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Gold Stock News From the Day of September 26, 2009
Where Does Money Come From?
Most people in the United States do not know where their money comes from. Most people do not even think about the fact that the piece of paper on which their money is printed is worth next to nothing. And most people do not know that until the 1970s, money was tied in some way to the gold price. It is not necessarily their fault for not knowing these items, although I believe it should be the responsibility of our educational system to teach everyone. Back when I was in school, I chose to take my first economics class because I wanted to learn about money. But it was an elective course rather than a requirement. I was surprised to learn that money in the US is created by the concept of fractional reserve lending, and that a private organization, called the Federal Reserve, is responsible for conducting the country’s monetary policy through various complicated mechanisms that are tied to the banking system within the United States.
Given the significant economic and financial events of the past several years, more and more Americans are learning how money is created. Unfortunately however, it has taken a severe financial crisis for this to occur, but this learning process is a very good thing nonetheless. The Federal Reserve has made great use of its ability to create money out of thin air with the simple click of button, now that it no longer is restricted based on the past relation to the gold price. It has expanded the money supply at an enormous rate to combat the deflationary impact of the blow up of the largest credit bubble in United States history.
The efforts of the Fed have been both praised and heavily criticized by many. Its supporters say that as the last resort in ensuring the stability of the financial system, the Fed has taken the necessary steps to support those financial institutions whose failure may have brought down the entire system. They go on to say that the Fed has been very creative and effective at supporting various credit markets that basically shut down in the fall of 2008. Its critics, on the other hand, say the Fed has completely overstepped their boundaries. They have overstepped their boundaries, chosen to save certain firms like AIG and Citigroup while letting others like Lehman Brothers fail, and expanded its balance sheet to ungodly and dangerous proportions. The critics go on to say that if a standard tied to the gold price were still in place, the Fed would not be able to perform these types of measures.
As with most things in life, the true most likely lies somewhere in the middle of these two extremes and it is not the point of this article to try to find the exact answer. Nevertheless, it is clear that the Fed’s extraordinary actions have had and will continue to have a very large impact on the monetary system in our country, and that there are some serious long term consequences of their unique and momentous actions, many of which will impact the gold price. Some of the most important consequences include the debasement of the US dollar, which the Fed does every time it prints more money. There are massive inflationary impacts of this money printing that will continue to put downward pressure on the dollar. And the dollar denominated gold price will respond accordingly, with an eventual large move to the upside to reflect how many more dollars are needed to equal an ounce of gold.
Only one form of currency has lasted throughout human history: gold. And many people are beginning to wonder if the US may have to eventually return to a monetary system tied to the gold price, given the recent actions of the Federal Reserve.