By Donald W. Miller, Jr., MD
People consider Federal Reserve notes, U.S. dollars, to be real money. This includes their digital equivalent in bank and credit card statements and Treasury-issued base metal coins. As a unit of account, all goods and services, and land and labor are priced in U.S. dollars. Declared legal tender, Federal Reserve notes are the country’s medium of exchange.
This year marks the 100th anniversary of the Federal Reserve System. It is the third central bank in the country’s history. The first two were short-lived compared to the Fed. The First National Bank, chartered in 1791, lasted 20 years, as did the second one, from 1816 to 1836.
When the Fed opened its doors for business in 1914 and for a while thereafter, until 1933, gold was money. People used gold coins to make purchases and pay debts—Double Eagles ($20 Liberties, minted 1850-1907; and $20 St. Gaudens, 1907-1933), Eagles ($10 Liberty Head, minted 1838-1907; and $10 Indian Head, 1907-1933), and $5 Half Eagles (1795-1929). Paper dollars were redeemable in gold, like the $20 Treasury-issued gold certificate shown here:
These dollar bills were redeemable “IN GOLD COIN, PAYABLE TO THE BEARER ON DEMAND,” with gold then valued at $20.67 per troy ounce. Americans over age 90 (0.6% of the population) can remember gold coins being used as a medium of exchange. Few Americans today have ever handled a gold coin.
When the Fed began issuing Federal-Reserve-note paper dollars they were also “Redeemable in Gold on Demand at the U.S. Treasury or in Gold or Lawful Money in any Federal Reserve Bank.” That changed in 1933 when the President signed an Executive Order making it illegal for U.S. citizens to own gold (gold jewelry and numismatic gold coins excepted). Then they became “Redeemable in Lawful Money,” eliminating any hard asset backing. Since 1963 the declaration on U.S. dollars simply states that, “This Note is Legal Tender for All Debts, Public and Private.”[1]
(Federal Reserve notes initially circulated along with two other kinds of U.S. dollars: 1) National Bank notes issued by the U.S. Treasury and redeemable in U.S. bonds in its possession, beginning in 1862 to finance the Civil War and up until 1966, when they stopped being printed; and 2) silver certificates, first printed in 1878 and redeemable in silver coins or bullion. The Treasury stopped printing them in 1967, and in June 24, 1968 reneged on redeeming the ones in silver still in circulation.)
The U.S. dollar has lost more than 95% of its value since the Fed began printing them. And now it can create them just with keystrokes entering numbers on a computer. As Richard Maybury, in his Early Warning Report, puts it, “At one time the biggest problem was paper money. Now it’s vapor money. The government can create trillions of dollars just by pushing a few computer keys.”[2] The government concedes that the dollar has lost 95% of its value over the last 100 years. Goods and services that cost $10 in 1914 now cost $200. Respected economic analyst (and fellow Dartmouth alumnus) John Williams, however, employing methods the government formerly used to gauge price inflation, calculates that the U.S. dollar has lost 99% of its value since the Fed opened its doors. Goods and services that cost $10 in 1914 now really cost $1,000 [3].
Americans do not comprehend this fact and generally view the Federal Reserve in a positive light, like my friend Ted, a prominent Seattle attorney my age (73). Like many educated people with a progressive bent who countenance government intervention in our lives, he argues that the Fed has an important job to do: “to keep inflation under 2 percent, or some other amount reflective of actual productivity increases.” The economy needs an elastic currency to accommodate increases in GDP and productivity, and a central bank to print money when needed, especially “to help folks out” affected by disastrous events like 9-11 and Katrina, and large institutions threatened by the current global financial crisis. Limited to having a fixed amount of gold as the nation’s currency won’t do. From this Keynesian perspective, gold is a relic—and as Maynard Keynes would have it, a barbarous one at that. Freed from gold, my friend writes, “The ‘money supply’ needs to grow to accommodate increases in GDP from increased productivity.”
