How Federal Reserve Notes Work

Actually we know historically that government certification of the "money" in circulation is required. While "money" which is not "legal tender" US Minted coins has been extensively used in American history (e.g. gold and silver bullion were commonly used during the gold and silver rushes in the second half of the 19th Century in the western United States). The "money" is the gold and silver and the US coinage of it certifies that it contains the amount of gold and silver that it says it does. If not people would have to assey all "money" to ensure the purity of the alloy and that is expensive to do. It is the "certification" of content of officially minted coins by government that makes them more valuable than pure bullion that would require an assay to determine the actual metallic content.

To provide an example I just checked Apmex and gold bullion is selling at about $1,670/oz while $50 American Gold Eagles, that contain an oz of gold, are selling for about $1,750 and the primary difference is the US government certification of the gold content of the American Gold Eagle.

Of interest this morning is a news story that at the Republican Convention they are looking at investigating returning to the gold standard which has long been advocated by the Libertarian Party (Gary Johnson, the LP presidential candidate advocates it) as well as some Republicans like Ron Paul.

http://news.yahoo.com/republicans-tease-gold-standard-idea-seen-full-bugs-050102148--business.html

There are numerous errors in the news story of course. For example the US isn't officially off of the gold standard under current statutory laws. Next is that Nixon did not remove the US from the "gold standard" and had no authority to do so. What Nixon did was withdraw the US from the Bretton Woods agreement that required the US to redeem international debt in gold at $35/oz. There is no Constitutional requirement that the US redeem international debt in gold and US "money" is to facilitate commerce in the United States for the People of the United States. When it comes to international trade the US can require exchanges to be in commodities other than "money" and retain all "money" for use in the United States. This has been confirmed by US Supreme Court decisions.

The story also mentions that Utah passed a law to make gold legal tender in the state but American Eagle coins are already "legal tender" in the United States and always have been. The US Mint even mentions this on their Platinum Eagle website:

http://www.usmint.gov/mint_programs/american_eagles/index.cfm?Action=american_eagle_platinum

The article does mention that if the US returns to the gold standard where the Title 12 requirements are enforced that gold would increase in "value" to about $10,000/oz but that is only true if the United States is expected to provide the monetary foundation for the entire world. Our government doesn't have the responsibility nor can the American People afford to provide the monetary currency for the entire world. We might be the most wealthy nation on Earth but we're not that wealthy. As also noted "US money" can be limited to use in the United States so we have no obligation to provide a "gold standard" for the entire world.

In the past I calculated what I believe America Gold coins contianing one ounce of gold would have to be "worth" based upon USD demoninations and I estimated oit to be about $5,000. My logic was also based upon the 262 million ounces of gold? held by the US government (which was confiscated from the American People) and the almost $1 trillion of Federal Reserve notes physically in circulation. If all of those notes were turned in for gold coins the value of the coins would only be slightly more than $3.800 but we would anticipate the "price of gold" increasing which is why I set the value at $5,000. As we know historically people like paper currency for transactions so not everyone would want gold coins so long as they know that the paper currency is redeemable in gold coins. How many Americans today would exchange $5,000 in Federal Reserve notes for a $5,000 American Eagle gold coin containing one ounce of gold with gold bullion selling at under $1,700 per oz? Demand dictates how many gold coins are required and what the denomination value of the gold coin is going to determine demand.

Of note as well is that the US government could demand that the Federal Reserve redeem the Federal Reserve notes it's issued in gold. I've always found it irnonic that the US government needs to borrow "money" which is gold and so it issues Treasury Notes (T-bills) but instead of receiving gold it accepts promises of gold (i.e. Federal Reserve notes) issued by the Federal Reserve. It's a promise of repayment for a promise of payment so the first thing to do is make the promise of payment (i,e, the Federal Reserve note) actually pay what it promises. Then the US government can repay that loan by redeeming the note it issued (i.e. the Treasury Note). If the US government needs to borrow "money" then it should not be accepting promises of money and if it receives a "promise" of payment then it should go to the issuing entity of that promise and require that it redeem the promise in gold coins.

In the end the problem once again relates to the failure to comply with existing federal laws. In Title 31 it reflects that the Federal Reserve is required to maintain the equal purchasing power of all currencies in the US economy. We only have two forms of "legal tender" which are the currencies defined under US law and those are American Eagle coins and Federal Reserve notes. It is the responsibility of the Federal Reserve to ensure that they have equal purchasing power but obviously they don't. I can exchange a $50 American Gold Eagle for over 30-times what I can exchange a $50 Federal Reserve note for in the free market.

