by Ben Hewitt
Which is to say, until we fix our relationship to money, we will fix very little else.
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12 So now you know why maple syrup typically fetches $50 or more per gallon; although modern sugaring technology has made the process less labor intensive, it still consumes copious amounts of time and energy.
13 Somewhat less famously, he also said, “If money is your hope for independence you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience, and ability.”
14 If for some reason you find yourself drawn to the history and byzantine particulars of US monetary policy, I am happy to recommend a trio of books that address the subject in detail: The Web of Debt, by Ellen Hodgson Brown; Debt: The First 5,000 Years, by David Graeber; and The Lost Science of Money, by Stephen Zarlenga. All three are highly readable, or at least as readable as monetary policy writing is likely to ever get.
15 Of course, there is a middle ground, whereby you have neither money, nor debt. But given that most of us use money to secure the essentials of our day-today existence, it’s pretty hard to exist in these conditions: We need to either accumulate money or go into debt to procure necessities.
16 Okay, so maybe 10 percent of it does, assuming the bank is abiding by the regulations governing its mandated reserves, which is itself a fairly large assumption.
17 Actually, this is not strictly true: If the lending institution recycled interest income back into the economy via spending, it is conceivably possible that paid loan interest could be made available to be earned by borrowers, thus enabling them to repay future loans. But most financial institutions (not to mention most individuals and corporations) don’t recycle their profits; they invest them, which only exacerbates the situation, since those investments seek a monetary gain.
18 In fact, contemporary construction materials are increasingly made of nonrenewable resources. Vinyl siding has replaced cedar clapboards; vinyl flooring often stands in place of wood floors. Some builders even use plastic lumber.
19 The exacerbation of income inequality based on inflating money supply is primarily due to the fact that most wealthy people invest in ways that increase their financial wealth faster than the rate of inflation. Meanwhile, those in the lower income tiers simply don’t have the assets or the investing savvy to do anything but hang on by the skin of their teeth.
20 Not to get all biblical on you again, but this might explain why in Matthew 19:23 Jesus told his disciples, “I tell you the truth, it is hard for a rich man to enter the kingdom of heaven.”
[ CHAPTER SEVEN ]
IN WHICH I GO FOR THE GOLD.
TO UNDERSTAND how it was that I came to find myself in the dim confines of a second-story apartment in the small city of Manchester, New Hampshire, watching an unemployed middle-aged man legally create money, or at least, something that he claimed was money, and intended to distribute as such, it will help to have a little background.
And although that background by necessity reaches hundreds of years into the past, I will begin with the date September 13, 2011, which is the day Republican congressman Ron Paul took a respite from his bid to earn the GOP presidential nomination so that he might preside over a legislative hearing titled “Road Map to Sound Money.” Paul is a longtime student of monetary policy and an advocate for a return to precious metals–based currency; indeed, he is the only national political figure to speak on these issues in public with any frequency or passion. He is also chairman of the Domestic Monetary Policy and Technology Subcommittee, and, with his withering criticism of the Federal Reserve, a longtime thorn in the side of Federal Reserve Chairman Ben Bernanke.
Congressman Paul has a tendency to speak in a tone of mild surprise, but when he talks about monetary policy, his ire toward the status quo seems to ratchet things up a notch or two, and his tone becomes one of reserved, professorial concern. He began the hearing this way:
The monetary issue has been an issue that I have been fascinated with and interested in for a long time. I became much more aware of the significance of this issue back in August of 1971, with the breakdown of the Bretton Woods Agreement. At that time I was convinced—and remain convinced—that we have ushered in a special age that probably did not exist, ah, in the same fashion ever before. And we now have been living for 4 decades with a total fiat world currency, and it has created a lot of problems for us. We as a congress have lived way beyond our means because the people of this country wanted us to live beyond our means. And the monetary issue of course is very significant because it actually facilitates the spending. Without the type of system of money that we have today, there would have been a limitation on the massive expansion of size of government, spending, taxes, debt, and the crisis that we’re facing right now. But few are even thinking about monetary policy as a significant contributor to our economic problems we have today.
The good congressman continued in this manner for another minute or two, making brief swipes at the Federal Reserve and paper money, before he lowered the boom:
Many of us have been thinking about this for many, many years (but) things could move rapidly. Currency destructions—the end of currencies—sometimes move much quicker than everybody dreams that it could. So a major crisis could come. It could come next month or next year or in a few years. To me, there’s no guarantee that we have 5 or 10 years to keep studying this.
To understand Ron Paul’s preamble, we need to talk a bit more about the evolution of America’s monetary system and the nature of money itself. As you will see, this is not an uncomplicated topic, nor is it one that lends itself to being encapsulated within the context of a single chapter; indeed, entire books have been written about money and the workings of the system that controls its creation and distribution, and even those who have dedicated their lives to studying the subject admit that full comprehension often eludes them.
But that’s okay; our purpose here is simply to understand, in fairly broad strokes, how we have come to this place, how money’s role in our society has changed, and why it is that Ron Paul feels a sense of urgency when speaking of contemporary monetary policy.
