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More on the Federal Reserve

Last week we began discussing whether or not the Federal Reserve Bank was working in our best interests -- and not in the best interests of government and big business.

Let’s move on in our history lesson to the year 1933. The first major policy by Franklin D. Roosevelt was this: hand in your gold.

President Roosevelt had just signed a law stipulating that if you didn’t hand in your gold, you would go to jail and be fined an amount that in today’s dollars would equal a quarter of a million dollars. The dollar was still backed by gold but you couldn’t own any yourself. He also did away with gold certificates. If you owned gold or gold certificates, you were forced to turn them in and were then handed a Federal Reserve note—paper money. Once FDR believed that he had retrieved all the gold, FDR raised the price of gold from $20 to $32. Until then, it took $20 to buy an ounce of gold; FDR’s policy raised the cost of gold to $32 an ounce. That is a 40% devaluation in our currency.

The reason this is important is because the monetary system is to the economy what our cardiovascular system is to our bodies. How are you going to feel if your doctor comes in during a routine appointment and orders a technician to draw 40% of your blood? Do you think you’ll feel well? No, you’re going to be in very bad physical shape, as was the U.S. economy after FDR’s policies drained the economy of its lifeblood. Hence, the Depression was the result of a series of incredibly stupid monetary and fiscal policy decisions brought on by the Fed, Hoover, FDR, and other statist leaders.

By 1937 the winds of war were blowing again. Remember that all wars are financed through inflation. To pay for the costs of the war, the Federal Reserve, in partnership with the Federal Government and private banks, printed more money because this was a lot easier than taxing or limiting unnecessary spending.

The Glass-Steagall Act had recently been passed, allowing government bonds to back our money. A government bond is an IOU that is the same as if you were to show up at your bank with all your debts and say, “I’d like to use all this as collateral for a loan.” When the government did it, the advisor, John Maynard Keynes, told the government that not one in a million would know what they were doing and to go ahead with it.

But even Keynes knew that a monetary system needed to have some credibility so he talked the government leaders into keeping the dollar backed with 25% gold.

The Glass-Steagall Act allowed the monetization of debt. This resulted in the monetary system multiplying the money supply many times over. World War II was paid for by inflation and this same process is still going on today.

After World War II, Eisenhower became President and he wasn’t a politician. The politicians asked him to “spend, spend, spend.” When Eisenhower found out that the politicians had no money, he replied “veto, veto, veto.” Ike created balanced budgets and surpluses that were used to reduce the national debt.

Following Eisenhower as president was an economist, John F. Kennedy. The first thing he did was cut taxes. During his reign, the country went from one car on every block to two cars in every garage, because good economic policy leads to wealth creation. After the assassination, the left-leaning liberals took over again and it was back to spend, spend, spend with money they didn’t have.

President Johnson’s spending caused one of the gold reserve requirements to be eliminated. This was about the same time that silver coins disappeared from our currency. Inflation had caused the silver metal to be worth more than the nominal value of the coin, so smart investors would accumulate silver coins, melt them, and sell the silver at a profit.

I remember President Johnson chastising Americans for hoarding silver coins, but it was his policies that had caused the inflation and the subsequent fiasco. By 1967, the tax-and-spend guns and butter programs had grown to the point where the government needed more money. Increase taxes? No! They just printed more paper money! By 1967 the federal budget had grown to $167 billion. So instead of raising taxes, they eliminated the last gold reserve requirement, thus freeing themselves to print as much money as they wanted.

If you were a student of money and its history, you would have sold anything involving money such as bonds, and you would have begun to hedge with gold-related assets, plus diversifying into ownership-related investments. For history promised that more rapid inflation (devaluation of the currency) was around the corner.

In 1971 Nixon was forced to slam the gold window on the world, meaning the dollar was no longer backed by gold. If you or I did this, it would be bankruptcy. The government did it with a lot of pomp and circumstance and a nice press conference.

Nixon announced that gold would now no longer back the dollar, would now be a commodity, and would probably drop to its historic metallic value of $6 an ounce.

Looking at the history of gold, an ounce of gold would have bought you a fine silk tunic and a pair of sandals during the height of the Roman Empire. In the early 1900s, an ounce of gold would have bought you a fine men’s suit and a pair of shoes. Today an ounce of gold still buys you a decent quality men’s suit, so from a historical point of view, gold is still a cheap and prudent way to protect your purchasing power.

Once the gold window was slammed in 1971, the dollar became pure fiat (Latin for government decree). History screams to us that when money goes pure paper, get out. Don’t have any investments that are a claim of future paper money. Yet most people still consider these investments to be safe, a perception completely opposite from reality.

During their administrations, Johnson and Nixon opened the floodgates of inflation. As the 1970s progressed, inflation grew. Then Jimmy Carter came along and nearly destroyed the economy. By 1980, the printing presses were hot and inflation was accelerating through 18% while the dollar was collapsing world wide. By January of 1980, people were throwing their dollars away to a tune of $850 for one ounce of gold. Whatever happened to those smart people who predicted it would go to $6 an ounce? The dollar was collapsing because President Carter had no clue how to run an economy.

In three days during the spring of 1980, the Monetary Control Act was passed, signed by President Carter on the fourth day, allowing all state, local, and foreign debt to be good collateral for our money. Now think about that. In other words, the debt of the whole world has now been added to things that can be monetized, allowing all government and foreign government debt to back your dollars.

To put this in perspective, if you were the government you could take your mortgage to the bank and say, “I want to borrow against this because it’s worth something.” This continues to go on because most citizens don’t understand this. What do we do about it? We start by not having any investments that are in any way tied to the dollar because today the dollar isn’t backed by anything. History shows that the dollar will collapse, either slowly or in a panic like the October 1987 panic that almost brought the “house of cards” down.

The period between 1933 and 1980 set the stage for the changes needed to bring our economy back and keep a rigorous review of the Fed Reserve. We're still not out of the woods yet, but things have gotten better during the past 25 years. More on that next week.

Published Jun 18 2007, 08:14 PM by moneycoach
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