If a $50 Federal Reserve note could purchase the same amount of goods as a $50 American Eagle then their would be minimal demand for the $50 American Eagle because Americans like using currency over species money for transactions. That lowers demand in the American markets for American Eagle coins. As noted I believe the balance would be at about $5,000 for an American Eagle coin containing one ounce of pure gold. That is a higher ratio than we see today between Federal Reserve notes and American Eagle gold coins. At the $5,000/oz of gold how many Americans today would want to actually exchange their Federal Reserve notes for a $5,000 American Eagle containing an ounce of gold? it's all about establishing a rate of exchange and the subsequent demand for the US minted coins. Eventually they would balance and we'd be completely back on the "gold standard" in compliance with the US Constitution where all "currency" has fundamentally the same purchasing power (with the exception of $100 Platitum Eagles that are current worth less than a $50 Gold Eagle in the free market and that needs to be addressed).

I see no inherent problems with returning to the "gold standard" which would stop future inflation and stabllize the American monetary system. Remember that the recession of 2007-08 would not have occurred if we were on the gold standard. It was a direct result of "fiat currency" inflation.

 

I liked your summary but would say that the market can and would determine which coins were trustworthy (ie, which issuing agency was stable) and the market can do this. The government stamp of approval would be no better than their willingness to maintain it. We have seen how governments fail miserably at this. The temptation to inflate (debase) would be there always, so it is only market forces that would keep them in line. But those same market forces keep private companies in line, and better, since they can't use a gun to enforce their notion of fairness..

As for the difference between bullion and coin, that is segniorage and reflects the added value of making a circulating coin and BRANDING it, which is what the coin is, a brand. Thiat says "We stand by this 100%."
Also, I can sue a private company, I can't sue the government unless they say it's OK.


All we need is a weight (grains is my preference, but grams or ounces work) and that IS the standard.

 

The cost of coinage is insignificant and it's the certification by the Government of the contents of the coin which makes "legal tender" coins worth more than raw bullion which requires an independent assay.

Yes, we can file suit against a corporation if they create bogus coins but that doesn't imply that we will recover a loss. The lawsuit may merely drive the corporation into bankruptcy in which case we might recover nothing. The corporation could also be non-existant by the time the fraud is discovered and the principle owners could have fled the country with their ill-gotten gain long before the fraud is detected. If a person walks into a store with a coin made by "Joe" how is the store owner to know that the coin has the amount of bullion it says it contains? Do they refuse the transaction? That is counter-productive to commerce if they do because the "coin" maybe completely valid. We need only remember that under the Articles of Confederation the States were issuing coins and even that, with only 13 States, created a serious problem for commerce. It was that problem that the delegation of authority to the US Congress was based.

This was addressed in Federalist Paper 44:

http://www.constitution.org/fed/federa44.htm

Yes, we have to have faith that our government will follow the laws that it creates and it doesn't always do that. We can file suit against the federal government if it is in violation of the laws it has passed although we don't always get a "fair shake" because the determining authority is none other than the Federal Government (i.e. US Supreme Court). That reflects a problem with our adjudicating the laws moreso than anything else and I've also recommended a solultion to this in another thread that would address that issue.

http://www.politicalforum.com/civil...amendment-protect-our-inalienable-rights.html

 

I would think that the minting process takes time, money, capital investment, labor, energy, all of those cost money. But in fact I do not know how much it costs to mint a coin. But the branding is there no matter, and that is what we look to. I buy Coca Cola not some off brand becaus3e I know Coke will be the quality I want. That quality has stood up far better than any government promises.

And it is not the government branding those coins "Legal Tender" that makes them valuable, it is the government standing behind the purity and weight that makes them valuable. (actually, it's the gold that makes them valuable, it's the branding that make them acceptable to merchants) I own silver coins that are privately issued, and they are as valuable as government issued coins.

Also, 'legal tender' is a legal phrase that is meaningless in a discussion of money. "Legal tender" means legislative fiat, while money requires no consent nor approval.

The currency has been debased by 95+% over the past hundred, all we would be doing is exchanging known counterfeit money (FED notes) for real money. IOW, the government is already ripping off 100% of the people every year of their life, I don't see how the a potential problem that is limited to those in direct contact would be worse than a systemic pandemic debasement of all the money.

