Why the Fed's 100th Birthday Could Be Its Last

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On December 23rd, the Federal Reserve will turn 100 years old.

We can look back on its few successes… but its many failures far outweigh any positives it may have achieved.

What's at stake now is the Fed's future. And it looks bleak.

In fact, the Fed won't even exist in 100 years…

America's First Three Central Banks

Central banks and fiat money have been a major point of contention ever since the founding of America.

Between 1775 and 1779, as the colonies delved deeper into rebellion, the fiat money supply grew by over 5,000%.

Within just four years, the colonial currency, the continental, lost more than 99% of its worth. It soon stopped circulating altogether, hence the phrase "not worth a continental."

America's first central bank of the time, the Bank of North America, was organized by a member of Congress. Chartered in 1781, it lasted barely a year as confidence in its inflated paper notes plummeted.

As the Constitutional Convention approached in 1787, most delegates were staunchly against fiat money. Recent experiences fresh in their minds, these guys knew exactly why.

Jefferson said: "A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army." "We must not let our rulers load us with perpetual debt."

But the attraction of central bank benefits (for its insiders) was simply too irresistible. Alexander Hamilton, the era's ultimate insider, campaigned hard against Jefferson, and by 1791 a 20-year charter was granted to the Bank of the United States.

To the surprise of almost no one, fervent money printing resumed, and the purchasing power of paper money issued by the Bank of the United States fell by 42% in just five years. The bank's charter was never renewed.

Congress being what it is, by 1816 it had approved a 20-year charter for the Second Bank of the United States. It too eventually failed as the money supply exploded, then contracted, as the bank's directors played nasty politics with the nation's economy.

Through all these shenanigans, despite stock market crashes and wars, a gold standard (in one form or another) allowed the dollar to remain relatively stable.

That would change in the next century.

A Beast Is Born

Then came the Bank Panic of 1907, a manufactured crisis aimed at eliminating banks' competition from trust companies. The ultimate goal was the establishment of a central bank.

It worked.

A commission was set up to investigate the crisis and recommend solutions, which led to the establishment of the Federal Reserve System.

The system was supposed to be "beneficial" for the country, and yet the plans were hatched in secret, and passed at Christmastime 1913, in the absence of lawmakers.

The promise of the Federal Reserve was that it would serve as a "bank of last resort," providing stability through its dual mandate of maximum employment and stable prices.

What America got instead was massive credit expansion, the 1929 stock market crash, and the ensuing Great Depression.

At the time, the Fed was required to hold a gold reserve of at least 35% of the deposits owed to its member banks, and another 40% of the Federal Reserve notes (dollars) outstanding, which were redeemable in gold.

This dark period was capped off with Roosevelt's 1933 gold confiscation, which added substantially to the Fed's coffers, enabling (of course) more money printing.

Gold reserve requirements were lowered gradually until 1971, when they were totally eliminated by Richard Nixon. He closed the gold window, removing foreigners' ability to redeem U.S. dollars for gold.

At that point, pretty much any and all obstacles to profligate money printing had been removed.

A Terrible Track Record

So let's look at the Fed's performance measured against its dual mandate.

The first is to achieve maximum employment.

Unemployment, as calculated by ShadowStats (based on previous government calculation methods), has current unemployment near 23%, and it never reached below 10% going back to 1994.

Grade: Fail

The second Fed mandate is stable prices.

As you can see from the very first chart above, prices began to rise soon after the Fed's creation in 1913, but then exploded higher as the last link to gold was severed by Nixon in 1971.

Grade: Fail

Over the years, Fed duties have expanded considerably. Their track record on those has been dismal too.

  • Maintaining moderate long-term interest rates: Until the Fed, long-term rates averaged about 6%. Between 1974 and 1992, they were above 8%, peaking at 14% in 1981: Fail
  • Supervising and regulating banking: 1933 Great Depression, the worst banking crisis of the 20th century. 1980s-1990s Savings and Loan Crisis: Fail
  • Maintaining stability of the financial system: 2007-2008 Financial Crisis, considered the worst since the Great Depression: Fail

There is a lesson for us in all these failures – even if the Fed refuses to learn.

