“All the Perplexities, Confusions and Distresses in America arise not from defects in their Constitutions or Confederation, not from a want of Honour or Virtue, So much as from downright Ignorance of the Nature of Coin, Credit and Circulation.”
– Letter from John Adams to Thomas Jefferson, August 25, 1787
Illegal Money
“Let’s rip the waste out of our great nations budget, even if it’s a penny at a time,” wrote President Trump on February 9. This remark followed his instruction to the Secretary of the Treasury to stop minting pennies.
Trump’s rationale is that it costs more to mint a penny than a penny is worth. In fact, it costs the U.S. Mint nearly four cents to produce one penny.
This reality offers a deep insight into what the federal government has done to our money since the Federal Reserve Act was signed into law by President Woodrow Wilson on December 23, 1913. In short, the federal government, working hand in glove with the Fed, has destroyed the value of money. This includes the money you’ve worked for, saved, and invested, over your entire lifetime.
How bad has the money destruction been? Using the Bureau of Labor Statistics own inflation calculator, the value of a U.S. dollar has decreased 97 percent since 1913. The dollar, in other words, has been devalued to roughly $0.03.
Trump’s efforts to reduce government spending and waste are important. What he’s attempting to do should have been done many decades ago. But eliminating the penny does little to reduce waste and return sound money to the citizens of America.
Money in the United States for close to 150 years was gold and silver coins. This was established by the U.S. Constitution, which limits anything but gold and silver coin tender in payment of debts. The Constitution also places the power to coin money in the hands of Congress.
Today the dollar is a Federal Reserve Note. And while Federal Reserve Notes are legal tender, they are illegal per the Constitution. They are not gold or silver coins, and they are not coined by Congress.
Federal Reserve Notes are also the reason why it has become nearly impossible for the average wage earner to satisfactorily provide for his or her family. If sound money is not restored this madness will get far worse.
Pesos and Dollars
To better understand what has happened let’s compare the plight of money over the last 100 years between the U.S. and its neighbor to the south.
Currencies, both north and south of the Rio Grande, aren’t what they used to be. Several generations ago, they were as reliable as a rooster’s call at dawn. Now they’re as crooked as a politician’s spine.
We know this not by reading history books, nor by hearsay, but by the honest, verifiable, silver dollar and silver peso we’re holding in our hands.
One coin, the Peace Dollar, is a U.S. silver dollar minted in 1921. At the time of its mint, one coin equaled one dollar and each dollar contained 0.77344 troy ounces of silver. The other coin, the 1922 Un Peso, is a Mexican silver peso. At the time of its mint, one coin equaled one peso, and each peso contained 0.3856 troy ounces of silver.
The exchange rate was really simple. Based on their silver content, two pesos equaled one dollar.
Nowadays, both pesos and dollars are merely paper promissory notes issued by their country’s central banks. The value of pesos and dollars are derived by their government’s track record of stewardship, the size of their country’s military, and the international currency market’s perception of their government’s ability to make payments on their debt.
Currently it takes roughly 20.30 pesos to buy one dollar. As you can see, the Mexican government has been less upright in managing its currency than the U.S. government has over the last 100 years. The exchange rate has gone from 2 to 1 to over 20 to 1.
More importantly, when you use silver as the measuring stick, the picture dramatically changes for both dollars and pesos.
Value Destruction
It took about $1.29 to buy an ounce of silver in the early 1920s, while today it takes about $33.50 to buy an ounce of silver. This means silver presently costs 2,496 percent more in dollar terms than it did in the early 1920s.
In pesos, however, the value destruction is a downright disgrace. It took 2.58 pesos to buy an ounce of silver in 1922, while today it takes 680.05 pesos to buy an ounce of silver. Astonishingly, in peso terms, silver now costs 26,258-percent more than it did in the early 1920s.
Price inflation in the U.S., while insidious, has been much more cunning than in Mexico. This provided some degree of trust in the dollar as the reserve currency in global finance.
However, with Washington’s insane spending this century, and especially since the coronavirus fiasco, there’s been an overt transition from subtle price inflation to more rampant price inflation for the first time in 50 years.
Without question, the peso, the dollar, and nearly all paper currencies will continue to get trashed by their respective governments in the years ahead. But the trashing of the dollar, relative to other currencies, will likely accelerate. By this, it will take a massive dollar devaluation to get the dollar back to an exchange rate where two pesos equal one dollar.
This, unfortunately, is what’s needed to make U.S. manufacturing competitive in international trade. If Trump’s goal is to bring manufacturing back to the USA, a weaker dollar is the only way to make this work. Import tariffs and strong-arming foreign governments to buy ‘Made in the USA’ will only go so far.
Death of the Penny and What this Means for Gold
The death of the penny – a token – may be a practical matter. Why fabricate something at a loss? But, more so, it is the result of decades of reckless deficit spending in Washington.
What has happened is no different than the massive government spending under the Roman Empire, which was financed through a continuous process of currency debasement (i.e., melting and reminting coins with more and more base metal added over time).
In 54 A.D. a denarius was 94 percent silver. By 218 A.D. it was down to 43 percent silver. Then, just 50 years later, it was less than one percent silver.
The prospect of an abrupt dollar devaluation is why central banks throughout the world are diversifying their financial reserves out of dollars and loading up on gold. For this same reason, you should also hold some physical gold.
As the dollar loses value, the price of gold, in dollar terms, increases. Owning gold is a simple means people can employ to preserve their wealth.
At the same time, as Trump pursues policies to weaken the dollar, to return manufacturing and industry to America’s shores, he may also be looking to reset the financial system upon a firmer foundation while reconciling the debt.
“We’re going to monetize the asset side of the U.S. balance sheet for the American people,” said Treasury Secretary Scott Bessent earlier this month.
What this really means or how it would be executed remains unclear. But one thought that has been getting plenty of exposure is the idea of marking the gold Washington holds on its books to its market price. Whether the gold that’s supposedly in Fort Knox really exists is another question. It hasn’t been audited in over 50 years.
According to the Treasury’s financial statements, the U.S. owns about 261.6 million troy ounces of gold. Those reserves are currently valued at a statutory rate of $42.22 an ounce, which amounts to a book value of $11 billion. With gold’s current price of about $2,950 per ounce, the market value of those holdings is nearly $771 billion.
Certainly, a $760 billion addition to the Treasury’s monetary assets would be a nice boost. But comparatively, for the 2024 Fiscal Year, the U.S. government spent $6.75 trillion. Thus, these gold assets would be enough to fund the government for about six weeks.
So, what is the real calculus here?
Would this merely be an accounting gimmick to buy six weeks of government funding? Or would it be an attempt to deleverage the financial system – inflate away debt – by devaluing the dollar against gold?
If it’s the latter, then marking U.S. gold assets to the market price of gold won’t cut it.
With a U.S. national debt of $36.5 trillion, and with unfunded liabilities topping $226 trillion, to truly reset the financial system on a foundation of gold, the price of gold, in dollar terms, would have to be many multiples higher than its current market price.
So, too, prices for goods and services would have to adjust upward in-kind.
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Sincerely,
MN Gordon
for Economic Prism
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