A Special Guest Post From-
I have been reading a book called 'Gold and Liberty' by Richard M. Salsman and re-acquainting myself with monetary policy. Between the 1820s and 1913 – inflation was relatively low because the dollar was linked to gold. Gold was $18.93 (HISTORICAL GOLD PRICES- 1833 to Present) for almost 90 years! (I didn’t take this at face value; I checked several different websites for historical prices of gold – true - some will say $20.65). There were minor recessions referred to as business panics during this time. This was the period known to practice what is called free banking. As a response to a business panic in 1907 when rumors led to run on some major New York banks, the Federal Reserve Bank was created in a practice known as central banking. During the time of the central banks (around the world) would de-link paper money from any metal primarily gold and silver; hence, the period of rapid inflation begins.
In 1933, Roosevelt furthers the devalue of the dollar by making it illegal for Americans to own gold and making the dollar worth less gold. Then after WWII, the Bretton Woods agreement was signed where countries can have Special Drawing Rights (SDR) which would give other governments rights to US gold. This worked until France in 1971 would not accept a SDR, they wanted the gold. Nixon then delinked the dollar from gold and inflation has really taken off since. During times when governments seem to be pro-business (producer), gold will decline in comparison to fiat money (dollar); gold will increase in value when governments over-regulate, over borrow and in general act fiscally irresponsible. Therefore, the dollar is backed by the full faith and guarantee of the US government.
The goods produced and services provided are still worth something. Look at the size of the US economy in terms of GDP of the US as a single pie when the pie is the GDP of the US, as we purchase and sell our G&S in US dollars. Let’s say there is $10 T that have been printed and is used to represent the GDP; now Obama recently had congress approve the debt ceiling by $1.9Trillion. Therefore, our current GDP must now support more debt in an environment that is not seen as friendly toward business. The increase in deficit spending will create more inflation, as the dollar is devalued (more dollars at the same GDP). A welfare state and/or a state that is at war (whether just or unjust) needs a central banking system to devalue it’s currency. This book sited examples from the 1600s through 1900s of how this has been done throughout history by governments. It is an added tax – unseen, yet felt by anyone who who tries to save, spend or invest in dollars.
The dollar is monetized debt. The US government needs money; they create notes (accounting transaction) and send to the FED. The FED reissues the notes as bills. As the US government draws down on this loan ( US government is the first users of this new money). Then the government contractors and employees deposit these funds and more money is created through the fractional reserve banking system – the bank only needs to keep a fraction of this “new” deposit and loan the rest, creating more money. One of the functions of the central bank (FED) is to have policies that are to maximize employment. I have not checked, but from what I have read, under free banking unemployment rate never topped 25% ( NPR- Paulson Calls For More Financial Regulatory Power), like in the Great Depression (under the FED’s watch). I would draw a conclusion that free banking is more responsible and freer than central banking.