1913, the US Congress authorized the creation of the Federal Reserve.
Its mandate was limited, but it grew over time to become the central planner
of all things monetary. In 1933, President Roosevelt outlawed the
ownership of gold. In 1944, the soon-to-be-victorious allied powers
signed a treaty at Bretton Woods, agreeing to use the US dollar as if it were
gold. Their central banks would hold dollars and borrow dollars, and
pyramid credit in their own currencies on top of the dollar.
US dollar was redeemable by foreign central banks, and so this was
effectively a scheme for various currencies to have a fixed exchange rate
between each other and to gold. It, at least, had the virtue of
limiting credit expansion, as there was still this one tie to gold and hence
problem with fixing the price of one thing relative to another is that
whichever one is undervalued is hoarded and whichever is overvalued is
dumped. The US government set the price of gold too low, and so foreign
central banks were increasingly demanding delivery of gold.
the time President Nixon was in office, something had to be done. In
1971, he defaulted on the gold obligations of the US government. This
had the effect of severing gold from the monetary system, plunging us into
the worldwide regime of irredeemable paper money. One consequence was
that the exchange rates of the various paper currencies were allowed to
“float” against one another.
was the prescription of Milton Friedman, monetary quack. He actually
“If internal prices were as
flexible as exchange rates, it would make little economic difference whether
adjustments were brought about by changes in exchange rates or equivalent
changes in internal prices. But this condition is clearly not fulfilled. The
exchange rate is potentially flexible in the absence of administrative action
to freeze it. At least in the modern world, internal prices are highly
that’s why we have volatile foreign exchange markets today, because
Friedman and his followers wanted to compensate for labor law and other
regulation that make certain prices ratchet only upwards, but never
fraudulent, unworkable, and dishonest scheme of floating exchange rates
certainly did not fix the problem of wage and other price
inflexibility. It did cause several others.
side effect was to loot people’s savings and thereby teach them not to
save, because the word ”floating” is disingenuous. The
paper currencies all sink. There is no mechanism, nor desire on the
part of the central bank, to increase the value of the currency.
floating currency regime is a regime of sometimes-slower and sometimes-faster
currency debasement. Each government engages in a race to zero.
Sometimes one currency is sinking relative to the others, and sometimes
others are sinking relative to it. This is enormously destructive.
never-ending process of currency devaluation has a follow-on effect: reduced
investment. This of course reduces growth. This premise must be
taken to its logical conclusion.
as such, is not possible using irredeemable paper.
saving, the wage earner sets aside a portion of his wage; he consumes less
than he produces. His basic intent is to hoard this value until
he retires and needs to exchange it for food and other goods when he can no
longer work. It is advantageous to lend to a productive enterprise to
increase his quantity of money, but this is not essential to the concept.
The key is that he can carry value over time. Gold and silver do this,
but paper does not.
paper currency is a loan to the government. Unlike a productive
enterprise, government is not borrowing to increase production.
Government does not produce anything; it consumes. Government is
borrowing to consume with neither the intent nor the means to ever
repay. And therefore the “loan” is counterfeit
It will not be repaid.
and silver are positive values. One can hoard them, as one can hoard
any tangible commodity. Paper currency is a negative value. It is
debt. There is no way to “hoard” it, its value is always
falling, and in the end it will default to zero.
government’s paper scrip loses value gradually, and then
suddenly. We are in the gradual phase now. This phase will end
without much warning (other than permanent gold backwardation:
under irredeemable paper is perverted into speculation. People are
forced to crowd into one asset bubble after another. Those who blindly
follow always end up transferring wealth to those who lead. People who
bought houses between 2004 and 2008 in the USA still have not
recovered. At least those who deposited dollars into a bank account
have not lost as much, yet. When the markets finally become aware that
the banking deposits are backed by mortgages on homes which are worth 25% to
50% less than their mortgage values, bank depositors will lose more.
people will discover that they cannot save in terms of dollars (those who
don’t figure it out will be rendered economically irrelevant as their
wealth is removed from their hands). Savings is a necessary
prerequisite for investment. Investment is necessary for companies to
grow, to develop new technologies, products, and markets. Growth is
necessary to hire new workers.
existing companies achieve higher productivity of labor, and do not need as
many workers to perform the same work, they lay off unneeded people. In
a free market, the unemployed would quickly be hired by growing companies
that expand and develop new businesses. But today’s structurally
high unemployment can be traced back to Friedman’s quack prescription
(among other government interference).
the currency not only discourages savings, it also weakens businesses who
have to keep the currency on their balance sheet and who have to import some
of their inputs.
a currency loses value, then all who hold it incur a loss. It is not
possible to employ workers and run a business in a country without holding
significant amounts of its currency. Currency debasement therefore
imposes constant losses on enterprises that try to operate in such an
with the fact that imported supplies, ingredients, parts, software, and other
inputs are constantly rising in cost in terms of the falling currency, and
one can see another reason why Friedman’s assertion is false. In
many cases, especially modern products, the cost of the labor input into a
product is a small percentage of total cost.
your lunch money in gold and silver, the best way to protect yourself against
our mad regime. If you want to speculate, make sure you risk only your