History of Money & Bankrupt Nations

 

Around 1000 B.C., China was the first to produce and use metal money and coins; these primitive metal monies were made out of base metals and the mostly round coins had a hole in the center for stringing them to form a wealth chain. Turkey came up with silver coins by 500 B.C. that gave rise to gold and bronze coins in Greece, Persia, Macedonia and later the Roman empires. China was also the first to introduce leather money by 115 B.C. that has been viewed as the first "banknote" measuring 12" square white deerskin with a colorful border.  
 
The practice of "pay through the nose" was put in effect by Danes in Ireland around 800A.D. — they slit the noses of Danish poll tax defaulters (more on this later). About the same time, China upgraded leather banknotes to ones made out of paper. For centuries since, the printing of paper notes escalated in China first and later the world-at-large to the point an individual country's currency-value (depreciation/appreciation) today fluctuates drastically, which in turn produces soaring inflation/deflation in that country.
 
The GOLD STANDARD
England established Gold as its standard of value in 1816 and printed as many banknotes that its gold reserves permitted to curb run-away inflation. The United States officially adopted the gold standard in 1900 with its Gold Standard Act that lead to the creation of its central banking system - The Federal Reserve System, aka The FED.
 
The inflationary forces of World War I broke the gold standard, which reappeared as the Gold Exchange Standard from 1925 to 1931. In this period, the United States and Britain held reserves only in gold, while all other nations could combine gold or dollars or pounds as their reserves. The 1930's deep depression brought on the end to this version of gold standard in 1931when Britain stopped its participation after experiencing massive gold and capital outflows. Then in 1933 — America, under President Franklin D. Roosevelt, nationalized gold in possession of households and individuals and banned gold as payment instrument.
 
The BRETTON WOODS SYSTEM (1946-1971)
As a precursor to the Bretton Woods System — Roosevelt and British Prime Minister Winston Churchill worked out an agreement in 1941 called "The Atlantic Charter" that affirmed the right of all countries to equal access to trade and raw materials with full freedom of the seas.
 
The Bretton Woods was a fixed exchange rate system; it created a pegged-rate currency regime that required member nations to maintain parity of their national currencies with respect to the U.S. dollar that was established as the "reserve currency." Nations were required to buy/sell U.S. dollars to keep within the plus or minus 1 percent band of their pegged rate. However, foreign governments were free to exchange dollars for gold from America at the fixed rate of $35 per ounce as per one of the rules of the Bretton Woods agreement. Thus, the U.S. dollar replaced the shine of gold with its own resplendence and might.
 
Though unhappy, war weary Britain acquiesced to the U.S. dollar's supremacy when a senior Bank of England official observed: "One of the reasons Bretton Woods worked was that the US was clearly the most powerful country at the table and so ultimately was able to impose its will on the others, including an often-dismayed Britain. This agreement is •the greatest blow to U.K. next to war,' largely because it has forcefully transferred financial power from Britain to America." 
 
However, America and its mighty dollar faced their own difficulties from trade deficits that grew over time and depleted U.S. gold reserves drastically in fulfilling the balance-of-payment obligations. To counter the dire gold reserve situation — President Richard Nixon put an end to gold for currency redemption in 1971, which ended the reign of the gold standard and the Bretton Woods System.
 
PUBLIC/NATIONAL DEBT
Public debt or national debt is the financial obligation assumed by a central government (aka federal government in America) in order to fund the various programs, projects and nation building operations. Governments can also print money to fund their workings to avoid interest costs, which practice produces hyperinflation, should there be excessive misuse of this method.
 
The United States borrows by issuing securities, government bonds and treasury bills, popularly known as T-bills. Nations who lack credit worthiness borrow from financial institutions like - International Monetary Fund (IMF), World Bank, European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD), International Bank for Reconstruction and Development (IBRD), Asian Development Bank (ADB), and similar institutions all over the world.
 
British economist John Maynard Keynes was the first to propound his theory called "Keynesian economics" that trumpeted the virtues of high levels of public debt to pay for public infrastructure and other projects/services in difficult times like those in 1930's depression, and later pay back from higher tax revenues, as a result of boom times these public investments bring about. (Experts believe heavy military spending during World War II actually ended the Great Depression, confirming the Keynesian hypothesis).
 
