*****True Cause Of The Great Depression*****

Below is an extract from the transcript of the hearings before the Committee on Banking and Currency about the Gold Reserve Act of 1934.

(emphasis mine) [my comment]

MONETARY DEMAND FOR GOLD

There appears to be no escape from the conclusion that prices in pro war gold currencies cannot be expected to be higher than pre-war unless this situation is brought about by some unusual and spectacular decrease in the demand for monetary gold relative to business. This is the real problem on the gold side of the price question.

It is, of course, possible that some important countries will definitely discontinue the use of gold as money and definitely discontinue their efforts to maintain gold reserves. This might be done by the remonetization of silver or the adoption of a paper standard [the fiat dollar...]. While there is discussion of continuing off-gold, there is as yet no indication of any discontinuance of the demand for gold by any important country. In fact, gold is the most popular subject of discussion in nearly every country.

It is also proposed that coinage be discontinued and that gold be kept in bars that are so costly as to make it difficult to own one, and that these bars be used only in international transactions. Discontinuance of coinage is probably desirable and provision should be made for preventing a run on the gold supply, but too much should not be expected from this. Gold must be released for industrial uses and it will be difficult to have all the second-hand gold returned to the mint, difficult to compel the turning in of all new gold, difficult to prevent persons from following the age-old tradition of purchasing jewelry and plate as a storehouse of wealth. Nations and individuals desire some concentrated nonperishable product which they can hold. It is true that this desire is less prevalent in America, but by this fact there is less to be gained by trying to overcome it. In the more prosperous countries, savings are more likely to be invested in homes, savings banks, bonds, and life insurance; but a large part of the world's population still desires to store its savings in precious metals. [important point >>] It is probable that after such a period of monetary chaos as the world has recently experienced, nations and individuals will bid more vigorously for the privilege of having gold. At the present time, the world looks on France and the United States as the champion hoarders.

Nations have experienced war as well as monetary chaos. They found their metallic reserves to be of great value for war purposes.
It is highly probable that the desire to build up these reserves will continue to be very keen. There are many factors tending to cause inefficiency in the use of gold. Many communities are without banks. It will take time to establish these. Many individuals have lost their savings in banks, and may prefer to be their own bankers. Charges for the use of checks and discontinuance of the payment of interest on deposits check the growth of the use of banks. For some years, bankers will favor the maintenance of high bank reserves. All these things point to a probable check in the former rate of expansion of bank credit per dollar of gold.

For many years before the war there was a steady growth of bank credit per dollar of gold in the United States and a steady decline in the monetary circulation per dollar of gold. The sum of the two showed a gradual increase. For the 5 years preceding the establishment of the Federal Reserve System, monetary circulation and bank deposits per dollar of gold averaged $11.01. For the 5 years 1923 to 1927, the average was $11.56. In 1920, the overexpansion of credit brought the figure to $14.92 and in 1929 it reached $13.39. Apparently, it is unsafe to build up too great a pyramid of credit. Credit as well as paper money may be fiat.

The arguments that are now used to indicate that the gold supply is sufficient to restore the price level are the same arguments that were used to indicate that prices in gold would not fall.

WHY WERE PRICES HIGH?

We find no statistical basis in efficiency in the use of gold or in the world supply of gold to call for prices above pre-war in the period from 1914 to 1929. Why then were prices so high? Apparently, the reason for this was low demand for gold. On this point, there is an interesting historical parallel.

When the French Revolution broke out. France drifted into paper inflation. The wild, inflation of this period frequently has been described. The influence on prices in other countries is less well known. Being no longer in demand for monetary uses, both gold and silver lost value and drifted elsewhere. Prices on a metallic basis rose 46 percent from 1790 to 1795 in the United States and rose 34 percent in England. Ultimately a large part of Europe was involved, and prices in the United States and England rose still higher.

The United States was off the metallic standard for a short period during the War of 1812, but the currency returned to par in March 1817. Prices remained more than 50 percent above the level of 1790 until England attempted to return to the gold standard, a process which was completed in 1821. Prices in both countries fell precipitously nearly to the price level of 1790.

In the similar situation this time, the continent of Europe discontinue bidding actively for gold [during WWI], and prices of commodities in the United States more than doubled. They remained at 40 to 50 percent above pre-war until England, France, and other countries returned to the gold standard.

There is one significant difference. In the Napoleonic war period, Europe used both gold and silver as money, and prices in neutral countries in both gold and silver rose.

In the World War period, only gold-using countries were involved and only gold-using countries had inflation and deflation. Prices in China [the only country in the world on the silver standard] continued their long-time gradual upward course. They showed no indication of the inflation of 1920. They rose rapidly from 1922 to 1931. Since that time, they have fallen nearly to the 1926 level. The writers believe that the major factor in the rise in prices was the reduced demand for monetary gold and that the major factor in the decline in prices was the return of demand.

Merely being off the gold standard does not necessarily mean low demand. Thirty-four countries are off the go ld standard now, but most of them are vigorous bidders for gold. Europe was not actively bidding for gold during the war period.

The writers have anticipated that gold would acquire more than its pre-war value with the attempts to return to the gold standard, and for 15 years have been stating the conclusion that prices would return to pre-war or lower. The arguments now being presented to indicate that a given quantity of gold with a given volume of business can support a price level 50 percent higher than the same gold would have supported before the war, are the same arguments that were used to indicate that prices would not fall. We think them equally unsound in both cases.

The conclusion so frequently stated in the past we believe still holds—that provided the former gold-using world returns to the gold standard, prices expressed in any pre-war gold currency will be below pre-war for the next decade or longer, unless unforeseen phenomenal gold discoveries are made.

...
PRICES OF GOLD

The prices of gold in various countries are shown in table 6, which is reproduced at the beginning of this hearing. Throughout the world there is a strong movement to raise the price of gold. A number of the countries off gold have taken definite steps to raise its price.

Thirty-four countries are now off gold and only two are attempting to maintain their pre-war gold currencies.
A world-wide movement of this sort cannot be attributed to the acts of any one country. Such a movement must have back of it a driving force which is beyond the power of any nation to stop. The United States was the last of the 34 countries to succumb to this force.

