Investing in physical gold and silver is not a profit driven investment. It is a mindset. It gives investors the same type of peace of mind that protects their wealth they receive by insuring their home, auto or health…just in case something happens where they need it. What other type of insurance gives a return that is guaranteed not to be zero and has a 4,000 plus year history of purchasing power stability? What other currency can claim such a track record? Is it the Federal Reserve Notes you carry in your wallet that have 42 short years of existence without a relationship to gold? If gold was so invaluable, why do all Central Banks own it? Why do we have any gold at Fort Knox? Why are Germany and other countries asking to take possession of their gold?
Federal Reserve Notes are Legal Tender and a Promise to Pay
Why are one ounce Gold American Eagles legal tender just like the Federal Reserve Notes are? Is it because gold used to back the Federal Reserve Notes?
In fact, many don’t realize that Federal Reserve Notes are a “promise to pay.” Before 1934, these Federal Reserve Notes were called Gold Certificates and used to say at the bottom of a $10 Certificate for example; “Ten Dollars in Gold Coin Payable to the Bearer on Demand” which I have highlighted in the graphic below.
(Click for clear view)
One could take their Certificate to the bank and exchange it for a gold coin. This is because you will notice at the top of the Certificate it says that $10 of gold coin has been “deposited in the Treasury of the United States of America.” These Gold Certificates also had written on them the following; “This certificate is legal tender in the amount thereof in payment of all debts and dues public and private.”
After the government told everyone to exchange their gold for notes in 1934 by Executive Order 6101 and the introduction of the Gold Reserve Act, the $10 Note (the $20 Note too) changed to say this at the bottom; “Will Pay to the Bearer on Demand Ten Dollars.”
(Click for clear view)
What else does this new 1934 Note say on it? It says; “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.” What is “lawful money?” This is where one must resort to the 1792 coinage act and the Constitution and beyond where I want to take this conversation. But look at what the Government did to the money. They changed the word from “Certificate” to “Note” and they changed redeemable in “gold coin” to “lawful money.” Does this mean the Federal Reserve Notes, by the Fed‘s own admission, are not “lawful money?” If one can exchange a note for “lawful money,” wouldn’t then this imply, by default, that it is not lawful money? I don’t think a case could be made for that since the Federal Reserve Notes are “legal tender” by government decree. So what the Fed and Congress are really saying with this change, is this new 1934 Federal Reserve Note is redeemable, …..well, in more Federal Reserve Notes!
At the time, and on a larger inter-governmental global scale, gold was still backing currencies and traded accordingly to settle debts among nations. It wasn’t until 1971 that the U.S. was losing gold as the world’s larger countries, coming to a head with France’s demand for gold, were turning in their Federal Reserve Notes for our nation’s gold and Nixon had to do something to stop this. Nixon closed the gold window and forced all other countries to take our Federal Reserve Notes as settlement.
From The Nixon Shock (worth reading this Newsweek article);
The gold exodus continued and, to make matters worse, the U.S. began running a substantial trade deficit, a politically charged issue given that unemployment remained at 6 percent. Nixon had to act, but his advisers were split. Volcker, as well as Shultz, wanted to close the gold window. Burns was vehemently opposed. Severing the gold link would turn money into … paper. If the government no longer had to preserve the dollar’s value in metal, how could the Administration claim, with any credibility, to be countering inflation?
The Nixon Shock was a central cause of the Great Inflation (of the 70’s). It also spelled the end of the fixed relationships that had governed the financial universe. Previously, people took out mortgages for set periods and at fixed rates. They had virtually no options for saving money other than in banks, and the interest rates that banks could pay were capped. Floating currencies unleashed a new world of risk and instability. For the first time, investors could bet on the direction of interest rates or the Swiss franc. New financial instruments, new speculative tools, proliferated. The world gravitated from the certainties of Bretton Woods to the dizzying market cycles we’ve lived with since. Donald Kohn, who joined the Fed in 1970 and retired last year as vice-chairman, thinks Bretton Woods was doomed. But bankers have yet to find as rigorous a standard as gold. And they have become ever more apt to please politicians, deferring recessions at the risk of inflating asset bubbles.
Gold was priced at about $40 an ounce in 1971 and Federal Reserve Notes from that point forward said at the bottom; Ten Dollars (or whatever the amount of the bill is) and the additional verbiage simply stated; “This Note is Legal Tender for all Debts Public and Private.”
