Friday, November 25, 2011


Let’s take a look at some history.

In 1944, 730 delegates from 44 nations met in Bretton Woods New Hampshire and agreed on an international monetary system.

Pretty simple idea. The United States had a lot of gold in Fort Knox and our dollars were pegged at 1/35th of an ounce of gold. Thirty-five dollars an ounce. Not hardly enough to interest Glenn Beck or Gordon Liddy.

The other 43 nations agreed to adopt fixed rates to exchange their money for US dollars.

The system worked pretty well until about 1970. The United States was involved in a prolonged and not very successful war in Viet Nam. Folks around the world began insisting on redeeming their US dollars in gold.

France demanded 191 million in gold. Switzerland redeemed 50 million, then on August 9, 1971 withdrew from the Bretton Woods system.

Congress began to consider devaluing the dollar.

Six days later, on August 15, 1971, President Richard Nixon imposed a ninety day wage and price freeze, a 10% import surcharge, and closed the gold window.

Historians call it the “Nixon Shock.”

Our Yankee dollar no longer represented 1/35th of an ounce of gold. We were officially using fiat money.

“Fiat” is Latin for “let it be.” Our currency is money because we say it is. Sort of like the banker in a game of Monopoly.

My grandson says fiat money doesn’t work because printing money causes inflation. In fact we did experience inflation in the 1970’s. By the time Ronald Reagan and Jimmy Carter squared off in 1980, 13 and 14 percent inflation was the norm.

Enter Ben Bernacke.

The Federal Reserve System was established by the Federal Reserve Act of 1913. It’s a group of regional banks which function as the official bank of the United States. It’s the job of the Fed to prevent inflation and to ward off recession.

Something else the Fed does: it props up the banking system.

Nothing new there. Back in1907 we had a severe recession. People lost faith in the banks and lined up to take their money out. J. Pierpoint Morgan did a one man bail out, deciding which firms were too big to fail and saving the New York stock market.

Shortly after the panic of 1907, Congress formed a National Monetary Commission, chaired by Senator Nelson W. Aldrich of Rhode Island. Aldrich invited a group of bankers to a ‘duck hunt’ on Jekyll Island. They came up with a plan for a central national banking system.

Three years later the Fed was born.

Most Americans don’t know much about the Fed. It’s all a kind of mysterious economic hokus pokus. Seven bankers who are appointed by the President of the United States and paid $179,000 a year to decide what interest rate to charge the banks.

And some other things. The Fed controls our money supply. They don’t have to print dollar bills, or fives, tens and hundreds. No sir, they just write checks. They write checks that are drawn on the Federal Reserve.

That’s right. It’s a check that tells itself to pay money to somebody. If they want to put more money in circulation, they buy government bonds with those checks. The people they buy the bonds from deposit the checks in their banks and their banks deposit the money with the Fed.

If you or I did that, we’d be arrested for check kiting.

So what’s the big deal about owing trillions to the Chinese? When their loans come due, the Fed can just write them a check.

And what’s the big deal about deficit spending in Washington? The Fed can write checks and never be overdrawn.

Free food, clothing, shelter, health care, education? No problem. The Fed can write a check.

Ain’t Utopia wonderful? All we have to do is pitch a tent on Wall Street and elect Michael Moore President of the United States.

1 comment:

  1. NO! All we have to do is PREPARE for and become self-sufficient.