The world gold situation did not arise from a change in the world gold supply relative to world business, but resulted from a change in the world price level in gold compared with the world gold supply. It might be expressed as "too much price " rather than " too little gold." The only possible corrections are to reduce the whole price and debt structure or reduce the gold content of gold currencies. Apparently the gold-using world must follow the latter procedure.

THE FUTURE VALUE OF GOLD

Gold, like every other commodity, has always been unstable in value. The most stable period in the English experience was from 1840 to 1914, but violent fluctuations occurred during this period. From 1840 to 1849 the purchasing power of gold for commodities in England rose 38 percent. From 1849 to 1873 its purchasing power fell 33 percent. From 1873 to 1896 its purchasing power rose 80 percent. From 1896 to 1914 it fell 29 percent.

...
It is to be expected that gold will continue to have a high value for some years. Whether or not this forecast continues to be true, it is practically certain that its value will fluctuate violently. The best that can be expected from the various control measures is to prevent the fluctuation from being as erratic as they might otherwise be.

With 34 countries off gold, and several others that are likely to go off with the scramble to acquire gold; with the possibilities of sudden movement of gold from one country to another; with the great development of foreign investments which at any time may be shifted; with the shift of some of the densely populated countries of Europe from a creditor to a debtor position; and with war uncertainties and desires for gold for military purposes, decided fluctuations in the value of gold are to be expected; and it is to be expected that these fluctuations will be around a high value.

Some Americans think that being on gold regardless of the rate is all that is required. They seem to have forgotten our experience from 1929 to February 1933. To set any figure that is to hold for a generation certainly involves a considerable element of risk, both to our prosperity and to the future of the gold standard. The gold standard might be unable to survive another unsuccessful world attempt to reestablish it [it didn't]. A proposal to provide some method for 10 Prices of gold for the United States are London prices in dollars because these are the effective prices. They apply when commodities are purchased or gold. making future necessary changes in the price of gold without the necessity of long years of economic distress and political agitation would seem to be a conservative proposal. If the gold standard is to have a fair chance for survival, it requires some kind of a safety valve.

The Global Times reports about hard lessons from China's silver standard.

Hard lessons from China's silver standard
Source: Caijing.com.cn
[08:30 July 15 2009]

...

In 1867, an international monetary conference in Paris included a push for a shift from bimetallism (gold-silver) toward gold as the international standard. This policy was promoted by Britain and France.
And by 1910, every major country was on gold -- except China. As countries went to a gold standard, silver prices began to depreciate. This devaluation actually gave China an export advantage. But by borrowing in sterling silver or gold, China suffered because silver's value continued to fall against gold. Under these circumstances, the country had to export more to pay debt.

Between 1890 and 1930, China had a current account surplus in terms of an inflow of silver, as silver devalued against gold.
This led to the industrialization of the Yangtze River Delta. During this period, domestic and international banks began to flourish by financing trade as well as trading in silver. When there was an export surplus and silver inflow, banks could lend to finance trade as well as real estate, thus expanding the money supply.

However, in times of silver outflow, banks had to contract credit, putting real estate prices under pressure. Bank credit multipliers depended on the state of global silver prices. In other words, Chinese monetary policy was at the mercy of international forces, beyond the control of the government, whose leaders did not understand modern monetary policy.

From 1929-'31, while the rest of the world was suffering from the Great Depression, China initially escaped deflation by using the silver standard.
Other countries went (wrongly) [tried to go] back to the gold standard. After September 1931, when everyone abandoned the gold standard and devalued their currencies, China suffered for remaining on the silver standard, which rose sharply against other currencies. The result was a sharp net outflow of silver, a trade deficit and domestic deflation.

The American Silver Purchase Act was implemented in 1934 to protect domestic U.S. silver prices. This worsened conditions for China. The silver outflow meant banks had to liquidate their loans to finance the outflow. This "deleveraging" of paper credit due to an outflow exacerbated the crisis, in exactly the way the world suffers tod ay from the current crisis. Shanghai suffered a real estate crisis and, consequently, a banking crisis.

In other words, by sticking to silver, China suffered more than necessary from the Great Depression. This was because the international supply and demand of silver was beyond the control of the Chinese government, and its domestic economic growth and investment were completely at the mercy of international silver prices.

After the banking crisis of 1934, China's Nationalist government had no alternative but to reform the currency. On November 4, 1935, China abandoned the silver standard and created a central bank.
But it did not link the yuan to the British pound, U.S. dollar or yen (the currencies of the most important powers in Asia at that time). More importantly, China did not introduce exchange controls. This was probably a mistake, because once war with Japan broke out and fiscal expenditures got out of control, currency stability could not be maintained, and inflation soared, ultimately destroying the government's credibility.

My reaction:

1) This shows the true cause of the great depression: England, France, and other countries trying to returned to the gold standard boosted value of gold, creating deflation in gold standard countries.


2) Debt deflation (the most common explanation for what happened in the 1930s) was only a secondary, less important, cause of the Great Depression. (note: of course there were a number of other lessor factors which helped create the Great Depression)

3) This also shows the major problem with the gold standard: countries establishing/leaving gold standard create deflation/inflation in other countries on the gold standard.

4) After a period of monetary chaos (and we are about to enter the mother of all periods of monetary chaos), nations and individuals will bid more vigorously for the privilege of having gold.

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41 Responses to *****True Cause Of The Great Depression*****

  1. Anonymous says:

    Say Eric...

    How about bring some more news in from china, japan, russia and other nations...

    Would be nice to see where they are at in terms of supporting the dollar today vs yesterday...

    Can never get enough news on the dollar crash that will be...

    Though you gold bugs might strike it good if the talks with iran go all to hell...

    heheh...

  2. Anonymous says:

    Cause of the great depression was a

    A: Too much bad debt caused by the federal reserve and large banks participating in a fractional reserve lending scam that led to a boom. In these scams, the bank loans out deposits and keeps a fraction of it (fractional reserve lending) to cover requests. The loan eventually comes back as a deposit which they loan out again. a 7% fractional reserve (Keep 7% of every deposit on hand) results in 11X the debt, 9X the deposits, and the bank collecting 180% of the original capital through interest if the annual rate is 3%. When they loan out the depositors money as second time, they are not loaning money; they are loaning banknotes.

