bitterness Well, you do have things like you have you have international monetary policy groups So you have things like the g7 right and you have things like Yeah, you have like what happens in Davos. What's that you've got the all the central banks that come together to talk about monetary policy World economic forum Yeah, so you have you do have those those sorts of mechanisms But so we're in that system right now that we've kind of stumbled into now and the other thing is that this system has more or less incentivized peace now, I know it's controversial thing to say but if you are a small fledgling nation If you're a second world power you have an you have an incentive to play ball with the global system More so than you have an incentive to to militarize and go off because of America if that is a impediment to the same to the safety of trade Well, not all of a sudden you've got the entire might of the US army.

That's like hey, you're you're making it difficult for everybody else And so if you run afoul of that Then you know there is there is a a bit of an incentive for nations to get on board with the global financial system That's backed by the US dollar a great example is that is is look at the nations when they came out of the fall of the Soviet Union The nations that kind of got on board to the US dollar backed system have been the ones that have come out of communism and flurist Poland is probably the best example What how what Poland went from under communism to what Poland is now? 30 years later is is the great example of them sort of embracing the game now you can hate the game you can not love the system You can say like this has the problems where have nations feel like they are disenfranchised and I and I agree but it has been the system that has kind of At least my reading of it is something that the United States kind of stumbled its way into after World War two As a like well, we don't want this kind of thing to happen again What's gonna keep it from happening? Well safe free trade and then over time that has solidified into the US dollar being the mean the means of exchange and And the settlement rail for the world and that has meant that you sort of have this glow They call it the global dollar wrecking ball you have the dollar be this this the operating system of the world But there are ways much that's really good a country like Poland that could not otherwise Protect their boats against the people who are throwing a lot of weight around right they get to participate in free trade and flourish Even though they don't have the military to necessarily yeah, our boats are gonna go to your port and they're gonna go safely In the ancient world if a small nation like Poland was part of a dissolved empire They were gonna get taken over by the empire next to them Yeah, but in this world when Poland comes out of a dissolved empire of the Soviet Union You haven't you have a world being like hey will trade with you right and so and so like welcome to the part You were glad you're here. Yeah, no in a sense You could look at that and say that the only way that Poland is going to stay alive is if Poland like allows themselves to be colonized into this global system, but if the alternative is Integration into the global economy or integration into a belligerent empire that's stronger than you I mean those are those are those are decisions that usually you adopt for the one that you retain some kind of autonomy Autonomy of country even though you are yeah, you are gonna be beholden to the system and I'm actually making your laws Yeah, yes.

Yeah, anyway, so that is real quick and dirty framework of talking about sort of like monetary arrows And if you can sort of place those monetary arrows and have them in the back of your mind as you're studying different eras of history They help organize and understand various things like it's not just that everyone loved Rousseau and that's why they cut the king's head off It's that you also were bankrupt six years ago and you have those realities as well It's not that America has become this sort of bloodthirsty colonizing force that took over the world after World War two No, I mean we sort of stumbled into this into this this game where it was just easier for the world to trade in the US dollars be protected by the US Navy and And there was sort of that rising tide thing and in fact that system defeated communism It wasn't like we had I don't know like strong family values and the godless Russians didn't know it was because we had This global system that no amount of central planning was ever going to compete with right? Okay, that's a lot. Yeah, that's awesome. This has been classical stuff.

You should know This is AJ grandma Thomas you can check out our website classical stuff net you can find us pretty much anywhere podcasts are happening and turns out You probably already found us because you're listening you can also find us on patreon patreon.com slash classical stuff You can tweet us at clsscal stuff you can email us at the guys classical stuff net or you know send vibes our way We might we might pick them up tries like five dollars bills. Yeah, you do that too, but I'm sure vibes We'll try to get your vibes, you know, who knows how much that works So sense of vibes sense of what do we want to do? We're glad you're here and glad you're listening Although you probably not listen to this part most people turn off before now. Oh, that's true You think we should give like little nuggets of wisdom here in the end we should give like a fact like a shark fact I got one yeah, so people who've listened to the end will hear that there was a There was an old Canadian beer campaign where we used to sell a bucket of beer Okay, and the jingle was beer beer beer beer bucket of beer beer beer beer beer beer All you need is a five or and a sober driver beer beer beer beer bucket of beer and this was an actual campaign I love that in Canada part of the campaign is Road safety I have to like bring money, but also you know be responsible it costs five bucks and all you need to drive her all use a fiber And so we're driver and you got yourself a bucket of beer my friend right should we should we sing it out?

No, no, no, no, no, no, no, I'm gonna sing that out. I'm ready. All right fine fine