Then And Now (Part 1)

Yesterday we had a chance to go on Liberty Talk Radio and talk about what is going on economically. We decided that despite what we felt was a great show, it didn’t even scratch the surface in terms of the differences between how things used to be and how they are now. Particularly disturbing is the relative lack of understanding or willingness to even accept the changes that have taken place by the majority of the population. The latter is called ‘normalcy bias’. It is something ingrained in each of us as a human and either reinforced or stunted by our experiences. We aren’t sure how far down the road of ‘Then and Now’ we’ll get in today’s installment. There may be future installments.

What is most important for people to understand is the effect time and delay have on human perception. Here’s a good example. If you took the American Economy of the 1950s and turned it over a period of a few months into the American Economy of today, no one would recognize it. It would have been chronicled in the media as being the worst crash in history, and so forth. But spread the same events out over a half century and not only do people not notice, they tend to embrace the changes (even the negative ones) as part of the new ‘reality’. A sense of learned helplessness sets in and apathy is soon to follow.

While this revelation will not be news to many of the readers of this column, we have been reached out to recently by a cluster of people who are first starting to become aware of what is going on around them. To be totally honest, they’re tired of being lied to by the mainstream press about pretty much everything. We find this encouraging. In addition to pointing them towards a few precious and trusted resources online, we’ve promised to put together some educational tidbits which will give them the ‘other side of the story’. At least they will have given themselves the chance to create an informed opinion about matters, rather than opting to have one spoon fed to them by the Goebbles-ish mainstream press.

Part One – Then

By ‘then’ we mean the pre-fiat age for sure and, for good measure, the pre-central bank era as well. We might add that before the ink was even dry on the Constitution, America was back at war. Not with Britain or a principality, but with elements within its own leadership who wanted a central bank as the main player in the economy. People like Robert Morris and Alexander Hamilton were instrumental in pushing these early central bank models. Fortunately, there were individuals like Thomas Jefferson and even George Washington who, despite their respective roles as statesman and military genius, knew enough economics to understand that a central bank issuing notes at its own leisure was more dangerous to the new nation than any army could ever be (more on this below). If only our politicians today understood just half of what these men did. Notice I call today’s leaders ‘politicians’ and not ‘statesmen’. There’s a huge difference and we’ll just leave it at that. There are few precious examples, the most well-known being Dr. Ron Paul.

The Coinage Act of 1792 specified that a ‘dollar’ was to be a silver coin, weighing 371.25 grains. The silver was to be as pure as technology would allow. Today that is 99.9% pure. Even purer that Ivory soap. Over time, banks were created and while the banks were allowed to issue paper notes, they had to have the silver in house to back up the notes. But similar in fashion to how the grain bankers used to rip the people off thousands of years ago by over issuing notes, the silver banks of the early 19th century pulled the same stunts. One thing has never changed and that is human greed. No matter how much we get, we always want more. It’s universal. Some people resist it better than others, but everyone battles with greed.

As you can probably guess, the silver bankers did the same thing as the grain bankers. They issued more notes than they had silver so they could use the extra notes to make themselves ‘rich’. The biggest problem back then is people were pretty sharp and eventually it became obvious that there was way too much paper floating around and the people would run on the bank and attempt to redeem their silver. The bank would eventually run out and run to the already corrupted USGovt, which let them off the hook, ruling it wasn’t necessary allow redemption for all notes. It is somewhat unclear if the law ever laid hands on these bankers, but if today is any indication, then we lean towards ‘probably not’ as a good choice. Cynical perhaps, but with plenty of backing from current happenings.

Difference #1 – The Monetary System

The takeaway from all of this is that those Americans understood what money was. It wasn’t a piece of paper. It was something that had scarcity, intrinsic value, was an accurate store of wealth, and could still be a unit of account. You could have x number of ounces of silver or x number of coins just as easily as you could have y amount of dollars. In addition, like paper money, the silver coins were homogenous (they were all the same). What is stated above is probably the most important economic difference between then and now. The awareness of the people was a check on wanton robbery by the monetary ‘authorities’ of the day; in this case, the silver bankers. The monetary system is an important component of the foundation of any economic system that wants to expand beyond direct exchange (barter) and its limitations such as coincidence of wants. In the next installment, we’ll discuss how things changed from this point where the populace was enlightened to the point where the populace was dumbed down and couldn’t care less about stores of wealth and intrinsic value. If these things are important to you when it comes to your money, then you’re one of a different 1 percent. You have something in common with the great thinkers who founded this Republic. The one we couldn’t keep. But it wasn’t the fault of the Founders or the Republic. We were warned.

