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Chapter 6 - What is Money?

 

The bailout is one way the elite transfer wealth from our hands to theirs. But it is certainly not the only way, nor is it the most sophisticated. Perhaps the cleverest scam of all is the actual “money” they’ve created for us to use. Not unlike the fraudulent mechanisms we’ve outlined in previous chapters, our money has theft built right in. By design, it enables wealth to be secretly transferred from those who’ve earned it, to those who create and control it.

 

Few know the history of money or the many different forms money can take. Some forms are more prone to fraud than others and our ignorance of this fact works to the advantage of those running the scam. They’re more than happy to make us believe only they are smart enough to understand the “complex nature of money.” Our monetary policy, so they say, is best left to the experts; we should just trust them. -Knowing the ultimate goals of those who created our monetary system, we could hardly make a more dangerous mistake.

 

Defining money

 

To accurately define what money is, we can’t simply hold up a US Dollar (or a Russian Ruble, or a Mexican Peso) and say “This is money.” We’re better off to start by defining the overall purpose of money. –What does money do? In the simplest terms, money enables us to purchase products and services from other people. Using this basic description, we might go on to say: Money can be anything that is widely accepted as “payment” for products and services.

Having defined money in this way, it will be easier to explain the different forms of money and why some are far superior to others. However, before we actually get into the different forms of money, it’s a good idea to touch on what existed before money. It was known as barter.

 

Barter

 

To “barter” basically means to pay for something you want with products or services instead of paying for what you want with money. As an example, imagine you grow corn and your neighbor grows tomatoes. It’s possible to imagine a scenario where you and your neighbor agree to trade 100 pounds of your corn for 100 pounds of his tomatoes. In this scenario, you have each paid for what you want with something other than money.

 

Although barter provides an opportunity to engage in trade with others, this type of trade is far more limited than what we’re used to today. To illustrate: What if your neighbor also grows wheat and you need 100 pounds of that too, but having already acquired 100 pounds of your corn, he has no use for any more? You might try to find another person who grows wheat and trade with them. Or, you might find somebody who has something your wheat growing neighbor wants, trade them your corn for that item, and then trade that item for the wheat…but clearly none of these options are as convenient as simply trading your neighbor “money” for his wheat, his tomatoes or anything else he might be willing to part with. As you can see in this example, barter was far from ideal.

 

Even though barter was limited in its usefulness, it played a major role in developing the concept of money. While trading with each other, people realized certain commodities were always in demand. For instance, it was eventually discovered corn was so high in demand it could be traded for almost any other item or service. From that point forward, corn took on a value that exceeded its “consumption value.” In other words, even though your neighbor already had all the corn he needed; he’d be happy to acquire more because he knew the corn would be “accepted as payment” for the products and services of others. The more corn he had, the more purchasing power he had. In this way, many different commodities (corn, wheat, animals, etc.) eventually evolved into reliable forms of money.

 

Now, with that brief explanation of how barter eventually led to “commodity money,” let’s move on to…

 

Commodity money

 

Cows, sheep, corn, wheat; all of these commodities had intrinsic value, were highly “in demand” and, as such, individuals were nearly guaranteed to accept them in trade. For this reason, they became some of the earliest forms of “commodity money.” But just as barter was limited, so too was the ability to easily “buy” using indivisible items like a cow. Perishable food items had their limitations as well. When mankind discovered metal and learned to craft it into tools and weapons, the metals themselves took on the role of commodity money (and they were superior to the old in many ways.)

 

For starters, metal didn’t need to be fed, watered and cleaned up after. And, unlike wheat and corn, you didn’t have to worry about it going bad, becoming contaminated with bugs or mold, etc. Perhaps best of all, metal was easily divisible. Compare the flexibility of purchasing something with a cow versus purchasing something with iron. Assuming a cow is equal in value to 100 pounds of iron and an item is for sale, valued at 10 pounds of iron (or 1/10^th of a cow), the individual buying with iron has a distinct advantage; he can easily produce the exact amount of money needed. The same cannot be said for the man trying to purchase the same item using his cow. Sure, he can divide the cow into 10 pieces, but the other 9 wouldn’t be worth much for very long.

 

“The value of metal ingots was originally determined by weight. Then, as it became customary for the merchants who cast them to stamp the uniform weights on the top, they eventually were valued simply by counting their number…in this form they became, in effect, primitive but functional coins.”

 

Just as barter led to the concept of commodity money, and that led to “metal” becoming the commodity of choice, centuries of experimenting with different kinds of metals produced a clear favorite around the world: GOLD. Gold’s ability to function as a stable form of money is unmatched. (Silver runs a close second.) When it comes to “monetary stability,” the Federal Reserve System has failed miserably compared to gold and silver. –But knowing the real aims of those who crafted the system, should we be surprised?

