A Brief History Of U.S. Dollar Debasement

January 8, 2013

by David Ziffer

On the 100th anniversary of the creation of the Federal Reserve, it seems fitting that we should present a brief history of US dollar debasement:

1787: U.S. Constitution ratified. “No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts.”

1792: U.S. Coinage Act ratified. Our first Coinage Act establishes a uniform standard of gold and silver content of U.S. coins, paving the way for over a century of trust in the U.S. dollar that will ultimately catapult the U.S. to world economic supremacy.

1861: Greenbacks and Greybacks: In desperation and in direct violation of the U.S. Constitution, both the north and south issue paper currency with no gold or silver backing. Following the war, the U.S. returns to its constitutional roots, ceasing production of Greenbacks and making efforts to retire them as the U.S. returns to the gold standard. A first-class postage stamp (introduced in 1863) costs two cents.

1913: Creation of the Fed: In the belief that a central bank will prevent future economic panics, the U.S. government forms a banking cartel called the Federal Reserve, a rather facetious name given that the Fed is not federal and it maintains no reserves. In so doing our government ignores the warning of Thomas Jefferson:

If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered.

The stage is now set for the collapse of the dollar. A first-class postage stamp still costs two cents.

1934: Gold Reserve Act: After 23 years of dollar debasement by the Fed, Franklin Roosevelt is forced to acknowledge the growing disparity between the century-old fixed price of gold ($20.67/oz.) and its market price. The rift is made painfully obvious by the outflow of U.S. gold into the coffers of foreign nations redeeming dollars for gold at the stated fixed price. In direct violation of the U.S. Constitution, Roosevelt and Congress not only remove gold from circulation but prohibit ownership of gold by U.S. citizens. With the stroke of a pen the dollar is devalued from $20.67/oz. to $35/oz. Despite massive improvements in delivery efficiency, a first-class postage stamp now costs three cents.

1944: Bretton Woods: In the belief that the world requires a unified monetary standard in order to eliminate trade wars that ultimately lead to shooting wars, leading nations establish a dollar-based monetary system in which currencies are valued in terms of the U.S. dollar, which still claims to be gold-backed. This unwarranted trust ironically gives the U.S. yet more license and incentive to continue its debasement, since the world’s citizens now accept newly printed dollars with the mistaken notion that they can be redeemed for a fixed amount of gold. A first-class postage stamp still costs three cents.

1965: Second Coinage Act. In order to finance two very expensive initiatives (the Vietnam War and moon walking) and in direct violation of the U.S. Constitution, Lyndon Johnson signs a new Coinage Act that removes all silver content from U.S. coins. In so doing he provides the following advice to the public, explicitly promising future federal precious metals market manipulation:

If anybody has any idea of hoarding our silver coins, let me say this. Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content. The new coins are not going to have a scarcity value either. The mint is geared to get into production quickly and to do it on a massive scale. We expect to produce not less than 3 1/2 billions of the new coins in the next year, and, if necessary, twice that amount in the following 12 months.

In this same speech Johnson states that scarcity of silver is the motivation for the change. Despite incredible improvements in delivery efficiency that should have dropped the price astronomically, a first-class postage stamp now costs five cents.

1971-75: Petrodollars replace the gold standard: In a repetition of the 1934 crisis, the U.S. gold supply is being decimated by foreign governments redeeming dollars for gold at the stated fixed price ($35/oz.), a completely untenable ratio after thirty more years of dollar debasement by the Fed. In direct violation of the U.S. Constitution, Richard Nixon and the Congress once again stop the outflow, but this time rather than set a new unmaintainable fixed rate they simply eliminate the fixed dollar/gold ratio. Realizing that the collapse of the gold standard will dramatically reduce demand for dollars worldwide, Nixon strikes a deal with OPEC: trade oil in dollars only in return for perpetual U.S. military support. By 1974 gold is irrelevant to the U.S. hegemony, and so as his final act of the year Gerald Ford signs a bill that once again allows U.S. citizens to own gold. The first-class postage stamp now costs ten cents.

2000: Iraq threatens the petrodollar: Shortly after the creation of the Euro, Saddam Hussein makes Iraq the first major oil exporting country to sell oil in a currency other than the dollar, thereby threatening the global petrodollar arrangement. Citing this “weapon of mass destruction” while misleading the public into a preposterous belief that he is really referring to conventional weapons that could somehow threaten the U.S., George W. Bush reacts swiftly by invading in 2003 and quickly reverting Iraq to dollar sales. To make our point exceptionally clear to world leaders, the U.S. (using proxies) hunts down Hussein and executes him in 2006. The first-class postage stamp now costs 33 cents.

2008: Beginning of the end: Under Barack Obama, Fed chairman Ben Bernanke begins a series of bailouts of banks (that are presumably Fed members) and of U.S. debt (both mortgage-backed securities and U.S. Treasurys). The first-class postage stamp now sells for 42 cents.