    B: There wasn't enough money, due to A, to pay off all the debt at the onset of the great depression.

    C: The igniting event was when banksters took their money out of the system (read the creature from jekyl island). This caused a crash where orders plummeted and investor capital dried up.

    D: People began paying back their loans and stopped taking them out. Additionally, credit dried up.

    E: This caused a reduction in Said bankers forclosed on property and shut down factories. This creates resource scarcity and reduces expenditures further since people don't know when things will get better.

    F: Everyone played a game of musical chairs for the next decade trying to get out from under the debt. The only way they can do this is by the bankers buying their goods or loaning them money.

    So in short, there was more debt than there was money to pay it off; the bankers caused a crash, which caused a cascading economic failure, which caused forclosures, which shut down production, which gave them control over everything, literally. The Federal Government went bankrupt in 1933 and has been operated in name only ever since.

  3. Anonymous says:

    I have to disagree with you as well Eric and agree with the above poster. Since it is impossible to 'print' gold it is not possible to loan non-existent money there by creating more debt then there exists actual money to pay off said debt. This post is up there for inaccuracy like your previous claim the Federal Reserve is a stage prop and the Treasury is in charge. You've got the cart before the horse.

  4. Pliny-Cato says:

    Gt.report but clarify dates-
    when were countries on/ off
    gold?
    E.g. Western nations
    went off gold in ww1, then
    returned (Keynes: why did UK
    go back on gold after ww1?),
    off sept. 1931, then on
    until after ww2 c.1950, and
    then off (c. 1971?)

  5. Numonic says:

    3rd Anonymous you make no sense because 2nd Anonymous is agreeing with Eric and you are disagreeing with both of them and are wrong.

  6. Numonic says:

    And let me break it down for you. For instance when Eric says "...boosted value of gold, creating deflation in gold standard countries." what technically happened was that the market value of gold rose while the face value of the gold stayed the same. So for instance the market value of gold went above $20/ounce while the largest denominated currency was 1 ounce that had $20 inscribed on it. That meant that the melt value of the currency was worth more than the currency. This is bad news for a minting company because a minting company survives off of it's minting costs other known as Seigniorage. So what did the govt. do to try to fix this, it increased the face value denomination of it's one ounce gold coin. Unfortunately, the market price continued to rise higher and instead of chasing the market price of gold and creating a larger denominated one ounce gold coin, they broke the tie to the dollar and gold all together. We used to be on a gold standard, now we are on a cotton-linen and copper-nickel zinc standard. Also our promises used to be on paper during the gold standard, today it's electronic. So allot more promises can be and have been created than when we used paper as promises. On top of that today the promises are limitless. Infinite amounts of electronic accounts can be created but only so many physical paper certificates can be created due to the finite tangible asset used to mint/produce the paper certificates. So even though the payment of today(paper) is allot easier to create than the payment during the gold standard(gold), the promises of today(electronic accounts) are allot more easier to create than the promises during the gold standard(paper). Because the promises of today are so easy to create and limitless and the fact that there's still(and IMO will always be) those minor transactions that use the payment(physical gold/Federal Reserve Note) instead of the promises(Gold certificate/electronic transaction i.e. debit) default is very imminent.

  7. Numonic says:

    I was having an email with Jason Hommel of silverstockreport.com recently about people making the mistake of comparing gold/silver certificates to Federal Reserve Notes when Gold/Silver certificates should be compared with credit/debt cards while physical gold coins should be compared with Federal Reserve Notes. Because the promise is not the Federal Reserve Note, the promise is the debit card. The Federal Reserve Note is the payment. Here is part of the email I wrote...

    "Prices will be rising not because people will be buying things like crazy nor because the govt. will be printing like crazy but because there will be true defaults like crazy which will end the Federal Reserves seigniorage which overvalues it's 1 gram of cotton and linen piece of paper. See the dollar's value is an illusion. If you really want to see the true value of the dollar compared to gold you have to take the market price of 1 gram of cotton and linen and compare it to the market price of 1 ounce of gold. An astronomical difference. And that doesn't even count the inevitable rise in the value of gold compared to cotton and linen that will come with the increase in demand when the smoke clears and the true value of the dollar is revealed. We will see the price of everything rise but the rise in price of gold and silver will be so great that even though the price of everything will be rising in nominal(dollar) terms, the price of everything will be dropping in real terms against gold and silver.

    Remember i said the dollar can effect it's loss in value in two ways. 1 way is an over expansion of credit(in other words a huge wave of spending and buying up tangibles) and the 2nd way is defaults, and I'm not talking about the bankruptcy protection, FDIC bailout "defaults" we have but defaults in the true sense of the word. I'm not saying that futher loss of value in the dollar can't come from an expansion of credit or spending by the public because there is nothing physically halting banks from typing electronic digits on a computer and transferring it to another computer as money but I believe what is more imminent is defaults. Defaults are more imminent today than an expansion of credit and/or spending. It's almost like I'm taking a deflationary stance but instead I'm ultra deflationary in the sense that I expect more than just credit to contract but I expect to see true defaults.

    Okay I'm a weirdo for doing this but as I was re-reading this current email I noticed that I misspelled "deflationary" as "defaltionary". I corrected it but the weird thing is i was right in typing "defaltionary" because that's what I'm getting at. I expect massive defaults. So you can say I'm taking an ultra "defaultionary" stance. I think it's weird that it came out that way. Anyway back to what I was saying.

    The combination of contracting credit and preventing defaults with bailouts is what is keeping the dollar from loosing tremendous value. Had we been expanding credit while all these banking problems were going on, the dollar would be loosing allot more value than it currently is loosing. The banks are contracting credit because they know this. They also know that expanding credit is giving more people a right to withdraw the already stretched thin Federal Reserve Note that they are lacking in their vaults. This would be putting more overwhelming pressure on the Fed in it's attempts to stop defaults and would more than likely cause the Fed to fail in stopping defaults. That is why they are contracting credit. But regaurdless defaults are imminent. And defaults will end the Federal Reserve's seigniorage and bring it's 1 gram of cotton and linen down to it's market value."

