Worried About Bank Failures?

Become A Student of History, Learn from Past Mistakes, Cover Your Assets

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"Gold is the money of kings; silver is the money of gentlemen; barter is the money of peasants; but debt is the money of slaves." - Norm Franz

If you’re worried about another round of bank failures and a possible economic apocalypse, maybe it’s time to look back at how America dropped the Gold Standard, why, and what happened to the U.S. banking system.

We are repeating the same mistakes of the past en masse. If you think more like a contrarian, as I do, you may be leaning toward hard assets or looking to bury bars of gold in the sand.

Full disclosure: I have no clue what will happen in the future. I encourage everyone to be as well educated as possible, take full responsibility for our finances, and do our best, regardless of the times and history.

Either way, let’s look at how we ended up where we are today. There’s never been a better time to improve your financial education.

The Gold Standard

The gold standard was a monetary system in which a country's currency was directly convertible to a fixed amount of gold. In other words, the value of a currency was tied to a fixed amount of gold, and the government or central bank would exchange paper currency for gold on demand.

The gold standard was used in various forms worldwide from the 19th century until the mid-20th century. The United States adopted the gold standard in 1879, and it remained in place until 1933 when President Franklin D. Roosevelt issued an executive order that effectively ended the gold standard.

The order prohibited the hoarding of gold and required all U.S. citizens to turn in their gold coins, bullion, and certificates to the government in exchange for paper currency.

The move away from the gold standard was motivated by several factors:

1. Depression. The Great Depression began in 1929, leading to massive unemployment, bank failures, and economic contraction. In response, President Roosevelt and his advisors believed that the government needed more control over the money supply to stimulate the economy.

2. No limits. The government needs more “flexibility” in monetary policy. Under the gold standard, central banks were limited in adjusting the money supply in response to changing economic conditions.

3. Greed. By abandoning the gold standard, governments could print more money and manipulate interest rates to influence economic growth.

Fractional Banking

After the end of the gold standard, the United States adopted a fractional reserve banking system, in which banks were required to hold only a fraction of their deposits in reserve and could lend out the rest.

This system allowed banks to create more money than they had on deposit, increasing the money supply.

In addition to fractional reserve banking, the U.S. adopted fiat money, which has no intrinsic value and is not backed by a commodity such as gold. Instead, fiat money has value only because the government declares it legal tender and accepts it as tax payment.

The combination of fractional reserve banking and fiat money has led to an increase in inflation over time. Because banks can create more money than they have on deposit, the money supply has grown faster than the supply of goods and services. This can increase prices as more money chases the same goods and services.

Fiat Money

The term "fiat" comes from the Latin word "fiat," which means "let it be done" or "let it become." In the context of money, "fiat" refers to the fact that the currency's value is established by government decree or fiat rather than by its intrinsic value or the backing of a commodity like gold or silver.

The term "fiat money" was first used in the early 20th century to describe a currency not backed by a commodity but accepted as legal tender by the government. The government or central bank controls the money supply in a fiat money system and can create and destroy money as needed.

Overall, the move away from the gold standard was driven by a desire for more control over the money supply and more flexibility in monetary policy. While it has allowed for more government intervention in the economy, it has also increased inflation and a less stable monetary system.

The Money Supply

The U.S. money supply refers to the total amount of money circulating in the economy. It is measured by various monetary aggregates, which the Federal Reserve and the central bank of the United States report.

The U.S. money supply is created through fractional reserve banking, in which banks must hold only a fraction of their deposits in reserve and can lend out the rest. When banks make loans, they create new money in deposits, increasing the money supply. This process is known as "credit creation."

The Federal Reserve has several tools to influence the money supply, including open market operations, which involve buying or selling government securities in the open market to affect banks' and money supply reserves. The Fed can also adjust the discount rate, the interest rate charged to banks for borrowing money from the Fed, and the reserve requirement, which is the reserves banks must hold against their deposits.

The Federal Reserve uses monetary policy to achieve its dual mandate of promoting maximum employment and stable prices. To fulfill this mandate, the Fed sets a target for the federal funds rate, which is the interest rate that banks charge each other for overnight loans of their reserves. By adjusting the money supply through various tools, the Fed can influence the federal funds rate and the overall level of interest rates in the economy.

The U.S. money supply is an essential indicator of the economy's health and inflation. When the money supply grows too quickly, it can lead to inflation, while a slow-growing money supply can contribute to economic stagnation. Monitoring the money supply is an essential part of macroeconomic policy.

