Foot Bone…

You remember the old song, don't you? "Foot bone connected to the ankle bone, ankle bone connected to the leg bone, leg bone connected to the thigh bone…" etc. Goes all the way to the top, or from the top down maybe. It's been a long time since I heard that song, but the point is that all these bones are connected together, to hold the body together. Let's see how the monetary system is connected together. OK? Is it like the body?

In the beginning, long before inflation, paper money, and the total fraud the dollar is now, it was really quite simple. Unfortunately, our Constitution told the states that they couldn't coin any money except from silver or gold, but it didn't tell the federal government it was limited that way. Too bad, and eventually the cat got out of the bag. In the beginning, gold and silver were money. Real money, and they still are. In the beginning, of all civilizations, that was true, and the cat got out of the bag in all of them. It wasn't long before it was obvious that it would be a bit easier to have some paper money around, because those teensy dollar gold coins were always getting lost, and even the three dollar ones were easily misplaced. Honestly, as government was then, gold and silver were used as backing for the paper. All paper money was convertible into gold or silver, and it said so on its face. There was lots of gold and silver in the treasury's vaults, and coinage was made of 90% silver. Gold coins were carried about by those who chose to do so, and it was all very simple, honest, and straight-forward.

As is usual in history, governments eventually run out of control, and no one knows how to stop them. They always spend more than they take in with taxation. Realizing that citizens will only stand for so much taxation, indirect taxes are always tried. Taxes on everything such as utilities, food, tires, telephones, and purchases of all types, just to get some more dollars into the till for the politicos to spend. When they tax all they can, and there still isn't enough coming in, the printing press is always used. This in turn, always leads to extreme proliferation of printing press money, with the result that it always becomes worthless. Before the printing press, when silver and gold coins were the money of the realm, emperors or others in charge, used to clip the coins, and then melt the clippings down to make new coins. That was one way of increasing the money supply. Another way was to continually make the coins smaller and dictate that they the same value. Or the coins could be diluted with cheap metals; usually the color of the coins, so more could be made. Man has a brain which can and does overcome obstacles. Politicians know all the tricks, and always have, it seems.

In America, beginning with the Presidency of FDR, the trick was to constantly lower the gold and silver backing of the dollars. Silver would have been difficult to do this to, so he began with gold. Silver coinage was everywhere in the world, and no one had yet developed a way to make coins that looked like silver, but which weren't. So the silver coins remained. The treasury was running low on gold, and the money FDR needed to increase the size of government wasn't there. What to do? He then told everyone to turn in their gold coins and he would give them a brand new $20, $10, or whatever bill the coin represented. It was for the 'benefit of the nation,' of course. And if everyone didn't turn in their gold, he would fine them $1,000 and maybe even send them to jail. That never happened, regardless of what some used car salesmen types say. No one was ever fined, and no one ever went to jail.

Until FDR polluted the dollars, the economic body was held together like the song says. The bones all were connected, and all was healthy and honest. The expression "sound as a dollar" was a common one, as opposed to the running joke the dollar is now. Imagine prices never going up, real estate being rock solid, and being able to save dollars in a bank with small interest, which was not taxable, and which small interest was nice to have, since there was no inflation. Maybe the song could be, " Gold coins the same as the dollar, silver coins connected to the gold coins, gold coins smaller than the silver coins, and greenbacks connected to the gold, now hear the word of the Lord." Or something like that. A poet I am not, but those times were really solid and pleasant. A new row house priced at about $3,000, a Model A Ford at $300, a nickel Coke, dime movie matinees, and nickel cigars. When I was growing up in my Dad's drug store, cigarettes were thirteen cents and two packs for a quarter. I think they're $3 or more now, aren't they? As late as 1962, the admission to my theatres was 75 cents, and I was buying diesel fuel for 30 cents a gallon.

Then the bones started coming apart, and the economic body fell apart with it. Gold coins were no longer wholly connected to the dollar, and silver certificates weren't redeemable in silver any more. I still have a little packet of silver which came from the US Treasury, when I sent in a silver certificate for redemption. It took but 38 years for the whole economic body to virtually disintegrate. That 38 year period seems small enough now, because it was from 1933 to 1971, and probably the majority of you readers weren't born then, or at least you maybe were kids with no idea of economics. When you become a geezer, as I am, you have lots of memories of fine things. Fine things like…well I won't bore you with those, but a solid economy and solid money backed by gold was fine. Tricky Dickie removed the last vestige of gold backing of the dollar in 1971, and then the dollar bones weren't connected to hardly anything. The silver coins disappeared in 1964, seven years before Nixon removed the last vestige of dollar backing. With no more silver coins, and no more backing of the dollar, 'dem bones were totally disconnected, and there was nothing to hold the economic body together.

Banks couldn't loan more than they had on hand, and there was no Federal Reserve when the gold and silver bones held the economic body together. There was no Freddie Mac or Fanny Mae when the gold and silver bones kept the economic system in order. Dollars didn't increase in numbers unless there was gold and silver in the treasury. To quote from the Wikipedia free encyclopedia, regarding the creation of new money today: See how easy it is for banks to loan what they don't have and the Fed to print endlessly. "The most common mechanism used to create money is typically called the deposit creation multiplier." (The piece goes on to show how a $1,000 deposit allows a bank to loan $8333.33.) Further: "The government issues a Treasury security. This is simply an IOU." (In other words 'money' has been created out of thin air, thanks to a printing press.) "The Federal Reserve prints a check and makes it payable to the government. This check is the proceeds from the sale of the bonds." (The bonds are the IOU.) "The check is recorded as an asset by the Fed. It is assumed the government, with its power to tax, will make good on its debt. The government deposits the check in its own account. The government hires employees and buys things by writing government checks." All the taxes collected from various sources aren't enough, so the presses run 24/7.

Space prohibits further quotes from this, but the point is that "money" has been created out of thin air, spent, and loaned to you as a mortgage perhaps. You have to work and sweat and pay back what Freddie Mac or Fanny Mae (the government sponsored outfits which probably bought your mortgage from its seller) loaned to buy your home. It cost them NOTHING, but it costs you perhaps 30 years of struggle and toil. As I write this, as usual, I begin to boil at the sheer fraud and hypocrisy of the entire affair. I also am steamed at the utter stupidity of the public, who still thinks that dollars are a worthwhile way to invest or save. America has been sold down the river by the bankers and Federal Reserve, and guess who allows it to happen? The D.C. Gang. The same Gang which gets us into wars and enlarges itself endlessly, and which causes the dollar to crumble like a coffee cake. We can't change them or throw them out, because they are too big and have the power of the armed forces and endless bureaucracy behind them. All we can do is….guess what? Protect yourself.

July 13, 2006

Don Stott has been a precious metals dealer since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com