19/11/2010 – Robert Prechter Explains The Fed, Part I

For answers, let’s turn to someone who has spent a considerable
amount of time studying the Fed and its functions: EWI president
Robert Prechter. Today we begin a 3-part series that we believe
will help you understand the Fed as well as he does. (Excerpted
from Prechter’s Conquer the Crash and the free Club
EWI report, “Understanding
the Federal Reserve System.”) Here is Part I. 

Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter

An argument for deflation is not to be offered lightly because,
given the nature of today’s money, certain aspects of
money and credit creation cannot be forecast, only surmised.
Before we can discuss these issues, we have to understand how
money and credit come into being. This is a difficult chapter,
but if you can assimilate what it says, you will have knowledge
of the banking system that not one person in 10,000 has.

The Origin of Intangible Money

Originally, money was a tangible good freely chosen by society.
For millennia, gold or silver provided this function, although
sometimes other tangible goods (such as copper, brass and seashells)
did. Originally, credit was the right to access that tangible
money, whether by an ownership certificate or by borrowing.

Today, almost all money is intangible. It is not, nor does it
even represent, a physical good. How it got that way is a long,
complicated, disturbing story, which would take a full book to
relate properly. It began about 300 years ago, when an English
financier conceived the idea of a national central bank. Governments
have often outlawed free-market determinations of what constitutes
money and imposed their own versions upon society by law, but
earlier schemes usually involved coinage. Under central banking,
a government forces its citizens to accept its debt as the only
form of legal tender. The Federal Reserve System assumed this
monopoly role in the United States in 1913.

What Is a Dollar?

Originally, a dollar was defined as a certain amount of gold.
Dollar bills and notes were promises to pay lawful money, which
was gold. Anyone could present dollars to a bank and receive
gold in exchange, and banks could get gold from the U.S. Treasury
for dollar bills.

In 1933, President Roosevelt and Congress outlawed U.S. gold
ownership and nullified and prohibited all domestic contracts
denoted in gold, making Federal Reserve notes the legal tender
of the land. In 1971, President Nixon halted gold payments
from the U.S. Treasury to foreigners in exchange for dollars.
Today, the Treasury will not give anyone anything tangible
in exchange for a dollar. Even though Federal Reserve notes
are defined as “obligations
of the United States,” they are not obligations to do anything.
Although a dollar is labeled a “note,” which means
a debt contract, it is not a note for anything.

Congress claims that the dollar is “legally” 1/42.22
of an ounce of gold. Can you buy gold for $42.22 an ounce?
No. This definition is bogus, and everyone knows it. If you
bring a dollar to the U.S. Treasury, you will not collect any
tangible good, much less 1/42.22 of an ounce of gold. You will
be sent home.

Some authorities were quietly amazed that when the government
progressively removed the tangible backing for the dollar,
the currency continued to function. If you bring a dollar to
the marketplace, you can still buy goods with it because the
government says (by “fiat”) that it is money and because its
long history of use has lulled people into accepting it as such.
The volume of goods you can buy with it fluctuates according
to the total volume of dollars — in both cash and credit —
and their holders’ level of confidence that those values
will remain intact.

Exactly what a dollar is and what backs it are difficult questions
to answer because no official entity will provide a satisfying
answer. It has no simultaneous actuality and definition. It
may be defined as 1/42.22 of an ounce of gold, but it is not
actually that. Whatever it actually is (if anything) may not
be definable. To the extent that its physical backing, if any,
may be officially definable in actuality, no one is talking.
… 

Do you want to really understand the Fed? Then keep reading
this free eBook, “Understanding
the Fed”, as soon as you become a free member
of Club EWI.