In the United States our money supply is controlled by the Federal Reserve. I want to explore what this means for our supply of money, how the government maintains it’s own funds, and whatever other implications this has for the value–or rather its lack of–in the dollar.
The other day I posted a link to an article that discussed how our system found it’s way to where it is today, and a simple explanation of how it operates. To get a good handle on this subject, we need to know how the dollar was defined in the past, and how it is defined now.
In essence the dollar is always worth–or rather was always worth–a measurable amount of a valuable commodity–no more, no less–and inflationary pressures were likely reduced by this arrangement. “Representative money and the Gold Standard protect citizens from hyperinflation and other abuses of monetary policy, as were seen in some countries during the Great Depression.”2 However, “it is difficult to manipulate a gold standard to tailor to an economy’s demand for money, providing practical constraints against the measures that central banks might otherwise use to respond to economic crises.” 2 But the question for me is, what real powers of manipulation do central bank’s need, and doesn’t it sound a little fishy that they would want to manipulate the money supply anyway?
A Little History
During various wars, the convertibility of notes to gold coinage was suspended in order to ensure the war effort was properly funded. After the suspension in the UK during World War I, there was an active effort for the UK to return to the gold standard; this was accomplished by 1925 but at an economic cost. “Although a higher gold price and significant inflation had followed the wartime suspension, Churchill followed tradition by resuming conversion payments at the pre-war gold price. For five years prior to 1925 the gold price was managed downward to the pre-war level, causing deflation throughout those countries of the British Empire and Commonwealth using the Pound Sterling.” 2
At this point the British needed to do something in order to make up for the demand in conversion payments by increasing their gold holdings relative to goods. In order to do this, they needed to attract investment. Unfortunately this had a depressing effect on their economy and “the British government finally abandoned the gold standard [by] September 21, 1931. Sweden abandoned the gold standard in October 1931; and other European nations soon followed. Even the U.S. government, which possessed most of the world’s gold ($175 million flowed into the U.S. in 1929, and $280 million in 1930) moved to cushion the effects of the Great Depression by raising the official price of gold (from about $20 to $35 per ounce) and thereby substantially raising the equilibrium price level in 1933-4.” 2
After the second world war the international community established a sort of gold standard under the Bretton Woods agreement. “Under this system, many countries fixed their exchange rates relative to the U.S. dollar. The U.S. promised to fix the price of gold at $35 per ounce. Implicitly, then, all currencies pegged to the dollar also had a fixed value in terms of gold.” 2
This would not last. As illustrated here, trying to maintain a certain dollar value to gold ratio was an untenable position:
Reinforcing the relative decline in U.S. power and the dissatisfaction of Europe and Japan with the system was the continuing decline of the dollar—the foundation that had underpinned the post-1945 global trading system. The Vietnam War and the refusal of the administration of U.S. President Lyndon B. Johnson to pay for it and its Great Society programs through taxation resulted in an increased dollar outflow to pay for the military expenditures and rampant inflation, which led to the deterioration of the U.S. balance of trade position. In the late 1960s, the dollar was overvalued with its current trading position, while the Deutsche Mark and the yen were undervalued; and, naturally, the Germans and the Japanese had no desire to revalue and thereby make their exports more expensive, whereas the U.S. sought to maintain its international credibility by avoiding devaluation. Meanwhile, the pressure on government reserves was intensified by the new international currency markets, with their vast pools of speculative capital moving around in search of quick profits.
In contrast, upon the creation of Bretton Woods, with the U.S. producing half of the world’s manufactured goods and holding half its reserves, the twin burdens of international management and the Cold War were possible to meet at first. Throughout the 1950s Washington sustained a balance of payments deficit in order to finance loans, aid, and troops for allied regimes. But during the 1960s the costs of doing so became less tolerable. By 1970 the U.S. held under 16% of international reserves. Adjustment to these changed realities was impeded by the U.S. commitment to fixed exchange rates and by the U.S. obligation to convert dollars into gold on demand. 5
Thus, by 1971, the U.S. had moved to a floating currency, no longer fixed to gold and other world currencies soon followed.
Our Currency Today
We’re currently operating with a fiat currency, backed by nothing more than a law stating it is legal tender for the payment of all debts public and private, valued according to the taxes collected. It is essentially worthless, in that it is not backed by any commodity. It’s paper. Nothing more. And it really isn’t even U.S. currency, rather it is Federal Reserve debt that is not backed by the wealth of the United States 1, which I must say, leads me to question why we still hold so much gold. Is it because that is what our government’s wealth is based on?
Interesting to note is that, according to Jason Kirby’s article, under the system in which our currency used to operate, “debt freedom, once achieved, was much closer to absolute under such a money system. It bore no interest except when its owner consented to lend it to a borrower for a rate of return. When it was spent, it was considered at common law that a debt was paid. And it respected the tradition from time immemorial that in exchange, value would be exchanged for value; it was equitable. When it was saved, instead of spent, it preserved the wealth of the saver, who could reasonably expect prices to be within reasonable range of what they were when the coin was saved.” 1 That’s something that Dave Ramsey can get behind.
