Well, first of all, my perspective towards money and currency has completely changed. This book could be my base point, from where i This book is a must try. This book could be my base point, from where i would look at economy or my future studies of money and would try to relate in general. It could have been lot better if he had taken consideration of asian countries to his context.
Because we could really relate to it. But at the end of day we are talking about gold and silver which is similar to every nations in the world. This book is incredibly important and relevant right now, in an era of reckless fiat currency printing within a global financial system that is warping under extreme pressure.
Everyone should read this book, which should be titled something l Absolutely superb. Book has 4 parts to it. Part 1 history of money Part 2 current money situation Part 3 future of money Part 4 what to look out for when investing in gold and silver and how to invest in gold and silver. It a fantastic book to read and to understand.
Mike Maloney educational video on YouTube titled " the hidden secrets of money" is a great way to understand about money why investing in gold and silver is important Investing in gold and silver Great book for understanding gold and silver as investment. Mike Maloney educational video on YouTube titled " the hidden secrets of money" is a great way to understand about money why investing in gold and silver is important. You learn how central banks rigs the system and how to protect yourself from their wealth theft.
Surprisingly, the book doesn't recommend buying silver and gold at certain times. It's more of a book of how to obtain wealth in general, not just obtain wealth through gold and silver. Although it does a good job of explaining that too.
This book was written in , with a few update notes in each chapter for All the information in the book from holds up I learned so much from this book. All the information in the book from holds up well in , when I read the book.
I can't recommend this book enough. To understand how gold and silver periodically revalue, you first need to know the differences between money and currency. Throughout the ages many things have been currency. Livestock, grains, spices, shells, beads, and paper have all been forms of currency, but only two things have been money.
You guessed it: gold and silver. Currency A lot of people think currency is money. For instance, when someone gives you some cash, you presumably think of it as money. It is not. Cash is simply a currency, a medium of exchange that you can use to purchase something that has value, what we would call an asset. A current must keep moving or else it will die think electricity.
A currency does not store value in and of itself. Rather, it is a medium whereby you can transfer value from one asset to another. Money Money, unlike currency, has value within itself. If you are having a hard time grasping this, just think about a hundred-dollar bill. The answer is, of course, no. That paper simply represents value that is stored somewhere else—or at least it used to be before our money became currency.
Later we will study the history of our currency and the gold standard, but for now all you need to know is that the U. You might call this counterfeiting; the government calls it fiscal policy. The whole thing is what we refer to as fiat currency. Fiat Currency A fiat is an arbitrary decree, order, or pronouncement given by a person, group, or body with the absolute authority to enforce it.
A currency that derives its value from declaratory fiat or an authoritative order of the government is by definition a fiat currency. All currencies in use today are fiat currencies. For the rest of this book I will use these proper definitions. At first it will sound strange to you, but it will only serve to highlight, and bring greater understanding of, the differences between currency and money.
What you will learn about currency and money in this book is knowledge that probably 99 percent of the population has no clue about or desire to learn. So congratulations, you will be way ahead of the game. The symptom of monetary inflation or deflation is rising or falling prices, which I will sometimes refer to as price inflation or price deflation. Regardless, one thing is for sure. With inflation everything gets more valuable except currency.
Societies usually start with high value commodity money such as gold and silver. Gradually, the government hoodwinks the population into accepting fiat currency by issuing paper demand notes that are redeemable in precious metals. I would venture to say that many Americans think this is how the U. You have a fiat currency. Its very purpose is to confiscate your wealth and transfer it to the government. Each time the government prints a new dollar and spends it, the government gets the full purchasing power of that dollar.
But where did that purchasing power come from? It was secretly stolen from the dollars you hold. As each new dollar enters circulation it devalues all the other dollars in existence because there are now more dollars chasing the same amount of goods and services. This causes prices to rise. It is the insidious stealth tax known as inflation, robbing you of your wealth like a thief in the night.
Throughout the centuries, gold and silver have battled it out with fiat currency, and the precious metals have always won. Gold and silver revalue themselves automatically through the free market system, balancing themselves against the fiat currency in the process. This is a pattern that has been repeating and repeating since the first great currency crash in Athens in B.
Whenever an investor detects the beginning of one of these battles, the opportunities according to history to accumulate great wealth in a very short period of time are enormous. It always seems to start the same way. Energy builds as the currency supply is expanded, and then, through natural human instincts, the coming crash is felt by the masses, and suddenly, in an explosive move and in a relatively short amount of time, gold and silver will revalue themselves to account for the currency that has been created in the meantime, and then some.
If you see the writing on the wall and then take action before the masses do, your purchasing power will grow exponentially as gold and silver grow in value relative to an inflated currency. These heavyweight bouts between fiat currency and gold and silver can end one of two ways: 1A technical decision, where the fiat currency becomes an asset backed by gold or silver again.
