The History of the Federal Reserve 514
Michael J. Ross writes "Money plays a key role in modern life; in fact, for some people, nothing is more important than acquiring more of it. Yet most people do not know what money really is, how it is created, how its supply is expanded and contracted, and who benefits from those changes. In the United States, the central figure in this ongoing drama, is our central bank, the Federal Reserve, whose history, power, and effects are explored in G. Edward Griffin's fascinating book The Creature from Jekyll Island: A Second Look at the Federal Reserve." Read on for the rest of Michael's review.
For the citizens of the United States and several Latin American countries, the "coin of the realm" is the US dollar, which is, in simple terms, created by the Federal Reserve, a.k.a., the Fed. But who created the Federal Reserve, and why? The subjects of banking in general, and the Federal Reserve in particular, would be considered by most Americans to be dry, boring, and of little importance to their day-to-day life. But those same people are endlessly fascinated by how to make more money (with minimal effort, such as the lottery), how to spend as little of it as possible (coupons never go out of style), and how to maximize one's investment returns. Why this disconnect? Why do Americans care so little about the origins of that which they spend a third of their time pursuing, and seemingly another third spending?
The Creature from Jekyll Island | |
author | G. Edward Griffin |
pages | 624 |
publisher | American Media |
rating | 9 |
reviewer | Michael J. Ross |
ISBN | 0912986212 |
summary | A compelling history and indictment of the Federal Reserve system |
Some of these "salary slaves" may understand that their money serves as a store of wealth and a medium of commercial exchange, which makes possible their daily financial transactions without the need for bartering. But, for the most part, they do not understand the critical importance of what is backing that money, if anything; how that money comes into existence, and what debt offsets it; what entities control the supply and distribution of that money; and how those changes can be used to legally steal purchasing power from victims who may not be entirely unsuspecting, but do not truly comprehend how they are getting ripped off.
The typical American, if he or she has given any thought to the matter, would consider the following statements to be true: The Federal Reserve is federal, i.e., a part of the US government. The Federal Reserve is a reserve, i.e., it has monetary savings of real value. The Federal Reserve serves the public, and is not a cartel of private banks serving itself. The US dollar has real value, i.e., it represents tangible wealth, such as gold securely stored at Fort Knox. Inflation is an increase in prices. Inflation is caused by greedy companies, not the US government or the Federal Reserve.
As G. Edward Griffin makes clear in his book, none of these beliefs are true — regardless of how well entrenched they are in our conventional "wisdom." He also explains why the US government and the Federal Reserve have their own reasons for being in no hurry to eliminate this ignorance. Yet these topics are just a small portion of what is covered in his far-ranging discussion of the theory and history of money and banking, particularly within the United States.
Spanning 624 pages, the material is organized into 26 chapters, which are grouped into six sections: "What Creature Is This?" (the Federal Reserve's shameful birth, and the shenanigans of the Fed, S&Ls, the IMF, and the World Bank), "A Crash Course on Money" (money, gold, debasement, fiat money, fractional-reserve banking, and money creation), "The New Alchemy" (the Rothschilds, J.P. Morgan, and banker financing of wars and revolutions), "A Tale of Three Banks" (America's failed experiments with central banking, and the American Civil War), "The Harvest" (the unconstitutional creation of the Federal Reserve, and its dreadful effects, including the Crash of 1929), "Time Travel into the Future" (current crises caused by central banking, how they can be reversed, future scenarios, and what the individual can do regardless). Every one of the six sections begins with a brief summary, as does every chapter, with every chapter wrapped up with a more extensive summary.
The section summaries also appear in the table of contents, which precedes a preface and the author's acknowledgments. These are followed by a delightful introduction — a piece from the British humor magazine Punch, comprising a rather telling exchange between an unusually honest banker and a soon-to-be-disillusioned bank customer. The book contains three appendices: a summary of the structure and function of the Federal Reserve system; natural laws of human behavior in economics; and whether the M-1 measure of money is subtractive or accumulative. The author also provides an index, as well as an impressive bibliography, reflecting his extensive research on the topics. In addition, the author invites readers to join Freedom Force, an organization dedicated to increasing liberty in the United States, curbing federal totalitarianism, and abolishing the Federal Reserve — all through peaceful participation in government, and the shaping of public policy starting at the grassroots level.
