by Gary L. Graham
A nation's economy is composed of the ability to produce goods, a population to produce and consume goods, and money to facilitate the movement of raw material to consumed goods. Money being a medium of exchange used in commerce has a value only when it is used as the vehicle to move raw material to consumed goods. The value of a nation's monetary unit is determined by the proportion between the amount of money in circulation and the amount of goods produced. The prices of a nation's consumer goods are determined by the amount of money in circulation while the number and type of consumer goods are determined by demand.
The monetary system of the US of A began as a purely objective one with the monetary unit of Dollar designated as a unit of measure of a specified amount of gold or silver. The lawful money of the US of A was established as gold and silver coin containing a specified amount and purity of gold or silver and the amount of money in circulation relied upon the amount of these two metals brought to the US Mints by the people to be turned into Dollars. The amount of money in circulation was determined by the amount of effort expended in mining gold and silver and the amount of goods exported in trade for foreign gold and silver, both activities of production.
As the banking industry became established, the practice of lending depositor's money did not expand the supply of money. The process was simple. A person wishing to purchase property identified the property for the bank; the bank used deposited money to purchase the property; the property title was placed in a trust established in the name of the depositors; the person paid the trust for the property over an agreed upon period of time and paid an agreed upon fee for the use of the property during the purchase period.
As banks and banking practices became more acceptable in America, the practice of bank-issued notes (currency) circulating in place of money (gold and silver) became more commonplace in many communities. This practice was most readily accepted in the major metropolitan areas which were the centers of banking and industry. The theory underlying the issue and use of bank notes is that they are issued Dollar for Dollar as receipts for actual money (gold and silver) held by the bank as the notes are less bulky and lighter in weight. The problem with bank notes is that the issuance of notes Dollar for Dollar for actual money relies upon the false assumption that all bankers are honest.
In our objective monetary system, a Dollar is a unit of measure of a certain amount of gold or silver and a bank note Dollar bill is a paper receipt for this same amount of gold or silver. When a bank issues more notes than it has gold or silver Dollars, it has committed a fraud that will not be uncovered unless more notes are presented for redemption than the bank can honor with gold or silver Dollars. The difficulty of discovering this fraud is compounded by the banks' ready-made excuse that most of the money on deposit has been loaned and the person holding the receipt must wait until a loan payment is made or a loan is repaid. These two circumstances allow a certain amount of subjectivity to come into our monetary system once bank notes begin circulating as currency. How many excess bank notes can be put into circulation without the fraud being discovered?
In an attempt to curtail the fraudulent issuance of bank notes and force a return to an objective monetary system, the government passed the National Bank Act of 1863. This act restricted the issue of bank notes to money on deposit and restricted the percentage of deposited money which could be loaned. Many bankers subverted the intent of the act by issuing notes for original money deposited and loaning a portion of the deposited money with the requirement that the money loaned had to be re-deposited with bank notes issued upon such re-deposit. This system allowed banks to exercise subjective control over a portion of the monetary system. This act did curtail, somewhat, the fraudulent practice of banks issuing more notes than the actual amount of money on deposit and resulted in an increased confidence in the idea of paper money circulating as actual money in the US.
During the period between 1863 and 1900, while the US was building this confidence in paper money, the European countries had established the concept of a "Gold Standard" in recognition of their paper currencies. The adoption of the Gold Standard fundamentally changed the definition of the term "Dollar" and led to the eventual adoption of a purely subjective monetary system. Prior to the Gold Standard, the US Dollar was one ounce of silver or 1/17th of an ounce of gold and paper money was merely a receipt for a Dollar. This is the same as saying that a foot is twelve inches and if you have a receipt for a foot of rope, you can redeem it for twelve inches of rope. Under the Gold Standard, the paper money is no longer a receipt for a Dollar but is rather worth one ounce of silver or 1/20th of an ounce of gold, which was shortly changed to 1/24th of an ounce of gold, then 1/36th, then 1/45th, and today 1/400th of an ounce of gold. This is the equivalent of saying that a foot is twelve inches but your receipt for a foot of rope is worth twelve inches today, ten inches next week, five inches next year, and one-tenth of an inch in ten years.
Thirteen years after the adoption of the Gold Standard, the Federal Reserve Act was passed in order to establish a single bank note as the Currency of the United States. This was necessitated by the failure of several large banks between 1863 and 1907 which resulted in a decline in public confidence in bank notes which in turn resulted in national currency panics. Prior to the National Bank Act and growing use of bank notes, there were no national currency panics. Because bank notes are supposed to be receipts for actual money on deposit, they have the appearance of maintaining an objective money system. However, when bank notes are issued in excess of money on deposit, they become subjective as the amount issued in excess is determined strictly by how much the bank believes can be circulated safely.
In 1933 and 1934, all bank notes were replaced by Federal Reserve Notes and the money of the United States, gold and silver coin, was taken out of circulation. First, the government seized regulatory control of all banks. Then, they replaced all bank notes with Federal Reserve Notes. Then, they required Americans to surrender all gold coins and bullion in exchange for Federal Reserve Notes at a rate of 24 one-Dollar-notes per ounce of gold. And, finally, they changed the value of Federal Reserve Notes to 36 one-Dollar-notes per ounce of gold. While the US Dollar remains as a unit of measure of one ounce of silver or 23 grains of gold, the Federal Reserve Note has been devalued to, first, 45 one-Dollar-notes, then to the market price of gold, and finally to "the full faith and credit of the United States". The monetary system of the United States became fully subjective when the money of the United States became Federal Reserve Notes with the amount in circulation determined arbitrarily by the Federal Reserve Board.
Once Federal Reserve Notes became the money of the United States, a new problem faced the banks and the government. There were not enough Federal Reserve Notes in circulation. the solution to this new problem was basically the same as the use of bank notes issued in excess of money. The banks created ledger entries (computer entries) representing Federal Reserve Notes based on the amount of notes they held on deposit. These ledger entries are known as credit and are issued by banks in excess of Federal Reserve Notes based on a multiplier of assets dictated by the Federal Reserve. These credits are not Federal Reserve Notes but they are issued by banks as representing Federal Reserve Notes and, just like the old bank notes, they are issued in excess of existing money as loans.
Bank notes were receipts for money that didn't exist which the banks loaned. Federal Reserve Notes were receipts for money that didn't exist which banks loaned. Credit is now receipts for money that doesn't exist that the banks loan. The problem has always been the same: not enough money in circulation. The solution has always been for the banks to issue something that they create to represent money and charge interest. The result has always been the same: the interest that the banks charge causes an eventual shortage of money since money to pay the interest is not created by the banks.
The current system is at the same place the old system was in the 1920s and 1930s. Then it was too many Federal Reserve Notes in relation to gold coin and now it is too many computer entry credits in relation to Federal Reserve Notes. The system must be changed or face total collapse. Either Federal Reserve Notes must be eliminated or interest-bearing credit must be eliminated and replace by credits. If credits replace Federal Reserve Notes (cashless society), this will result in elimination of private property ownership and government control of wages and prices.
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Copyright at Common Law, West El Paso Information Network, 1996