Do Digital Assets Have Intrinsic Value?: The monetary history of the 20th century 3/4

These theories of value play out in the monetary policy of the 20th century global financial system through the events of the Great Depression, the subsequent applications of Keynesian theory, and the post-war global order. The demand side valuation gained predominance in the global financial system. Most of the story of the U.S. financial system in the 20th century, I have followed the lead of Lyn Alden in her Macro Outlook for 2021 and in her blog post The Fraying of the US Global Reserve Currency System.

In the aftermath of World War II, the United States and Great Britain had the predominant influence in the structuring of the post-war global financial system at the Bretton Woods conference. The conference was headed by Harry White on the American side, who interestingly enough turned out to be a Soviet spy, and John Maynard Keynes on the British side. Since the United States controlled a huge portion of the world’s gold reserves and since Great Britain was indebted to the United States for its assistance in the war, the United States had significant leverage to assert its position in the discussion. Accordingly, it was decided that the United States dollar would be the global reserve currency and would be pegged to gold, and all other foreign currencies would be priced in terms of US dollars. By 1949 Robert Triffin who worked in the IMF argued that it was a contradiction for a particular nation state to also serve as the global reserve supplier; the US would not be able to maintain both global liquidity and confidence of gold convertibility. John Maynard Keynes had already argued at Bretton Woods for a neutral basket of floating currencies as the reserve asset. They were proven right. By 1971, the US had just 11 billion in gold to back 24 billion in US dollars circulating. Nixon dropped the dollar peg to gold after France and Britain demanded conversion of their dollars.

When the gold standard ended, we moved to a fiat system where the currencies floated in price in relation to each other. The value of the money was not backed by a hard asset but by trust in the authority of United States as a global empire. But in 1974, in order to maintain the US dollar’s reserve status, the United States reached a bilateral agreement with Saudi Arabia, who in turn influenced OPEC countries to standardize the sale of oil in US dollars. We moved to a system in which U.S. dollars were essentially backed by oil reserves, the petrodollar system. The United States offered military and naval support to protect the shipping lanes, and OPEC countries allowed them to control most of the world’s oil supply and required other nations to buy oil from them in US dollar denominations. Through this system, almost all nations had to become trading partners with the United States in order to have access to their hold of 80% of the world’s oil reserves so that they could have oil energy to power their domestic economy. The petrodollar system creates an artificially strong dollar because the US profits twice. First, foreign countries have to acquire dollars in order to pay for their oil, then OPEC countries make a profit on the sale of oil, and re-invest back in US treasuries.

Since there is no free lunch, and the US did not have to draw down any fixed reserve assets in order to spend overseas, it was forced to draw down its manufacturing base. Manufacturing jobs and low income service sector jobs were shipped overseas, because US exports were no longer competitive when the dollar was so strong. Some people think that manufacturing jobs were shipped overseas simply because the labor was cheaper. That is only part of it, and is mostly a downstream effect of the political-military deal with Saudi Arabia and OPEC countries which induced an artificially strong dollar.

So essentially, over the course of the twentieth century, the backing of the global money supply went from: hard, fixed supply asset (gold), then briefly to pure trust (fiat), and then to energy (oil reserves). So now, on the petrodollar system, the United States basically serves as the central bank for the world, at the expense of its own domestic work force. But more than that, the global financial system, as structured, is inherently biased toward the demand side value and so is inflationary by nature. The oil reserve backing is not a peg. However, more generally, the oil reserve backing does represent a compelling idea about intrinsic value and reserve assets. Why did the US decide to price dollars in oil? Because everyone needs energy. It would not have been possible before the technological era of human history to have energy back the purchasing power of money. But to this day, the petrodollar system still stands, and money is backed by energy. Given this framework, we can examine the rise of the technology sector in a new light.