The Insidious History of Our Debt-Based Money

The Era of Sound Money

Our forefathers were very leery of the potential corruption of banks and vehemently opposed the creation of a central bank. They were so astute that they even added verbiage to the U.S. Constitution stating that no state shall issue anything other than gold or silver as legal tender (Article I, Section 10). Banks, by this time, had historically shown themselves to be vampiric in nature whenever they were allowed to issue credit against paper currency or any medium of exchange not fully backed by specie.

The Slippery Slope

On December 23, 1913, the Federal Reserve Act was passed by Congress in the middle of the night during winter recess, with just enough paid-off politicians present to ram the legislation through. This ill-conceived, malevolent law established the central bank that exists today, setting our nation on the road to the self-destruction of our prosperity and morality.

In 1933, President F.D.R. further solidified the strength of the Federal Reserve—by executive order—by making the ownership of gold illegal for U.S. citizens. Some refer to it as a confiscation, but it was intended to take existing gold out of the hands of citizens and add it to the U.S. Treasury. Since we were still officially on the gold standard, the dollar remained convertible to gold, but only between nations. As a U.S. citizen, you could no longer go into a bank with a gold certificate and redeem it for gold.

During World War II, the United States remained neutral for a significant portion of the conflict. The general public was very much opposed to any involvement. Our factories had been producing arms, munitions, tanks, artillery, etc., for other nations involved in the war. During that time, the U.S. was importing massive amounts of gold in payment for the war machines. Our national reserves of gold had reached levels exceeding 8,000 tonnes. In effect, we had become the richest nation in the history of mankind.

Shortly after the conclusion of the Second World War, the finances of many developed nations were in tatters. The cost of the war itself, along with reparations, had drained their treasuries and weakened their currencies. Delegates from 44 Allied nations met at the Mount Washington Hotel in Bretton Woods, New Hampshire, to discuss the stabilization of the international monetary system.

The Demolition of Morality

Since the U.S. was in possession of a massive stockpile of gold, and the U.S. dollar was backed by that hoard, world leaders agreed that the dollar was “as good as gold.” The dollar would be convertible to gold at a fixed rate of $35 per ounce. The U.S. dollar became the de facto world reserve currency. The Bretton Woods agreement also established the IMF (International Monetary Fund) and the World Bank, setting the stage, in the author’s view, for global impoverishment through corrupt lending mechanisms.

It didn’t take long for the U.S. Treasury to take advantage of the newly established exorbitant privilege of controlling the reserve currency before it began spending much more than was being taken in. The U.S. was spending dollars at an alarming rate, but little concern was expressed by much of the world.

The continuous display of irresponsible spending did not go unnoticed by French President Charles de Gaulle. He could not understand how the U.S. was funding the very expensive Vietnam War if the U.S. was not mining or receiving volumes of gold equivalent to its expenditures. He began ordering ships full of cash to be sent to the U.S. and demanded that they be loaded with gold at the $35-per-ounce rate. Over a three-year repatriation of gold, he successfully extracted more than 3,000 tonnes from the U.S.

Side note: Somehow, our national reserves still do not reflect that drop of more than one-third of the previous total.

One would think that the repatriation efforts from France would have been a wake-up call for the U.S. They weren’t. The government continued spending and spending. Over the next handful of years, more and more countries began to demand gold for their dollars. On August 15, 1971, Richard Nixon issued a televised address to the nation and took action to temporarily stop the convertibility of dollars into gold. With a press conference and the stroke of a pen, he effectively turned our nation and the rest of the world into debt slaves.

This “temporary” measure removed all backing from global currency reserves. To this day, there is nothing behind the U.S. dollar but “the full faith and credit” of the United States. The dollar is now simply an instrument of debt—in and of itself, an I.O.U.

The Theft of Nations

Without the restraint imposed by a commodity-backed currency, the U.S. government has been recklessly spending, with the current national debt approaching $40 trillion. The U.S. is not alone, as most developed nations are also accumulating enormous sovereign debts. These debt-issuance and spending habits are malignant. They have impoverished many nations and families, looting their prosperity on a global scale.

