Building Wealth with Silver - Thomas Herold

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      As a result of a long standing series of financial panics and economic instabilities that culminated in the financial panic of 1907, the United States looked into creating a more stable Central Bank in the years of 1912 to 1913. There was much opposition and great debate within Congress, but the Federal Reserve Act at last passed just before the Christmas recess in 1913.

      A system of twelve regional banks had been enacted in order to spread the authority of the Central Bank out between the East coast and the rest of the country. Despite this, the New York Fed became the first among equals in the new system. It maintains several privileges to this day, including engaging in open market operations as instructed by the Federal Reserve Open Market Committee.

      The rise of the Federal Reserve Bank to prominence began almost immediately after its starting operations in 1915. Its first major accomplishment lay in its function in a critical role as financier of both the American and the Allied war efforts in the First World War. From this humble beginning, the Federal Reserve has only risen to greater prominence and importance in the U.S. economy and eventually that of the world.

      The Federal Reserve began acquiring greater powers in the depths of the Great Depression. They began setting interest rates for the nation in an effort to influence economic growth and intervene in the severity of economic downturns.

      This power was never relinquished, and is one that they maintain and use aggressively to this day.

      During World War II, the Federal Reserve had to surrender some of its powers by agreeing not to raise interest rates on Treasury Bills above 0.375 percent. This compromise was made in an effort to support the war efforts, which it did heroically even after the Allies won the war. Afterward, in 1951, the Federal Reserve signed The Accord with the U.S. Treasury and regained its independence.

      The Breton-Woods Agreement proved to be the turning point for the Fed in becoming an agency that had an impact on all economies of the world. This arrangement following World War II set up a new global reserve system with the reserve currency based on the dollar.

      This meant that the Fed’s actions in raising and lowering interest rates now influenced the policies and currencies of all countries in the world.

      In the 1970’s the Fed became obsessed with the mission of battling down inflation. Inflation had risen to out of hand levels throughout the decade, and the Federal Reserve chairman Paul Volcker made it his goal to get it under control. The Fed actually fought inflation by targeting bank reserves, another power it assumed in its march towards controlling the economy. They were so successful at this that by 1987, inflation was down to a mere percent, from its highs in the mid double digits of the 1970’s.

      The Federal Reserve continues to exercise its muscles to this day. In the early years of the new century, from 2001 to 2003, they lowered interest rate thirteen times to fight recessions. From 2004 to 2006, the Fed then raised interest rates seventeen consecutive times.

      In March of 2006, the Federal Reserve unilaterally decided to stop giving out the most accurate means of measuring the money supply anymore, known as M3.

      With this powerful act, they had completed their destiny of growing from a limited powers organization to becoming one that could set interest rates, determine individual bank reserves, and even dictate the ways that they shared information on their activities of increasing or reducing money supply of the U.S. dollar that impacted the entire world economy.

      1971 – Nixon's Gambit and the Death of the Gold Standard

      Another real change that shook the U.S. financial system and dollar proved to be President Nixon’s decision to take the U.S. dollar off of the long standing gold standard. Contrary to what you may believe, he did not turn out to be the first major economy to do this. West Germany and Switzerland were actually the first two countries to withdraw from the Breton-Woods agreement governing the gold standard and international currency exchange.

      The United States made the decision to follow suit for several reasons. On the one hand, the rising spending of the government on both domestic programs and the Vietnam War caused the country to realize its first trade deficit and balance of payments deficit in the entire twentieth century. This marked a critical point in the country’s modern finances, as the Austrian School of economics and the Neoclassical economists argue that at this point, countries and individual holders of the dollar gave up on their belief in the government’s ability to reduce trade deficits and its budget.

      Because of this, other countries and investors were exchanging their dollars for gold at a shocking rate. Gold coverage pertaining to paper dollars fell by thirty-three points from 55 to 22 percent in only the single year of 1970. As the country continued to print a great number of dollars with which to cover the country’s military bills and domestic spending, more and more gold found its way from the U.S. Treasury to other countries, who surrendered their paper dollars for gold.

      France and Switzerland proved to be extremely aggressive in their withdrawal of gold for dollars. France drew down fifty million while Switzerland demanded one hundred and ninety-one million dollars in gold.

      The dollar began to drop sharply against other major world currencies like the Deutschmark and the other European countries’ currencies. With this going on, West Germany withdrew from the international agreements. Switzerland followed suit three months later.

      Congress began recommending that the country devalue the dollar to defend it.

      President Nixon responded with drastic actions. In order to help stabilize the economy, severe inflation, and the dollar, he enacted a series of dramatic moves. He put a ninety day price and wage freeze into effect, levied a ten percent import tax on imports, and ended the U.S. dollar’s convertibility directly to gold. The President and his advisors did this without consulting with the international monetary system representatives, giving it the informal name of the Nixon Shock.

      At the time, President Nixon’s policies proved to be very popular domestically. Members of the public gave him credit for saving American citizens from runaway inflation and price gougers. He received accolades for staving off the foreign exchange crisis as well.

      Internationally, this abandoning of the gold standard caused the Bretton-Woods agreement to totally collapse. By 1976, all of the important currencies in the world had moved to floating systems.

      The dollar’s value no longer resided on a basis of gold value. It now floated based on the concept of an estimated potential future value.

      The long term effects proved to be less desirable. Some economists and political scientists have claimed that the 2007 Great Recession developed as a result of the collapse of the Bretton-Woods agreement and the gold standard.

      This is because the failure of these arrangements led to a great amount of volatility in money and the creation of instruments that were not properly regulated or were even unregulated. Because of the greater volatility, a need arose for financial instruments that could hedge risk, like derivatives and credit default swaps. These complex off balance sheet arrangements were much credited with leading to the financial meltdown of 2007.

      The Government and the Fed Perform an Old Trick

      You will likely find it hard to believe that the government, through the Federal Reserve, is actually able to create money out of thin air. This concept has been referred to in the ancient and medieval world as ex nihilo, or out of nothing.

      This creation of money from nothing is not only possible today, but it is a commonly accepted and pursued policy.

      Listen to the words of Federal Reserve Bank Chairman Benjamin Bernake, if you doubt the truth of this statement. He said in 2002 that the United States government possesses a modern day technology of an electronic equivalent to the printing press that permits it to create all of the U.S. dollars that it wants.

      He

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