Sunday, September 23, 2012

Honey, Forget the Kids, Who Shrunk The Dollar? Part II

By Miriam B. Medina

In part 1 of this 2 part series, we examined the plight of most American citizens today. Sure, there's that 1% or so that are doing quite well, but the rest of us are struggling mightily. This is not to damn those that are doing well, but America was built and made strong on the ideal that anyone could find their fortune, make their way and build their home in this great country.

So what happened? Why are we all broke ALL OF THE TIME? As stated in part 1 of this series, the American economy was originally founded and prospered on trade backed by gold that was used as a common currency. But all of that began to change at the outset of the Civil War, and we've slowly been paying the price ever since.

President Abraham Lincoln, representing the desire of the North to hold the Union together at all costs, was forced to amass a great army to quiet the rebellion, but he had one huge problem. A country made of many states with state-run banks had no united currency or central bank that was effective enough to pay for such an army. The country didn't have enough gold on hand to purchase the weapons it required or to pay the soldiers for the service they were to perform for their nation. Lincoln hired an old friend, Colonel Dick Taylor, to help him solve this problem. Taylor advised the President to print federal money, authorized legal tender, that could be used in place of gold. Lincoln wasn't sure this would work, but Taylor assured him it would. If the federal government said it would, it would have to, the citizens would have no choice.

"Colonel Dick Taylor, when Lincoln asked if the people of America would accept the notes, said: "The people or anyone else will not have any choice in the matter, if you make them full legal tender. They will have the full sanction of the government and be just as good as any money; as Congress is given that express right by the Constitution."

Thus greenbacks were printed, named for the green ink used to print the "money," and the dollar was born. The dollar was still tied to the promise of gold. It could ultimately be redeemed for gold if the holder asked, but it was accepted as cash, except there wasn't enough gold to redeem every dollar if everyone redeemed them at one time. This means the value of gold rose above $1 an ounce. This process is called inflation. This signaled the beginning of the end for the Almighty Dollar. Americans and the world accepted the currency. America pushed forward, once again growing at an astounding pace. America's gold standard became the standard bearing currency around the world. By the 1920's, the economy peaked, and the dollar and gold were sitting high, as were U.S. citizens.

Then the Great Depression set in during the late 1920's and into the 1930's. Banks defaulted by the hundreds as many citizens, in fear, tried to redeem their dollars for gold, but there wasn't enough gold to cover the mad flight to safety. The economy crashed. President Franklin D. Roosevelt's New Deal was ultimately born. More dollars were printed, and the value of gold once again inflated, reaching as high as $25 an ounce. The dollar, once worth $1 per ounce of gold, was 1/25th the value it had been when it was first printed.

After World War I and World War II, the American economy soared again. To the victor go the spoils. The strength in the dollar led to a natural inflation. The more the dollar soared, the more expensive basic commodities, necessities and services became. By the time Richard Nixon was in power in the early 1970's, the nation faced a great problem. There was another costly war in Vietnam to pay for. The cost of gold soared, from $38 to $42 in one year between 1972 and 1973, and stagflation had set in, meaning there was a loss in the growth of production, but inflation continued to rise. People had less money to spend and everything cost more. Sound familiar, rising costs with less money to go around?

Faced with really no alternatives, except to either suffer a much-needed consolidation in an inflated economy, or, divorcing the dollar from the gold standard in an effort to put this correction off for a few more years, Nixon removed the dollar from the gold standard in 1973. The value of gold soared to over $100 an ounce on the free market at an astonishing pace. The dollar was no longer a promissory note redeemable in gold. It was no longer a coupon, it was simply a piece of paper that this government and other governments, via trade, set the value for. You can see the problem there. The Fed, led by Ben Bernanke today, the independent American banking system, and other central banking systems such as the EU (European Union) and the IMF (International Monetary Fund), set the value and rate of the dollar and other currencies with their actions or lack of actions, particularly during a financial crisis like the one we are in now. The Fed answered the housing crash in 2008 by "bailing out" the economy. How? They printed more cash, not coupons any more, simply dollars printed on paper. This is known as hyperinflation. Hyperinflation kills any currency, its value ultimately decreases, and will continue to do so. The more dollars there are, the less they are worth. Gold is now worth over $1600 per ounce. Gas is near $4.00 a gallon as is milk.

The Almighty Dollar has been devalued over time, and unless some grand changes are made in economic policy, which is unlikely, this will continue to happen. The dollar will stretch less and less, and goods and services will cost more and more. Sadly, the only question is, how low will the dollar go? We are a great nation, and we will survive and thrive again, but survival and growth have a cost. Perhaps that cost won't be paid for, ultimately, in broken dollars, but will be paid for with ingenuity, the indomitable American spirit, our work ethic and our great will. I hope so. I, like most other people I know, am running out of dollars. I'm chock full of spirit, work ethic and will power though. I hope you are too. We must remember this when we vote and empower those that make decisions that affect all of us. Each bailout has a cost. Each Quantitative Easing has a cost. Each entitlement program has a cost, and one way or another, through taxation or rising prices we pay every day for food and gas and clothing, we ALL pay it. Perhaps it is time to roll up our sleeves and find a solution that doesn't involve a printing press, because every time the government prints more paper for whatever reason, everything costs more and more, and the almighty dollar continues to shrink. Soon enough, the dollar won't be worth the paper it's printed on, if it isn't already.

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