The FORGOTTEN History of Money in the U.S.

Since FR seems to be attracting more new folks seeking answers, might be time to post this old chestnut.

Gold, Gold, Gold!! Nothing bad happens with Gold!

No Recessions...(wait...that’s false)
No market crashes...(wait, that’s false too...)
No fractional reserve banking...(wait...false again...)
No inflation...(wrong again...)

I don't really care what the TOTUS script reader has to say. It's all moot; not only will each & every one of his handlers' agenda items fail, but he will (figuratively) preside over the actual reduction of the US budget.

The bottom line is that there isn't sufficient margin (ie asset inflation) to sustain the level of credit expansion necessary to continue driving (illusory) economic activity in the form of consumer spending. In other words, the FIRE economic model is DEAD. As a result, the tax receipts derived from income, sales, property & capital gains taxes necessary to support the welfare state are cratering.

In the near-term, as a result of slowing export demand & growing unemployment, both sovereign wealth funds (eg China) & domestic savers will greatly reduce, if not outright halt, their purchases of Treasuries. This will reach a point where the volume of debt sold will not even cover base-line operating deficits, much less finance the TOTUS fantasy budget (eg card check, health care, cap & trade, education, civilian force, etc).

And forget about printing money - after the People experience first-hand the immediate inflationary price spike effects of the Fed monetizing the debt via quantitative easing (QE), the Fed will be reigned in by Congress to prevent any further destruction of the $USD. (Because we ultimately need a steady, if weak, $USD to encourage foreign capital investment - assets [like factories], not debt.)

At this point, without the ability to either raise/access new credit via Treasury sales, nor print money by Fed QE, the Fedgov will have no choice but to make significant cut-backs so that expenditures meet revenues derived from actual hard-money tax receipts.

There is nothing the brain-fried crackhead nor his masters can do about this playing out. (The drug-addled -0- doesn't even have slightest clue as to what is transpiring. We are actually extremely fortunate that an affirmative action incompetent of his magnitude is the Left's token figurehead.) These course of events were set in motion decades ago and are now finally coming to their final fruition. Remember, socialism always fails! It does, it will, and it is actually in the process of doing so as we watch world events unfold.

Kick back and enjoy the show - just make sure you have food, firearms, family & friends in place to form your local support organization when the SHTF.

Fractional reserve banking would be illegal under a gold standard. If it weren’t, it wouldn’t be a gold standard.

What do you mean by no inflation? Monetary or price?

Ping

Good read. I discuss with friends and co-workers what the burgeoning debt, out of control consumer credit, and now the feds printing presses being fired up full steam means in the most simplest of terms.

With your permission, I would like to copy your article and distribute it to others

BTW....I still get a good laugh out of the term, “Teleprompter of the United States”

*Ping!*

Thanks.

Please share with everyone with the sense to grasp what it means. That’s why I keep posting it.

BTW, the world’s central bankers gathered recently to discuss, among other things, THE PROSPECT OF RETURNING TO A PRECIOUS METALS STANDARD!!

But we can be assured any such will be structured to benefit them and their buds.

Here’s Karl Denninger’s take on Fractional Reserve Banking:

http://market-ticker.org/archives/865-Reserve-Banking.html

Makes sense to me.

How is what he says impossible under a gold standard?

Good grief, HERE’S A FRIEND OF PAPER MONEY NOW! Didn’t think there were any left. They must have been put on the Endangered Species List.

While I admitted that gold ain’t PERFECT, it beats the living crap outta what’s going on now with the political fiat “money” system collapsing all about us.

A few things for you to read in your cage there at the National Zoo:

In early 1983, I wrote Senator Sam Nunn of Georgia
to ask about the redeemability of Federal Reserve
Notes. His reply arrived on March 11 and read (in
part) as posted below.

It would APPEAR that either:
1. Sam Nunn ACTUALLY gets it about what happens when man
(or certain men) play God with “money;”
2. Nunn DOESN’T get it — and some staffer sent this out
without actually READING it or running it by the boss (in
which case said staffer now works for the DC Sanitation
Department.
3. None of the above. Because nearly every American is an
economic illiterate, what possible harm could it do to send it?
In which case, you economic illiterates who read this will mutter
“So what?” and flip back to MTV.

