As a people we discuss politics, we talk about the economy, the Federal Reserve, inflation, money, and more, however, do we know how we got to where we are? Do we know what decisions were made, and by who, and for what? If we do not know, how can we hope to ever make a change?
America, you have been conned. Let's discuss the history of money and see how we have arrived where we are. It isn't so much that we as Americans do not know a lot about our economy, our history, and our government, it is just that like Ronald Reagan once said about liberals, we just know so much that isn't true.
Money was, and has always been, something we have agreed upon to be money. Early on it could have been shells or stones or sheep, later we started using precious metals, like gold, silver, copper and others, mostly gold. This was the basic means of exchange for around six thousand years until 1971 when our money was taken off the gold standard.
When we used gold, there were businessmen known as goldsmiths. These goldsmiths were the bankers of their day, so you wouldn't be in danger of being robbed of your gold, you could deposit it with a goldsmith who would issue you paper receipts or scripts to be able to come back and redeem your gold as you needed it. This evolved to a point where the goldsmith's scripts could be exchanged for purchase and the person you gave it to could redeem it. Soon the goldsmiths realized that only a fraction of the gold they held on deposit ever was redeemed at any given time, so they started printing more scripts against that deposited gold than their was gold held on reserve. This was known as fractional reserve banking, we are still using that same program in our banks today.
Genghis Khan came to the decision that he wanted to use paper money, he had the most powerful and ruthless army on the planet so he enforced that what he said was money was, if you disagreed you died. When Marco Polo explored Asia he came back with stories of this Khan money.
Then in 1715-1720 we saw the impact John Law had on money. A Scot, and son of a banker, John Law was famous for his talents with the ladies. This ended with Law killing a jealous husband in self-defense. He had to leave England and went to France. There at the death of King Louis the 14th, the heir a seven year old Louis the XV inherited the three billion livres of the old king. The currency was devalued by 20% which did no good, those who were accused of hoarding were arrested. John Law showed up with an idea of Fiat money. It was paper money issued by the government secured by land and Royal revenues. He wasn't done yet, he started issuing paper money against land in France's holdings in America, capitalizing on the speculative frenzy the New World held. This created a massive boom the French saw their standard of living escalate as never before known. Many no longer worked, they became full time speculators buying and selling this new paper. Then an angry Prince de Conti arrived and brought wagon loads of this paper and wanted to cash it in for gold. When he did, they gave him his gold, but it caused others to do the same, crashing the bubble.
Law gambling his remaining authority he abolished coin as a medium of exchange, and then in February 1720 declared it illegal to own more than the tiniest of sums in gold in any form. Then he closed the borders, and sent instructions to all coach-houses to refuse fresh horses to anyone travelling to foreign lands until an inspector had examined their baggage. The substantial fines imposed were shared with the public spirited individual who filed the report.
By August of that year it was all over, and John Law was the most hated man in France. Fortunately he was living in Venice. Like all good gamblers he had gone on to the next game, by which means he continued his existence for another 9 years. Much of the money he won at this time would have been that which had earlier escaped him in the capital flight which he had outlawed.
This is truly a story of Booms and Busts, or otherwise known as Inflation and Deflation.
Inflation is not, as most believe, rising prices, demand can cause prices to rise. It is when the money supply is increased too large for demand. It causes prices to go up two ways, one by lowering the value of the money you are using. The other is that those selling goods see an opportunity to raise prices when people have a lot of money in their pockets.
Inflation is actually a secret tax, governments love inflation, and do it intentionally. Inflation is a tax on the people that is hidden, it is actually a reverse graduated tax because it hits the poor and middle class harder as a much higher percentage of their money is used for consumption. It shrinks the buying power of your savings, and as Americans have had repeated attacks on the value of their money for most of their lives it has trained them to not save money.
However, again governments love it, they get to see increased exporting of goods since foreign currencies can buy our goods cheaper than we can. Further it allows them to pay back the massive government debt with cheaper devalued dollars. If wages increase, it will push people into higher tax brackets again raising taxes without the political hit of a tax increase.
Deflation is the opposite, this is the thing governments fear the most. It is caused with the shrinking of money supplies and causes real prices to drop. If you lost your job and then had your one hundred thousand dollar home foreclosed where it resold for fifty thousand, what happened to the other fifty thousand dollars? It is simply gone, it is out of the economy, and the economy was deflated of that purchasing power. Prices going down is good for buying food and energy, but bad if you bought something speculating it would go up in value.
Today the value of the dollar is imaginary and in the hands of the Federal Reserve who manipulates it by pouring money into the market or not. We no longer have a stable money tied to gold or anything else.
How did we get here?
Our founders gave Congress the power to declare what money would be, they only gave the states the power to coin money. The founders had already had an experiment with paper fiat money called the Continental. They printed this paper money to help pay for the war, it wasn't tied to anything of value other than the new government said it was money. It devalued so much that no one would take it, even today we sometimes hear the phrase "It isn't worth a Continental" used.
