Since 1971, U.S. citizens have been able to utilize Federal Reserve Notes as the only form of money and for the first time had no currency with any gold or silver backing.
This is where you get the saying that U.S. dollars are backed by the “full faith and credit” of the U.S. Government. In other words, Nixon implied take our paper dollars or don’t.
The U.S. at this time was a world super power having been victorious in WWII and there really wasn’t much anyone could do about the decision by the U.S. government to abandon metal backing.
What does a dollar or Federal Reserve note represent now that gold and silver no longer back any of the currency printed in the U.S.?
A dollar bill used to say “This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury or at any Federal Reserve Bank.” Look at a dollar bill today. It simply says; “This note is legal tender for all debts, public and private.” In other words, you can’t redeem it for “lawful money.”
Guess what folks? A dollar bill is not lawful money, but rather “legal tender.”
From the Treasury;
“Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. Redeemable notes into gold ended in 1933 and silver in 1968. The notes have no value for themselves, but for what they will buy. In another sense, because they are legal tender, Federal Reserve notes are “backed” by all the goods and services in the economy.”
What the government, via the Treasury and the Federal Reserve, really did in 1971 was coerce you to accept something (Federal Reserve notes) that used to be redeemable for gold and/or silver but now aren’t redeemable at all.
But let’s play along with their definitions and see if “all the goods and services in the economy” really back the dollar?
What the Treasury would have you believe is that GDP backs the dollar. GDP is defined as “The monetary value of all finished goods and services within a country’s borders in a specific time period It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.”
To break it down;
GDP = C + I + NX + G
where:
“C” is equal to all private consumption, or consumer spending, in a nation’s economy
“I” is the sum of all the country’s businesses spending on capital
“NX” is the nation’s total net exports, calculated as total exports minus total imports. (NX = Exports – Imports)
“G” is the sum of government spending
For the U.S. Presently:
C is down to nothing with high unemployment and people struggling just to pay bills.
I is down to nothing (especially now that lending has dried up)
NX is hugely negative and has been for quite some time
G is all that is running the show
Yes, that’s right, government spending is all that is running the show for the most part. Does anyone think that adding more debt to debt is in the long run a healthy thing to do? Does it work for the consumer to take out more credit cards and use this newly created credit to pay for old debt and current expenses? Hardly. So how will it work for the U.S. government? Can the U.S. government really afford to keep policing the world and fight wars when the only thing that allows them to do so, the U.S. dollar, is on the brink of collapse?
So if this theory of GDP backing the dollar is viable, and if government spending is all that is backing the dollar at this point in time, where do they get the money to do it? Answer; taxes and printing it out of thin air.
Since politicians don’t get elected by raising taxes, that leaves only one viable answer; printing it or creating credit. Or in other words, DEBT. It’s a nice legacy that our generation is leaving future generations isn’t it?
The George W. Bush administration was spending out of control and President Obama’s administration is piling on debt at an even more alarming rate “to prevent the system from collapsing” mind you. Any bets on their success? The system will collapse as long as government keeps spending.
But the reality with this government theory of GDP backing the dollar is flawed to begin with. The dollar acts as a “medium of exchange” and is only valuable because it can be exchanged for goods and services. It is one’s production that is the actual backing of the dollar, not the piece of paper itself.
Take another look at that dollar bill you pulled out….
Do you need further proof that U.S. dollars are debt? What does it say at the very top of the dollar bill? It’ says “Federal Reserve Note.”
What is the definition of the word “note?”
Note: “A written promise to pay a debt.”
What is this debt that you, the one who is possessing these dollars, has to pay? I thought your production (via your hard earned labor) was something you got to keep? But according to what you are being paid for your labor, i.e. dollars you are accepting as payment, are nothing but IOU’s.
Since you can’t redeem these IOU’s for “lawful” money (gold or silver) any longer, what makes you think that these pieces of paper called “notes” that have 38 short years of existence are going to maintain your wealth in the years to come?
What are you doing about it today to protect yourself?
Don’t be confused by all the games the Treasury and the Federal Reserve are playing. Educate yourself as to what money is and what really backs the U.S. dollar. Educate yourself about investing in gold.