  8. intropy says:

    Eric,

    High prices up to 1929 were caused by inflationary policy, not by low demand for gold. As Anonymous #2 correctly points out (although a few of his points are incorrect or at least awkwardly worded), the Federal Reserve Act of 1913 and fractional reserve banking were the foundation of this inflation. Please read Murray N. Rothbard's America's Great Depression, Part II which discusses this exact topic and addresses the influx of gold.

    The subsequent intervention and attempts to reinflate this boom made the Depression "Great". Although the situation in Europe contributed, you do not need to look further than the coast for the cause of America's trouble.

  9. Natasa says:

    I think that “second” Anon comment is good and play great together with Noumonic explanations.

    Please correct me if I am wrong.

    ***********
    The “second” Anon said:
    “…They are not loaning money; they are loaning banknotes.”

    “ … The igniting event was when banksters took their money out of the system…”

    “…The only way they can do this is by the bankers buying their goods or loaning them money…”

    Simlpe:
    1. At this time “the money” (USD notes) - WAS connected to the gold.
    2. Banksters took out “the money” from the system
    3. It caused “D” – because ALL EXISTED “the money” (or gold) was in their hands already.

    1934 – US government broke the tie to “REAL” World i.e. to the – gold.
    USD – depreciated.
    Deflation – exterminated.

    *******************
    Numonic said:
    “… The promise is not the Federal Reserve Note, the promise is the debit card. The Federal Reserve Note is the payment….”

    “… We used to be on a gold standard, now we are on a cotton-linen and copper-nickel zinc standard…”

    “…Had we been expanding credit while all these banking problems were going on, the dollar would be loosing allot more value than it currently is loosing….”

    “…But regaurdless defaults are imminent. And defaults will end the Federal Reserve's seigniorage and bring it's 1 gram of cotton and linen down to it's market value…”

    Noumonic discussion is not so “simple” for me, but I understand so:
    1. Today just “the currency” is the USD (1 gram of cotton and linen) – but REAL money is still gold.
    2. You do not believe that FED has any chance to print enough USD (1 gram of cotton and linen) – so it will be impossible to stop massive bank defaults.
    3. The massive bank defaults, DESPITE massive FED printing of “1 gram of cotton and linen” – will neither cause monetary “hyperinflation” nor “deflation”. It will cause – CURRENCY DESTRUCTION (i.e. “1 gram of cotton and linen” = to the appropriate amount of “real money” (gold))…
    4. With other words, today the monetary “deflation” never happened, and “hyperinflation” will never occur. It will by “hyper-deflation” in value of REAL money (gold) and “currency” (USD) – will be worthless in extremely short time.

    *************************
    Noumonic, am I right?
    If I understand you correct (perhaps not) - When you think it will happened?

    Thanks
    Best regards
    Natasa

  10. Dhalsim says:

    Eric has learned me a lot, so I don't agree with you at all Snake. Market Skeptics is one of the best blogs on economy I know. Eric both has great knowledge and is very intelligent.

  11. Anonymous says:

    Well one thing is for sure...

    No dollar collapse this year...

    And the chances on it happening next year...

    40/60...

    Likely not to happen, but I rate it at 40% because one never knows what will happen with the x-factors...

  12. stibot says:

    Thank you for important message LOLAnon. It was very helpful for me, i suppose for everyone..

    There is some sentence written by FOFOA which i consider interesting and would like to quote here:

    Gold is pretty widely distributed right now. Especially outside of the US. They are selling it by the GRAM now out of vending machines! And you can buy it from your teller at the bank! Tax Free! And that is what the largest holders of private gold want. They WANT the people to hold and value gold. That will give them (the giants) some serious purchasing power! Gold would not be valuable if one person owned all of it. It is most valuable in its widest distribution possible, the wealth reserve, which requires a much higher valuation than it has right now. A higher valuation denominated in hard assets, not just fiat currencies!

  13. Anonymous says:

    LOL stibot...

    So what they sell gold by the gram now...

    News Flash!

    They been selling cocaine by the gram for decades now...

    And marijuana for the last ten years...

    LOL!

  14. Dread says:

    Ok, causes of the Great Depression (1929-1939). First off, kudos to intropy. Rothbard's America's Great Depression, is the definitive study IMVHO. It honestly has no equal to date.

    I would point people to Meltdown, for the current crisis, but then again, Woods will point you back to Rothbard, as that was one of his chief instructors.

    Eric, you have been speaking much on China. Curious if you are familiar with Krassimir Petrov's, China's Great Depression? It was written back in 2004, and oh...... Petrov begins by giving credit to Rothbard. Need I say more?

    Understand, that this is 2004. Petrov also gives credit to the great Dr. Marc Faber. He, just as Faber, believes (like I think you stated sometime before), that hyperinflation will begin in China, and that will be transmuted to the rest of the world (via its exports).

    To conclude this discussion (at least for now), this exchange with Glenn Beck and Ron Paul is most enlightening. Beck makes some most pointed questions, and Paul gives some most interesting (dare I say to the "unwashed," terrifying) answers.

    I believe in the most, in that as pertains to Iran, and that China has a very vested interest in Iran. In a nutshell, Paul says that attack on Iran is inevitable. Not if, but when. Together with that, $200/barrel of oil, and dollar (FRN) crash shortly after that. Subsequently followed by the defacto 10th Amendment secession of the 50 states (at least most of them) from D.C. Interesting times ahead. Prepare wisely...

  15. Anonymous says:

    As a matter of fact...

    I think the dollar will be rising over all, and well into next year...

    Gold should maintain a base value of 900, but then again it could drop below that...

    I believe that it should say above 900 because of since the dollar had risen over a point (between Wednesday and Friday morning) gold was very resilient...

    In the past gold would have dropped 35-50 points on such action from the dollar, but this time it only dropped like 11 points...

