At first glance, it seems a trifle odd. At second glance, it gets a bit surreal. At third glance . . . well, judge for yourself. The same people that came up with the idea of creating a strategic reserve of cryptocurrency (which makes you wonder if they know what a strategic reserve actually is) are now obsessed with the idea of auditing the gold in Fort Knox.
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| Fort Knox |
In other words, they want to accumulate an asset that doesn’t really exist (cryptocurrency) and also count gold bars that some people insist are the only real asset the government has and what should be backing the dollar. All these ideas are wrong.
We mentioned the inadvisability of stockpiling cryptocurrency in a previous blog. As we said in “How to Get Rid of $37 Trillion in Debt” —
President Trump (or whoever talked to him last) wants to create a government stockpile of cryptocurrency . . . which is a bunch of electronic impulses (which is actually okay) completely non-redeemable by the issuer and that absolutely no intrinsic value whatsoever. It’s only “worth” what somebody will pay for it, even though it exists only as an idea in the mind of the beholder and no independent existence. Cryptocurrency is, as a rule, the perfect example of the “greater fool theory.” It’s worth only what you can fool somebody else into paying for it and can be used for nothing else.
So much for the last word in cryptocurrency, right? (Hardly. There are some ideas so foolish it’s hard for people to stop believing in them. Like the people who insist they can prove the existence of non-existence. But we digress.) And gold is not the only asset the government has. Besides, the problem there is the idea that the government should own anything. In theory at least, the government should own nothing. That leaves us with the belief that the U.S. Dollar was at one time backed by gold.
No, the U.S. Dollar was never backed by gold. Being on the gold standard meant the Dollar was defined and measured in terms of gold and was convertible into gold. The official legal tender reserve currencies of the United States, however, have never been backed by gold.
Initially, the Dollar was not even defined in terms of gold, but of silver — 412½ grains of .900 fine silver, to be exact. The silver dollar, not the gold dollar was the standard of measurement. This did not mean that everything measured in U.S. Dollar terms had to be paid for or redeemed only using silver dollars, but that whatever was tendered had to be the same value as the U.S. Dollar.
In theory, there did not need to be a single ounce of silver or (later) of gold in the economy, so long as everyone agreed as to the standard value of the U.S. Dollar. Prior to 1857, in fact, the United States produced less than one coin of any denomination annually in gold or silver for every person in the country.
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| George Tucker |
In the 1830s, Congressman George Tucker noted at least 95% (and probably more) of the United States money supply consisted not of government-issued gold and silver coin, whether foreign or domestic (foreign coin was legal tender until 1857). Rather, the vast bulk of the money supply consisted of merchants and bankers acceptances — private sector mortgages and bills of exchange. These either backed privately issued banknotes which circulated as currency, or more rarely served as currency themselves.
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| The Trail of Tears |
The “Specie Circular” of 1836 wreaked havoc in the U.S. economy by requiring payment for land purchases from the federal government be made only in gold and silver coin. (Evidence suggests Andrew Jackson instituted the Specie Circular in revenge for the removal of the Cherokee — among whom he had many friends — and confiscation of their land, which the land speculators wanted to purchase on credit and flip for quick profits . . . which was probably behind the demand to force the Cherokee off their lands in the first place.)
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| Salmon P. Chase |
Salmon P. Chase’s financial gymnastics to finance the Union war effort during the American Civil War and then the National Banking Act of 1863 which established the National Bank system as a quasi-central bank of the United States did not institute a gold backed reserve currency. No, the United States Notes were backed by government debt and initially redeemable in gold, but convertibility (redemption in gold) was suspended soon after the first United States Notes were issued because people rushed to convert the paper notes to gold as fast as they got them (Gresham’s Law), and the banks soon ran out of gold.
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| $2 "Lazy Two" National Bank Note |
The National Bank Notes — backed 100% by U.S. government debt until 1913, when they became legally the same as the new U.S. government debt-backed Federal Reserve Bank Notes — were not convertible into gold until 1878. In common with the other reserve currencies, the Treasury Notes of 1890 were also backed 100% by government debt. Gold convertibility for all reserve currencies ceased with the Gold Surrender Order in 1933.
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| Federal Reserve Bank Note |
The real question is not why the reserve currency of the United States — the Federal Reserve Bank Notes and commercial bank demand deposits at the Federal Reserve — are not backed by gold. That was never the case. Rather, people should be asking why the reserve currency is not backed by private sector hard assets as intended in the Federal Reserve Act of 1913 and as recommended in the Economic Democracy Act.
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