The Petrodollar

By: Alex Winfield
Sunday, July 13, 2014

Once upon a time, the act of settling a debt could be handled by directly bartering goods and services.  An exchange of time and effort had to be negotiated, and all parties involved would try to gain more than they were losing.  E.g. I am stronger so it is easier for me to farm, and you, being more dexterous, can sew much faster than I can. Thus, I bring food while you provide cold weather clothing.  Good trading relationships are born this way; the gains outweigh the losses.  

You finished 20 coats, but its summertime.  I don’t need a coat right now, so give me something else to remind us that you spent the effort, maybe I’ll give it back to you in the fall?  Perhaps a “place-holder” could serve some purpose.  Something like a certificate to show effort spent that transfers about a community when one’s labors aren’t necessary at that moment.

Something like a gold coin?

 

Gold is rare, so we can’t just fabricate it on demand (theoretically).  The community tends to agree that this method is useful since it affords us all the ability to exchange the efforts of our work in standardized units; however, gold is heavy.  How much do I owe you?  What if the gold was stored in a common (safe) location, and I just used the receipt of deposit? It’s worth the same amount, it’s easier to carry, and you can go retrieve the gold yourself.

 

We’ll call that receipt/certificate of deposit a dollar, and as long as the receipts equal the amount of stored gold, we should be fine.

If, by chance, the amount of receipts circulating around our community exceeded that amount of gold (say the person who guards the gold also issues the certificates…we don’t really know how much he’s got, do we?), we might be able to increase the rate of transactions which in turn would stimulate economic productivity, no?  Actually, that might work out to our benefit….assuming that the entire community doesn’t collectively decide to exchange their certificates at the same time, because then some of those certificates would be valueless.  Even if we somehow equally redistributed the gold, the receipts would be worth much less since the total amount would have to uniformly absorb the loss.

The more our community grows, the more intricate our trade habits become.  Soon, we are trading with neighboring communities who have adopted similar methods of handling their goods and labor distribution.  Our community is on a mountain, by the way (lucky for us), so it turns out our gold storage site more secure within the caverns, earthen walls, and BANKS of rock, and this compels the other communities to store their gold at our place due to the security advantage.  The other communities are fine with this as long as we don’t issue more certificates than the amount of gold we have. 

 

Let’s call the guy who guards the bank and writes the receipts Nixon.  Nixon has a team of some of the strongest, most able-bodied men to help guard the mountain gold bank, fortunately.  We all rest easy as long as Nixon keeps his promise not to offset the ratio of receipts to deposited gold…by too much.

Well, a neighboring community notices our community has spent an awful lot of time trying to get rice out of a particular rice patty in the region, and the rice gained doesn’t seem to equal the amount of certificates being distributed in order to sustain the rice acquisition operations. This community (let’s call them “France” for no particular reason) knows how hard it is, for they tried to get rice out of the same patty for many years.  France is skeptical of Nixon’s actions, so France asks Nixon to return their portion of gold sitting in Nixon’s bank. Will others now be motivated do the same thing? Then Nixon might lose the economic control he’s gained from managing the bank if everyone else collectively decides not to leave their gold with him.

 

Nixon is a crafty bastard, and he senses the panic brewing amongst the neighboring communities.

Rather than lose control, he decides to de-couple ALL of the receipts from the gold in storage . . . (can he do that? Those guards he has look pretty tough).  Now, all the receipts are essentially useless unless some are still willing to exchange goods and services for them.  What else can Nixon do to perhaps prop up the value of these ‘dollars’?

 

Another community settled in an area that didn’t seem ideal, but it worked for them. They get by on what they have.  Turns out that this area, assumed to be relatively barren, can grow a certain type of grain: a super, nutritionally dense grain that feeds the horses and the mules enabling them to work much faster.  This community unfortunately lacks the means to harvest the grain, but fear not, for Nixon has a plan.  He is willing to provide farmers as well as some of his guards to make sure the grain is safely harvested. Perhaps some extra weapons in case the community needs/wants them.  In exchange, the Saudis… I mean, the other community will agree to keep using Nixon’s receipts in order to facilitate trade.  Since the entire region needs this grain for their livestock, all of them must trade with the same receipts, so Nixon has security again being that he is the master of the certificates.

 

This arrangement should work out fine for Nixon and the Saudi community.  Yet, other people begin to tire of this arrangement. After all, the others don’t reap the rewards, and they only pay the extra burden of time and effort spent on exchanging dollars for grain: a burden that manifests itself into Nixon’s pockets.  In an effort to reduce Nixon’s clutches, what if they start trading grain for gold again? There’s other grain out there, they can harvest it independently without Nixon’s vast resources. Maybe they could use a different certificate of deposit?  After all, they are certainly capable of organizing themselves. 

What is Nixon to do? The Saudis are worried as well since they benefit directly.  Should they just, I don’t know… march into another community, stomp all around, and disable them from organizing into a stronger entity? Wouldn’t this force the other community to remain on Nixon’s standard?  The better, if they know what’s good for them.

 

But I’m just a farmer, and you are a tailor.  I don’t know about all the intricacies of this “dollars backed by fuel” nonsense.  All I know is that sending people from our own community to stomp out another community is disgusting.  I’m not farming for that, and you don’t want to make coats for that either.

Unless, of course, those other communities pose a threat? 

Do they?

 

I don’t know, but Nixon said they do.  Nixon said they’re pulling babies out of cribs, they’re making poison, they hate us, and they’re coming to kill us if we don’t protect ourselves.  What a rotten turn of events.  Now, I have to farm a little more, you have to sew a little more, because it’s a tremendous group effort trying to keep all of those other communities from ganging up on us, and everyone has to give a little more to keep the foreigners (and they’re baby killing, poison making tendencies) at bay.

 

We do what we have to, now.  So as immoral as it may seem, if destabilizing everyone else in the region is what it takes to keep value for our flimsy little paper receipts, and then that’s our gain…and their loss.