Image: Declaration of Independence, oil on canvas, John Trumball (1817)
This week we continue with the reading: Essential Dialogues of Plato, Laws: Books I-III
Athenian Stranger. Tell me, Strangers, is a god or some man supposed to be the author of your laws?
Cleinias. A god, Stranger; in very truth a god: among us Cretans he is said to have been Zeus, but in Sparta, whence our friend here comes, I believe they would say that Apollo is their lawgiver: would they not Megillus?
~ Opening dialogue of Plato’s Laws: Book 1
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.
~ Preamble to the United States of America Declaration of Independence
Plato begins his treatise on Laws by establishing the first principal that the origin of laws is divine, and not manmade. The “truths” expressed in the Declaration of Independence reflect a similar view among the American Colonialists that a “Creator” is responsible for the rules that ought to (and do) govern men and women’s lives. By comparing views expressed over 2300 years ago in ancient Greece with the beliefs that influenced the original Framers, we can improve our understanding of what assumptions and values are embedded in our contemporary political system.
The historical record shows that faith and belief were guiding forces for many of the first Americans, yet a significant distinguishing feature in the founding of the United States was the separation of Church and State. History has repeatedly shown that those who suffer as a result of a particular political system eventually separate themselves to institute a different system when and where they have the economic and political power to do so.
I expect one of the distinguishing features of our time will be the separation of Money and State because of Bitcoin. The union of Money and State today, as was the case with Church and State in centuries past, is a function of laws. In order to develop an informed view of whether money ought to be separated from the control of the State, Plato’s dialogue on laws may be instructive.
If man (i.e., mankind, humans, we the people) is the originator of laws, then it may be reasonable to expect that we can produce different results or outcomes notwithstanding the same or similar actions from prior historical periods. When it comes to money and laws, Central Bankers and many politicians around the world today seem to embrace the mantra that, it can be and is “different this time.” However, if laws are things that originate beyond us and exist apart from us (let’s say there are “natural” laws upon which our human laws may be based) then by understanding laws intrinsically we can better predict and navigate the consequences when man attempts to depart from the wisdom of the lawgiver.
The Future History of Money
In the last ten years, a choice has emerged that could prove to be extremely disruptive to the present global monetary order.
Plato’s Athenian Stranger tells us that the object of laws is to make those who use them happy. Are the people around the world today happy with their money? Like the early Americans who used their economic and political power to enforce their preference for a new system of government, users of bitcoin and cryptocurrencies are expressing their preference for a new form of money. What unfolds in the years ahead may be similar to the founding of a new nation.
Today we live in a world where our money is fiat currency and there is no constraint on the supply of fiat money that can be created.
Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it. Most modern paper currencies are fiat currencies.
In order to grasp why the separation of Money and State might be an attractive proposition to people around the world, whether in emerging economies or fully developed super economies like the United States, it is important to understand both the natural laws and manmade laws that characterize the money we use today.
Consider that we refer to laws of supply and demand to explain our observation over time that when the quantity of money in circulation increases, the value of each unit decreases. Another way to say this is that each unit of money buys less and less as more money enters into circulation - also called, inflation.
The value of money is not static. In the short term, it may ebb and flow against other currencies on the market. In the long-term, a currency tends to lose buying power over time through inflation, and as more currency units are created.
Inflation is a result of too much money chasing too few goods – and it is often influenced by government policies, central banks, and other factors. In this short timeline of monetary history in the 20th century, we look at major events, the change in money supply, and the buying power of the U.S. dollar in each decade.
In the United States today (and around the world), money is synonymous with the United States Dollar (“USD” or the “dollar”). What many people do not realize is that technically speaking, the paper currency dollar is actually a debt instrument called a Federal Reserve Note that is denominated in dollars. The dollar bill in your wallet represents one dollar borrowed by the United States Treasury from the Federal Reserve Central Bank. Each dollar is like a mortgage on a house where the federal government is the borrower, the Federal Reserve is the bank, the citizens are the collateral and taxes collected from those citizens will be used to pay the bank interest on the loans.
