Feb

THE LIFE AND DEATH OF THE US DOLLAR

“Pearls are not valuable because men dive for them…
men dive for them because pearls are valuable.”
-Joseph Salerno

It’s pretty scary to think that the United States dollar is not backed by gold, silver or anything precious or valuable. The only reason we accept its value is because enough people believe it to be worth something. This is fiat currency, a legal tender where the power and the value of the dollar is determined by the central bank that prints it.

There is an inherent flaw with fiat currencies though. If the central bank prints dollars too rapidly, we face hyperinflation, where all perceived value of the dollar is lost. Let’s face it, Mickey Mantle rookie cards would not be nearly worth as much if millions more were discovered tomorrow. The same is true for dollars. With every extra dollar a central bank prints, the dollar in your pocket becomes less valuable because it becomes less scarce. Within the last century we have seen the value of the dollar fall 95%.

Some have even speculated that the dollar is worth less than the latest Hanson CD.
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It hasn’t always been this way. Our Founding Fathers knew the flaws of a centralized banking system. Throughout history empires have fallen because of loose monetary policies brought on by central banks. The Roman Empire fell because they constantly debased their coins to pay for an over-extended military and expensive social programs.

To prevent this from happening, the Founders decided to use gold and silver pieces to trade, instead of a central bank note. This would help deter banks from running a fractional reserve system. Fractional reserve banking, or FRB, for short, has been around for centuries. Banks loan out more money then the gold they have in their vaults. When there is a fiat money regime, if banks do not have enough money to cover a customer’s withdrawal, the central bank has the ability to just print up more notes to cover the difference. This happens all too often now. If we stuck to the Founder’s system, gold and silver pieces would be inflation proof and counterfeit proof.

Through the Constitution and the Coinage Act of 1792, the Founders set up a system where they defined dollars to be gold and silver coins, and allowed only Congress the power to coin money. Only these minted coins would be deemed “lawful money,” meaning that promissory notes or demand notes (today’s version of dollars) were unlawful.

The US government was able to keep to these standards for at least a little while, even during two 10 year reigns of central banks. But in order to finance the Civil War, Lincoln reeled in coins and replaced them with the infamous greenbacks. The value of the dollar plummeted and it wasn’t until after the war, when the government began to reissue coins, that the buying power of the dollar increased.

SIDE NOTE:
In order for paper money to have value, it must be a legally binding document or contract. That’s what all the writing and funky signatures on bills are for. But when looking at a bill you should pay close attention to the wording of it.

Between the Civil War and 1914, there were several versions of paper money with several different agreements, but when the Federal Reserve Bank, a “private” central bank, opened its doors in 1914 they began printing money with this contract on it:

“This note is receivable by all National Banks and Federal Reserve Banks for taxes and public dues. It is redeemable in gold on demand at the treasury department in Washington or in gold coin or lawful money at any Federal Reserve Bank.”

If a note can be redeemed for lawful money, then it is not lawful money. It is a loan, a promissory note, an IOU. It is a contract that gives the Federal Reserve the full power to inflate the dollar, and does not guarantee any set amount of gold in return.

Today’s dollars have been further revised to not allow the exchange of notes for gold.

Today’s dollars have been further revised to not allow the exchange of notes to lawful money.

LET THE PRINTING PRESSES BEGIN

By the 1920s Fractional Reserve Banking was in full effect. Banks, backed by Federal Reserve notes, loaned out too much money, creating a financial bubble that would soon burst and result in many bank failures. (Sound familiar?) To stimulate the shrinking economy, FDR sent the printing presses into overdrive and confiscated all of the circulating gold coins. He believed that people were “hoarding” gold and delaying economic recovery. Under Executive Order 6102, it became illegal for citizens to have any gold coin, bullion or certificate. The seized gold which would be exchanged for dollars became the infamous gold housed in the Federal Reserve vaults.

At the time of the exchange the dollar was pegged at $21/ounce of gold. But because FDR, used the Federal Reserve to print new money to exchange for the gold, he devalued the dollar driving the price of gold up to $35 per ounce. Ironically, in the name of preventing “hoarding” the American public was duped into taking money that was 40% less valuable then the gold they had originally had.

Complete control of the gold supply was now in the hands of the Federal Reserve, exactly what our Founding Fathers were trying to avoid. World war and depression raged on throughout the globe and, in order to provide a foundation for global recovery, a conference was held in Bretton Woods, NH in 1944 by all 44 major allied powers. At the conference it was recognized that the US represented half of the global economy, and it would be for the world’s best interest to make the US dollar the global reserve currency to make trade easier between nations. This was great for the United States, because in order to trade, all countries had to buy dollars at its $35 per ounce rate, resulting in a US economic boom. But there was nothing in the Bretton Woods agreement that stopped the Federal Reserve from issuing more Federal Reserve Notes.

In only a few decades, countries began to question how we were possibly able to finance our unending overseas wars. In order to fund the Vietnam War, the US ran huge budget deficits and started flooding the economy with paper dollars. The French, under President Charles de Gaulle, became suspicious that the United States could not back the money supply with gold, and began trading in their surplus of dollars for gold.

In 1971, the United States Treasury’s gold stocks began to decline at an alarming rate and, in order to save our reserves, Nixon declared a force majeure, unilaterally breaking us from the Bretton Woods agreement. He had officially closed the gold window, and would no longer allow anyone to redeem their dollars for gold. We were now completely severed from the gold system. Without gold backing our dollar, there was no limit to how many Federal Reserve notes could be printed.

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It took our country 300 hundred years, from the first pilgrim until 1973, to generate the first trillion dollars of money stock. The most recent trillion dollars was generated in the past four and a half months. Before our dollar completely crashes, we need to put an end to our out of control spending. We need to take back control of our dollar, and put it back in the hands of the United States citizens. And, above all else, we need to put an end to the Federal Reserve.

There is hope. The rules that were outlined in the Constitution still stand. There has been no amendment to repeal them. The Coinage Act is held in a state of suspension by laws that are both unconstitutional and illegal. We have ended central banks in the past and we can do it again. New currency can be phased in as the Federal Note is phased out. The introduction of the euro is proof of it. But unlike the euro, which is also a fiat currency, we would develop a new currency backed by gold, silver or any other precious commodity. We would allow this new currency to compete with the dollar on the free market and as people saw the prices in dollars inflate they would invest more in the new stable currency until eventually the dollar would be phased out.

Right now there is a bill, HR 1207, in Congress to audit the Fed. Contact your representatives and make sure that they are supporting this bill. This is the first step to change we can actually believe in.

EDITOR’S NOTE:
Please note that although gold coins deterred FRB, it did not stop it. Banks have been legally privileged to loan out “checkbook” money, which is literally created by the bookkeeper’s pen. It is the legal reserve ratio that determines this privilege, not the kind of money used. What sound money does is make it very hard to evade the consequences of fractional reserve banking – bank runs and bankruptcy for unscrupulous banks.

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