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A Brief History of US Money - Crash Course Chapter 9

The rules get changed (a lot)
Friday, August 15, 2014, 5:29 PM

Chapter 9 of the Crash Course is now publicly available and ready for watching below.

Looking at the past 100 years of the US dollar's history, one theme becomes abundantly clear: in times of crisis, the US government has no issue with changing its own rules or breaking its own laws. And those "temporary" emergency measures have a nasty habit of quickly becoming permanent.

Among the more notable milestones of the past century, the Federal Reserve was created (and soon after took possession of most of the nation's gold reserves), the Bretton Woods agreement made the US dollar the world's reserve currency granting it extraordinary advantage (which America quickly began abusing, continuing to do so up to today), and Richard Nixon ended the currency's convertibility into gold.

Nixon's turning the dollar into something backed only by the "full faith and credit" of the US government ushered in a new era for our country. The fiat dollar we use today for trade and investment is really only an experiment a little more than 4 decades old. We don't have a national experience to draw from in knowing how well it will work over time.

But as we see the US money supply exponentially accelerating since the 1970s, and the Federal Reserve more than tripling its balance sheet since 2008, it's only prudent to ask the question: Without constraints, are we in danger of destroying the purchasing power of our currency by making too much of it? 

For the best viewing experience, watch the above video in hi-definition (HD) and in expanded screen mode

Coming next Friday: Chapter 10: Quantitative Easing

For those who simply don't want to wait until the end of the year to view the entire new series, you can indulge your binge-watching craving by enrolling to PeakProsperity.com. The entire full new series, all 27 chapters of it, is available -- now-- to our enrolled users.

The full suite of chapters in this new Crash Course series can be found at www.peakprosperity.com/crashcourse

And for those who have yet to view it, be sure to watch the 'Accelerated' Crash Course -- the under-1-hour condensation of the new 4.5-hour series. It's a great vehicle for introducing new eyes to this material.

Transcript: 

Before we move on to current events, it’s vital that we know how we got here.

I will now present an extremely shortened version of recent US monetary history. 

The purpose of this section is to show you that in the past the US government has radically shifted the rules during times of emergency and that our monetary system is really a lot younger than you might think.

After the great financial panic of 1907, when private banker J.P. Morgan   stepped in as the lender of last resort, banks began agitating for a government solution.

What was finally decided upon in 1913 was a federally-sponsored cartel, called the Federal Reserve, which sounded governmental but really was not.

The stock of the Federal Reserve was to be held by its privately-owned member banks, not the US government nor the public, which remains the case today.

So what we call the Federal Reserve actually is a federally-sponsored banking cartel, licensed to lend money into existence.

One of the main arguments for creating the Federal Reserve was to have a more central bank able to step in and prevent losses from panics.

How did that work out?

Not very well. Instead of simply being a lender of last resort the Federal Reserve had helped provide the necessary fuel for a speculative bubble in stocks that burst in 1929 with devastating effects.

Among the financial consequences were numerous bank failures a shrinking the money supply by nearly a third in just three years and, in 1933, the US government effectively declared bankruptcy.

At that time, newly-elected President Franklin D.  Roosevelt decided to counter the falling money supply in a most drastic manner. 

He ordered the confiscation of all privately-held gold and immediately devalued the US dollar.

Up until this time in history, America was on the gold standard, which meant that each paper dollar in circulation was backed by a specific amount of gold, which it could be exchanged for upon demand.

Prior to the seizure it took approximately $21 to buy an ounce of gold and afterwards it took $35.

Soon after, contractual obligations of the U.S. government, such as bonds payable in gold, were nullified, with the approval of the Supreme Court.

This goes to show how governments, in a period of emergency, can change rules and break their own laws even if those laws are written into the Constitution.

All of this seized gold either ended up in the   vaults of the Federal Reserve, at the International Monetary Fund or “on the books” of the Federal Reserve. 

