The FED's roots

verfasst von CRASH_GURU, 02.03.2003, 15:00

-->By Douglas Gnazzo
U.S. MONETARY HISTORY 1164-1835

Great Britain exemplifies the classical functioning of a modern gold standard. For almost 250 years gold was money in Britain. The earliest recordings date back to around the year 1664 and lasted until the outbreak of World War I. Only when Britain was at war with France from 1797-1821 was the gold redemption promise closed until after the war. As the great Sir William Rees-Mogg wrote in his book The Reigning Error, “Gold was money and money was gold.” Many a historian attributes much of the rise of The British Empire to have been made possible by a sound currency that was backed by gold.

Of more than just interest to note, a brief viewing of the consumer prices during this time may provide the reader with an idea to the soundness of gold as money or the term: “good as gold”. The Economist states that at the beginning of this time period (1664) the level of prices was set at 100 so as to provide a starting point to index subsequent changes in prices. From 1664 until the Napoleonic Wars, prices remained quite stable, fluctuating ever so slightly just above or below the 100 mark. During the Napoleonic War of 1813 prices exploded up to the 180 level only to return to the average level once the war was over. Upon the advent of World War I in 1914 the index measured in at 91, exemplifying how a sound monetary system based on gold had kept prices in check such that prices were lower 250 years later in time.

Now let’s take a look at prices in the good old USA from the 1800’s to 1913 to get an idea of how we compared to Britain from whence we came. First from the words of the venerable Sir Alan we have from his latest speech the following:

“Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. But, in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, has allowed a persistent over issuance of money. As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess.”

Once again we can see that under a classical gold standard that price stability occurs on a regular basis. In 1800 the index of wholesale prices in the US was 102.2. By the year 1913 when the Federal Reserve was created the price level had gone down to 80.7. During this time the average annual change in prices, up or down, was 1.3%. During The Civil War the variation rose to 6.2%, from WWI to Bretton Woods (5.6%) and since Bretton Woods approximately 6%. At least Sir Alan can read his history books, too bad his doesn’t glean anything from them.

Now we will take a trip back in time and take a peak at the history of our monetary policy as to understand where one is going one must understand where one is, to understand where one is it helps to understand where one has come from. The future comes from out of the present and the present comes from out of the past, yet they are one in the same, as a point becomes a circle.

1690-1764 - the first settlers in Massachusetts resorted to issuing bills of credit or fiat paper currency to finance the battles with the French troops in Quebec. The result was as always, inflation prevailed and prices went to the moon. Inflation levels ranged from 500% to 2300%. The state of affairs got so bad that in 1751 Britain stepped in and declared that all issuance of paper money by the colonies must cease and that only the Bank of England could provide such currency.

After the Bank of England stepped in paper money was looked at with contempt. People scorned it and began to use what they had hoarded during the easy money period of paper currency - their Dutch, French and English gold coins. A period of prosperity then ensued. Inflation dissipated and prices and the economy returned to a sound basis. This is an example of how even after a period of unstable monetary policy and resulting economic dislocations, a return to gold as money can actually repair the damage done and right the wrongs that were previously done.

September 5, 1774 - The first meeting of The Continental Congress took place. At this time the colonialists decided that they wanted to break all ties to England until or unless the Coercive Acts were repealed and stopped all trade with the Mother Country. They declared that England had no right to tax them.

April 19, 1775 The Revolutionary war began with the battle at Lexington followed by the battle at Concord. The war was not the only change that occurred at this time; the other was the existing monetary policy that had up until now returned to the use of gold coin and was on a sound basis. But the advent of war necessitated money; money to pay for not only the running of the country but also the fighting of the war, which is always very expensive and as seen through the hindsight of history, has always placed great strain on the monetary, economical, and moral fabric of the countries involved.

May 10, 1775 - Fiat money printed by the Continental Congress. The name of the currency was The Continental. The colonial monetary unit was valued at one dollar in gold.

During the start of the revolutionary war, the total money supply was $12 million. By the end of the year Congress had issued an additional 5 million for a total of 17 million. In 1976 they added another 19 million, in 1777 another 13 million, 1778 another 64 million, and in 1779 an unbelievable 125 million. In five years they issued $239 million dollars. But is doesn’t end here. The states themselves printed about the same amount and the Continental Army issued 200 million certificates to buy or pay supplies with. In total almost 650 million dollars were created in five years time from a starting base of $12 million. That is an expansion of the money supply in excess of 5000%.

