Monday, June 20, 2011

The Alchemists of Money part deux

What is alchemy? Alchemy was a proto-science that focused on turning base metals into precious metals, especially gold (chrysopoeia) and silver (spagyric) by use of a mythical “Philosopher’s Stone”.  Many years were spent in research and experimentation by the early scientists and mystics in their search of the magic stone.

Why would sovereigns across the globe spend treasure in search of the stone?


Remember from an earlier post that the sovereign maintained power by maintaining the population of serfs dependent on their king. If the king was unable to feed, clothe and house their population, the serfs would lose faith in their king and revolt. Growing populations placed growing burdens to feed and maintain the population. Technological efficiencies were far and few in between. Only those who were sponsored by the king stood to profit of their inventions and there was no natural mechanism or opportunity for innovation and thought to flourish.
The only way for a sovereign to expand his resources was either by conquest or trade. Conquest brought along a new set of challenges. The more territory that was conquered, the more mouths to feed. Trade required that a kingdom had something of value to trade. In effect, in order to gain wealth a kingdom must have surplus wealth. There lies the dilemma. Sovereigns could not give up control of the means of production without losing control and they could not increase production from serfs that had nothing to gain and no means to become more efficient in production of wealth.

The easiest solution was to find a way to convert a worthless and abundant material, such as lead, into a valuable commodity, such as gold. Chance provided the answer.

A bit of History

During the late middle ages, Italian trade of textiles and other consumer goods flourished. Since the goods were sold on credit, merchant ships did not pay directly for the goods. A ship’s captain did not buy the goods, he only transported them. The credit was extended to the merchant’s agent on the receiving port. Because of this credit, bills of exchange became prevalent. A bill of exchange was basically a receipt. The Italian manufacturer selling his wares to a British merchant would load his goods in a London bound ship and receive a bill of exchange for the value of his goods. The bill of exchange was a note from the ship’s captain to the manufacturer guaranteeing the delivery of his goods to London. Once in London, the ship’s captain would receive gold in exchange for the Italian goods and return to Italy were he would exchange the gold for the bill of exchange, extinguishing the debt. This is a very simplified explanation of the process that could involve dozen of exchanges along the trade route and many different bills and ships. But the basic process succeeded in replacing money for a symbol of money, currency, if only for a specific period of time.

Later goldsmiths began issuing vault receipts in exchange for gold. You would store your gold in their vault for safe keeping (for a fee) and receive a receipt for your gold. If you needed to go to the market, you would go to the goldsmith, present your receipt and withdraw your gold. Soon after, people found it more convenient to trade the goldsmith receipts in the market instead of withdrawing the gold. This practice cemented in people’s minds the idea that the paper receipt was as good as the gold in the vault.  So far, no problem. But then the goldsmiths started to notice a trend. Most people would not withdraw their gold and just trade the receipts. If people did not claim their gold, there was no reason why the banker, I mean goldsmith, couldn’t just issue more receipts than the amount of gold he had in the bank, ahem, vault. This was the birth of Fractional Reserve Banking. This was their way to turn a common almost free product, a banknote, into gold. Here was their Philosopher's Stone.

Let the theft begin!

Bankers began loaning receipts for gold to businesses and merchants for all kinds of things. The customers would pay a small fee for the loan (interest) and the banker would make money on the transaction. As long as not everyone claimed their gold, no one would know that the receipts held no value. And if the customers became wise to the game or the banker made bad loans that went unpaid? The banker would shut his doors and run. That was the birth of the bank run.

These practices continued, with small changes, for hundreds of years. Bankers would create receipts for gold they did not possess, collect interest on loans of money that did not exist and run away once the customers began claiming their gold.  Banker’s power grew exponentially. Since they held the gold, they made the rules. Need to buy some sailing ships to go to the new world? Talk to the banker. Need money to finance a war against your neighboring country? Talk to the banker.

By the time that the American colonies broke away from the crown, the founding fathers were well aware of the game and fought to control it or kill it entirely. The US constitution reserves the power to coin money and establish the value thereof exclusively in Congress, not at the banks. It also forbade the States from making anything but silver and gold as money. You would think that this would have ended the scam, right? No Siree, too much money to be made. Local banks continued the practice of issuing notes (receipts) on gold and silver they claimed was in their vault. This practice caused the inevitable panics (bank runs). Many a banker was hung from the nearest tree for defrauding their customers. By the 1860’s banks held control of a vast majority of the gold and silver available in the US. Yes, their customers held receipts for all that money, but the merchants depended on the banks for credit.

President Lincoln, in the months leading to the Civil War, attempted to borrow money from the banks to finance the war. The banks refused. After all, if the US was divided into smaller States, it would make it easier for France and England to reclaim the continent. And guess where the biggest banks were based? London. President Lincoln decided to take a page from early colonial days and began issuing his own fiat currency, the greenback. He financed the war with this currency and by the end of the war the greenback was in broad circulation. Bankers did not like the competition. They bribed congress critters into recalling the greenbacks from circulation limiting the currency circulation to banker issued currency. Happy days are here again (for the bankers)!