Do as They Do, Not as They Say

The history lesson is quite clear: When the dollar is tethered to gold, in some form, it actually holds its value remarkably well.

And the period before the Fed still experienced tremendous growth in the economy, production, and living standards.

Meanwhile, the gold supply grew minimally, so that was certainly no impediment.

While the Fed hates gold, and Bernanke is unwilling to admit that it's real money, the Fed and Treasury (apparently) own thousands of tons. What's more, central banks globally became net buyers of gold in 2011, the first time in over 20 years. Central banks in Asia and a host of developing nations keep growing their stash.

Jonathan Spall, director of precious metals sales at Barclays Capital, told FinancialTimes.com, "We're going back to a time when gold is seen very much as money. It has been a complete reversal of the attitudes we saw during the 1990s."

For as much as our central bankers badmouth gold, they just can't seem to get enough of it.

The Byzantine Empire is a striking historical example of how a society and its economy can flourish thanks to the discipline of a gold standard.

The Byzantines: A Lesson from History

The Byzantine Empire existed from its split from Rome in 395 CE until its collapse at the hands of the Ottomans in 1453.

Emperor Constantine the Great built upon the Greeks' sound-money tradition – incredibly ironic considering Greece's problems today.

Constantine ordered a new gold coin, the solidus, and a new silver coin, the miliarense, to be created.

The solidus's weight was minted at a standard 65 grains for the next 800 years. The Empire's strict monetary laws ensured the coins' dependability. They were accepted across the known world, from Asia to Europe and Africa.

In its heyday, the Byzantine Empire was the center of global commerce. It never went into debt, let alone bankruptcy. The imperial currency was never debased during the Empire's eight centuries.

But, that sound-money, gold-based system would not allow bankers to get as insanely rich as they can today, with a system of debt-based fiat money.

Looking Back, and Forward

In more recent history and closer to home, holders of U.S. dollars enjoyed about the same purchasing power between 1783 and 1913, thanks to its linkage to gold.

But sadly, once the Fed arrived, the U.S. dollar's ties to gold were gradually removed. Its purchasing power has since plummeted, losing 96% since 1913.

History has clearly demonstrated that central banks will come and go, but gold is a constant.

So, as the Fed marks its first (and likely last) hundred years, let's keep the bigger perspective in mind.

Jefferson knew exactly what he was talking about.

As governments grow desperately more reliant on ever more fiat money, its purchasing power is sure to wither; the dollar is headed the way of the continental.

Gold, on the other hand, has stood the test of time for 5,000 years.

But central banks?

Not so much.

Join the conversation. Click here to jump to comments…

About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

Read full bio

  1. Joe Smith | December 3, 2013

    There is not enough gold to use a gold standard now. Even if there was the banksters own so much they would still have all the power (he who has the gold makes the rules) fractional reserve lending gives the banksters an unfair advantage and causes inflation. The federal reserve and all TBTF banks should be broken up. The treasury should assume it's proper role in issuing money. I see no need for them to charge interest or have inflation. The value of the dollar would be backed by nothing more than confidence. If the fed can do it when no one has any confidence in the fed, why not congress?

    • fallingman | December 3, 2013

      Come on Joe. It's simple arithmetic. You have a supply of currency. You have a supply of gold. You do some division and get a price for gold at which the currency is backed/redeemable. The absolute supply of gold is utterly meaningless. Why repeat this canard?

      It just means the price of gold would be quite high, because the Fed has gone hogwild with clownbuck creation.

      That said, I'm not in favor of an official government gold backed currency. Let there be no official "money." Let currencies compete.

      Yes, the Fed should be eliminated. The TBTF banks should be allowed to fail. Ain't gonna happen. The bankers OWN the government and literally own the FED.

      ***

      Mr. Krauth…thanks for the report card on the Fed. It seems complete failure doesn't disqualify them from continuing to mismanage monetary affairs. Thanks also for exposing that scumbag Hamilton. Good article.