1778 - The Continental that was originally valued at $1 dollar of gold now was valued at.25 cents. By 1779 it was worth less than one cent. Once again, the issuance of fiat paper currency created inflation and the debasement of the currency, hence the phrase “Not worth a Continental.”

May 31, 1781 - As with all fiat paper money, The Continental ceased to circulate.

1782 - Continental Congress chartered the first central bank, called The Bank of North America. It was modeled after The Bank of England and issued paper fiat promissory notes under the guise of fractional reserve banking which allowed it to issue notes in excess of deposits. It is of interest to note, that although our founding Fathers were aware of the evils of fiat money created by the governments printing presses, they still allowed such a bank to be chartered; this begs the question as to why?

I submit that the war placed great pressure on the need for money and also the fact that our founding Fathers had not any experience with fractional reserve banking as practiced by The Bank of England and did not understand the obscurities of such a system that was just as villainous as government issuance via the printing press. The bank lasted little more than a year and by the end of 1783 the first central bank was no more

September 3, 1783 The Treaty of Paris was signed and the war with England was over, the independence of The United States of America was recognized by Britain. The ending of war was obviously a blessing, however, the states were in near chaos from not only the losses of war but also from the loss caused by the inflation and debasement of the issuance of fiat paper dollars. The Whigs suffered the most, as they had placed their faith in the government and its paper; the Tories mistrusted the government and had kept most of their assets in gold, consequently they did not suffer the same hardships as the Whigs.

Is it any wonder that three months before the Constitutional Convention of 1787 that George Washington was moved to write the following:

“The necessity arising from a want of specie is represented as greater than it really is. I contend that it is by the substance, not the shadow of a thing, we are to be benefited. The wisdom of man, in my humble opinion, cannot at this time devise a plan by which the credit of paper money would be long supported; consequently, depreciation keeps pace with the quantity of the emission, and articles for which it is exchanged rise in a greater ratio than the sinking value of the money. Wherein, then, is the farmer, the planter, the artisan benefited? An evil equally great is the door it immediately opens for speculation, by which the least designing and perhaps most valuable part of the community are preyed upon by the more knowing and crafty speculators.”

The issuance of fiat paper money had once again caused unnecessary suffering upon the people and once again they had become disillusioned with its usage. The prevailing opinion and mood of the Constitutional Convention in 1787 was one of despair an abhorrence of paper money and the delegates were resolved to create a constitution that would prevent the Federal government and or states from ever again issuing fiat paper money again.

1785 - Thomas Jefferson recommended that the Continental Congress adopt the Spanish silver dollar as the official monetary unit of the nation. On July 6, 1785 Congress unanimously voted as such.

1787 - Constitution was created at the Constitutional Convention. The basis of this document was the belief that individual freedom was of the greatest importance above that of the state or government. The purpose of government was to protect the freedom of the individual against all foes, including any oppression from the government itself, including the issuance by the government of paper fiat money - for the pain that such issuance had caused in the past was still indelibly impressed upon the minds of the constitutional delegates.

1789 Congress is granted the power to “coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” Article I, Section 8, Clause 5.

“To provide for the punishment of counterfeiting the securities and current coin of the United States;” Clause 6

Section 10 states the following: Section 10. “No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility”. Note the words …NO state shall emit bills of credit. We will re-visit this statement shortly.

1791 - Congress grants a twenty-year charter to The Bank of The United States, the second try at a central bank. Alexander Hamilton who was the Secretary of The Treasury at the time proposed the bank. But there was strong opposition from none other than Thomas Jefferson, Secretary of State. It was this debate that essentially gave birth to our first political parties; The Federalists were behind Hamilton and the anti-Federalists backed Jefferson and later became the Republican Party. The position of the two men can be summed up as follows:

JEFFERSON: “A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army. We must not let our rulers load us with perpetual debt.”

HAMILTON: “No society could succeed which did not unite the interest and credit of rich individuals with those of the state. A national debt, if it is not excessive, will be to us a national blessing.”

