Tracing the Fed’s Vital Role in the Decline of the US Dollar
by Eric Fry
by Eric Fry: How
to Skew Bad Economic Data to Inspire Investor Confidence
In 2013, we
Americans will commemorate a century of wealth destruction in the
United States the Federal Reserve will be 100 years old.
In 1913, the
Federal Reserve Act became law granting sole authority to
the Federal Reserve to issue legal tender. Armed with
its new power and its good intentions, the Fed embarked on a 98-year
process of currency debasement. Thats not what the Fed set
out to do; its just what it did do.
In the early
days of the Federal Reserve, this monetary authority enjoyed the
support of a gold standard. Few Americans doubted that the Feds
new greenbacks would be as good as gold. As such, gold coinage and
paper dollars intermingled effortlessly in the US economy for most
of the Feds first two decades.
But as the
wheels of progress roared ahead, Americas hard money
coinage disappeared and soft promises took its place soft
promises and lots of chatter about hard money. As it turns out,
chattering about hard money does not preserve wealth as well as
hard money itself.
power of a one dollar bill has plummeted more than 95% since the
Federal Reserve first began printing its legal tender in 1914. Although
the dollars epic decline began glacially, it has gathered
value dropped only 50% during the first 33 years of the Feds
stewardship i.e. between 1913 and 1946. But the 1946 dollar
would lose half its value in just 24 years, while the 1970 dollar
would lose half its value in just nine years. The rate of decay
slowed somewhat during the Volcker years, as the 1979 dollar did
not lose half its value until 14 years later.
the dollars progression toward zero since 1913 feels more
geometric than arithmetic.
In 1914, the
year the Federal Reserve began conjuring dollar bills into existence,
700,000 shimmering new $10 Indian Head Gold Eagles rolled out of
the Philadelphia, San Francisco and Denver Mints. Once in the hands
of a working stiff, each $10 coin would buy $10 worth of goods and
services. Likewise, the Feds crisp, new McKinley $10 bill
would also buy $10 worth of goods and services.
Over the ensuing
98 years, a succession of Federal Reserve Chairmen labored to preserve
the purchasing power of their McKinleys, Washingtons and Lincolns.
The Gold Eagles had to take care of themselves. The results are
in; the unprotected Gold Eagles flourished, while the protected
Mckinleys withered. Based on its metal content, a 1914 $10 Indian
Head Gold Eagle is worth $643.45. A 1914 $10 bill is still worth
this contrast from a slightly different perspective, consider the
divergent paths of the two $50 bills pictured below.
The first $50
bill is a 1913 Gold Certificate, issued directly by
the US Treasury and fully convertible into gold. The second $50
bill was issued by the Federal Reserve in 1914 and was convertible
into nothing. Both versions of this $50 bill circulated freely in
of the $50 Gold Certificate held title to 2.41896 troy oz. of Gold
at the fixed rate of $US20.67 per troy oz. These certificates
could be redeemed at any bank or from the US Treasury itself at
until 1933, when FDR outlawed gold ownership.
this little nuance, lets consider the plight of two hypothetical
buddies from 1914. The first buddy, Caleb, stashes a $500 rainy
day fund under the floorboards of his house a roll
of ten $50 Ulysses S. Grant dollar bills. The second buddy, Josiah,
also stashes $500 under the floorboards he walks into the
neighborhood bank with ten $50 Ulysses S. Grant Gold Certificates
and exchanges them for gold. Josiah then takes his gold and hides
it under his floorboards.
forget about their hidden stashes. Eventually, lets say 2010,
the respective heirs of these two long-deceased buddies happen to
conduct simultaneous renovations of their respective residences.
Calebs heirs find the ten ancient $50 bills. How quaint,
they think to themselves. Josiahs heirs find $32,172 worth
Thus, 98 years
of history demonstrates conclusively that a blind monkey could have
preserved the dollars purchasing power better than a Federal
Reserve Chairman. Unfortunately, its tough to find a blind
monkey who will take the job.
with permission from The Daily
Eric J. Fry has
been a specialist in international equities since the early 1980s.
He was a professional portfolio manager for more than 10 years,
specializing in international investment strategies and short-selling.
Mr. Fry also publishes investment insights and commentary under
his own byline as Editor of The
Daily Reckoning. His views and investment insights have appeared
in numerous publications including Time, Barron’s, Wall Street Journal,
International Herald Tribune, Business Week, USA Today, Los Angeles
Times, San Francisco Chronicle and Money. He appears regularly on
business news stations like CNBC and Fox.
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