The passage of time is a marvel of order and precision. Seconds combine to form minutes, minutes gather into hours, hours aggregate into days, and finally, each day encapsulates a full rotation of our planet.
The moon makes a complete orbit around the Earth approximately every 30 days, marking the passage of one month, while the Earth takes a full year—about 365 days, plus an inconvenient extra 6 hours—to circle the sun.
So far, everything appears to be in harmonious balance, right?
But here’s where the neatness begins to unravel. To accurately measure one of Earth’s trips around the sun, we need to account for those additional 6 hours. This small discrepancy can throw off our carefully constructed calendar.
Nevertheless, we refuse to let these little hours disturb our sense of order. As humans, we innovate and adapt, even if it means bending the rules a bit. When faced with incongruities, we simply find ways to adjust the numbers.
We create budgetary discrepancies, ponder new theories, fabricate negative interest rate policies, and even establish leap years.
This coming Monday presents a critical moment of accounting. We discover that over the past four years, we have accumulated 24 hours that need to be reconciled.
As a result, we face the necessity of a correction day to realign our calendar with the true astronomical year and reset our measurement standards.
Without this realignment, what value does a year genuinely hold?
A minor deviation might not be noticeable for a decade, but after just 28 years, the calendar could lag by an entire week. Eventually, our calendar could become obsolete, reduced to mere scratches on cave walls.
The Importance of a Stable Foundation
This reflects the fate of the dollar—or any paper currency—when it lacks backing from gold or any other commodity that cannot be produced on demand. Without a stable foundation to regulate its supply, what meaning does a dollar hold?
It becomes abstract, indefinite, and arbitrary. The Federal Reserve can simply conjure it from thin air. One day you have a handful of dollars to spend, and the next, those same bills could be worth little more than kindling or toilet paper.
The conversion between gold and paper currency once constrained the Federal Reserve’s capacity to generate money. However, that changed when the U.S. disconnected the dollar from gold and established the dollar reserve standard. Before 1971, foreign banks could trade $35 for an ounce of gold. From that point forward, when they presented $35 to the U.S. Treasury, they simply got back the equivalent amount in dollars.
Unlike gold, which holds no debt obligations or counterparty risks, dollars can become worthless if the promises they represent are broken. Alternatively, they can be diluted to insignificance when the Federal Reserve resorts to “helicopter drops” of cash into the economy.
If you’ve never encountered the concept of helicopter money, let me assure you it’s not a jest. In fact, former Federal Reserve Chairman Ben S. Bernanke described this method as a legitimate response during a financial crisis in his speech on November 21, 2002, titled Deflation: Making Sure “It” Doesn’t Happen Here.
At that time, Bernanke elaborated by stating, “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 value of a dollar in terms of goods and services, which is equivalent to raising the price in dollars of those goods and services.”
Later in the same speech, he mentioned the concept of a “helicopter drop,” envisioning a central banker hovering above, distributing suitcases filled with cash to people below.
The Approaching Day of Reckoning
Unfortunately, this day of reckoning is fast approaching. Without a gold standard to anchor it, financial disparities and rampant debt creation are set to escalate. A rise in inflation, leading to a de facto default, will likely seem easier politically than an outright default.
At the moment, although the dollar may not be entirely worthless, its persistent instability poses a significant challenge. How can one save, invest, or accumulate wealth when the dollar’s supply is constantly being inflated?
Consider a carpenter measuring a cabinet at exactly 3 feet—he can trust that the measurement will remain 3 feet, no more, no less.
Conversely, a shopkeeper pricing a 24-ounce loaf of bread at $3.93 cannot guarantee that the value of that loaf won’t fluctuate. In 1971, the same year the dollar last severed its connection to gold, three 20-ounce loaves of bread were priced at only $0.89.
Is the quality of a loaf of bread really 1006 percent better now? Of course not. Instead, the baseline used to gauge the value of bread has been distorted, just like a politician twisting the truth. The amount of dollars in circulation has soared, subsequently eroding the unit value of each dollar.
Yes, prices for goods and services will naturally fluctuate due to shifts in supply and demand. However, when money is tethered to a stable reference point—such as during the classical gold standard of the 19th century—overall price levels tend to remain stable.
Just as a leap year is crucial for maintaining the calendar’s accuracy, today’s monetary system also requires a firm basis to derive its meaning and value. Without such anchor, we will drift further from our intended path. Money will accumulate more zeros, but what value does a $100 bill hold if it buys what a $1 bill did previously?
So, make the most of Monday’s day of reckoning. The time has always existed; it simply requires reconciliation. Yet, we are left with a troubling suspicion that correcting the imbalances within the dollar reserve system will not be as smooth as one might hope. Nonetheless, it is a necessary step.
Sincerely,
MN Gordon
for Economic Prism