When we consider that money in one form or another has existed since at least 5000 BC, it’s fascinating to realize that our current monetary-related crises, as sweeping and historic as they are, appear as but a mere speck along the arc of humanity’s relationship to money. Rather than begin at the beginning, if only because the beginning exists at a point so far in the rearview mirror of monetary history that it has little bearing on the issues at hand, let us move forward along this arc, to a point marked by the latter years of the 18th century. Specifically, let’s begin with the Secretary of the Treasury Alexander Hamilton’s Coinage Act of 1792, also known as “An Act establishing a Mint and regulating the Coins of the United States.” True to its title, the Coinage Act established the United States Mint and oversaw production and distribution of the national currency.
Quality control and general veracity were particularly important because, at the time, a dollar was expected to embody a rather exacting unit of measure. It was to be a coin minted of 24.1 grams of pure 371.25-grain silver. This was not some arbitrary number that had come to Hamilton in fugue state; a precedent had been set by the Spanish milled dollar, often referred to as “pieces of eight,” so named because these coins were customarily divided into eighths to make smaller denominations called “bits.” Before—and for some time after—United States independence in 1776, pieces of eight were the prevailing currency, and they were minted throughout the colonies at a measure of—you guessed it—24.1 grams of pure silver per dollar.
Now, it just so happens that only a few years before the enactment of the Coinage Act of 1792, a wee document known as the United States Constitution was adopted. This is important because although the Constitution does not directly put forth a standard for the nation’s currency, it does at least mention money twice. The first is in relation to the slave tax, whi
ch of course has long since been abandoned. The second is in relation to the Seventh Amendment, which states: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of a trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.”
You may be wondering why this matters, and to be honest, to many people it doesn’t seem to matter very much at all. But to Ron Paul and other sound money advocates, it is the foundation for their contention that not only is the contemporary Federal Reserve Note doomed to worthlessness, it’s downright unconstitutional, too. How so? Well, if the dollar mentioned in the Constitution was known to consist of 24.1 grams of pure silver, and only such dollars were considered valid throughout this foundling nation, then naturally the only dollar that could forevermore be considered in keeping with the Constitution was one that measured precisely 24.1 grams of 371.25-grain silver.
Now, let’s take into account the fact that although the dollar was precisely defined in terms of a certain silver measurement, larger denominations were minted in gold, based on a silver-to-gold ratio of 15:1. In other words, 15 ounces of silver was the equivalent of a single ounce of gold, and this was convenient because carrying around a couple of pounds of silver in the pockets of your woolen knickers was absolute hell on the lower back. But a funny thing started happening: The value of the yellow metal began to rise, and gold coins were being melted down almost as fast as they could be minted, since their weighed value was greater than their face value.
Under these circumstances, it did not take long for the dollar to deviate from its Constitutional roots. The first deviation of note occurred with the Coinage Act of 1834, whereby the 15:1 silver-to-gold ratio was declared obsolete, and a new ratio, reflecting gold’s increased value, was set at 16:1. In effect, this was the first orchestrated devaluation of the US dollar, because whereas previous dollars had been backed by 1.6 ounces of gold, the new ratio meant that all future dollars would be backed by only 1.5 ounces of gold. In other words, on a weighed-value basis, the new dollar was worth 6 percent less than its predecessor.
The next devaluation was quick to come. In 1853, the weights of all US silver coins, with the notable exception of the one dollar coin, were reduced (the dime, for instance, dropped from 2.67 to 2.49 grams of silver). The not-exactly-surprising reaction is that people began to shun the devalued silver medallions, and the US currency became, effectively, one that was both backed by and minted from gold.
This worked just dandy for a time. Eight years, to be exact. Then came the Civil War, and the United States found itself in a spot of bother, financially speaking. The problem was simple: Conflict is not a cheap date. It demands a steady flow of cash to pay, feed, clothe, and arm soldiers. But with a gold-backed money supply, your available funds are limited to a fixed quantity of metal. Sure, you can mine more, but no matter how many shovels you stick into the ground, you’re unlikely to uncover gold at a rate greater than a war’s capacity to spend it. True, you could simply revalue gold, but then the last thing you need in the midst of an all-consuming war is a massive currency revaluation. You can see the rub, can’t you?
Now, one of the few absolute truths of monetary policy is that governments tend to make major shifts at times of crisis, and a nation standing on the brink of bankruptcy while mired in civil war is generally considered to be in crisis. It was rapidly decided that what was needed was a bit of financial innovation. This is a term we have come to associate with the sort of barely concealed sleight of hand that accounts for much of our contemporary economic malaise, but the trickery relating to the 1861 issuance of the US Demand Note seems almost quaint in comparison, having to do with the decision made by our nation’s founding fathers that the government should not be granted the right to issue banknotes. This, one would assume, ruled out federal printing and distribution of paper currency.
One would assume wrong, for while the US government didn’t have the right to print currency, it had been granted the capacity to issue short-term debt, in the form of Treasury Notes. These had first been utilized during the War of 1812 and sporadically thereafter, as conditions warranted. One of these conditions was the great financial panic of 1837, which resulted from a rampant speculation in real estate and kicked off a deflationary depression that lasted for 5 years. The issuance of Treasury Notes was widely credited for, at least in part, pulling our nation out of the doldrums.