The Creature from Jekyll Island is published by American Media, under the ISBNs 0912986212 and 978-0912986210. It first came out in July 1994, and is now in its fourth edition, and its 19th printing. It also has Japanese and German editions, published in February 2005 and August 2006, respectively. On the book's Web page, visitors will find testimonials and comments from readers, updates to the book, a review of the book by Jane H. Ingraham of The New American, and G. Edward Griffin's response to a critique of his book by Edward Flaherty, who holds a Ph.D. in Economics. On that Web page, interested readers can order audio cassettes or CDs of the author's lecture, based upon this book, and produced in 1998.
My only criticisms of the book concern not the material itself, but its production — more specifically, the printing and layout, presumably chosen and thus fixable in the future by the publisher. The generous font size used throughout the volume, makes it easy to read; but the bold text, such as the subheads found in every chapter, is a bit rough-edged — on some pages worse than others. The subheads, already bolded, do not need to be in all uppercase; the publisher should choose one or the other. In addition, the inside margin length is a bit too small, forcing the reader to crack open the book more than should be needed, in order to comfortably read the text closest to the binding. In future editions, some of the space in the outer margin could be used to solve the problem, without any change to the words on each page, and thus the length of the book.
But aside from these minor flaws, this book is to be highly recommended. The Creature from Jekyll Island is a remarkably thorough, detailed, and challenging critique of central banking and America's latest incarnation of it, the Federal Reserve. G. Edward Griffin's precision of language, and his interweaving of the major players and their motives, makes for a most compelling historical study.
Michael J. Ross is a Web developer, freelance writer, and the editor of PristinePlanet.com's free newsletter.
You can purchase The Creature from Jekyll Island from amazon.com. Slashdot welcomes readers' book reviews -- to see your own review here, read the book review guidelines, then visit the submission page.
Re:Another good read... (Score:4, Insightful)
Add up mild inflation over the course of a century, and yes, you will find that the dollar has lost 95% of its value - but you'll also find the largest, most impressive economic expansion in the history of the world.
real value? (Score:4, Insightful)
Real value is power--the ability to control other people (aka labor). Whether the medium is gold coins or paper money or tootsie pops, what you are trading when you exchange money is labor.
Inflation does not tax the poor: They have no cash savings.
Inflation does not tax the middle class: They keep their assets in real-estate and mutual funds.
Inflation forces everyone else to invest in something, because hoarding money isn't good for the economy.
I'm sick of all the "money is a scam" articles on the internet recently.
Gold Standard == Bad (Score:5, Insightful)
Because the value of gold is implicitly tied to the value of a currency, gold can no longer be traded as a commodity in any real sense. As in - if your currency is backed by gold, what happens if the value of gold should go down due to a glut in the production market? Answer is nothing, because it *can't*. If money is backed by gold then you can't logically trade gold separately from money. This means that gold is artificially valued, and the prices of things that use gold would increase for no sound economic reason.
Re:My review (Score:4, Insightful)
Bankers are able to create money to lend far in excess of what is actually backed by real assets, meaning money from depositors, gold, silver, goats, or whatever. They have been doing this for a long, long time though. They were doing it during the gold standard as well. These days, the vast majority of money in circulation is backed only by a debtor's promise to pay it back to the bank.
This [google.com] is a video that attempts to explain this in plain terms. It is long (around 45 minutes) but informative.
Re:What the...? (Score:4, Insightful)
Nevertheless, I'm going to comment:
The review claims that a number of statements are false. I mostly disagree:
The Federal Reserve is federal, i.e., a part of the US government.
It's a semantics game to claim otherwise. The Fed chairman is appointed by "the government", charterd by the government, and designated to achieve US domestic policy goals, and subject to being shut down if it acts too crazily. It is given significant autonomy by congress. Does that make it "not part of the government"? Okay, then I guess the federal courts aren't either.
The Federal Reserve is a reserve, i.e., it has monetary savings of real value.
The federal reserve has cash holdings. Cash has real value. Don't believe me? Go offer it in an exchange.
The Federal Reserve serves the public, and is not a cartel of private banks serving itself.
Kind of. Given its autonomy, it could achieve nefarious goals. However, members are required to basically give up any financial holdsing that could lead to a conflict of interest.
The US dollar has real value, i.e., it represents tangible wealth, such as gold securely stored at Fort Knox.
It is true that money is only a *claim* on real wealth; that, in other words, money flows in the opposite direction as wealth. However, you can in fact trade your money for real wealth; in that sense, it has real value.