Or: 2A knockout blow that is the death of the fiat currency. Either way, gold and silver are always declared the victors. They are always the reigning heavyweight champions of the world. Gold and silver have been the predominant currency for 4, years, but they became money in Lydia, in about B. But it was when coinage first made its appearance in Athens that it truly flourished.
This made possible those amazing architectural public works like the Parthenon. Indeed for many years the Athens star shone brightly. So what happened? Why did such a great and powerful civilization like Athens fall? The answer lies in the same pattern we can see time and time again throughout history: too much greed leading to too much war.
Athens flourished under their new monetary system. Then they became involved in a war that turned out to be much longer and far more costly than they anticipated sound familiar? After twenty-two years of war, their resources waning and most of their money spent, the Athenians came up with a very clever way to continue funding the war. They began to debase their money in an attempt to soldier on. In a stroke of genius the Athenians discovered that if you take in 1, coins in taxes and mix 50 percent copper in with your gold and silver you can then spend 2, coins!
Does this sound familiar to you? It should. This was the first time in history that gold or silver had a price outside itself. Now, for the first time, there was official government currency that was not gold and silver, but rather a mixture of gold or silver and copper. You could buy gold and silver with it, but the currency supply was no longer gold and silver in and of themselves.
Over the next two years their beautiful money became nothing more than currency, and as a consequence it became practically worthless. But obviously, once the public woke up to the debasement, anyone who had held on to the old pure gold and silver coins saw their purchasing power increase dramatically. Within a couple of years the war that had started the whole process had been lost.
Athens would never again enjoy the glory they once knew, and they eventually became nothing more than a province of the next great power, Rome. Rome Is Burning Rome supplanted the Greek empire as the dominant power of its day, and during its centuries of dominance, the Romans had ample time to perfect the art of currency debasement. Just as with every empire in history, Rome never learned from the mistakes of past empires, and therefore they were doomed to repeat them.
Over years, various leaders inflated the Roman currency supply by debasing the coinage to pay for war, which would lead to staggering price inflation. Coins were made smaller, or a small portion of the edge of gold coins would be clipped off as a tax when entering a government building. These clippings would then be melted down to make more coins. And of course, just as the Greeks did, they too mixed lesser metals such as copper into their gold and silver.
And last but not least, they invented the not so subtle art of revaluation, meaning they simply minted the same coins but with a higher face value on them. By the time Diocletian ascended to the throne in A. In , Diocletian issued his infamous Edict of Prices, which imposed the death penalty on anyone selling goods for more than the government-mandated price and also froze wages.
Merchants could no longer sell their wares at a profit, so they closed up shop. Oh yeah, the Romans invented welfare. Rome had a population of about one million, and at this period of time, the government was doling out free wheat to approximately , citizens. That equaled out to 20 percent of the population on welfare. Because the economy was so poor, Diocletian adopted a guns and butter policy, putting people to work by hiring thousands of new soldiers and funding numerous public works projects.
This effectively doubled the size of the government and the military, and probably increased deficit spending by many multiples. When you add the cost of paying all these troops to the swelling masses of the unemployed poor receiving welfare and the rising costs of new public works projects, the numbers were staggering. Deficit spending went into overdrive. When he ran short of funds, Diocletian simply minted vast quantities of new copper and bronze coins and began, once again, debasing the gold and silver coins.
That means the price of gold rose 42, times in fifty or so years. This resulted in all currency-based trade coming to a virtual standstill, and the economic system reverted to a barter system. This signaled the second great victory for gold and silver over fiat currency in history.
So there you go, gold and silver are now 2 and 0. In the end it was currency debasement and pure deficit spending to fund the military, public works, social programs, and war that brought down the Roman Empire. Just as with every empire throughout history, it thought it was immune to the laws of economics.
As you will see, debasing the currency to pay for public works, social programs, and war is a pattern that repeats throughout history. It is a pattern that always ends badly. Chapter 2 The Wealth of Nations In studying monetary history to identify cycles, it is necessary to examine both sides of the coin so to speak.
The temptation is for people to blame all their woes on their government. History is full of examples of greed leading a populace to do incredibly stupid things. We can get by just fine by ourselves, thank you. The best example I can think of is the tulip mania of A Tulip Is Still a Tulip. If the answer to that question is yes, then please put this book down and get some professional help.
Otherwise, read on and see just how crazy the public can become. Everyone thinks of tulips when they think of Holland. Then they think of beer. They were imported. In the first tulip bulbs were brought from Turkey to Holland. They quickly became a status symbol for royalty and the wealthy. This developed into a mania, and soon a tulip exchange was established in Amsterdam. Very quickly this mania turned into an economic bubble. You may find this comical; in a single tulip bulb of the Viceroy variety was traded for the following: 2 lasts a last is 4, pounds of wheat, 4 lasts of rye, 4 fat oxen, 8 fat swine, 12 fat sheep, 2 hogsheads gallon wooden barrel of wine, 4 tons of beer, 2 tons of butter, 1, pounds of cheese, 1 bed, 1 suit of clothes, and 1 silver goblet.
