Money and Wealth II

This is the continuation of “Money and Wealth I” which, as I said last week, suffers from an ever present malady of my blogging … too long!!

Wealth and Money II

Back to America …  The Continental Congress didn’t have any gold or silver, their only revenues were quotas promised by each of the Colonies that were to be derived from local taxation.  The States (Colonies) were not very forthcoming with their obligations to provide the money for the war, but the debts of the Congress continued.  So the Congress just printed the money anyway.  Since the paper money had no intrinsic value and could not be redeemed for a real commodity, the “Continental” was soon worthless.  As a result, when the US Constitution was adopted, it was recognized that all money should be based upon gold and silver; and our money was, until well after the adoption of the Federal Reserve Act; until the Roosevelt Administration cranked up the printing presses in the early 1930’s in order to comply with the now debunked “Keynesian model.”

From the beginning of the constitutional republic, the American dollar was pegged at one ounce of silver; and the price of gold on the open market was $17.50 per ounce for well over 100 years.  The $20.00 gold piece also weighed one ounce, so we see right off that the government was scamming the gold producers.  Nevertheless, American money was still commodity based.  The paper money was either a gold certificate or a silver certificate, that is, the paper certificate could be redeemed in metal … a commodity … something of worth.  All that changed with FDR.  He outlawed “gold certificates” and made private ownership of gold illegal.  He had to do this because as he printed more and more paper dollars, redeemable in gold, the amount of gold in the treasury to back those paper certificates remained the same.  As he manipulated the price of gold, it being a commodity, its price began, inexorably, on the open market, to rise from the historical $17.50 per ounce until it reached $34.00 per ounce; it was at this point that he outlawed its ownership.  It is easy to see why he did this.  An individual person could buy a $20.00 gold piece with 20 silver dollars, 20 paper dollars or could sell his particular commodity for a $20.00 gold piece, then melt the one ounce coin down and sell it back to either some gold merchant or the government for $34.00 dollars, thereby nearly doubling his money.  Roosevelt’s minions labeled people who would do this as “evil speculators.”  The fact is that the evil speculator here was, as always, the government.  Gold coinage disappeared from the American scene.  The crisis in silver coinage was not as immediately apparent, because silver is, in addition to its use in coinage, a highly demanded industrial commodity.  Also, throughout the 20th Century, there was a large supply of silver from numerous mineral discoveries that kept its price as a commodity down.  For those of us who grew up mid-century, silver coinage was still very much in evidence.  We who grew up in the western US routinely had silver dollars and half dollars in our pockets.  The people in the east did not often see these coins.  Everyone in the US traded with silver quarters and dimes … and with nickels made of real nickel and copper pennies made of real copper.  By the time that Richard Nixon became President, however, America, continuing to print dollars, had much further debased the value of the money.  The world demand for silver, nickel and copper had escalated to the point that people were melting these coins and selling the metal at a large profit.  Nixon was forced to withdraw the dollar bills from circulation that were “silver certificates.”  A one dollar silver certificate bore on its face the words,”This certifies that there is on deposit in the Treasury of the United States of America one dollar in silver payable to the bearer on demand.”  The payment presumably would have been one ounce or there would have been some very angry citizens.  The silver and gold certificates were replaced by the currency that we now use … the Federal Reserve Note.  The pledge of this note is simply, “This note is legal tender for all debts, public and private.”  It is a little known fact that if you refuse to accept one of these bills when tendered to you in payment of debt, the tender statute states that you have been paid. (Presumably without recourse)  Very soon after abandoning metal backed paper money, the United States Mint had to start withdrawing all denominations of silver and nickel metaled pocket change from circulation.  This scam was not much different from its historical antecedents.   The Mint, instead of changing the size of the coins (probably because of the millions of coin operated machines), opted to debunk the quality of the coins.  Dollars, half dollars, quarters, dimes and finally nickels were made of a low grade copper alloy that was overlaid with a zinc wafer.  The coins, when new, looked like their silver forerunners, but soon oxidized or tarnished; nonetheless, after initial resistance, the American public soon got used to the fiat coins.  We are now well into the second generation of citizens who have never seen a silver coin, so the modern generation doesn’t know the difference.  By the end of the Nixon, certainly by the Reagan administration,  the wealth base, the commodity base value of our money had disappeared.  All our money was fiat paper or valueless coinage.  It is to the point now that the penny, once the size of a dollar (which most Americans have never seen), is, as with its more valuable noble metal cousins, now worth more as metal than currency.  People will soon be melting copper pennies. (In the last year or so, the copper has been taken from pennies by the Mint)

When American money was tied to something of real worth, a commodity like silver or gold, the number of paper dollars in circulation, although distorted by the factional reserve laws that allowed 9 dollars to be loaned for each dollar of deposit, was somewhat constrained.  From the time of FDR on until the present, the Treasury has been constantly debunking the worth of the dollar by printing and putting into circulation more and more paper dollars.  This malady in our economic life has been manifested by the continual rise in the cost of the things that we buy.  This phenomenon of a 4 or 5% (or more) general cost rise of the things that we buy on an annual basis has been blown off by governmental and economic experts for the last half century (or more).  This inflation has characterized variously as, “normal”, “the result of ‘evil speculators'”, the result of “business expansion,” an “overheated economy” and so on, but never, as we now begin to see the real cause, the immoral monetary policies of the government, the Federal Reserve Bank and (and/or) cynical governmental officials and regulators.  Not many people understand that this “normal” inflation devalues the purchasing power of any savings, property, cash, stocks or bonds in an IRA that they have put away for a rainy day at that rate of inflation.  A dollar today; 95 cents next year; 90 cents the year after and so on at a
“normal” 5% inflation rate.