We then went to a Gold/Silver standard and the nation's money was stable for years. Then another expensive war came about with the Civil War, and we printed money again to pay for it. We also had an Income Tax imposed and a way of collecting in with the IRS in 1862. The income tax was declared Un-Constitutional in 1894, but the IRS remained.
Then the Panic of 1907 came about. Speculation still contends it was done intentionally by a group of big bankers did it on purpose to cause panic and give them and the government the opportunity to "fix it." What we do know is that it started with a failed attempt to corner the copper market. The stock market crashed by 50% in a year, and banks across America failed. It was likely it would have been much worse if not for J.P. Morgan pledging vasts sums of his own money to shore up the banking system. At the time America didn't have a central banking system to shore up the system in crisis. We had two National Banks earlier both highly unpopular with the American people. The last one was the singular purpose of Andrew Jackson to remove. Senator Nelson Aldredge was given the task to find a way to "fix this."
In 1910 there was a meeting on Jekyll Island Club off the coast of Georgia. Aldrich convened a secret conference with a number of the nation's leading financiers to discuss monetary policy and the banking system. Aldrich and A. P. Andrew (Assistant Secretary of the Treasury Department), Paul Warburg (representing Kuhn, Loeb & Co.), Frank A. Vanderlip (James Stillman's successor as president of the National City Bank of New York), Henry P. Davison (senior partner of J. P. Morgan Company), Charles D. Norton (president of the Morgan-dominated First National Bank of New York), and Benjamin Strong (representing J. P. Morgan), produced a design for a "National Reserve Bank".
Forbes magazine founder B. C. Forbes wrote several years later:
Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundreds of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written.
The final report of the National Monetary Commission was published on January 11, 1911. For nearly two years legislators debated the proposal and it was not until December 22, 1913, that Congress passed the Federal Reserve Act. President Woodrow Wilson signed the legislation immediately and the legislation was enacted on the same day, December 22, 1913, creating the Federal Reserve System. At the time it was a secret national bank.
The Federal Reserve is not Federal and it has no reserves.
1913 was maybe the most pivotal year in our economic and Republic's history since it's founding. Also in 1913 the Income tax was brought back, even after it had been found Un-Constitutional twenty years earlier. The government needed to pay the 6% interest to the Federal Reserve. One congressman filibustered on the floor of the House trying to stop the income tax, he said that there could come a time when it would be as high as 20%, the other congressmen laughed him off the floor as a radical an extremist, and an alarmist.
Now the government doesn't take need to take away liberty and freedoms by force, they know that they only have to get the camel's nose into the tent. 1913 was that year. Another gem brought to us in 1913 was the 17th Amendment where unlike the Founder's intent of the Senators being selected by the State representatives of each state to represent the state's interest, they became popularly elected making them part of that buying the constituency vote as well as the House.
1913 was the Birth of an Empire and death of the Republic.
Now, we hear a lot about the Federal Reserve, but do you know how it works?
Basically it is like this. The government sells a bond to the Federal Reserve, the Reserve hands a check to the government written on an account that doesn't exist. The government then deposits that check into an electronic account and the money appears out of thin air, and the Federal Reserve holds the Bond. Every time the Reserve buys bonds from the government money flows out and increases the supply causing inflation and lowering interest rates.
Wars are expensive, they are golden opportunities for government to print more money. W.W.I comes along, Wilson and the Fed pumps money into the supply, inflation and devaluation come right with it. After the war, the soldiers come home, need to find jobs, war machines are no longer being made, and we see a recession. France is demanding gold to pay back our debt to them, so what do we do? Pump more money into the system creating inflation, and the Roaring 20s, everyone had money, life was good, people started speculating in the market that was booming until... Herbert Hoover was hinting about something called the Smoot Hawley Tariff. Just the talk about it caused businessmen to start pulling in their resources, this caused the stock market to crash.
Of course you have heard about the stock market crash, how the market crashed, people committed suicide, and no one had any money for a long time, right? Wrong.
Very few committed suicide, just one year after the crash the market was back where it was before. (Sound familiar) However, this was a perfect crisis for the government to "do something" and they did.
The reason the market crashed is that when businessmen heard, and believed, the government was going to impose tariffs they knew it would be destructive to business and they pulled in their capital.
The government did something:
1932 the Smoot Hawley Tariffs were imposed creating a trade war pushing the recession into the Great Depression.
1934 the Gold Reserve Act made it illegal for any American to own gold, this lasted until the mid 70s.
1935 the Wagner Act gave us unions and collective bargaining. While some of this was needed at the time, we see today how it has become a destructive monster to our Republic and our freedom along with our economy.
1935 the Unemployment Act brings us unemployment insurance.
1937 the Social Security Act, the largest Ponzi scheme in history. This is nothing but a giant pyramid scheme and would be illegal if not run by the government. There was never any money set in reserves in it.