  16. Numonic says:

    Natasa I think you pretty much get it.

    As far as when it will happen is hard to say but it will happen fairly quickly. I don't mean it will happen soon(because I don't know when it will happen), I'm just saying when it does happen, it won't take long for the dollar to loose tremendous value. So you may see the dollar rally one day and the next day the $hit can hit the fan and the dollar looses an unprecedented amount of value. That's how it will happen. It won't be a gradual decline of value, it will be a crash. Crashes happen instantaneously. One second your car is in mint condition, the next it is totaled. This is how it will happen. You won't see it coming by looking at the current value of the dollar, that's like looking at the car before the accident and saying "look how mint and put together that car is, how can anyone think that it will be totaled anytime soon" while at the same time the car is driving 200 mph and headed toward a brick wall. People are not noticing the brick wall. You know what the brick wall is? It's reserve ratio's at 0 for so long, unprecedented borrowing, FDIC funds running low and entering deficit levels, all of these are telling us default is imminent regardless of what the govt. says it's going to do. It doesn't matter what they say they're going to do, it only matters what is being done. And look at what is being done, reserve ratio's, FDIC funds and unprecedented borrowing. The Federal Reserve Note's overvalued state is coming to an end.

    Here's another part of the email with Jason Hommel. I said...

    "...when seigniorage ends, it happens quickly. Zimbabwe and Weimar Germany are proof of the speed the seigniorage can and will end. Proof that we are in fact experiencing the end of the Federal Reserve's seigniorage is in the fact that reserve ratios for some time recently have been zero, meaning they couldn't print fast enough to keep reserves in the banks and banks were forced to take from reserves to prevent defaults and also the fact that we are borrowing at unprecedented rates and also FDICs depleted reserves. We are so close to default and the end of the Federal Reserve's seigniorage. It will come very unexpectedly for allot of people that are unaware of these signs. In a day prices will rise 100% and go higher from there. And all that will be happening is not that the dollar will be loosing value but that it will be returning to it's market value from it's highly overvalued state."

  17. Numonic says:

    James I never said the true defaults will be in October but i'm also not saying that they won't. I don't know when the true defaults will happen but from the facts and proof I pointed out above true defaults are imminent.

    Also James you are missing the point. It's not legislation that is preventing them from stopping true defaults, it's the fact that they can't print fast enough. That legislation BS is just jawboning to make it seem as if legislation is in control but it's not. Physics is in control and it is physically impossible for them to print fast enough to stop defaults. The evidence is in your face. Look at reserve ratio's, look at FDICs fund balance, look at the unprecedented borrowing going on. The $hit is about to hit the fan, I don't know when all I can say is it's close.

  18. Numonic says:

    I can't understand how people think that printing more Federal Reserve Notes will be the cause of the devaluation of the Federal Reserve Notes as if the Federal Reserve Notes are made of some rare commodity only the Federal Reserve has access to producing. The Federal Reserve Note is already worthless because of what it is made of(cotton-linen). The supply of Federal Reserve Notes is nothing compared to the supply of cotton-linen on earth. So creating more Federal Reserve Notes isn't really changing anything especially since it's taking from supply that already exists and just reforming it. The FRNs are very overvalued. As much as people like to talk about how much value the dollar has lost over the years, it's peanuts compared to how overvalued the dollar is. But I do attribute the loss in value of the dollar mostly to the expansion of the money supply which was mostly the electronic money and not the physical(base) money. The circulation of physical cash is nothing compared to the circulation of electronic money. But one thing to understand is that there are 2 ways the dollar effects it's loss in value. 1 way is expanding the money supply too much and 2 is defaulting. The way people think of the dollar and the way the dollar is valued is as if the dollar is an element of it's own created only by the Federal Reserve. People worry about creating too many Federal Reserve Notes as if the Federal Reserve Note isn't just a piece of cotton and linen. I don't see people up in arms about the great supply of cotton and linen but they're against overproducing Federal Reserve Notes. As if the Federal Reserve Note is an element of it's own. Now I'm not saying people shouldn't be concerned about the expansion of the money supply, I'm just saying people need to recognize seigniorage.

  19. dashxdr says:

    You know, I for one am a bit tired of Numonic's rambling comments actually ending up being longer than the article itself...

  20. Anonymous says:

    @dashxdr

    LOL!

    It's not just the length, but that his logic is flawed...

    I mean really flawed...

    However, fooser77 brought some cool things to the table...

  21. Numonic says:

    Anonymous what part of what I said in this blog is flawed?

    dashxdr, I'm sorry but I can't water down what I have to say.

  22. dashxdr says:

    I can't water down what I have to say.

    You've got it backwards, what you are writing is extremely watered down.

    Why use 1 word when you can use 25?

  23. dashxdr says:

    BTW I'd like to comment on the specific assertion Numonic makes as regards the innate valuelessness of paper money.

    He claims the Fed printing money (monetizing debt, stimulus, etc) cannot devalue the dollar because the dollar, being paper, is already worthless.

    This is ridiculous. The dollar's value is completely based on faith. It does have value even though it is paper, because people believe and behave as if it has value. As long as people are willing to exchange things of real value for paper dollars, the dollars have value.

    The Fed going crazy with introducing new dollars will merely destroy everyone's faith in the value of the dollar. And when that faith goes away, the dollars really will have no value.

  24. Bro,

    It's been a few days since your last post.

    Are you OK.

    We miss you...

  25. I just realized, you have posted within the last 3 days. Ignore previus comment by me.

  26. Anonymous says:

    ERIC'S FATHER HAS JUST PASSED AWAY. BE GENTLE WITH HIM.

  27. Numonic says:

    dashxdr, you don't get it. You are right in saying the dollar is based on faith but you don't know what that faith is. The faith is not that they won't print too much, the faith is that they will print enough to supply anyone with a right to the physical notes that wishes to withdraw the physical Federal Reserve Notes. This faith that they will print enough to supply any and every depositor that wishes to withdraw the notes is what is keeping the Federal Reserve's 1 gram of cotton and linen so much more overvalued than the same amount of cotton and linen coming from the market.