A grand total of $11 billion dollars was exchanged for all 261 million ounces of the nation’s gold. 

In other words, complete control of the gold supply of the most powerful and prosperous nation on earth was exchanged for slightly more than $11 billion dollars literally printed out of thin air.

After just twenty years, a private banking cartel went from an idea to owning all of the wealth of a young, powerful and prosperous nation.  Not bad!

Every one of these original 261 million ounces of gold still remain on the books of the Federal Reserve as a private asset, so technically it actually belongs to the shareholders of that corporation, not the American people.

In any event, to end the turmoil of depression and a subsequent world war, and to provide a foundation for global recovery, a conference was held at Bretton Woods, N.H, in 1944, with all the major allied powers attending.

Recognizing that the U.S. then represented nearly half of the global economy, the U.S. dollar was made the global reserve currency.

All other currencies had fixed rates of exchange to   the dollar, which in turn was redeemable for gold at 35 dollars per ounce.

The Bretton Woods II system ushered in a period of prosperity and rapid economic recovery. But, there was a flaw in the system.

Nothing in the Bretton Woods agreement prevented the U.S. Federal Reserve from   expanding the supply of Federal Reserve Notes as rapidly as it wished.

As this happened, the gold backing behind each dollar steadily declined, such that there was not enough gold to back all of the dollars.

Meanwhile, as the Vietnam War intensified, the U.S. was running budget deficits and flooding the world with paper dollars.

The French, under President Charles DeGaulle, became suspicious that the U.S. would be unable to honor its Bretton Woods obligations to redeem their excess dollars into gold.

As the French exchanged their surplus dollars for gold, the U.S. Treasury's gold stocks declined alarmingly. Finally, President Nixon   declared force majeure on August 15th, 1971, and “slammed the gold window” ending its dollar convertibility.

The last ties of the US dollar to gold were severed. The days of a “gold standard” were over.

That's what governments do during wartime, they change the rules to allow them to print what they need rather than impose unpopular taxes trusting that it will all be paid back at some point in the future, and the U.S. followed that pattern to a "T".

But this time, it affected the whole world, because the removal of gold convertibility of the dollar destroyed the foundation of the   Bretton Woods system.

Without a gold backing, there was no hard, physical limit to how many paper dollars could be issued. 

Since we now know that all dollars are backed by debt, what do you suppose happened to US debt levels once the externally applied rigor of gold was removed?  Let’s find out.

This is a chart of US federal debt from the period of 1949 to 2013.  Note that it looks like any other exponential chart we’ve already reviewed. 

But especially note what happens after Nixon slammed the gold window – that is, when Nixon removed the last vestige of external physical restraint from the system.

And also note how rapidly the debt levels have climbed recently – these past few years have seen the highest and most rapid accumulation of federal debt in our entire history thanks in large measure to a series of experiments never before attempted in our country’s history – the conduct of two foreign wars AND a tax cut at the same time while printing money out of thin air to finance the enormous structural deficits that resulted.

This rapid accumulation of debt is not a mysterious process at all; rather it is an entirely predictable consequence of the slamming of the gold window.

Remove politicians constraints and they will spend.  As far as I know, that's happened in every country that's tried it. 

How much longer can this continue?  Unfortunately there’s no good answer to this besides “as long as foreigners let us”.

A second predictable, and related, consequence concerns the total amount of money in circulation.  Remember, all money is loaned into existence so the shape of the federal debt chart should tip you off to the shape of this next chart   of US money from the years 1959 to 2013. 

The first thing we can note here is that it took our country over three hundred years, from the very first pilgrim until 1973 to generate our first trillion dollars of money stock.

Every road, every bridge and every   marketplace on every corner of every town; every boat and every building from the first colony until 350 years later required one trillion dollars of money stock.

Now we are creating a trillion dollars in just under a year.

My question to you is: What will it be like to live here when our nation is creating a trillion dollars every 6 months?  How about every 6 weeks? Every 6 hours? 6 minutes?