We cannot stress how important the issue of understanding the monetary system is. Everything – literally everything that goes on in our economy stems from the monetary system. Growth, inflation, deflation, employment, price levels (note this is different than inflation/deflation), and trade. Everything. If you have an honest monetary system, you have a decent shot at an honest economy. Much better than average in fact. Reason being if you have enough leaders who understand this issue and understand it deeply, then almost by definition they will be committed to making sure that not only is the monetary system honest, but the systems of government that spring up around the economy are honest as well. Washington and Jefferson got it. Our guys today? We are sure some of them get it, but it is not politically nor financially expedient for them to pursue an honest system. Their economic advisors understand it almost universally, yet pursue a dishonest system to their own enrichment and at your expense – and ours.

Difference #2 – The Central Bank

Much like the monetary system, the central bank model is another important component of the foundation and, unfortunately, the central bank model of the past few hundred years is corrupt from birth. The model is a carefully designed and constructed system. A system developed with one intent – to rob a nation of its wealth and conscript said nation to a lifetime of servitude. A mouthful, yes. True? Absolutely. We and many others have laid it out, but if you’re new to all this, a great read on the topic is ‘Creature from Jekyll Island’ by G. Edward Griffin. Were it up to us, this would be required reading in every school in America, and the rest of the world for that matter. One debate that has never really gotten much momentum in today’s discourse about economies, financial markets, and so forth is the need for a central bank at all. Sadly, most of the discourse surrounds how much power these institutions should have beyond what they already possess.

As we pointed out earlier, the first attempts at central banks in the new United States of America were squashed because there was a general awareness amongst not only the leaders of the day, but the populace as well, about what could happen. Jefferson spoke poignantly in saying the following regarding central banks:

"I believe that banking institutions are more dangerous to our liberties than standing armies," Jefferson wrote. "If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around (these banks) will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."

How much did he miss by? Are we homeless? Of course not, we have houses! Who owns them? Huh. Well, we do. What about that pesky mortgage that is due the first of the month or whenever? Who really owns that house? Who really owns that land? Who really owns the vehicles we drive around while we work longer workdays and take on more menial jobs to continue making payments? Exactly. Jefferson didn’t miss by much. Were it not for the credit available, which is directly attributable to the US central bank (privately owned, despite popular opinion otherwise), the living standard of the average American would have already taken a serious thrashing. This thrashing would have really started to show in the early 1990s, but would have been evident – and felt long before that.

Again, this series of articles is not meant to be all inclusive, but a primer for some and hopefully a reminder for others. Congress will undoubtedly ignore it. The Keynesians will laugh at it, cite their Harvard, Stanford, and Yale degrees in Economics and ask why they are Nobel Laureates while we are obscure, little known peons. That’s ok. Jamie Dimon over at JP Morgan will scoff and tell us how healthy the USConsumer is while said consumer is buried in JP Morgan’s (as well as others) debt. The USGovt will continue to break the law by continuing to operate above the joke that is referred to as the ‘Debt Ceiling’. The US Govt will also continue to break the law by incessantly violating Gramm-Rudman-Hollings – the balanced budget law passed in 1985. Like the laws of Economics, the laws of the land don’t matter when the population is unaware; much unlike the same population 240 years ago. Let that sink in. We’ll be with you again soon with more on ‘Then and Now’.

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Graham Mehl is a pseudonym. He currently works for a hedge fund and is responsible for economic forecasting and modeling. He has a graduate degree with honors from The Wharton School of the University of Pennsylvania among his educational achievements. Prior to his current position, he served as an economic research associate for a G7 central bank.

Andy Sutton is the former Chief Market Strategist for Sutton & Associates. While no longer involved in the investment community, Andy continues to perform his own research and acts as a freelance writer, publishing occasional ‘My Two Cents’ articles. Andy also maintains a blog at http://www.andysutton.com/blog.