    The printing that is going on is nothing compared to the expansion of the electronic money supply that has already happened and the printing press can not create money as fast and as great as electronic money can be created. And if electronic money has not destroyed the value of the dollar with it's great expansion, there is no way the printing press can. The only way the printing press can and will is by failing to print enough to meet demand.

    While the printed dollars would go out and be spent in the economy, the amount of value the dollar will loose from these minor transactions with these physical notes is minor compared to the amount of value the dollar would loose from defaulting on these promises for physical notes. So the govt. doesn't mind loosing some value of the dollar by printing more physical notes if it is to stop the dollar from loosing far more value from defaulting. It's like I said before, as much as people like to talk about how much value the dollar has lost over the years, it's nothing compared to how overvalued the dollar is. It doesn't matter if the dollar looses 100% of it's value because it's over a trillion times overvalued. Even when it costs a thousand dollars for a loaf of bread the dollar will still be greatly overvalued because I'm sure a loaf of bread is worth more than a thousand grams of cotton and linen(and that's assuming the thousand dollars is all in one dollar bills which it most likely will not be). It's more than likely that there will be a thousand dollar Federal Reserve Note created after a loaf of bread costs $1,000 and that right there still means the Federal Reserve Note is still greatly overvalued because that would be pricing a loaf of bread at 1 gram of cotton and linen(which a $1,000 bill would be).

    The govt. could print larger bills but there will be no demand for those larger bills unless prices rise high enough first. The govt. won't create larger bills unless there is already demand for larger bills. People won't withdraw the larger bills unless prices rise high enough first and the govt. won't create the larger bills unless it sees a reason to. The only reason to would be if it became too inconvenient to use the current denominations. If people were going around with wheelbarrows of cash to buy a loaf of bread. The govt. in that situation will create larger bills because it knows that if it becomes too inconvenient to carry cash, people will find alternatives like gold and silver and due to their rarity, their prices against the currency will rise. For instance people will choose to accept a 1/14th oz silver coin for a loaf of bread instead of accepting a wheelbarrow amount of cash to buy that same loaf of bread. Right now the demand for bills is only for the current denominations. I don't see people carrying wheelbarrows filled with physical cash to buy a loaf of bread. And the only reason people would be withdrawing so much physical cash is if prices have risen so high that minor transactions demand such withdrawal. The larger bills will come after there is a demand for them so the larger bills will be the effect of prices rising, not the cause.

  28. Numonic says:

    There are always going to be people withdrawing physical cash for some small transactions and if the smallest transactions are like $1,000, then there will be people withdrawing $1,000. If the smallest transactions are a trillion dollars, then there will be people withdrawing a trillion dollars in physical cash. They can not convince everyone to conform totally to a cashless society and they can not force them because forcing them to become a cashless society is defaulting. And defaulting will be the end of the seigniorage and the cause for the rise in prices/devaluation of the dollar. The cause of the rise in prices won't be the larger bills, the larger bills will be the effect of the rise in prices. The cause of the rise in prices will be the banks defaulting on their promise to exchange the electronic certificates for the physical Federal Reserve Notes.

    This is not to say that increasing spending doesn't devalue the dollar but you have to be careful, increasing the supply of Federal Reserve Notes is not the same thing as increasing spending. What we are experiencing today is proof of that. There is unprecedented increase in the supply of Federal Reserve Notes but spending is decreasing. With the decrease in lending and the increase in unemployment, spending will be decreasing regardless of how much printing is going on because the printing is only to feed those with minor transactions. 2 things can devalue the dollar: 1 spending and 2 defaults. Spending is decreasing and we are allot more likely to see true defaults(FDIC funds and reserve ratio's are proof). The devaluation of the dollar will come through true defaults, not spending.

    In fact the supply of Federal Reserve Notes really has no direct barring on spending as all that is needed to increase spending is to punch the number keys on a keyboard and electronically charge for things. The only reason credit is contracting is because banks see that their vaults are becoming empty of physical cash due to the withdrawals people make to make their minor transactions and realize the more they expand credit the more people they are giving a right to to these Federal Reserve Notes. When banks expand credit, they don't have to do it with physical cash, they can do it electronically or not at all but after they have expanded credit and that credit enters an insured bank account, that money that they just created electronically is now a right and promise for physical cash. So knowing this and knowing that banks vaults are practically empty, they don't want to put any more pressure on the Federal Reserve to create more Fed Notes. Expanding credit is potentially putting more pressure on the Federal Reserve to create more Fed Notes. It's like being in a boat at sea and the boat has holes in it and the Fed is trying to plug all the holes but expanding credit is potentially adding more holes to the boat.

  29. Numonic says:

    It is far less detrimental to the value of the dollar to print more dollars than it is to default on promises for those dollars. The govt .is printing the Fed Notes and increasing the base money supply only because of those depositors withdrawing physical cash to make those minor transactions. Physical cash is not promised for loans so loans don't demand physical cash and can either be loaned electronically or not at all but when you have an insured account, that is a promise for physical cash and those promises must be kept and they have been and are the reason the 1 gram of cotton and linen coming from the Federal Reserve is worth over a trillion times more than 1 gram of cotton and linen coming from the market.

    You're saying that printing too much will cause the dollar to loose value but that doesn't explain why the dollar has so much value in the first place. You have to understand why the dollar has so much value in the first place. You can't just say the dollar has value because people give it value. You have to understand why people give the dollar so much value and the answer to that comes straight from the Federal Reserve itself. The dollar gets it's value through it's seigniorage. The Federal Reserve is just like a mint. It charges for it's duty. And depending on how well it performs, the more it charges. The value of the Federal Reserve note starts at the Fed. So when the Fed charges so much for the Fed Note, who ever receives the Fed Note will charge just as much to the person he/she gives that Fed Note to. That's not to say the Fed Note can't loose value through over supply but when the Fed releases the Fed Notes in to the economy they already set the Fed Notes at such a high price that any value it looses is miniscule to the amount it is overvalued. The Fed charges a very high minting cost for the Fed Notes. So high the value the Fed Note has lost over the years is nowhere near how overvalued the Fed Note is. So far the Fed has almost never failed to mint enough Fed Notes to meet demand on time. On top of that it has expanded it's potential orders to mint more than any other mint/central bank. This is the reason they can charge so much to mint the Fed Notes. Their minting practice is one of the most efficient in the world. Unfortunately for them, their minting practice is coming to an end and they are facing true defaults(FDIC fund and reserve ratio's are proof). The Federal Reserve is going out of business and there will be enormous discounts on their products(their Federal Reserve Notes).

