April 22, 2013 / August 29 2015 (rev1)
“I believe that banking institutions are more dangerous to our liberties than standing armies . . . If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] . . . will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered . . . The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” — Thomas Jefferson — The Debate Over The Recharter of The Bank Bill, (1809)
“I am ready with the screws to draw every tooth and then the stumps.” Andrew Jackson 1832 – 2nd National Bank
The currency war will have a major effect on all global citizens. The article will take three parts because of its length. It covers a lot of material in a short space and it is intended to be educational and informative rather than academic. It is designed to provide an understanding of current things that are happening in the financial world that are important to all Americans. It is also designed to inform them as to what I, and others, believe is coming and hopefully help prepare them for a market crash, a recession, deflation then inflation and hyperinflation. Finally, it will provide some understanding of the gradual change of currency from the Federal Reserve note to a new gold backed standard, the fall of the dollar and the possible conversion of the US into a 3rd world like country. I will not get into the possibility that this could have all been pre-planned and if acted upon could have been prevented but the implications will become obvious upon the reader getting into the material.
The first is a background covering the concepts of money, free banking, currency, the gold standard and how the US gold backed banking system worked between 1840 and about 1913.
This will cover the fall of the fiat dollar and what I believe will replace it – an international currency that is gold backed our gradual return to the Gold Standard and some predictions of what might happen when the dollar falls from being an international standard. The Chinese have backed their currency, the Yuan, with gold. Our constitution says in the Constitution that the Currency is to be backed by rare metals.
Part 1: A Financial Gold Backed Currency System
I am indebted to the succinct and clear summary of the article written by Alan Greenspan, who was a collaborator with Ann Rand in her private “think tank”. He wrote a short piece entitled, “Gold and Economic Freedom”, that can be reviewed here . It was published in Ayn Ryand’s “Objectivist” newsletter in 1966, and reprinted in her book, Capitalism: The Unknown Ideal, in 1967. It is still outstanding, even though, I believe are, Alan Greenspan shortly thereafter “sold his soul” and became the leader of the Federal Reserve Bank, which is the antitheses of what he praises in his article and what he knew was needed for this nation.
Some Concepts of Banking
There is a great deal of antagonism for financial systems based on gold. Alan Greenspan pointed out it is one issue that seems to unite all statists because they sense that gold and economic freedom are inseparable. When one has an economic system of freedom from the government, it implies that both private property and gold must be present. In order to understand the source of the antagonism one needs to first understand the use of gold in a free society…
Money and Medium of Exchange
A free society requires money or currency for all economic transactions. Money generally serves as a medium of exchange, is acceptable by all parties as payment for their goods and services. As such, it can be used as a standard of market value and as a means of saving.
The existence of this commodity, called money, is a precondition for a free economy’s concept of division of labor. Without the use of money, the barter system must be used. Gold is a means of storing value and if there were no means of storing value, then no long-term planning could be done. Planning is essential to a free economic system.
Characteristics of a Good Medium of Exchange
Let us consider for a moment the characteristics of a good medium of exchange. The medium chosen for money should be (1) durable, (2) homogeneous and (3) divisible. For this reason, a metal is usually chosen as the medium of exchange. This metal is usually chosen to be a luxury metal in order to become acceptable. In this instance, a luxury good is one that is of high value and scarce. For these reasons, gold is a very good choice for medium of exchange.
In the early stages of a developing money economy several media of exchange could be used but a single medium is highly advantageous. The advantage comes from the fact that exchanges can be made on a much wider scale. In the past, both gold and silver have been used as mediums of exchange. After World War I, gold was used as a medium of exchange. In the past, gold was also used in multiple cultures. However, for large transactions goal was heavy and bulky; therefore, a banking system was devised including credit instruments such as banknotes and deposits, which were convertible into gold.
Free Market Gold Backed Money
A free banking system that has gold as its backing has a number of functional requirements. First, a system based upon gold allows the bank to extend credit and thus create banknotes such as currency and deposits according to the production requirements of the economy. This means as the economy needs more money, then banking can create more money and if it needs less it can create less. It is a self-adjusting system. When depositors deposit gold into the system they usually do not need to take all of it back at any one time, so they just get credit lines in the form of currency and use it, as they need it. This allows the banker to keep only a small percentage of gold in relationship to the actual loans outstanding and still cover the needs of all of his depositors. Historically, this number has been 10:1. Thus, the banker can lend out $10 for each dollar of gold that he has on deposit.