2013: 100th Anniversary: The master of dollar-printing is 100 years old. The Fed marks its birthday by engaging in the largest debt purchase program in history ($40 billion of mortgage-backed securities and $45 billion of Treasurys per month). Awaiting the collapse of the petrodollar arrangement and the subsequent radical reduction in the purchasing power of the dollar, the price of gold is bid up to over $1600 per ounce. And despite the fact that humans now expend a tiny fraction of the effort to deliver a letter in 2013 compared to what was required in 1863, the price of a first-class stamp is now 46 cents.

Technically the U.S. left the gold standard in 1971, but in reality we abandoned it in 1913 with the creation of the Fed. The two publicly visible gold-standard slippages of the past century (FDR’s repricing and Nixon’s cancellation) were merely necessary adjustments following decades of gradually increasing gold-price inconsistency caused by continuous inflation. Given this, it seems hard to imagine that the Fed was created for any purpose other to create this inflation, i.e. to effectively raise our taxes under the table.

This has enormous implications for today’s long-term investor. Our most constant and predictable financial reality is the continued inflationary policy of the Fed. Given this, and assuming the U.S. is unlikely to pull another rabbit out of the global hat as Nixon and Ford did with the petrodollar in the early 70s, the dollar will almost certainly continue losing purchasing power indefinitely, in terms of both commodities and other currencies. And when the oil-producing nations finally agree to accept payment in currencies other than the dollar, expect a precipitous drop. Invest accordingly.

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INFLATION On The Way

J. D. Longstreet

A Commentary by J. D. Longstreet

Let me be clear. I am not an economist. Heck, I’m not even a CPA. Frankly, I know squat about finance short of running a business and having the good sense to hire someone to handle the financial end of the business — extremely well.

Here, at the Longstreet Manor, my lovely and gracious (and long-suffering!) spouse is the financier. She is my “Personal Banker.” No, I MEAN IT! She has kept me out of jail, debtor’s prison, or wherever they place men like me (who spend all the money they can lay their hands on.)

See, I view money as having been made for one purpose — to spend! And yes, I have been told all my life that one cannot take it with them when one departs this world. Although, I did meet a hearse once, out on the interstate, towing a U-Haul trailer behind it. I remarked to my wife at the time, that, perhaps, someone HAD figured out a way to take it with them, after all!

I distinctly remember a member of my board of directors insisting once, many years ago, that if he couldn’t take it with him, the he wasn’t going! Today’s he’s gone — and so is his money. Oh, he didn’t take it with him. No, after he passed from the scene, the family spent the heck out of it until, it, too, was gone!

This may seem strange and even alien to some of you, but I never sought wealth. It was never important to me. Having ample funds to stay fed, clothed, housed, and out of jail was sufficient. So far, I have managed to do that.

I think an aunt made such an impression on me, as a child, that it bent me in a way one might even describe as fear of wealth.

See, my aunt ,was the daughter of a share cropper. (I’m the first generation off the farm, myself.) She was fortunate. She married a man on the way up in one of the most powerful labor unions in the country at the time. They became wealthy. But it affected my aunt in a strange way. She was always afraid — afraid of losing her wealth and returning, I suppose, to the poverty she knew growing up as a hard scrabble sharecropper. She invested wisely, had plenty of money, real estate, stocks, bonds, all of it. But what she lacked was happiness.

I decided then and there, I did not want that. I chose an occupation that I loved, was, indeed, suited for and I stayed with it for thirty years.

Now that I have established my bona fides — which is to say that I am dumb as a post when it comes to high finance, I am about to tell you why Ben Bernanke blew the US economy to hell recently with QE-3.

In a word: INFLATION.

The money you had before QE-3 is now worth less — and the more money Ben and his cronies order printed — the less your money will be worth.

Bernanke, a Jew and a Republican, was born in Augusta, Georgia and raised just thirty miles, or so, from where I sit as I write this piece. It’s a small country town in the coastal plain of South Carolina. So, we are both “Sandlappers.” And as much as I would like to agree with, and support, a fellow son of the Palmetto State, and a fellow Republican, I cannot. He’s wrong on this and, unfortunately, all Americans are going to pay for it, dearly, in the not too distant future.

Ben Bernanke

It pains me to say this, but I am of the mind that Ben really wants Obama to win the coming election. See, Mr. Romney has already said he intends to replace Mr. Bernanke if he is elected. So, it stands to reason that if Bernanke can make the President look good, or even better, in the few weeks left ’til election day, Obama may be reelected and — guess what — Ben gets to keep his cushy job!

See? Politics ain’t all that hard, now, is it?

Seriously, inflation brings the mighty low… quickly! To get a better understanding of what inflation, especially hyperinflation can do to a country just Google “Weimar Republic” or “Hyperinflation in the Weimar Republic.”