Hamilton’s views won the day and the Bank was chartered and once again modeled after the Bank of England, with eighty percent of the banks capital to be provided by private investors while the Federal government only put up the remaining twenty percent. The total capitalization was to be $10 million - eight million from the private investors and two million from the government. This raises a very interesting question. Who were these private investors that had that much money? And why was the bank once again structured after The Bank of England? Perhaps the answers rest in the following quote from Gustavus Myers History of the Great American Fortunes:

“Under the surface, the Rothschilds long had a powerful influence in dictating American financial laws. The law records show that they were the power in the old Bank of the United States.” Hence as Griffins states: “The Creature from Jekyll Island is descended from a species that is not native to this land.” So from whence did this “creature” come forth?

Remember the words of Hamilton, “unite the interest and credit of rich individuals with those of the state” or in other words with the interests of the Rothschilds and their associates. So it would appear that from the very beginning “the rich bankers or investors” were the mysterious and unseen guiding hands behind the curtain controlling our monetary policy - but controlling it with what purpose in mind or for whose benefit - theirs or ours? As Governor Morris stated:

“The rich will strive to establish their dominion and enslave the rest. They always did. They always will…they will have the same effect here as elsewhere, if we do not, by such government, keep them within their proper spheres. We should remember that the people never act from reason alone. The rich will take advantage of their passions, and make these the instruments for oppressing them. The result of the contest will be violent aristocracy, or a more violent despotism.” It would seem that the man knew from whence he spoke. It would seem that that which gave birth to “the creature” was none other than the ancient one named “greed & avarice”.

So once again the battle rages on, the hard money advocates on one side, the easy money advocates on the other. One side wants only gold and silver coins as stated in the recent Constitution, the other opposing side wants fractional reserve banking and fiat currency issuance.

It is a rude awakening to realize that just a few years after writing a Constitution that limits the issuance of money to gold and silver coin and after the demise of the Bank of North America due to fiat paper currency issuance, that delegates could still be fighting for a central bank with fractional reserve lending.

This begs the question once more as to why? Once again the answer can be found by the twins of greed and avarice, which always blind men’s eyes to the truth. Large money interests, the capitalists wanted free and easy money to build the new country. They had visions of grandeur and riches twinkling in their eyes if only the natural untapped resources of our country could be harnessed and brought forth.

But how can such an undertaking be done without causing worry and panic amongst the people? Will they not see the intent of the rich bankers, which is to unite the interests of the rich and wealthy with those of the state?

The bankers weave their web by use of smoke and mirrors, illusion and delusion, subterfuge of every possible means. For example, although the Constitution forbids Congress from printing money, it did not forbid them from borrowing money.

The Bank of the United States used the mysteries of fractional reserve lending to obfuscate what was actually happening from the people. Congress did not print or create money the bank did that. The bank was allowed to lend privately -issued bank notes to the government and then to use the governments IOU’s as money. These notes were not forced on the public as legal tender for private debt. They were, however, legal tender for all debts to the government (taxes & duties, etc.), which made them acceptable as common money.

But one cannot lend that which one does not have, so in effect what the bank was doing by lending that which they did not have was to create money out of thin air. This provided the smoke to hide any thought that Congress was emitting bills of credit and reflected the responsibility for such off of the mirror of fractional reserves to the bank itself. The bank emitted the bills of credit for Congress. Alchemy is still alive and well.
The bank was required to keep gold and silver on deposit to redeem its notes when presented by the public. However, there was no provision that stated that the bank must keep or have on deposit enough specie to redeem ALL of its issued notes.
So from its birth, the banks purpose was to create money for the federal government and for its owners. Money for the private citizen was secondary. Originally the banks charter called for a total capitalization of 10 million, two million to be granted by the government and the remaining 8 million from private rich investors. After placing this original two million dollars the Federal government then proceeded to borrow $8.2 million over the next five years. This means that the bank “created” $6.2 billion dollars out of thin air.

The result was the same as before and the same as now and will be the same forevermore - inflation and the debasement of the currency in question. Originally it was printing press money that caused this problem, now it was fractional reserve lending - both at the bequest of monetizing the FEDERAL DEBT. As Jefferson so clearly states:

“I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the general principle of the Constitution; I mean an article, taking from the federal government the power of borrowing.”

January 24, 1811 - Congress voted to not renew the banks charter, The Bank of the United States was no more. As we have already seen in the past, the end result of fiat currency and or fractional reserve banking is always the same - self-destruction and currency debasement.

April 2, 1792 - The Coinage Act of 1792 was passed which created the US Mint whose purpose was to manufacture gold and silver coins as/per the Constitution to be used as lawful money.

