Fed News Friday: What is Litter Was Gold

We left off after discussing how money develops in communities and countries. We saw how a more tight-knit community, such as a prison, can still experience the free market in regards to their most “marketable commodity”. So what are we acclimated to in the United States? The Federal Reserve Note, better known as the US Dollar.

The Federal Reserve is the third attempt at centralized banking in the United States. If you don’t know how the central banking system works, take a look at this piece by Murray Rothbard that breaks down the functions of fractional reserve banking, central banking, and the history of each. The first two attempts at central banking failed to renew their charter, but today we still have the central bank, also known as the Federal Reserve, issuing our banking notes.  They are the only institution allowed to do so. This was not the case with the previous central banks who still dealt with competition from other currency issuers.

So how did we get to the point of using a green piece of paper labeled “Federal Reserve Note: This note is legal tender for all debts public and private”? Doesn’t sound like a very marketable commodity…

The dollar’s name was contrived during the Roman Empire when a coin called the thaler was made with silver from the St. Joseph’s Valley of Bohemia.  That all being trivial information on the origin of its name, the way the paper dollar became our currency is what we are after.

The dollar was used in the 13 colonies, not as a government issued currency, but along with other monetary options of the time. Alexander Hamilton announced in 1792 that the dollar would be what currency rates would be based off of. Going back the first pieces of paper were issued  from the Massachusetts government as an IOU for soldiers in the late 1600′s. The government didn’t have enough to pay them at the time so they printed certificates stating they would be redeemable in a few years for gold and silver once the government had enough time to accrue some tax payer money, promoting they begin circulating the paper. A vicious cycle followed this instance and caused a culmination of financial promises left unkept.

Before the Declaration of Independence was signed, many instances of paper money were popping up around the colonies. In 1775 we saw our first national account of outright printing from the Continental Congress for the Revolutionary War. You will find in later history that war influenced how many times the “print” button was pushed.

The dollar was based on 1.67 g of gold through the late 19th century. As most monetary systems in history some form of precious metal was used in weight to measure its value. An up surge of silver deposit discoveries caused the value of the coins to lower (the relationship between gold and silver being closely related); 1.5 g of gold made up the dollar. Eventually in 1900 the Gold Standard Act passed which made gold, and gold only, redeemable for dollars.

Next up Franklin D. Roosevelt banned gold ownership (except jewelry) by citizens in 1933. Then the Brentwoods System (1946) brought foreign government’s gold into the US’s possesion for a mere $35/oz, which led many foreign countries to changing the value of their gold to the US set prices, since much of the global community was based on the dollar. For those of you who don’t know, we now see gold prices well over $1,300/oz. We eventually went off the gold standard all together as a country in 1973, but the next year legal ownership of gold was declared. (To read more on the confiscation of gold check out this article from Future Freedom Foundation)

So here we are today left with a piece of paper that is in demand for illusional reasons. What is now litter was gold.

For a more extensive explanation of the monetary system and its evolution, as always, I recommend Rothbard. Suggested reading: History of Banking and Money in the United States. Happy reading on this lovely Fed Friday!