At its very peak in a single bulb of the Semper Augustus variety was sold for 6, florins. The average yearly wage in Holland at the time was florins. Soon people began to realize how absolutely crazy the situation had become, and the smart money if you can call anyone involved in this mania smart began to sell. Within weeks tulip bulb prices fell to their real value, which was several tulip bulbs for just one florin. The financial devastation that swept across northern Europe as a result of this market crash lasted for decades.
John Law and Central Banking Another great example of a society replacing its money with an ever inflating currency supply is the story of John Law. Born the son of a Scottish goldsmith and banker, John Law was a bright boy with high mathematical aptitude.
At one point, he got into a fight over a woman and his opponent challenged him to a duel. He shot his opponent dead, was arrested, tried, and sentenced to hang. Being the knave that he was, Law escaped from prison and fled to France.
Meanwhile, Louis XIV was running France deeply into debt due to war mongering and his lavish lifestyle. Law, sensing opportunity, showed up at the royal court with two papers for his friend blaming the problems of France on insufficient currency and expounding the virtues of paper currency. The slightly increased currency supply brought a new vitality to the economy, and John Law was hailed as a financial genius. The Louisiana Territory was a huge area comprising about 30 percent of what is now the United States, stretching from Canada to the mouth of the Mississippi River.
Shortly after that the share price exploded, rising by more than 30 times in a period of months. Just imagine, in a few short years, Law went from a gambling addict and penniless murderer to one of the most powerful financial figures in Europe. Again, Law was rewarded. And since everything was going so well, the Duke asked John Law to issue even more notes, and Law, agreeing that there is no such thing as too much of a good thing, obliged.
The government spent foolishly and recklessly while Law was pacified with gifts, honors, and titles. Yes, things were going quite well. So well, in fact, that the Duke thought that if this much currency brought so much prosperity, then twice as much would be even better. All it had to do was print it. Upon hearing this news, Law decided to issue 50, new shares of the Mississippi Company.
When he made the new stock offer, more than , applications were made for the new shares. Among them were dukes, marquises, counts, and duchesses, all waiting to get their shares. Paris was booming due to the rampant stock speculation and the increased currency supply.
All the shops were full, there was an abundance of new luxury goods, and the streets were bustling. Due to the inflation of the currency supply, prices started to skyrocket. Real estate values and rents, for instance, increased fold. Law also began to feel the effects of the rampant inflation he had helped create. With the next stock issue of the Mississippi Company, Law offended the Prince de Conti when he refused to issue him shares at the price the royal wanted. Furious, the Prince sent three wagons to the bank to cash in all of his paper currency and Mississippi stock.
He was paid with three wagonloads-ful of gold and silver coin. People started converting their notes to coin, and bought anything of transportable value. Jewelry, silverware, gemstones, and coin were bought and sent abroad or hoarded. In order to stop the bleeding, in February of the banks discontinued note redemption for gold and silver, and it was declared illegal to use gold or silver coin in payment. Buying jewelry, precious stones, or silverware was also outlawed. Rewards were offered of 50 percent of any gold or silver confiscated from those found in possession of such goods payable in banknotes of course.
The borders were closed and carriages searched. The prisons filled and heads rolled, literally. Finally, the financial crisis came to a head. On May 27, the banks were closed and Law was dismissed from the ministry. Banknotes were devalued by 50 percent, and on June 10 the banks reopened and resumed redemption of the notes for gold at the new value.
When the gold ran out, people were paid in silver. When the silver ran out, people were paid in copper. As you can imagine, the frenzy to convert paper back to coin was so intense that near riot conditions ensued. Gold and silver had delivered a knockout blow.
By then John Law was now the most reviled man in France. In a matter of months he went from arguably the most powerful and influential force in society back to the nobody he was before. Today I have nothing, not even enough to keep alive.
But what astounds me most is that this all transpired in just four short years. At the beginning of World War I, Germany went off the gold standard and suspended the right of its citizens to redeem their currency the mark for gold and silver. Like all wars, World War I was a war of and by the printing press.
The number of marks in circulation in Germany quadrupled during the war. Prices, however, had not kept up with the inflation of the currency supply. So the effects of this inflation were not felt. The reason for this peculiar phenomenon was because in times of un-certainty people tend to save every penny. World War I was definitely a time of uncertainty. So even though the German government was pumping tons of currency into the system, no one was spending it—yet.
