The Federal Reserve And History of Money

Elaine Meinel Supkis

DeVaul, one of the readers of this blog, sent me a photocopy of the famous case, Juilliard v. Greenman which was an 1884 Supreme Court case which opened the barn doors for a Federal bank to issue fiat paper currency. Since this is the week the Federal Reserve which was launched by really rich men at a secret meeting offshore in 1913, issues its annual reports, it is time to talk about the Consitution, money and why we have a political economy that is destroying America's economic future in the name of quick profits for the top 1% of the nation and cheap prices for the working class.

On May 31, 1878, the lower courts in New York held that certificates issued by the Army during the Civil War were legal tender and could be passed around as if it were gold coin and it would carry the face value of gold on redemption but this was all false since the inflation caused by the war had significantly reduced the value of these bills handed out by the US Army and so when a manufacturer tried to use them in lieu of coinage, the man selling the cotton wanted payment in currency and not a goverment IOU of indeterminant value.

Namely, due to the war between the states, hard coins were gaining in value and paper IOUs issued by the government were always dropping in value. This situation is common in time of war. This week, the Federal Reserve released their annual report which has lots of interesting data hidden in the lists of numbers that have little commentary attached. The door to a fiat currency was first opened by the Supreme Court in 1884 but the consequences of all this wasn't felt until on the very doorstep of the first of the global Great Wars: WWI. Namely, there was a long political struggle between the believers in gold currency, the silver fanatics and of course, the manufacturers who wanted paper money because then the sky is the limit.

This was an early form of 'carry trade' whereby industrialists would try to use the paper script as the face amount when paying for commodity volumes. Presidential races were bedevilled by this debate over gold coins versus paper money. The Confederacy published paper money, the one photographed here says the Confederacy will pay the bearer of this note issued on February 17, 1864, TWO YEARS after a 'peace treaty is signed', namely, if and when there is victory and the Confederacy triumphs, THEN the holder of this $10 paper can collect this amount in gold (talk about fantasy!). Of course, these pieces of paper became worthless when General Robert E. Lee handed over his sword and surrendered. But the Union had many of these bonds all over the place and all were similiar, namely, after 2 years or so, one was supposed to get gold in return only there wasn't any gold at all.

The Supreme Court decided unilaterally that these pieces of paper if issued by the winning side in a war, were 'money' and had to be accepted at face value. One justice was so outraged, he wrote a long objection to this ruling, one that gold bugs to this day refer to:

Justice Field dissented on this important case that seemed to be so trivial on the surface: From the Supreme Court's home page:

From the decision of the court I see only evil likely to follow. There have been times within the memory of all of us when the legal-tender notes of the United States were not exchangeable for more than one-half of their nominal value. The possibility of such depreciation will always attend paper money. This inborn infirmity no mere legislative declaration can cure. If congress has the power to make the notes a legal tender and to pass as money or its equivalent, why should not a sufficient amount be issued to pay the bonds of the United States as they nature? Why pay interest on the millions of dollars of bonds now due when congress can in one day make the money to pay the principal? And why should there be any restraint upon unlimited appropriations by the government for all imaginary schemes of public improvement, if the printing-press can furnish the money that is needed for them?

Click on all images of money to enlarge.

Here is a 'Fractional Dollar' from 1874: the USA Treasury kept printing these long after the Civil War ended. This is what that case is all about, this sort of script.



Quite. He goes through the long and awful history of paper money which always ends up being used to wage wars and thus, inflated out of value rapidly. Throughout the then-short history of paper writs, bankruptcy always followed the use of paper money like a baby calf trails after a milch kuh. I was curious to see if the Federal Reserve which was launched right on the eve of WWI, did it do the usual money printing to enable wars?

I know that right off the bat, the US goverment began to issue certificates of silver deposits. I have in my possession a real, bonafide 1899 Silver Certificate for $1. "This certifies that there has been deposited in the Treasury of the United States of America, ONE SILVER DOLLAR." In other words, the silver dollar was supposedly safe and sound in the Treasury's care and the paper represented it.

Alas, this fiction was soon shown to be fake! The bank runs that announce the beginning of depressions or great collapses always features fearful holders of these certificates demanding GOLD OR SILVER COINS. People looking at stories of these events today think the banks ran out of paper money. This is silly. Banks NEVER run out of paper money! Even when the technophiles of Germany ran up the biggest inflation printing race ever, they still could keep up with the inflation they created by simply adding more and more zeros. This can go to infinity!

What the good people rushing to banks in all the bank runs in history have been people anxious to convert paper or tulip bulbs into gold or silver! And this is strictly limited! And when there is a run and there is no gold or silver, only tulips or paper, then there is a panic. A bad panic. And lots and lots of people die in the aftermath.

