How the Fed Buys an Ounce of Gold for 10¢
A primer on how the bankers’ policies—and greed—have led us to the brink of disaster
By Pat Shannan
IN 1992, POLITICAL ADVISOR James Carville launched Bill Clinton toward the White House with the slogan “It’s the Economy, Stupid,” posted on the walls of every campaign office. He was on target but missed the bullseye. In reality, “It’s the Legal Tender, Stupid.”
A friend wrote that when his first great-grandchild arrived a few weeks ago, he thought, “Gotta start a little education fund for the tyke,” just as he had done with all his grandchildren. Then he reminded himself that the Federal Reserve had just promised to turn up the money-inflating machine, making any conventional savings program a waste of time—not to mention the money.
The weakness of the dollar makes any saving of dollar-denominated paper assets pointless. Why would any rational person, unless totally ignorant of what is happening, save a dollar in an account that pays less than 3% a year when the rate of inflation is 10% or more? Disregarding the “official” annual rates that are continual, boring lies, just reach back in your own mind to only one year ago. How much did you pay for eggs? Bread and other food items? Gasoline? And if you can buy any of those today for less than a 10% increase from 12 months ago, please tell me where to do it, because I can’t. These are the true inflation indicators— at your lunch counters, gasoline stations and supermarkets —not some figures from a government-funded, bureaucratic deceiver.
On my first sales job in the 1960s, I was traveling through 11 states throughout the southeast, and my daily lunch always cost between 65 and 75 cents of lawful money (silver coin), depending upon where I was and how much I wanted to splurge that day. (Oh, how wonderful it was to blow an extra dime and sit in a first class joint.) And I filled the tank of my old Chevy for four bucks.
A few years ago, when your average plate lunch of an entrée and two or three veggies, with iced tea included went to exactly ten times the 1960s figures, I began to talk and write about it, remembering that nothing had changed about the meal except the price. The buildings were just as modern, the floors and tables were just as clean, the restrooms still needed attention and the waitresses were just as sassy. Only the price had gone up.
But then I remembered my independent education about lawful money and realized that the price of lunch and everything else was still the same. A dollar of lawful money now required ten Fed “dollar” notes to obtain. So anyone with knowledge of lawful money realized that the plate lunch was still costing the same as in the 1960s. It was just that the banksters had hoodwinked us into using their paper scrip, issued by their privately owned Fed bank. [Which isn’t federal and has no reserves. Ed.]
Now put the same yardstick to today’s price of lunch and you will find that it matches in real cost of 40 years ago. A $1,000 (face value) bag of pre-1965 silver coin now goes for $16,000 in Fed notes.
How much did you pay for lunch today? I paid $10.40, with no dessert. Divide that by 16 and see what you get: 65 cents. This should help you realize that nothing has increased in cost in your whole life, but what you have been using to make purchases has continually decreased in value, thereby requiring more of it. The nation’s founders had a similar problem in the 1780s and solved it with hard (metal) money. That lasted for some 125 years, until the banksters schemed a way around the constitutional mandate (never been amended and still on the books), “No state shall make any thing but gold and silver coin a tender in payment of debts.”
Now George Bush, wallowing in a fool’s paradise, says he’ll perk up the economy this summer by sending $158 billion back to the people. Should that happen, take whatever paltry part is yours and pay off some debt or buy some silver or gold coins. Do not spend this “rebate” on a vacation trip or anything you don’t absolutely need. Of course, if you use this to extinguish debt, it won’t have the desired (by the government) effect of stimulating the economy, but that is only a politician’s way of temporarily staving off the inevitable hyperinflation.
Ultimately it will prove to be the financial equivalent of dumping gasoline on a forest fire. After all, the $158 billion band-aid will be created out of nothing.
Remember, every economic boom, fueled chiefly by debt, always implodes into a deflationary spiral. Buying stocks and real estate with other people’s money when inflation is roaring is almost a guaranteed winner, but it is lethal with the turnaround into deflation, a situation already evident in real estate foreclosures in Florida and elsewhere. Bear Stearns had a market value of $20 billion only a year ago. Last week it sold out for $236 million—two bucks a share.
The current housing crisis and all that flows from it comes from two main sources, both deriving from Washington.
In 1977, Congress passed the “Community Reinvestment Act” compelling financial institutions to make loans to people with lower incomes. These regulations were then amended in 1995 and 2005 to create different rules for institutions of different sizes, so that various kinds of institutions would be better able to meet the government’s goals for fostering home ownership in poor communities.
Next, the Federal Reserve started making loans available to the banking system at extremely low interest rates. Then, the lenders combined to make cheap housing loans available to people who previously could not have afforded or qualified for them. This caused an increased demand for housing that sent real estate prices spiraling upward.
Now mortgage lenders began managing the risk involved in making these loans by selling their mortgages to other companies, believing that they were accomplishing this with a wide variety of mortgages in their portfolio. However, these decisions were all in error, because the Fed’s policy of “easy money” had falsely inflated the value of all homes. This meant that good mortgages could not be used to manage the risk involved in questionable mortgages, because the value of all homes was inflated.
Finally, as with all inflationary booms, increases in home prices absorbed the increased purchasing power provided by the Fed, leading to a slowdown in home purchases. When this moment arrived everyone realized that the homes they had purchased weren’t really worth what they had paid for them. The defaults and foreclosures then began, along with the collapse of the financial institutions that owned these unsound mortgages.
Now the complicated, multipart scenario described above has been simplified in popular reporting to just two words: “subprime loans.” These two words, combined with the idea that lenders took advantage of poor. unsuspecting customers, are supposed to explain everything.
Perhaps this will explain it better. On Labor Day of 1984, my longtime friend Martin “Red” Beckman sat in a seminar in Orlando, Fla., squirming in his seat as many of the highly publicized and oft-quoted hard money advocates spoke of the soon to come $3,700 an ounce price of gold.
Finally, the meeting was opened to questions, and Red began to speak from the floor. He gently chided the “experts” about their predictions before launching into an explanation of why they were wrong. When he finished, not one could disagree.
Red said to them: “The problem is, you are asking the wrong questions. What you need to ask is, who is buying all this gold. The Federal Reserve Bank buys gold at 10 cents an ounce, so why would they want to push the price to $3,700?”
Gold was at $400 at the time, and the cost of production was $187 to the mining companies. By keeping the price reasonable, Red explained that it also kept the mining companies operating. Hearing the mumblings of disbelief in the audience, Red said, “Oh, you didn’t know that the Fed bought gold for 10 cents an ounce? Well, let me tell you how they do it.”
He then reminded them of something that everyone in that audience already knew: that the Fed printed paper bills—from $1 to $100 denominations. The price of ink and paper was the same—at a cost of 2.5 cents each. So four $100 bills were created at a cost to the Fed of 10 cents, and these could then be traded for one ounce of gold.
“Now, if you had control of this printing press,” Red said, “and could purchase anything you wanted, what would you want more than the gold? Wouldn’t you go after that first?”
A quarter-century later we would ask: “And why would you stop?” It’s the legal tender, stupid.
Pat Shannan is the assistant editor of American Free Press.
(Issue # 13, March 31, 2008)