The following is an edited excerpt from The Money Bubble: What To Do Before It Pops:
During a 2011 congressional banking subcommittee hearing, Texas congressman Ron Paul asked Federal Reserve Chairman Ben Bernanke if gold is money. “No,” replied Bernanke, “It’s an asset.” Video of this exchange went viral in the gold-bug community, because the difference between money and an asset is, to people who care about such things, both profound and crucial to the future of the global financial system.
The subtext of the Paul/Bernanke exchange was a slightly different but equally important question: Can a government simply decree that what has functioned as money for 5,000 years no longer be money? This question has been debated in various forms and forums since the first government began debasing its currency eons ago. But the modern iteration can be traced back to the Great Depression. Recall that at the time the US was on a gold standard, and a paper dollar was simply a warehouse receipt for 23.222 grains of gold (approximately 1/20th of a troy ounce), while a dollar in a bank account was in theory exchangeable for those paper receipts (dollar bills). But because the Federal Reserve issued up to 2½-times more receipts than gold and because banks operated on a fractional reserve system, the total quantity of claims vastly outnumbered the weight of gold held in reserve.
After the 1929 stock market crash, the fractional reserve system began working in reverse (see Chapter 15), leaving the US – and much of the global – economy on the verge of imploding.
For countries on the gold standard, currency devaluation was seen as an admission of failure and deemed dishonorable because it allowed a country to pay off its debts in currency that had less purchasing power than at the time the loans were made. Nevertheless, devaluation was grudgingly accepted as last-ditch strategy for badly-run countries to boost economic growth and avoid a depression or more direct form of default.
The US, as it turned out, chose to both devalue its currency and default on its debts. Shortly after his inauguration in 1933, President Franklin Roosevelt concluded that US problems were serious enough to warrant devaluation of the dollar, among other aggressive policies. Under Article I, Section 8 of the Constitution, only Congress had the power to “regulate”6 the relationship between the dollar and gold, but FDR claimed that authority for the presidency. And instead of simply decreeing that henceforth the dollar was worth less gold than before, FDR first confiscated Americans’ privately-held gold and made it illegal to own the metal – and then devalued the dollar against gold, effectively taking the difference between the purchasing power of the gold citizens turned in and the dollars they received in return. This was, to put it bluntly, theft. It was also a partial default on US debt, much of which carried “Gold Clause” provisions specifying that it was payable in specific weights of gold.
The implications of FDR’s actions, however, went far beyond a garden-variety asset confiscation or currency devaluation. By making gold ownership illegal, FDR was asserting the primacy of government over the market in deciding what constitutes money. In the process, it made the right of private contract – a fundamental pillar of law heretofore considered sacrosanct – subservient to the government’s conception of the “national interest.”
By lifting the restraint that sound money places on federal spending, FDR fundamentally altered the relationship between Americans and their government. Previously, governments could borrow modestly (by today’s standards) but for the most part could spend only the money that they had on hand. Money was gold, and the coins and bars in the national treasury helped define the government’s wealth while limiting its ability to promise all things for all constituencies. In the future FDR created, governments would be free to act as they saw fit, simply creating a desired amount of paper fiat currency and spending it to make the world a better place – as defined by the people in charge. Perhaps FDR’s goal was the public good rather than what is now often called an “imperial presidency.” But regardless of his intent or motivation, as the brief tour of monetary history in Chapter 1 makes clear, a government with a printing press is a monster in the making.
11 thoughts on "Who Decides What Is Money?"
Actually the US Dollar was defined as being 371.25 grains of fine silver in a coin that was 90 percent silver and 10 percent copper. This monetary standard was based on the Spanish milled Dollar and was included in the coinage act of 1792. Gold and copper coins were not in fact the monetary standard of value but were used as higher and lower denomination coinage. Debasing the currency or in this case specie was a death penalty offense. Was the coinage act of 1792 and the constitution ever properly amended to allow the current monetary system?
Nicely written, though it does not address the title’s question unless we accept the evidence that our government from FDR onward will always have this decision power.
While the majority may not imagine this could possibly change, they will be caught off guard, and unlikely to ever know any more than the media tells them.