To see the numbers better, I used the basic statistics at their webpage, The Federal Reserve's Annual Report:Lucky for me, they provide the data going back to day one! Turning this into a series of graphs, the fact that a government can use paper money to wage war is most striking!

Each of these graphs have a different way of tracking the money. Since the amount rises rapidly, to show each era clearly, I used the same relative scale but each era involved 10X more money than the earlier eras which is why each graph starts near the bottom with everything compressed. The inflation of paper money has been very great indeed and the peaks are all involved with waging wars.

The smallness of banking reserves is obvious at the very beginning: the Federal Reserve has a vanishingly small money pot! But from 1916 to 1920, it literally shoots to the heavens. 12X over only 4 years. This is 3X higher each year! Because the new Federal Reserve was created magically via a conspiracy of the nation's top money men seeking some way of creating money for themselves, they had to promise they would not inflate the currency madly and would anchor it to gold reserves which were to be kept at Fort Knox. Due to the Alaskan gold rush, there was a lot more gold available and everyone thought keeping it safe in Fort Knox and not letting it cirulate but to use certificates that said, 'Pay the bearer in GOLD' would keep the paper money from inflating rapidly.

This was hopeless. Right off the bat, there was great inflation.

We can see the timelag between issuing of these certificates and the war's progress. Of course, the printers couldn't see what would happen next so of course, they overshot their goals and a lot of equity was now available to slosh around within the economy. In a frazzle, the rich men running the Federal Reserve scheme backpeddled rapidly especially when they saw what was happening in Germany and Britain. The German inflation really spooked them badly so they clamped down on production of dollars starting with 1922.

This caused great problems so they upped the money production which simply created a huge asset bubble as everyone rushed to move along these 'free money' certificates! So in late 1928, the Federal conspiritors suddenly strangled the money making and we got the Great Depression. Roosevelt strongarmed them into releasing some money when he was elected but we can see how grudgingly they did this.

Here is a gold certificate. The runs of the banks in 1933 were 'fixed' by simply declaring these notes to be FAKE. They could not be used to demand gold.

In none of the old bills I own from before 1933 does anyone of them have 'In God We Trust' on them. The addition of this line when faith in the Federal Reserve was badly shaken was to give the whole business of fiat certificates some sort of faith and authority. My grandfather taught me to be suspicious of all this because he got stuck with these gold and silver certificates that were made ipso-facto via government fiat, worthless as far as trust is concerned. I also have from family members who went to war, a parcel of gold certificates from the government of the Philippines and Nationalist China all of which became worthless due to wars, of course. If one loses one's country, it is hard to pretend the paper has any value just as the Confederacy discovered.

We can see from these charts how, starting with Germany's invasion of Poland, the money machine was unleashed to pay for WWII. It climbed as fast as a rocket. The Fed slowed down a tad after the war and we had a recession but then the Korean war and the Cold War broke out and off it took to the skies. For paper money always=war.

This chart starts when I was born: 1950. The money machine was set at only $250 million. Eisenhower was very conservative and he tried to keep costs down and he shut down the hopeless Korean war and kept things under control. For example, the imperialists of France and England wanted him to help them suppress the natives of their former colonies and he refused and even used money to force them to back down. Thus, India, Egypt and others won freedom and became sovereign nations. But not Vietnam, for example.

Here is a chart from the Big Picture showing how coins rise in value as the dollar drops.

Again, war makes the printing presses roll. As the long, disasterous, stupid Vietnam War ground on, money was printed with reckless abandon. We passed one warning sign after another. For example, the value of the minerals in our coins greatly surpassed the value on the face! People like me began to hoard silver coins and use them as raw material. So the government, just like in 1933 when they ceased honoring their gold certificates, made it illegal to turn a quarter into 65¢ by melting it down! The coins were rapidly debased by using cheap metals. And the destruction of the dollar continued. I note on this graph when each destructive event happened. None of this stopped the military madness! The sky was the limit and the whole point of the Constitution whereby the goverment is to be HINDERED from going to war via all sorts of restrictions, the one thing our Founding Fathers feared were foreign adventures that would bankrupt America---this is obvious. They failed to protect us from the madness of our own leaders who will merrily print money for war forever if they could.

From 1982 to 1994, the Fed tried to keep things at an even keel but even then, when we had Gulf War I, there was a blip upwards. In 1994, Greenspan decided to up the ante and the money took off. In the Great Asian Currency Crisis which I suspect was created by the Bank of Japan so they could kill the yen, the interest earned by the Federal Reserves collapsed suddenly to ZERO. At no point in the history of the Fed has this happened. It is very significant because usually the numbers try to track each other. I confess I have no idea what this means but the fact that it coincides with that event makes me very suspicious.

