American Currency is Nothing but Lies on Paper

and it is going down the toilet fast....

I will open this week by saying, from a writing stand point of flow, the last letter wasn’t my best work, but I still stand by the content of the work.

As a nation we find ourselves in a very uneasy and precarious position where food, fuel, and other costs have been steadily rising.  This is because of the basic fact that inflation is a monetary function not a function of price (here).  By this I mean increased prices are the result of inflation, and while supply chain and production issues can cause temporary price increases, as we saw on and off over the course of 2020 and 2021 with various items, in most cases they spiked for a week or two and then collapsed back to where they were.  This persistent ever-growing inflation of most everything is due to the fact that there are more of the infinite fiat dollars chasing a finite amount of real goods in the economy.  This reduces the value of each fiat dollar vs unit of real goods or services.  This is illustrated really well by “How an Economy Grows and Why It Doesn't” (by Irwin Schiff).  It also touches on other issues inside of a capitalist economy as well as non-capitalistic influences that can destroy an economy (here). And, quite frankly, they have.  It is presented as a simple comic, but the ideas and concepts are those of real, sound economic thought.  This comic also strips away the “fancy” arguments for complex economics (almost all are just rationalizations for fraud).

As an aside, the constitution does give the Federal Government the power to establish a monetary system as part of section 8.  It reads “To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures”. Two things to note here: In the original document, the Feds are given the power to coin money and establish the standard of weights and measures in the same sentence.  This is also the only place in the constitution where it mentions anything about the government’s ability to make money.  It seems reasonable to me that our founder’s original intent was to have the establishment of real, hard currency in the form of metal coins.  Remember, they had just lived through the revolution and the continental congresses disastrous foray into paper money, in the form of continental currency, and its race towards zero (here).  It seems to me, these men knew what they intended and since sound money is the basis for sound trade, the ability to set weights and measures was also included on the same line.  This effectively would have made a fixed weight of gold, silver, copper, or other metal that could be coined worth a fixed number of Dollars.  It would also tie the value of the Dollar to the value of the commodity in question.  In my opinion, taken in historical context of the continental currency, this is what our founders also intended.  If we look at the conduct of the U.S. financial system until 1933, it is clearly also accepted that through most of American history that was also how it was interpreted.

Since our founders set us on a firm foundation, with hard currency and limited government intervention into the financial affairs of the general public, America prospered as no other country in history prospered.  There were times of over exuberance and correction, but they were always short lived and followed by more and better prosperity once the mal-investments were cleared, to make way for sound investments.  In his excellent 1893 book, A Brief History of Panics (here), author Clement Juglar points out that almost all panics are preceded by an over exuberance of credit leading to businesses expanding beyond their ability to profit and as a result, failing to pay back their loans, leading to a contraction in credit.  This is typically resolved by the liquidation of the failed firm and those that purchased the assets putting them to a more productive use, leading to more stable growth.  He also covers the creation of the second Bank of the United States and the problems with its establishment of a currency to Jackson’s dissolution of the bank.  It covers Jackson’s arguments fairly well in that fixed weights of gold and silver were in fact a plenty stable currency and whatever value the market assessed them relative to other goods was satisfactory.  I do find Mr. Juglar’s assertion that all panics are financial in nature to be false.  I think this is a misinterpretation of the information he himself presents.  It would be more accurate to state all panics have financial repercussions.  In his book, he covers panics due to new tariff regulations, where import companies didn’t archive the profits they had expected. He also illustrates panics that resulted from inopportune refit of production capital and then incorrectly describes them as having a financial root cause.  He does, however, illustrate how they were corrected and in so doing laid the ground work of a strong foundation for further growth.

An interesting side note about hard currency is that every new unit of account added to the financial system is itself a measure of production.  In a gold, silver, copper system it is a measure of the miners’ work, as well as the refiners’ work and without the actual input of labor there is no expansion of the means of exchange.  This also provides a good time to explain the difference between money and wealth, as they are not the same.  In a hard currency system, no matter how much or how little of the currency is present, all things will adjust to a relative value.  Who is wealthier, a guy with 100 fiat dollars that can buy one barrel of oil or a guy with a one ounce $20 gold coin who can buy 19 barrels of oil?  This same example could be made of anything. However, at time of writing, oil is somewhere around $100 a barrel and gold is just shy of 2000 U.S. Dollars an ounce.  I do this to point out the fact that inflation has, in fact, given us more money, but not necessarily more wealth.

