I.O.U.S.A - Addison Wiggin [26]
But is America ’ s low savings rate simply a matter of personal choice? Or are there also other forces at play here?
The Federal Reserve
In 1913, President Woodrow Wilson was successful in pushing
Fiat Money:
the Federal Reserve Act through Congress. The act allowed the Money that has no
government to establish the third central bank in the nation ’ s intrinsic value and
history.
is not convertible
Think of the Fed as the bank of banks, and the govern-to any commodity,
ment ’ s bank — the gatekeeper of the U.S. economy. The board, such as gold or
silver. It is made
which is run by seven governors and presided over by a chair-legal tender by a
man and vice chairman, is charged with managing the supply government decree. of money and credit to the economy. By manipulating interest c03.indd 46
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Chapter 3 The Savings Defi cit 47
rates and creating money, the Fed can either stimulate or sti-fl e the economy. The Federal Reserve is the primary force in determining our nation ’ s money supply. The Fed ’ s two main goals are (1) to help stimulate economic growth and (2) to try to keep infl ation low. These goals often confl ict.
The central bank Federal Reserve System has a tremendous amount of power and a monopoly control over money and credit. The chairman of the Federal Reserve is more powerful than even the president because he has so much control over the economy. The Fed is the key to how much money and credit is in the U.S. economy in any given time. This is due to the fact that the United States currency is a fi at money — in other words, it is not backed by anything tangible, and therefore it can be created out of thin air.
The U.S. dollar was not always a faith - based currency.
There was a time when for every dollar in circulation, there was a coinciding amount of gold to back it up — a gold standard.
“ In the nineteenth century, starting with the Napoleonic Era, all the major money systems of Europe were anchored by gold, ” Bill Bonner explains. “ All of these countries had gold lining their systems, so when they traded with one another they could either trade their gold, or if you traded paper money, it was certain that there was gold backing their currency.
“ And that system was very, very successful. The prosperity of the nineteenth century was amazing, ” Bonner continues.
“ But that system broke down in World War I; the governments, as they always do, spent too much money. Britain borrowed too much, the French borrowed too much, and then they couldn ’ t pay it back because they didn ’ t have enough gold to pay that kind of expense. ”
Even so, that gold - backed system lingered on throughout the twentieth century — but not perfectly — and the last stage of this system was called Bretton Woods, which lasted until 1971.
Bonner tells us:
“ Prior to 1971, we had the Johnson
administration, we had the Great Society and the Vietnam War, and those things were very, very expensive. And somebody told Johnson, ‘ Wait a minute, you can ’ t have both guns c03.indd 47
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48 The
Mission
and butter. You can ’ t have a huge domestic spending program, the Great Society, at the same time that you have a huge war going on in Asia. That won ’ t work, we can ’ t afford that. ’ At the time the Democrats, led by Johnson, said, ‘ Oh yes we can; we ’ re a big rich country, we can afford both guns and butter. ’
Well, sure enough it wasn ’ t true, and they couldn ’ t afford that much without raising taxes, and they didn ’ t want to raise taxes because then they wouldn ’ t be reelected. So they had this big problem. And what resulted from that was a run on America ’ s money. ”
Other countries, especially the French, led by Charles de Gaulle, noticed that the dollar was weakening. So de Gaulle told then - President Nixon that he wanted to exchange the dollars France had for gold. Nixon examined the situation