Legalized Theft

But bankers continued to have a problem. If enough customers redeemed the banknotes for gold or silver, it would break the bank and lead to a bankruptcy (see how all these term have an actual meaning?). In order to solve the problem the banks worked to establish a central banking authority. With a Reserve Bank, bankers could place a percentage of their gold and silver into a vault and, in case of a run on the bank, borrow enough gold and silver to stay solvent. The problem was that after Andrew Jackson killed the Second Bank of the U.S. the idea of a central bank was not too popular. The bankers began a propaganda campaign that rivaled Tokyo Rose. They purchased reporters and newspapers to create fear in the general population. They financially backed (or outright bribed) congress critters that would toe the line. The most powerful bankers met at a private resort off the coast of Georgia, called Jekyll Island, to once and for all protect their power. Finally, in 1912, their chosen Presidential candidate, Woodrow Wilson, won the Presidency of the US and in 1913 pushed the Federal Reserve Act thru congress giving bankers a monopoly charter to all money in the US.

From Freedom to Slavery

Two problems remained. One, since the Federal Reserve Notes were still tied to money (silver and gold), there was a limit of how many notes could be issued. Second, since the notes are not actually money, how would the banks make money?

Let me go a bit deeper into the second one. If I print a note and loan it to you at interest, where is the interest coming from? Put another way, if I print a million notes and loan them to the government at interest, let’s say 10%, where is that 10% coming from? After all, I loaned you a million dollars in notes (monopoly money) and I expect you to pay me with real money. Where is the government going to get the additional one hundred thousand to pay me back?

Easy, by stealing a portion of the production of its citizens. In 1913, the same year that the Federal Reserve Act gave a group of private banks a monopoly on the creation of currency, the US congress passed the sixteenth amendment and the Income tax. This was the source of revenue for the bankers.  
The surplus production, the wealth, of every citizen of the Republic was now to be transfered to the bankers.

Let’s pause for a second. The banks created banknotes (monopoly money) based on some gold and silver (real money) holdings in the bank. They loaned this currency to the Federal Government and received interest on the loan based on a percentage of the surplus production of every citizen. We had effectively and legally become indentured servants to the banks.  

Slavery died: 1864 – reborn as a zombie: 1913

 But wait, it gets better. In 1932 President Roosevelt found himself in dire need of money. He had decided, incorrectly, that the only solution to the depression that had begun in 1929 was complete management of the economy and a generous public works program. All this requires money. But Federal Reserve notes were backed by gold and there was not enough gold available in the banks to massively expand the available currency. President Roosevelt did what any other dictator would do. He nationalized all gold, made it illegal to be owned by US citizens and turned the gold over to the Federal Reserve at a fixed rate of $20 notes per ounce. Then, after confiscating the gold, he devalued the notes to $35 an ounce effectively doubling the US supply of currency.

At this point the bank receipts for your money became backed, not by the expectation that you could get your money back, but by a promise that you could not. Paper was now more valuable than gold.

Gold, a valuable commodity used as money, that retained its purchasing power thru generations, was replaced by paper currency backed by nothing and immediately devalued. In one stroke, your stored surplus production was converted into worthless inflating currency. You could no longer depend on the stability of money in order to store your surplus production for the future. Now your surplus production was stolen twice; once by taxation in order to pay interest to the bankers, and second by the purposeful devaluation of the currency.

Let’s return to the wampum. Your 20 hours worth of surplus production, the ones you traded for wampum, were now traded by edict for 20 wampum receipts and could only purchase half a bushel of wheat!

You could no longer save your surplus production with the assurance that it could be turned into wealth at a later date.  You could no longer depend on that surplus labor to purchase the same amount of wealth it did when you first saved it. As an effect, your wealth was destroyed by the government and the bankers.

Enter inflation, stage left

As the funding needs of the Federal Government increases, the printing of notes also increases. This is exponential in nature. The more the Federal Government borrows from the bankers, the more interest they owe the bankers and the less each note is worth.

Now you know why the harder you work, the less you can buy. Why, even with generational increases in production efficiency, the price of wealth when compared with your production; increases more and more. It takes you more hours of production today to have the same wealth your parents enjoyed.

This is not an idle claim. Let’s look at just one critical product, gasoline. In 1964, the last year where 90% silver quarters were issued, a gallon of gasoline cost an average of .27 cents a gallon or about ¼ ounce of silver. Today a gallon of gasoline is about $3.60 a gallon, a 13 times increase in price. You would think that with technological advances in the last 47 years, it would actually be cheaper. It actually is cheaper, when measured in silver. One quarter of an ounce of silver today is worth $8.93. So the same quarter of an ounce of silver can buy you 2 ½ gallons of gas! Efficiency has made gasoline 2 ½ times cheaper than it was in 1964.

Wait. What?

Yes my friend, the laws of efficiency are alive and well. Gasoline is 2 ½ times cheaper today, in money, than it was in 1964. The laws of inflation are also alive and well. Gasoline is 13 times more expensive, in currency, than in 1964.

If your father would have saved $1,000 dollars in silver coin (real money) in 1964, he could have given you $36,000 in Federal Reserve Notes today. And that is at zero risk. He could have stored it in a box in the attic and still increased his ability to exchange money for wealth.
Remember what I said in our last conversation about the difference between money and currency. Money holds its value at a generational level. Currency looses value at a daily basis.

Let’s look at it a different way. Let’s say that your dad had a car that gave him 15mpg in 1964 and worked at a minimum wage job at 1.25 an hour. He would have had to work 216 hours to buy enough gas at .27 cents a gallon, to travel 15,000 miles. Today at $7.25 an hour, you would have to work 496 hours to pay for the gas, at $3.60 a gallon, to travel the same 15,000 miles on the same 15mpg car. You have to work more than twice as long, even after increases in productivity, to purchase the same wealth!

Feel free to take that to your next family reunion. You are welcome.

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