Backing Bunk


Column by Paul Hein.

Exclusive to STR

A monetary system that has replaced money with non-redeemable notes that can only enter circulation as a loan is doomed to collapse, and many have warned of that fate regarding our own system of ever-growing debt. Our situation is not unique, however. Governments all over the world have realized the advantage--temporary, of course, of issuing IOUs--never to be paid--and making them, by fiat, a substitute for money.

The recent announcements by Russia and China that their currencies were going to be backed by gold might be interpreted as good news, at least for Russians and Chinese. American bankers could hardly rejoice, however, that the “dollar,” backed by nothing, would be competing in world markets with gold-backed bills. There is no advantage in being able to print “dollars” if no one accepts them!

Talk of a gold-backed currency reminds me of the trading stamps so popular in this country at one time. If you are of a certain age—or older--you may remember them.

The first I remember were called Eagle Stamps, and the largest department stores would give them to you, in proportion to the amount that you spent. You were also given a booklet into which to paste them, and when the book was filled, you could use it as cash to purchase various items at the issuing stores.

There were also, if memory serves, S&H green stamps, as well as various other stamps, often given by filling stations, which served the same purpose: an inducement to buy at the establishments which gave them to its customers. In all cases, the stamps were saved in order to be used as money at stores which could accept them in exchange for an assortment of items.

It was the late Merrill Jenkins, the original Monetary Realist, who pointed out that the stamps could be thought of as “backed” by the merchandise in the stores. One such “redemption center” was in south St. Louis. I remember looking through the window at the counters of things awaiting the stamp-collectors, from toasters to televisions. These shiny new goods were the backing for the stamps we carefully collected after each shopping trip. But, as Jenkins pointed out, so what?

What gave the trading stamps any value? Why bother collecting them, and pasting them into those little booklets? Was it because they were backed by an eclectic mix of goods? Of course not.

Consider, as Jenkins explained, that the doors of the redemption centers were locked. Yes, the goods within were the backing for the stamps we so painstakingly accumulated, but if access to those goods was denied, of what use were the stamps?

It was redeemability, not backing, that made the stamps valuable. Would we bother saving them, even if they were backed by pots and pans that we could not obtain with them? Even if the backing were to be gold, silver, platinum, or copper, so what? We could not even see all the goods that backed our stamps, and would have to take the word of the issuers of those devices that the backing actually existed. How would the stamps that were backed differ from those that were not?

One could argue, I suppose, that having a tangible backing for trading stamps—or currency--meant that there must be a limit to the number of stamps, or bills, that could be issued. That would provide a protection from inflation, thus maintaining the purchasing power of the paper devices. But the ones making that claim were the very people who determined the ratio between the stamps/dollars, and the backing. In other words, if it suited the issuers of the stamps/dollars to create more of them, they could simply announce that an electric blanket, which formerly backed ten stamps, now backed twenty. And, in fact, this was exactly what happened when the dollar was backed by gold.

So why save dollars? Well, for one thing, it would be difficult to make day-to-day purchases with anything other than dollars. But the longer you hold them, the less you will be able to get for them at the “redemption center.” In addition, although it is obviously criminal to obtain another’s goods or services in return for a bogus “note” never to be paid, issuers of dollars have exempted themselves from prosecution by declaring their scrip legal to offer, or tender. They have the authority to do this because they say so. Thus, when you give your goods or services for an intrinsically worthless “note,” you can at least tender it--pass it--legally, for someone else’s goods or services.

But mere “backing” is bunk. If the issuers of notes won’t redeem them, talk of backing is meaningless. What good is a key that won’t fit any lock?

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Paul Hein's picture
Columns on STR: 150


Jim Davies's picture

Nicely reasoned, Paul.
I had missed the news that the Ruble is gold-backed. What source do you have on that? - the Wiki page on it makes no mention of gold backing since the early 20th Century. I wonder if perhaps the "backing" means just that the Russian government has some gold in its vault.

Paul's picture

We saved S&H green stamps and pasted them in little books because it was fun to do so. ;-) Something for the kids to do... I don't remember if we actually got anything from them.