Amid Debt Crisis, A Trail Of Broken 'Promises'

National Public Radio
February 7, 2012

Financial writer Philip Coggan traces the current global financial crisis to the 1970s, when the U.S. went off the gold standard.

"Up till then, every form of money had some link to precious metal: gold or silver," Coggan, author of a new book, Paper Promises: Debt, Money and the New World Order, tells Morning Edition's Renee Montagne.

Coggan, who writes about finance for the Economist magazine, explains that before that time, the U.S. used gold to back the dollar; other countries could exchange their currency for American gold. But when President Nixon went off the gold standard, "essentially you had no limit on the amount of money that could be created and no limit on the amount of debt that could be created."

The result, he says: asset bubbles.

Debt was used to buy assets, which rose in price and then burst. He points to Black Monday in 1987, when global financial markets crashed and the Dow Jones industrial average fell more than 20 percent. Those same factors, he says, led to the dot-com bubble of the 1990s and the more recent housing bubble. When bubbles burst, central banks stepped in and cut interest rates to keep the system afloat.

"The result of all that was that it was kind of a one-way bet for speculators: Keep borrowing money to keep buying assets; central banks will always bail you out," Coggan says. "And that's why we ended up in this mess that we are in ... with lots of debts and central banks creating money to try and prop the whole system up."

Today, governments are trying different approaches to get themselves out of debt.

Greece, for example, is negotiating with the European Union and the International Monetary Fund on a $170 billion bailout to avoid a default in March on its bond repayments. The Associated Press reported Monday that the bailout also depends on talks with private bondholders to forgive more than $131 billion in Greek debt, along with new bonds worth 50 percent less than their original face value.

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Listen to the Interview

Read an excerpt of Paper Promises