Of course, from 1980 to 2006, the Fed's numbers have shot up from slightly more than $10,000,000,0000 to around $40,000,000,000. It quadrupled in only 26 years. One thing is obvious, the production of money is roaring ahead even if there are temporary drops. I read in the business pages people wondering where all this money sloshing around the world's economies is coming from. Well...DUH. Ask Bernanke and his ilk. Ask the damn Bank of Japan.

And I will also note that the money machine turned on not on 9/11 but the summer of 2003 with the invasion of Iraq. It is shooting up because of that, as per usual.

From Market Watch:

Although there has been anxiety in financial markets all week about inflation, the Federal Reserve does not have an itchy trigger finger to hike rates, an expert on inflation said Friday.
Instead, inflation has been like a lumpy chair in which one can't get comfortable.

Core consumer price inflation increased 2% year-over-year in April, making it the first time in 14 months that core prices have been inside the Fed's unofficial target zone of 1% to 2%. See full story. In addition, the core CPI over the last three months has risen only 1.9%.

"If the Fed looks at where inflation rates are, while they are not going to leap for joy, they certainly are about where the Fed has a right to hope they would be. But obviously the Fed is not only looking where we are, but where we are going. I would say right now there is a lot of uncertainty," said Don Ratajczak, an expert on inflation and an economic consultant to Morgan Keegan.

Worries about growth are diminishing, wage pressures are possibly building up and the dollar has been weak.

A lumpy chair? Maybe Bernanke should be put in an Iron Maiden and get some holes poked in himself. And the fake inflation numbers piss me off. If the price of gasoline goes up for six weeks, that is one thing. But the price of energy has climbed steeply for going on 5 years now! And this has either raised prices since then or if they are dropping like with Japanese cars and Chinese goods then this is still inflation, the trade deficits should be thrown into the calculations so that if we are importing to hide inflation, then this should be revealed in these numbers by simply adding this deficit to the inflation figures!

Since we ran up nearly ONE TRILLION in red ink trade last year, then this trillion should be added to the inflation figures. Then we see reality. Only they won't do this because they have a vested interest in hiding the inflation THEY are creating by printing money like crazy. We know the inflation rate is over 5%. This is the rate the Feds are charging for the money they are printing. So to speak.

From the Wall Street Journal:

The South Korean won has risen 10% against the U.S. dollar since the start of 2005, appreciating more than any other Asian currency and causing problems for the country's export-oriented economy.

The currency's strength forces South Korean companies to raise prices of their products or cut into profit margins. Major manufacturers such as Samsung Electronics Co. and Hyundai Motor Co. in the past two years have seen their price advantage against competitors erode, operating profits tumble and stock prices decline.

All over the earth, bankers are raising rates because all of them are printing money and this emphatically includes the Bank of Japan who ships this out so inflation is hidden even as they amass the world's #2 largest FOREX funds by hoarding dollars so the yen can look weaker than it really should be. This global money moving game is not only rigged, it is explosively dangerous because the players hate each other and are looking to do something nasty at some point. Far from keeping this going forever, they track the money carefully and either bide their time or bite their nails with fear.

From the WSJ article:

For example, a shipbuilder that takes a $100 million order today for a ship delivered in 2010 may receive a $10 million down payment from the buyer and then hedge the other $90 million. It does this by offering to pay a bank in 2010 the $90 million if the bank will at that time give the shipbuilder today's equivalent value in won, or about 83.4 billion won. The bank then will go to the foreign-currency market and obtain 83.4 billion won, which it will hold in an account earmarked for the shipbuilder.

The act of acquiring won today creates demand that raises the value of the currency. And the rising value of the won reinforces shipbuilders' desire to hedge and protect their future revenue. "This is a vicious circle being created, with the expectation that the won will become stronger causing it to happen," says Hong Sun-young, an economist at the Samsung Economic Research Institute in Seoul. But he doesn't blame the shipbuilders, saying they are engaging in "very rational behavior."

Everyone is being rational and looking out for me, myself and I. But not all players are blind to what is going on. And when we couple open door trade with currency games run by various banks that are run by secretive individuals who have their own agendas and some of these are quite nasty, we get constant churning of money and events. And these things, as they move about the planet and everyone adds or subtracts numbers, numbers that aren't attached to anything at all, not even scraps of paper, we get the present system which is far from stable---it is about to fly apart!

From the Street.com:

The salutary impact of an increasingly levered hedge fund industry, globalization, financial innovation, recycling of financial flows, lower taxes, free trade and loose monetary policy -- which Pimco's Bill Gross recently described as leading to a "stable disequilibrium" and others have termed leading to Goldilocks -- appears to be waning.

At the same time that these factors are changing, it is particularly worrisome that risk spreads are at near historic lows, global equity markets seem priced nearly for perfection, the world's investor base has never been more leveraged with margin debt and carry trades, and the U.S. consumer has never had so much debt, nor has he been so dependent on cheap money and the appreciation of stocks and homes.