My free white paper, “How Gold Investments Can Secure Your Retirement Years” is a good start. Please do yourself a favor and read it.
Related posts from the Fed Up Blog:
Doug Eberhardt
Doug Eberhardt was a financial advisor for over 20 years. He left the business in 2005 because he didn’t agree with the mainstream advice the financial services industry was trying to pass on to investors. After subsequently working for one of the largest gold dealers in the United States, Doug is now helping investors with his unique insights into how to buy gold and silver the safe way through this blog and his forthcoming book "Buy Gold and Silver Safely." Follow "Buy Gold and Silver Safely" on facebook by clicking here. If you would like to buy gold or silver bullion coins or bars, call 888-604-6534 to speak to a representative.
Doug,
Some interesting ideas here dude.
I have read your white paper…and couldn’t put it down until I was done reading it. I don’t say that about many ebooks.
Good stuff…keep it up.
I am looking into your gold book.
Joe
Spending may be out of control, but I have faith in my man Barack! Still, a good story with more alarm bells sounding than a collision warning.
Digger,
Haven’t had a chance to make my way through your blog yet, but
do you discuss “fiat” money? That’s what the dollar is – just paper with a “belief” behind (backing) it. What would happen to the value of the dollar if people just did not believe it had value?
Ed
Hi Ed,
You are correct. Currency only has value because of this “belief” that you speak of. I didn’t want to start with the heavy stuff as it’s hard to reverse the systems education process, so I am doing so in steps. Understanding the Treasury’s definitions I thought to be a good start.
People in the 1600′s at one time thought tulips had tremendous value. Then they didn’t. The book, “Extraordinary Popular Delusions and the Madness of Crowds” goes into these types of mania including that of John Law and paper scrip.
The same “belief” might be applied by some to gold now or in the future, but the difference IMO lies with 38 years of U.S. dollar existence sans gold versus over 5,000 years of existence of gold’s perceived value where it has never become worthless.
So there’s not much of a “delusion” with gold, hence my support of it. I go into the Federal Reserve involvement a little bit more in this post; http://fedupbook.com/blog/federal-reserve/the-fed-is-relevant-for-now-however/ and thoroughly address it in my white paper and book.
Hope you’re well Ed!
Well done! You most certainly covered the subject and it scares me!!
“What is this debt that you, the one who is possessing these dollars, has to pay?”
This is backwards. Fiat money represent a debt owed to you, just like your bank account balance represents how much the bank is in debt to you. Dollars are a non-redeemable bond with infinite maturity that pays no interest. Its value is backed only by the governments ability to enforce legal tender laws and crack down on counter-feiting and the federal reserves ability to restrain itself from printing money.
Hi Soylent,
In short, the answer to whom they have to pay the debt to, is the Federal Reserve. The problem is that it’s a game that the U.S. government will never win.
Let’s say the Federal Reserve was the only entity allowed to create money and all the money in the world was $1.00 and the Fed loaned it to the U.S. Government at 5% interest. When the U.S. wants to pay back the $1.00, where will they get the money to pay the 5% interest? Answer: they have to borrow more in a never ending game that they will never come out ahead in unless of course they got rid of the Fed.
More detailed response:
My point was that dollars used to be redeemable in coin (gold or silver) and today they only represent a debt. One can’t turn the Federal Reserve Note in at a Central Bank and get anything of tangible value in return.
If fiat money truly “represented a debt owed to you,” how does one collect upon said debt? This, IMO, is different than someone retrieving dollars from their bank account. Yes, that money is a debt to the bank, but a credit to their account. They can’t turn that money over to the Federal Reserve and get anything for it whilst in the past they could.
Today, what happens is this fiat money “debt” is to be paid to the Federal Reserve in repayment of what they loaned the Treasury. What do they get in return for turning in their Federal Reserve Notes? More Federal Reserve Notes!
The problem with this never ending game is what they are receiving (more Federal Reserve Notes), is worth less than what they started with unless they put it in a financial institution and received interest. Purchasing power is diminished if Federal Reserve Notes are not invested.
The decoupling of gold versus Federal Reserve Notes that are invested has been occurring since 1971. I write about this decoupling in this article: http://fedupbook.com/blog/inflation/confused-about-gold-and-the-dollar/
Let me know if this answers your query. Perhaps I should have explained it better. I plan on going back and reworking some of the article for clarity.