 

A common argument against using gold as money today is: “There simply isn’t enough of it to go around.” Initially, this argument seems reasonable, but taking a closer look reveals its flaws. The truth is; having more gold is NOT necessary. Whatever the supply of gold is, the market will set values based on that supply. So, if there are only 10 million ounces of gold circulating in an economy, the “per ounce” price for gold will be higher than if there are 100 million ounces in circulation. This basic economic truth applies to all money, regardless of the form it takes.  

 

Explaining further:

 

The more money there is circulating in an economy (whether we’re talking corn, sheep, gold or paper) the less purchasing power that money will have. For example, if we create a community from scratch and give everyone an equal amount of money, (say $10,000 each) prices for goods and services within that community will be set based on the available money supply. If instead we give each person $100,000, the same thing will happen; prices will be set based on the available money supply. If we give them all 10 million dollars, it’s no different…the fact everyone has $10 million in our third example will not make any of them any “wealthier” than they’d be if we only gave them $10,000. More money chasing after the same amount of goods and services only bids prices up. 

 

The same thing happens if you start a community with a set money supply and then begin “inflating” the amount of currency in existence. So, the first year everyone starts with $10,000 and prices are set according to the total available money supply. If the following year, the money supply is increased 100% (another $10,000 is given to each person) and there isn’t a corresponding increase in newly available goods and services, the flood of new money will only bid prices up. This is called inflation. And although people tend to think of inflation as prices rising, what is really happening is the purchasing power of the individual monetary unit is going down. The new money dilutes the currency’s value.

 

I’m getting ahead of the story a little bit, but here is an important point to consider. Imagine for a moment you are an unscrupulous (yet highly intelligent) banker given the legal authority to control the amount of money in the community we just mentioned. Can you think of a way you might be able to use your inflationary power to your advantage? I’ll provide an example.

 

Let’s say the community begins with a total combined money supply of $50 million. As a banker, you earn money by making loans and charging interest on those loans. So, you begin making loans to the community’s inhabitants. Per the current fraudulent banking system, the money for your “loans” is created out of thin air…they cost you nothing. All you’ve got to do is enter “$100,000” (or whatever the amount may be) into a borrower’s checking account and poof, you just created the money for the loan.

 

Unfortunately, by creating this money for the loan you also add $100,000 (or whatever the loan amount might be) to the total money supply. You do this over and over and before long, the community’s money supply doubles from $50 million to $100 million. Soon, the effects of inflation start to take their toll; prices are rising, people who actually saved money prior to the inflation are having “purchasing power” stolen from every dollar they’ve earned, and people on fixed incomes are finding it increasingly difficult to get by. But you’re doing just fine earning interest on the $50 million in “loans” that you’ve put into the community.

 

But why stop there? Being the unscrupulous (yet highly intelligent) banker that you are, you have an idea. You notice real estate prices have doubled from the inflation…some might even call the massive rise in prices a “bubble.” You wonder what would happen if you “pop” that bubble. You wonder what would happen if you begin to DECREASE the amount of money in circulation. –But you don’t really wonder…you know exactly what will happen. The purchasing power of each dollar will begin to rise and as a result, prices will begin to fall.

 

Specifically, all the real estate prices that had been “bid up” when there was $100 million in circulation will begin to “correct downward.” …Ah, but the mortgages on all those properties aren’t going to “correct downward,” no sir. The people who borrowed $200,000 from you to buy their home when the “bubble” was at its peak will still owe you $200,000. This despite the fact, with the money supply tightening, they’d be lucky to sell their home for $150,000. And a couple months from now (caught in the ensuing panic of people trying to sell before their home loses more value) they might not be able to sell it for $100,000!

 

And that isn’t all they’ve got to worry about. Payments on a $200,000 mortgage were much easier to make when hourly wages in the community were based on a total money supply of $100 million. Now, with only $50 million to go around, it’s becoming nearly impossible to earn enough to keep up with (what are now) ridiculously high monthly mortgage payments. And if they are lucky enough to stay employed and earn enough to actually pay off their mortgage, their big reward is they’ll end up paying double what the home is actually worth.  Many will have little choice but give up their homes and try to find another place to live. But is that such a “bad deal” for you, the unscrupulous (but highly intelligent) banker who created the money for the loans out of nothing? -Probably not.