To assess the financial stability of a country, economists use the debt-to-GDP ratio; a low debt-to-GDP ratio is preferred since it means the country is producing and selling goods and services more optimally and can quite easily pay back its debt without the need to borrow further. This goal is shattered when a country like Germany or America enters an unnecessary war or experiences the worst recession due to the mismanagement of financial instruments or promises programs and services to the masses that are not within its means. 
 
As of November, 2013, America's national debt is just over $17 trillion (or 105.6 percent of its GDP that stands at $16.1 trillion) and has continued to increase since 2012 at an average of $2.62 billion per day or approximately one trillion per year. With the U.S. population of 317 million, the current public debt puts a burden of a little over $54,000 per citizen.
 
Economists are of the opinion that when the public debt of a country grows beyond 100 percent of their GDP, there is a greater risk it will default on its debt obligations and paralyzing the global financial markets with the external debt delinquency. In 2010, the total global public debt stood at $50.253 trillion or 19 percent of global financial assets of which U.S. Treasury-backed loans amounted to $5 trillion.
 
DEFICITS
The annual government deficit results when the yearly receipts and spending are not aligned or mismatched. A surplus in receipts is a rare phenomenon, at least in America and most other countries. Almost all countries struggle with balancing the yearly budget, while rising deficits keep ballooning the national debt year-after-year.
 
More often than not — the expected future higher tax revenues to pay back public debt do not materialize and thus take the country into a downward financial spiral as witnessed in Greece or a prolonged stagflation experienced by Japan. Any austerity measures kill jobs and revenues, while new public debt to create jobs and higher revenues drastically increases the national debt whose repayment becomes even more burdensome than before. Still, economists with Keynesian bias insist on government spending as the best way to slip out of this catch-22.
 
THE BANANA REPUBLICS OF THE WORLD
A country that fails or refuses to pay back its external or internal debt in full becomes unstable economically first and then politically, diplomatically and militarily. 
 
Another label for public default is •national insolvency' if the total debts exceed total assets. The near default on October 17 by the United States was not a matter of insolvency since America's worth of all its assets - land, resources, corporations, infrastructure, institutions, buildings/edifices, private-businesses/houses/properties/personal-wealth, etc. - is roughly $75 trillion, give or take a few trillions, while the total national debt sits at 17 trillion dollars.
 
In the case of external debt, nations who become delinquent sometimes face hostility from lending countries. For example, Britain invaded Egypt in 1882 for non-payment of its foreign debt, while America used "gunboat diplomacy" in Venezuela in 1890s and occupied Haiti in 1915 for similar reasons.
 
Sovereign defaults are not a new phenomenon. Back in the 4th century B.C., Greece, which defaulted in 2012, refused to pay back the loans it took from the Delos Temple. Including 2012, Greece has defaulted six times since 1826. Other notable delinquencies include: England refusing to pay its borrowings from city-state banks in 1339; France in 1770 and 1788; Germany after it lost World War I and again in 1922 and 1933; Russia in 1918 and 1998; Venezuela in 1998; Ukraine in 1998 and 2000; Ecuador in 1999 and 2008; Peru in 2000; Argentina in 2001; Moldova in 2001 and 2002; Uruguay in 2003; Dominican Republic in 2005; and Belize in 2006.
 
The recent Shutdown and near misses on default by America have put to question its superpower status and pre-eminence in political, economic, diplomatic and military matters. Meting Danish treatment, the Standard & Poor even cut America's nose by downgrading its triple AAA rating to double AA+ in 2011, making many experts to wonder if the American empire has begun its supremacy decline in the manner of Roman, Byzantine and British empires of the past.
 
Had the United States defaulted, it would have further degraded its credit rating and caused: interest rates to skyrocket; loss of jobs in tens of thousands within weeks; delay or stoppage of social security payments and other benefits; stock market crash followed by a global economic meltdown worse than the one in 2008.
 
Hopefully, commonsense will prevail in the Capital this time to find a bi-partisan solution to this budget/deficit/debt-limit/default dilemma America faces every few months. Kicking the can down the road should not be an option anymore and if the Congress were to fail once again - we will not just revisit another shutdown on January 15, 2014 and default by middle of March, four to five weeks from the debt-ceiling date of February 7, 2014 — we will risk becoming the richest Banana Republic of all times!