How did we get here?
1) 1787 - The Constitution is signed, mandating that only gold and silver are to be money, with the power to coin granted to congress.
2) 1780-1913 - Banks engage in fractional reserve banking. Repetitive boom bust cycles occur as banks expand credit during booms and subsequently contract it by writing off bad loans during busts.
3) Banks often fail during busts as the public demands access to their money. The bank runs expose the fact that the banks are insolvent, having lent out multiples more money than they have on deposit.
3) Despite these boom/busts, over time value of the dollar holds steady because it is tied to gold. Base money can only increase at rate of physical gold increases.
4) 1913 - Powerful banking interests finally succeed at hoisting a banking cartel on the American public called the Federal Reserve System. Bank runs are no longer a problem for the insolvent banking industry as they can borrow money from the Fed to cover redemptions.
6) The U.S. Dollar is still backed by gold but now instead of the Treasury issuing the dollar bills, they are issued by the Fed and called Federal Reserve notes. This arrangement somewhat obscures the nature of money creation from the public's eyes as it must go through an additional step. The U.S. Government borrows money by issuing bonds. If need be, the Fed can buy those bonds with money it has created out of nothing. This arrangement is popular among politicians because it allows the government to run deficits and be assured of a buyer for their bonds to finance this borrowing. The process of the Fed buying bonds from newly created money, now called monetization or quantitative easing, is held back by the dollar being tied to gold.
5) 1933 - President Roosevelt orders all U.S. citizens to turn in their gold to the Fed in exchange for $20.67 per ounce. It was illegal to own gold for U.S. citizens but the dollar was still settled with gold for foreign holders. The next year the gold price is changed to $35.00 per ounce.
5) 1933 - FDIC Insurance established. The insurance promoted to the public as a way of assuring that deposited money is safe has the unintended consequence of encouraging risk taking by banks. Depositors choose banks based exclusively on interest rates with no concern as to their risk taking. The banks that take the highest risks pay the highest interest rates. All banks pay the same insurance premium to the FDIC.
6) 1944 - Bretton Woods agreement after World War II. This agreement sets the dollar as the world reserve currency and as it is still convertible to gold for foreign bank transactions. Other currencies are not on the gold standard, but are considered stable because they are pegged to the dollar.
7) 1971 - The U.S. unilaterally renigs on its agreement to make the dollar convertible to gold. All currencies in the world are purely paper from this point forward. Gold soars from $35 an ounce to $800 an ounce in 1980 as inflation soars.
8) 1974 - Gold is again legal for U.S. citizens to own.
9) 1981 - The Fed manages to contain inflation expectations by raising the Fed Funds rate to 20%. The stage is set for a three decade period of slowly declining interest rates as the world becomes awash in credit and debt. The more credit is offered the lower the interest rates become. Gold begins a long bear market during this period ending at $250 in 1999.
10) 2001 - After two decades of rapid credit expansion culminating in the dot-com bubble the nasdaq crashes 80%. Gold begins its current bull market.
11) 2001-2004 - Instead of letting the malinvestments from the previous boom correct, the Fed lowers rates to 1%.
12) 2005-2008 - interest rates below their natural rate encourage another round of malinvestment. This time it is even bigger than the dot-com bubble as the housing bubble reaches every facet of the economy. The big banks create trillions of dollars of derivative products tied to mortgages and additional credit default swaps circulate on the institutions that hold these risky contracts.
13) 2008 - Falling housing prices cause a collapse in the value of mortgage backed securities. All institutions with exposure to these securities are in danger of failing. Companies that issued credit default swaps on those institutions (like AIG) are in turn in danger of failing. In the biggest theft in plain sight in history Treasury Secretary Hank Paulson, former Goldman Sachs CEO, orchestrates a bailout of key parties involved in the mortgage debacle. It is discovered after the fact that AIG owed Goldman Sachs billions of dollars in payment on credit default swaps.
14) 2008 to present - The Fed has pushed interest rates to near zero in yet another attempt at preventing the market from correcting its three decade binge of massive credit expansion. The Fed has exploded the monetary base by purchasing hundreds of billions of dollars of toxic assets at par from troubled banks. The dollar is now worth a few pennies compared to the dollar that existed prior to the creation of the Fed. The world watches to see what will happen next as puzzled onlookers wonder why the price of gold repeatedly makes record highs. The few among us with an understanding of monetary history are not surprised.