Debt (66 page)

Part of the problem was the obvious one: the national debt is, first, born of war; second, it is not owed to all the people equally, but above all to capitalists—and in France at that time, “capitalist” meant,
specifically, “those who held pieces of the national debt.” The more democratically inclined felt that the entire situation was opprobrious. “The modern theory of the perpetuation of debt,” Thomas Jefferson wrote, around this same time, “has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating.”
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Most Enlightenment thinkers feared that it promised even worse. Intrinsic to the new, “modern” notion of impersonal debt, after all, was the possibility of bankruptcy.
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Bankruptcy, at that time, was indeed something of a personal apocalypse: it meant prison, the dissolution of one’s estate; for the least fortunate, it meant torture, starvation, and death. What national bankruptcy would mean, at that point in history, nobody knew. There were simply no precedents. Yet as nations fought greater and bloodier wars, and their debts escalated geometrically, default began to appear unavoidable.
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Abbe Sieyés first put forward his great scheme for representative government, for instance, primarily as a way of reforming the national finances, to fend off the inevitable catastrophe. And when it happened, what would it look like? Would the money become worthless? Would military regimes seize power, regimes across Europe be likewise forced to default and fall like dominos, plunging the continent into endless barbarism, darkness, and war? Many were already anticipating the prospect of the Terror long before the revolution itself.
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It’s a strange story because we are used to thinking of the Enlightenment as the dawn of a unique phase of human optimism, borne on assumptions that the advance of science and human knowledge would inevitably make life wiser, safer, and better for everyone—a naïve faith said to have peaked in the Fabian socialism of the 1890s, only to be annihilated in the trenches of World War I. In fact, even the Victorians were haunted by the dangers of degeneration and decline. Most of all, Victorians shared the near-universal assumption that capitalism itself would not be around forever. Insurrection seemed imminent. Many Victorian capitalists operated under the sincere belief that they might, at any moment, find themselves hanging from trees. In Chicago, for instance, a friend once took me on a drive down a beautiful old street, full of mansions from the 1870s: the reason, he explained, that it looked like that, was that most of Chicago’s rich industrialists of the time were so convinced that the revolution was immanent that they collectively relocated along the road that led to the nearest military base. Almost none of the great theorists of capitalism, from anywhere on the political spectrum, from Marx to Weber, to Schumpeter, to von Mises, felt that capitalism was likely to be around for more than another generation or two at the most.

One could go further: the moment that the fear of imminent social revolution no longer seemed plausible, by the end of World War II, we were immediately presented with the specter of nuclear holocaust.
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Then, when that no longer seemed plausible, we discovered global warming. This is not to say that these threats were not, and are not, real. Yet it does seem strange that capitalism feels the constant need to imagine, or to actually manufacture, the means of its own imminent extinction. It’s in dramatic contrast to the behavior of the leaders of socialist regimes, from Cuba to Albania, who, when they came to power, immediately began acting as if their system would be around forever—ironically enough, considering they in fact turned out to be something of an historical blip.

Perhaps the reason is because what was true in 1710 is still true. Presented with the prospect of its own eternity, capitalism—or anyway, financial capitalism—simply explodes. Because if there’s no end to it, there’s absolutely no reason not to generate credit—that is, future money—infinitely. Recent events would certainly seem to confirm this. The period leading up to 2009 was one in which many began to believe that capitalism really was going to be around forever; at the very least, no one seemed any longer to be able to imagine an alternative. The immediate effect was a series of increasingly reckless bubbles that brought the whole apparatus crashing down.

ON AUGUST 15, 1971
, United States President Richard Nixon announced that foreign-held U.S. dollars would no longer be convertible into gold—thus stripping away the last vestige of the international gold standard.
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This was the end of a policy that had been effective since 1931, and confirmed by the Bretton Woods accords at the end of World War II: that while United States citizens might no longer be allowed to cash in their dollars for gold, all U.S. currency held outside the country was to be redeemable at the rate of $35 an ounce. By doing so, Nixon initiated the regime of free-floating currencies that continues to this day.

The consensus among historians is that Nixon had little choice. His hand was forced by the rising costs of the Vietnam War—one that, like all capitalist wars, had been financed by deficit spending. The United States was in possession of a large proportion of the world’s gold reserves in its vaults in Fort Knox (though increasingly less in the late 1960s, as other governments, most famously Charles de Gaulle’s France, began demanding gold for their dollars); most poorer countries, in contrast, kept their reserves in dollars. The immediate effect of Nixon’s unpegging the dollar was to cause the price of gold to skyrocket; it hit a peak of $600 an ounce in 1980. This of course had the effect of causing U.S. gold reserves to increase dramatically in value.
The value of the dollar, as denominated in gold, plummeted. The result was a massive net transfer of wealth from poor countries, which lacked gold reserves, to rich ones, like the United States and Great Britain, that maintained them. In the United States, it also set off persistent inflation.

Whatever Nixon’s reasons, though, once the global system of credit money was entirely unpegged from gold, the world entered a new phase of financial history—one that nobody completely understands. While I was growing up in New York, I would hear occasional rumors of secret gold vaults underneath the Twin Towers in Manhattan. Supposedly, these vaults contained not just the U.S. gold reserves, but those of all the major economic powers. The gold was said to be kept in the form of bars, piled up in separate vaults, one for each country, and every year, when the balance of accounts was calculated, workmen with dollies would adjust the stocks accordingly, carting, say, a few million in gold out of the vault marked “Brazil” and transfering them to the one marked “Germany,” and so on.

