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Title: Tracing the Fed’s Vital Role in the Decline of the US Dollar
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URL Source: http://dailyreckoning.com/
Published: Feb 6, 2011
Author: Eric Fry
Post Date: 2011-02-06 10:13:10 by Capitalist Eric
Keywords: None
Views: 13420
Comments: 16
In 1913, the Federal Reserve Act became law – granting sole authority to the Federal Reserve to “issue legal tender.” Armed with its new power and its good intentions, the Fed embarked on a 98-year process of currency debasement. That’s not what the Fed set out to do; it’s just what it did do. In the early days of the Federal Reserve, this monetary authority enjoyed the support of a gold standard. Few Americans doubted that the Fed’s new greenbacks would be as good as gold. As such, gold coinage and paper dollars intermingled effortlessly in the US economy for most of the Fed’s first two decades. But as the wheels of progress roared ahead, America’s “hard money” coinage disappeared and soft promises took its place – soft promises and lots of chatter about hard money. As it turns out, chattering about hard money does not preserve wealth as well as hard money itself. The purchasing power of a one dollar bill has plummeted more than 95% since the Federal Reserve first began printing its legal tender in 1914. Although the dollar’s epic decline began glacially, it has gathered luge-like momentum. The greenback’s value dropped only 50% during the first 33 years of the Fed’s stewardship – i.e. between 1913 and 1946. But the 1946 dollar would lose half its value in just 24 years, while the 1970 dollar would lose half its value in just nine years. The rate of decay slowed somewhat during the Volcker years, as the 1979 dollar did not lose half its value until 14 years later. Nevertheless, the dollar’s progression toward zero since 1913 feels more geometric than arithmetic. In 1914, the year the Federal Reserve began conjuring dollar bills into existence, 700,000 shimmering new $10 Indian Head Gold Eagles rolled out of the Philadelphia, San Francisco and Denver Mints. Once in the hands of a working stiff, each $10 coin would buy $10 worth of goods and services. Likewise, the Fed’s crisp, new McKinley $10 bill would also buy $10 worth of goods and services. Over the ensuing 98 years, a succession of Federal Reserve Chairmen labored to “preserve” the purchasing power of their McKinleys, Washingtons and Lincolns. The Gold Eagles had to take care of themselves. The results are in; the unprotected Gold Eagles flourished, while the “protected” Mckinleys withered. Based on its metal content, a 1914 $10 Indian Head Gold Eagle is worth $643.45. A 1914 $10 bill is still worth ten dollars. To examine this contrast from a slightly different perspective, consider the divergent paths of the two $50 bills pictured below. The first $50 bill is a 1913 “Gold Certificate,” issued directly by the US Treasury and fully convertible into gold. The second $50 bill was issued by the Federal Reserve in 1914 and was convertible into nothing. Both versions of this $50 bill circulated freely in American commerce. Any holder of the $50 Gold Certificate held title to 2.41896 troy oz. of Gold – at the fixed rate of $US20.67 per troy oz. These certificates could be redeemed at any bank or from the US Treasury itself at any time…until 1933, when FDR outlawed gold ownership. Notwithstanding this little nuance, let’s consider the plight of two hypothetical buddies from 1914. The first buddy, Caleb, stashes a $500 “rainy day” fund under the floorboards of his house – a roll of ten $50 Ulysses S. Grant dollar bills. The second buddy, Josiah, also stashes $500 under the floorboards – he walks into the neighborhood bank with ten $50 Ulysses S. Grant Gold Certificates and exchanges them for gold. Josiah then takes his gold and hides it under his floorboards. Both buddies forget about their hidden stashes. Eventually, let’s say 2010, the respective heirs of these two long-deceased buddies happen to conduct simultaneous renovations of their respective residences. Caleb’s heirs find the ten ancient $50 bills. “How quaint,” they think to themselves. Josiah’s heirs find $32,172 worth of gold! Thus, 98 years of history demonstrates conclusively that a blind monkey could have preserved the dollar’s purchasing power better than a Federal Reserve Chairman. Unfortunately, it’s tough to find a blind monkey who will take the job.
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#1. To: Capitalist Eric (#0)
The measure of the value of a dollar in terms of purchasing is its parity against other currencies which was the goal of Bretton Woods and has still remained somewhat steady even tho the currency "floats".
Bullshit. The value of a currency, is what that currency can purchase. The ultimate test of the value of a currency, is how much currency it takes to purchase one unit of the standard measure of value. That standard measure of value is globally accepted to be gold. Thus, the value of a dollar is measured by how many dollars it takes to buy an ounce of gold. And the result of this measure, is the following: Sorry war... but when it comes to economics...
That's the spot value. It's value is also what it will be worth at a fixed point in the future. Thus, the yield curve. And you understand that what you've purchased with the spot value has value as well, correct? That standard measure of value is globally accepted to be gold. My turn. BULL. Just about any commodity is pegged in dollars. Gold is but one benchmark. And as I've said before, the people who buy gold are usually scarier than the reason they are buying gold. Where would oil, lumber and cotton be if you removed every speculator from the market. A speculator being someone who has now tangible use for the commodity.
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#6. To: war (#1)
The measure of the value of a dollar in terms of purchasing is its parity against other currencies which was the goal of Bretton Woods and has still remained somewhat steady even tho the currency "floats".
#15. To: Capitalist Eric (#6)
(Edited)
The value of a currency, is what that currency can purchase.
Replies to Comment # 15.
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