Federal Reserve Fiscal Folly: Fiat Money

• By Dave Whitney · Oct 08, 2018

One of my favorite questions to ask people when we get into a discussion about money or monetary policies is, “If you take a five-dollar bill to the Federal Reserve, what will they give you for it?”

Most people struggle for an answer. That’s a fair commentary on our current monetary system here in the US.

Federal Reserve Notes

Actually, all you can get for a Federal Reserve Note is another Federal Reserve Note.

There was a time, like when I graduated from military school in 1954, that I could take a $5 US Silver Certificate into a bank and exchange it for $5 in silver coins. A decade later, Silver Certificates were on their way to extinction.

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The Silver Certificates guaranteed the Federal Reserve had on deposit an equivalency in silver. When they were replaced by Federal Reserve Notes that guarantee no longer existed. Federal Reserve Notes became backed only by faith the government would see that they did not lose their nominal value.

Federal Reserve Fiat Currency

They are called “fiat money” – money not backed by specie (gold or silver in our case). Never in the history of the world, since the first Chinese bank, has any fiat currency not deflate to zero. Therein lies the rub for those of us who are retired and living on our pensions and savings.

The $5 dollar Silver Certificate I had in 1954 would buy me 17.2 gallons of gasoline for my car. The $5 Federal Reserve Note today will only buy 1.9 gallons of gas. In other words, I need about nine of today’s $5 Federal Reserve Notes to do today what I did in 1954.

Over the years many of us put aside some dollars for our retirement years the deflation in the value of our dollars has been the most severe regressive tax our government has levied upon us. Most of us have not been able to keep up with it.

In charge of maintaining a stable dollar has been the Federal Reserve System since its inception in 1913.  The government-owned and operated Third National Bank that threw the country into a financial panic in 1907 was replaced. The Federal Reserve System became a marriage of public and private monetary interests. It is owned by a consortium of banking interests but its officers are appointed by the President. It is supplemented by Federal Reserve officers appointed by the banks that own the system.

US Fiat Money Printing

The US Treasury Department still prints our money. However, it is sold to the Federal Reserve System at basic printing costs. The Federal Reserve System returns much of the money at face value to the US Treasury in profits made on its operations. When more money is needed to keep the economy rolling, the US Treasury prints Treasury Notes. They are then sold to the public. The Federal Reserve is garnering more cash to put on the streets.

It’s a rather loose system with only a nominal auditing by the General Accounting Office. No one seems to know for sure how much money the Federal Reserve System really has. The bankers that own it like it that way. Such obfuscation gives them plenty of room to bail each other out when things don’t go well; as they often do when bubbles break.

Seniors are at the mercy of the Federal Reserve when it comes to maintaining their standard of living. If it all seems like a Doomsday scenario, all is not lost.

That 29-cent gallon of gas I bought in 1954 dollars costs $2.60 cents in today’s dollars. That’s about the price of a gallon down at my corner gas station.