The Lend-lease scheme of 1941 changed history. It meant that success of the Allied cause was not constrained by historical factors governing money supply, and the value of money.
Governments have held gold reserves from time immemorial. Historically, governments, organisations and individuals paid their bills in precious metals. The introduction of paper currency did not dispense with metal forms of money in western countries – paper currency was a promissory note, an item that was more easily transported and exchanged than quantities of precious metals in the form of coins or ingots. Indeed, between the 17th and 19th Centuries, western countries maintained a dual system of coins and paper money. This dual system partly encouraged banks to issue more paper money than they had gold or silver holdings, on the assumption that they would not have to redeem all their paper money at the same time. In short, it was a system based on trust – you held paper money and you trusted that the issuing bank would redeem the face value of the paper money on demand in gold or silver.
What do you think happened? You guessed it, banks found printing money a little too easy to do. This is ok (sort of) in boom times. Not so great in bust times. Like a reverse form of pass the parcel – usually you want the music to stop when you are holding the parcel. However, in economic terms, the music stops when more creditors want their money repaid than there are customers willing to spend money. And if the money you are holding is not underwritten by enough tangible assets, then its face value drops. A bad thing quickly becomes a very bad thing. For everyone.
In Part 6 (of this 10 Part series), I will discuss the role of the ‘Gold Standard’ in underwriting economies between the mid-19th and mid-20th Centuries.