Where does it stop, if not in hyperinflation and the destruction of the dollar and, by extension, our nation?

If we view these events on a timeline, we can see that the Federal reserve was formed in 1913 and only twenty years later in 1933 our country had entered a form of bankruptcy during which it turned over its collective gold supply, under force of law, to the Federal Reserve.

Eleven years after that the US dollar was enshrined as the world’s reserve currency with an explicit backing by gold. That system was then unilaterally removed by Nixon 27 years later.

In effect, the current global monetary system of un-backed currencies is now roughly 40 years old.

It was not planned, but simply emerged out of a crisis. The unredeemable U.S. dollar remains a popular reserve currency as a matter of convenience, but nothing requires or guarantees that it will retain this role.

It is a safe bet that the next currency system will arise out of some future crisis too.

Only the U.S. is able to use its eroding reserve currency status   to borrow and print dollars to pay for its trade deficits.

However, should this abuse create doubts about the dollar’s integrity as a sound reserve currency, the U.S. will be forced to either export more to pay for imports, or take on ever-heavier levels of debt.

If these actions cause the dollar to keep falling, other countries will be tempted to devalue their currencies to keep pace and remain competitive.

In fact, we have already seen such “currency wars” erupt among the major fiat currencies of the world.

The US Fed, the ECB, the Bank of England, the Bank of Japan – all have dramatically increased their sovereign money supplies over the past few years – and no end to the money printing remains in sight.

Every government wants the same thing - as much money as it desires to spend without resorting to increased taxes and a weak currency to keep their exporting businesses happy.

These money printing efforts go by fancy names, such as Quantitative Easing, or QE, and knowing how these work helps us understand why they are really traps that are very hard to get out of once begun.

At least without a lot of painful disruptions.

Please join me for the next chapter on Quantitative Easing.

Thank you for listening.

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16 Comments

climber99's picture
climber99
Status: Silver Member (Offline)
Joined: Mar 12 2013
Posts: 176
Inflation adjusted money supply

Are there any graphs of money supply adjusted for inflation out there?

james_knight_chaucer's picture
james_knight_chaucer
Status: Silver Member (Offline)
Joined: Feb 21 2009
Posts: 160
Money supply adjusted for

Money supply adjusted for inflation?

That would be a flat horizontal line, wouldn't it? :)

(I know it wouldn't really be flat as of course you meant price inflation, not the strict definition of the amount of money in existence.)

Merle2's picture
Merle2
Status: Bronze Member (Offline)
Joined: May 4 2014
Posts: 34
The Fed

I've been reading up on the Fed lately, and it really is amazing that we allow it to be a privately owned entity. Yes, most of the Fed profits end up going to the government, but not all of it. And one wonders what manipulations might be done at the Fed to channel money to rich associates or to benefit the member banks. If we are going to have a Fed that is allowed by law to force people to sell their gold coins to it for $22 an ounce, knowing that the price will later jump to $35, how can we allow that to be done by a privately owned company? And if they are going to be allowed to print money out of thin air, and use it to buy that gold, what a charter that company has! And if they are printing money out of thin air, why do they get to keep the money they print? Shouldn't they be giving everything they print to the American people, who gave them that charter?

According to Wikipedea the Fed owns $2.6 trillion in securities, including $1.6 trillion in U. S. Treasury securities, and $900 billion in mortgage backed securities. Not bad at all for a company that manufactures nothing but the money it prints.

Do we even need the Fed? During a time of growth we probably needed some institution to print some money to maintain a growth of the money supply proportional to economic growth. After all, there is far more economic activity in 2014 then there was in 1914, so it makes sense that some increase in money supply might be needed. (But one could also argue that we would have been fine with no increase of the 1914 money supply.)

But now that we reached a point of near zero or even negative growth, it makes no sense to increase the money supply. There may still be functions for an institution with the charter of the Fed to act as a lender of last resort, etc., but couldn't that just be run by the federal government? 

