100 Years Ago: Why Bankers Created the Fed

The Mises Daily ^ | 12/23/2013 | Christopher Westley

[LS]

Consider it repeated (and true)

[BfloGuy]

it's really the dishonesty at fault, not the system, per se

Of course, it is. But a system which separates us by hundreds or thousands of miles from our representatives is one to always be suspicious of.

[BfloGuy]

But here we get into whether we want the GOZ currency actually to have ounces of gold sitting in a vault, enough to back every paper or electronic ounce.

If we do want that “backing” gold in a vault, at today’s dollar price of gold, there is nowhere near enough gold available to the US Treasury to back the GOZ currency that would translate to the USD that is now in paper or electronic form.

Though I prefer to be a purist, partial backing would be better than none. It is the ability to exchange dollars for gold when one fears that too much paper currency is being issued that enforces the gold standard.

I understand that isn't a perfect system and, really, I've no interest tonight in getting into a discussing of 100% reserve vs. fractional reserve banking. It can be fascinating, but we're so far down the inflation curve that fractional reserve would serve us well.

[Toddsterpatriot]

Love those fake numbers!

[Toddsterpatriot]

Try an inflation graph from 1913 to 2012 and compare it from 1791 to 1912.People will be horrified!

yup pretty much a straight line until 1912.

LOL! The up and down swings were much, much worse before 1912.

[plainshame]

You must have been looking at the wrong graph that a drunk drew then.

[plainshame]

http://www.davemanuel.com/inflation-calculator.php

This may help you out!

[PieterCasparzen]

Though I prefer to be a purist, partial backing would be better than none. It is the ability to exchange dollars for gold when one fears that too much paper currency is being issued that enforces the gold standard.

One can always exchange dollars by buying something.

People exchanging dollars for gold won't put any pressure on the financial elites when they create too many dollars. The elites control both dollar creation and the gold market, and they can invest in either at any time - and in advance of market moves. To wit, Soros was into gold prior to the run-up and exited just before the peak, when the retail customer was being whipped up into a frenzy of gold buying. Of course, he's just one, there certainly are many others that are tied in closely with new world order.

A gold or other precious metal standard does nothing to prevent money creation of such a large scale that it causes inflation. This is because those in control who desire to create more money will simply reduce the purity of the metal used for backing. It actually happened to the Spanish empire and was written about contemporaneously by Juan de Mariana. Strangely, economists of the Austrian school have written about this and are quite well aware of it. They obviously then know that a "gold standard" is no guard against excessive money printing.

One of de Mariana's works, "A Treatise on the Alteration of Money", is available online as a downloadable PDF...

"The Political Economy of Juan de Mariana" is available for free as a downloadable PDF from google books (you just have to click on the "gear" on the far top right, under the sign in button to see the option to download the PDF. You might have to allow cookies, at least temporarily, I'm not sure). It appears to have be republished by the Ludwig Von Mises Institute in 2008.

Corrupt financial elites are the source of continual problems, changing currencies won't affect that situation.

[Toddsterpatriot]

Thanks, but I already know that we had wide price swings, up and down, before the Fed was created.

[plainshame]

LOL!Go study!

[Toddsterpatriot]

http://www.ritholtz.com/blog/wp-content/uploads/2013/08/2.jpg

LOL! You first.

[expat_panama]

Try an inflation graph from 1913 to 2012 and compare it from 1791 to 1912.People will be horrified!

yup pretty much a straight line until 1912.

http://www.ritholtz.com/blog/wp-content/uploads/2013/08/2.jpg

Ritholtz got a few things right with his graph--

--but I got two problems with it.  One is that when he got his numbers from http://www.measuringworth.com/uscpi/, he left out from 1775 to 1791 which included the wildest swings.  The other is that people that know how to use money are more concerned with what prices will be next year than what they'll be in the next century --they want to pay off loans and feed their families (duh!).  Here's the same graph corrected to show all years and with the emphasis on purchasing power:

[khelus]

Re:



That is what they call “stability”

Try an inflation graph from 1913 to 2012 and compare it from 1791 to 1912.People will be horrified

I found two more interesting charts for you both.

[Toddsterpatriot]

Prices up 11% one year and down 10% the next give an average change of 0%. Would that be okay?

[expat_panama]

Prices up 11% one year and down 10% the next give an average change of 0%. Would that be okay?

There are people who've never tried to earn a living in the real world who actually think the wild fluctuations over months doesn't matter, and that the change from one century to the next does.  But even the long term cpi change didn't begin until 1933 when gold certificates were recalled and the FOMC took over.  We all know that this was the big change that put paid to the gold insanity, but not as many people are familiar with how the employment picture changed after 1933:

[plainshame]

The US dollar has lost 95.8% of it’s value since 1913.Math doesn’t lie.

[BfloGuy]

One can always exchange dollars by buying something.

That is beside the point.

Under the classical gold system, banks held their reserves in gold. When dollar-users suspected that too many had been issued, they could present their dollars at the teller's window and receive their equivalent in gold.

