May 11, 2011 The American History You May Not Know “A man goes broke slowly, then all at once.” —Ernest Hemingway

And Now, Here We Go…

In our opinion, Hemingway’s quote above is right on.  Before a man (or a country) goes broke, everything seems to be sailing along just fine.  Then, seemingly all of a sudden, things have changed for the worse.  Often though, it’s not really “all of a sudden.”  Instead it’s a steady progression of bad decisions, which manifest themselves in overt, and irreversible failure.

Our regular readers know for years we’ve been warning of the unfolding fiscal fiasco in the United States and other “developed” nations.  Chronic overspending and catering to constituencies (and special interests) on both sides of the aisle – coupled with the unwillingness to make meaningful changes, has led to large-scale indebtedness and the debasement of currencies no longer backed by gold.  It’s been our long-standing opinion a currency not redeemable for gold may ultimately be printed into oblivion by its government.  After all, without the worry that holders of ever-increasing amounts of currency can show up and redeem it for gold bullion – what’s to stop a debt-ridden government from continuing to print like mad?  Where is the accountability?  It’s no wonder the Founding Fathers of the United States made sure the Dollar was initially backed by gold and silver.

For the skeptics, let’s think about this.  In 1913, when the Federal Reserve Bank was created, gold was priced at $20.67 an ounce. Today (May 11, 2011), with the Dollar no longer backed by gold, the yellow metal trades at $1500 an ounce.  In other words, at the time of the creation of the Fed, the Dollar was worth 1/20^th an ounce of gold.  Today, the Greenback has slipped to a value of 1/1500th an ounce of gold.

We wonder what 1/1500th of an ounce looks like.  Perhaps we’d better start straining our Goldschlager as we pour it.  Others seem to be thinking along the same lines.

And now, here we go…

Worthless Money in America We Were Never Taught About in School

For those who pooh pooh a gold backed Dollar as an archaic and unnecessary phenomenon – our response is a simple, straight-forward, and based on the facts “oh really?”

For starters, the Founding Fathers witnessed the rampant inflation during the Revolutionary War period as certain states, along with the Continental Congress, issued their own non-gold-backed paper money.  Predictably, unchecked by the inability of currency-holders to convert it to gold, it was printed and debased to virtual worthlessness.

The Continental Congress’s version of non-gold-backed paper money was called the Continental.  As it was printed into oblivion, the saying “not worth a Continental” was coined.  Most American history books for some reason omit this occurrence, but we find the following excerpts on the subject from a New York Herald article written in 1863 immensely interesting:

“Sanguine politicians took heart, and declared that the effete financial theories of the Old World were too narrow for the destinies of the free, intelligent population of the New World. A specie basis (gold and silver backing of the Continental), they said, had been found unnecessary…

…The delight of the people at the success of their new wealth-creating machinery (government money printing of the Continental) was about this time abruptly chilled.  From some unknown cause the mystic wand of the magician was losing its power.  At the very moment when all apprehension had passed away the spectre of depreciation (of the Continental) appeared….

…Now it so happened that a series of military reverses occurred about the same time; and, as such disasters were known to depress the value of interest bearing stocks, it was urged that the paper securities of Congress had temporarily lost value from the same cause.  What we fervently hope is easily believed (our emphasis)… The depression of the public mind cause the decline in the government paper, and all that was wanted to stop the evil and restore the Continental money to par was military success.  Thus argued the less intelligent majority in Congress (our emphasis).

Soon this hopeful theory was put to the test.  The tide of battle turned.  Glorious victories crowned with laurel wreaths the heroes of the Revolution.  The whole country ran with triumphant notes of rejoicing at the news from Trenton and Princeton, from Bennington and Saratoga.  Acting on the belief that decisive successes could undo all the mischief sustained by the public credit, Congress, on the 20th May, 1777, determined to issued five millions more of paper money.  But, to their astonishment, it appeared that no one would take the paper currency at par, Victories had no power to check depreciation.  The five millions of paper were worth no more to the treasury than $1, 877,273 in specie (gold and silver).

Thus rudely and suddenly was the magic spell broken, and from the shock thus given to the paper currency it never rallied, nor ever rose again to par.  As every fresh issue increased the depreciation, it began to be suspected that the loss in value of the paper was caused by its being excessive in quantity.  This theory, which is now know to be the true one, attracted as yet but little attention.  Public opinion absolutely persisted in still attributing the evil to want of military success…

…All was, however, in vain.  Depreciation, the evil genius of the republic, had laid his hand on its currency and refused to release it from his palsying grasp.  Every successive issue increased the glut of currency and lowered its value as compared with coin.  We need not pursue this portion of history further…  Congress, at length, alarmed at the consequences should they lose the resource of paper money altogether, made a vigorous effort to stop the downward course of depreciation…

…It (the Continental) continued to circulate and depreciate till the end of 1780, when it had fallen to seventy-five for one. At this time the money circulated from the French army, and by means of the loan from Holland, France, and Spain, became sensible in all the States north of the Potomac.  Hence the paper soon became too unpopular for use. Dealers refused to take it for their goods.  In Virginia and North Carolina it continued a year longer.  But its value fell to 1,000 for one, and then it expired, as in the other States, without a groan (our emphasis)…”

Thus went the United States of America’s first experiment with money not backed by gold and silver.  The utter devaluation to worthlessness of the Continental confiscated from people their savings denominated in it.  Benjamin Franklin made note that the Continental’s depreciation was in reality a tax to pay for the war. A steep and unannounced one we might add.

Restoration and Apparant (Convenient?) Amnesia

To restore the credit of the United States, and to prevent the reoccurrence of the confiscation of property through currency debasement which took place during the Revolution – the Founding Fathers of the new republic made sure the US Dollar was backed by gold and silver.