 

Let’s see: First you earned millions in interest payments on “loans” that were made with money created out of thin air. Now you get to seize real physical assets (people’s homes) because that “money” (keystrokes in a computer) wasn’t paid back. …And those millions you earned when people were able to make their payments? Those dollars will now buy twice as much in the economy you just crashed. What a great time to go bargain hunting for new assets, no? Looks like a win/win/win. (Or a lose/lose/lose – depending on which side of the game you’re on.)

 

Would anyone in their right mind want to give a banker (or bankers) this kind of control over their community’s money supply? No? Ok, then it certainly doesn’t make any sense to give that kind of power to a banker (or bankers) over our entire nation’s money supply. But that is exactly what our elected officials have done.

 

"If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."-- Attributed to Thomas Jefferson [1]

 

It doesn’t get any more “straight forward” than that.

 

Returning now to the original point of all this: The argument against gold (that there isn’t enough to go around) is fraudulent. The real reason our banker friends don’t want an honest monetary system (one backed by gold for instance) is because of what it would do to their power – it would destroy it. When they insist our “modern economic reality” requires an elastic money supply to function properly (elastic meaning, they can inflate or deflate as much as they like) they are actually telling us the truth. That is, our modern economic reality of endless “bubbles” and “bursts,” steady inflation, bailouts, inescapable debt and the covert transfer of wealth from our hands to the hands of others really does require the system they’ve created to “function properly.” The problem is our modern economic reality is unacceptable. It wasn’t created to serve our needs; it was created to serve the needs of those who lied it into existence.

 

On the issue of needing an elastic money supply, professor of economics, Murray Rothbard, writes:

 

“There is no need whatever for any planned increase in the money supply, for the supply to rise to offset any condition, or to follow any artificial criteria. More money does not supply more capital, is not more productive, does not permit “economic growth.”

 

The idea of making money more elastic isn’t new. Even under the discipline of a gold coin monetary system, unscrupulous individuals figured out how to inflate the money supply. By shaving off a small portion of each gold coin that passed through their hands, merchants and kings were able to amass piles of gold shavings which were then melted down and cast into new coins. By now you can surely predict how this affected the economy. Those who created the money would spend it at “full value” and as the newly created coins began to inflate the existing money supply, (driving down the value of existing coins) the number of coins it took to purchase goods and services went up. 

 

“As governments became more brazen in their debasement of the currency, even to the extent of diluting the gold or silver content, the population adapted quite well by simply “discounting” the new coins. That is to say, they accepted them at a realistic value, which was lower than what the government had intended. This was, as always, reflected in a general rise in prices… (Emphasis added)

 

Governments don’t like to be thwarted in their plans to exploit their subjects. So a way had to be found to force people to accept these slugs as real money. This led to the first legal-tender laws. By royal decree, the “coin of the realm” was declared legal for the settlement of all debts. Anyone who refused it at face value was subject to fine, imprisonment, or, in some cases, even death.” (–Emphasis added; the inherently worthless paper money we use today has been declared “legal tender” for a reason.)

 

The king’s legal tender laws forced individuals to accept coins that they would have otherwise rejected or, at the very least, discounted heavily. As an example, imagine an economy where all trade is conducted using gold coins. Suddenly, the king decides to start minting coins made of wood. By “royal decree” he demands his new one-ounce wooden coins be accepted at the same rate as one ounce of gold. He declares them legal tender. What would the people do? Well, there is no need to guess. We can simply look at what citizens actually did do in response to the first legal tender laws. They began hoarding their truly valuable gold coins. After all, if they were going to be forced to accept junk as payment, there was no reason to pay others with something of genuine value. 

 

The same thing happened in America in the 1960s when silver dimes, quarters and half-dollars were replaced with new coins made out of a mixture of copper and nickel. Within months, a good percentage of the silver coins had already been stashed away. Sure, the new “cupronickel” quarters said they were worth the same as the old quarters (25 cents) but that didn’t mean they really were. To put it in perspective; a roll of 40 quarters has a stamped face value of $10.00 whether the quarters are made out of silver or the cupronickel of today. However, the real value of a roll of silver quarters (based on the weight of the silver alone) is over $100.00. So which would you rather have? Would you trade a roll of silver quarters for a roll of cupronickel quarters?

 

Of course, today our rulers have more sophisticated ways to debase our currency. Rather than shaving coins, or replacing solid coins with “plated coins,” or intentionally diluting the purity of the gold or silver content, they instead achieve what they want through our modern banking system. Alan Greenspan spoke out against the consequences of this practice in 1966. Ironically, a few years later, he was elected Chairman of the Board of Governors of the Federal Reserve! “Even the wisest of men can be corrupted by power and wealth” –Griffin.  Nevertheless, in 1966 Mr. Greenspan laid out the truth in no uncertain terms. He wrote:

 

“The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit…

 

The law of supply and demand is not to be conned. As the supply of money…increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value…

 

 In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. …Deficit spending is simply a scheme for the “hidden” confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”

 

 

And on that note, even if gold isn’t the absolute perfect choice for our monetary system, it surely beats the blatant fraud and exploitation inherent in the system we have today.