The thing is, the first time an agency issues a bad coin will be the last time. The issuance of a bad coin, 1 bad coin, will destroy the reputation of the agency and bankrupt it, limiting the damage to those in direct contact. An there is NOTHING the government can do to prevent fraud before the fact. And, when the government issues bad money...we are forced to accept it. Those pesky 'legal tender' laws.

I agree that there are problems to work out, but to think that only the government can work them out is to lack faith in the market process.
I also agree that it would not start off as smoothly as paper money we have now, but so what? Getting out of paper and into money would be a blessing. That it might require some work is not enough to say no to market money.

OK, well, I don't see the Constitution as having any value whatever.
I figure if the men who wrote it could turn around an pass laws (Alien and Sedition) that violently violated the intent and express words of the Constitution, well, if the FF violated their own principles less than a decade after writing it, well, then why should I think they meant what they wrote?

To follow your thought, not only do the courts have to agree to accept our suit, even when they do, they are at all times and in all courts in violation of the conflict of interest laws..

Every judge is paid through the same mechanism that pays the DA. Hence, if they receive their paychecks from the same entity, they can in no way said to be objective. Which is why government law is a contradiction. The DA and the Judge are on the same side. That leaves the defendant is a dicey situation.

The GOP will NEVER return us to a gold standard. And the article I read had gold at $10,000, based on 262M ounces and however many dollars. In any case, that means that gold can still go up.
To get to gold, the dollar will have to collapse.

 

And how is that allegedly done other than by political force?

 

You're not making sense. Capitalism is inherently about force (something the Austrian school doesn't realise because of its backward understanding of economic agents). Keynesianism, given its detailed use of behavioural economics, is simply able to understand capitalism better.

 

WOuld you tell me what, exactly, a "backward understanding of economic agents" means?

 

If you can't make sense of your own strawmen, then there's very little help for you, I'm afraid.

Whether or not your assertion is valid, Keynesianism still relies on the use of the police powers of the state to enforce which was the gist of my argument which you are attempting to deflect (as usual). It's prescriptions cannot work absent a state with a legal monopoly on force. Therefore, if it can operate effectively, it would only do so in the political context. Or, perhaps, you are making the utterly unsupportable assertion (which, as usual, you will refuse to support) that no economic transactions can happen outside an area not covered by a powerful central authority.

 

If we are to go back to the gold standard, then how would Ben Bernanke do quantatitve easing to save the economy?

See we need federal reserve notes because when the bad rich people mess our economy up, the government can create paper money to spread the wealth in essence.

This creation of money goes to the banks for lending, it saves GM corporations which saves jobs, printing money is a safety net that can't exist with the Gold Standard.

 

Listen....it is the FED and its manipulation of rates and the govt itself that keeps causing these problems. If gold were used as currency then we would not be in this mess in the first place. Gold can't be counterfeited. Govt spending is limited. The way it should be. Don't believe me? Just remove taxes from gold and repeal legal tender laws and watch the dollar fail within a year if that long.

It is quite funny you believe the two entities that caused our problems not to mention our debt are the same two entities to lead us out of this problem.

If the FED had left rates alone after the dotcom bubble burst then we would have had a severe recession which we would have been out of by now. Instead the FED, with the urging of economic geniuses such as paul krugman, dropped rates to spur on a housing bubble. Then there is the whole fannie and freddie thing. The repeal of glass-stegal. The list goes on and on and on. If you can't see how this is all interconnected then I am not sure you can be helped. If you believe more govt and more authority given to the FED is the answer then you are going to get more of the same. Sad state of affairs. Stop watching MSM, fox and msnbc. Do you own research. Look at the people who predicted this mess and see why they predicted and how it came to pass. I am not sure why you would want to listen to people who are wrong over and over and over and over.

If you took your car to a mechanic and he was consistently wrong would you continue to go back? What about your plumber?

 

While there are several points to cover I wanted to cover this one first because there is an error in the logic.

It isn't "the first time an agency issues a bad coin will be the last time" but instead it's the first time a bad coin is detected that is the problem. A private enterprise could be issuing one ounce gold coins that actually contain one ounce of gold. It would issue billions of dollars of them and then, in a private board meeting, change the content to .95 ounces by a simple alloy change and not tell anyone. The coin could simply state "One Ounce Gold" on it as opposed to "One Ounce Pure Gold" and technically it would still be "legal" and not fraudulent but the enterprise would reap a huge profit from this change. Unless someone actually asseys the coin no one would know. If someone did assey the coin then it creates a problem not just for those with the .95 oz coins but for everyone holding any of those coins because it would devalue all of them.

