Relying on the current main stream media news would most likely make one believe that we’re on the verge of an economic recovery. Despite the high unemployment rate, high number of foreclosures, a depressed real estate market, and rising prices on food and other commodities there’s plenty of optimism that comes straight from the Central Bank and the Treasury. But what the officials don’t take the time to explain in a logical manner is how can our debt burdened economy truly recover after decades of (Federal Reserve induced) bubbles and busts.
Except for a minority of economists and investors the topic of sound money has never been put up for discussion. Because there is a direct correlation between sound (or unsound) money and the economy it is imperative to understand the meaning of sound money and its opposite, fiat currency.
Sound money is characterized as money backed by a tangible asset such as gold, for example. Gold is a commodity that has been used by humans for thousands of years as a form of money. Because it comes with a limited supply it is the ideal specie. A gold backed dollar retains its value because unlike fiat currency (the dollar we have today) it cannot be created out of thin air. It makes our government and our politicians accountable since they would be less able to fund new and expensive government programs. Sound money is at the core of a free market economy and individual freedom.
To better understand the most recent history of the U.S. dollar it’s best to know that we did have a gold standard until 1971. However, shortly after the birth of the Federal Reserve in 1913 the dollar’s position had been weakened. The nation’s monetary policy had since been transferred by Congress in the hands of a few powerful international bankers. Beside managing the nation’s money accounts the Federal Reserve’s main activity consists in actually creating money that distorts production and creates inflation and the business cycle. During World War I the gold standard had been temporarily removed specifically to finance the war. During this time the window of opportunity for the Fed’s creation of new credit and money supply had been fully exploited. The dollar experienced a significant decline however, the return to gold standard (prompting a reversal of inflation) helped regain partial stability.
In 1933 president Franklin Roosevelt had taken the first step of the removal from the gold standard when Americans were no longer allowed to exchange dollar notes for gold. Whatever was left of the old gold standard applied only to exchange amongst Central Banks and between the U.S. government and other countries.
After World War II the Bretton Woods system fixed the value of the dollar to $35 per ounce of gold. Uncontrolled government spending however, led to United States government’s inability to meet its obligation of redeeming other countries’ dollars for gold. More dollars flooded the world and as other countries requested to redeem the U.S. dollars they owned more gold was being sent oversees to these governments. The U.S government’s inability to provide the physical gold to meet the international investors’ needs of redeem-ability may lead us to believe that more dollar notes were printed and used in the world than physical gold existed at Fort Knox. As a result, the value of the dollar began to decline. Finally the government recognized that the United States was no longer able to redeem dollars for gold, so president Nixon completely closed the gold standard by removing all the dollar’s ties to gold in 1971. The dollar has officially become a fiat currency.
Over the long run it’s clear that the prior gold standard kept inflation in check. For example, the value of a 1880 dollar was maintained all the way until 1914, the year after the birth of the Central Bank (Federal Reserve).
Since 1971 the value of the U.S. dollar declined significantly due to its removal from the gold standard. The Federal Reserve continued to increase the money supply by creating new credit and dollar bills out of thin air. The dollar however maintained a powerful position amongst fiat currency for a long time due to the 1971 and 1973 agreements between OPEC and the U.S. that enacted the world’s oil trading to be exclusively in U.S. dollars. These events gave the dollar the status of the world reserve currency. The high demand for (petro)dollars on the international exchange markets gave the government, the central bank, and the politicians the opportunity to abuse it by printing more money to satisfy their desires for financial gains and power.
In his 1966 essay “Gold and Economic Freedom” Alan Greenspan”, former chairman of the Federal Reserve said: “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.” Sadly, Mr. Greenspan has become one of those central planners whose career at the Fed appears to have influenced his views on gold.
Our history has never experienced such an expansion of money supply like in the past few years. The world has become rather anxious about the U.S. debt, the dollar’s loss of value as fiat currency, and the country’s inability to repay the debt to foreign creditors. As a result, emerging countries – Brazil, China, India, Russia – had already started to work-out a plan towards trading in currency other than the dollar. What that means for us here in the U.S. is that our dollar will soon not be in demand and with that our lifestyles will change. Monetary inflation is the end result of the Federal Reserve’s monetary expansion. It is a hidden tax on the poor and middle class with little impact on the wealthy, the bankers, and the big corporations. China is already experiencing the signs of the inflation triggered by the U.S. and the Federal Reserve’s expansion of dollar supply, and as such is taking a pro-active approach. Just a few weeks ago the Chinese government declared that it intends to strengthen the Yuan to the level of the world reserve currency.
Finally, as Texas Congressman, Ron Paul states in his book Pillars of Prosperity, that “it is our individual responsibility to live within our means. A society that lives within its means can only be accomplished by producing more, consuming less, saving, and investing wisely.” And with that the concept of sound money will not anymore be so hard to grasp.