 

So far we’ve seen how trade first began as barter, and from barter came the discovery that certain commodities were always in demand. Those commodities, (sheep, wheat, corn, etc.) became the first form of commodity money; widely accepted as payment for other products and services. Commodity money evolved, eventually leading to the use of metal coins and then finally to the use of gold (and silver) as the most widely sought and accepted coins.

 

But these coins also had their limitations. First, they were heavy. Today, we take for granted the fact we can carry $1,000 in paper money as easily as we can carry $1. This wasn’t the case in a silver or gold coin economy…$1,000 worth of coins weighed 1,000 times more than $1 worth. Also, if you were able to accumulate any significant amount of wealth, you had to seriously worry about what to do with all your coins. Lugging them around with you wasn’t practical and safely hiding them wasn’t much better; especially if you had a large quantity. “Receipt money” emerged as the solution to both of these problems. Receipt money, as it first began, is an example of a legitimate form of paper money. Here is how it came into being.  

 

Receipt Money is born

 

Goldsmiths handled large stockpiles of precious metals in their trade. Logically they needed a safe place to store those stockpiles and, for this purpose, they built very strong and well guarded vaults. Citizens eventually figured out there was no need to worry about hiding their own coins because, for a small fee, they could simply store them in the goldsmith’s vault. The goldsmiths happily agreed to the arrangement as it was a way to earn some easy extra money.

 

As a citizen renting space in the goldsmith’s vault, you would take in your supply of gold coins (say $1,000 worth) and you would be given a receipt as proof of your deposit. The receipt would state the value of the gold coins you’d deposited (in this case $1,000) and it would be stamped payable on demand. In other words, whenever you decided to present the receipt to the goldsmith, he was required to take it from you and, in exchange, give you the amount of gold you were owed. However, it was rare for people to withdraw their gold. (They would just need to find another place to store it if they did.) Instead, most just continued making deposits and collecting receipts as proof of each deposit they’d made.

 

Soon enough everyone was walking around with these paper receipts in their pockets. Because the paper receipts literally were “good as gold,” people began using the receipts themselves to purchase products and services. As an example, if you wanted to purchase an item for $1,000, rather than go to the goldsmith to withdraw your gold coins you’d simply give the seller your $1,000 receipt. This not only made it easier on you, it was easier on the seller too. (If you had paid in gold coins, chances are the seller would have just taken the coins right back to the goldsmith for safe storage.)

 

This paper “receipt money” (100% backed by gold) was a huge improvement in the evolution of money. It was improved even further when different denominations of receipts where made available at the time of deposit. For instance, if you brought $1,000 worth of coins to the goldsmith, you could now ask for (10) $100 receipts or (20) $50 receipts, etc. instead of just a single $1,000 receipt. This of course led to the receipts themselves being exchanged for different denominations; if you had a $100 receipt, you could easily exchange it for (10) $10 receipts, so on and so forth. It was honest money at its best. …But it didn’t last long.

 

Fractional Money is born

 

Receipt money made trading with others easier than ever. It was light, easily divisible, didn’t need food or water, never “went bad,” and was backed 100% by a commodity preferred by all. As a result of its use, communities flourished and individuals prospered. But just as so many before them, the goldsmiths could not resist their temptation to corrupt the money supply in pursuit of illegitimate profits. 

 

As noted, it was very rare for individuals to “cash in” their receipts and withdraw actual coins. The goldsmiths realized at any given time, 90% or more of all coin deposits were left untouched. This sparked an idea. Why leave all that gold gathering dust in the vault when instead it could be loaned out (at interest) to earn a profit? Where once the goldsmith was limited to loaning out what belonged to him (a tiny amount of what was held in the vault) he now could earn ten times as much, or more, loaning out what belonged to others. It would be a profitable little secret known only to him and others in his trade. 

 

This of course was pure fraud. The total value of every coin in the vault had an equivalent “total value” of receipts which were held by the coin’s rightful owners. Those who had accepted these receipts in exchange for their coin deposits and those in the community who accepted these receipts as payment for their products and services believed them to be no different than receiving the actual coins themselves. Instead, the receipts (unbeknownst to the receipt holders) were now only backed by a fraction of the value stamped on their face. What began as “receipt money” had now evolved into a new form; it was now fractional money. 

