PART TWO: HOW AMERICA BECAME ENSNARED IN THE DEBT TRAP (Cont'd)
ENSNARED THROUGH THE CURRENCY SYSTEM
Prepare yourself for this one. It is the hardest part of our financial system to understand and to describe simply, but is the most important to grasp. Because our founding fathers were well aware of the dangerous reefs in the waters of banking and currency issues, they mandated in article one, section ten of the U.S. constitution, that our currency was to be made of precious metal; either gold or silver. As we’ve said, this is called ‘commodity money’. For many years we only had commodity money or convertible money. Especially in the last half of the 20th century, gold and silver were gradually removed from both the CONTENT of coinage and from the BACKING of paper currency, until there was no inherent value left in the currency. (See side bar for details) 
From the people’s point of view, a currency backed by precious metal provides great economic stability. From the government’s point of view, however, gold-backed currency is limiting because there are times (such as war) when a government wants to be able to spend more than the tangible wealth it has available in its holdings of gold. Politicians really like to have the freedom to just crank up a press and print whatever they think is needed when they get into a tight spot. Bankers have figured out a slick way to let this happen. |
Silver was removed from dimes and quarters after 1964. The half-dollar coin was reduced from 90% silver to 40% from 1965-1970. Silver was completely removed from the half-dollar beginning in 1971. The last legal tender ‘silver’ dollar was minted in 1965 and was immediately bought up by investors for $7.50 each, since by this time the price of the silver in the coin was worth more than the $1 coinage value. Since 1965, U.S. dimes and quarters have been made of cheap metal alloys. (Nickels continue to have their historical 75:25 ratio of copper:nickel. Pennies were copper until 1982. In that year pennies were transitioned from copper to zinc.) Exchange of precious metal for paper gold certificates was ended in 1933, and for silver certificates in 1963. |
The system that the bankers have come up with is a radically different form of currency, even though on the surface it looks and functions almost identically to commodity and convertible money. Instead of backing the value of currency with precious metal, they back it by the ‘good faith’ of the government. This means the government can issue a ‘bond’, which amounts to an IOU, and borrow the money it needs by simply having the central bank print it. The central bank conveniently ‘buys’ the bond by printing a ‘note’ for the value of the bond, or debt. This is why our currency bills have ‘Federal Reserve Note’ printed on them. So the central bank ‘buys’ the government bonds by giving these ‘notes’ to the U.S. Treasury. When the Treasury takes possession of the notes, they are at that moment turned into ‘money’ (monetized) and then put out into the economy. Thus, money is created with only the price of paper and ink (and in the digital age, even that cost has been removed). Is your head spinning yet? This is probably the most difficult and slippery idea to try to understand about how our present money system works. This type of currency is called ‘fiat money’ (fiat is a Latin word meaning, ‘let it be done’) and it is backed -- not by anything of real value -- only by government debt. It is money, simply because the government declares it to be money, not because it has any inherent value of its own. So fiat currency is literally only as sound as the economic state of the country. More specifically, it is only as sound as people BELIEVE it is. If the general population ever loses confidence in their currency, its value collapses and it can do so very quickly. Of the 599 fiat currencies that have been established throughout history, every single one has eventually collapsed in value or has been removed and replaced because it was in danger of collapsing.
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The United States has maintained a gold or silver backing to its currency throughout its history, except for a period of time during the civil war when the Union issued 'Greenbacks', a totally fiat currency. After the war, the U.S. reverted to a gold standard, and continued with a commitment to gold-backed currency until 1971. The toll of carrying World Reserve Currency status, the financial stress of fighting the spread of communism in Vietnam, and other circumstances led Richard Nixon to issue what is called the ‘Nixon Shock’, abandoning the gold standard in favor of a fiat currency. This opened the door for a pattern of increased spending which enabled massive growth of the economy through debt. Fiat currencies have been used many times through the course of history. They have a universal failure rate and are notorious for slipping into hyper-inflation. The average life-span is approximately 27 years. All the currencies of the world were pegged to the dollar as the World Reserve Currency by the Bretton Woods agreement of 1944. This meant that they had to follow the dollar off of the gold standard in 1971. As the dollar switched to fiat-currency status, the currencies of the other world nations, being tied to the dollar, necessarily followed. Today, virtually all currencies of the world are fiat.
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Fiat money has several serious pitfalls:
1) It starts as debt and stays debt. Remember, fiat currency comes into existence as debt-with-interest-owed. The money loaned has been created out of nothing. But that doesn’t provide enough to pay the interest on the loan, therefore new money has to be created to pay off the original interest. But the new money is also debt-with-interest, so more money has to be created to pay off the new interest, and ---- whamo! --- we’re into a cycle where money has to constantly be created.
2) Inflation happens when more currency is created than there is wealth to back it. In the case of fiat currency, since it is not backed by wealth at all, it is inflationary from the very beginning. The more of it that is printed into circulation, the less each piece of the currency is worth.
3) Fiat currency has no backing except public confidence. This means that if confidence evaporates for any reason, people will seek out surer ways to store their wealth, and the fiat currency will lose its value.
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4) Another major problem with fiat is that it REQUIRES growth (expansion) in order to prevent recession and the potential for economic collapse. Here’s how this happens. Because fiat currency starts as debt-with-interest-owed, and new debt-money has to be created to pay off the original interest, continual expansion is required. If it stops, somebody is not being paid either the interest or principle they are owed. If they don’t get paid, then they will have trouble paying their bills to the next guy, and so forth down the line. If the system begins to ‘stop up’ like this it is called a ‘recession’. If the jam up becomes severe, it is called a ‘depression’. Pushed far enough, the whole system can collapse. Once we’re in a fiat currency system, the economy has to keep growing or it develops the danger of imploding back into itself. It is very much like lift to an airliner. An airliner can safely ascend and descend within a limited range of angles. If it loses lift, however, it stalls and begins falling downward. If it does not recover in time, it enters a downward spiral where recovery becomes impossible. You can also think about it as a traffic jam. When debt expands, the currency expands, but a slow-down, or tightening, of available credit, backs up in the system like a traffic jam. Just like on the highway, if a slow-down happens too quickly, some unprepared drivers crash into others. That is a recession. In a depression, brakes slam on and then cars start backing up into each other. In a collapse, people abandon their cars in the middle of the road and start walking. If you’ve ever wondered why reporting on the growth of the economy seems to be a daily newsworthy event, think of it as your pilot coming over the intercom to explain whether the turbulent dips you’re feeling are of no concern or whether you need to brace for impact.
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The debt-and-interest-based money system requires infinite economic growth in order to avoid currency collapse so that, once we are hooked on money, we are hooked on economic growth. With debt-based money as a foundation for the global economy, growth is requisite for nations and for the global economy as a whole. |
We made a huge mistake when we switched to fiat currency in 1971, leaving the wisdom of our founding fathers’ constitutional mandate to maintain commodity money. Nixon called it a ‘temporary suspension’, but here we are, forty-plus years later. From the moment our currency became fiat it has been living with a death sentence. Since 1971 the dollar has lost 80% of its value.