A Flood of Money

If you had a printing press at home that could print all the money you need, your money supply would be theoretically endless. Welcome to America and the Federal Reserve, banking in America as we know it today.

The U.S. money supply has increased significantly since the country left the gold standard in 1971. Below is a list of the major monetary aggregates, as reported by the Federal Reserve, for selected years from 1971 to 2022:

• 1971: M1 = $180.1 billion; M2 = $716.9 billion; M3 = $958.5 billion

• 1980: M1 = $401.5 billion; M2 = $2.2 trillion; M3 = $2.7 trillion

• 1990: M1 = $723.2 billion; M2 = $3.9 trillion; M3 = $5.0 trillion

• 2000: M1 = $1.2 trillion; M2 = $6.9 trillion; M3 = $8.9 trillion

• 2010: M1 = $1.6 trillion; M2 = $8.9 trillion; M3 = $14.0 trillion

• 2020: M1 = $4.0 trillion; M2 = $18.6 trillion; M3 = not reported

• 2021: M1 = $6.4 trillion; M2 = $20.9 trillion; M3 = not reported

• 2022: M1 = $7.3 trillion; M2 = $23.1 trillion; M3 = not reported

Note that the Federal Reserve discontinued reporting M3 in 2006, so data for this measure is unavailable after that year.

M1 includes currency in circulation and demand deposits, while M2 includes M1 plus savings deposits, small-time deposits, and retail money market funds. M3 is the broadest measure of the money supply, including M2 plus large time deposits, institutional money market funds, and other significant liquid assets.

We’re experiencing unprecedented amounts of money, spending, and rising taxes. Cycles such as these can be extremely painful for humans of all nations.

Inflation: Cover Your Assets

Now that you know more about the history and why we are where we are today with high inflation in America, there’s never been a better time for you to invest in your financial and investment education. Accept the moral obligation to be more informed, better educated, and responsible for financial security.

By learning as much as possible about how money works, how to make a great living without losing your mind or home, and taking full responsibility for your financial gains and losses, you’re in a better position to create wealth and sleep well at night.

If inflation erodes your purchasing power today, the job of every investor is to know their risk tolerance, time horizon, and income goals now or later. Investing serves the purpose of meeting current and future income needs. Inflation is a deadly threat to purchasing power.

Nothing in this article is intended to provide specific investment advice. While you educate yourself, it is best to work with qualified and trusted financial professionals.

Investment Overview - Assets

Inflation can erode the purchasing power of money over time, so it's essential to have a plan to hedge against inflation.

Here are some common hedges, asset classes, or investment types to learn about:

1. Investing in stocks. Stocks have historically outpaced inflation and can offer an excellent long-term hedge against it. However, stock investing comes with risks, including market volatility and potential losses.

2. Investing in real estate. Real estate can be a good hedge against inflation, as property values tend to increase. Real estate investments can include rental properties, real estate investment trusts (REITs), or investing in property through crowdfunding platforms.

3. Investing in commodities. Commodities like gold, silver, and oil can be a hedge against inflation, as their prices tend to rise with inflation. Investors can invest in commodities directly or through exchange-traded funds (ETFs) or mutual funds that invest in commodities.

4. Investing in inflation-protected securities. Treasury Inflation-Protected Securities (TIPS) are bonds issued by the U.S. government that offer protection against inflation. TIPS are designed to keep pace with inflation, as their principal value is adjusted based on changes in the Consumer Price Index (CPI).

5. Investing in foreign currencies. Investing in foreign currencies, particularly those of countries with strong economies and stable currencies can offer a hedge against inflation. However, currency investing comes with risks, including volatility and potential losses.

6. Increasing income. Another way to hedge against inflation is to increase income. This can include negotiating a higher salary, starting a side business, or investing in dividend-paying stocks or bonds.

Own Your Education

In conclusion, the decision to leave the gold standard and adopt fractional reserve banking and fiat money has significantly impacted the U.S. economy.

While it has allowed for more significant government intervention in the economy and more flexibility in monetary policy, it has also led to an increase in inflation and a less stable monetary system.

The U.S. money supply has increased significantly since leaving the gold standard, and it's essential to understand how to hedge against inflation. Investing in stocks, real estate, commodities, inflation-protected securities, foreign currencies, and increasing income are all common hedges against inflation.

However, each strategy has risks and potential downsides, so it's essential to consider individual financial situations and goals before investing. By educating yourself on the economy, monetary policy, and investment options, one can make informed decisions to hedge against inflation and achieve financial security.

May you own your education, live long, and prosper.