Money Defined


The Constitution of the United States of America, Article 2, Section 8, Clauses 5 and 6 reads:  The Congress shall have Power … To coin Money, regulate the Value thereof, and of foreign Coin; To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;

And in Article 1, Section 10, Clause 1 reads:  No State shall … coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;


It seems pretty specific that Congress is to manage the production and value of a currency of this country. The states can mint coinage that is compatible with the federal coinage and money and that only instruments of the precious metals gold and silver are to be used for money.  And actually, a reading of the above does not prohibit the issuance of private money or the use of foreign money for the everyday process of commerce!  It appears the Constitution allows private money that conforms to the standards set by congress:  if a ‘half-dollar’ coin produced by the mint of the USA contains 0.3617 troy ounces of silver when struck as established by Congress, then a coin that you strike with the same silver content should have the same value and be perfectly acceptable in domestic commerce if all parties in the transaction agree to the value.  Just don’t make the private money resemble in any way USA issued money:  that’s counterfeiting.  Common sense would lead one to believe that the Constitution allows any gold or silver token to be used as money, just don’t try to copy and pass as genuine any copies of ‘money’ produced by the government of the USA.


The Coinage act of 1792 established the dollar as the unit of money in the USA and defined it as 0.8486 oz silver or 0.0566 oz gold.  This fixed the value of silver (in dollars) at $1.18 per ounce and of gold at $17.67 per ounce.  Money was not created out of thin air.  That first coinage act mandated that the government obtain metal for coins by offering private individuals to have their gold and silver minted into coins for a tiny fee.  The value of the dollar, in gold terms, remained thus for 42 years.  This precious metal exchange rate fixed value provided great stability to the financial system of the new nation. In 1834, the dollar was devalued with respect to gold by 6.3% through the passage of the Coinage Act of 1834, with the new exchange rate being $20.67 per gold ounce.  It stayed at that rate until 1933 when Franklin Delano Roosevelt banned the possession of gold.  After confiscating as much gold as possible, he redefined the gold/dollar exchange rate to $35 per ounce of gold, instantly devaluing the dollar by 69%!  Amazingly, he even confiscated gold held in the USA by foreign governments!  Some might have thought this an act of war.

Actually, foreign coins (British, Spanish, French, etc.) were all that were in circulation at the time the USA was created, which is why “foreign coin” was mentioned in the Constitution.  [As an informative aside:  The phrase “two bits” originally referred to the practice of cutting silver Spanish 8-reales coins (the “pieces of eight” of pirate song and legend) into eight sections to make smaller valued tokens for commerce.  The original American dollar was almost exactly the same size and weight as the 8 reales coin which was also the same size and weight as the popular German thaler (Anglicized “dollar”).  So “two bits” was two-eighths or one-quarter of the Spanish dollar, German thaler and new American dollar.)  In 1806, an act of congress established official exchange rates of various foreign coins.  The Coinage Act of 1857 eliminated the validity of foreign precious metal coins as legal tender for commerce in the USA and also effectively removed the definition of ‘one dollar’ in silver terms. 


The Coinage Act of 1965 removed silver from normal dime, quarter, half-dollar and dollar coins.  It did allow for special precious metal proof and commemorative coins to be minted.  And Congress authorized in 1985 and 1986 minting of the current silver and gold ‘eagle’ bullion coins.  These coins have no monetary connection to the value of ‘one dollar since the ‘face value’ of each does not reflect the value of the metal they contain nor the price charged for the coins.

Then, in 1971, Richard M. Nixon severed the link between the dollar and gold.  Since then there is no ‘intrinsic value’ of ‘one dollar.’  This act effectively gave the federal government the ability to create money at will backed by nothing.  That is a far cry from the first mint buying or exchanging private gold and making coins from it.  The money supply can be expanded exponentially, literally overnight.  And it has been increasing almost that fast in the last decade.


Okay, so why do I bore you with this bit of history?  Because of the following chart:

If you study the inflation in the USA from its beginning in 1788 (when the Constitution was ratified) tracked by the chart above, you will see short periods of inflation – even hyperinflation – always associated with wild creation of fiat (backed by nothing but a promise and having no intrinsic value) money like during and after the American Revolution, the War of 1812, the War of Southern Secession and World War I.  [No, it was not truly a “Civil War.”  A civil war is when two factions, usually those in power and others opposing them, are trying to seize control of their nation.  The Confederate States of America were, rightly or wrongly, seeking their own independence: a new nation.  But I digress…]  After these short bouts of ill-advised money creation, the value of the US dollar always returned to its intrinsic precious metal value as the government paid down its war-related debts.  So a gold eagle ($10.00) would buy essentially the same quantity of goods, land, labor, etc. in 1910 as it did when George Washington was president.