Thanks for your comment.
“Let’s say the Federal Reserve was the only entity allowed to create money and all the money in the world was $1.00 and the Fed loaned it to the U.S. Government at 5% interest.”
That’s erroneous and possibly dishonest.
When the US government wants to borrow it issues treasuries with various maturity dates, depending on interest rates and how long it wants to borrow the money for. They auction them off, and at some given price the amount of interest is enough to intice someone to buy them.
The FOMC(part of the federal reserve system) creates money by purchasing US debt(i.e. treasuries) with newly created money. If the FOMC wants to destroy money it sells treasuries back into the market to anyone willing to buy them and just return the money it created to the oblivion from whence it came.
There is nothing particularly sinister about this process of money creation; it is not a for-profit activity and they don’t get to keep any interest from treasuries they hold. They return that money to the US treasury other than the trivial amount they spend on operating expenses and wages for their employees.
“When the U.S. wants to pay back the $1.00, where will they get the money to pay the 5% interest?”
It’s tremendously bad policy to annihilate all money in a society. But lets ignore that.
It’s not easy to shrink the money supply to zero, but it is not because of any technical difficulty. Firstly you must recognize that paying down debt held by non-FOMC entities does not destroy money because this debt was never monetized in the first place.
Assume there is $100 in circulation and I buy a US T-note for $0.97 and collect my $1 upon maturity. Did 3 cents necessarily spring into existance? No, because you just paid me from money already in existance that was collected from taxes and as soon as I spend that money into circulation the US government can collect parts of it from sundry taxes and use it to pay down additional debt.
Since the FOMC returns surplus money to the treasury, there is no extra debt created by its monetization of debt. So all the government has to do is somehow convince the FOMC, which is in charge of the money supply, to start destroying money by puking up treasuries into the market. Then the government has to vacuum money out of the economy with higher taxes(very unpopular) and vastly reduced spending(very unpopular). The debt still won’t reach zero because there will be mass-unemployment, starvation in the streets and an armed revolution before you can get there; but it is technically possible to suck all this money out of the economy.
“Answer: they have to borrow more in a never ending game that they will never come out ahead in unless of course they got rid of the Fed.”
Nonsense.
“If fiat money truly “represented a debt owed to you,” how does one collect upon said debt?”
It represents a monetized slice of US treasuries. You don’t collect on it because it’s not reedemable for anything except other federal reserve notes. It’s a bond with no maturity and no coupon; valuable only because supply is limited, because the government enforces legal tender laws, has the power to tax and the federal reserves assurances that it will not enact tremendously stupid monetary policy.
“The problem with this never ending game is what they are receiving (more Federal Reserve Notes), is worth less than what they started with unless they put it in a financial institution and received interest. Purchasing power is diminished if Federal Reserve Notes are not invested.”
That’s a conscious decision to encourage investment. Having a pile of gold bricks or pale green paper slips with dead statesmen on them sitting in a deposit box somewhere only allows you to take possession of a corresponding share of the real wealth that is being produced; it does not magically increase the production of actual wealth. For that you need people to build and operate factories, farms and businesses and do other productive things; this activity is accomplished through prudent investment. Mr. Greenspan has managed to encourage a lot of imprudent investment, this is an error in judgement following the housing bubble. Gold on the other hand, makes no judgement and will sort of hobble along ignorant of the world around it; sometimes this is a good thing, sometimes it’s not.
Soylent, I see where you are coming from in your criticism of my explanation and admit it wasn’t a good example and misleading. I should have taken more time to research my reply.
An explanation of “Modern Money Mechanics” from the Fed:
http://www.rayservers.com/images/ModernMoneyMechanics.pdf
And a video explaining “How Money is Created and Destroyed:”
http://www.rayservers.com/images/ModernMoneyMechanics.pdf
Excerpt from “Modern Money Mechanics:” “In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper, deposits merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face value.
What, then, makes these instruments – checks, paper money, and coins – acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and for real goods and services whenever they choose to do so.