  30. Anonymous says:

    Finally you see...

    The scales have been removed and all can now conclude...

    That Numonic is a dumb ass and that what he states is pure bullshit...

    LOL!

  31. dashxdr says:

    @LOLAnon

    Why so much vitriol? Numonic is entitled to his viewpoint. As are you.

    And if I had to choose between the two of you, I'd choose Numonic.

    Fortunately I'm allowed my own reality, which I'll choose instead.

  32. Numonic says:

    Yeah I keep confusing things while an unprecedented amount of Federal Reserve Notes are being created while spending is still decreasing. You keep holding your breath for the day those Federal Reserve Notes cause an enormous amount of spending and we'll see how long you last.

    I mean it's silly, what do you think those Fed Notes are being created and borrowed for? lending? That's stupid, most if not all lending is done electronically and doesn't require physical cash to be lent. There is no obligation to even lend at all, let alone lend physical cash as oppose to electronic money. The supply of physical cash has no barring on lending as all that is needed to lend is to press a key on a computer keyboard and lend electronically. That means the only reason to be creating more physical cash is to meet the obligated demands of people demanding the physical cash. The only reason to increase the supply of Federal Reserve Notes is if there is an obligated demand for Federal Reserve Notes and that demand only comes from insured bank withdrawals. I'm telling you the source of the financial problem today is that there are too many people withdrawing physical cash and there's hardly enough physical cash to supply all these obligated demands.

    You keep ignoring seigniorage. You keep trying to explain how the dollar will loose it's value without fully understanding how it has it's value in the first place.

    Spending is decreasing while the supply of base money is increasing and you fear an explosion in spending as if base money is what is used in a majority of spending.

    Or rather you're saying the increased supply of base money is what will collapse the dollar but base money is only a fraction of the money supply and I know base money will never get anywhere near as large as the total money supply so if the total money supply didn't collapse the dollar why would the increased supply of base money?

    You guys have to answer these questions for yourselves before you go downplaying what I have to say.

  33. stibot says:

    The faith is not that they won't print too much, the faith is that they will print enough to supply anyone with a right to the physical notes that wishes to withdraw the physical Federal Reserve Notes. This faith that they will print enough to supply any and every depositor that wishes to withdraw the notes is what is keeping the Federal Reserve's 1 gram of cotton and linen so much more overvalued than the same amount of cotton and linen coming from the market.

    I understand your logic but it is still hard for me to accept it. Eric has reported such situation occured year ago, but who will be those you are describing?

    Most of my transaction are made digital. Only some small buying i'm doing using cash. Virtually i can do without cash. The faith you described is not related to me, i'm not going to change digital to physical. I've no reason, no feeling i should posses physical money instead of digital. I can not distinguish much between them (you know, that's why i considered cash as bank account in some of previous post).

    My believe is there are much more money than assets can be buyed for therefore hyperinflation can happen. My faith in money is established on this assumption.

    So who are those entities believing more fed notes needs to be printed?

  34. Numonic says:

    mr pinnion what you are saying that i am saying is totally in error. You misunderstand what I am saying. I don't even understand how you can say that I am saying what you are saying I am saying. Your understanding of what i am saying is way off.

    First of all creating money out of thin air isn't printing money. The money that is created out of thin air happens when there is fractional reserve banking. You're blaming the wrong people for creating money out of thin air. It's not the Federal Reserve(or rather Beureau of Printing and Engraving) that creates money out of thin air, it's the commercial banks that do that. The Fed thought BP&E; creates money out of cotton and linen not thin air. The banks when they electronically expand the money supply and only keep 10% in physical cash is the one that creates money out of thin air. That 90% of the money supply backed by nothing is the money that is created out of thin air. Don't let people confuse you. People use these terms incorrectly. Printing actual Fed Notes is not printing money out of thin air, it's the portion of the money supply that is greater than the supply of physical Fed Notes that is thin air money, and that is created outside and independent of the Federal Reserve.

    Also I don't think there is a value difference between electronic money and physical money, but i do believe the supply and accessibility of physical money determines the value of both the physical money and electronic money. The less accessible(meaning if there are defaults) the more value is lost. Even though the decrease in spending due to it's less accessibility would have an opposing effect, the effect of defaulting will have a greater opposing effect. That's why i make a point to say true default and not just credit contraction. There is a difference.

    On top of all this I expect the true defaults to cause the value of the dollar to crash so I don't know what you are reading of mine.

  35. Natasa says:

    Numonic,
    Thank you for the explanations.

    I read little bit about seigniorage.

    It really looks like you are on the right way.

    The seigniorage in USD can be quite huge too.
    Not just because of citizens in USA, but also because there are many countries around who actually USING paper USD instead of own currency.
    Additionally many criminals, drug dealers and all those "underground transactions are too in physical USD. And there is NO "credit" money. NOT there.
    There is Cash the only king.

    I find for example that S. Korea (as opposite to US) has very little paper money in circulation since there are almost everything in "credit money" - so it is logically that their Central bank can not get so much from seigniorage... But they can not loose much in reduction of it neither.

    On the other side - US and FED could get really huge portion of "free money" with it.

    Do you know how much FED use to get of seigniorage in good times?

    Best regards
    Natasa

  36. Numonic says:

    Stibot, I'm glad you understand me and I also understand if it is hard to believe that there is this huge demand for physical cash because you yourself and most people you see are using electronic money as opposed to physical cash but one thing I have to ask is, what other reason is there to create more physical cash? More physical cash is being created. Why is this happening? The only logical answer is that there is a demand for more physical cash. Reserve ratio's are depleted to 0, FDIC funds(which I believe are physical cash) are depleted. How do you explain this without concluding that there is a great demand for physical cash?

