What’s a Federal Reserve Note?
Never heard of it!
In 1971 the United States officially broke the last remaining link between the dollar and gold. Since then the dollar has existed as a fully fiat currency whose supply has been expanded at a continually increasing rate. Why should this be of concern to the average person?
Because honest money and freedom are fundamentally related.
Money is the heart of any economy. In fact, it is the very basis of modern civilization itself. Without an honest, effective medium of exchange, society cannot advance beyond a primitive barter system, and history shows that a society will degrade when based upon a fraudulent money system. Things that we take for granted, such as specialization of labor – and its associated advancements in technology–are all enabled by the existence of money. Just imagine the plight of a violin teacher in a barter economy. Without money, every time he gets hungry, he is has to find a farmer who wants violin lessons!
Money then is the lifeblood of an economy. When the government takes control of money and its creation, it effectively takes control of society itself. The ability to create new money at will is done for the benefit of the government and its favored citizens, at the expense of the general society. Now, the U.S. National Debt is growing by $1 Million Dollars per Minute, benefiting only a few. The private sector is deprived of resources and capital while the purchasing power of its savings and store of wealth is continually eroded.
Our system of fractional reserve banking is incompatible with a gold standard. Under the current system, deposits in savings and checking accounts are available for full redemption on demand by depositors. At the same time, almost all of those deposits have been loaned out for repayment at some point in the future. How can both of these situations coexist? The answer is they cannot, as every depositor who demands his or her money in a crisis will exhaust the limited amount kept on deposit (the reserve).
The bank relies on the fact that, under normal circumstances, only a small fraction of the money deposited will be required for withdrawal at any given time. As long as the reserves are large enough to cover those withdrawals, then the operation can continue. This arrangement in any other business would be considered fraud.
The far more radical implication of such a reform – by today’s standards anyway – would be the effective elimination of the Federal Reserve System. Contrary to its stated mission of fighting inflation, the Federal Reserve System serves as a backstop to maintain the inflationary system of fractional reserve banking in times of crisis. In the past, a run on a bank resulted in its failure as its insolvency was exposed. The role of the central bank is to act as a lender of last resort under such circumstances – ultimately resorting to its ability create honest, new physical currency if necessary. However, this country’s founders frowned on the concept of a central bank.
At the heart of the expanding debt-based global financial crisis is the failure of its underlying monetary system. The battle between gold and the fractional reserve banking system will play a central role its resolution. The system we have will not be maintained – that’s what these last four years were all about, and that’s what the turmoil in Europe is now all about. The question is, are they going to move toward a constitutional form of money, or are we going to go another step further into international money. Instead of having an international gold standard based on the market, are we going to go toward a UN, IMF standard where they are going to control with the use of force another fiat standard? We consider that a very, very dangerous move.
The solution to this problem is a 100 percent gold/silver backed currency. In this arrangement, gold and silver backs up not only the physical currency in circulation but dollar denominated bank credit as well. The gold standard that was employed in law based upon the United States Constitution prior to 1933 did not allow for the expansion of bank credit. This is a critical difference as the bulk of the U.S. money supply exists in the form of bank account statements and NOT physical currency. When banks issue credit not backed by physical gold, they effectively create new money out of thin air. When they are allowed to do this, the entire supply of dollars is increased beyond the amount of gold that backs it. Eventually the imbalances become so great that calls for redemption by holders of dollars threaten to drain the U.S. Treasury of all of its gold.
To be compatible with a gold standard, all deposits that could be withdrawn upon demand would have to be covered 100 percent by reserves at the bank. Deposits that are loaned out by the bank would not be redeemable by the depositor until such time as they are paid back. By enforcing these requirements, dollars are not allowed to do double duty within the money supply.
The purpose of a gold standard to is to provide stability to the money supply, thereby preventing ‘legalized plunder’ through inflation and placing limits on the power of government. The existence of a gold backed dollar alongside a fractional reserve banking system reduces the notion of a gold standard to fiction unless and until it is promoted to the marketplace and the marketplace replaces fractional banking. It begins the ticking of a time bomb that will ultimately lead to its destruction, as good money drives out bad money from the free marketplace—depositors seek the safety of hard asset banking over the uncertainty of a system based on fraud. We will be paid in gold, deposit gold and buy and sell in gold. With NO government interference, the free markets will control the amount of money in circulation. With the FDIC abolished, private insurance will replace any coverage of risk as in other markets.
The transition to a gold standard is not difficult: we must get our house in order by reversing the appetite for big government, balancing our budget by practice instead of a constitutional amendment, refusing to increase public short and long term debt and not printing money beyond reserved funds. While Congress has historically been aware of the problem, politically they have not yet had the will to do what is sorely needed. On the state level, the main hindrance to restoring sound money is that some legislators lack education on the subject and do not yet see this as a voter issue.
An effort from the ground up is starting to place much more pressure on legislators and Congress today as the debt ceiling debate has recently shown. In fourteen states, Sound Money projects want to establish the legal basis for further legislation as the free market defines sound money and further refines and implements innovative solutions. ‘We The People’, the nonpartisan marketplace, are demanding protection for our resources, our labor and our assets for us and our posterity. Let’s act now or we’ll soon arrive at “The Day the Dollar Died.”