Understanding the complex relationship between time and money can often feel like uncovering a grand cosmic design. With every minute, hour, and day following a well-established order, it seems everything is in perfect harmony. Yet, a closer examination reveals how this system often falters, especially when we consider the implications of our financial constructs.
It all appears systematic and orderly. Sixty seconds constitute a minute, 60 minutes make up an hour, 24 hours form a day, and one day is equivalent to the Earth’s full rotation.
Roughly every 30 days, the moon revolves around the Earth, defining a month. Additionally, the Earth orbits the sun once a year—every 12 months.
So far, so good, right?
However, this neat order is disrupted when we consider the Earth’s solar orbit measured in days: it actually takes 365 days plus an inconvenient extra 6 hours to complete one cycle.
Yet, we don’t let these pesky 6 hours derail our pursuit of perfection. After all, we’re human. We innovate, create, and shape the world according to our vision. When the numbers don’t align, we adapt.
This results in an off-balance account. We devise modern monetary theories, implement negative interest rate policies, and even establish leap years.
Tomorrow [Saturday], it’s time for reconciliation. As we assess our off-balance account, we discover 24 accrued hours that need to be accounted for.
Thus, a day of reckoning is necessary to realign the calendar year with the astronomical year. Moreover, we must reevaluate our measuring system’s baseline or reference point.
Without such realignment, what truly defines a year?
Perhaps the calendar could remain accurate for a decade or two. However, in just 28 years, it would fall behind by an entire week. Before long, it could devolve into nothing more than meaningless scratches on cave walls.
A Technology, Called a Printing Press
Such is the fate of the dollar—or any paper currency—when it’s not anchored by gold or another commodity that cannot be created at will. Without a stabilizing foundation to regulate its supply, what is a dollar worth?
Its value becomes abstract, indefinite, and arbitrary. The Federal Reserve can produce more dollars at will, transforming your pocketful of currency from a valuable asset one day to little more than birdcage lining the next.
Before Nixon severed the dollar’s link to gold in 1971, the convertibility of dollars limited U.S. Treasury budgets and the Fed’s credit creation. Until then, foreign banks could exchange $35 for an ounce of gold at the U.S. Treasury. From that point onward, they received only $35 in return for their exchange.
At the G-10 Rome meeting in late 1971, Treasury Secretary John Connally succinctly explained this new dollar reserve standard to European finance ministers:
The dollar is our currency, but it’s your problem.
In contrast to gold, which carries no debt obligation or counterparty risk, dollars can lose all value if their promises go unfulfilled. Alternatively, they can be inflated to worthlessness if the desperate Federal Reserve cranks up its printing press, showering urban centers with money.
If the concept of helicopter money is new to you, rest assured it’s serious. In fact, former Federal Reserve Chairman Ben Bernanke suggested this as a response to financial crises. He made this clear in his November 21, 2002 speech, Deflation: Making Sure “It” Doesn’t Happen Here.
At that time, Bernanke clarified:
The U.S. Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. Government can also reduce the dollar’s value in terms of goods and services, effectively raising prices in dollars for those goods and services.
Later in the same speech, Bernanke referenced a “helicopter drop,” suggesting a scenario where a central banker hovers over neighborhoods and drops suitcases full of money to aid the struggling masses.
Even if the dollar hasn’t yet lost its value, its constant fluctuation creates ongoing challenges. How can one save and invest effectively when dollar inflation is a constant threat?
Where Did Your Money Go?
When a carpenter measures a cabinet at three feet, he knows that this measurement is fixed and reliable. It will always remain three feet—no more, no less.
Conversely, when a saver puts away $1, there’s no guarantee that the value of that dollar will remain intact. For instance, according to the Bureau of Labor Statistics’ CPI inflation calculator, $1 in 2020 holds the same purchasing power as $0.15 did back in 1971, the year the dollar last tied itself to gold. Where did the remaining $0.85 go?
In reality, it was subtly taken from savers and redistributed by the government—a national disgrace.
Over the decades, the baseline—the dollar—used to appraise goods and services has been distorted. As the number of dollars has increased, their individual value has dwindled.
It’s important to clarify that the prices of specific goods and services will naturally vary depending on supply and demand. However, when money is anchored to a stable reference, like during the classical gold standard of the 19th century, overall prices tend to remain stable.
Just as a leap year is essential to align our calendar, today’s money requires a secure foundation from which to derive its value. Without such a reference, we risk veering further off course. Money would only accumulate more zeros, rendering a $100 bill equivalent to what a $1 bill could once afford.
So, enjoy your day of reckoning. Time has always been present, waiting to be reconciled. Yet, we have a nagging suspicion that addressing the distortions of the dollar reserve standard will not be a pleasant task, although it is certainly necessary.
Sincerely,
MN Gordon
for Economic Prism