Money, like anything else, derives its value from its scarcity in relation to its usefulness. Commodities or services are more or less valuable because there are more or less of them relative to the amounts people want. Money’s usefulness is its unique ability to command other goods and services and to permit a holder to be constantly ready to do so. How much money is demanded depends on several factors, such as the total volume of transactions in the economy at any given time, the payments habits of the society, the amount of money that individuals and businesses want to keep on hand to take care of unexpected transactions, and the forgone earnings of holding financial assets in the form of money rather than some other asset.
Control of the quantity of money is essential if its value is to be kept stable.”
The beginnings
“As early bankers, Goldsmiths initially provided safekeeping services, making a profit from vault storage fees for gold and coins deposited with them. People would redeem their “deposit receipts” whenever they needed gold or coins to purchase something, and physically take the gold or coins to the seller who, in turn, would deposit them for safekeeping, often with the same banker. Everyone soon found that it was a lot easier simply to use the deposit receipts directly as a means of payment. These receipts, which became known as notes, were acceptable as money since whoever held them could go to the banker and exchange them for metallic money.
Then, bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money. More notes could be issued than the gold and coin on hand because only a portion of the notes outstanding would be presented for payment at any one time. Enough metallic money had to be kept on hand, of course, to redeem whatever volume of notes was presented for payment.
Transaction deposits are the modern counterpart of bank notes. It was a small step from printing notes to making book entries crediting deposits of borrowers, which the borrowers in turn could “spend” by writing checks, thereby “printing” their own money.”
You said;
“For that you need people to build and operate factories, farms and businesses and do other productive things; this activity is accomplished through prudent investment. Mr. Greenspan has managed to encourage a lot of imprudent investment, this is an error in judgement following the housing bubble. Gold on the other hand, makes no judgement and will sort of hobble along ignorant of the world around it; sometimes this is a good thing, sometimes it’s not.”
I think you mean “leading to” the housing bubble, rather than “following” here.
Lastly, gold is not “hobbling” along any longer. I think there is a definite decoupling occurring since Nixon’s 1971 departure from the gold “backed” standard and especially since 2000 after the intro of the EURO, which has become, outside of gold, chief competition to the dollar: http://fedupbook.com/blog/inflation/gold-and-the-euro-connection-another-nail-in-the-us-dollar-coffin/
I do think there are solutions (less spending), but I think we’re in agreement that congress won’t do it. There’s wars to fight!…, among other wastes that the 300 million of us let 545 individuals tell us one thing (to get elected) and do whatever benefits special interests or themselves once in office. There is no accountability and after 4 years of service to their country, they are set for life. Nice gig if you can get it…
[...] So as far as GDP goes, Government Spending is all that is running the show right now. The question that investors need to ask themselves is, “How long can this last?” Of course the key to everything is the purchasing power of those things we get paid in called dollars. [...]
Farmland.In another country. Everything else is a scam.
Go ahead and invest in gold. They'll know right where it is when they come to steal it….AGAIN.
Steal it they will. They'll send in the guys that ' protect and serve”, THEM, to collect.The US govt and the private reserve bank are the two biggest terrorist organizations in the history of mankind.
Hi Boomy,
Farmland is a great place to invest for many reasons. I address this in a chapter of my forthcoming book, “Fed Up!”
Yes, they did confiscate gold back in 1933 and unfortunately today the laws are on the book that say they can confiscate pretty much anything they want, including gold. In my book, “Buy Gold Safely,” I address this and recommend how to legally counteract any potential gold confiscation. http://safelybuygold.com
Farmland.In another country. Everything else is a scam.
Go ahead and invest in gold. They'll know right where it is when they come to steal it….AGAIN.
Steal it they will. They'll send in the guys that ' protect and serve”, THEM, to collect.The US govt and the private reserve bank are the two biggest terrorist organizations in the history of mankind.
Hi Boomy,
Farmland is a great place to invest for many reasons. I address this in a chapter of my forthcoming book, “Fed Up!”
Yes, they did confiscate gold back in 1933 and unfortunately today the laws are on the book that say they can confiscate pretty much anything they want, including gold. In my book, “Buy Gold Safely,” I address this and recommend how to legally counteract any potential gold confiscation. http://safelybuygold.com