    • Jim | December 3, 2013

      Some supposedly in the know say there is much more gold then officially reported.

      Do a youtube search on former senior legal counsel for the World Bank, Karen Hudes.

      Regardless, scarcity/limited supply is actually one of the reasons gold is a perfect asset to back a monetary system.

      The unlimited printing of paper money is exactly why it's not a sound form of money. It can be printed into oblivion (and in fact is). Gold can not.

      Also since it's easily divisible, having "enough" gold is a mute point.

    • Alex Polski | December 7, 2013

      I don't understand your comment on money backed by confidence. If the government keeps spending more than it takes in and keeps borrowing more to pay off its obligations…how can there be any confidence?

  2. Ray Southwell | December 3, 2013

    Jefferson quote stated "private central bank." A public bank used to expand the productivity would work just fine. Fiat currency is not the problem. It is what the currency is used for. Non-productive activity. The USA has been using our fiat currency for destructive activities called wars to expand our empire. That is a failed system.

  3. DD | December 3, 2013

    The Fed should be abolished and those who run it made accountable for this financial mess. This is what people NEED to demand, but they won't and that's a very sad thing. The people will regret this for sure for generations to come.

    Suggested reading – The Creature from Jekyll Island by G. Edward Griffin.

  4. Dave | December 3, 2013

    The unemployment graph seems to be missing the Shadow Stats line for unemployment.

    • Rebecca Kerins | December 3, 2013

      Dave, thank you for pointing this out. We have updated the Unemployment graph. Thanks for reading Money Morning!

  5. Dave | December 3, 2013

    Excellent article. I am not sure that the Fed will go away anytime soon although I hope it does. I particularly like the key point about purchasing power remaining the same from 1783 to 1913, then plummeting 96% in the past 100 years.

    I disagree with Mr. Smith about there being in insufficient amount of gold to have a gold standard. If one looks at our history, one will see the we had gold and silver certificates. A gold standard would have to include something similar today. We also must remember that the reason the money supply is so large today is that we have devalued the dollar so much that it had to grow. In the sixties my father made around $4,000 per year yet he was able to raise a family with three kids, buy a house, etc. and mom didn't have to work. Today, in many parts of the country you are hard pressed to raise a family, buy a home, etc. on ten times that amount.

    • wayne | December 8, 2013

      I agree 100% with what Dave wrote. you may not have made as much per hour in the 60's , but what you did make sure went a long way
      One parent could work and raise a family with 3 Kid's buy a couple car's , A home and live comfortable. my Father also did this as well. My Mother took care of the home and us. no day care and we were not raised to a stranger's values, which is also a big problem today

  6. Havenstein | December 3, 2013

    "There is not enough gold to use a gold standard now."

    This is always a complete red herring. It doesn't matter, even if we only had 1 tonne of gold in the whole world. You just value it accordingly. What matters is not the amount, but the value given to that amount.

    The problem is that with all these paper gold contracts (naked shorts) the true value of physical gold is being grossly understated. For every ounce of real gold there are about 70 ounces of paper claims. But soon the paper markets will be taken over by the real market, and we will see true price discovery. Unfortunately, for every 1 person who will be happy, 69 others will get a nasty shock.

  7. Paul D | December 3, 2013

    Concentration of power is what Big Money/Progressivism is after. If it can proceed as it has for at least a century, then there is a real possibility that the future for the Fed is to morph, with other central banks, into an international central bank. This, of course, is ultimately doomed to failure and war. But what a hell of a lot of pain it can create on its way to its demise.

  8. Mike | December 4, 2013

    Can this be done: Print or create infinite amount of dollars, don't let people know how much dollar there is in the world. Buy all the assets, companies, metals, real estate the world. All sellers will be happy with this if price is good enough. Once the operation is complete, kill the currency without waiting for it to collapse naturally. This is not a smart thing to do but it brings a lot of money and power in the short run, which seems to be the goal of richest people behind cb's.

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