Today’s economic conditions reflect a fiat monetary system held together by many tricks and luck over the past 40 years. The world has been awash in paper money since removal of the last vestige of the gold standard by Richard Nixon when he buried the Bretton Woods agreement — the gold exchange standard — on August 15, 1971.
Since then we’ve been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.
A paper monetary standard means there are no restraints on the printing press or on federal deficits. Since 1971, our dollar has lost almost 80% of its purchasing power. Common sense tells us that this process is not sustainable and something has to give. So far, no one in Washington seems interested.
Although dollar creation is ultimately the key to its value, many other factors play a part in its perceived value, such as: the strength of our economy, our political stability, our military power, the benefit of the dollar being the key reserve currency of the world, and the relative weakness of other nation’s economies and their currencies.
What a remarkable thing that President Obama delivered a state of the Union message on the 100th anniversary of the founding of the Federal Reserve and made not one mention of monetary policy. He certainly had an opportunity in respect of wages. “Today,” said the President in his State of the Union message, “the federal minimum wage is worth about 20% less than it was when Ronald Reagan first stood here.” But wait, wasn’t the minimum wage $3.35 an hour throughout Reagan’s two terms? Isn’t it now $7.25 an hour? How does that add up to a drop in value by 20%? The president glided right past that point.
By our lights, the president owed the country an explanation. The editor of The New York Sun, writing in the New York Post a column from which this editorial is adapted, noted that when the Federal Reserve Act was passed a century ago Congress refused to agree to a Federal Reserve until language was included that would mandate protecting the convertibility of the dollar into gold. That law unraveled in a series of defaults that started in the Great Depression and ended under President Richard Nixon. By the mid-1970s, America had moved to a fiat currency, meaning a dollar that is not redeemable by law in anything of value.
One economic myth is that paper money is wealth. The proponents of big government oppose honest money for a very specific reason. Inflation, the creation of new money, is used to finance government programs not generally endorsed by the producing members of society.
It is a deceptive tool whereby a 'tax' is levied without the people as a whole being aware of it. Since the recipients of the newly created money, as well as the politicians, whose only concern is the next election, benefit from this practice, it's in their interest to perpetuate it.
For this reason, misconceptions are promulgated about the 'merits' of paper money and the 'demerits' of gold. Some of the myths are promoted deliberately, but many times they are a result of convenient rationalizations and ignorance.
Paper money managers and proponents of government intervention believe that money itself- especially if created out of thin air - is wealth. A close corollary of this myth - which they also believe - is that money supply growth is required for economic growth.
Paper money is not wealth. Wealth comes from production. There's no other way to create it. Capital comes from production in excess of consumption. This excess is either reinvested, saved, or loaned to others to be used to further produce and invest.
Duplicating paper money unites creates no wealth whatsoever, it distorts the economy, and it steals wealth from savers. It acts as capital in the early stages of inflation only because it steals real wealth from those who hold dollars or have loaned them to someone.
Esther George, president of the Federal Reserve Bank of Kansas City, stepped forward as a new, high-profile internal critic of the Federal Reserve's easy-money policies.
Ms. George told an audience in Kansas City, Mo., Thursday that current Fed policies made her "uneasy" and warned that the Fed "must not ignore the possibility" that monetary policy could contribute to new bubbles that harm the financial system.
"A long period of unusually low interest rates is changing investors' behavior and is reshaping the products and the asset mix of financial institutions," she said.
Ms. George noted bond and farmland prices are at very high levels. If there were a big correction in those prices, it could be "destabilizing and cause employment to swing away from its full-employment level and inflation to decline to uncomfortably low levels," she said.
She also said the Fed's purchases of government and mortgage securities would "almost certainly" complicate the task of tightening credit down the road when the Fed wants to pull back its policies.
... Ralph Benko, editor of the Lehrman Institute's monetary policy website, recently attacked the platinum coin proposal, noting its violation of a monetary principle first established by the famed astronomer Copernicus. He also pointed to the hyper-inflation experienced recently in Zimbabwe, when its government violated the same principle.
In spite of left-wing opposition to spending cuts, there is a huge spending problem in the U.S. The editorial board of Investor’s Business Daily reminded readers of that very fact on Jan. 7, writing that Obama’s debt commission “made clear that spending is the driving force behind the nation’s debt crisis.” The final report of the commission said, “We should cut all excess spending -- including defense, domestic programs, entitlement spending, and spending in the tax code.”