 

crissman's picture
crissman
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Posts: 3
US Gold

Correct me if I am wrong about this, but I think that the US Treasury confiscated privately held gold in 1933, not the Fed, and that putatively at least the Treasury still holds all US government owned gold on its books, although it is physically under the control of the US Army at West Point and Fort Knox.

The Fed owns no gold at all, although it does store gold deposited in its NY vault by, or on behalf of, foreign governments or their central banks. Much of this came from the Treasury in the 1960s when countries like France and Germany demanded gold for their excess dollars as was their right under the Brettonwoods Agreement, and took the form of unsaleable 1930s 90% coin melt, not LBMA good delivery bars that must be at least 99.5% pure gold.

That would be the same stuff that Germany wants 300 odd tonnes of returned over a total of seven years, which they will gradually refine to 99.99% pure gold.  It has never been in Germany, so is not, technically, being 'repatriated'.

Merle2's picture
Merle2
Status: Bronze Member (Offline)
Joined: May 4 2014
Posts: 34
crissman wrote:Correct me if
crissman wrote:

Correct me if I am wrong about this, but I think that the US Treasury confiscated privately held gold in 1933, not the Fed, and that putatively at least the Treasury still holds all US government owned gold on its books,

Check out execuctive order 6102 on the web. That was the order in 1933 for private citizens to give up (most of) their gold, and yes, from what I read on the web, it went to the Fed. The government forced people to sell gold to the Fed (a privately owned institution)  at a price that was far lower than the subsequent price of gold on the free market. That is scary stuff.

According to the Fed website they do not now own gold, so the question of the Fed buying gold is only one of historical significance.

The Fed now owns treasury bonds and mortgage backed securities, which it buys with money it prints out of thin air. That is also outright scary. What exactly are those mortgage backed securities? Does that mean they essentially own the deed for property in America until the mortgages are paid to them? And they got these deeds, simply by printing the money they needed to buy them?

And are we to believe those who tell us this is good for America? Surely they can't be serious.

 

cmartenson's picture
cmartenson
Status: Diamond Member (Offline)
Joined: Jun 7 2007
Posts: 5569
US Gold owned by Federal Reserve
crissman wrote:

Correct me if I am wrong about this, but I think that the US Treasury confiscated privately held gold in 1933, not the Fed, and that putatively at least the Treasury still holds all US government owned gold on its books, although it is physically under the control of the US Army at West Point and Fort Knox.

(...)

Technically, the Fed is not monetizing US debt.  But realistically where the treasury sells a bond on Monday and it ends up on the Fed's books by Tuesday is the exact same thing.   Only a very minor technical step separated the act of Treasury issuance and Fed purchase so this little charade is just an example of slight of hand for the sake of optics so the Fed can technically say they are not monetizing US debt.  

Similarly, the US Treasury technically called in the gold in 1933, but it ended up on the Fed's books almost immediately thereafter for the princely sum of $11 billion.

Here it is on the Fed's balance sheet, exactly like all the other assets including Treasury paper and MBS.

(Source

As far as I am concerned, if it's showing up as an asset on the Fed's balance sheet, the Fed claims to own it.  

Some might quibble that the Fed operates at the whim of the US government, but if you read the Federal Reserve Act carefully, there's no mention at all of the US government owning anything at all should the Fed be dissolved...it all belongs to the member banks that own the stock of the Fed. 

Merle2's picture
Merle2
Status: Bronze Member (Offline)
Joined: May 4 2014
Posts: 34
cmartenson wrote: As far as I
cmartenson wrote:

 

As far as I am concerned, if it's showing up as an asset on the Fed's balance sheet, the Fed claims to own it.  

Some might quibble that the Fed operates at the whim of the US government, but if you read the Federal Reserve Act carefully, there's no mention at all of the US government owning anything at all should the Fed be dissolved...it all belongs to the member banks that own the stock of the Fed. 