Congress cannot secretly change the alloy or metal content of US Minted coins and has to redisginate them when it does so. For example we went from Double and Single Eagles to American Gold Eagles under the American Gold Bullion Coin Act of 1985 and everyone was aware of that change in the laws for minting US species money.

 

I fail to believe our government in its magnificence, which has brought us this far as a civilization, does not know what it is doing when it comes to managing our currency in the form of federal reserve notes.

You see the free market is just that, a place where a market has the freedom to fail or succeed on its own, but when it fails it shan't bring Society down with it. Any responsible government empowers itself with the ability to create money, to weather these storms so that the people don't suffer when the capitalists lose to the market.

Since our inception, this is what we have been doing to get us out of downturns. The Great Depression for example, easing policies brought America out of danger, it had nothing to do with currency manipulation but the free markets inability to correct themselves when they made a catastrophic error. We are presently in the midst of another error of the market, but not of the same magnitude as the great depression.

We need a complete makeover of government, those policies referenced above, were like cash for clunkers and Obamacare and did not go far enough. We need a more substantial strangle hold on government, something we have not had public support until now after Ronald Reagan stigmatized socialism for 30 plus years.

 

A rather delusional opinion if the following facts are considered.

No economy based upon fiat currency has ever withstood the test of time. All monetary systems based upon fiat currency eventually fail. Since the inception of fiat Federal Reserve notes into the US economy they have lost over 97% of their purchasing power and continue to lose purchasing power. At some point they will fail completely as it's a mathmatical certainty.

All economies exist based upon the exchange of commodities for commodities or labor for commodities. Money is how expended labor is stored and when the purchasing power of the money diminishes then it reflect the theft of expended labor. 97% of the historical labor of Americans has been stolen from the American People as the purchasing power of Federal Reserve notes diminished over time.

Gold coins have basically retained their purchasing power over the last 1000 years because they are a commodity that has a natural market balance with other commodities. That's why historically gold coins have always been the preferred form or money.

US GDP growth has diminished as our government has become more involved in the economy. Current CBO projections reflect that future GDP grwoth will be below 2.5% in the future where it's historically been above 3.5%. A GDP growth of less than 2.5% won't produce enough jobs to provide employment for the net increase in the work force in the future and will result in lower wages and higher unemployment than anytime in US history. We can see that today as new jobs being created pay substantially less than previously. The days of unemployment at 4% will never return to the United States, ever, unless the national debt is substantially reduced.

As for "trusting Congress" to address the economy I woul point out one simple fact. In the Gold Bullion Coin Act of 1985 Congress designated that a $50 American Eagle would contain 1 oz of pure gold and that a $10 American Eagle would contain 1/4 oz of pure gold. If I have $50 in US minted gold coins I would have 1.25 oz of gold if it's in $10 American Eagles but I'd only have 1 oz if I have a single $50 American Gold Eagle. Congress couldn't even do simple math so that the gold content of American Eagle gold coins would be consistant. Congress CAN'T EVEN ADD and people want to trust a government entity that can't even add at a grade school level to control the US economy?

People must be nuts to trust the Congress to control the economy when the average 10 year old has more knowledge than Congress demonstrates in passing laws.

 

hey, you're good. I did make an error.

But, the point is that market forces are what keep us in line, and the government has declared itself above the markets forces. SO, while they cannot 'secretly' do it (you have far more trust in government than I do) they can do it through the same way they have in the past, namely "We;re the government. Of course we know what we're doing"---as a poster above asserted

 

As I also noted we can demonstrate, as I've done, that Congress doesn't know what it's doing especially when it comes to the economy. If Congress can't even multiply 1/4 times 5 to realize that it doesn't equal 1 (e.g. the comparison between a $10 Gold and a $50 Gold Eagle) a person would have to be a complete idiot to trust them with a multi-trillion annual economy.

When it comes to our "monetary system" and the Federal Reserve the greatest problem I see is that our government doesn't require the Federal Reserve to comply with statutory and contract law. If the laws of the United States, specifically the requirements in Title 12 that the Federal Reserve redeem Federal Reserve notes in US gold coins (lawful money) and the requirements in Title 31 that all forms of US currency (i.e. US minted gold coins and Federal Reserve notes) must maintian equal purchasing power then we wouldn't have any monetary problems today.

It is the violation of the laws of the United States which are at the heart of the monetary problems in the US including the nation debt.