Just before the end of the war, the exchange rate between gold and the mark was about marks per ounce. But by it was fluctuating between 1, and 2, marks per ounce. Retail prices shortly followed suit, rising by 10 to 20 times. Anyone who still had the savings they had accumulated during the war was bewildered when they found it could only buy 10 percent or less of what it could just a year or two earlier.
Then, all through the rest of and the first half of , inflation slowed, and on the surface the future was beginning to look a little brighter. The economy was recovering, business and industrial production was up. But now there were war reparations to pay, so the government never stopped printing currency.
In the summer of prices started rising again and by July of prices had risen another percent. This was the breaking point. Having watched the purchasing power of their savings fall by 90 percent in , they knew better this time around. They were smarter; they had been here before. Suddenly everybody started to spend their currency as soon as they got it. The currency became a hot potato, and no one wanted to hang on to it for a second.
France thought Germany was just trying to weasel its way out of paying. So, in January of , France and Belgium invaded and occupied the Ruhr the industrial heartland of Germany. The invading troops took over the iron and steel factories, coal mines and railways. Meanwhile, the government put its printing presses into overdrive. According to the front page of the New York Times, February 9, , Germany had thirty-three printing plants that were belching out 45 billion marks every day!
The government was caught in a downward economic spiral. A point of no return had been passed. No matter how many marks the government printed, the value fell quicker than the new currency could enter into circulation.
So the government had no choice but to keep printing more and more and more. By late October and early November , the German financial system was breaking down. A pair of shoes that cost 12 marks before the war now cost 30 trillion marks. A loaf of bread went from half a mark to billion marks. A single egg went from 0. The German stock market went from 88 points at the end of the war to 26,,,, but its purchasing value had fallen by more than 97 percent.
Only gold and silver outpaced inflation. The price of gold had gone from around marks to 87 trillion marks per ounce, an 87 trillion percent increase in price. But it is not price, but value, that matters, and the purchasing power of gold and silver had gone up exponentially.
The total value of the currency supply, however, had dropped The poor were so before the crisis, so they were affected the least. The rich, at least the smart ones, got a whole lot richer. But it was the middle class that was hurt the most. In fact, it was all but obliterated.
Chart 1. There were a few who had the right qualities and cunning to take advantage of the economic environment. They were shrewd, adept, and nimble, but most of all, adaptable. Those who could quickly adapt to a world they had never seen before, a world turned upside down, prospered.
The reason for this is that those who held their wealth in the form of currency became poorer and poorer as they watched their purchasing power destroyed by the government. On the flip side, those who held their wealth in the form of gold watched their purchasing power increase exponentially as they became wealthy by comparison.
Here is the important lesson: During financial upheaval, a bubble popping, a market crash, a depression, or a currency crisis such as this one, wealth is not destroyed. It is merely transferred. Thus, those who held on to real money, instead of currency, reaped the rewards many times over. A sovereign state starts out with good money i. As it develops economically and socially, it begins to take on more and more economic burdens, adding layer upon layer of public works and social programs.
As its economic affluence grows so does its political influence, and it increases expenditures to fund a massive military. Eventually it puts its military to use, and expenditures explode. Finally, the wealth transfer caused by expansion of the currency supply is felt by the population as severe consumer price inflation, triggering a loss of faith in the currency. An en masse movement out of the currency into precious metals and other tangible assets takes place, the currency collapses, and massive wealth is transferred to those who had enough foresight to accumulate gold and silver early on.
We are, after all, the greatest country in the history of the world. We may not be an empire in the traditional sense of the word, but when it comes to economic issues, we operate like one in many ways. This meant that they were also pegged to each other. Businesspeople could make plans and projections far into the future, ship goods, start businesses, and invest in foreign lands, and they always knew exactly what the exchange rate would be.
On average over the period when the developed world was on the classical gold standard, there was no inflation. Sure, there were a few booms and busts, inflations and deflations. But from the beginning of the classical gold standard to the end, it averaged out as a zero sum game.
The reason? Gold: the great equalizer. The imported goods were paid for with gold, so gold flowed out. As gold flowed out of the countries, their currency supplies contracted that is monetary deflation. This caused these economies to slow down and the demand for imports to fall. And as exports rose to meet foreign demand, gold flowed back into that country.
Then the process started all over again, the value of currency—based on gold— always moving up and down, in a narrow range, maintaining the equilibrium. During the classical gold standard our currency was real, verifiable money, meaning that there was actual gold and silver in the Treasury backing it up.
The currency was just a receipt for the money. Then, in stepped the Fed, one of the most notorious and misunderstood institutions in the history of the United States. There are two very polarized camps when it comes to the Fed. On one end you have the government, which trusts it to regulate the U. On the other end, you have the conspiracy theorists, who believe, in no uncertain terms, that the Fed will eventually bring about the collapse of the U.