The financial malaise generated by the US Civil War was more grinding than acute, but it nonetheless provided the motivation to seek new ways to bolster the money supply. As such, it didn’t take long before a loophole was recognized (the truly quaint part, I suppose, is that anyone thought a loophole necessary) and Demand Notes were issued under the framework of Treasury Notes. In essence, they were Treasury Notes, though they bore no interest and were issued in minor denominations of $5, $10, and $20. They also differed from previous notes in that the Treasury promised to pay “specie” (on demand) for the Demand Notes. In other words, one could redeem his or her Demand Notes for gold or silver coinage.
Unsurprisingly, the public’s initial reaction—rooted in the suspicion that a piece of paper claiming to be the equivalent of a given allocation of gold or silver was not quite the same as the actual gold or silver—was tepid at best. A bird in the hand is worth two in the bush, and all that. Therefore, those who accepted the notes at all typically did so at a significant discount. This de facto devaluation forced Secretary of the Treasury Salmon P. Chase to embark on an energetic public relations campaign. He first agreed to accept his salary in Demand Notes and then, perhaps realizing that he’d effectively signed up for a considerable pay cut, issued a statement assuring the nation that the notes would be “at all times convertible into coin at the option of the holder” and that “they must always be equivalent to gold, and often and for many purposes more convenient and valuable.”
Chase’s words and actions propped up the notes for about 4 months before a shortage of gold and silver coinage forced banks to suspend specie payment. This had the predictable consequence of immediately eroding confidence in Demand Notes, a rather unsettling situation to which Congress responded by passing the Legal Tender Act of 1862. This laid the groundwork for the printing and distribution of the United States Note, a paper currency that carried the following promise: “This Note is Legal Tender for All Debts Public and Private Except Duties On Imports And Interest On The Public Debt; And Is Redeemable In Payment Of All Loans Made To The United States.”
One might reasonably ask: Why does all of this matter? This is a question that could rightly be answered in numerous ways, at length. But the immediate answer I believe to be most crucial to understanding the current state of American monetary policy is that the United States Note, which was really just a modified version of the Demand Note, was America’s first nationally distributed fiat currency.
As it relates to money and monetary policy, fiat refers to a currency that holds value only because a government says so. “Let it be done,” said the leader, and it was done. That’s the sort of value I’m talking about, although it should be noted that the United States Note was, for a time, backstopped by gold. Until 1933, you could actually redeem your dollars for gold at any bank, at the rate of $20.67 per ounce. In other words, although few people actually did commerce in precious metals, the paper dollar essentially served as a deposit slip for gold. It was still fiat in the sense that it depended on a collective faith that it would and should be granted value equivalent to gold, but that faith was supported by the knowledge that a physical asset actually existed.
This exchange mechanism was extinguished in 1933 by President Franklin Delano Roosevelt, with the signing of Executive Order 6102, which expressly prohibited private ownership of gold in excess of 5 ounces (remember, at the time the price of gold was fixed at $20.67 per ounce, so we’re talking about $100 or so). This was yet another form o
f “financial innovation” at a time of economic malaise—in this case, the Great Depression—which Roosevelt sought to remedy by raising the price of gold to $35 per ounce. This had the effect of devaluing the dollar by nearly half, and it meant that the government’s gold holdings were suddenly convertible to nearly twice as many dollars. The result? With a few strokes of his pen Roosevelt had generated a handsome $2.8 billion in “profit.” Most of this sudden windfall was deposited into the newly created Exchange Stabilization Fund, intended to influence foreign exchange markets for the purpose of stabilizing the woozy dollar.
Clearly, there was never any serious intent of prosecuting American citizens for gold ownership and subjecting them to the maximum penalty of a $10,000 fine, 10 years in prison or, if someone was having a really bad day, both. In fact, over the 4 decades the law was in effect (it was repealed in 1974), only one person was indicted for refusing to surrender his gold; the charges were ultimately dropped, but the government’s right to confiscate the gold was upheld.
Of course, it is no coincidence that 6102 was signed at the zenith of the Great Depression; the country was in dire straits and Roosevelt had his New Deal to finance. By ending the exchange-ability of dollars for gold, Roosevelt had essentially removed all accountability from the currency distribution process and paved the way for unencumbered printing. Sure, the dollar was still pegged to gold at least in theory, but given that gold ownership in excess of 5 ounces was illegal, it was at best a symbolic connection.
Not surprisingly, there was a significant downside to Roosevelt’s “innovation,” which amounted to little more than a 41 percent devaluation of the dollar and an immediate increase in the US money supply. The implications were not confined to the United States, because the depreciated US currency was an impediment to other countries that wished to export goods to the preeminent consumer nation. So they did the only obvious thing: They devalued their currencies, too, while at the same time restricting much of their trade to nations that operated under a shared currency. To put it mildly, this was not particularly good for the global economy.