Fiat currencies—those backed by nothing—have allowed the International Monetary Fund to loot the wealth of nations through debt-based currencies. The resulting hardships have caused starvation, famine, the spread of disease, and prevented the construction of infrastructure required by developing nations to care for the sick, supply fresh water for drinking and irrigation, and provide sewage disposal.

Developing nations often have national currencies in place for transactions within their own borders. However, these currencies are not universally accepted for international trade. Therefore, these nations are required to hold reserve currencies to transact with other nations, such as dollars, yen, and euros.

These nations are forced to hold a majority of their national wealth in debt-based currencies that are constantly losing value and over which they have no control. Their reserves are at risk from devaluation, political upheaval, and a multitude of other factors.

When these nations get into a financial bind, they reach out to the International Monetary Fund for additional capital. The IMF will often issue these resource-rich nations a loan that, according to this argument, it knows cannot be repaid.

The resources of such nations are vast and provide their main source of revenue, but they often lack the proper infrastructure to extract those resources efficiently. When they default on their IMF loans—which were never the IMF’s money to begin with—the IMF can claim access to those resources as repayment, for the direct benefit of other developed nations.

In other words, the argument is that the resources are effectively stolen, ensuring that the indebted nation has no means to advance its own prosperity while enriching other nations that collectively offered the loans with newly created currency—currency that previously did not exist.

Why It Is Predatory

This tactic is by no means isolated to the international level. Since the birth of fiat currency in 1971, banks in the U.S. have operated under fractional-reserve lending standards. Historically, this allowed them to hold only 10% of depositor funds in reserve while lending out the remainder.

If a bank makes a loan to one customer who pays another customer of the same bank, the bank can then loan out 90% of that deposit, and so on. Effectively, for every dollar a bank receives in deposits, it can dramatically expand the amount of credit circulating through the banking system.

While this may seem preposterous enough from a risk standpoint, the system has devolved even further. During the COVID era, reserve requirements were removed entirely and have not been reinstated. Banks can now create loans to the extent permitted under current banking regulations and capital requirements.

When you swipe a credit card or take out a loan—personal, mortgage, debt consolidation, etc.—the issuing bank does not simply draw physical cash from its vault to fund the transaction. The loan is entered onto the bank’s balance sheet, expanding bank credit and the money supply.

Read that again if you need to.

Every time new bank credit is created, the amount of money and credit circulating in the economy can increase.

Similar to the way the IMF is described as stripping nations of their wealth, banks and lenders can do the same to the populace. It is a trap that the majority of Americans fall into. Here are some specific examples:

• If you use a credit card and don’t pay off the balance by the due date, the credit card company may charge an extremely high interest rate—sometimes 29–30% annually—on the outstanding balance. If you fail to repay it and default, the creditor may sue you, potentially obtain a judgment against you, and, depending on applicable law and circumstances, pursue collection remedies.
• If you have a mortgage and make regular payments, a large portion of your payments during the first several years goes toward interest. If you later default on the mortgage, the lender may ultimately foreclose on the home after having already collected years of interest payments. The property may then be sold, while the borrower can lose the equity and down payment invested in the home.

Conclusion

A debt-based, unbacked fiat-currency regime allows for the consumption of people’s future earnings. The credit system can become a trap, meticulously designed to lure us like a siren’s song without our ever realizing that we have been ensnared.

A return to a sound-money system is needed, in this view, to restore financial freedom, free us from servitude, and reestablish financial responsibility. Gold and silver backing can restrict the expansion of currency supplies, potentially reduce inflationary pressures, and allow market forces to play a greater role in determining lending standards and interest rates.

Although the debt trap is a cunning device, there are ways to benefit from the use of credit and ways to escape for those already stuck in its web. In next week’s article, we will examine those strategies.