In any event, for the edification of you non-economic illiterates
out there, here it is.

“Dear Richard:

Thank you for your letter requesting information on
redeemability of Federal Reserve Notes for lawful
money. I have enclosed information from the
Congressional Research Service that I hope will be of
assistance.”

The enclosure was 4 pages from something called
“The Gold Standard: Its history and record against
inflation. A Study prepared for the use of the
Subcommittee on Monetary and Fiscal Policy of the Joint
Economic Committee, Congress of The United States.” It
was printed September 18, 1981. I was sent only the
England and U.S. portions of the study. What they
revealed was most interesting. From the England study:
(Emphasis added)

“England has had 350 years of experience with
various forms of the gold standard. She first went on
the gold coin standard, de facto, in 1717. This was
done by Sir Isaac Newton, then Master of the Mint (and we all know what a dumb ass HE was). It
was done by pricing gold at the mint more favorably,
relative to silver, than in the marketplace. An Act of
Parliament in 1816 gave formal recognition to this
‘new’ monetary standard that had been operational for a
century in promoting England to a world power.

“Between 1797 and 1821, England temporarily
suspended the gold standard because of the economic
disruptions of the Napoleonic Wars. With no gold
backing to the currency, the supply of money had no
discipline except that imposed by the Board of
Governors of the Bank of England (analogous to our Fed
of today).

The result was that wholesale commodity prices shot up
nearly 50% in 4 years-a momentous inflation.

The ‘Bullion Committee’ was formed by parliament
to investigate. Their findings read in part as follows:

‘The suspension of cash payments has had the
effect of committing into the hands of the Directors of
the Bank of England, to be exercised by their sole
discretion the immediate charge of supplying the
country with that quantity of circulating medium which
exactly proportioned to the wants and occasions of
the Public. In the judgment of the Committee, that is
a trust which it is unreasonable to expect that the
Directors of the Bank of England should ever be able to
discharge. The most detailed knowledge of the actual
trade of the Country, combined with the profound
Science in all principles of Money and circulation,
would not allow any man or set of men to adjust, and
keep always adjusted, the right proportion of
circulating medium in a country to the wants of trade.’

“Gold convertibility of the currency was resumed
in 1821. It is a matter of record that wholesale
prices came back down immediately to the level
preceding the hiatus in the gold standard.

“England was again off the gold standard between
1919 and 1925. When she resumed gold convertibility it
was on a gold bullion standard where she remained until
1931, when she went off the gold standard altogether in
the midst of the Great Depression.”

Under the United States, we find the following:

“The long period of the gold standard in the
United States was not an economic nirvana. The most
severe inflationary period reaching completion under
the gold standard was from 1897 to 1920. But from
trough to peak, the average annual compound rate
was 5.4%—mild by present experience. And most of this
occurred from 1914 to 1920 when the European war and
its aftermath bore so heavily on the domestic economy.
If we look at the period between 1897 and 1914, the
average annual rate of inflation was 2.6% — enviable
from the perspective of today.”

http://www.freerepublic.com/focus/f-chat/2211758/posts

Fractional reserve banking would be illegal under a gold standard.

We had fractional reserve banking under the gold standard. Sorry.

after the People experience first-hand the immediate inflationary price spike effects of the Fed monetizing the debt via quantitative easing (QE)

Quantitative easing in an environment of debt-deflation and asset-deflation does not cause immediate inflationary price spikes. QE is still another form of pushing on a string, so the problem with QE is not that we get a sudden bout of unacceptable inflation - look at Japan, they did QE for a decade and got no inflaton at all, ever.

