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Saturday, July 18, 2009

What Caused the Gold Standard to Fail?

If you listen to the comedians on the Communism channel, they occasional ridicule a guest who suggests a return to a gold standard. They say "The free market discredited the gold standard! The free market banking system was a failure!" The reality is that government violence caused the gold standard to fail. The reality is that the USA never had a free market banking system, although the system prior to 1913 was much freer than the one in place now.

The erosion of the gold standard happened in stages.

There were a couple of things that set the stage for the elimination of the gold standard, albeit indirectly.

Until the US Civil War, there was a presumption that the Constitution was a voluntary contract. Individual states could opt out of it at any time. This placed a limit on the rate of expansion of Federal government power. After the US Civil War, this check on the expansion of State power was removed.

Also during the US Civil War, a lot of laws were passed that regulated the banking industry. For example, government regulations forced banks to operate under corrupt fractional reserve principles, instead of sound warehouse receipt banking or time deposit banking.

During the late 19th century, the Supreme Court legalized limited liability incorporation. Limited liability incorporation combined with unsound fractional reserve banking is a recipe for disaster. Limited liability incorporation gives bank owners and management a free put option to declare bankruptcy and cheat depositors/creditors. Limited liability incorporation encourages fraud by the owners of a nearly insolvent bank. Before limited liability incorporation was legalized, there was a limit to how much a banker could abuse the fractional reserve fraud. The bank owners and management would be forced to sell personal assets as collateral in a bankruptcy, limiting the extent they could cheat depositors.

Unsound fractional reserve banking, a regulated banking industry, limited liability incorporation, and collusion among banksters caused severe crises in the late 19th and early 20th century. These problems were blamed on "failure of the free market", but the real problem was other regulations. These crises led to the creation of the Federal Reserve.

The USA never had a free market banking system. One of the first things that Alexander Hamilton did as the first Treasury Secretary was to create a central bank. Also, laws were passed requiring the use of gold as money. Using crops, tobacco, furs, or cotton as money was forbidden. A law requiring people to use gold as money is as evil as a law forbidding people to use gold as money. In the late 18th century, the European banksters had a near monopoly on the world gold supply, which is what made a gold standard evil at the time. The gold standard forced out small local monetary systems.

It's silly to say "The free market banking system in the USA was failure!" The USA never had a free market banking system. Even after Andrew Jackson vetoed the renewal of the 2nd US central bank, there still were laws regulating banking.

The final blow to the gold standard actually came in 1913 and not 1933 as is commonly believed. Before 1913, banknotes were only issued by individual banks. If a bank went bankrupt, then its paper was worthless. This limited the ability of the banksters to use paper to expand the money supply, because people could take the paper and say "Give me my gold!"

The Federal Reserve was allowed to print more Federal Reserve Notes than there was physical gold in the US Treasury. The original Federal Reserve law required the percent gold backing of the US dollar to never fall below 25%, but the executive branch declined to enforce that part of the law and it was later amended. A Federal Reserve Notes says "This note is legal tender for all debts public and private." The legal tender law meant that you had to accept the Federal Reserve Note as payment, even if you preferred gold. People who preferred gold didn't object. Until 1933, you could redeem your Federal Reserve Notes for gold.

In the 1920s, the Federal Reserve cut interest rates and caused an inflationary boom. In 1929, the Federal Reserve jacked up interest rates causing a crash. In 1933, the Federal Reserve started inflating to bailout the banksters. It's the exact same mechanism as the recent housing bubble and bust and bailout. In 1929, insiders knew the crash was coming and converted to cash ahead of time. Then at the bottom of the depression, they borrowed money to buy assets, profiting from inflation. In 1933, there was a limit on how much the Federal Reserve could inflate, due to the gold-redeemability of the Federal Reserve Note. The "solution" was to default on the gold standard.

The Federal Reserve was allowed to print more Federal Reserve Notes than there was physical gold in the US Treasury. In 1932-1933, Federal Reserve insiders started massively inflating. Getting suspicious of the scam, people started rushing to redeem their Federal Reserve Notes for physical gold. At the time, the mainstream media decried gold hoarders as unpatriotic. The reality is that hoarding gold is a rational economic decision when you expect the government to default on its money.

In 1933, President Roosevelt defaulted on the gold-redeemability of the Federal Reserve Note. Instead of declaring the Federal Reserve bankrupt, President Roosevelt bailed out the banksters. In addition to the default on the gold standard, President Roosevelt declared it illegal for Americans to own gold. He demanded that every American turn over their gold in exchange for a piece of paper. If you had money in a bank account, you no longer had the right to withdraw your balance in gold. If you had gold in a safe deposit box at a bank, then the bank management was required to steal your gold.

Was this gold seizure legal? A corrupt Supreme Court and Congress backed President Roosevelt's decision. Some of his advisers were uncomfortable with the gold seizure, but they played along with the scam. The mainstream media spread the propaganda that gold hoarders were criminals.

It was necessary to seize the gold in 1933. Otherwise, people would have merely boycotted the Federal Reserve and used gold instead. In 1971, more than a generation later, people were finally brainwashed to believe "gold is not money". They had accepted to use paper as money.

As an individual, there is no rational reason to prefer paper money to gold or silver. With paper money, there is always theft via inflation. With paper money, the people who control the printing presses cannot resist the temptation to print more money and give it to themselves.

With gold and silver, your money is protected from confiscation via inflation. With gold and silver, your savings are protected from theft.

Given the free choice, there's no rational reason to prefer paper to gold and silver. In the present, people don't use gold and silver as money because it's illegal. If you use gold and silver as money for an on-the-books transaction, you owe a *HIGHER* taxation rate than if you used slave points as money. Financial industry regulations make it illegal/impractical to operate a gold and silver warehouse receipt bank. Taxes and regulations make it hard to operate a business that lets people conveniently trade their slave points for gold and silver.

Paper money concentrates economic power in the handful of insiders who print and spend the new money. The power to finance new businesses is concentrated in the hands of the banksters. If I want to start a business, it doesn't pay for you to make me a FRN-denominated loan charging 8%, because that is less than true inflation. A bankster will gladly lend at 6%, because he is borrowing at the Fed Funds Rate and profiting off the spread times his leverage ratio. Only insiders may borrow at preferred interest rates.

Before the Federal Reserve was created, there was a financial instrument known as the "Bill of Exchange". It was common for individuals to lend each other money, bypassing the banksters. The Bill of Exchange was used when individuals wanted to lend each other money directly. With paper money, economic power is concentrated in the hands of the banksters. It doesn't pay for individuals to lend each other money, due to the inflation tax.

A pro-State troll says "Paper money provides flexibility!" This flexibility is merely a synonym for theft.

A pro-State troll says "The free market banking system is a failure. More regulation is needed!" The blame for banking crises lies with previous regulation. After 1913, the Federal Reserve scientifically created boom/bust cycles via its cartel power to set interest rates. Before 1913, government regulations allowed insiders to collude to create business cycles.

If you listed to a professional Communist, they'll say "The free market discredited the gold standard." and "The free market banking system was a failure!" The reality is that State violence discredited the gold standard, culminating with President Roosevelt's gold seizure in 1933. The USA never had a free market banking system. There has been an ever-increasing amount of regulation of money and banking.

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