Inflation is an increase in prices.
Usage determines meaning, and this is exactly how most people use the term "inflation" (in the economics sense).
Inflation is caused by greedy companies, not the US government or the Federal Reserve.
Under the definition the author wants to use, yes, the US gov. and Fed cause inflation. They're not the only cause of general price increases. There are also supply shocks.
Re:Another good read... (Score:2, Insightful)
So should anyone who has been trying to save their money safely to invest in a home (say towards a 20% down payment), prepare for a future business, or leave money for their heirs. All central banks discourage savings and encourage "investments" when not everyone should be taking a hefty risk on their savings.
For someone who doesn't have a good idea of "what the Fed really is, what is does, and what it is supposed to do", you are exceptionally critical of the Fed.
Oh, I know what the Fed does, I meant to say that no books I've read explain a central bank properly. They're legally mandated thieves, to put it lightly.
If British government didn't promise to guarantee all deposits at Northern Rock, it would likely have failed. But was it a bailout of the bank, or were they simply protecting the banking system? And while member banks hold shares of the Federal Reserve Banks, they and the Board of Governors remain under the oversight of the President and Congress.
The depositors at Northern Rock were, sorry to say, idiots. I would _never_ put my money into a fractional reserve bank.
In a full-reserve bank (which currently does not really exist), you put your money into a bank as a non-loanable deposit for security. You trade maybe 0.5% a year in losses to secure that wealth from theft. If you felt like you wanted to take some risk, you could give the bank a desired risk environment to invest your money into (or loan into, as it is), and you could accept a chance of gain but also a chance of loss.
Fractional reserve banking is fraudulent, it is theft, and it should be criminal. The idea is criminal for anyone to perform except for banks licensed by the State or Federal governments. Just because "everyone is doing it" does not mean it is good nor moral.
All banks are bankrupt -- if each person that visits Slashdot this week was to withdraw all their savings, checking accounts, money markets and CDs (even at a penalty), many banks in the U.S. would be insolvent. They don't have the funds that they tell you they have, because they're only legally supposed to keep a tiny reserve (8-11% generally). The Central Bank enables them to appear solvent by loaning them money "overnight" (even though the new overnight regulations can last 30 days, and can be renewed indefinitely) in case of depositors demanding _their_ money.
Sorry, not me. I don't partake in the fiat monetary system you call a bank.
Re:i am very surprised to see this on /. (Score:3, Insightful)
- Lord Stamp, former Director of the Bank of England, 1940
Here's a link [google.ca] for 'The Moneymasters', it's an interesting watch--if a little 80's/90's
This is an area where there are some interesting conspiracy theories, however central banks and currency are complicated subjects so it's worth keeping a cool head and trying to remain objective.
This is a subject not many understand, myself included, so I remain very skeptical that the information put forth by books like The Creature from Jekyll Island: A Second Look at the Federal Reserve and films like The Money Masters is correct. What we can all take from these are some interesting questions to ask bankers and economists, it would be interesting to find out how the banking systems of the world actually work, unfortunately--judging by the Amazon reviews someone else posted--it looks like this book is not a good place to find this out.
Re:real value? (Score:3, Insightful)
Gold is one of the only elements that does not deteriorate (ever), is not destroyed by any acid or chemical process, nor susceptible to environmental changes (rusting, corrosion, etc). Because of this, gold DOES have massive value as one thing: a store of value.
It is hard to come by (rare) -- industry uses up about as much gold as is mined per year.
It is useful in MANY modern and ancient processes, from electronics (computers, etc) to medical uses (fillings, etc) to consumer uses (jewelry, etc). It has significant value beyond just as a store of money.
Real value is power--the ability to control other people (aka labor). Whether the medium is gold coins or paper money or tootsie pops, what you are trading when you exchange money is labor.
No, you're not. What you're exchanging is an item of value. Labor is important in the initial creation of a product but it is not the only significant "cost" of a product. Rarity, longevity, storage requirements, transportation requirements and usefulness are all valuable towards the price of a product. Labor, while important, doesn't account for value alone. Paper money can be printed at will, tootsie pops can be manufactured by the billions. Only gold has the rare aspects of its composition and rarity that make it valuable as a store of value.
Inflation does not tax the poor: They have no cash savings.
Bull. The poor have no savings because they have no incentive to save -- their savings is destroyed by inflation.