Interesting. The Fed's website specifically states, "The Federal Reserve does not own gold". But that is probably just a legal technicality, and in reality they probably do own gold as listed here.

One wonders what other money manipulations are going on behind the scenes at the Fed. The whole thing is so complex and secret that we really don't know what is going on. Is it possible that somehow  someone is actually printing money that secretly ends up in the hands of the powerful that never actually shows up in the Fed's books?

Having the member banks instead of the Federal government own the Fed is just amazing. Shouldn't that be the property of the American people?

 

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
Ferrari's as hard assets

The truth is starting to show up in the mass media;

https://autos.yahoo.com/blogs/motoramic/1962-ferrari-250-gto-sells-for--...

.....That a 1962 GTO would come up for auction at all is a watershed event; the 39 in existence rarely trade hands, and often only in private. Last year, another 250 GTO sold in a private sale for $52 million, well above the previous record-holder for a car sold at auction, Juan Manuel Fangio's Mercedes W196 that sold for $29.6 million.

But the massive valuations for what's considered the pinnacle of Ferrari collecting reflects the rising value for many other antique vehicles. While much of the demand has come from true car enthusiasts, the latest wave has also been driven by investors simply seeking an asset class gaining in value to park their money.

Luckily, TPTB who are invested in maintaining the illusion that is fiat currency's value don't have to worry about suppressing the price of Ferrari's and famous works of art.. they are so rare and so expensive that they will never be a distraction for the 99,99%.  Silver, on the other hand, is very, very different.  A relatively rare metal, with a long, long history of being used as money, it is within reach of everyone as an alternative asset for savings.  Buy an ounce every two weeks instead of your morning coffees, and after one year you have a full roll of 25 Canadian Maple leaf coins (noting that most other Silver coins come in rolls of 20).  

This is why the Silver price must be brutally suppressed, for as long as possible.  Read the highlighted sentence above, and realize that the monetary powers that be do not want the 99% realizing that they have a readily available asset class that is gaining in value that they can park their money in.  No, if the 99% do have any savings, it needs to be in stocks, or housing.  Better yet don't have savings... live large and get a really nice, new car with zero % 60 month financing.  Go ahead, you deserve it!  

For now, Silver is in fact readily accessible.  There will come a day though when it is not.. because there simply isn't that much of it.  If price were allowed to rise dramatically from here, the momentum following crowd would jump in, and inventories of physical would rapidly deplete.  News articles about lines out the door at local coin shops would help fan the flames of the craze.  As so, I am convinced the suppression must and will remain until it breaks completely.  When it does break, there will be no warning, and you will probably miss your chance to grab a chair if you are not watching very closely.  If you want to take your chances with grabbing phys in the last minutes, I strongly suggest using a supplier that only sells what they have in inventory, like Texas Precious Metals;

    https://www.texmetals.com/

You will also be able to use this website to assess real time availability, because when the break between physical and paper finally occurs, you will see more and more of the items listed as, "out of stock" on this website.  For now, the fact that you can buy a mint-sealed "monster box" of 500 specialty (read: hard to counterfeit) coins like these Perth Mint Saltwater Croc's for $11K is just astounding to me, given the economic and geopolitical state of the world.

   https://www.texmetals.com/2014-perth-mint-silver-saltwater-crocodile-mon...       

 

 

Merle2's picture
Merle2
Status: Bronze Member (Offline)
Joined: May 4 2014
Posts: 34
cmartenson wrote: But
cmartenson wrote:

But realistically where the treasury sells a bond on Monday and it ends up on the Fed's books by Tuesday is the exact same thing.   Only a very minor technical step separated the act of Treasury issuance and Fed purchase so this little charade is just an example of slight of hand for the sake of optics so the Fed can technically say they are not monetizing US debt.   

First the Fed prints money out of thin air. If you and I did that, we would be in jail for counterfeiting.

Next the Fed does a little money handling charade by which they get rid of the counterfeit money and end up indirectly with real assets worth real money. If you and I did that, we would be in jail for money laundering.