For one thing, the Federal Reserve is not a government agency. It is a privately owned bank that has stockholders to whom it pays dividends. It has the power to actually create currency from nothing, and it is shielded from audits and congressional oversight. It operates outside the control of Congress and manipulates the credit of the United States.
Rothbard, the vice president of the Ludwig von Mises Institute, distinguished professor of economics, and author of twenty-six books, opens his book The Case Against the Fed with the following: By far the most secret and least accountable operation of the federal government is not, as one might expect, the CIA, DIA, or some other super-secret intelligence agency. The CIA and other intelligence operations are under control of Congress. They are accountable: a Congressional committee supervises these operations, controls their budgets, and is informed of their covert activities.
The Federal Reserve, however, is accountable to no one; it has no budget; it is subject to no audit; and no Congressional committee knows of, or can truly supervise, its operations. You might call this the not so humble beginning. In there was a banking and stock market panic in the U. It was widely believed that the big New York banks known as the Money Trust had been causing crashes, and then capitalizing on them by buying up stocks from rattled investors and selling them for tremendous profit just days or weeks later.
The Panic of was a particularly devastating one for the U. In Congress created the National Monetary Commission to research the situation, and to recommend banking reforms that would prevent such panics, as well as to investigate the Money Trust. Upon his return, Senator Aldrich decided to take some time off and organized a duck hunt with some friends. Davison senior partner at J. Morgan , Charles D. Morgan Bankers Trust, and to become the first Federal Reserve head.
The retreat took place on a little island off the coast of Georgia called Jekyll Island. I am not romancing. I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written. Forbes, Forbes magazine, The results of the conference were entirely confidential. Even the fact there had been a meeting was not permitted to become public. Though eighteen years have since gone by, I do not feel free to give a description of this most interesting conference concerning which Senator Aldrich pledged all participants to secrecy.
I do not feel it is any exaggeration to speak of our secret expedition to Jekyll Island as the occasion of the actual conception of what eventually became the Federal Reserve System. We were told to leave our last names behind us. The servants and train crew may have known the identities of one or two of us, but they did not know all, and it was the names of all printed together that would have made our mysterious journey significant in Washington, in Wall Street, even in London.
Discovery, we knew, simply must not happen, or else all our time and effort would be wasted. If it were to be exposed publicly that our particular group had got together and written a banking bill, that bill would have no chance whatever of passage by Congress. Frank Vanderlip, quoted in The Saturday Evening Post, February 9, Secrecy was so important to the attendees of this summit because Aldrich, as the chairman of the National Monetary Commission, was charged with investigating banking practices and recommending reforms after the Panic of , not to conspire with the bankers on a remote island.
So the bankers who were under investigation for needed reforms got together with the chairman of the congressional investigating committee the guy that was supposed to investigate the suspects at a secret meeting on an isolated island and concocted a bill, the Aldrich Plan, for a private central bank that they the suspects would own.
When the bill was presented to Congress, the debates raged. I have alleged that there is a Money Trust. The Aldrich Plan is a scheme plainly in the interest of the Trust. Why does the Money Trust press so hard for the Aldrich Plan now, before the people know what the Money Trust has been doing? Not accepting defeat, the bankers essentially took the Aldrich Plan and changed a few details.
In a nearly identical bill, called the Federal Reserve Act, was presented to Congress. Again the debates raged. Many saw this bill for what it was: a prettied-up version of the Aldrich Plan. But on December 22, , Congress gave up its right to coin money and regulate the value thereof, which was given it by the Constitution, and passed that right to a private corporation, the Federal Reserve.
The Fed creates all currency, not the U. This is one reason why the national debt keeps expanding. It can never be paid off. It is mathematically impossible. But even more disconcerting is the way the Federal Reserve creates currency: 1.
It makes loans to the government or banking system by writing a bad check. It buys something with a bad check. When the Federal Reserve writes a check, it is creating money. They are creating currency, not money. And once those newly created dollars are deposited in the banks, the banks get to employ the miracle of fractional reserve banking. Here is fractional reserve banking in a nutshell. All banks have a reserve requirement, meaning they must keep a certain amount of currency on hand for withdrawals and such.
If the reserve requirement set by the Fed is 10 percent the bank must keep 10 percent of the currency deposited on hand just in case someone wants to make a withdrawal; however, they are allowed to loan out the other 90 percent of those deposits. Then, if those brand-new loaned dollars are deposited in a checking account, the bank is allowed to create another 90 percent of the value of those deposits, and then another 90 percent of that. Then the process is repeated, and round and round it goes.
Coincidentally, the same year that the Federal Reserve Act was passed, there was also an amendment added to the Constitution: the Sixteenth, which created the dreaded income tax. Before there was no income tax. The entire government was paid for by tariffs duties on imports and excise tax taxes on things like alcohol, cigarettes, and gas.