You may notice an anomaly in the chart around 1915.  Inflation accelerated, due to the federal government borrowing and creating money to fight World War I, but the value of the dollar never returned to its historical value until the Great Depression occurred.  There is a reason for this, which I will discuss in another blog post concerning the Federal Reserve.

One of the major concerns of the federal government during the Great Depression was a period of ‘deflation’ in which the value of the dollar actually ROSE by more than 25% over several years.  One result of deflation is that if people expect their money to be worth more tomorrow than it is today, they will hold their money in anticipation of a better deal in the future and the economy will slow down.  This is unfortunately a double edged sword, because while incomes and savings will be worth more, employers may need to lay off workers if their sales fall because of that lower velocity of money.  Deflation was also bad for the government, because if incomes and sales fell, the recently enacted income tax, sales tax and other taxes generated less revenues for the government.  Roosevelt’s response to this deflation was the confiscation and re-pricing of gold, which instantly made life significantly harder for middle and lower class Americans.


[Let me go off on a little tangent here to speak a little more about deflation and inflation.  It may seem a little counter-intuitive that deflation can be good.  Deflation is usually recognized as a period of falling prices.  This means that a unit of currency will buy more than it previously did.  I.e., if prices fall 50% then you can buy twice as much of a product for the same money.  Deflation can be caused by several forces.  Improved productivity reduces costs and, hopefully, prices.  If one person can make a dozen items per day by hand and adding a device that will allow him to make two dozen of the same or better quality per day without paying him more, then the cost of making the items is cut in half and the price can be cut in half.  Advances in computer technology, for example, are a deflationary force!  With improvements in computer technology, the cellphone you may have in your pocket has more computing power than the original IBM 360 mainframe!  At an infinitesimal fraction of the cost!

Generally, as is the case with the example above, as workers increase their productivity by producing more or becoming more skilled thus improving the quality and hence value of a product, they are paid more; and they produce more wealth for the company, themselves and the nation.

With inflation it is just the opposite.  Prices rising means the same amount of money buys less of a product. (Can you find a ‘penny candy’ for one cent any more?)  If raw materials become scarce or harder to produce or labor expenses rise due to increased wages, the cost of production increases.  So final products or services prices must increase.  The value does not necessarily increase.

Using the federal government’s own inflation calculator, the house my parents bought in 1964 for $30,000 would now cost about $229,000.  It is the same house – you just need more little special pieces of paper to acquire it.  Inflation does NOT increase value or wealth.

When nominal wages increase due to inflation, on the surface, the worker is better off since she has more money to spend, but income taxes and prices also increase.  If wages increase by 2% and prices increase by 2% the worker has gained nothing.  Her wages will obtain only the same amount of goods as before.  If prices increase 5% and wages increase 2% she is behind 3%. (And she will probably be even further behind since her tax burden will likely increase further reducing her available funds!)

Inflation is sometimes considered a desirable thing because debt can be repaid with ‘cheaper’ money.  I’m not sure I fully grasp this concept, but I think it goes something like this:  If you take out a 30-year home mortgage for $100,000 at 5% fixed interest your payments (covering only principal and interest) will be $526.82.  If inflation is at 2% and your wages go up 2%, then you will have more money to pay that same monthly mortgage payment with a little more left over for other purchases.  In theory you are getting ahead.  The problem is everything else is increasing in price so the ‘little left over’ evaporates as the cost to maintain the same standard of living increases.

Inflation is also defined as more money buying the same amount of goods.  If the government creates more money from nothing, applying more ink to more paper or adding electronic bits to accounts, no wealth has been created, as in the house example above.  People will just feel wealthier and freer to spend the additional money they think they have.  A true increase in wealth would be adding a garage to the house or buying a bigger house.

There is a great illustration of the insanity of trying to manipulate the money supply in Douglas Adams’ Hitchhikers’ Guide to the Galaxy series.  The Golgafrinchans crash land on Earth and use leaves for money.  With a limitless supply of leaves, hyperinflation is rampant and no one really feels truly rich and it is taking huge quantities of leaves for simple transactions, so they burn the forests to remove the source of new money.]


With that out of the way, let’s return to the discussion of money and the American Constitution.  If the dollar was once defined as a specific amount of silver or gold and there is now no legal backing of the currency of the USA with ANY physical asset, what is the intrinsic value of ‘one dollar.’  The answer is:  nothing.  It is only worth what two parties of a transaction agree it is worth.

Former Federal Reserve Bank chairman Ben Bernanke testified before a congressional committee that gold was not money.  The assumption is:  he believes it has no value?

If gold is not money and has no value, why does the USA claim to have more than 8,100 tons of gold in storage as part of their ‘monetary reserves’?  That is what is left from the 20,000 tons (more than half of the world’s reserves at the time!) it had before the run on American gold that Nixon ended in 1971.