This provides a self-adjustment of the system, which makes it similar to a servomechanism that works like this. When the 10 to 1 ratio is approached, the banker must slow the credit loans because he does not want to exceed the 10:1 ratio since the government regulates it. To slow the process down, the bank increases the interest rate. Alternatively, if he does not have many loans outstanding and the loan to asset ratio approaches to 2:1, he can lower the interest rate. The net result is that the process is self-sustaining and self-regulating. The further advantage of a system like this is that governments are constrained by that ratio of 10:1. How so? If the nation has $1 billion on deposit in the banks, they then can lend $10 billion in loans – but no more.
The system works like this – when banks loan money to finance productive and profitable operations, the loans are paid off and the bank credit continues to be generally available. When the business ventures are less profitable, the ventures will be slow to pay them off. This tends to be restricting new ventures getting loans and enforces existing borrowers to become more profitable or they cannot get extensions on their loan. As a result, in a free economy the gold standard is a protector of the economy stability and provides for balanced growth.
Free Market Sovereign Nations on Gold Reserve Banking Systems
In international exchange, the system works the same. When gold is used from country to country, each country converts its medium of exchange (money) into a ratio of gold backing. The gold itself is priced in an exchange currency and it remains stable. For instance, the Federal Reserve Dollar was priced based on $41 / oz. from 1933 to 1971. Currently, I expect that we will have a new international currency, the Chinese Yuan. It will be set in relation to gold and remain stable for a long time – say 50 years. As a result, when there is freedom of the exchange of capital, the countries act as one. Credit, interest rates and policies on loans tend to be very similar.
How does this work? If country A were to increase the interest rate to 2% above the average in country B, then country B’s capital would fly to country A and country B would be short of reserves. To get those reserves back, they would have to increase its interest rate percentage to 2% to match country A. One can see this is a self-regulating expansion contraction system – domestically and internationally.
America’s Gold Backed Monetary System
A banking system such as this existed in America and the rest of the world, from Andrew Jackson’s time in the 1840s. Banking works the same worldwide. It was free and self-adjusted periodically because of over rapid credit expansions. In this instance, the banks were loaned up to their limits and they had to shut down their lending. As a result, interest rates rose sharply, credit was cut off and the economy went into a sharp but short-lived recession – until the system readjusted. It was limited gold reserves that slow the system down as it was designed to do since this is a self-governing mechanism. The readjustments were short and the economies using the system quickly adjusted and reestablished the sound basis for expansion.
1913 and the Creature from Jekyll Island
The system worked so well that according to Ed Griffin in his, The Creature from Jekyll Island, the bankers around 1910 suddenly realized that the U.S. would soon be out of debt and they would not be making any money in interest. Therefore, they met and created a system that gave them the power over the money supply that was modeled after the Bank of England. This was called the Federal Reserve System but it was in fact a private banking Cartel.
How did they sell the FED to Congress? They postured the logic that the recession disease was a really a shortage of bank reserves rather than the normal expansion contraction of a gold base system. They argued for bank intervention – – -with themselves as the interveners. They said that you could find a way of supplying reserves to the banks so that they always had enough to loan. This would allow banks to lend indefinitely but further, and this is important, it will allow to Congress to have a blank check to order anything they desired and always have money to afford it by putting it on the books as a loan. To a politician this was like candy. He always had something to bring back to his constituency to get himself reelected.
The Federal Reserve act passed in 1913. It was snuck through Congress on Christmas Eve. The system consists of 12 regional Federal Reserve banks owned by private bankers; but these are government sponsored and supported. Credit extended by these banks in practice is backed by the taxing power of the federal government. However, technically this is not legal per the Constitution. In 1913, we remained on the gold standard, which allowed individuals to still own gold and gold to be continued to be used as bank reserves. After the Federal Reserve Act was passed, in addition to gold, credit was extended by the Federal Reserve banks using paper reserves. These Federal Reserve notes could serve as legal tender to pay deposits. They had created an elastic dollar – controlled by private bankers.
It is interesting to observe that the Federal Reserve Act says that the Act’s purpose or objective is to maintain full employment keep contain inflation. How does this work in practice? The FED failed miserably. In 1927, there was a slight recession and as a result, the Federal Reserve created more paper reserves in the hope of stopping any possible bank reserve shortage. Remember that the Fed is essentially a European-banking cartel. This is clearly described in Ed Griffin’s book, The Creature from Jekyll Island. .