 

To easily understand the fraud, imagine I ask you to sell me a one-ounce gold coin. To purchase the coin, I pay you with receipt money equal in value to the coin itself. The receipt is 100% backed by the exact same amount of gold (or so you think.) In reality, what I’ve given you is a piece of paper that is only partially backed by gold…no different than if I traded you half of a coin for a whole coin. Would you knowingly agree to such a “deal?” -Of course not.

 

But nobody knew this was the case. Nobody knew the coins (supposedly backing each receipt 100%) were being loaned to others. And when the people finally did discover their coins were being loaned (without their permission) they still didn’t comprehend the seriousness of the problem. Sure, they were outraged. But not because they understood the dangers or inherent fraud of fractional money; no, they were upset because the goldsmiths were getting rich loaning out their coins!

 

Well, the last thing the goldsmiths wanted was for the game to end. So, to calm their depositors (and continue earning big bucks loaning coins that didn’t belong to them) they made the following offer: Depositors could now store all their coins in the vault free of charge AND (as if that generous gesture weren’t enough) depositors would also be paid a percentage of the value of their coins! (Let’s say 5 %.) So, the more coins a person deposited in the vault, the more they would earn! From the perspective of the average citizen, this was quite an offer. (1) They’d get to continue using their convenient paper money, (2) they’d no longer have to pay a storage fee for their coins AND (3) they’d earn some extra money on the side. The goldsmith, all of a sudden, “wasn’t such a bad guy after all…” 

 

So the problem of the goldsmiths earning all the money had been solved, but the greater problem (the inflation of the money supply and depositor’s wealth being put at risk) had not. Nor were either of these two greater problems understood by the general public. Let’s briefly cover them both:

 

Inflation

 

Assume a depositor brings in $1,000 worth of gold coins and receives $1,000 worth of receipts in exchange. The community’s money supply will not change as a result of this transaction. (Where there once was $1,000 in gold coins circulating in the economy, there now are $1,000 in receipts. And if the receipt holder returns for his coins, the $1,000 in receipts will be surrendered in exchange for the $1,000 in coins. No change in the overall money supply will take place.)

 

However, under the “fractional money” system something different happens. Our depositor still comes in with $1,000 in gold coins, and he still receives $1,000 in receipts. No problem there. But an hour later, another man comes in. He doesn’t want to make a deposit; he wants to borrow $1,000. The goldsmith agrees to the loan and issues the borrower $1,000 worth of NEW receipts. Where in our first example the money supply did not change, in our second example the money supply has doubled. (There is now $2,000 worth of receipts circulating in the economy backed by only $1,000 in gold coins.)

 

Threat to Depositor’s Wealth

 

Aside from the inflation, there is also another big problem. Say the borrower above meets up with someone in the community and spends his $1,000 in new receipts. And say the person he paid with those receipts decides he’d rather have the actual gold coins than the paper. No problem there. The seller can take the receipts to the goldsmith, cash them in for coins and be on his way. But what happens if an hour later the man who made the original deposit shows up for his coins? Let’s say he decided he’d rather just store his coins himself. Too bad for him, his gold walked out the door an hour earlier. This is a highly simplified example, but it illustrates what happens when a banker / goldsmith makes more promises to “pay on demand” than he can honor. The banker / goldsmith cannot produce the coins, he is bankrupt, and he takes the depositor down with him.

 

Now in the simplified example above, the goldsmith got into trouble by pushing his reserves down to 50%. (He only had $1,000 in actual coins to back the $2,000 in receipts he had issued. That puts the fraction of reserves at 50 %.) However, it’s very unlikely he’d ever get into trouble at that level. In reality, there are hundreds or thousands of depositors and the vast majority of them are happy to keep their gold with the goldsmith. As long as they believe their coins are safe, they prefer to keep them in storage earning interest. Additionally, those who receive the receipts in commerce aren’t likely to come in and request coins either because the paper receipts are much more convenient to carry and use. The goldsmith knows this. He’s seen first hand that demand for actual coins is very low.

 

So what inevitably happens is, the goldsmith / banker continues to push down the reserves more and more; always walking closer to the edge of insolvency. Why? Because every time he “creates more receipts” and loans them out, he earns more money. Returning to our simplified example, consider the following: A man deposited $1,000 in coins with the goldsmith and in exchange received $1,000 in receipts. In addition, the goldsmith has agreed to pay the man a percentage of the value of his deposit. We’ll assume that percentage is 5% per year. To earn the money to pay this 5%, the goldsmith creates another $1,000 in receipts and loans them out at say 8% interest. That leaves the goldsmith a profit of 3% on money he “created out of nothing.” (The goldsmith earns 8% on the newly created receipts; he pays the original depositor 5%, and that leaves a 3% profit.)

