End the Fed


On Monday I mentioned that the Federal Reserve “virtually single-handedly eliminated the fortunes of nearly every citizen in this country and will likely lead to the bankruptcy of this country.” I will admit that this was a vague and damning accusation so I will briefly expand on this today.

Before I begin my own explanation, it is pertinent to explore the official charges of the Federal Reserve. As mentioned before, it was created during the Woodrow Wilson administration as the central bank for the United States. In similar fashion to the Post Office, the Fed is a quasi-governmental entity. The official purpose of the Fed was to make the economy more stable. As history has shown to those who desire to look, the Fed has anything but succeeded in its mission.

Throughout American history, there have been somewhere in the neighborhood of 47 recessions. Some economists will differ slightly in this number but it’s a pretty good ballpark figure. Since the Fed was conceived in 1913 we have had 19 recessions. One of these recessions was coined the Great Depression and another of these occurred during the Great Depression. Sort of like a bonus prize at the bottom of your cereal box.

Numerically, during the first 124 years (since 1789) America experienced an average of one recession every 4 years, 4 months. After the Fed came around and started tinkering with our monetary system in 1913, we experienced an average of one recession every 5 years, 1 month over the following 97 years. Not that great of a difference. We could argue over severity and duration and depth and flavor and any number of other qualities but these are all moot points. The real damage came with inflation (or deflation depending how you look at it).

Unfortunately, my computer took a dive a few weeks ago so I don’t currently have access to the nifty spreadsheet I created which conveniently lists approximate inflation/deflation statistics. So I’ll promise to get the actual numbers as soon as I can. In the meantime, one could draw a huge line in the sand at 1913 and completely ignore everything prior to that date. There was essentially very little overall inflation or deflation throughout this period since the U.S. Dollar was rigidly tied to gold. In other words, if you had $100 in 1800 it was still worth $100 in 1900.

Fast forward to 1933. President Roosevelt (remember that poster child from Monday?) effectively ended the gold standard. Through acts of Congress and Executive Orders, FDR suspended the gold standard so the treasury could print more money, revoked gold as legal tender for debts, and banned private ownership of gold coin and bullion. (Oddly enough, 1933 was also the year prohibition was ended. So now you could drink booze but you couldn’t own gold!) The government continued to claim a gold redemption value for the Dollar but it was really more of a political gesture than anything else.

In 1968 they abandoned the façade of a Dollar fixed to gold. The banks still privately traded at the official $35/oz. but the market prices continued to creep higher and higher. Finally in 1975 the gold standard was officially dropped. Gold at the time was selling for $100 per troy ounce. Immediately the price of gold shot through the roof, hitting almost $900 in 1980.

Ok! History lesson is over! I know that was painful but it was also extremely brief so please bear with me. Now we get to explore how the Fed destroys wealth.

Since nobody is really self-sufficient and barter is such a hassle, we utilize a common commodity (money) to facilitate trade. Throughout the history of the world the money of choice has been gold. Unfortunately, it gets rather exhausting to haul around a chest full of gold when you decide to go to the grocery store. Enter paper money.

Paper currency is extremely easy to carry and identify so it only seemed natural to utilize it. Unfortunately, paper is not really worth all that much in and of itself. The reason gold was used as money was due to its accepted value as something besides simply being a medium of exchange. So the gold standard was established which allowed a person to exchange a paper Dollar for an established quantity of gold. Voila, you have the gold standard.

The problem comes when the government just can’t seem to figure out how to turn the printer off. When the amount of gold stays equal but the quantity of paper money increases, there is not enough gold to redeem the paper so you devalue the currency (also known as currency deflation). Eventually, people will realize that you continue to print money because everyone seems to have more money. Prices will naturally tend to rise to compensate for the apparent increase in wealth and you get what economists now call inflation (or more properly price inflation).

So here is our current situation. Gold is currently trading around $1,100 per troy ounce. Unlike in our first century when $100 would still equal roughly $100, we have the Fed which has generously deflated our currency. Now the $100 we had in 1900 is roughly equal to $5,250. Although it seems like the Dollar (and thus wealth) has increased in value, it has not. In fact, just the opposite has occurred.

The Dollar has no value in and of itself so you cannot use it as the point of reference. Instead, we utilize something such as gold which can be said to always retain the same amount (or roughly so) of value. Looking at it this way, one troy ounce of gold cost $19.39 in 1800, $20.67 in 1900, $35 in 1934, $97.81 in 1973 and around $1,100 in 2010.

So unless you had your money (wealth) invested in gold, a nest egg today is worth about 1/10th what it would be prior to 1973 and about 1/50th its value in 1900. This would not have come about without the Federal Reserve.

Thus I stand by my claim: the Federal Reserve has virtually single-handedly eliminated the fortunes of nearly every citizen in this country and will likely lead to the bankruptcy of this country. (More on bankruptcy tomorrow.)
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