Counterfeiting the Dollar - The Last Great Bubble
M.A. Nystrom, M.B.A.
Man on the street in (the Republic of) China
June 1, 2005**
The last few years has seen a series of "nested bubbles" popping. The internet bubble popped and brought down the tech sector which brought down the NASDAQ which is bringing down the U.S. economy. But the granddaddy of them all, the bubble which envelopes them all is still in play.
You may be inclined to think that the green bills in your wallet are dollars, but I have shocking news for you: They're not. They're counterfeits. Since 1913 US dollars have gradually been transformed a form of wealth to a form of debt, and finally into a speculative investment.
Following, I shall offer proof of my statement with argument, evidence and deductive logic. See if you agree with me.
First, a couple of quizzes.
Quiz 1: What do the hyper-inflated reichsmark of post WWI Germany,
the Argentinean peso and the U.S. dollar all have in common?
Click here for the answer.
Quiz 2: What do all fiat currencies have in common?
Click here for the answer.
Background to the Quizzes
Prior to 1913, the year of the founding of the Federal Reserve System and the first year of the Federal income tax, gold and silver coins stamped by the U.S. Mint were the principal form of money used in the United States. This was not merely tradition, but it was a constitutional imperative, as we shall see. The U.S. Coinage Act of 1792, consistent with the Constitution, provided for a U.S. Mint, which stamped silver and gold into coins. One dollar was defined by statute as a specific weight of gold. The Act also invoked the death penalty for anyone found to be involved in debasing money.
Gold & silver certificates were also issued, as a convenience. It was clear that they were not gold, but equally clear that they represented and could be redeemed for physical gold on demand.
Exhibit A: The Gold Certificate
Here is an example, from 1928, of a $10 Gold Cert
Note the wording on the note: Gold Certificate. Payable to the bearer on demand, in gold coin. At the top it states "This certifies that there have been deposited in the Treasury of the United States, ten dollars in gold coin, payable to the bearer on demand."
The above bill is consistent with the U. S. Coinage Act and the constitution of the United States, which lays the legal foundation for money in the U.S.:
Article I, Section 10, U.S. Constitution
No State shall coin Money, emit Bills of Credit, make any
Thing but gold and silver Coin a Tender in Payment of Debts.
This is a relatively clear statement: States cannot mint their own money, and only gold & silver coin is acceptable as payment. So where are they to get the coins?
This is set forth in the Constitution as well, two sections prior:
Article I, Section 8, U.S. Constitution
The Congress shall have Power to Coin Money, [and] regulate the Value thereof
This, taken with Section 10, is quite clear: Since only gold & silver coin is acceptable as payment, and the Congress is in charge of coinage, it follows that Federal money must be issued by Congress and backed by gold.
This constitutional standard was followed for just over 100 years. There were booms and busts, and non-backed "greenbacks" were printed to help finance the Civil War. Following the war, the emergency fiat currency was deflated and returned to its legal standing. Over this period, inflation remained in check. One dollar at the time of Washington had roughly the same value of a dollar in 1912. But a curious thing happened in 1913.
The government started to cheat.
Amendment 16, ratified Feb. 3, 1913 established the Federal income tax:
The Congress shall have power to lay and collect taxes on incomes,
from whatever source derived, without apportionment among the
several States, and without regard to any census or enumeration.
This gave the Federal Government the ability to tax all incomes in all states, but without the obligation to share the money back with the states from whence it came. What was to be done with the money?
On December 23, 1913, President Wilson signed the Federal Reserve Act establishing the Federal Reserve System, to deal with the new bounty of cash. The purpose, ostensibly, was "to help counteract inflationary and deflationary movements and to share in creating conditions favorable to a sustained higher level of employment, a stable dollar, growth of the country, and a rising level of consumption."
1913 saw the income tax and Federal Reserve System. Two bad moves in an unlucky year marked the beginning of a colossal money grab by the US Government that continues to this day. This year marked the beginning of the end of the US dollar, by decoupling it from its underlying anchor of value: gold.
A Brief Timeline
As time wore on, and additional monies were needed to finance wars, patch up the (first) Great Depression, pay for social programs, etc., the unconstitutional. As a result, the decoupling continued. Here are some of the low lights:
1922 - As a result of wartime inflationary pressures, the gold exchange standard was adopted. The dollar and the pound sterling were officially declared Ďas good as gold' - deemed fit to be used along with gold in the monetary reserves of other countries
1933 -April 5 - One month after his inauguration, at the nadir of the Great Depression, President Roosevelt declared a national emergency and unconstitutionally ordered all gold coins, gold bullion, and gold certificates to be turned into the Federal Reserve banks by May 1st under the pain of imprisonment and huge fines. It was a national confiscation of gold and silver.