As banker Vince Rossiter has pointed out, ‘from 1814 to 1913, the U.S. fought four wars, enjoyed greater increases in population than any other nation in the world, suffered significant short-term inflation and deflation at intervals, and still it was possible to buy substantially the same basket of food in 1913 for approximately the same price that it cost in 1814, 100 years earlier.’ 6
This is not possible today, even if you were to travel back only 20 or 30 years.
What we had then (gold, silver coin) was replaced with what is today in your pocket and your bank account. Today, we use THEIR money. You cannot tell me that Federal Reserve Notes are our money. The Constitution does not contemplate them. The First Money Act of April 2, 1792 does not contemplate them. The code of the United States for most of our history does not contemplate them. It is not our money. It doesn’t matter that it has been around since granddad was a young man. Crime has been around for a long time too. The long lived perpetration of a wrong does not lend it legitimacy. It is alien to the Constitution, and our money is effectively in exile. Their money resembles ours, more or less, if you need glasses or don’t read; there are pictures of our dead Presidents on it. Many Americans simply believe it is our currency because that is the way it has been since their birth, and they don’t know what they are looking at. Or they do and do not distinguish between real value and debt. We, including those of us who know better, begrudgingly use it mainly because our own government refuses to follow the Constitution on the money issue. And we must use something so we use this. Our government has long since bought into central banking with debt-based irredeemable paper. If you want to read why, look up Alan Greenspan’s essay, “Gold and Economic Freedom,” which gives as good an explanation as any: it is the easiest way to set up and maintain a socialist welfare state.
There is no SUBSTANCE associated with their money. It may read X Dollars on the face, but dollars of what? Above you saw a dollar of gold and a dollar of silver. Above you saw gold and silver certificates that promised on demand to pay a dollar of silver or ten dollars of gold. A Dollar was a unit of value that related precious metal to a weight measured in grains.
A Federal Reserve note does not conform to the description above, nor does it conform to the
Act of February 12, 1873 (Sec. 14), [which] establishes ‘25.8 grains of gold’ 900/1000 fine (or 23.22 grains of fine gold), which bears the required stamp and impress…furthermore, the statute again cuts off all controversy regarding the worth of a dollar; for it says that the dollar (the printed piece of gold containing 25.8 grains of gold 900/1000 fine) ‘shall be the unit of value’ in our money system1
Kirby then goes on to criticize the Federal Reserve note:
The Federal Reserve Note, which is their money is not even a promise to pay. It makes no promise at all. Read any bill, you will not find any promise. What is in your pocket or your bank account is debt. As a nation, we have borrowed our own tax coupons and in commerce we accept and use them as if they were money. You do not own your currency free and clear. Borrowed first by the national government, it automatically arrives to the American people with interest due. It is a fiduciary asset which is absolutely simultaneously someone else’s interest-bearing liability. It bears interest for the benefit of its issuer and creator, the central banks and their stockholders, the instant it goes into circulation. The central bank, which supplanted the existing system—which was unique and American—was modeled after the Bank of England. “The Creature From Jekyll Island,” by E. G. Griffin, explains how that happened. Does that sound like our system? Yet when you lend your own money today, as a private lender, you are lending someone else’s debt. And when you spend it, you are discharging your immediate debt. When you accept it someone else’s immediate debt to you is discharged. But our collective perpetual debt remains. All debts become relative with our government being a first-level debtor, and we citizens being second-level; third-level debtors depending on how our borrowing is structured. The game we play is to cleverly move debts around until we have what we want and hopefully don’t find ourselves insolvent at some point. Even if you are technically debt free, all mortgages paid off and car loans too, you are responsible, in the eyes of the government, for your share of the national debt. Your debt freedom is relative, not absolute. How do you know they won’t come to you at any time to call for the principal, or principal and remaining interest? Do you have that guarantee? And being on the hook for a share of the national debt; and knowing that your children will also be so burdened; and knowing that all the currency that we use is borrowed, how could anyone refer to the currency we use today as our currency? 1
I can add nothing more to his premise other than to say, read this article.
Many criticics of fiat currency conclude “…that no sound economy can long endure under fiat money…prominent Austrian Economist Ludwig von Mises [argues] in his book Human Action that, ‘What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse.'” 3
There is much more to this subject that smarter individuals have had a chance to research and form more intricate opinions on, but I will stop by saying that in order to return our country to some sound standing, we must return to a commodity backed currency, and we must return to our constitutional principles.
Please also read: United States Note. There is a lot about the way our current system of currency operates that isn’t right, and could be seen as conspiracy theory garbage, but if you want to blame anyone for economic crises and panics, blame central bankers and their debt creation system.
- Kirby, Jason. The Amero vs. The Dollar. http://www.gold-eagle.com/editorials_05/kirby062806.html. Accessed 7/1/2009
- Gold Standard, Wikipedia. Accessed 7/1/2009
- Fiat Currency, Wikipedia. Accessed 7/1/2009
- Federal Reserve System, Wikipedia. Accessed 7/1/2009
- Bretton Woods System, Wikipedia. Accessed 7/7/2009
- Parity. ACRES, USA, by Charles Walters, Jr. Page 14. Via Kirby, Jason.