Inflation does not tax the middle class: They keep their assets in real-estate and mutual funds.
And those assets are often-times in asset bubbles because of inflation's drive to create malinvestments. See the current housing market, see the stock market in 2015.
Inflation forces everyone else to invest in something, because hoarding money isn't good for the economy.
Hoarding money IS good for the economy -- when money is "hoarded," it creates a demand for money, and a demand for money brings prices DOWN for those who are not hoarding. Inflation makes prices go up, and not everyone should invest in something. I only invest in myself.
I'm sick of all the "money is a scam" articles on the internet recently.
Paper money is a scam.
Re:Another good read... (Score:4, Insightful)
If we were stuck on a gold or silver standard, we'd be in real trouble: there just isn't that much gold or silver around to make a a very good currency. We need a currency that can grow as the amount of real assets in circulation grows -- as we as a society and civilization create more valuable stuff, we need a way to pay for it. The debt money system uses all those real assets as the basis for its value, rather than an arbitrarily chosen precious metal.
In effect, the debt money system, though complicated, is a lot more 'real' than a gold standard. Gold is only valuable because it's shiny and pleasant to look at and you can beat it into useful shapes and it's been used as money for a long time. You can't eat it, you can't live in it, you can't plow a field with it -- aside from some applications in the jewelry and electronics industries, you can't do much of anything with it. But a house, that has real value. A factory has value. A John Deere tractor has value. When people borrow money to pay for these things, the money is created and the newly-created money is backed by the pledged asset. So when I buy a house for $250k, two hundred and fifty thousand new dollars are created, but those dollars are backed by my house; they are, in one sense, actually my house, floating around out there. And then I work, and pay the loan principle back, and basically suck those 'house-dollars' back out of the market and put them back into my house.
Once you get around the mental shock of realizing that the system doesn't work the way you thought it did, there's a certain elegance to the system. Money is created and destroyed as it's needed to pay for things, rather than there being some fixed amount of it floating around. When we need a lot of capital, it appears; when we don't (and pay off our loans), it goes away. With a fixed amount of gold, you'd have massive inflation/deflation cycles as prices changed in response to the amount of available currency.
Where you run into serious problems are when banks start making loans to people who don't have enough real assets behind them to cover the amount of money that's being created. IMO, this should be illegal, or at the very least the banks should be held directly responsible for ensuring that the loans they're making are backed by something (real property, or an income stream). If they don't, then they're magicking money into existence that has nothing behind it, and letting it out into the market. That's dangerous business, and the source of our current credit problems.
Cheaper gold would actually be quite useful (Score:4, Insightful)
Re:Another good read... (Score:4, Insightful)
The _real_ economy also tends to increase by a few percent each year, so the money supply needs to be increased a few percent each year to compensate for this (or else there would be deflationary pressure because of real growth).
Re:This guy is a conspiracy theorist (Score:2, Insightful)
Re:Gold Standard == Bad (Score:2, Insightful)
Comment removed (Score:5, Insightful)
Re:Another good read... (Score:4, Insightful)
We don't need something that can grow with the economic growth of the country. If we fixed to a gold standard, prices (in gold ounces or grains) would fall softly over time -- soft price declines. This encourages people to save rather than overspend, and only spend on things they need or are sure they want. Soft price declines are GOOD and happened for thousands of years when people used gold as a medium of exchange. This also allows for proper investment as people are not pushed to invest and can watch their savings grow in value even if they hoard their gold in the mattress.
Instead, we have fiat currency inflation (which just means more money is created than destroyed) which caused soft price increases -- this gives people incentive to spend and not save, even if they don't need or are sure they want something. It also creates malinvestment as people invest "just to protect their savings."
But a house, that has real value.
No it doesn't. Buy a home and ignore it for 5 years. The yard gets destroyed, pests and mold destroy the inside, roofs fall apart, windows need replacing, carpet goes stale, dust collects. A house has declining value.
A factory has value.
I'm sure all those horse-shoe manufacturing factories in 1889 are still valuable today. I'd say they weren't valuable within 30 years.
A John Deere tractor has value.
For about 7 years, at which point it is more costly to buy used than new in terms of lost productivity.
When people borrow money to pay for these things, the money is created and the newly-created money is backed by the pledged asset. So when I buy a house for $250k, two hundred and fifty thousand new dollars are created, but those dollars are backed by my house; they are, in one sense, actually my house, floating around out there. And then I work, and pay the loan principle back, and basically suck those 'house-dollars' back out of the market and put them back into my house.