The problem (or risk) with QE is almost the opposite your underlying theme. The extra base money goes out there, long term interest rates get pulled down to ridiculous lows, the govt keeps running record-level deficits, but for a couple of years there is still no hyperinflation to get the torches and pitchforks marches on the capital. And then a couple of years later We find outselves in one of the following situations:
a) Inflation and devaluaton suddenly explodes, but long long after anyone any longer believes it was possible anymore. Poeple ar eunprepared for it,politicians are unprepared, and the federal budget is suddenly crushed. We do not have a case of this happening in modern history, and don't go by Weinmar of Zimbabwe, what they did was much different.
b) We continue in a long, prolonged deflationary slump for a decade or decades. This is what has happened to Japan, although they were in a much different situation - they started out a net exporters with very low levels of debt and high levels of savings, and their currency was not a world reserve currency.
c) Prob our current best case scenario right now - we struggle with 1+ recessions over about 4-5 years, like in the early 1980s - but not a hyper-inflationary one.

Be careful within simple comparisons to Zimbabwe. What we're doing has never been done before - at least not in this situation. We have no idea what will happen in 3-4 years, and the types of possibilities are very broad.

I know, which means it wasn’t really a true gold standard.

BTW - many people ask me how it's possible that the Fed can "print" without causing inflation. Here's how:

We all agree that the fractional reserve banking system fuels inflation. The Fed controls the monetary base, but it is the banking system that expands that base to make the much larger M1 and M2 and MZM measures of total money, without the Fed having to do a thing.

The corollary is that in a deflationary crisis, it is that same fractional reserve system that fuels deflation by slowing lending, increases insolvencies and lower intrest rates. At this point the Fed can create base money all it wants, but if banks don't lend, that doesn't reall put much money into spending to drive up prices. The formula MV=PQ shows that prices are a factor of both the quantity of moeny and of Velocity (the level at which that money is spent). This chart shows what I mean. Fed has already doubled the monetary base, and all it did was nudge it slightly above its trend:

That is why I say that the Fed can ease without us seeing "immediate" inflation... although what happens 2-5 years from now is a much much different story.

Actually, I agree with your analysis - I expect continued years of deflation. I should have been more clear when I referenced 'immediate price hikes', in that what I really meant was imported commodities (eg oil).

Overall, of course, in reaction to these cost increases, people/industry will drastically reduce consumption, thus further depressing economic activity and thereby fueling the downward cycle.

Where I do disagree with you is the public's reaction to QE. I took great interest in the AIG bonus diversion simply because it indicated that rage is building.

Some members in Congress have been doing their homework by reading Denninger, Mish, et al. They are becoming more informed and developing the confidence to take on the Fed. Ben is not god - even though he likes to bluff about being MOTU. There are plenty of other equally intelligent people who also understand the math who can counter every one of his prescriptions.

He'll get to do QE a few times, but after the first initial dislocations, you'll see sentiment turn against a private cabal directing US capital. That's why I'm confident QE will be halted and the country will reach a point where it accepts that the only way out is that we will collectively have to take our lumps.

Only until the $USD stabilizes will we begin to see net foreign investment directed towards productive capacity and a more balanced economy of savings, production & consumption.

He'll get to do QE a few times, but after the first initial dislocations, you'll see sentiment turn against a private cabal directing US capital. That's why I'm confident QE will be halted

Maybe. I think the American public can be distracted by bread and circuses and feigned outrage for a lot longer than is required to implement irrevesible policy (or at least policy that limits our outcomes and options in the future), and that our policians are more likely to try to score simplistic points than to make intelligent and difficult choices. And the sight of public protests and death threats against IAG employees for doing something that was explicitly sanctioned by all legislative and regulatory bodies, the sight of those same regulators with their fake outrage and show trials, the sight of congress using an economic emergency to ram through their favorite re-election schemes whiel calling it "stimulus", the sight of the media hyping up the emotional frenzy instead of focusing on substance (uh, anyone on TV want to talk a little about the deficits and about QE?), none of that inspires my confidence in our political system to deal with this appropriately.

Why does fractional reserve lending make the gold standard untrue?

How can you have a gold standard when the paper isn’t fully backed by gold? Is that not the point of a gold standard?