Not too long ago, money was pegged to the price of gold. While this is now thought to have worked so well that many wish to return to a “gold standard”, that golden age had as many recessions and depressions as any. If it worked, it was because gold tended to stay in a community. Local farmers sold food to a local grocery store, or directly to consumers. They bought locally, or made their own shoes, clothes, and implements. Most towns had tailors, wagon-makers, silversmiths, and all the other small-scale craftsmen needed to provide the necessary goods.
As transportation improved, it was possible to bring items in from more modern, efficient producers. The local farmers could not produce eggs, milk, or meat as cheaply as they could be brought in from larger producers. Railroads made it possible to bring clothing, shoes, linens, and other necessities to “department stores”, each department of which replaced some locally owned business. They, in turn, were replaced by larger stores, malls, discounters, and every other sort of specialty retailer whose importations crossed continents, oceans, and boundaries.
Gold no longer stayed in the local community. Instead, it flowed toward ever larger cities whose efficiencies were made possible by improvements in the delivery of water, gas, electricity, and people to the factories, banks, hospitals, and other institutions that grew where larger, more efficient producers gathered; mostly around sources of cheap energy, raw materials, and transportation. Rural areas and small towns without manufacturers began to die.
No one would send gold to rural, dying economies, but the areas had to be maintained, if only because each state, no matter how rural, had two senators pledged to legislate for its well-being. By the late 1920s, it was clear that there was no way to force the people who owned the gold to get it into the broad stretches of increasingly impoverished rural America. So, paper money had to be given credit, and supplied wherever political bosses could send it. Voters soon realized that Senators with seniority had real advantages, so no effective rural Senator was ever rejected by voters.
At the same time, factories were becoming more mechanized. There was less and less need for workers. Adam Smith’s brilliant essay on the division of labor in the production of pins proved that assembly lines were far more efficient than craftsmen. But, he never imagined that one small “lights-out” manufacturing plant would produce all the pins and needles the world would need in a one, small factory the size of a football field that had only a few dozen maintenance men and engineers who ran and took care of ever-faster, ever more efficient machines.
If there were a gold standard, the owner of that factory would soon possess all the gold that the entire world was willing to spend on pins and needles. That was true of the biggest zipper maker, the biggest cracker maker, and the ever-fewer people supplying an ever larger amount of the goods and services of virtually everything Americans would need. Paper money, on the other hand, allowed those people to be taxed. It had to be kept in banks, and its flow could be monitored, regulated, and, when necessary, more easily confiscated than gold coins buried under a rock on the proverbial “back forty”.