This had the effect of drawing down the bank's reserves thus decreasing their ability to pyramid loans from it and also served as a warning to the bank's officers that the public was growing skeptical of their performance.

This was the crucial component to the gold standard's working as well as it did. The ersatz gold standards adopted in Europe after WWI did not allow citizens the ability to exchange their currency for gold and failed miserably.

To this day, many still blame the gold standard for the Depression in Europe but it really wasn't one.

This is because those in control who desire to create more money will simply reduce the purity of the metal used for backing.

Another reason for gold as currency. Tampering with its purity is very easy to determine. That kings got away with it several centuries ago is a testament only to the lack of education and economic understanding of their subjects.

Corrupt financial elites are the source of continual problems, changing currencies won't affect that situation.

No monetary system can work to the benefit of the individual if his leaders are corrupt. There are some who are not. If one of those someday gains power, I hope he will push to reinstate hard money for the reasons I've stated.

[khelus]

The US dollar has lost 95.8% of it’s value since 1913.Math doesn’t lie.

Facts are such inconvenient things they are to be avoided both by Al Gore and those who have swallowed global communism's faux conservative message about 'free trade' and the 'stability' brought about by the Fed.

[PieterCasparzen]

One can always exchange dollars by buying something.

That is beside the point.

Under the classical gold system, banks held their reserves in gold. When dollar-users suspected that too many had been issued, they could present their dollars at the teller's window and receive their equivalent in gold.

There's not enough gold to make that possible any more. Let alone the fact that modern banks have enough difficulty coming up with cash when withdrawals are made. Fractional reserve introduces the risk of not being able to meet withdrawal requests on demand deposit accounts - but it allows the banks to use demand deposits as leverage (i.e., they are investing part of them and generating profits) so the practice was instituted by our banking friends despite the risks of bank insolvency. Somewhere around 2,000 banks have failed in the past few years, and the top 10 or so - one would think the strongest - received bailout loans from the government. Notice how it was not the Federal Reserve that bailed out the banks in its own Federal Reserve System, it was the taxpayer, via the Treasury. Requiring banks to keep gold as reserves would only complicate and exacerbate all our problems. If there was truly a popular demand for redeemable gold certificates - banks would be offering them. Then again, they'd be competing with all the existing sellers of gold and gold funds, and they'd be exposing themselves to the risk of fluctuations in the price of gold.

This had the effect of drawing down the bank's reserves thus decreasing their ability to pyramid loans from it and also served as a warning to the bank's officers that the public was growing skeptical of their performance.

"pyramid" is not an accounting term. I assume you mean use the same gold that "backs" the private money issued as collateral to borrow. That gold would already pledged as collateral to "back" the "private money", so the same gold would be pledged twice as collateral, which is fraudulent.

Perhaps you're describing a "fractional-reserve" banking where the reserves are held in gold. Again, if the price of gold drops, additional physical gold would have to be posted to the reserve. This would be simply introducing another variable in the banking business model, one that would add risk while doing very little to improve the either real or perceived solvency of banks.

This was the crucial component to the gold standard's working as well as it did.

Today we tend to think that the "old days", the glory days of, say, the 1800's were economic "smooth sailing" due to the gold standard, or at least inflation was very low and very consistent. Neither of these is true, they were ecnomoically chaotic times, due mostly to the machinations of financial elites.

This is because those in control who desire to create more money will simply reduce the purity of the metal used for backing.

Another reason for gold as currency. Tampering with its purity is very easy to determine. That kings got away with it several centuries ago is a testament only to the lack of education and economic understanding of their subjects.

I'm not talking about tampering, I'm talking about official government policy, i.e., a dictate that the currency is being devalued. The whole US government right now issues all sorts of dictates that are forced on the citizens of the US, some with popular political support after propagandizing, others they just shove down their throat by issuing policy changes and cue the news media to NOT report the changes. A few people in the know may howl with objections - but these changes are simply forced into law. Subjects or citizens, the public is, for the most part, stuck with its ruling elites and is ruled by them. And usually when they finally have "had enough" and there is a revolution, the elites are 10 steps ahead of them and have their operatives well-placed within its leadership.

Corrupt financial elites are the source of continual problems, changing currencies won't affect that situation.

No monetary system can work to the benefit of the individual if his leaders are corrupt. There are some who are not.

A single politician, i.e., 1 President, working against the Congress can't do much. Congress has to be in on the plan at least enough to get bills passed, the Judiciary needs to uphold the laws made. There needs to be quite a bit of popular support or Congress and the President won't do squat.

In truth, the citizenry is pitted against the ruling financial elites who run education, the news and entertainment media, the capital markets, the foundations, the intelligence agency leadership, Congress, the Executive Branch leadership (spans Presidents, a la Zbigniew Brzezinski, "advising" from Carter - and still at it), etc., and thus exert tremendous control behind the scenes (since the major news networks refuse to mention this corruption).

The ruling financial elites, through their foundations and lobbying organizations (both left and right), are the ones that "craft" legislation.