Today, a synchronized worldwide economic expansion is morphing into a simultaneous tightening by the world's major central banks. The world's debt markets are making lows in price and highs in yields (e.g., the yield on the 10-year U.S. note increased by 20 basis points last week and by 50 basis points over the last four to five weeks).

And here it is: even with the world's leading states either printing money or in the case of Japan, giving it away virtually free or in the case of China, hoarding it, we get a very dangerous situation where all the birds and there are several trillion birds flying madly about, if they all come home to roost they will pour into the USA's Federal Reserves.

And this is what we call 'a panic' which is when everyone presents their certificates and demands blood.

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Comments

[John]

Elaine,

This link may be of interest to you.

[Elaine Meinel Supkis]

Thanks for the link, John!

Heh. I am not surprized that Japan wants to do this stupid thing forever and ever. It benefits them greatly.

[teddy]

This global "free" trade with "capitalism" is in reality nothing more than extreme intervention by world wide central bankers who are controling all the strings, something that free market advocates 20 years ago would call something other than capitalism.

[JSmith]

Goldbuggery is just funny.

Consider the sizes of various hard-money economies: they were small, agrarian economies with little year-to-year growth and little oppportunity.

At the end of the 19th century, large-scale industrialization became possible because of the breaking of the hard-money restriction on payments: there was never enough gold or silver in circulation to satisfy the needs of a growing economy.

Despite all the fulmination above, paper money is not a bad thing.

[Elaine Meinel Supkis]

And note my story line: the issuance of paper money is directly connected to WARS. And the degradation of the paper value is connected to WARS. They are one and the same creature.

[DeVaul]

Inflation is the means by which the ruling elites wage their endless wars. That is its primary purpose, and has been since the dawn of time.

It was never intended to support social programs of any kind. This only came about as a means of staving off violent revolutions against the ruling elites because of the suffering caused by their endless wars.

Paper, and now electronic money, is the preferred means of inflating the money supply to pay for the ever increasing costs of war. In the past, coins were debased by removing more and more of the precious metal content until they were virtually worthless. That is what the bronze coins from Roman times represent: debased silver coins first established under the Republic.

Few goldbugs ever speak about the relationship between inflation and war. They always blame Social Security and Medicare. They never explain how their hard money system will pay for several fleets to patrol the Persion Gulf or the Seven Seas, or 30 brigades deployed on the other side of the world.

Elaine is one of the few writers who always makes the obvious connection between war and inflation.

[Elaine Meinel Supkis]

DeVaul, the valuable information you send me is tremendously appreciated, seriously. You are a fountain of great information and interesting history.

I can't thank you enough.

[blues]

The coupling of inflation with war is not an obvious relationship to me. But the US is now planning to bomb Somalia, it seems. I almost think BushCo & the media propaganda machine merely start them to show us who is in charge. They certainly produce far less than nothing. Of course, the DemocRats could not help but give the military $124 BILLION. They just HAD to do it. They are all nuts. Now they seem to be moving the whole government to Denver so they can see the Great Drought! They are idiots.

[Frank Schilling]

The richest people in the world, (those who are in a position to buy the gold today) made their money with fiat currency. You have to accept your situation (good or bad) and make it work to your advantage. Me paying you a tael for a week's worth of bread is not so different from fiat dollars used to send aircraft cariers so the oil can keep flowing and perpetuating the need for more fiat dollars. The reason I can type these words on my laptop, have you read them and respond is 'because' of fiat dollars. At some point there will be an inevitable recalibration, and that short window is when you want to hold physical gold. Of course you'll have to find the courage to sell that gold during times of panic and great uncertainty if you really want to profit.

[DavidB]

Hi Elaine,

I am reading your blog for the first time today. You made it into the Big Picture linkfest this weekend. You need to work on your writing a bit as it is a bit difficult to read but your heart is clearly in the right place. I think you have a future in the writing biz.

Don't let the fiat cult zombies get you down. You are right about fiat money buying wars. That is the dream, guns and butter, war and welfare with no one to pay the bills. The problem is we all pay the bills and our children pay the biggest price.

Always remember that because of productivity enhancements the natural trend for the price of goods is supposed to be downward not upwards. That shows how much of the hidden tax is being taken off of us. What is the matrix? The banking system is very much the matrix. We were born in a debt slave society but it doesn't mean we have to die there. Keep telling people about it and maybe we can win back the future for our kids that we are selling today for a bowl of food

Peace and Blessing to you

[auto glass replacement]

Blessing are always light to come in to your life.

[Parbrize auto]

Good info.
Watch "Zeitgeist" the movie.
Good info there too.