 

But in this example, the goldsmith has only doubled the money supply. He still has 50% reserves and that is far more than he needs, so the game continues. What if he quadruples the money supply? Instead of earning just 3% per year on the original $1,000 deposit, the goldsmith’s profits soar to 19%! That is over 6 times as much profit as he earned originally, and he is still only down to a 25% reserve ratio. (Here is the math: Instead of creating a single $1,000 loan, the goldsmith creates a total of three $1,000 loans. Including the original $1,000 in receipts issued to the depositor, there is now $4,000 in receipts circulating for the $1,000 deposit. That puts the reserve ratio at 25%. The first $1,000 loan only produces a profit of 3% for the goldsmith (8% minus 5% paid to the depositor leaves 3% profit.) However, EACH of the next two loans generates a full 8% for the goldsmith. In other words, the depositor is not due any more money on his $1,000 deposit just because the goldsmith creates more loans. (So 3% profit on the first loan, plus 16% total on the next two loans equals 19% earned for the goldsmith on money created out of nothing.)

 

But the goldsmith still has far more reserves than he feels he needs. From what he can tell, he thinks he can push his reserves down to 10% and still be OK. So he decides to expand the money supply some more, A LOT MORE. If he multiplies the money supply by 8 times, he still will have reserves of 12.5%, and his profits will soar to 51%! [2] Sure, the money supply is being diluted, inflation is wreaking its havoc, and the depositors are blissfully unaware how close they are to losing everything; but the goldsmith is literally making money by simply “creating it” out of thin air! Who would want to interrupt something as marvelous as that?

 

-If the goldsmith can charge more for his loans, all the better. Imagine how much more exciting things become. Even a small increase in the loan rate increases profits significantly. For instance, with his reserves at 12.5% and loaning at 8%, he earns more than a 50% annual profit on every $1,000 of his depositor’s money. But at 10%, he earns more than 60%! And at 15%, he earns nearly 100%!! At that rate, for every $1 million he attracts in deposits, he will earn nearly $1 million for himself!

 

But wait; maybe he can inflate the money supply even more. Maybe he can get by with driving reserves down to only 6.25%, more than DOUBLING his profits yet again.  …Maybe 3%, maybe even 1%!!! …The game is intoxicating and it always leads to disaster for depositors. Inevitably, the scam collapses when people realize the receipts they hold are only worth a small fraction of what is printed on them. A one-ounce gold receipt might only be backed by a tenth of an ounce of gold (or less.) When the truth is discovered, a “run on the bank” ensues and only the first few in line are able to withdraw gold. All the rest, the vast majority, are left holding worthless paper.

 

One would think, after witnessing the aforementioned disaster unfold repeatedly, that bankers would realize the error of their inflationary ways. One would think they’d devise an honest monetary system. –A system that permits them to earn legitimate profits without exploiting (if not completely ruining) the people who depend on it. One would think… Instead, they set out to devise a sort of “banker’s utopia” where they could expand their fraud, operate with ZERO reserves of gold and silver, and shift any losses they might incur on to others. And that brings us to the final form of money we’ll be discussing: Fiat money. 

 

Once the idea of fractional money is accepted, the fraction is inevitably pushed down to zero, at which point the money becomes nothing more than pure fiat. Fiat money is money backed by absolutely nothing. It’s the equivalent of the “wooden coins” mentioned earlier; inherently worthless. And because fiat money is inherently worthless, the people must be forced to accept it via legal tender laws.

 

Fiat Money

 

“The American Heritage Dictionary defines fiat money as “paper money decreed legal tender, not backed by gold or silver.” The two characteristics of fiat money, therefore, are (1) it does not represent anything of intrinsic value and (2) it is decreed legal tender. Legal tender simply means that there is a law requiring everyone to accept the currency in commerce. …when governments issue fiat money, they always declare it to be legal tender under pain of fine or imprisonment. The only way a government can exchange its worthless paper money for tangible goods and services is to give its citizens no choice.

 

…The first recorded appearance of fiat money was in thirteenth century China, but its use on a major scale did not occur until colonial America. The experience was disastrous, leading to massive inflation, unemployment, loss of property, and political unrest. "

 

The first paragraph above provides a perfect definition of fiat money, so let’s expand on the second paragraph; the track record of fiat money in colonial America.