Apparently a lot of people had heard these stories. At least, right after the Towers were destroyed on September 11, 2001, one of the first questions many New Yorkers asked was: What happened to the money? Was it safe? Were the vaults destroyed? Presumably, the gold had melted. Was this the real aim of the attackers? Conspiracy theories abounded. Some spoke of legions of emergency workers secretly summoned to make their way through miles of overheated tunnels, desperately carting off tons of bullion even as rescue workers labored overhead. One particularly colorful conspiracy theory suggested that the entire attack was really staged by speculators who, like Nixon, expected to see the value of the dollar crash and that of gold to skyrocket—either because the reserves had been destroyed, or because they themselves had laid prior plans to steal them.
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The truly remarkable thing about this story is that, after having believed it for years, and then, in the wake of 9/11, having been convinced by some more knowing friends that it was all a great myth (“No,” one of them said resignedly, as if to a child, “the United States keeps its gold reserves in Fort Knox”), I did a little research and discovered that, no, actually, it’s true. The United States treasury’s gold reserves are indeed kept at Fort Knox, but the Federal Reserve’s gold reserves, and those of more than one hundred other central banks, governments, and organizations, are stored in vaults under the Federal Reserve building at 33 Liberty Street in Manhattan, two blocks away from the Towers. At roughly five thousand metric tons (266 million troy ounces), these combined reserves represent, according to the Fed’s own website,
somewhere between one-fifth and one-quarter of all the gold that has ever been taken from the earth.

The gold stored at the Federal Reserve Bank of New York is secured in a most unusual vault. It rests on the bedrock of Manhattan Island—one of the few foundations considered adequate to support the weight of the vault, its door, and the gold inside—eighty feet below street level and fifty feet below sea level … To reach the vault, bullionladen pallets must be loaded into one of the Bank’s elevators and sent down five floors below street level to the vault floor … If everything is in order, the gold is either moved to one or more of the vault’s 122 compartments assigned to depositing countries and official international organizations or placed on shelves. “Gold stackers,” using hydraulic lifts, do indeed shift them back and forth between compartments to balance credits and debts, though the vaults have only numbers, so even the workers don’t know who is paying whom.
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There is no reason to believe, however, that these vaults were in any way affected by the events of September 11, 2001.

Reality, then, has become so odd that it’s hard to guess which elements of grand mythic fantasies are really fantasy, and which are true. The image of collapsed vaults, the melted bullion, of secret workers scurrying deep below Manhattan with underground forklifts evacuating the world economy—all this turns out not to be. But is it entirely surprising that people were willing to consider it?
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In America, the banking system since the days of Thomas Jefferson has shown a remarkable capacity to inspire paranoid fantasies: whether centering on Freemasons, or Elders of Zion, or the Secret Order of the Illuminati, or the Queen of England’s drug-money-laundering operations, or any of a thousand other secret conspiracies and cabals. It’s the main reason why it took so long for an American central bank to be established to begin with. In a way there’s nothing surprising here. The United States has always been dominated by a certain market populism, and the ability of banks to “create money out of nothing”—and even more, to prevent anyone else from doing so—has always been the bugaboo of market populists, since it directly contradicts the idea that markets are a simple expression of democratic equality. Still, since Nixon’s floating of the dollar, it has become evident that it’s
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the wizard behind the screen who seems to be maintaining the viability of the whole arrangement. Under the free-market orthodoxy that followed, we have all being asked, effectively, to accept that “the market” is a self-regulating system, with the rising and falling of prices akin to a force of nature, and simultaneously to ignore the fact that, in the business pages, it is simply assumed that markets rise and fall mainly
in anticipation of, or reaction to, decisions regarding interest rates by Alan Greenspan, or Ben Bernanke, or whoever is currently the chairman of the Federal Reserve.
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One element, however, tends to go flagrantly missing in even the most vivid conspiracy theories about the banking system, let alone in official accounts: that is, the role of war and military power. There’s a reason why the wizard has such a strange capacity to create money out of nothing. Behind him, there’s a man with a gun.

True, in one sense, he’s been there from the start. I have already pointed out that modern money is based on government debt, and that governments borrow money in order to finance wars. This is just as true today as it was in the age of King Phillip II. The creation of central banks represented a permanent institutionalization of that marriage between the interests of warriors and financiers that had already begun to emerge in Renaissance Italy, and that eventually became the foundation of financial capitalism.
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Nixon floated the dollar in order to pay for the cost of a war in which, during the period of 1970–1972 alone, he ordered more than four million tons of explosives and incendiaries dropped on cities and villages across Indochina—causing one senator to dub him “the greatest bomber of all time.”
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The debt crisis was a direct result of the need to pay for the bombs, or to be more precise, the vast military infrastructure required to deliver them. This was what was causing such an enormous strain on the U.S. gold reserves. Many hold that by floating the dollar, Nixon converted the U.S. currency into pure “fiat money”—mere pieces of paper, intrinsically worthless, that were treated as money only because the United States government insisted that it should be. In that case, one could well argue that U.S. military power was now the only thing backing up the currency. In a certain sense this is true, but the notion of “fiat money” assumes that money really “was” gold in the first place. Really we are dealing with another variation of credit money.