1938 brought us Fannie Mae, the government took started carrying the notes on our mortgages.
If 1913 under Wilson the Camel's nose got under the tent of our freedom and Republic, in the 30s the camel got inside. If our Republic died in 1913 and the Empire was born, the Empire was wearing big boy pants now.
Of course the event that brought us out of the Great Depression was W.W.II. What happens during war? We pump more money into the system devalue the dollar with inflation, and away we went. Then in 1944 there was a conference held called the Brenton Woods Conference. This was the birth of the International Monetary Fund and the World Bank, even though it didn't become fully operational until 1959. This was just the ticket for the Fed and the government, the U.S. Dollar became the reserve currency for world financial markets. This way the U.S. government could dump trillions of dollars into the IMF and the world without causing the massive inflation it would have caused if dumped in the United States economy. This system has worked for years, but have you heard recently that there i growing talk of removing the dollar as the reserve currency? If that happens, and it is actually very possible, the Housing Bubble Pop will look like a blip on the economy compared to the Dollar bubble pop that would surely follow.
Have you heard about government's Guns and Butter Programs?
What were they? They were 1. The Kennedy Space Race, 2. LBJ's Great Society, and 3. Vietnam. All very expensive, all great opportunities for government to pump more money out.
In 1965 we added Medicare and Medicaid along with Freddie Mac in 1970.
With our government's habit of manipulating the money supply to keep driving down the value of our dollar to pay back debt cheaper, the Arab Oil states revolted at selling us oil with dollars that gave them less than they bargained for. Now we have skyrocketing prices as they would no longer sell to us, we would buy it through other countries who bought Arab oil and resold to us taking out middleman pricing.
American voters said "Do Something" Nixon wanted to be reelected he did something. He gave us price controls, this created shortages and producers refuse to produce if they can't make a profit. So to fix this let's add tariffs, they worked as well this time as before.
Now in 1974 we add the ERISA laws, this is where our retirement plans were changed from defined benefit plans to defined contribution plans or IRAs, 401ks, and other deferred tax plans. What we did was take the little guy and put him in the stock market. Of course we didn't teach him what to do when there. Now the big banking system not only got to create our money, they now held our savings as well. The little guy got slaughtered.
In 1979 we got a short reprieve. Paul Volker started pulling money out of the system and brought back some value to our dollar. Then Ronald Reagan dramatically cut taxes, and between those two things it created the greatest economic boom we have seen and sustained longer than any in any of our lifetimes.
However, Alan Greenspan took over the Fed in 86 changing our monetary policy once again. Then in the 90s we had the technology boom, money was flowing, people started day trading, Wall Street was rewarding short term profits not long term manufacturing gains, this drove our manufacturing base out of America. Then it turned to 2000 and Pop goes the Tech Bubble.
When the Tech bubble burst the herd starting looking for the next big thing, the next fix, the next easy short team profit. It found Real Estate. Boom Baby, off they went buying, flipping, refinancing, using their home like a ATM machine to buy cars, jewelry, electronics, vacations, and more Real Estate to flip. The hot market towns in the Sun belt had entire subdivisions purchased by those who had no intention of ever living in the home, but just flipping it. When the bubble burst we heard the sad stories of the people losing their homes, but the media didn't talk much of the novice speculators who took out 125% loans on their homes to buy several others to flip and then lost them all after the bubble burst in 2008.
Okay, now we know how we got here. What do we do about it?
There is a three step process we must do to save things.
1. We need Stable Money, be it back to the Gold standard or something else, it must be stable.
2. We need to lower taxes, we must reward, not punish the producers. Last year 50% of Americans did not pay Federal Income taxes. When that number reaches 51% the game is over.
3. We must deregulate, reduce the amount of laws and rules on businesses.
Government will kick and scream about those three ideas. They now have an entire herd of camels in the tent, they are not going to willingly give up their power. When it comes to inflation and deflation by government and the FED, you must remember that Ben Bernanke has said that he will not allow deflation to occur if it means he would have to throw money out of helicopters. That is a frightening thought that the man in charge of our money value believes this.
There is a storm coming that will make this last few years look like the good old days if we don't regain control over our government's spending habits. I believe we have this next election to either save our nation, or it's over as we know it.
Government's role passed onto us by our founders was to protect us from a big government foreign or domestic. Our founders wrote our Constitution in fear of government, and terrified of democracies. That is why they gave us a Republic. Democracies are mob rule.
James Madison said, "Hence it is that such democracies have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their deaths. Theoretic politicians, who have patronized this species of government, have erroneously supposed that by reducing mankind to a perfect equality in their political rights, they would, at the same time, be perfectly equalized and assimilated in their possessions, their opinions, and their passions." Federalist No. 10
We have a chance of turning this around, but it will depend upon us to do so. Then if we do, to educate our children, and ourselves what got us here, to make sure we don't do it again.