 

Fiat money first appeared in Massachusetts following a failed military campaign against Quebec in 1690. Previous expeditions had been successful, but this time Massachusetts had seized nothing of value and, as such, could not pay her troops. Raising taxes would have been very unpopular; a risky proposition. However, ignoring the obligation to pay her troops what they’d been promised was even riskier. Desperate to discharge her debt, the government of Massachusetts decided to simply print the money. Other colonies watched in amazement and before long, they too were enjoying the magic of printing their own cash (and the citizens enjoyed the consequences.)

 

As the printing presses inflated the money supply, legal-tender laws were instituted to ensure the worthless paper was accepted. Predictably, gold and silver coins disappeared from circulation in the colonies. (Why pay with real money when all you could expect was paper in return?) The only time gold and silver coins were spent was with foreigners who demanded real money as payment for their products and services. This steadily drained the colony’s total supply of gold and silver. As the supply of gold and silver dwindled, international trade nearly ceased. –Foreigners had no interest in selling their wares for fiat paper; who could blame them?

 

As the inevitable problems of a heavily inflated “fiat money system” began to surface, the colonial governments took steps to fix the problems. In 1703, South Carolina threatened citizens who refused its paper with fines “double the value of the bills so refused.” That didn’t work, so in 1716 it increased fines to “treble the value.” Some colonies began printing new money to soak up some of the old. For instance, in 1737 Massachusetts traded its citizens $1 of new fiat money for $3 worth of their old money, with the added promise the new money would be fully redeemable in gold or silver in five years. (A promise that wasn’t kept.)

 

“By the late 1750s, Connecticut had prices inflated by 800%. The Carolinas had inflated 900%. Massachusetts 1000%. Rhode Island 2300%. Naturally, these inflations all had to come to an end and, when they did, they turned into equally massive deflations and depressions. It has been shown that, even in colonial times, the classic booms and busts which modern economists are fond of blaming on an “unbridled free market” actually were direct manifestations of the expansion and contraction of fiat money which no longer was governed by the laws of supply and demand.”

 

This downward spiral was temporarily brought to a halt by, of all things, British intervention. The Bank of England, using its influence with the Crown, sought to force the American Colonies to use its paper money. The Bank got its way in 1751 when the British Parliament began putting heavy pressure on the colonies to withdraw their currency from circulation. The pressure was increased until, in 1764, the British Parliament passed the “Currency Act” which made it illegal for the colonies to issue paper currency in any form.

 

Despite major opposition, the Currency Act actually ended up working to the benefit of the colonies. Rather than accept Bank of England money as a primary medium of exchange, the colonists simply returned to a true commodity-based monetary system. The remaining gold and silver coins once again began to circulate and other commodities, like tobacco, also served to stabilize the economy. Returning to an honest money system produced immediate results. 

 

“Trade and production rose dramatically and this in turn attracted an inflow of gold and silver coin from around the world, filling the void that had been created by years of worthless paper. …After the colonies had returned to coin, prices quickly found their natural equilibrium and then stayed at that point…”

 

Unfortunately, the recovery was short-lived.

 

The Colonies Declare Their Independence – Fiat Money Returns

 

Wars are very expensive and it’s rare for them to be fought using existing government funds. The American War for Independence was no exception. Faced with a shortage of money, the leaders of the revolution had the usual options available to finance the war:

 

• They could look to borrow the funds, but that would put them at the mercy of their lenders. Even if the colonies were heavily favored to win their battle against Great Britain, there would be limits to how much lenders could produce or would be willing to risk. –And, up against the most dominant military in the world, the colonies were anything but “heavily favored to win.”

 

• They could try to raise the money via taxation but (as is often the case) taxes sufficient to fully fund the war would have been severe. Support for this approach would have been very difficult to sustain.

 

• Finally, there was the path of least resistance, the printing press. Arguably, this approach ends up costing the most, but as G. Edward Griffin explains:

 

“By artificially increasing the money supply…the real cost is hidden from view. It is still paid, of course, but through inflation, a process that few people understand.” 

 

Between 1775 and 1779, the central government expanded the total money supply from just $12 million to a whopping $425 million. That’s an increase of more than 3,500%. In addition, the individual states were busy doing the same thing. It’s been estimated, in just five years, the total expansion reached 5,000%.

 

“The first exhilarating effect of this flood of new money was the flush of apparent prosperity, but that was quickly followed by inflation as the self-destruct mechanism began to operate. In 1775, paper Continentals were traded for one dollar in gold. In 1777, they were exchanged for twenty-five cents. By 1779, just four years from their issue, they were worth less than a penny…it was in that year George Washington wrote, “A wagon load of money will scarcely purchase a wagon load of provisions.”