Not quite, because when you have an inflationary fiat economy, people malinvest -- they take the easy new money as quickly as it comes, and that causes prices to rise extravagently. Your $250,000 house bought in 2005 may only be worth $175,000 today -- and if it is in Southern Florda [unanimocracy.com], it may be worth only $125,000. Add to that your property taxes, maintenance, utility cost, and general upkeep, and the house is a terrible investment.
With a fixed amount of gold, you'd have massive inflation/deflation cycles as prices changed in response to the amount of available currency.
Inflation just means an increase in the money supply, deflation means a decrease in the money supply. You mean price rise/price decrease. This is _good_, actually, because it benefits the non-hoarders to pick up newly repriced assets that have dropped in value when they need them most, and it benefits hoarders in watching their money become more valuable even without investing.
Where you run into serious problems are when banks start making loans to people who don't have enough real assets behind them to cover the amount of money that's being created. IMO, this should be illegal, or at the very least the banks should be held directly responsible for ensuring that the loans they're making are backed by something (real property, or an income stream). If they don't, then they're magicking money into existence that has nothing behind it, and letting it out into the market
Re:This guy is a conspiracy theorist (Score:2, Insightful)
Re:Another good read... (Score:2, Insightful)
The Fed isn't here to protect the value of OUR money
And if that gets your interest piqued, search for the Council on Foreign Relations and their role in the Fed. Then ask yourself why the head of the Secretary of State has been a CFR member for the past several decades. And why presidential candidates (both rep and dem) are *almost* always members of the CFR. Ahh it's a whole new world of elitism nobody seems to know about.
Re:Gold Standard == Bad (Score:4, Insightful)
As a counter-argument (I have to play devil's advocate here):
1) The volatility of gold is only tied to the supply and demand of it. If the supply of gold increases, does it really reduce the value of currencies? Or does it create new wealth? If it creates new wealth (in the hands of the mining companies) then it hasn't reduced the value of gold holdings, as long as demand increases proportionate with supply. This is why gold is usually put forth as a standard: the demand for it increases almost exactly 1:1 with the increase of the supply. Or, in other words, there is infinite demand, but the price sensitivity is linear.
2) The opportunity cost of not being able to manufacture electronics with gold in it (or jewelry, or whatever you're going to do with the gold) is balanced by the opportunity cost of running out of gold. Gold is rare. It's not as rare as some other minerals, but by putting significant amounts in reserve, any government can then guarantee the value of its currency. Hyperinflation is a significant opportunity cost just so that manufacturers (and jewelers) have an unlimited supply of gold.
3) This may be the hardest one to counter. The environmental cost of mining for gold will probably never be properly taxed or regulated. I think the best counterargument is to compare a gold standard with our current environmental crisis, fueled by the U.S. Government's insistence that all oil be sold for U.S. Dollars (source [wikipedia.org]). If we assume (pretty naively) that oil will continue to be pegged to the U.S. Dollar, then we effectively have Oil as our currency backing right now. The result is that in times of economic growth, (now I'm quoting you) "Increasingly huge portions of the economy are diverted to [oil] production
The environmental impact of mining is arguably more controllable (it stays on the ground) than that of burning oil (it causes GLOBAL pollution).
OK, so please respond to me and let's debate the pros and cons of a gold standard.
Re:Another good read... (Score:5, Insightful)
Something can have substantial value, even if it's not the sort of thing you can leave sitting around idle and come back to later.
A tractor has substantial value not in the same way a pile of gold bricks does, but because it performs a function. It represents a potential income stream to a farmer, which is why a farmer might want to own one. Thus the farmer goes to a bank and takes out a loan against the tractor, in order to purchase it. For the bank to make this loan, they want to ensure that the farmer isn't an idiot, and that he'll pay back the value of the tractor either faster than it depreciates (or he has some other assets that won't depreciate as quickly, in order to secure the loan). If they think this is the case, they can then go and create a pile of 'tractor-dollars', dollars that are backed by that tractor. Those dollars only stay in the system until the farmer pays off the loan, and assuming the loan was intelligently made, there should never be more tractor-dollars sloshing around than the tractor is actually worth (either in literal terms or as an income stream).