The U.S. government severed the dollar’s last link with gold in 1971. While people could no longer redeem the dollar for gold coins, its international convertibility was maintained. Foreign countries and their central banks could redeem dollars for gold bullion—(400 oz.) gold bars, priced at $35/oz. After World War II, with the money supply (M2) at $147 Billion, the U.S. had 21,770 tonnes (699,905,500 ounces) of gold, which backed 17% of the money supply. By 1964 the money supply had grown to $400 Billion, and U.S. gold reserves dropped to 13,885 tonnes, covering 4% of the official quantity of money. By 1971 the amount of gold backing the dollar had shrunk to 1%, rendering default inevitable.
Freed from any gold restraint the dollar now became a purely fiat currency. (Fiat comes from the Latin word fiere, which means “let it be done.” A fiat currency is “money” that is not convertible into coin or specie of equivalent value, where government edict arbitrarily fixes its value.[1]) Accompanying the dollar’s loss of a gold backing were the 5 cent cup of coffee, candy bar, beer, movie, cigar, and average $25,000 cost of a house, which also disappeared.
Since 1971 the St. Louis Fed’s Adjusted Monetary Base (circulating currency and bank reserves), has risen from $70 Billion to $3,885 Billion today, a 55-fold (5,500%) increase. With the government no longer able to hold its price at $35/oz., gold now functions as a barometer of fiat currency expansion. Its rise in price to $1,895/oz. on September 5, 2011 is a 54-fold increase! At gold’s current depressed level around $1,300, it still is a 37-fold increase. The Dow Jones Industrial Average has tracked U.S. dollar growth less well. Its rise from 890 in 1971 to 16,400 today is an 18-fold increase, half that of gold at its current price.
The U.S. dollar has lost value at an increasing rate since 1971. What cost $100 in 1971 costs $2,428 now, a 96% decline. The dollar lost 75% of its value from 1914 to 1971 and 96% from 1971 to 2014, adding up to a 99% decline over the 100-year period from 1914 to 2014. (I used the Inflation Calculator on shadowstats.com to obtain these numbers.[3])
Such a precipitous decline in the U.S. dollar’s purchasing power disqualifies it as real money. A critical attribute of money is that it be a store of value. The American dollar was money in its truest sense only when it was backed by gold, and to some degree by silver. Not only did it function as a unit of account and medium of exchange, it also served as a store of value. The dollar maintained its purchasing power from the Colonial period in the 1600s up until 1914, when the Fed was formed and World War I began. It lost value twice during this time, in the American Revolutionary War when Continental dollars printed to finance it became worthless, and with National Bank notes, printed to pay for the Civil War. But during periods of economic growth accompanied by price deflation, 1820-1855 and 1873-1910, the purchasing power of the U.S. dollar increased 50%.[4,5]
As originally defined, inflation means an increase in an economy’s quantity of money. Now, however, the state and its Keynesian economists define inflation as a rise in selected consumer prices, diverting attention from increases in the quantity of money, the true cause of climbing consumer prices. From a Keynesian perspective, if selected prices don’t climb then there is no inflation—irrespective of how much money banks create or how much inflation of the money supply bloats equity and real estate prices. Bill Buckler, in his financial newsletter The Privateer, puts it this way: “For more than three generations, governments and central banks have inflated the quantity of money in circulation while at the same time engaging in futile efforts to counter the economic effects of their own inflation. They have used price controls, rationing, more regulations, higher taxes and even subsidies to bring some high prices down. When all that failed, they resorted to ‘cooking the books’ by ignoring any inconvenient price rises.”[6] Seen in this light, the Fed’s goal of keeping inflation under 2% is not credible.
The decades-long monetary inflation of the U.S. dollar is now producing a spike in consumer prices. Food prices in the U.S. are up 19% in the first 3 months of 2014, a 76% annualized price inflation rate, raising concerns that hyperinflation looms...
Read the rest here:
http://www.lewrockwell.com/2014/04/donald-w-miller-jr-md/currency-masquerading-as-money/
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