(Click for clear view)
Federal Reserve Notes 42 Years Without Gold Backing – How are we doing?
Answer: National debt approaching $17 trillion and unfunded liabilities over $120 trillion.
So there you have it. 42 years now we have had Federal Reserve Notes with no relationship to gold and a Federal Reserve that has been happy to enslave Americans via Congress to them for interest payments for the rest of their lives and their children and grand children’s lives. And to make matters worse, the Federal Reserve allows Congress to spend more than the country earns each and every year raising the National Debt to the tune of almost $17 trillion which will be hit in October, or $53,525 per person in America and $148,193 per each taxpayer in America. The only way to pay this debt off is by higher taxes or inflation. Congressmen never get elected saying “I’ll raise your taxes,” which means your purchasing power will dwindle as the Federal Reserve Note buys you less and less over time. For this you need the insurance that gold provides.
This National Debt that Congress is debating, as shown above, is only a part of the story. Unfunded Liabilities amount to over $120 trillion. Others say $86 trillion, but with numbers this large, and the fact government forecasters are almost always wrong, the projection difference is meaningless as it will still be debt we can’t afford to pay.
Excerpt from Cox and Archer’s analysis, who both served on President Clinton’s Bipartisan Commission on Entitlement and Tax Reform, the forerunner to President Obama’s recent National Commission on Fiscal Responsibility and Reform, on the unfunded liabilities;
The actual liabilities of the federal government—including Social Security, Medicare, and federal employees’ future retirement benefits—already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.
Why haven’t Americans heard about the titanic $86.8 trillion liability from these programs? One reason: The actual figures do not appear in black and white on any balance sheet. But it is possible to discover them. Included in the annual Medicare Trustees’ report are separate actuarial estimates of the unfunded liability for Medicare Part A (the hospital portion), Part B (medical insurance) and Part D (prescription drug coverage).
For Those That Can Do Simple Math
Below you will see the figures for the entire net worth of our nation. Granted we will continue to produce as a nation, but with any increase in the interest rate paid on the National Debt, and any return of inflation in the future, all these unfunded numbers will become even more impossible to cover from the current account. That’s why I said the Fed won’t taper in my article before the last Fed meeting; Calling the Fed Taper Bluff and What Gold Might Do Next. Since writing that article, interest rates on the 10 Year have fallen from the 2.90% range to 2.62% today. Lower interest rates save a lot of trouble in funding the budget, if in fact Congress can come to an agreement.
Here’s What You Need to Know
Keep this forefront in your mind; a 1964 Washington quarter could buy you a gallon of gas with an additional nickel in 1964 and that same quarter today because of its silver content could buy you $3.89 worth of gas if exchanged for the scrip of the day, which is pretty close to the national average.
We’ve seen in this article what the government does to our money. No matter what the government prints on Federal Reserve Notes, you can take control of your wealth and insure it with an allocation into precious metals. How else will you maintain your purchasing power over time? With gold and silver off their highs because of a stronger dollar since 2011, it is a perfect time to dollar cost average into a position, especially if you have not done so already. The dollar itself is breaking down a bit because of this debt ceiling debate, but the Index has not yet crossed into the 79 area. It is something to keep an eye on it as to whether the upward trend since 2011 will be broken downward, which would favor gold. As you can see, the downward trend of the dollar is still intact overall. But pricing currencies in each other is just an illusion, explained further in my forthcoming book Illusions of Wealth.
I am of course bullish on gold and silver long term . It’s because I can do simple math. 81% of gross receipts go to mandatory government programs ex defense, and not including what will be sure to be a financial nightmare known as Obamacare. Can we really expect to run a government on 19% of tax receipts for very long, let alone be the policemen to the world? I think not. Something’s got to give. But “perception” is still important and investors live and breathe on what the Fed might do next. But look no further than Japan and possibly Europe (things are much worse than you think there too, especially in Japan) as to what will happen next. Things will implode in Japan before they do here or Europe, but it can set off a snowball effect. It will be the banks that cause it all to crumble. That’s why you own the gold insurance. Next week will be interesting with the Debt Ceiling debate. Stay tuned.
Gold and silver are insurance against the $17 trillion of current debt, the $120 trillion of unfunded debt, the tricks government plays via the Fed with our money, and the never ending problems with the banking system I have written so much about. Please share this article for those who may not be aware of what the government has done to our money or the serious nature of how much debt we as a nation are in.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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