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Survival of the United States Monetary System

The Federal Reserve Chairman, J.P. Morgan, Woodrow Wilson, Franklin D. Roosevelt, Richard M. Nixon. They, and others like them, have moved this country from a creditor nation to a debtor nation. When the Constitution was ratified, the United States was a third world country, an enemy of the most powerful nation on the planet and deeply in debt. By the turn of the next century that same nation had become wealthy enough, and its citizens so well educated, to be the envy of the planet. During the next 50 years, the United States dollar would become the reserve of the entire world, replacing gold. In the last decades of the 20th century and the first of the 21st, this nation has amassed so much debt it will take much of the 21st century to redeem it. The survival of the US monetary system necessitates a return to the gold standard by replacing the Federal Reserve, along with eliminating fractional banking and a modification of the Internal Revenue Service.
In Europe during the late middle ages, goldsmiths held the knowledge of refining precious metals, along with possessing a large portion of them. This paper will briefly explore the history of those workers of metal to banks and like financial establishments. It will delve into the successful economic communities of the American colonies in 1692, through the United States Revolutionary war, and on to the systems in place today. After journeying through these financial systems, it will close with suggested corrections for the current structure that will reduce and equalize taxes, pay the national debt, and enable both the nation and the following generations an assurance of financial success.
Gold or silver, diamonds and pearls were searched out or mined and then traded for a farmer’s wheat, rancher’s meat, vineyard’s juice, weaver’s cloth and the cobbler’s shoes. For thousands of years that bartering system was how commerce worked. The inconvenience with gold, the more common medium of trade, was the bulk and weight. A conspicuously heavy purse enticed robbers and thieves. The goldsmiths of Europe solved this problem by building vaults to keep it safe, and, it would be fair to assume, they told trusted family and close friends about the vaults. Disagreements inevitably came up regarding how much gold one or more persons had placed in the vault, which required developing a method to keep track of the gold, thus creating the first receipts, ledgers and accounting (Skousen, n.d.).
As time passed, more people discovered the vaults for the safety and security of their gold and then an epiphany and transformation happened. The goldsmith realized that during any given week, only a few visited the vault to make an actual withdrawal (Gascoigne, 2001). The rest of the people were exchanging the paper receipts. All the niceties that were normally purchased with gold were being exchanged for a piece of paper from the goldsmith. They realized people would rather employ the paper receipts instead of going through the tedious process of withdrawing the gold, making the desired purchases and returning what was left. Paper “currency” was much easier to carry and keep secure. (Skousen, n.d.)
After the goldsmiths discovered that the amount of gold needed to redeem the receipts was a fraction of what the vault contained, an idea occurred to them: what was the harm of using the rest? It could help the economy grow, assist someone expand or start their business, purchase a larger farm or a multitude of other benefits. It would be paid back, including extra to help the goldsmith with expenses (Investopedia ULC, 2009). Their new concern became if a rumor started that this is what the banker/goldsmith was doing, people would remove their gold because in reality, they only held a piece of paper. Soon the gold would run out and the vault, or now bank, would close (Gascoigne, 2001). Recognizing this would be bad for all involved, the goldsmith turned banker agreed to cooperate, and move enough gold from other locations to the one experiencing the run. Soon the common people would calm down, the deposits would be returned and the gold would quietly be returned to the original vaults.
This is what it might be like should someone want to do something similar today: a friend owns a fifth wheel trailer, but only uses it one weekend a month and, since their yard is too small, has a neighbor store it. A person coming by wants to purchase it, but due to an alternative work schedule, only plans to use it Tuesdays through Wednesdays. The neighbor realizes the opportunity presented and it’s sold at full price to that person. Then, a second person comes by and requests to purchase it. Discovering their schedule will only allow them to use it on Thursday and return it early Friday, another full price is negotiated. This goes on until the trailer has been sold for every weekend and many weekdays. Along with the selling price, a charge is made to each buyer for a storage fee. Other families, having a duplicate trailer stored on their property and seeing the profits, sell their trailers in like manner. Everything goes well until two of the owner’s schedules temporally change and they want to use “their” trailer at the same time. Anticipating such a situation, a deal is worked out in advance between the families “storing” the trailers. Each agrees to let the trailers be used during that time of need until schedules returned to normal, afterwards the trailers would be taken back to the original storage yard, with no one the wiser.
