Basic Learning: The American Dollar

When I was much younger, I attended what was considered a very good public high school in the United States.  Yet like many schools around the world, much of what I was taught had very little to do with practical knowledge.

In a humble attempt to shine a light on what my former teachers missed, I present to you a new series I call Basic Learning.  Many of you who read these articles may be far more well-versed on these topics than I, and I apologize if my discourses offend you.  Furthermore, I am as much a purveyor of knowledge as I am still a student seeking it, and therefore remain prone to the fallacies of the non-expert.

Today’s Basic Learning: the American dollar.
At first glance, there doesn’t seem to be anything mysterious or unknown about the American dollar.  Even if you live in Europe, Asia or Africa you’ve probably handled a few greenbacks in your lifetime and they’ve changed very little in appearance over the past 100 years.  Simply put, the dollar (and its tangible form, the bank notes themselves) are the currency of the United States.

If you had asked me 5 years ago what a dollar actually was, I’d say “the money of the United States”.  If you further asked me as to what a dollar was worth, what it signified other than a fancy green piece of paper, I’d have told you something like “it is worth a certain amount of fundamental value, backed by the American government” or something like that.

The truth however is much more elaborate.  The first truth about the dollar is, quite simply, that it isn’t worth anything at all.  The only fundamental value of the dollar is the paper its printed on, which is practically worthless except as a way to light a fire or something.  As strange as it sounds, the only reason the U.S. dollar has any worth (beyond the paper it’s printed on) is that people, collectively, have agreed to give it value.

Let me give you an example.  I could rent a printing machine, make up my own “Soj dollars” and print them up with any design I like.  If the people of the world used them to trade and buy goods and services, my Soj-dollar would be on par with the American dollar.  The fancy word for this is a fiat currency.

Historically speaking, modern money came in two forms.  One was in coins, minted from a valuable material such as silver.  The value of the coins was (roughly) the same as the amount of precious metal in the coin.  Therefore a 1 ounce silver coin had the same value as one ounce of uncoined silver.  Therefore the coins were traded as “money” because they were certified as being a certain weight and purity of metal.

Notes or paper money started when the banking system started in the Middle Ages of Europe.  A person could deposit a certain amount of gold at a certain bank and receive a “note” from the bank attesting that the said sum was deposited there.  The person could then trade or buy goods and services with this “note”, which the second (or third or fourth, etc) person could eventually take back to the bank and redeem for the stated amount of gold.

In the United States, the dollar was originally placed on what is known as the gold standard.  This means that a dollar could be redeemed, if somebody so wished, for a certain amount of gold (originally 1.67 grams metric) that the U.S. government held in reserve.  The coins of the United States were manufactured with a certain amount of silver, making them similar to the historic coins described above.

Article 1, Section 8 of the Constitution states that Congress “shall have the power to coin money and regulate the value thereof” and that’s pretty much how things operated until recently.  The thing to remember is that ALL American money could be directly traded for a specified amount of gold (or silver).

The second truth about the dollar today however is that it is neither printed nor particularly regulated by the American government.  In fact, the American dollar is issued, controlled and destroyed under the aegis of the Federal Reserve.  And despite the word “federal” in there, don’t be fooled – it is a private company.

So how did a private company usurp the American government’s own ability to power to regulate and produce money?  That’s a long and complicated story, and my apologies to those of you experts out there for shortening and simplifying the issue.  It is done merely for the sake of clarity – I have provided links for those of you who want more detail.

When a currency is fixed to a precious metal, this means the government cannot print more money than it has reserves of that metal.  This is good in terms of preventing deficits and inflation but prevents the government from accessing other options, such as defeating a “bank run” or more elastic credit options.  Again, for you experts, this is a simplified explanation and is not meant to be an exhaustive treaty on the subject.

Two separate issues combined to change the dollar as we know it today.  The first was the creation of the Federal Reserve, which was passed by Congress and signed into law in 1913.  The Federal Reserve is a private corporation that is owned by eight regional Federal Reserve Banks.  The Fed is run however by a Board of Governors, including its Chairperson, and these positions are nominated by the President of the United States and have to be confirmed by the U.S. Senate.  The positions on the Board are for a specified period of time (14 years) but as far as I can tell, the U.S. government has no power to dismiss someone once they are confirmed.

From 1913 to 1951, the main role of the Fed was to regulate the interest rate on Treasury bills and bonds.  In 1951, the Federal Reserve officially became independent of the Department of the Treasury.

After World War 2, an important financial meeting was held in New Hampshire and became known as the Bretton Woods summit, named after the town in which it was held.  These meetings created the World Bank and IMF, which I’ve written about earlier.  They also changed the nature of modern currencies by making every other major currency directly linked to the U.S. dollar.  And since the U.S. dollar was linked to the gold, this meant that every currency was pegged to the gold standard.

Through a series of complicated reasons, the price of gold began to rise and this caused worldwide inflation.  Under President Nixon in 1975, the U.S. dollar was removed from the gold standard.  Since that time, the U.S. dollar has had no fixed correlation to any commodity.  It is instead “pegged” to what economists call a “basket” of other valuables, which include precious metals but also includes other currencies.