1927 Gold Drain from U.S. to U.K.
In 1927, something else happened – not often mentioned in print. The European banks had a problem and since the European bankers, as primary owners of the FED, could “lean” on the FED to do things that helped them with but was inconsistent with the charter or in helping the American people – they did so. This is what happened. The politicians in the UK for political reasons refused to lower the interest rate, which would have helped their economy during the world depression. As a result, UK gold was leaving and coming to America in large amounts. This is how the gold reserve system works.
The politicians did not like this, so they dreamed up the idea of letting America put in excessive reserves into the banking system. This should result in reduced interest rates in America and the interest rates between America and the UK would approach one another. When that happened, the gold losses from the UK would stop. The FED was very successful; it stopped the gold loss, but nearly destroyed all of the economies of the world in the process. The Fed then tried to “brake” the system by increasing the interest rates and pulling money out of the system. When they did these things, they did them too late. The 1929 speculative imbalances had become so large that the business confidence was destroyed and the market crashed. The American economy crashed. However, Great Britain was even worse. As a result, she abandoned the gold standard in 1931. This action destroyed the confidence that international sovereign nations had in the gold reserve system. As a result, bank failures happened all across the world and the great depression of the 1930s was created.
Congressional and Executive Office Reaction to UK Leaving Gold Standard
Progressive statists who were in the executive branch and in control of sections of Congress said it was the gold standard that failed. If Britain had not dropped it, then the international banking system would not have died. However, there was another more likely reason unstated but very real. If the gold standard returned and ran like it should, it would have stopped the spending. This includes the spending for social services. The infinite deficit spending, the hallmark of the socialist welfare state, would not have been possible. The welfare state is a mechanism by which governments confiscate the wealth of the productive members of society and support a variety of welfare schemes. This confiscation comes by taxation and inflation. But the welfare statist were quick to recognize that if it wanted to retain political power, the amount of taxation had to be limited and they had to resort a program of massive deficit spending in order to get reelected. In short, they had to borrow money by issuing government bonds to finance welfare expenditures on large-scale. This is what occurred.
Under a gold standard, the economy’s tangible assets such as gold determine the amount of credit that an economy can support. They can lend 10 times the value of their tangible gold. However, government bonds are not backed by tangible wealth. They are only backed by the government’s promise to pay out of future tax revenue and cannot easily be absorbed by the financial markets. A large number of bonds can be sold to the public with higher interest rates within the constraints of the gold reserve. Thus, per the design, the gold standard constrains the government from adding excess debt. There is a limit to the amount of debt.
Progressives, Welfare State and Socialism
In 1913, the progressives in Congress and the White House soon learned that the abandonment of the gold standard made it possible for the welfare state of their dreams to become real. They did it by using the banking system as a means of the providing unlimited expansion of credit. They created paper reserves in the form of government bonds that the banks accepted as deposits as if they were gold. The holder of the bank asset believed that they have a claim on the real asset gold. Since there is now more money claims relative to the supplier tangible assets in the economy, prices must rise. This ensured that the earnings saved by the productive members of society lose value in terms of units. When the economy’s books are finally balanced, one finds the loss of value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds. .
It is clear that in the absence of a gold standard, there is no way to protect savings from confiscation through the invisible taxation called inflation. In addition, there is no safe store of value. The only safe store of value was gold and in 1933, the government made that illegal to hold because the government needed the gold. Greenspan points out that if everyone converted all the bank deposits to silver or gold and decline to accept check payments for goods then bank deposits would lose their purchasing power. As a result, government created bank credit would be worthless. The financial policy of the welfare states requires that there is no way for the owners of wealth to protect themselves.
Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this process. Once one realizes this, one has no difficulty in understanding the progressive statists do not like the gold standard.
In Part I, we found that a partial gold reserve system that existed from 1800 to 1912 in the U. S. was self-regulating and worked very well. In fact, the interest rate during that period was very steady. In addition, it constrained the government from over spending. In fact, by 1913, the U.S. was almost out of debt. The Constitutionally illegal Federal Reserve act of 1913 put a private banking cartel of mostly European banks in control of the money supply in the United States.
Since 1913, inflation has gone up and unemployment has gone up. Further, uninhibited spending for the welfare state has driven the debt to $17 trillion from virtually zero.
We will continue the discussion in Part 2