At this point you may be asking, what does this have to do with our current dreadful economic situation?  Well, I started at the beginning and with a simple but powerful fundamental lesson in economics, because if you don’t understand that, you will never understand what is happening here, and like so many others, you might even decide Biden is the bag man, just as Carter was in the late 70s.  While Biden is a dotard and his administration’s policies are absolutely exacerbating some of our issues,  the truth is, like Carter before him, there really isn’t anything he could do or have done to stop this.  I say this because from 1913 to 1971 the entire solid foundation of the American economic system was ripped out by the root.  This process started in 1913 when the constitutional responsibility to coin money was handed over to a private banking organization by a law that was intentionally written to prohibit congressional oversight, allegedly so the Federal Reserve could operate with independence.  While this was bad, and we saw a sharp rise in fractional reserve banks vs full reserve banks, it was also limited by the fact that since one U.S. Dollar was one ounce of silver and twenty U.S. Dollars was an ounce of gold and had to be redeemable, the Fed was still limited in the amount of money it could produce at will, either through direct issuance of notes or credit by fractional reserve banking.

While there were no actual laws setting reserve requirements until around the Civil War, small private banks practiced full reserve banking, where they were required to keep the full amount of redeemable deposits on hand at all times.  These banks made money in two ways. First was by charging a fee to holders of on-demand accounts (these were essentially checking accounts where the money was available on request). This was essentially a storage fee for keeping your funds in their vaults. It was safer than your house and the bank purchased insurance in case of robbery.  The second way was through interest on loans.  The capital for these loans was drawn from deposit accounts (these are essentially the predecessors of the modern CD or certificate of deposit account but paid much better rates). These accounts were not available on-demand, and the longer you agreed in the beginning to keep the funds on deposit with the bank, typically the more interest the bank would pay you.  These savings deposit funds were then lent out at interest, governed by the market, and risk involved.  The banker would make a calculation such as: base interest 5% (2% for the depositor and 3% for the bank) and 1% for insurance on the loan (because the bank has to pay back the depositor with interest even if the loan goes south). So, the borrower gets the funds at 6% interest in this simplified example.

After the establishment of the Federal Reserve Bank, and largely due to its encouragement, many more banks started to practice fractional reserve banking, those who joined the Federal Reserve System because they were guaranteed by the system and then those who did because they couldn’t compete without doing so.  As Murray Rothbard points out in his book, America's Great Depression (here), this sudden advent of new credit not backed by actual savings inflated the biggest bubble in history to that point.  In doing so, especially while the Fed’s hands were tied because a dollar was an ounce of silver and twenty dollars was a ounce of gold, there was little to be done when the over-exuberance resulted in malinvestment, the failure of which caused the crash of 1929 back to the actual level of value.  The fractional reserve system made it so some banks couldn’t produce deposits on-demand and new-fangled technology like radio made sure everyone knew it.  This resulted in more bank runs across the nation where the first people there were able to redeem their deposits, while those that came later could not.  The more people who had delivered gold and silver to the banks for safe keeping, who couldn’t then retrieve their gold and silver, created and environment that generated more and more bank runs.  This also caused banks that had resisted joining the Federal Reserve System to fail, costing their depositors all their funds.  This, of course, led to the advent of the Federal Deposit Insurance Corporation (FDIC) that put the tax payers on the hook for bankers’ choices, and conveniently took the Federal Reserve off the hook for insuring member banks deposits.

Things were so bad that it was clear the situation was untenable by 1933. And, since the answer to all government-created problems is more government, President Roosevelt essentially, like an emperor, on April 5, 1933 made it illegal for the American public to own gold bullion or coins.  Then, after buying all the gold at $20 an ounce, Roosevelt, with the help of congress, passed the Gold Reserve Act of 1934 that changed the value of an ounce of Gold from $20 an ounce to $35 an ounce, devaluing every Americans savings by 57% in one fell swoop.  Even then, in its devalued state, the paper dollars were still linked to gold at $35 an ounce because the United States still had to pay its obligations internationally in gold at $35 an ounce.  It was at this time that a mad man by the name of John Maynard Keynes would introduce the Keynesian school of economics with his book The General Theory of Employment, Interest and Money.  This book argued for total fiat currency and a system where a government could borrow its way to prosperity by essentially creating so much money that inflation wouldn’t matter (here).  This idea was very popular amongst the political class, and first caught on in the United Kingdom during World War Two (WWII).

