‘No State shall... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.’
America’s Founding Fathers, having had their own currencies collapse, wrote this clause with good reason.
'Fractional reserve banking'
Firstly what is it? Well it works like this. Lets say the American government needs $100 trillion dollars for roads, welfare and other social improvements. It goes to the Federal Reserve who buys $100 trillion worth of government bonds. The government sends these treasuries, which are bits of paper (it's probably digital these days, but you get the picture!) to the Federal Reserve, who in turn issue dollars. (So that's $100 trillion dollars out of thin air!)
These dollars are then deposited in a commercial bank by the US government. This makes them part of the country's money supply. Under the fractional reserve scheme the bank is required to keep 10% of the $100 trillion back in reserve. (Lets hope there is not a run on the banks!) They are then free to lend the remaining 90% i.e. $90 trillion. At this point you'd be forgiven for thinking that the $90 trillion which was deposited in the commercial bank is what is used to lend out for loans. But you'd be wrong! When the bank loans money and excepts promissory notes, they simply credit the customer's account with the loan amount. This 'money' isn't taken from money supplies they hold. It is created out of 'thin air'. This fraudulent monetary expansion, allows the banks to rake in billions of dollars on interest from loans they created from nothing, and remember this money is backed by nothing.
This is why dollars have the words: 'Federal reserve note' on them because in essence that's all they are, a promissory note, worthless paper. In the UK we have ‘I promise to pay the bearer the sum of X pounds’. When the world was on the gold standard, $1 dollar was always redeemable from the bank for 1/20 of a troy ounce of gold. However, this is now a broken promise as we have neither the gold standard nor the physical gold after Mr Brown's aberration – selling 400 tonnes at $254 an ounce, which represented about half of Britain's gold at the time! (This is known as "Brown's bottom" by investors).
So the bank note in your pocket is nothing more than a credit note for something that doesn't exist. The fact that no business has created this money through economic activity is absurd. It just came out of thin air. So you see, only new debt makes new money. Therefore Money = Debt. If currencies were backed by gold (gold standard) we wouldn't have the monetary expansion that we have today in fiat currencies, because there would not be enough gold to pay for it. But with modern fiat currencies $, £ etc there are no such restritions. In fact, the fractional reserve system relies on ever expanding debt to function. But, as we are beginning to see, you can only put so much air in a balloon!
You only have to look around to see governments burning down their currencies to zero in order to service the debt. All the talk of economic recovery is a rather 'optimistic' view point. Every time the Federal Reserve prints more money it debases the dollars value. At the same time it sets in motion rising prices and inflation. The Federal Reserve can expand and contract the money supply at will. So every boom and every bust, be it Dot-com or the Housing market can be manipulated.
In addition by controlling the interest rates (yes they set them too) and keeping them below the rate of inflation, it forces people to speculate i.e. houses, stocks, bonds etc. This drives the price of these 'assets' up, which would not happen if interest rates were at normal levels, and as we all know wages and savings cannot compete with this escalation.
So what can you do to protect your wealth? Well, we can begin by taking back control by buying gold and silver. Why store all your wealth in worthless paper assets controlled by politicians? Once you have bought gold / silver you'll realise just how portable an asset it is. It is easier to sell than property and has none of the running/maintenance costs! It can lose value, but it will never be worthless, unlike fiat currencies and paper derivatives, ISA's etc. Remember all investments come and go, but gold and silver are constant. Despite what governments and central banks publicly say about holding gold, they are buying it up. Gold is the best liquid asset as it has no party risk i.e. no government or central bank has control and it can't be counterfeited. So by buying gold and silver you are not only protecting your personal wealth and purchasing power, but equally important, you're taking back control.
I will leave you with the words of Alan Greenspan, reminding us of what happens when a fiat currency reaches the end of the road.
"Germany in 1944 could buy materials during the war ONLY with gold. Fiat money paper, in extremis, is accepted by NOBODY. Gold is always accepted."
Alan Greenspan, 1999
If this has been of any interest or help please share. As always your comments are most welcome!
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*Article I, Section 10, Clause 1