Returning to Europe in the year 1694, King William III is embroiled in a war costing more than was in the royal coffers. He requests an extension of credit from the banks. They see an opportunity to capture more than just money. A bank owned by them entitled “The Bank of England” acts with the King’s blessing in forcing most of the other banks to deposit their reserves of gold into this one bank and receiving only paper in return. The King got the funds to finance the war, the Bank of England got control of the entire nation’s money (Skousen, n.d.).
In 1692 the Massachusetts colony tried the following approach; the government of the people controls the money making it legal tender. They decided to keep the amount of money and credit in the community relative to, as Dr Skousen (n.d.) stated “the growth of the productivity of the people”, since they did not have gold or silver to exchange for or base the notes on. Notes were loaned out at a low interest rate, which was paid directly to the government treasury, with the results being lower taxes. The other colonies followed suit and colonial America experienced, expressed by Dr Skousen (n.d.) “a period of unrivaled prosperity”.
The reason this beneficial economy was abandoned was due to the bankers in England wanting the colonies to borrow from them. They used their influence in Parliament to suppress colonial money. The defiance of the colonies required years to overcome, so they finally came up with the Resumption Act, requiring all contracts and taxes be paid in gold or silver. The colonies did not have much in the way of precious metals, thus the economy in the colonies went into a depression; prices fell and trade went stagnate. The banks caused a financial crisis to get what they wanted. This became one of the flash points of the Revolutionary War (Skousen, n.d.).
During, and after, the Revolutionary War, the Congress of America issued money with no limitations. The result of this action was rapid, out of control inflation, depression and rioting (Sutton, 2009). The event that saved the young nation from splitting apart was the United States Constitution being implemented, with the gold and silver standard as a required part of the financial function of the nation (Article 1, section 10 United States Constitution). The only error was that the federal government allowed bankers to setup a private bank, named ironically, The Bank of the United States, its charter lasting only 20 years. The Government gave bonds to the bank to pay for the war debt. The bonds earned interest for the private bank which did nothing but issue paper money. The bank promised financial stability and prosperity which did not materialize (Skousen, n.d.).
The economic cycles of boom and bust continued as a result of manipulation of the money markets by those who understood the circumstances; possessing together the finances and influence, they continued to attempt obtaining a position of advantage in legal or illegal ways. This continued until one of the created emergencies gave a small circle of financiers an opportunity to follow the European banks examples, and form a national bank.
Comprehending the function of the Federal Reserve Bank starts with the erroneous information that it is part of the federal government, it is not. The Federal Reserve Bank is privately held and owned. The only portion influenced by the government is with the President appointing the board of governors, with conformation by the Senate. Appointments may appear to be questionable, being made almost exclusively from recommendations submitted from the board members and other bankers (Skousen, n.d.). Term of office of a board member is fourteen years, so during the President’s term of office only two appointments are usually made.
The Federal Reserve was first presented to congress as The Aldrich Plan, conceived by Senator Nelson W. Aldrich in the waning months of 1910. Assisting in the creation were A. Piatt Andrew, professional economist and Assistant Secretary of the Treasury; Frank A. Vanderlip, president of the National City Bank of New York City; Henry P. Davison, senior partner of J.P. Morgan and Company; Charles D. Norton, president of Morgan's First National Bank of New York; Paul Warburg, partner of the banking house of Kuhn, Loeb and Company in New York; and lastly, Benjamin Strong of the J. P. Morgan and Company central office in New York. Together they wrote, and then with others, pressed for five million dollars from their friends in the banking world to finance a public education campaign for congress and the American people. When an investigation revealed that the backers of the plan had caused the crashes of 1907 and 1908, the group’s strategy shifted to politics (Skousen, n.d.).
Resources were redirected to the political party not currently occupying the White House. Changing the name to the Federal Reserve System, they convinced and financed a popular former president to run as an independent in the coming elections, to split the vote of the incumbent’s party. The newly elected president, Woodrow Wilson, was a proponent of a strong central government, and saw the Federal Reserve act as a way to bring power to Washington D.C. and stability to the financial sector. The members of congress ignored, did not pay attention to, or were too caught up in the promised benefits to find out who backed the bill (Skousen, n.d.).
The worst financial contractions, to date, in the history of our nation occurred after this act was signed into law (Investopedia ULC, 2009). The depression that started in 1929 was caused by the slowing of credit and the shrinking of the money supply by the Federal Reserve Bank during a recession not once, but continually. Unemployment went from 3% in 1929 to 25% in 1933 (Amadeo, 2010).