Next the Fed keeps those assets as Fed property that is owned by the banks, but pays off some money as profits that go to the government. The government accepts these payments and overlooks the other activities of the Fed. If you and I did that, we would be in jail for bribery.

What a racket!

 

Tycer's picture
Tycer
Status: Platinum Member (Offline)
Joined: Apr 26 2009
Posts: 601
Merle2 wrote:Having the
Merle2 wrote:

Having the member banks instead of the Federal government own the Fed is just amazing. Shouldn't that be the property of the American people?

Find the video "The Money Masters" or read the book The Creature From Jekyll Island.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Thats Despicable.

Thanks Jim,

I needed a confidence booster. I am into this silver thingy with both boots, knee high. But I must confess to trepidation. There is counter-party risk. Consider your friendly neighborhood burglar and Big Brother Government. Can I really stroll into the Mint and buy an inconspicuous amount of silver without being photographed from every direction? 

A plan has been formulated. It involves pitting my personal burglar against BG. An interesting threesome. Perhaps wee timorous beastie can win after all. That's despicable.

I found it interesting that after visiting the Perth Mint website a few times, Youtube started offering me videos of Perth Mint.

Still, all things considered and notwithstanding Nicolle Fosses warning against seeking refuge in PM's*, the traditional cost of a three bedroom house is historically 16 kg silver. It is worth a shot.

* Nicolle says that when this Money stuff goes up in smoke, there will be no-one around with money to buy the silver and therefore it's value will plunge in the short term.

I am considering a scenario where I offer silver as a straight swap for the things I need. I wonder how I would stand legally? Can the government legislate against barter?

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
Nicolle can't do math

* Nicolle says that when this Money stuff goes up in smoke, there will be no-one around with money to buy the silver and therefore it's value will plunge in the short term.

Let's just think about the amount of "money" in the sovereign bond markets;

Global bond market:  > $100 Trillion 

Let's say there is a year's supply of Silver available for sale (there isn't):  1000M ounces, or 1B ounces, or $20 Billion worth at current prices.  

So in our thought experiment, if bond investors start looking for the exits, and some of them come over to PM's... there is presently $1 worth of Silver for every $5000 in bond funds.  Nicole's reasoning is absurd.  Silver price may go down, but it will only be very temporary as the leveraged paper market implodes.... the physical on the shelves at coin dealers will be emptied faster than the grocery store shelves on the eve of a hurricane.  The amount of Silver is tiny compared to all the money... the money can die a deflationary death, and there will still be plenty left to buy the small amount of phys that is for sale.  Once the dust settles, Silver will be revalued at a much higher level.             

Bankers Slave's picture
Bankers Slave
Status: Platinum Member (Offline)
Joined: Jul 26 2012
Posts: 519
I think the

ptb have that one sewn up unless you can unload silver to an unsuspecting buyer for barterable items. But you do not sound like the kind of man that would do that!

You only have equitable title to the silver, the government has legal title and you need a receipt proving that  you bought it in the first place (if it is a significant amount) so that they can extort their portion of the proceeds from the correctly named entity.

The equitable title would need to change hands legally (officially recorded) if there is a sale for fiat. Apart from that, barter away.

Its all to do with the prevention of laundering money you know, guilty until proven innocent and all that government crap.

 

climber99's picture
climber99
Status: Silver Member (Offline)
Joined: Mar 12 2013
Posts: 176
Yep, you're right

Yep, James, you're right of course.  What was I thinking?    Inflation is the growth of the money supply/velocity so money supply adjusted for inflation would, by definition, be flat. Sorry. I shall think more  before I post.