These taxes, and only these taxes, generated enough income for the government to operate. Welcome to the rabbit hole. Welcome to your new context. However, because the United States did not enter the war for almost three years, it became the major supplier to the world during that time. Gold flowed into the U. When the European Allies could no longer pay in gold, the U.
Once the U. The U. The world currency supply was exploding. After the war, the world longed for the robust trade and economic stability of the international gold standard that had worked so well before the war. Thus, throughout the s most of the world governments returned to a form of the gold standard. Instead, it was a pseudo—gold standard called the gold exchange standard.
During the war, many countries inflated their currency supplies drastically. Conversely, many European countries had large supplies of U. In the meantime, the U. How can you create currency out of thin air and still back it with gold, you ask? You impose a reserve requirement on the central bank the Federal Reserve , limiting the amount of currency it creates to a certain multiple of the units of gold it has in the vaults.
Fractional reserve banking is like an inverted pyramid. Adding a fractional reserve central bank, underneath fractional reserve commercial banks, was akin to placing an inverted pyramid on top of an inverted pyramid. With the new gold exchange standard, foreign central banks could use dollars instead of gold. That means that the real reserve ratio the ratio of real money that could be paid out against their currency was now only 1.
Now there was an inverted pyramid, on top of an inverted pyramid, on top of an inverted pyramid. This was highly unstable. Ultimately, the gold exchange standard was a faulty system that governments imposed on their citizens, which allowed the governments to act as if their currencies were as valuable as before the war. This was a system that was destined for failure.
The Rise of Credit Culture But every pyramid scheme flourishes in its early days, and so did the gold exchange standard. With all the new currency available from the central banks, the commercial banks generated many new loans. This abundance of currency led to the greatest consumer credit expansion thus far in American history, which, in turn, led to the biggest economic boom America had ever experienced.
In a very real sense, credit put the roar in the Roaring Twenties. Before the vast majority of loans had been commercial. Loans on nonfarmland real estate and consumer installment credit, like auto loans, were almost nonexistent, and interest rates were very high. But with the advent of the Fed, credit for cars, homes, and stocks was now cheap and easy. The effect of low interest rates combined with these new types of loans was immediate; bubbles sprang up everywhere.
There was the Florida real estate bubble of , and then of course the infamous stock market bubble of the late s. During the s, many Americans stopped saving and started investing, treating their brokerage account as a savings account, much like many Americans treated their homes in our most recent housing bubble.
But a brokerage account is not a savings account, nor is a house. The value of a savings account depends on how many dollars you put in. But the value of a brokerage account or a house depends solely on the perception of others.
If people believe things are great, then people borrow and spend currency, and the economy flourishes. But if people have the least bit of anxiety, if they have doubts about tomorrow, then watch out! In , the stock market crashed, the credit bubble burst, and the U. The Mechanics of a Depression The popping of a credit bubble is a deflationary event, and in the case of the Great Depression it was massively deflationary. To understand how a deflation occurs, you need to know how our currency is born, and how it can join the ranks of the dearly departed.
When we take out a loan from a bank, the bank does not actually loan us any of the currency that was on deposit at the bank. Instead, the second the pen hits the paper on that mortgage, loan document, or credit card receipt that we are signing, the bank is allowed to create those dollars as a book entry. In other words, we create the currency. The bank is not allowed to do it without our signature.
We create the currency, and then the bank gets to charge us interest for the currency we created. This brand-new currency we just created then becomes part of the currency supply. Much of our currency supply is created in this way. But when a home goes into foreclosure, a loan gets defaulted on, or someone files bankruptcy, that currency simply disappears back into currency heaven where it came from. So as credit goes bad, the currency supply contracts, and deflation sets in.
This is what happened in —, and it was disastrous. As a wave of foreclosures and bankruptcies swept the nation, one-third of the currency supply of the United States evaporated into thin air. Over the next three years, wages and prices fell by one third.
Run, Baby, Run Bank runs are also enormously deflationary events because when you deposit one dollar into the bank, the bank carries that dollar as a liability on its books. It someday owes that dollar back to you. However, under a fractional reserve system, the bank is then allowed to create currency in the form of credit loans , in an amount many times that of the original deposit, which it carries on its books as assets.
But a serious problem can develop when too many people show up to make withdrawals at the same time without the counterbalancing effect of the relatively same amount of people making deposits. This was what was happening in , and it was one of the major contributing factors to the collapse of the U. This was a very dangerous situation. The public had lots of deposits and very little cash, and the banks also had very little cash to back up those deposits.
By November of , bank failures were more than double the highest monthly level ever recorded. But this was only the beginning. The largest single bank failure in U. The sixty-two-branch Bank of the United States collapsed.
