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The First Nickel

At the end of World War II, unchallenged by anyone, the United States held a historically unique position to reconfigure international relations. The first order of business was to make its currency the world's currency.

Understanding how that was done and how the dollar eventually became linked to oil requires a brief look at money itself.

Money was invented independently in three different places at about the same time—in China, India, and the eastern Mediterranean, where gold, silver, copper, and bronze coins began appearing between about 700 BC and 500 BC. Because coins were made of metal that was both durable and valuable, they served as a way to store value. And because coins were portable and easy to recognize, they served as a medium of exchange. Store of value and medium of exchange—that's money.

Coins were a momentous social invention. Trading things for money and money for things is vastly more efficient than barter. But coins come with disadvantages, including their bulk and weight. Moreover, they are interchangeable and belong to whoever has them—a plus, but also a problem. If yours are stolen, there's little chance of recovering them. In Europe, that shortcoming led to the use of guarded vaults, where coins and gold and silver bullion could be stored.

Goldsmiths kept private vaults and issued receipts that could be redeemed only by the depositor. That practice evolved into goldsmiths acting as bankers: lending gold at interest, issuing depository receipts that were negotiable (early paper money), and later issuing receipts for imaginary gold (the beginnings of fractional-reserve banking).

Paper money originated in China around the sixth century—it was one of the marvels Marco Polo wrote about in his Travels—but banknotes didn't appear in the West until 1661, when Johan Palmstruch's Stockholms Banco issued the first ones. The idea quickly caught on. Initially, any bank could print its own currency, and its value hinged upon the perceived trustworthiness of the institution. At one time in the United States, there were several thousand different currency issues circulating, some nationally, some only locally.

For most of their history, banknotes, like the early goldsmiths' receipts, had a precious-metal backing. They were, by the promise of the issuer, convertible into gold and/or silver according to their denomination. Of course, whether the metal would actually be there when you wanted it was another matter.

A bank, under the fractional-reserve principle, can create more money to lend out than has been deposited with it. So an unexpected run on a bank, with depositors demanding more gold than the bank had, could quickly render the bank insolvent. Such events were not rare. When they occurred as epidemics, hard times usually followed.

It didn't take long for governments, or their proxies, to recognize the advantage of being the sole producer of banknotes. The Bank of England was one of the earliest, establishing its monopoly in 1694; its American counterpart, the Federal Reserve, didn't arrive until 1913.

Convertibility continued after governments became the money issuers, but there were compromises. In 1933, Franklin Roosevelt outlawed the private ownership of gold by U.S. citizens. Dollars were still convertible for gold—but not if they were tendered by an American. The United States was on a path to a completely fiat currency (i.e., one that was not backed by anything). And as the United States would go, so eventually would the rest of the world.[1]

  • [1] US dollar silver certificates, freely redeemable in that metal, hung around until the 1960s, but the writing was on the wall
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