Oscar Mayer's picture
Oscar Mayer
Status: Member (Offline)
Joined: Aug 18 2014
Posts: 3
You are confused

Currently, there are only $1.24 Trillion Federal Reserve Notes in circulation around the globe.  That is all the legal tender, fiat, money, dollars in circulation, all the rest is credit.  Credit has no legal standing as a currency, none what so ever (not even the credit the Fed creates), but all debts incurred through its use as such, are legally binding.  All credit as currency in circulation is someone else's debt, a promise to pay a Federal Reserve Note.  *Worse yet, it is an assumption that a Federal Reserve Note will be paid.

The 'money supply' did not shrink during the Great Depression, it was a cascading collapse of credit as currency.  Same thing happened in 2008/09.  Credit went "POOF!".  What was left in its stead, was debt.

The moral of the story is this: Stop calling credit 'money', 'fiat', 'dollars' or 'cash', it is none of those things, it is debt.

Oscar Mayer's picture
Oscar Mayer
Status: Member (Offline)
Joined: Aug 18 2014
Posts: 3
Credit as currency
All money is currency but not all currency is money 
 
 
Fiat Currency:
Section 31 U.S.C. 5103, defines legal tender as "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."
 
Federal Reserve notes are legal tender currency notes. The twelve Federal Reserve Banks issue them into circulation pursuant to the Federal Reserve Act of 1913. A commercial bank belonging to the Federal Reserve System can obtain Federal Reserve notes from the Federal Reserve Bank in its district whenever it wishes. It must pay for them in full, dollar for dollar, by drawing down its account with its district Federal Reserve Bank
 
Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them.
 
By law, Federal Reserve Notes (FRNs) are money, a tightly controlled, tangible product with severe penalties for their unauthorized reproduction and if the Federal Reserve's (Fed) balance sheet is to be believed, there are about $1,024 billion accounted FRNs in circulation worldwide, the majority of which are held overseas.
 
FRN's (a.k.a. Dollars) are the primary unit of account by which all public/private debt can be extinguished.  They are also a medium of exchange and are assumed to be a store of wealth.
 
Fractional Reserve Currency:
Commercial banks do not create money as defined by law.  They create a "money substitute" a.k.a. "book keeping money", a.k.a. "electronic digits", a.k.a. "Credit", a derivative of the primary money, Federal Reserve Notes, that is measured in dollars.  This practice is known as Fractional Reserve Banking (a practice that has been destroying economies, countries and lives for over 600 years).  Fractionally Reserved means a portion of demand deposits are backed by bank held cash.  Currently the reserve requirement is 3% of demand deposits.
 
Credit dollars are a debt generated currency that is denominated by a unit of account (FRNs). Unlike money (by a strict definition), credit itself cannot act as a unit of account. However, many forms of credit can readily act as a medium of exchange. As such, various forms of credit are frequently referred to as money and are included in estimates of the money supply.
 
Credit as currency is, quite simply, a promise to pay FRN's (dollars) upon demand as well as over time.  The everyday physical representation of that promise is the debit/credit card, which is the hallmark of modern computerized, fractionalized, debt driven commercial/investment banking.  Literally billions of dollars' worth of transactions are conducted in credit currency each and every day without any thought given to the un-fulfill-able promise that backs its use or the inevitable consequences of its failure.
 
Our economy is totally dependent upon the continuing flow of digits, which necessitates the continued expansion of public/private debt as well as the continued expansion of assets and asset values, for its survival.  In other words, it's a debt based pyramid scheme.
 
Unlike FRNs, which are an obligation of the government, credit currency is not, thus the need for the FDIC, which is as "Federal" as the Federal Reserve, a congressionally chartered consortium of private banks, the FDIC is a chartered subsidiary of the Federal Reserve that is funded primarily by member banks with allowance to borrow from the Treasury.  The objective of the FDIC is to re-digitize credited deposits (positive credit) that have reverted to their natural state of bank debt upon its failure.  In other words; the FDIC's function is to keep the illusion of "credit is money", and the fractionally reserved banking system that issues and administers this "money substitute", alive.  
 
Credit currency has no legal standing as money but all debts incurred through its use as such are legally binding.

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