June 5 - Congress enacted a joint resolution, that all gold clauses in contracts were outlawed and no one could legally demand gold in payment for any obligation due to him. This resolution is clearly in violation of Article 1, section 10 of the Constitution.*
1934 - The Gold Reserve Act of 1934 officially prohibited private persons subject to U.S. jurisdiction from holding gold for monetary purposes. It became illegal for U.S. citizens to own gold! The old standard was officially dead.
The result was this:
Exhibit B: The series 1934 D Federal Reserve Note
This is what happened to our money in just 6 short years:
Pure paper. Note the change in wording. All references to gold have been subtly replaced, while the bill has retained its overall appearance. A casual observer would hardly notice the difference. It still says that $10 dollars will be paid to the bearer on demand. But ten dollars of what? It does not say.
And then there is the bizarre disclaimer on the face of the bill: "This note is legal tender for all debts public & private, and redeemable in lawful money at the U.S. Treasury or at any Federal Reserve Bank."
If the bill is redeemable in lawful money, does this not imply that the bill itself in not lawful money?
This disclaimer continued on the bills until 1963, when. . .
1963 - New Federal Reserve notes with no promise to pay in "lawful money" was released. No guarantees, no value. This is also the year of the disappearance of the $1 silver certificate. Once again, the subtle shift continued in plain view.
1965 - Silver is completely eliminated from all US coins save the Kennedy half-dollar, which was reduced to 40 percent silver under President Lyndon Johnson's authorization.
1968 - June 24 - President Johnson issued a proclamation that all Federal Reserve Silver Certificates were merely fiat legal tender and could not really be redeemed in silver.
1971 - Aug 15 - President Nixon closes the international gold window. U.S. Dollars are no longer redeemable in gold for international settlements. This marked the beginning of the current, anchorless floating currency regime, and not coincidentally, a decade of massive inflation.
1980 - Gold reaches an all time high of $850/oz, as world confidence in the Dollar plunges.
This gets us fairly well caught up on the current situation. Clearly, the money we use today is not, by definition constitutional, and has not been since 1934. We have indeed come a long way from 1794, when the debasing of money was punishable by death. These days the government does it at will before everyone's eyes and we hear nary a complaint. As of today the dollar holds the record as the longest running fiat currency, ever. But like everything, this streak too will come to an end. The mighty dollar is an emperor with no clothes. Though it powers the world, sets the price of oil, gold, and a working man's wages, it does so without a constitutional leg to stand on, nor a standard of value to back it.
Conclusion: The Last Great Bubble
Make no mistake, the dollar is still (as of 2002, when this article was penned) rising against every other currency in the world. For now. The Yen, the Euro, the Canadian dollar, the Argentinian Peso, the South African Rand are all vastly inferior competitors. The dollar is viewed as a safe haven and a no-brainer investment on the world market. It alone is rising, seemingly levitating as the rest of the world's currencies tumble. It is reminiscent of the last big bubble we witnessed up close, only 2 years ago, called NASDAQ.
The final run up in NASDAQ was 86% in one year. But powering the advance was only a handful of about 50 stocks - the safe havens, the no-brainer big-cap investments. These were the Microsofts, Ciscos, Suns, Intels & Junipers. They were bought not merely because they were going up, but because everything else was going down! And up they went, until they too were discovered to be so many emperors without clothing. We are all familiar with what happened next.
The dollar's days, I am sorry to say, are numbered. We all know the truth. It's a phony. It's a giant momentum play, and the biggest bubble this world has ever seen. Time to wake up. We've been here before.
As Mark Twain said, history may not repeat itself, but it often rhymes.
Stocks are still at all time historic highs by PE measures, and still climbing. Gold is close to a 20 year low. What is your definition of a bargain?
- - - - - - - - - - - - - - - - - - - - - - -
*This was not the first time the Constitution was violated by law, and it certainly will not be the last.
**This article was originally published at depression2.tv on January 16, 2002.
- - - - - - - - - - - - - - - - - - - - - - -
For more on this topic, the excellent book: The Creature from Jekyll Island : A Second Look at the Federal Reserve , by G. Edward Griffin
- If you have comments on this article, please feel free to drop me an email at: email@example.com
- New charts, news and financial links -- both the bull and the not bull -- updated each day on the homepage.
If you would like to be notified of updates, and new articles, subscribe to my low volume announcement list
Back to the Archive
All contents © Michael Nystrom