by Walter Allen Bennett, Jr. on February 22, 2009

gold_standardTo truly understand our current financial crisis, one must go back to the year 1971 during the Nixon Administration,  the year the United States moved from the gold standard to what can be called, in short, the credit/debt standard (Fiat Dollar Reserve System). Simply put, before 1971 each dollar was backed by gold. In fact, on each dollar it stated that it was redeemable for that amount in gold. So what happened? Well there was a financial crisis and in order to address it the United States needed more money to pay its bills. However, one of the problems with every dollar being backed by gold is that eventually, there is not enough gold. Practically speaking, only a certain amount of gold can be mined a year and the United States was spending more dollars than the amount of gold that could be dug up.

What to do? The United States decided it would be easier to just print more money. Now one would say, “Hey, I wish I could do that when I run out of money. But won’t that eventually catch up with me?” The answer? YES!  What the Treasury Department and the Federal Reserve decided was to move from the gold standard and move to a standard that is basically based on bank assets. Each dollar would no longer be backed by gold, but instead backed by the assets held by banks. In short, our economy is based on a juggling game. Banks loan money so people can buy goods. These goods (until they are paid off), interest owed and collected from these loans and from investments they made with income from these loans become a bank’s assets. As long as people pay their loans and as long as the value of the goods that they purchased with these loans maintain their value, the bank has great assets and can continue to make other loans. Based on these bank assets, the government borrowed from the banks against it’s own income, such as taxes. Hence, a big juggling act and the government could keep printing money because the dollar was now based and backed by the amount of money they could borrow against it’s future income (taxes). Banks could lend money because it was based and backed on its assets (goods, interest and investments).

It’s the reason banks never talk about how much money they have. Banks talk about their assets. It’s also the reason, whether they know it or not, consumers don’t talk about the bank they keep their money in. Consumers say which bank they have an account at. An account is different from money. An account is a number and we access that account with, checks, debit cards, credit cards, etc. Have you ever wondered why it’s so easy to deposit your check rather than cash your check? To cash your check means those funds must be immediately available and takes away the banks ability to put your deposit in their asset/interest cycle. If on one payday everyone decided to cash their checks rather than deposit them, the bank would not have the cash on hand to cover the checks, because of their investments and active lending. They count on deposits and loans. Without deposits and loans the juggling balls would hit the ground.

What else can make the juggling balls hit the ground? Answer: If a bank’s largest assets or loans begin to loose value too quickly… large assets like… homes and home loans. And so, it’s now 2006. Yes, three years ago. The banks realize that the housing market is a runaway train and if it keeps going at that rate their inflated values will out match any sustainable juggling of the financial balls. A war breaks out in Iraq and the government borrows more from these banks to cover the war, but the assets that are being borrowed against are artificially bloated home values. It all becomes a ticking bomb. The Federal Reserve Chairman Warren Greenspan hears the ticking, Wall Street hears it too, as do the banks and so does the Treasury Department. However, this thing is running out of control. If Main Street finds out, there will be panic and a run on the banks so the only thing the government can do is say, “Our economy is fundamentally strong.” In the mean time, behind the scenes, CEO’s are packing it in, creating golden parachutes so they can get out, traders are starting to dump investments in the housing market and invest in precious metals (gold).  No one is saying anything about cheap loans and one hundred percent financing because in their gut they’re hoping it will keep the balls up in the air and buy time before the inevitable, dare I say, crash. Everyone begins jumping ship, including the long time Federal Reserve Chairman. Greenspan now knows it’s not going to matter how low he takes interest rates, this baby is about to hit the deck.

So… here we are. The GOP is hitting Obama’s stimulus package but that’s only to hold party lines. Conveniently, there were just enough to push it through. Some governors say they’re going to reject some of the money (again holding party lines), however, there are provisions so the state can overrule them.  At the end of the day, the GOP knows the stimulus package is a preemptive safety net designed to make the bottom less jarring. It is in fact an FDR move before the fact. Yes, I dare say the word, Depression. The package is designed to be ahead of that curve. Check the numbers. The “D” word is actually here but can not be uttered in the same way everyone was reluctant to say, recession. great_depression But… this time we have learned from our past and we know what it takes to get things going again. And through their bluster, so does the GOP. It’s not tax cuts. Call it socialism, call it whatever scary word is out there, but sometimes a strong hand of government is needed. It is the reason we have a federal government and not individual states behaving like small countries.   At times, America must operate as a union and not as a collection of independent regions, states and cities. At times, it must be a collective effort to get things going again. This is not the gold standard or the standard based on assets, this is the American standard. But it does ask the question, should the gold standard return.

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