Since the end of the Second World War there have been eleven recessions, as enumerated by Recession.org (n.d.), seven of those were directly or indirectly caused by interest rates and money supply alterations or a financial institution failure. Four were adjustments from a war economy to one of peace time. And the remaining one was attributed to cutting of the supply of oil (Amadeo, 2010). The results of these recessions were loss of personal property, businesses closing and lives of the common people disrupted, damaged and possibly destroyed. The ebb and flow of credit and money is a major cause of recessions and depressions, which tempo is within the control of the board of trustees of the Federal Reserve Bank.
The board of governors of the Federal Reserve Bank is the big seven of the financial world, controlling the money and credit of the entire nation. There are no accounting reports, or audits done by any external authority, no checks and balances for the nation’s money supplier.
Nowhere in the United States Constitution is the Federal Reserve Bank authorized. The Supreme court, in a 9-0 decision, stated that ”Congress is not permitted by the Constitution to abdicate, or to transfer to others, the essential legislative functions with which it is vested. Art. I, hx015 1; Art. I, hx015 8, par. 18. Panama Refining Co. v. Ryan, 293 U.S. 388. P. 529.” (Great Neck Publishing 2009).
It is stated in the United States Constitution that Congress is to create the nation’s money, with the express charge to keep its value assured (Skousen, 1981). As time has proven, the Federal Reserve Bank has allowed, through inflation via printing money that has nothing to back it, the devaluation of the dollar.
The departure from the gold standard was begun through President Franklin D. Roosevelt revoking the right of citizens to own gold bullion during the emergency of the great depression in 1933. Then President Richard M. Nixon unsecured the last fiat base of the currency in two steps; First, August 16, 1968 was the last day silver certificates would be redeemed with silver coins and second, stopping other foreign central banks purchasing United States gold at $35.00 per ounce on August 15, 1971 (Mcmanus, 2008). Furthermore, all gold, both coin and bullion, owned by citizens of the United States has to be reported to United States Government upon sale.
One of the promises of the Federal Reserve Bank was to stabilize the currency. History has shown that the dollar has been so devalued that it is worth less than a dime compared to when the Federal Reserve Act was initially passed (Mcmanus, 2008). To illustrate: a gift card purchased for $100.00 when the Federal Reserve was enacted would today only be worth approximately $20.00.
As illuminated by history, gold or silver hold their value. Using something else, iron pyrite or paper, for example, may fool a few for some time, but sooner or later the deception will be revealed; the economy and nations will collapse, and the common everyday citizens will bear the brunt of the hardship, losses and struggle. But in the end, even gold is just another metal and is only as valuable as it is allowed to become by the people and communities using it.
The recommended actions would be: immediately freeze the money supply and repeal the Federal Reserve Act (Federal reserve act: Section 7, n.d.) to restore the nation’s money control to the congress. Issue new United States dollars; exchanging them for Federal Reserve notes at a rate of twenty notes for one dollar.
Appoint a board of trustees of five persons, limiting authority to maintaining the money supply to within 3% of the gross national product. Their term of office ends at age 70. Qualifications would include a proven track record in the finance world, along with complete disclosure of said record and a complete and accurate detailed history of personal scruples with demonstrated integrity. Penalties for failure to keep the supply and the other responsibilities are to include but not be limited to; removal from office, prison time of 15 to 20 years with no reduction, and surrender of all personal and business assets to the government.
Setup a system of safeguards to keep the currency and credit available to within 3% of gross national product (goods and services). The only exceptions would be in time of war, declared by congress as defined in the United States Constitution, and serious national emergency to be declared by two thirds vote of the congresses of all the states. The excess would then be removed from the financial system within five years of the end of the emergency.
Grant loans to states, banks and other lending/clearing establishments at 3% interest, limiting those establishments to a maximum of 10% interest for loans they fund. Or, fund the banks through the states; the states would charge the banks and other establishments 3% interest and the United States treasury would charge the states 2%. Prohibit all Federal or National banks or financial establishments.
Monitor the banking and lending institutions so that fractional or reserve banking is eliminated. Those lending may use savings, fixed assets or money obtained from the Federal Monetary Fund to fund loans. At no time will any other demand-payment i.e. checking accounts be used as a fixed asset or loaned out. (Skousen, n.d.)
To assist with the repayment of the national debt a national consumption tax should be implemented. The removal of the income, inheritance, capital gains, and all other individual and corporate taxes would reduce the complicated tax laws. This, along with the elimination of favoritism found in the current tax system, would allow more revenue with less cost of collection.