The same holds true for a factory, or anything else that helps create an income stream. Just because it's not a stable asset doesn't mean it's valueless; as long as you can predict the depreciation, you can still use it as collateral, and if you can use it as collateral, you can use it as the basis for new money. (As long as you trust the government to enforce the lien and let the bank repossess it, of course -- the real basis for debt banking is the threat of force by people with guns.)
I also agree that banks have been supremely irresponsible with their lending practices, but I don't think that full-reserve banking is really the best solution. There are rules that need substantial tightening, but there's nothing inherently wrong with letting a bank use mortgaged assets as part of its reserves, as long as the value of those assets over time is computed, the loans made accordingly, and there's a iron-hard willingness by the government to liquidate those assets in the event of a default by the borrower.
Re:Gold Standard == Bad (Score:3, Insightful)
No, they give you a booklet containing coupons worth 10gAu, 0.1 bushel of wheat, etc.
You then go to the local granary, hand them the coupon for the wheat, and they give you a bag of wheat. They punch the coupon to indicate it had been redeemed and put it in the bag to send back to the government to indicate that share of the government's reserve in wheat has been paid out (for which the government has previously paid them).
You go to the local meat market, hand them the coupon for the hogs, and they give you the meat.
You sell the coupon for the copper on the open market to a business which needs it.
etc.
The "reserve" for the various items in the "basket" is just bookkeeping in the various entities which produce the goods - much as it is now. The government maintains a reserve of gasoline, food, etc. - most of which is nothing but a ledger entry at some refinery/food producer/etc.
Re:This guy is a conspiracy theorist (Score:1, Insightful)
Not a mainstream reporter?!? Since when have mainstream reporters been trustworthy and believable? It seems ludicrous to only pay attention to mainstream reporting and scholarship when they are mostly controlled and funded by the same monied interests that want to create a global dictatorship. Crazy? What do you think is the purpose of the European Union? Now go research the North American Union and APEC. Sovereignty is being systematically destroyed around the world and the manipulation of our currencies via privately owned central banks is a major factor. We can no longer trust the mainstream as it has been co-opted by the elite and is about as relevant as the music played by Clear Channel radio stations. Look around you at the chemtrails in the sky and the poisons in your food, medicine cabinet, and water as just a few examples of what these benevolent elite really think of us sheeple and then tell me again why I should believe their official view of things and not some "conspiracy theorist". Move along, nothing to see here. Go back to sleep, obey, believe........
Re:Gold Standard == Bad (Score:3, Insightful)
If we're discussing an article about China's proposed manned mission to the moon, for instance, and some fool writes a comment that seriously claims the moon is made of green cheese, do you really think we should waste time debunking that claim? No, I'd just call him an idiot. Similarly, if we're discussing paleontology, and some fool writes a comment that the earth is 6000 years old, is there any reason to debunk that idiotic claim? Of course not, because anyone with a basic grasp of science knows that's utterly ridiculous. So that's a perfectly reasonable time to call that person a moron. (Unfortunately, there's a LOT of such morons out there.)
I think the person who made this claim about proponents of the gold standard may be a little extreme with his standard, however, because I don't think it's quite as obvious to the audience here on
Re:Gold Standard == Bad (Score:3, Insightful)
Dollars are not a store of wealth (Score:3, Insightful)
On the other hand if you'd put your money into Ford stock in 1913, today that stock would be far more valuable than it was during that time. The truth is that the only true stores of wealth are assets. Dollars are not assets--they are currency. They are handy for exchanges, but are not wealth themselves.
You don't have to put your money in banks. You can instead put your money in IBM stock. Or you can put your money in bonds if you'd prefer to invest in governments. Or you could buy property if you'd prefer to put your money in real estate.
If you do this, and pick your assets well, you will accumulate wealth. If you focus on the value of a dollar bill I think you're shooting yourself in the foot.
Re:US Dollar and Oil? (Score:5, Insightful)
http://en.wikipedia.org/wiki/Nixon_Shock [wikipedia.org]
The dollar was then simply being printed, unbacked by anything. This increases the supply of dollars and the value falls massively. Huge inflation.
1972-3 Nixon or someone went to the Saudis and "persuaded" them somehow to remain only US dollars in return for oil. No idea what they promised, but it was big. From that point, the US dollar is pretty much backed by OPEC oil. It was denominated in dollars before, but the dollar had been backed by gold, so basically the oil price was based on gold. Not so after 1971.