One thing that I do dream about would be to the State Treasurer of any State. I would personally go to a Federal Reserve bank and demand redemption of about a billion dollars so that I could make payments on behalf of the State in gold or silver coins as required by Article I Section 10:

In the US Supreme Court decision of Julliard v Greenman that addressed "Legal Tender" the Court stated that allowing the federal government to issue legal tender currency did not affect the mandatory Constitutional requirement for the States to pay all State debts in gold and silver coins. While the US government can issue promissory notes the States are still limited to making payments in gold and silver coinage under the US Constitution but they're not doing that. I'd love to have the "power of the State government" to challenge the Federal Reserve's failure to comply with Title 12 based upon the requirement of the State to pay debts in gold and silver coinage. This issue has never been adjudicated in the courts.

 

I want you to note the passive construction of your sentence. What you didn't say was "who" is violating the laws of the US. And if you answer that question, you see it is the US government that is violating US law.

This is my takeaway. If the entity designed to protect us violates us, then it should not be in charge. Period.
While I can appreciate trying to reform the system, i don't see how to actually do it.

I don't like that idea, since the collapse of the dollar will hit us very hard, but I don't see any other way to get to hard money from here.

 

In fact it's not the US government that's in violation of the law but instead it's the Federal Reserve. The problem with the government is that it's not taking an active role in requiring the Federal Reserve to comply with the law. It's leaving it to the citizens to try and force the Federal Reserve into compliance but the average person doesn't have the financial resources to do that.

The eventual collapse of Federal Reserve notes will definately "hurt" some people but others won't be phased at all and can even profit from it. Only those that have their personal assets in "dollars" will be adversely affected. It will occur through hyper-inflation so many Americans will actually make out on it. A $250K mortgage, for example, might be paid off with a single day's income. Conversely anyone that has a large bank account will basically lose it all. Stocks, because they're a capital investment, will soar in "value" but only based upon inflation as the actual corporations won't be worth any more or any less based upon the failure of the money supply. As noted they may "profit" as well because any notes they owe will be in dollars so they can pay off that debt with hyper-inflated currency.

We will see a voluntary return to the gold standard though because it's legal to invoke the gold clause into contracts based upon mutual consent. That will, of course, lead to a major increase in the relative value of gold as demand increases.

 

That's parsing a bit too thinly for me. Congress created the FED, they can uncreate it. Congress knew why they created the FED, knew what it was for, hence, they have ZERO incentive to break up the cartel, which is all it is.

Yep. about what I think will happen.

 

I'd be interested in the income tax ramifications of conducting one's business in gold (or silver).

For example, let's say that I have a gold clause in my employment contract that specifies my salary in grams of gold. What does my W-2 say? Would they report to the government in grams of gold, or dollars? And if in dollars, how do they assign a dollar value to the gold they paid me?

 

This is an apparition of proper functioning of an economy.

The government can't compete with the gold standard, that would restrict the spending budget because it would severely limit liquidity. Our economy must accommodate neccessary expendatures by our government, so the purchasing power of the citizen must be reduced to accomodate this spending by printing money.

In order to meet the needs of everyone, the labors of those who are productive, must be 'stolen' or devalued to meet the needs of those who don't have marketable skills.

That allows for everyone to enjoy a quality lifestyle, because to pay for entitlement spending through debt for those who don't work, can only be accomplished by lowering the value of the money for those who do exchange their labor for goods.

That does not include military spending, which will also be reduced under the Gold Standard.

 

It worked from 1914 to 1933. The dollar was set at 371.25 grains of silver. That comes out to 0.7735 ounces per dollar.
But I don't think it is a good idea to tie the quantity of silver to any abstract name (dollar, yen, franc) but instead strictly to its weight. So we would have 480 grain (1 troy ounce) coins and prices of goods would be in grains.

 

No, I mean what would the ramifications be to using a gold (or silver) contract right now, without any legislative change. I'm talking about two parties negotiating a contract in which the payment is specified in terms of gold/silver grams/grains. What would the tax ramifications be?

 

Ah, sorry.
If you mean, can I at this moment create a contract with gold or silver as the medium of exchange, then no, that is against US law and cannot be enforced in US courts of law. It's part of the Legal Tender Laws. So the question is moot. It's illegal. As opposed to criminal.

 

Are you certain of this? I was under the impression that gold contracts were once again made legal some time in the 80s (maybe?). I'll look for a reference.

 

Yes, I am sure. But I was wrong.

Turns out that they are enforced one way only, to dollars, So you can take the contract to court, but they will NOT enforce the gold part of the contract, which makes it de facto worthless while de jure legal

http://mises.org/Community/wikis/economics/gold-as-money-faq.aspx