During the Gerald Ford Administration the US had a fight with inflation. I can still see, in my mind’s eye, those big red WIN buttons — “Whip Inflation Now!” It took a toll on the country that lasted the remainder of Ford’s Administration, through the Carter Administration, and right up until Ronald Reagan came into office. It was an anvil around the neck of the US economy.

As I said, I don’t know diddly-squat about high finance so I can’t dazzle you with great gobs of numbers with dollar signs and percentage signs, etc., but take it from a guy who was trying to run a business during those years and believe me when I tell you it was “hunker down” and “tread water” time during those years. Reagan tossed the country a life-preserver and we got through it — vowing never to make the same mistake again.

But Americans have extremely short memories. As a result, we are making the same mistakes over and we are inflicting unnecessary pain on ourselves.

The MSM was touting the skyrocket in the stock markets after Bernanke made the announcement. And, yes, it DID look good. But, believe me — it is a bubble and IT WILL BURST — and we will be far worse for it in the end.

J. D. Longstreet

INFLATION On The Way … J. D. Longstreet.

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• Bernanke keeps pushing failed policy (mysanantonio.com)
• QE3: Quantitatively Easing America Further Into Inflation (conservativeread.com)

European bank runs and failure of Credit-Anstalt in 1931

21 May, 2012, 14:52

Posted by Zarathustra

The events in Europe right now is essentially a slow-motion bank run (or “bank jog”) on various European banks in the periphery.   Greece, for instance, have been losing deposits in their banks, while Spanish bank Bankia was rumoured to have massive among of deposits being withdrawn.  And of course, in the days of modern banking with internet and other stuff, you don’t even need to see a massive queue outside a bank to know that there’s a bank run.

Disturbingly, what’s happening today in Europe reminds me of something happening more than 80 years ago, when bank failures triggered bank runs virtually in the whole of Europe, later bank holidays in hope to stop bank runs, capital control, and countries going off gold standard.  Sure enough, by thinking about the event in 1931 by no means suggest that I think what happened then will surely happen in 2012.  It is always, however, good to look at the history and see what we can learn from it.

We all knew that the Great Depression started in 1929.  Perhaps lesser known is that one of the more dangerous legs of the slump during the the Great Depression did not start until 1931 when an Austrian Bank Credit Anstalt went bust.

At the time, it was the biggest bank of Austria.  Its failure triggered a European banking crisis, with bank runs started first with Austrian banks, then with German banks.

In Liaquat Ahamed’s wonderful book Lords of Finance: The Bankers Who Broke the World, he wrote that while Austria was a small country with the GDP about one tenth of Germany’s, remarkably the failing on its biggest bank sent a massive shockwave to the whole of Europe, an ultimately to the world economy.  While the big central bankers were trying to come up with rescue packages, without the experience of modern central banking, they came in too late, with too little money.

During the time of the Great Depression, it was the French which had the biggest gold reserve after the United States.  At the time of Credit Anstalt’s failure, the French was apparently faring relatively well among European countries.  And not surprisingly, politics was in play in their attempt to save themselves.  France, although financially stronger among European great powers, they were not keen at all to save the Germans and Austrians (perhaps still quite keen to punish them for starting World War One).  When the United States unilaterally forgo war debts from Europe for a year, which included German’s reparation, France was furious.  Liaquat Ahamed quoted that the British Prime Minister at the time Ramsay MacDonald saying that “France has been playing its usual small minded and selfish fame over Hoover proposal…”, while the Bank of England Governor’s Montagu Norman said, according to Ahamed, that “Berlin was being ‘bled to death’ while the French and the Americans were busy arguing” (p. 413).  And sure enough, when the German’s central bank Reichsbank asked Banque de France and the French government for help, that didn’t work. The French government offered some loan with conditions, which the Germans thought of that as “political blackmail”.

As the crisis worsened, Danatbank, at the time the second biggest bank in Germany, went bust some two months later after Credit Anstalt failed.  On 13 July, it failed to open for business, triggering yet another wave of massive bank runs on every other German banks.  With the banking crisis at its worst, a two-day bank holiday was imposed in German to prevent further drain in deposits.  Later, banks in virtually the whole of Europe are closed.

Meanwhile, in London, the government is considering measures to reduce budget deficits even as the banking crisis hit Britain, partly because of UK’s banks exposure to Germany and other countries in the continental Europe, and the Bank of England was losing gold reserve, forcing the Bank to raise interest rate when it should not.  The military’s salary would be cut in hope to plug the budget gap, but the some sailors in the Royal Navy became (predictably) very angry and essentially went on strike, an event which is now known as the Invergordon Mutiny.  Not a particularly huge event, but enough to send a shockwave to the City of London with stock market crashed and a sterling crisis.  In about a week after the Mutiny, Britain was forced out of the gold standard.

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