 

Fiat money might provide instant purchasing power for those who create it, but it does so at the expense of those who are forced to use it. Every dollar worth of products and services it buys is extracted from the citizens via the hidden tax of inflation. As stated in chapter one, it makes little difference whether the government takes $3,000 worth of your purchasing power in direct taxation, or takes $3,000 of your purchasing power through an inflationary policy; the effect on your wealth is the same. You’re $3,000 weaker in either case. –That said, there are many aspects that make inflation a far more insidious tax:

 

• Those on fixed incomes or who have actually saved their money are hit the hardest.

 

• Whereas normal taxation cannot be hidden from the people (placing firm limits on its use) inflation allows purchasing power to be confiscated secretly. Like theft, there isn’t even the illusion of an agreement between those who are taking the money and those who are surrendering it. –Purchasing power obtained from the citizenry in this fashion is abusive in and of itself; that so few understand the process only makes it easier for the abusers.

 

• So long as the citizens are forced to use the fiat currency, there is nothing they can do to stop the confiscation of their money. $10,000 under the mattress today might only be worth $5,000 in actual purchasing power next month. (Consider the case of the Continentals. At the end of four years, what began as $10,000 worth of purchasing power had deteriorated to only $100! That’s no different than looking under your mattress to find somebody had stolen $9,900 of what you had saved.)

 

The massive inflation caused economic chaos and that was soon followed by attempts to fix the problems. (Sound familiar?) As prices went through the roof ($5,000 for a pair of shoes, $1 million for a suite of clothes, etc.) the colonies instituted wage and price controls. When that wasn’t enough, severe legal tender laws were enacted to further encourage people to be good patriots. According to this law, refusing the worthless currency was tantamount to treason:

 

“If any person shall hereafter be so lost to all virtue and regard for his Country as to refuse to receive said bills in payment…he shall be deemed, published, and treated as an enemy in this Country and precluded from all trade or intercourse with the inhabitants of these colonies.”

 

And as night follows day, the chaos of inflation was followed by the chaos of deflation. As the bubble burst, unemployment, bankruptcies, foreclosures, even riots and insurrection, appeared in its wake. The full costs would finally be counted.

 

“Prices fell drastically, which was wonderful for those who were buying. But, for the merchants who were selling or the farmers who had borrowed heavily to acquire property at inflated wartime prices, it was a disaster. The new, lower prices were not adequate to sustain their fixed, inflated mortgages, and many hard-working families were ruined…Idleness and economic depression also led to outbursts of rebellion and insurrection. George Washington wrote: “If…any person had told me that there would have been such formidable rebellion as exists, I would have thought him…a fit subject for a madhouse.”

 

When our founding fathers drafted our Constitution, the pain and suffering of fiat money was still fresh in their minds. They firmly resolved to rid our nation of it once and for all. As a result, the United States of America became the most powerful economic force the world had ever seen.

 

But the wisdom of our nation’s founders was lost with the passage of time, allowing those who benefit from “fractional reserve” and / or purely “fiat money” systems to steal their way back into power. In the next chapter, we’ll delve deeper into the “unbroken record of fraud, booms, busts, and economic chaos” of their dishonest money. 

 

Acknowledgements - Introduction

1. Money is Power...............................................5

2. Something for Nothing................................12

3. The Bailout.................................................18

4. Dreaming of a New World Order......................27

5. BUILDING a New World Order........................35

6. What is Money?..........................................44

7. The World's First Central Bank........................58

8. How They Do It - How We Stop Them.............64

(->Purchase a "hard copy" of the new / updated version here )

 

[1] This quote is often attributed to Thomas Jefferson, but it appears to be a “paraphrase.” For instance, the following quote conveys nearly the exact same sentiment, only it’s not written in laymen’s terms: "The plethory of circulating medium which raised the prices of everything to several times their ordinary and standard value, in which state...heavy debts were contracted; and the sudden withdrawing too great a proportion of that medium, and reduction of prices far below that standard, constitutes the disease under which we are now laboring...Certainly no nation ever before abandoned to the avarice...of private individuals to regulate, according to their own interests, the quantum of circulating medium for the nation, to inflate, by deluges of paper, the nominal prices of property, and then to buy up that property… having first withdrawn the floating medium which might endanger a competition in purchase. Yet this is what has been done, and will be done, unless stayed by the protecting hand of the legislature. The evil has been produced by the error of their sanction of this ruinous machinery of banks; and justice, wisdom, duty, all require that they should interpose and arrest it before the schemes of plunder and spoliation desolate the country. " -The works of Thomas Jefferson, Volume 12 (Correspondence and papers 1816 - 1826) in a letter to William C. Rives > RETURN to previous position on page