Worst of all, this was before deposit insurance. Then, to top it all off, on September 21, , Great Britain defaulted from the gold exchange standard, throwing the world into monetary chaos. Foreign governments, along with businesses and private investors from the United States and around the world, began to fear that the U. Suddenly, there was a dash for cash. Within the U. The pyramid scheme that was the gold exchange standard began to crumble. To stop the bleeding, the Fed more than doubled the cost of currency in the U.
However, was an election year. Three long years into the Depression people were desperate for a change, and in November, Franklin Delano Roosevelt was elected president. Again gold flowed out of the vaults as foreign governments, foreign investors, and the American public lost even more faith in the dollar, and the most devastating bank run in American history began. A month later he signed an executive order requiring U.
On April 20, he signed another executive order, ending the right of U. On the same day, the Thomas Amendment was sent to Congress, authorizing the president, at his discretion, to reduce the gold content of the dollar to as low as 50 percent of its former weight in gold. But there was still one major hurdle to overcome before Roosevelt could devalue the dollar: the infamous gold clause. During the Civil War, President Abraham Lincoln had to come up with a way to pay the troops and introduced a second purely fiat currency to the country, the greenback dollar.
When it first appeared, the greenback was worth the same amount as gold notes. But by the end of the Civil War they had fallen to just one third of the value of the gold-backed dollar. Many people who had made contracts or taken out loans before the war in gold notes paid them back in depreciated greenback dollars. Of course this was cheating the creditors and many lawsuits were filed. The big problem for Roosevelt was that most government contracts and obligations also had this clause written into them.
So devaluing the dollar would also increase the cost of government obligations by the same amount. So at the behest of President Roosevelt, Congress passed a joint resolution on June 5 defaulting on the gold clause in all contracts, public and private, past, present, and future. This great government, strong in gold, is breaking its promises to pay gold to widows and orphans to whom it has sold government bonds with a pledge to pay gold coin of the present standard of value.
Roosevelt gladly obliged. As far as I can tell, no one seems to know exactly who penned these proclamations and executive orders. But one thing was now clear. The government was no longer a government of the people, by the people, and for the people.
Instead it was a government of the bankers, by the bankers, and for the bankers. But there was still one more dastardly deed to be done. Weight Watchers On January 31, , Roosevelt signed an executive proclamation effectively devaluing the dollar. But now, since the dollar instantly had This also meant that, with regards to international trade, the government had just stolen That is the power of fiat currency. The worst part of this whole situation is that people who followed the rules and turned in their gold as decreed were the ones who suffered the most because those who illegally hung on to their gold realized a Less than 22 percent of the gold in circulation was turned in, however, and it seems not a single person was arrested or prosecuted for hoarding.
But despite the efforts of the U. By forbidding the U. By declaring the claim checks on gold held by U. Chart 2 shows the accounting that gold did of the U. The gray line is U. The black line is the total value of the U. By devaluing the dollar from one twentieth of an ounce of gold to one thirty-fifth of an ounce, the value of the gold held by the U. Treasury now exactly matched the value of the monetary base. This meant the dollar was once again fully backed by gold.
It also meant that there was no reason for gold to continue being illegal since there was now enough gold to pay out against every paper dollar in existence, and the dollar could have been fully convertible into gold once again. Chart 2. Monetary Base vs. Gold Reserves, — Source: St. Louis Federal Reserve Bank Gold had once again revalued itself, not with the knockout blow and the death of the currency as in previous chapters, but this time by a technical knockout.
To halt the implosion of the U. Gold was still the undefeated heavyweight champion of the world. But all the pain and suffering could have been avoided. Gold and silver require discipline and constraint from banks and governments, and both banks and governments resent gold for it. Numerous factors contributed to the Great Depression, but there was only one root cause.
Governments around the world, along with the Federal Reserve, foreign central banks, and commercial banks, all tried to cheat gold. What got us out of the Great Depression was the tremendous influx of gold from Europe. Remember, thanks to the Roosevelt administration, the dollar was devalued by over 40 percent.
So its purchasing power overseas fell by the same amount, slowing our imports dramatically. But countries buying from the U. Also, when a country fixes its currency to gold, it has to buy or sell as much gold as is offered or demanded to maintain that currency price. Suddenly, all of the gold mining companies around the world were selling their gold to one buyer, the U.
So this, plus a tremendous trade surplus, accounted for most of the gold inflows from through But in , a new dimension was added. And there was a transfer of wealth from European investments to U. European consumer goods factories were used to produce guns, ammunition, airplanes, and tanks. Thus most Europeans had to obtain everyday items from the U.
So, in reality, gold inflows, foreign investment, and war profiteering, not social programs, were what lifted the U. At this point, the United States held approximately two thirds of the world monetary gold reserves and had a thriving economy.