    Natasa I think you should look seigniorage more like the more promises for dollars are made the more the seigniorage because every promises(debt) is like a job for the Federal Reserve and they charge even before the job is done. It's like even though you don't withdraw the physical cash, just because you have an electronic account, the Fed has already charged you with the bill for minting the Federal Reserve Notes. It's like paying for the job before the job is done. So the more debt that was created the more they could charge for their services because the more debt that was created is like the more orders that was created to mint Federal Reserve Notes. And because every order has been fulfilled as any and everyone with an obligated right to these Fed Notes that has demanded these Fed Notes has received the Fed Notes, the Fed is not failing to perform it's duties. When it does, meaning when you are not able to withdraw physical cash from your account, then the Fed will have failed to do it's job and they will not be able to charge so much for their duty as the work has slacking.

    Anyway I know it can get confusing but the simple question to ask yourself is, what reason is there for there to be so many new bills printed?

  37. Natasa says:

    Today (6th oct) in UN:
    It is not just UN demand for new reserve currency, but even for right distribution of seigniorage:

    http://www.breitbart.com/article.php?id=CNG.e272eaa74dccc30f21c6ff7638b0f37b.461&show;_article=1

  38. Numonic says:

    As hard as it is to find people using physical cash for transactions, I still have no other explanation for the Bureau of Engraving and Printing to be printing so many more new Federal Reserve Notes other than because the current supply is close to being not enough to meet demand.

  39. Numonic says:

    The govt. wants a strong dollar. And here's why. Remember what I said before about there always being people withdrawing physical cash for small transactions. Well you gotta figure, allot more people are now doing these minor transactions due to the credit boom. Meaning there are more people making transactions after the credit boom than there was before the credit boom. Even after this credit contraction that money that was made during the credit boom is still there in secured obligated FDIC accounts. Now if there are more people making transactions while prices are rising, that means there is more physical cash being withdrawn. 1. from the fact that there are more people withdrawing cash for minor transactions and 2. there is more physical cash being withdrawn due to the rise in price of those minor transactions. Now there's not many ways to take this strain off the physical dollar. One way if possible would be to eliminate a number of people making these transactions(which is being done to some degree through the rise in unemployment) and another way is to bring the price of those minor transactions down so that less physical cash has to be withdrawn for them. They are accomplishing the latter by contracting credit. The expansion of credit is the major cause for the rise in price of things and contracting credit causes the price of things to drop.

    I still believe that they will fail in their goal to prevent true defaults because so many people have gotten rich during the boom and there are still too many people with deposit accounts than the system can take. There are still too many transactions using physical cash than the system can take. I know when you go shopping it doesn't look that way as you see so many people using electronic transactions but it's the only explanation for the Bureau of Engraving and Printing to be printing up so many more Federal Reserve Notes, the FDIC funds running out, the whole reserve requirement deposit reclassification issue and now added the credit contraction and rise in unemployment.

    The reason banks are contracting credit isn't the false reason some people give, which is that banks fear that if they lend the money out they will not get it back. That's silly because we live in a ponzi scheme economy where the return of that money depends on another bank making a loan. So basically as long as there are loans being made there should be no fear that the loans will not be paid back. We pay back loans with other loans. That's how the system has been working for decades. The banks know this. They are not contracting credit because of a fear of not getting the money back. They are contracting credit because the expansion of credit was causing prices to rise too high for the system to take. And being that banks always have the freedom to lend as much as they want, it wasn't that prices were rising too high for people but that prices were rising too high for the physical cash system to take. It doesn't matter how high the price of things got in itself because there can always be a loan to buy the thing but in comparison to the physical cash transaction system as I explained in the beginning, if there is an increase in the number of people making transactions with physical cash and the price of those transactions using physical cash are rising, this puts a strain on the physical cash system and puts the system near default and the system is based on maintaining this liquidity(ability to deliver this physical cash on demand).

    Call me crazy but this is where I stand. Unless you can give me another reason the BEP is printing so many new Federal Reserve Notes.

  40. Numonic says:

    On a related note, if you are a holder of physical precious metals, you should be using physical cash in as many transactions as possible. The more transactions you use with physical cash the less physical cash there is in the banks. Which would bring the bank/system closer to true default and end the FRN seigniorage. And would cause the value of your investment(your precious metals) to rise. You could even take it a little further and hoard physical cash. But if you partake in this you should be holding allot of your savings privately in precious metals for the end result of the action of hoarding cash and causing banks to default will cause the value of the currency to drop. I'm basically saying that if anyone wanted to help bring this system down, the best way they could do it is by avoiding electronic transactions and moving to physical cash for as many transactions as they can.

    You know during the great depression the reason people hoarded their money was not because they feared loosing the nominal value of it when the bank defaulted, they hoarded the money for the commodity value of the money. The money could never really be lost because if the bank couldn't give them the money in payment(coin) they could always give it to them in credit(gold certificate), the same way if a bank today failed to redeem my electronic promise(ATM card) for payment(Federal Reserve Notes), I could still use my electronic money(debit card) to buy things. The only thing that will change is that my electronic money(along with any physical Federal Reserve Notes I hold) will now buy less due to the decrease in seigniorage that was brought on by the banks failing to redeem my promise for payment. Unless you have precious metals in your private possession, hoarding the currency of today(cotton-linen paper) is very stupid compared to hoarding the currency when the currency was gold. It's true the value of cotton-linen will go up in relation to the dollar but it's not the value of the cotton-linen that will be going up it's the value of the dollar that will be going down, down to it's commodity value. And everything else will rise in price depending on their supply demand fundamentals in the market. Cotton and linen being in such abundant supply, although will be rising in relation to the dollar will not be rising as much as other things more rare and in more demand. So hoarding the currency of today without having physical precious metals in your own private possession is stupid. And I'm sorry if this is common sense to some people but there are actually people out there that talk about hoarding physical cash to save their money during today's banking crisis. And I want those people to know that it's a stupid idea.

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