It is mistakenly believed that the coinage act of 1792 created a “gold dollar”. What the coinage act expressed was that “the money of account of the United States shall be expressed in dollars or units.” Originally these “units” were coins that contained 371.25 grains of pure silver. These units were referred to as a silver dollar. The coinage act of 1792 also set the relative value of gold to silver at fifteen-to-one. Congress then authorized the mint to produce gold coins called “Eagles”, and it stated that one eagle was equal in value to ten (10) silver coins or dollars. Now each silver dollar contained 371.25 grains of silver, ten silver coins would contain 3,712.5 grains, however, as the ratio of gold to silver was 15-1, the “Eagle” was worth 1/15th this amount, or 247.5 grains of fine gold. So what Congress actually did was to authorize the minting of a gold coin (Eagle) and set the value of the gold in that coin at fifteen times the value of the dollar.

The year of 1812 found America to be at war once again it the very senseless war of 1812, the main issue being the impressments of American sailors by Britain to assist in the war against Napoleonic France. Once again money was badly needed; but once again Congress did not want to raise taxes to get the needed funds, as the people would revolt against such acts. What was Congress to do? They would do what they have always done - turn to the bankers for help in raising the needed money. Murray Rothbard explains it as follows:

“The U.S. government encouraged an enormous expansion in the number of banks and in bank notes and deposits to purchase the growing war debt. These new and recklessly inflationary banks in the Middle Atlantic, Southern, and Western states, printed enormous quantities of new notes to purchase GOVERNMENT BONDS. The federal government then used these notes to purchase arms and manufactured goods in New England…

By August 1814, it became clear that the banks of the nation apart from New England could not pay in specie, that they were insolvent. Rather than allow the banks of the nation to fail, the governments, state and federal, decided in August 1814 to allow the banks to continue in business while refusing to redeem their obligations in specie. In other words, the banks were allowed to refuse to pay their solemn contractual obligations…

This general suspension was not only highly inflationary at the time; it set a precedent for all financial crises from then on. Whether the U.S. had a central bank or not, the banks were assured that if they inflated together and then got in trouble, government would bail them out.”

By the end of 1814 the government raised the debt from 45 million to $127 million, thus tripling the money supply in one year without any appreciable increase in the gross domestic product; - the result was the same as always - inflation and debasement of the currency which at this particular time in history caused the currency to loose two thirds of its purchasing power in one year - quite a feat of accomplishment. Depositors demanded gold in payment for their notes; the banks responded by closing their doors and hiring armed guards to protect them. As always, there was a lone voice crying in the wilderness, Thomas Jefferson stated:

“Although all the nations of Europe have tried and trodden every path of force and folly in a fruitless quest of the same object, yet we still expect to find in juggling tricks and banking dreams, that money can be made out of nothing, and in sufficient quantity to meet the expense of heavy war…

The toleration of banks of paper discount costs the United States one-half of their war taxes; or, in other words, doubles the expenses of every war….

The crisis, then, of the abuses of banking is arrived. The banks have pronounced their own sentence of death. Between two and three hundred millions of dollars of the promissory notes are in the hands of the people, for solid produce and property sold, and they the banks formally declare that they will not pay them….Paper was received on a belief that is was cash (gold), and such scenes are now to take place as will open the eyes of credulity and of insanity itself to the dangers of a paper medium abandoned to the discretion of avarice and of swindlers.

It is a wise rule never to borrow a dollar without laying a tax at the same instant for paying the interest annually and the principle within a given term…We shall consider ourselves unauthorized to saddle posterity with our debts, and morally bound to pay them ourselves.

The earth belongs to the living, not the dead…We may consider each generation as a distinct nation with a right to…bind themselves, but not the succeeding generation.

The modern theory of the perpetuation of debt has drenched the earth with blood, and crushed the inhabitants under burdens ever accumulating.”

Monetary chaos reigned supreme by the end of the war of 1812. How did our government deal with such a travesty? - After all, American citizens had deposited their gold and silver in the banks for safekeeping, in return they had accepted paper money as a receipt for their gold and silver, with the implicit understanding that their gold and silver could be redeemed at any time.

But once again the beast raises one of its ugly heads - the face of fractional reserve lending comes to view with all its vicious trappings. The banks had lent out much more than they had gold and silver on deposit, there was no way that they could ever pay off the claims of all their depositors if they came at once - hell they couldn’t even pay off a quarter of them at one time.

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• The FED's roots - CRASH_GURU, 02.03.2003, 15:00