The Federal Reserve: A Federal Problem
Within the United States, there is a strange entity, neither completely public or completely private, that manages the monetary policies of the United States. This entity, The Federal Reserve, has the task of adjusting interest rates, and also attempting to stimulate the economy using various mechanisms such as Quantitative Easing.
Thomas Jefferson, one of the founding fathers of the United States, had this to say about a government influenced monetary system:
I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. This issuing power should be taken from the banks and restored to the people to whom it properly belongs. If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered. I hope we shall crush in its birth the aristocracy of the moneyed corporations which already dare to challenge our Government to a trial of strength and bid defiance to the laws of our country”
Thomas Jefferson said those words back in 1791.
Each year the Fed expands the money supply, usually by printing additional money which it then uses to pay for debt. This process leads to inflation, and the decrease in the purchasing power of an individual dollar. Inflation in this manner is really the confiscation of wealth from a country’s citizens by its government. Ironically, the previous chairman of the Federal Reserve, Alan Greenspan, wrote a paper in 1966 talking about inflation and the gold standard (my emphasis):
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth.
Many people seek out gold as a hedge against inflation measures, which is usually a smart thing to do. Unfortunately in dire times the government often makes it illegal to hold gold, and has previously made it illegal for citizens to hold gold, forcing people to exchange gold for dollars – one such example is executive order 6102 back in 1933. Gold was illegal to own in the United States for nearly 42 years. If everyone gave up dollars for gold, it would be impossible for the government to inflate the dollar to pay for debt, since nobody would want the dollar. Which is why it’s possible that the United States may attempt to outlaw possession of gold in the coming years.
Without a doubt, inflation is a big problem, one that’s only going to increase as the United States continues to have problems paying its debt. If inflation spirals out of control, it will become hyperinflation, which has destroyed many countries in the past, including Germany (In December 1923, the exchange rate was 4,200,000,000,000 Marks to 1 US dollar) and Hungary (in August 1946 the total value of all Hungarian banknotes in circulation amounted to one-thousandth of one US dollar). The only hedge against inflation are commodities with intrinsic value, such as precious metals, or the currency of other countries.