The borrowing activity of the federal government consists of Treasuries underwritten and sold by the Federal Reserve on behalf of the United States to investors and countries around the world who have historically considered the borrower - the United States of America - to be a good credit risk on the basis of its fiscal stability, political credibility and the economic productivity of its citizens whose labor and income provide the credit and confidence that “backs” the Treasury.
Today’s dollar is not convertible into another asset, such as gold or silver, like previous versions of the dollar were.
On June 5, 1933, the United States went off the gold standard, a monetary system in which currency is backed by gold, when Congress enacted a joint resolution nullifying the right of creditors to demand payment in gold. The United States had been on a gold standard since 1879, except for an embargo on gold exports during World War I, but bank failures during the Great Depression of the 1930s frightened the public into hoarding gold, making the policy untenable.
Soon after taking office in March 1933, Roosevelt declared a nationwide bank moratorium in order to prevent a run on the banks by consumers lacking confidence in the economy. He also forbade banks to pay out gold or to export it. According to Keynesian economic theory, one of the best ways to fight off an economic downturn is to inflate the money supply. And increasing the amount of gold held by the Federal Reserve would in turn increase its power to inflate the money supply. Facing similar pressures, Britain had dropped the gold standard in 1931, and Roosevelt had taken note.
On April 5, 1933, Roosevelt ordered all gold coins and gold certificates in denominations of more than $100 turned in for other money. It required all persons to deliver all gold coin, gold bullion and gold certificates owned by them to the Federal Reserve by May 1 for the set price of $20.67 per ounce. By May 10, the government had taken in $300 million of gold coin and $470 million of gold certificates. Two months later, a joint resolution of Congress abrogated the gold clauses in many public and private obligations that required the debtor to repay the creditor in gold dollars of the same weight and fineness as those borrowed. In 1934, the government price of gold was increased to $35 per ounce, effectively increasing the gold on the Federal Reserve’s balance sheets by 69 percent. This increase in assets allowed the Federal Reserve to further inflate the money supply.
The big take away here is that, at the federal level, we have a money system based on our government’s capacity to keep borrowing and confidence in the United States and its leaders (i.e., our nation’s economic strength and prosperity depends on the demand for USD around the world). This trust is derived from the stability of the nation both fiscally and politically accumulated over many decades. The system of laws on which the country was founded and the evolution of those laws to date have made the United States the trusted steward of money that the whole world depends upon. Nevertheless, there are signs everywhere that the trust underpinning our money and securing the dollar’s position as the leading global reserve currency is deteriorating.
THE HARDEST MONEY EVER MADE
With respect to cryptocurrencies the supply of money is permanently fixed and cannot be increased at the whim of any person, governing entity or political process. For example, the Bitcoin network is programmatically restricted to create only 21 million bitcoins (approximately 17.8 million bitcoins have been generated and are in circulation to date with 30-50% of that supply thought to be lost forever). Cryptocurrency is not backed by a physical commodity (or other asset) and is not backed, issued or controlled by a sovereign government. Its strength depends on the trust earned over time among its users.
Accordingly, a separation of Money and State has de facto already occurred, but will it persist? Could cryptocurrencies prevail over fiat currencies? Bitcoin and cryptocurrencies are already well along on the path to providing people around the world with a widely adopted medium of exchange and store of value. This is the first time in human history that we have a scare digital commodity form of money, useful - even necessary - in an internet age where the vast majority of communications and transactions are also digital.
In debating the topic of the future history of money and whether the future is being shaped in favor of happiness for all those who use money, let’s first decide whether the Athenian Stranger, Cleinias and Megillus are correct. Are there a set of forces and principles that exist, that will act upon us consistently and mercilessly because we are subject to them by virtue of our very existence whether we like it or not? If so, what are these principles and how will they impact our money and our future?
In the next and final essay on Plato’s Laws, we’ll get into exactly that!