So. All oil all over the world has to be bought in US dollars... The demand for US dollars (not gold) rockets, all the central banks across the world have to keep reserves on hand so the countries can buy oil. Billions of them. Trillions in total.
Do you see what this does? It does 2 things.
1: America gets paid first for any oil which other countries want to buy. They have to get the requisite number of dollars. And they get paid simply for running a printing press.
2: It allows the USA to print and spend as many dollars as they want to. The demand from outside the country means that inflation can't take off. The entire world is subsidising the US economy.
Now... 35 years later, there are trillions of US dollars out there sitting in central banks waiting to be spent on mostly oil. If oil were to be available in Euros, the dollars would be useless. They would come back to the USA.
Ask yourself what a million dollars would be worth if everyone had a million. ok, imagine what a trillion dollars or so would do coming back into the country. The value of the dollar would fall and as the value of the currency falls, the price of everything else increases.
As to the size of the effect... who knows.
http://www.ccc.nps.navy.mil/si/nov03/middleEast.asp [navy.mil]
Re:US Dollar and Oil? (Score:2, Insightful)
It's been said that one of the reasons we went into Iraq was because Saddam was accepting Euros for his oil.
Re:real value? (Score:3, Insightful)
I'm also not sure why everyone is going on about inflation. Inflation is at a low, targeted rate and has been for some time. There was a period when inflation went out of control -- but that's because economists had a very skewed idea about what sane monetary policy was and the result was 1970 to about 1982. Since then, the Fed has tried to keep inflation at a low, positive, and predictable rate (roughly 3%).
Deflation (the opposite of inflation) is detrimental to the economy because it encourages people to hoard cash -- why spend it, when its value is going up? Hoarding cash is not the same as saving -- you can save your money in a bank, for example, which typically provides you with an interest rate which is slightly greater than the rate of inflation. Hoarding cash is putting it in your mattress and keeping it out of circulation. Look at interest rates in Japan in the 1990s for an example of what that sort of thing can do to an economy. Are you old enough to remember how afraid everyone in the US was of Japan in the 1980s? Now they're just a random Asian country known for hi-tech toys and weird game shows. But there was a time that Americans were worried they were going to buy us.
A low, positive inflation rate does the opposite: it provides incentive to spend cash, and to keep it in circulation. This increases the liquidity of money markets and makes loans easier to obtain, which in turn stimulates wealth generation -- jobs, capital investment, etc.
Most people who start companies aren't independently wealthy -- they look for investors and they take out loans to finance their start-ups. In order to get the money they need, there has to be money around and available. It isn't around and available if it's hidden in your mattress. These people build products, employ workers, and generally keep the economy going.
Did you know that in inflation adjusted dollars, the yearly GDP of the US is greater than the worth of the world's entire gold supply? How exactly do you expect to reconcile that fact with a gold standard? How exactly can you have a currency based on gold when in a very real sense there simply isn't enough gold? Economics is not a zero-sum game, and the pie keeps on growing. The money supply needs to too, and having a supply-capped money supply may seem like a smart idea if you haven't thought much about it, but in reality it would effectively cap economic growth.
Re:You want the negatives on this book? (Score:3, Insightful)
Some inflation is desireable, and the reasons why are simple: sustained economic growth when the currency is deflating is next to impossible. Nobody wants to borrow money today that they are going to pay back with more expensive dollars in the future. As a result, productivity and capital investments drop, and the economy stagnates. The opposite is true when the currency inflates. The key is to keep inflation predictable so people can plan for it. No, thats not the only way that the money supply is increased. The US treasury dept increases the money supply when it auctions securities to the public. The FOMC can also increase the money supply through its open market operations. Your loaded terminology is betraying you. Implicit in our system is the assumption that loans and investments drive future economy growth. If the money supply grows by $y, and the resulting activity increases our economy by $y, then nothing has been "stolen". I guess its a lot easier to argue an opinion if you just blithely dismiss anybody that disagrees with you as being ignorant.
Re:RIAA vs. the Fed (Score:3, Insightful)
Actually the herd does not panic when it sees deflatin-- the period when the US was really growing, while on the gold standard and when we went from being a backwards nation to a world leader-- was a period of deflation.
Why would people get mad when their wealth gets more valuable?
No, all the anti-deflation propaganda comes from those who profit by printing money, which is literally a form of theft.