As soon as the noble metals were withdrawn as a basis for our printed money, Pandora’s Box was opened.  The Federal Reserve has tried every imaginable restriction on the money supply and/or tinkering with interest rates and banking gimmicks that man can think of, but the only way that the numerical amounts owed by government can ultimately be paid is by cranking up the presses to pay debts in the short term, with result of devaluing the worth of the dollar by the ratio of the printed dollars to the total dollars in circulation.  In the last few years, the Federal Reserve has found an even more innovative way of legal stealing, described by Federal Reserve chairman, Ben Bernanke, in a television interview with “60 Minutes,” when he stated that (paraphrasing), “we make an entry on a computer.”  In other words, the Fed makes up money out of whole cloth.  Think about it, if you receive money by direct deposit from the government, the government credits a sum to your account, you spend it by swiping you debit card and your bank electronically credits the store … no money ever changed hands.

The government’s minion, the Federal Reserve, is now buying the deficit debt of the US government by buying US Treasury bonds through large banks (with a high commission) like Goldman-Sachs electronically with money created by a few keystrokes on a computer.  If the Fed is a governmental entity, then we owe the debt to ourselves; if the Fed is a consortium of mega-bankers, as some suspect, then the citizens of the US are the dupes of a world banking conspiracy … Is that why the Federal Reserve Bank has never been audited?

So who is stuck for the bill?  Well, back to the core argument of this essay.  Only resources with the infusion of man’s muscle, sweat and intelligence can create commodities … wealth.  Money can be commodity backed, or it can be bogus coinage or fiat paper whose only value is the “full faith and credit” of the United States.  Many of us are losing “faith” in the monetary policies of the US and we also know the only true credit of the US is in the minds and labor of the citizenry and the commodities that they make.  Obviously, the only pseudo-moral way that the government’s debt can be paid is by taxing or by immorally stealing it from the people by mechanisms like inflation.  Of course, historically, there are other far more immoral ways to get rid of the debt.  Just refuse to pay (e.g. the Chinese, among others) and let the chips fall where they may.  Since the debt is in dollars, not based in wealth, crank up the presses (or callous up the numerical pad finger) and print up enough fiat dollars to pay the bill … Weimar Germany did it in 1923, to satisfy its obligations for losing WWI … in our case, just a few one trillion dollar bills should do it.  Or use the classical approach to get out of a monetary crisis, as was done with the “Great Depression;” wait 10 or 12 years, then go to war.

It is apparent that the Democratic Party’s solutions always involve keeping the governmental status quo, funding obligations with higher taxes on some minority until that proves inadequate and then taxing all until there is nothing left to tax.  Some Republicans have historically agreed with this approach.  The new Republican “Tea Party” inspired approach, which should be obvious, is to cut spending … a lot.  Many of the members of the “Tea Party” clamor for this solution, but probably have not divined that if this is done on a large enough scale to work that their particular “sacred cow” will probably get gored.  If the Republicans have the cajones to attempt this solution, they will be very much in danger of being turned out of office.

The inflation of money supply, with the resulting devaluation of the worth of the dollar is interesting to trace.  Henry Ford’s Model “T” sold for as little as $495 in the early 1920’s.  You could buy a new Chevy Pick-up for $600 in 1934, $1800 in 1956, $4000 in 1978 and $25,000 to $35,000 now.  Although in no way as luxurious as nowadays, the ’34 would run 75 miles per hour, the 1978 had the same engine and accessories as those of today and, if 4 wheel drive, would go anywhere the modern one will.  My 1955 Chev Bel Air was clocked at 155 miles per hour and got 24 miles per gallon down the highway.  The point is that the quality has not changed much; the price has, but not the wealth to buy it.  Approximately … the Model “T” cost 28 ounces of gold, the ’35 was 18 ounces, the ’56 was 53 ounces, the ’78 20 ounces, and the 2011 23 ounces.  The only real anomaly in the group above is the ’56 when the American price of gold was artificially far below the world price by law.  The point here is that the value of gold compared to other commodities remains essentially the same.  It is the value of the dollar that continuously diminishes.  And that diminution is exclusively due to government action.  And that governmental action is due to misapplication (certainly deviously … and maybe knowingly criminal) of economic principles and mistaken understanding of economic theory. John Maynard Keynes, a Fabian socialist, certainly advocated the increase of the money supply in times of economic stress, but he also advocated retracting the money supply in good times.  Worshipers at the altar of Keynesian economics have always supported the first part of his theory, but have never followed through on the second part.

So there you have some of my thoughts on the subject.  Trade of things of worth — commodities — is a natural trait of mankind and is as old as civilization itself.  Left alone, man will naturally evolve a system of trade, which will quickly develop money based upon convenient commodities.  Money naturally gives rise to banking.  Banking develops into a capitalistic system as is evidenced by fractional reserve banking and the bond market.  Everything works fine until the government intervenes with its minion’s insatiable appetite for spending the wealth of others on things they, for supposedly empathetic reasons, deem needed or desirable.  As long as money is based upon a commodity, it remains a reasonable medium of exchange, but when money is divorced from wealth, it is the populace that pays the piper.  Savings, annuities, bonds, any device used to store wealth other than investment in commodities is diminished, compromised, ultimately debunked, degraded, and finally stolen from the thrifty individual by governmental monetary policy.

The fruits of man’s mind and the sweat of his brow combined with those assets of the Earth provided by Mother Nature produce commodities which are wealth.  As we have seen some commodities lend themselves to being money.  As long as money is tied to wealth it works.  Divorce money from wealth and all the furies are released.  We have seen that money can be as ethereal (and worthless) as the click of a computer keyboard.

One has to wonder if Og and Smed would be proud of their descendents Ogden, the banker, and Smedley, the bureaucrat.  One has to wonder!!!