More simply put, the U.S. dollar today is worth what a number of other currencies are worth, the vast majority of them worth nothing more and nothing less than other currencies as well.  Which as strange as it sounds means that most of the money in the world is a complex equation of faith-based value with little grounding in any tangible substance (the Swiss franc remains the only major currency still on the gold standard).  For more information on this, click here.

In 1963, the words “will pay to the bearer upon demand” disappeared from all American dollars, meaning the U.S. government would no longer be required to cough up something of intrinsic value for their own notes.  In 1965, a new law removed all the silver from coins and all change circulated in the United States today is made of cheap metals with almost no inherent value.

There is a lot of confusion about what exactly the Federal Reserve does besides control and regulate the money supply.  If you follow the news, you’re likely to hear that the Fed controls “interest rates”.  This refers primarily to what is known as the “overnight rate”, the interest rate that banks can charge each other for loans.  This in turn affects the rates that banks charge their customers, which is you and I, and directly impacts the economy as a whole.

The Fed also affects the interest rates of U.S. Treasury securities.  These are pieces of paper in which the U.S. government does promise to pay the holder a certain amount of money after a certain amount of time.  In effect, Treasury securities are the sole remaining form of “money” that is backed by the United States government, although the currency used to pay the bearer is in itself printed by the Federal Reserve.

If the Fed wants to inject money into the economy, it buys Treasury securities (with money it prints itself), thereby lowering the interest rates.  If it wants to decrease the amount of money in circulation, it sells off its securities (or buys less of them), thereby raising interest rates on the securities.  What this translates to in practical means is that the Federal Reserve, a private corporation, “owns” much of the debt of the American government (and thereby the American people).

Although the Fed is technically a “non-profit” corporation, it operates in a curious way.  It orders money to be printed (done by the U.S. Treasury) and then “sells” this money to the Federal Reserve banks at a certain rate of interest.  For example, the Fed can print $100 and sell them to Bank X with an interest rate of 10%.  This means Bank X has to repay the Fed with $110.  The Federal Reserve banks then “sell” their money, from the Fed, to other banks at the interest rate that the Fed proscribes.  If that rate is again 10%, this means Local Bank Y has to pay Federal Reserve Bank X $121 for the initial sum of $100 to be returned to the Fed.  These transactions are handled via computer of course, meaning that much of this money exists in electronic circuits only and just a tiny fraction is actually printed on paper as notes.

The banks who “buy” money from the Fed don’t actually buy it.  Instead what they do is “buy” a certain amount which is kept “on reserve” at the Fed.  Under the system of fractional banking, the banks can then lend out money based on how much they have on reserve at the Fed.  This means that for Bank Y can “buy” $100 and keep it “reserved” in the Fed and then lend out $1000 ($900 of which doesn’t even exist and is created out of “thin air” quite literally), since it only has to have a fraction of what it lends (in this case, 10%).  Since all this money that Bank Y is lending is repaid with interest, it’s a very beautiful way to make enormous profits and easily allows Bank Y to pay back the interest it owes to the Fed.

There are many people who strongly oppose the Federal Reserve controlling the money supply of the United States.  A large part of this is because the shareholders of the Federal Reserve make money on every dollar it issues because they must be paid for with interest and also because the Federal Reserve owns or “buys” government debt, with money it creates itself.  You can read some startling information from opponents of the Fed here.

A man named Eustace Mullins wrote a very long book on the subject of the creation of the Federal Reserve that’s worth reading.  What’s undisputed is that the idea to create it was hatched during a secret meeting on the coast of Georgia by a very small group of powerful politicians and bankers, who later profited enormously from the Fed’s creation.

Another log on the conspiracy fire was that President Kennedy issued U.S. Treasury dollars, which look like modern dollars only with a red font.  These were printed and regulated directly by the U.S. government without being issued by the Federal Reserve – the interest on their purchase then was returned directly to the U.S. government instead of the Fed.

Many Fed opponents use Thomas Jefferson’s quote on the subject as a rallying cry:

“If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered.”

It’s also worth noting that many of the Federal Reserve banks are multinational or international in nature, which means the profit they make flows out of the United States and into non-American pockets.

Furthermore, since the Federal Reserve has such a strong ability to influence the national economy, it has a direct affect on national elections, particularly the presidential race every four years.  Many of the Fed’s critics say it manipulates the interest rates to suit the candidate it prefers.

Regardless of your opinion of the Federal Reserve, what is uncontestable is that the U.S. debt is absolutely enormous and the revenue generated through taxes every year is doing little but paying the interest on that debt without reducing the principle amount owed.  Anyone who has had problems with credit cards know exactly how this situation is entirely untenable in the long run, and in the case of the United States, those owning the debt rake in enormous profits paid for by converting the natural wealth of the nation into a faith-based currency.

And now you know what my teachers never told me about…

Peace

Author: soj

If you don't know who I am, you should :)