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Title: Tracing the Fed’s Vital Role in the Decline of the US Dollar
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URL Source: http://dailyreckoning.com/
Published: Feb 6, 2011
Author: Eric Fry
Post Date: 2011-02-06 10:13:10 by Capitalist Eric
Keywords: None
Views: 13279
Comments: 16
In 1913, the Federal Reserve Act became law – granting sole authority to the Federal Reserve to “issue legal tender.” Armed with its new power and its good intentions, the Fed embarked on a 98-year process of currency debasement. That’s not what the Fed set out to do; it’s just what it did do. In the early days of the Federal Reserve, this monetary authority enjoyed the support of a gold standard. Few Americans doubted that the Fed’s new greenbacks would be as good as gold. As such, gold coinage and paper dollars intermingled effortlessly in the US economy for most of the Fed’s first two decades. But as the wheels of progress roared ahead, America’s “hard money” coinage disappeared and soft promises took its place – soft promises and lots of chatter about hard money. As it turns out, chattering about hard money does not preserve wealth as well as hard money itself. The purchasing power of a one dollar bill has plummeted more than 95% since the Federal Reserve first began printing its legal tender in 1914. Although the dollar’s epic decline began glacially, it has gathered luge-like momentum. The greenback’s value dropped only 50% during the first 33 years of the Fed’s stewardship – i.e. between 1913 and 1946. But the 1946 dollar would lose half its value in just 24 years, while the 1970 dollar would lose half its value in just nine years. The rate of decay slowed somewhat during the Volcker years, as the 1979 dollar did not lose half its value until 14 years later. Nevertheless, the dollar’s progression toward zero since 1913 feels more geometric than arithmetic. In 1914, the year the Federal Reserve began conjuring dollar bills into existence, 700,000 shimmering new $10 Indian Head Gold Eagles rolled out of the Philadelphia, San Francisco and Denver Mints. Once in the hands of a working stiff, each $10 coin would buy $10 worth of goods and services. Likewise, the Fed’s crisp, new McKinley $10 bill would also buy $10 worth of goods and services. Over the ensuing 98 years, a succession of Federal Reserve Chairmen labored to “preserve” the purchasing power of their McKinleys, Washingtons and Lincolns. The Gold Eagles had to take care of themselves. The results are in; the unprotected Gold Eagles flourished, while the “protected” Mckinleys withered. Based on its metal content, a 1914 $10 Indian Head Gold Eagle is worth $643.45. A 1914 $10 bill is still worth ten dollars. To examine this contrast from a slightly different perspective, consider the divergent paths of the two $50 bills pictured below. The first $50 bill is a 1913 “Gold Certificate,” issued directly by the US Treasury and fully convertible into gold. The second $50 bill was issued by the Federal Reserve in 1914 and was convertible into nothing. Both versions of this $50 bill circulated freely in American commerce. Any holder of the $50 Gold Certificate held title to 2.41896 troy oz. of Gold – at the fixed rate of $US20.67 per troy oz. These certificates could be redeemed at any bank or from the US Treasury itself at any time…until 1933, when FDR outlawed gold ownership. Notwithstanding this little nuance, let’s consider the plight of two hypothetical buddies from 1914. The first buddy, Caleb, stashes a $500 “rainy day” fund under the floorboards of his house – a roll of ten $50 Ulysses S. Grant dollar bills. The second buddy, Josiah, also stashes $500 under the floorboards – he walks into the neighborhood bank with ten $50 Ulysses S. Grant Gold Certificates and exchanges them for gold. Josiah then takes his gold and hides it under his floorboards. Both buddies forget about their hidden stashes. Eventually, let’s say 2010, the respective heirs of these two long-deceased buddies happen to conduct simultaneous renovations of their respective residences. Caleb’s heirs find the ten ancient $50 bills. “How quaint,” they think to themselves. Josiah’s heirs find $32,172 worth of gold! Thus, 98 years of history demonstrates conclusively that a blind monkey could have preserved the dollar’s purchasing power better than a Federal Reserve Chairman. Unfortunately, it’s tough to find a blind monkey who will take the job.
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#9. To: Capitalist Eric (#0)
(Edited)
The Fed has been a total failure. Not only have they debased the currency, they've created four of the largest economic downturns in the country's history. 35 years ago Hayek argued for a system of competing currencies. Implementing a system like that in 1975 would have been difficult. But it would be easy today since most transactions are electronic and not cash. It would work just as me using my credit or debt card to buy something in Germany, which then gets translated in dollars and deducted from my dollar denominated bank account. Most likely, private competition in the issuance of money would quickly evolve into a system were things are priced in terms of some commodity, like grains of gold. Governments want control of the money supply precisely so they can debase their currencies to pay off special interests with new dollar. We should deny them this power.
again, an argument absent any factual basis. The 13 worst recessions/depressions in U.S. history: http://247wallst.com/2010/09/09/the-13-worst-recessions-depressions-and-panics-in-american-history/ Panic of 1797 Depression of 1807 1815-1821 Depression Panic of 1837 Panic of 1857 Panic of 1873 Panic of 1893 Panic of 1907 Panic of 1920-21 Great Depression 1973-75 Recession Early 80's recession 2008-09 recession The federal reserve was created in 1913, 7 of the 13 worst panics/recessions happened before it's creation. You need to remember that the Reserve was created as a result of all those panics that took place in the late 1800's and early 1900's, particularly the panic of 1907 which saw a 50% decline in the stock market and a near collapse of the U.S. banking industry.
The Fed Reserve was not the first central bank in the United States. In fact, the First Bank of the United States operated from 1791 to 1811, was chartered by Congress in 1791, with George Washington signing the charter. Several founding fathers bitterly opposed the Bank. Thomas Jefferson saw it as an engine for speculation, financial manipulation, and corruption. en.wikipedia.org/wiki/His...king_in_the_United_States This nation has had central banking/fractional reserve banking on and off over its history, so to state that the Fed Reserve wasn't responsible for say, the Panic of 1797, might be factually correct, but many, including me, argue that the same systems of central banking/fractional reserve banking were. The Fed Reserve is simply the latest incarnation of central banking in the US.
Fair enough, but as you note we lacked a centralized system during the panics of the late 1800's which led to demand for the Fed. I still argue that Gramm-Leach-Bliley was one of the root causes of the 2008 melt-down. Compare panics/recessions from Glass-Steagal to GLB in 2000.
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#10. To: jwpegler (#9)
The Fed has been a total failure. Not only have they debased the currency, they've created four of the largest economic downturns in the country's history.
#11. To: go65 (#10)
(Edited)
again, an argument absent any factual basis.
#16. To: We The People (#11)
This nation has had central banking/fractional reserve banking on and off over its history, so to state that the Fed Reserve wasn't responsible for say, the Panic of 1797, might be factually correct, but many, including me, argue that the same systems of central banking/fractional reserve banking were.
Replies to Comment # 16.
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