Structurally, the U. Very quickly world leaders realized the dire economic situation they were in. This huge trade imbalance meant that at the end of the war the world monetary system would be in shambles. About a year before the end of the war, representatives from forty-four countries met in July of at Bretton Woods, New Hampshire, to figure out how they were going to make the world of international trade and finance work again. They needed a system of international payments that permitted trade without the wild fluctuations in currency exchange rates or the fear of sudden currency depreciation that had crippled international trade during the Great Depression.
It was decided that all countries would peg their currencies to the U. This meant that, from World War II on, all foreign central banks had to hold dollars instead of, or in addition to, what was left of their gold reserves. But there were two big flaws in the Bretton Woods system. Actually the flaws were more like big gaping holes. First, there was no reserve ratio set as to how many dollars could be created for each unit of gold, allowing the U.
Second, even though U. This truly was a deficit war. And on top of that, he added his Great Society programs, enacting a guns and butter policy that borrowed heavily to fund wars abroad and social programs at home. But while we were waging a deficitfunded war in Vietnam, Charles de Gaulle, the president of France, was using the loopholes in the Bretton Woods system to quietly launch a full-blown assault on the U.
De Gaulle vs. Nor had anyone of such stature made so sweeping a criticism of the international monetary system since its founding in The Federal Reserve announced that the U. Then Great Britain devalued the pound in November , causing a run on gold. The pool was stretched to the breaking point, and the outflow of gold increased twenty-fold. By the end of the year more than 1, tons of gold had left the vaults. For years Gold Pool sales had averaged five tons per day.
By March of sales were heading past tons per day! Take a look at Chart 3. You can clearly see the rampant currency creation through the mid- and late s. You can also see that from to , more than 50 percent of the U. Chart 3. Louis Federal Reserve Bank The Gold Pool was closed and the parallel free market for gold was allowed to find its own price.
Gold had the dollar on the ropes and delivered a one-two punch! Gold had won this round, but the fight was not over yet. The Collapse of the Bretton Woods System By the Bretton Woods system had been completely overwhelmed by the will of the public and the free markets. For the first time in U.
This was tantamount to the United States declaring bankruptcy. Gold had won this match, and it was now free to set its own value on the open market. At this point most countries and central banks were now on a dollar standard, and were using dollars for international trade instead of gold. So with the end of the Bretton Woods system, in , the dollar was freed from any fiscal constraints, allowing the U. A power it still holds today.
No other country has this hidden advantage, and now U. This advantage gives the U. It also gives the U. Inflation of a currency supply respects no borders. Therefore, every new dollar that is printed devalues all other dollars everywhere in the world. Yes, the dollar was free from the fiscal constraints of gold, but gold was also freed from the dollar. On August 15, , gold became its own free-floating international money, no longer bound to any country.
The Golden Bull After the collapse of the Bretton Woods system, all the debt that was created in the s monetary inflation to fund the Vietnam War and the Great Society came back with a vengeance in the form of price inflation in the s. Coincidentally, on August 15, , the same day Nixon took the U. History was once again repeating itself; Diocletian had committed the same folly centuries before as the Roman economy collapsed. I remember seeing peach farmers protesting on the evening news by dumping their peaches on the roadside and leaving them to rot because the price they could legally sell them for was below their cost of production.
Shortages ensued and store shelves were bare. Once again, it was proven beyond a shadow of a doubt that governmentmanaged markets do not work. Most people think that this was a key factor leading to the inflation of the s. Again, they are mistaken. Even though the Arab states were meting out punishment to the West for supporting Israel, the bigger picture is that the purchasing power of the dollar had been falling since the United States started flooding the world with dollars in the mids, and the price increases in oil only served to bring the value OPEC received for a barrel of oil back up to the levels they had received under the Bretton Woods monetary system.
In , the Shah of Iran, one of the U. You increased the price of wheat you sell us by percent, and the same for sugar and cement. The rising dollar price of oil, back then, just as today, was only so that the producers of oil could recover the lost purchasing power of the dollar. But it was still illegal for Americans to own gold. He held press conferences while brandishing illegal gold bars, publicly defying the federal authorities to throw him in jail.
He worked tirelessly lobbying Congress to get bills introduced, and his reward came on December 31, , when President Gerald Ford signed the bill that made it legal for U. Even though gold was now freely traded, it was not traded as a currency; instead it was traded as a commodity. People had been using paper currency for so long that most had lost interest in gold and put their faith in paper.
It was once again acting like a currency. America had gold fever. But the mainstream was wrong. The gold fever was now turning into a twentieth-century gold rush. In cities throughout the U. This dealer was located in the center of the block, on a major city street, and the line of people went out the front door, down the block, around the corner, and up the side street. The lines were being compared to those for Star Wars and Apocalypse Now!
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