If gold is not money, why are the Department of the Treasury and the Federal Reserve fighting tooth and nail to prevent an audit of that remaining gold supposedly held at Fort Knox and elsewhere?

If gold is not money, why are some nations increasing their reserves at such huge rates?  China is accumulating gold at a rate as high as 1,000 tons per year and likely has far more than 4,000 tons in their stash.  China is using the more than $3.8 TRILLION of American debt it holds to purchase physical assets.  In addition to buying physical gold they are buying companies all over the world that produce gold, oil, iron, etc.  Russia and India are also increasing their gold holdings.  Russia appears to be converting the dollars they get for their natural gas into gold.

If gold is not money, why has the government of the USA been holding gold for Germany, Venezuela and other governments for safe keeping for decades.

If gold is not money, why are those nations repatriating their gold being stored offshore?  Venezuela repatriated from the USA 160 tons of its gold in 2011. The Netherlands recently announced they quietly reclaimed 122 tons from the USA in late 2014.  Germany has demanded that 300 tons (of 1,447 tons held by the USA) of their gold be returned to them.  They have been told it will take 7 years to return that amount of gold!  Certainly there should be an identifiable stack of gold in the bowels of the Federal Reserve Bank of New York vaults that has Germany’s name on it.  It shouldn’t be too hard to verify it, weigh it out and fly it to Bonn.  A C-5 Galaxy cargo plane can carry more than 135 tons of cargo.  Three flights would get it all back in short order. Why will it take 7 years?  The delay leads us to ask: Where is Germany’s gold?  Apparently, even the State of Texas no longer trusts the Federal Reserve or the USA to hold its gold and wants its metal assets stored within it’s own facilities on Texas soil.

If the government of the USA does not have or cannot find Germany’s gold and does not have gold ultimately belonging the people of the USA, what have they done with it?  How do we know we can trust them with anything?  Is that why the dollar of the USA is becoming worthless, because there is nothing but hot air backing it?

  If gold is not money, why did the authors of the Constitution of the USA insist that Congress define American monetary units in quantities of gold and silver?  Why are so many governments around the world, buying more and insisting on taking possession of the gold they already own?  Why are so many individuals all over the world buying gold for themselves?


Gresham’s Law (named after the 16th century English financier) states that ‘bad money’ will drive out ‘good money.’  Think about the coinage of the USA mentioned above.  When the American coins made of 90 percent silver for more than 170 years were replaced with base metal alloy coins, the silver coins disappeared from circulation and into storage in private hands within a very short time.  The ‘bad’ base-metal money drove the ‘good’ precious-metal money out of circulation.  One ‘face value’ dollar of the pre-1965 90% silver coins is now worth about 12 nominal dollars for their silver content, as of this writing.  It has been worth as much as nearly 50 fiat dollars.


As a defense to this debasement of the money of the USA the federal government has passed laws to prohibit private money and foreign money to be used as ‘legal tender,’ even though competing moneys were at least implied to be allowed by the Constitution.  There are many regional ‘private currencies’ circulating today.  But they are careful to claim to be media of barter – NOT ‘money’.  Unfortunately for Bernard von Nothaus, he had the temerity to imprint the word ‘dollar’ on his silver ‘rounds’ and suggest they had a specific nominal dollar value.  While many private mints have created objects containing one ounce or a fraction of an ounce of silver that resemble coins, the government took special interest in branding Mr. Nothaus a ‘terrorist’ for the audacity of competing with the currency of the USA with ‘good’ money made of and backed by precious metal.


The bottom line is this:  the value of the currency of the USA has been criminally mismanaged and debased for a century.  In 1910 a box of corn flakes cost $0.09 per box.  In 1940 it cost $0.14 and in 2010 it cost $3.79.  The corn in the box, just as the house in the example above, is not more valuable; the dollar has less value.  It is past time for the federal government of the USA to begin to use sound fiscal principles to manage the affairs of the nation.  It may be too late.  The current federal government debt is more than $18 TRILLION!  It is larger than the Gross Domestic Product of the nation.  It has liabilities on and off the books that makes this number look miniscule.  They are creating even more liabilities as you read this.


The evidence shows that the federal government has been a terrible steward of the money and wealth of the USA.  Starting at a gold exchange rate of $17.67 per ounce and it is now taking about $1200 to obtain an ounce of gold, the various congresses and presidents have destroyed the value of the dollar so that ‘one dollar’ has no intrinsic value and one nominal dollar will purchase less than 5% of what it could 100 years ago.


It is time for the American citizens’ representatives to understand that the federal government cannot be all things to all people.  They must return to governing in a fiscally responsible manner.  The dollar should be based on more than ‘faith and credit’ because faith is fading.  Is it too late?






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