After WWII, everyone owed us money, and as such, it let us make a deal called the Brenton Woods Agreement where we promised to back our Dollars with gold at $35 an ounce, so a country holding our bonds would essentially be holding gold.  This worked out very well and saw a post-war boom because we had money coming in from all the nations that owed us. We were essentially the only western nation with a functioning industrial sector, so the entire world needed the things our industry produced, and we had a wealth of man-power to fill these openings in our industry.  Everything was going swimmingly until President Johnson got the idea that we needed a set of Great Society programs, and he was successful in creating the modern welfare state.  Both Doctors Thomas Sowell and Walter Williams have written extensively about the impact of these programs on minorities and the working poor.  Between Social Security and the Great Society programs, the U.S. was floating a fair number of bonds and had turned from a net creditor to a debtor on the international stage.  No one minded, since our bonds were backed with gold at $35 an ounce and gold is good everywhere.  This became a problem by the early 1970s, when many of these bonds were coming due and nations of the world were seeking to redeem them as promised in gold.  Officially, they say on August 15th, 1971, Nixon closed the gold window because the redemption of bonds was to greatly impacting our reserves.  This is probably true, but I think that there were also more bonds than gold to redeem them.  Either way, it doesn’t matter. On that day, Nixon destroyed the last vestiges of honest money in America and freed the Federal Reserve to print money at will.  This closing of the gold window also set the stage for the stagflation of the Carter years.  Carter took office just as the full brunt of not only closing the gold window, but also the unwinding of all the debt to support the Great Society was hitting the economy, as the Fed was free to print away.  Reagan, on the other hand, came to office just as the crisis was winding down and Paul Volker, in a brave move, killed it by a massive interest rate hike that prevented the expansion of the money supply, at least temporarily forcing things to shake out and settle down in a more stable pattern.

The end result is a financial system based on nothing, where money is created continuously, and isn’t actually represented by increased production of goods or services, and credit is essentially free, where companies choose to float loans with the intention of buying their own stock and inflating the value of said stock without really adding any value to their company in efficiency, sales, or production.  While this does result in stock markets that ever accelerate higher, with companies that have lost millions of dollars every year, never having made a profit, being valued in the billions.  This has been facilitated since 2008 by the Fed actually directly buying securities (with money it just made up) to support market prices, to the detriment of the regular people.  This doesn’t do anything for wages, quality of life, innovation, or production.  The result of this over the last forty years is the stagnation of real wages, death of main street businesses, and now that the bubble can’t be inflated any further, we see inflation and shortages.  The largest and best example of this artificial price inflation due to artificially produced money at artificially low interest is housing.  We have reached a point where the median income level in America can’t afford to buy the median house at 2-3% interest (here).  The fact that a huge percentage of people can no longer afford to buy a home has resulted in rental prices going through the roof as well (here).  All of this serves to lower the average family’s standard of living, while pushing the lowest income families out onto the street.  I used housing because it is the most obvious example to everyone, but it doesn’t matter what you look at, from food to cars or anything else, the root cause is the same:   the creation of infinite dollars without equal increases in capital wealth to back them.  This effect is multiplied by artificially restricted interest rates that don’t reflect the actual risk involved, and government regulations that require banks to make unsound loans.  Because, after all, these loans are backed by the government who can produce units of money out of thin air, further devaluing all those presently in circulation.  The only reason inflation has been held in check (except for the housing market) for so long (since the dot com bubble in the late 90s) is because most of the excess dollars were captured in the form of mortgages, stock purchases, or held as excess reserves over the minimum required by Fed member banks (not to entice this behavior, for the first time ever, the Fed started paying interest on excess reserves)(here).  These actions largely sequestered all the funds out of the regular economy and prevented them from chasing finite goods and services.  The notable exceptions were housing and stocks. Both have skyrocketed, even as the actual productive underpinnings of society have crumbled.  Enter COVID and the governments flooding the consumer market with trillions in unearned and unbacked dollars, and inflation is the completely predictable result.  Read the books I linked and the books I mentioned and then look at the history.  I hope this helps you understand better what is really going on outside of what the propaganda wants you to think.

God Bless you

-Sam