In order for the Federal Government to go on the Gold Standard in 1933, executive order 6102 was issued by President Franklin Roosevelt. The order criminalized the possession of monetary gold by any individual, partnership or corporation. There is nothing in the constitution that allows for such an order and it was challenged in court. Its enforceability was always in question but many Americans blindly submitted. The privately owned Federal Reserve Bank paid $20.67 per ounce for the gold they received. Later the exchange rate was set at $35 per ounce for international transactions where it stayed until 1971.
None of what I just said should make anybody feel comfortable. What I just described is not capitalism in any way, shape or form. There is no free market at work here. There never was in relation to the gold standard. When government regulates the prices of anything, including gold, you now have a centralized (communist style) economy.
It was always doubted that the US government ever maintained the ratio of dollars to gold that it said it would maintain. This became obvious by 1971 when the French started demanding payment in gold for their dollar reserves and President Nixon decided to end the phoney gold standard that never really existed. Since it was illegal for American Citizens to own gold, trading in their dollars for gold was out of the question. The Gold Standard was an illusion.
Gold can not be converted into units of labor, food, energy or building materials. Any society that has ever used a precious metal standard has had currency problems, including Rome. There was a huge monetary crisis in Europe from 1750 to 1850 concerning money backed by precious metals. In a time of real crises when barbarians are at your front gate, the only thing of value is fortifications, weapons, armor, manpower, food, water. Gold and Silver mean nothing.
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Lets consider the two ways that fiat currency obtains value. One way is that the government sets its value and forces you to accept it. The other way…. is that an artificial “need” is created. Lets use cow-manure (shit) as an example and see how it can be transformed into something precious and highly coveted.
1-You need to fertilize a field and need 50 lbs of manure.
2-Your cow can only produce 1 lbs a day, so you go to your neighbor and borrow 50 lbs of cow-manure.
3-Your neighbor gives you the 50 lbs of cow-shit but tells you that you must pay him back with 100 lbs at the end of the month (interest).
4-Your cow has only produced only 30 lbs of manure by the end of the month. You need an additional 70 lbs to pay back your debt.
5- You go back to your neighbor and ask to borrow another 70 lbs of manure .
6-You pay your neighbor back with the 30 lbs of cow-shit you actually have, plus the additional 70 lbs he lent you.
7-You have paid back the debt of 100 lbs of cow-shit owed… but you had to borrow an additional 70 lbs of cow-shit to do it.
8- For the 70 lbs of manure you borrowed from your neighbor, you must now pay back 140 lbs next month.
9- Your cow still only produces 30 lbs per month, so you will have to borrow 110 lbs of manure at the end of next month to pay back your debt.
10-You will never have enough manure to pay back all your debt. Cow-shit is now the most valuable thing in your life and you can never have enough of it. You will spend the rest of your life working for shit.
I just created a virtual monetary system based on Cow-Shit. Not really… This system is really based on debt and you can substitute anything in the place of manure including gold or paper. The key to making this system work, is to set a rate of interest that exceeds that which can actually be paid back. Hence you put the debtor on a “rat wheel” where they are running forever and never actually catch up (pay their debt). Now lets take this example further and say we attach the rat-wheel to a “mill” so that the running actually produces something of value like flour for bread. You now have “productivity”. The goal of this system was never really to collect the debt. The goal of the system is to keep people working to pay off something that can never be paid off. Keeping the rat-wheel turning is “Productivity” and that is the end goal.
It is of no relevance if you use gold, cow shit, or paper as your currency. The part that makes it work is debt. You always owe more then you have due to compounding interest. With individuals and corporations there is a limit to how much they can borrow because they must put up real assets as collateral. That is not the case with the Federal Government. The Federal Government can borrow and keep borrowing without limit except for a debt ceiling limitation or a balanced budget amendment. There is no possible way for the Federal Government to ever pay back the debt to the privately owned Federal Reserve Bank, even if they raised taxes and cut all expenses, because the compounding interest on 14.5 trillion already owed is such a ridiculously high number. Once Debt is created, at no point in time is there ever enough currency in existence to pay off all principal and accumulated interest one it. Paying off all the debt is a mathematical impossibility because the money does not and can not exist.
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The only way to fix this problem is the to change the computation for interest. Interest is what keeps the debt growing.
Instead of Int= debt x rate x term. They need to change it so that Int= (debt x rate x term) – Deflation Variable.
This would start to decrease the debt at a faster rate, but there is still a problem… as soon as the free market realizes that their is now more available money in circulation, due to decreased debt obligations, business will respond by raising prices to acquire some of that money. The system has a built in fix. If new borrowers do not come in to borrow more money because borrowing money is too expensive (high interest rates), individuals and corporations will find themselves near default. Some will have to go out of business in order for others to survive. This is the painful truth that no one is willing to come to terms with.
In order to fix the system, you have accept deflation, recession, defaults and bankruptcies as part of the system. This is the fail-safe that was designed into the system to prevent inflation. The Deflation Variable I suggested above may ease the level of default. This Deflation Variable would work along with a prolonged recession to bring debt back under control. No amount of tax increase or cost cutting can fix the problem because that is not how the system was designed to work. The system was designed to trap debtors into a life time of paying off an ever growing debt. The Federal Government has fallen into their own trap.
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The Federal Reserve Banking System was designed to work as a Ponzi Scheme. When individuals, corporations and Government borrow money, they “new” create money. The bank rules allow local banks to create new money as long as it is backed by collateral. The new money is created electronically and is accompanied by a greater debt. Debtors depend on other borrowers to come in after them to create more money and do business with them so they can pay their debt off. The system was never designed so that one entity could dominate it in the way the Federal Government has. The reason the Federal Government is in default and will always be in default is because it has grown out of proportion to the other participants in the system. Cutting costs, raising taxes or raising the debt ceiling is just addressing the symptom temporarily. Smaller government has to be part of any real solution in addition to a change in how interest is compounded.
I don’t think the Government should have the ability to create money at all. I think money is best created in the private sector. It is a more “capitalist” way to create money.
-You mine gold and mortgage it to the bank, you get new money created for your gold collateral
-You mortgage your house, you get new money created for your house collateral.
It does not matter what the collateral is… only real assets should create money. When you give back the money to the bank, you take back ownership (title) of your collateral and the money created is removed from the system. That is because the money is only a receipt for assets being held by the bank. The system makes perfect sense.
Government should only be getting operating money through taxes and perhaps by borrowing “existing” money from the public. Government should not be creating new money for its own use… because government should not have anything of collateral to put up. All government assets belong to the citizens, not government. The problem here is not with the banking system, but with government abuse of banking.
(Note: Permission to reprint and link with credit to Bill Tsafa is hereby granted)
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