There are indications that other countries may succeed in avoiding the paper we call money to such an extent the value of our paper money crashes in exchange value.
More people will gravitate toward whatever seems to be a viable alternative, while the diminishing majority will continue accept what the media tells them.
This outcome has happened over and over in history, always with the same ending.
Look to Japan or Argentina as the next examples, though others, like Greece and the Ukraine will likely be saved for now.
Ultimately, markets decide. They can be frustrated for decades, until generations pass and forget what our ancestors took for granted.
While King Obama may play loose with the Constitution, there is little motivation for an Executive Order calling in Americans’ gold in the near future. The shaky Dollar is no longer backed by Gold, so there will not be the run on the banks to convert specie into gold coin this time around. There may be runs as the insolvency of U.S. banks becomes well-known to depositors, but that is another story. The Dollar is no longer backed by Silver either. It would take a new currency replacing the Dollar that is backed by Gold, Silver, Oil, and a basket of stable currencies (contradiction in terms) to motivate the Government to attempt to accumulate Gold that I am certain is no longer in Fort Knox. It has been lent out and squandered by the borrowers, who paid you and I virtually no interest for this privilege. Should this situation develop, the populace will already have taken to the streets due to terrorist strikes at home, bread lines, hyper-inflation, surging interest rates, and any other pestilence that the unfolding Obama Depression will visit upon our heads. Buying a 12-gauge is not a bad idea either in case some uninvited guests show up at the front door. My Remington is just a reach away. Got Gold? Got Silver?
The more poignant question is … ‘Who decides how value is defined and expressed’?
A ‘dollar’ is the invention of government statute. It doesn’t exist independently in nature. Thus by incorporating government’s proprietary definition by expression in ‘dollar’ terms, parties to a transaction invoke government as their ‘official evaluator’ and for use of this ‘benefit’ government is thus ‘authorized’ to levy tax and lay ‘rules and regulations’ on the particulars of such transactions.
The alternative is to value transactions strictly and solely by weight of an appropriate metal (like, 3 ounces copper per loaf of bread) so they stand as wholly private acts between two parties … exclusively.
They needed to barrow to fight wars. So no borrowing no wars!
Also with those wars we bombed and destroyed everyone’s factories giving us a almost 30 year advantage in manufacturing. Now we can’t do that with fears of being nuked, so The best we can do is get all the mid east countries bombing each other. Kind of a side note but shows the thinking has not changed in 80 years.
Now with computers and paper you can run an unlimited debt forever and I think that’s what they are going to do. There is no way now to pay it off so just keep creating debt.
If all parties agree to the paper shenanigans then this will go on for a very long time.
Usually a parallel currency rises to replace the old one, which looks like back to gold and silver.
What’s so interesting about history is that the same “logic” applies time and time again. Things get to a certain point and then – sure enough – the same choices are made, even despite the chooser’s knowledge of history. Or maybe they don’t know history or they think ‘this time will be different’ or they just don’t care about the long run or they are literally too stupid to realize the consequences of their decisions (that’s not their “talent”). No matter. In the meantime, for all the talk about financial bubbles, how about a centuries-old bubble in human compassion, tolerance, and ignorance? Maybe that bubble is about to burst too. Maybe today’s “well intentioned” arrogant do-gooder shits like Roosevelt are due for a wake up call. Can’t say a worldwide bourgeoisie revolution is such a good thing, but that tends to be the course of history when things get to a certain point.
Central banks are buying ALL the new government debt with $73 TRILLION being issued since 2007. https://confoundedinterest.wordpress.com/2015/02/21/debtors-prison-global-debt-has-grown-59-trillion-since-2007-with-100-percent-of-sovereign-debt-monetized/
God has determined what is money! As an intrinsic value and source of freedom.
Genesis 13:1-2
“And Abram went up out of Egypt, he and his wife, and all that he had, and Lot with him, into the south. And he was very rich in possession of gold and silver.”
But as the majority of mankind want nothing to do with God or His laws, one of His many punishments in our times is to have worthless paper as money, which is constantly devalued and gives no security.
I’m not a religious person but I will give God +1 for gold and silver as money.