For the year 2007 the IRS collected 2.4 trillion dollars after refunds (Longley, 2009) (Whitehouse, n.d.). With the majority of the states already collecting sales tax, shifting to a consumption tax would be simple, utilizing the system already in place.
To protect poverty level or below income groups, all basic foods ingredients would be exempt. If the tax is not levied on basic necessities, such as the ingredients for in-home prepared food, and clothing sold second hand, this would benefit the lower income most; maintaining revenues by collecting a greater percentage of tax on non-essential or luxury items like prepared foods, soda pop, sparkling juices, alcohol, tobacco products, new cars and clothing.
An estimate of the revenue generated using figures just for Sears and Wal-Mart with a 2% tax levied, the result would be Wal-Mart = $ 7,490,520,000 (Wolf, 2009) and Sears = $ 20,200,000.00 per quarter for an estimate of $ 80,800,000.00 annually (Sears, 2009).
The argument for protecting the mature generation is a good one as they have been taxed with income taxes (along with a myriad of others) all their life, and without paying taxes on basic food and necessities they are protected in survival areas. My argument for taxing non-essentials is that they were voting or able to vote while the debt was being run up, as was I, so paying more is a natural consequence. The just entering the workforce citizens would pay the least in both income and consumption taxes; they are responsible for the least amount of opportunities to vote.
The consumption tax, along with the 3% interest from loans to the states and banks, should be more than enough to fund the government and pay off the national debt. Currently, all interest being collected by the Federal Reserve Bank stays there, with none of it going to the United States Government.
To further secure the nation’s finances, a constitutional amendment requiring the balancing of the budget would be required. This would ensure economic stability and enable the confidence of the citizens of this nation in their government.
Conclusion
With the value of paper currency secured to a fiat base, or controlled by law and upheld in the company of honorable people, prosperity for the entire nation is a veritable certainty. Each individual, whether they choose to save their earnings, invest in a business, stocks, or just an idea, could feel confident in the currency value. This holds true regardless of where the money was put: if they buried the money in the ground or stashed it in a mattress; when spent, the purchasing power is the same as when they put it away. Inflation would no longer be a factor with the value of currency remaining constant.
The revenue for the government in interest would be phenomenal with the elimination of the majority of the National debt owed to the Federal Reserve Bank (Federal reserve act: Section 31, n.d.). The nation’s prosperity and security is enhanced.
This is confirmation that the power needs to remain as close to the people as possible. Not centralized in a few persons or one bank as it currently is with Board of directors of the Federal Reserve Bank.

References
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http://useconomy.about.com/od/grossdomesticproduct/p/1929_Depression.htm
Federal reserve act: Section 31 (n.d.). Retrieved October 20, 2009, from
Board of Governors of the Federal Reserve System:
http://www.federalreserve.gov/aboutthefed/section31.htm
Federal reserve act: Section 7 (n.d.) Retrieved October 20, 2009, from Board of Governors
of the Federal Reserve System:
http://www.federalreserve.gov/aboutthefed/section7.htm
Gnazzo, D. V. (2005, November 29). Fractional reserve lending. Retrieved October 20,
2009, from http://www.financialsense.com/fsu/editorials/gnazzo/2005/1129.html
Great Neck Publishing (2009). Schechter Poultry Corp. vs. United States; 2009, p1, 38p
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Investopedia ULC. (2009). Retrieved October 20, 2009, from
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Longley, R (2008, March 31). IRS collected $2.4 trillion in FY 2007. Retrieved October 20,
2009, from http://usgovinfo.about.com/b/2008/03/31/irs-collected-24-trillion-in-fy-2007.htm
http://www.irs.gov/pub/irs-soi/08databk.pdf
Mcmanus, J. F. (2008, February 4). What happened to our money. New American, Vol.
24 Issue 3, p33-38, 6p
Recession.org(n.d.) Retrieved Febuary 13, 2010, from http://recession.org/history
Sears Holdings Corporation. (2009, May 21). Retrieved October 20, 2009, from
http://www.searsholdings.com/pubrel/pressOne.jsp?id=2009-05-21-0005031160
Skousen, W. C. (1981). The 5000 year leap. The National Center for Constitutional Studies,
p187-190.
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October 01, 2009, from National Center for Constitutional Studies:
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Sutton, A. (2009, March 20). The great American banking experiment. Retrieved October
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Moved to http://seekingalpha.com/article/127236-the-great-american-banking-experiment
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Wolf, A. (2009, August 24). This week in consumer electronics. Twice, Volume 24 Issue 17, p45

Labels: banks, gold, Money, taxes

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