The Big Reset, Chapter 3 - The History of the Dollar

a Sunday morning thread
Our American bankers have found that for which the ancient
alchemists sought in vain; they have found that which turns
everything into gold - in their own pockets

William Gouge, A Short History of Paper-money and
Banking in the United States (1833)
.. And it is difficult to persuade them that a system which is so very beneficial to themselves, can be very injurious to the rest of the community.

William Gouge, A Short History of Paper-money and
Banking in the United States (1833)
History shows that once an enormous debt has been incurred by a nation, there are only two ways to solve it: one is simply declare bankruptcy, the other is to inflate the currency and thus destroy the wealth of ordinary citizens.

Adam Smith
Rising prices of precious metals and other commodities are an
indication of a very early stage of an endeavor to move away
from paper currencies..

Alan Greenspan, former chairman of the Federal Reserve
Board, (2011)
.. We have at this particular stage a fiat money which is essentially money printed by a government and it’s usually a central bank which is authorized to do so.

Alan Greenspan
..Some mechanism has got to be in place that restricts the amount of money which is produced, either a gold standard or a currency board, because unless you do that, all of history suggest that inflation will take hold with very deleterious effects on economic activity

Greenspan
..There are numbers of us, myself included, who strongly
believe that we did very well in the 1870 to 1914 period with an international gold standard.

Alan Greenspan
Intro: Many of the Founding Fathers were strongly opposed to the formation of a central bank because England had tried to place the American colonies under the control of the Bank of England. Robert Morris, a former government official, founded the first central bank in 1781 ..
He is seen as the father of the system of credit in the United States. His Bank of North America was based on the model of the Bank of England and could create as much money as needed through fractional reserve banking..
Interestingly, the bank’s collateral was a large quantity of gold
that France had lent to the US. Morris’ choice for his bank’s
name was a smart one: it led people to think they were dealing
with a governmental bank..
.. while in actual fact it was a private enterprise that had a monopoly on money creation. Ten years later the name was changed to the First Bank of the United States (1791–1811). Several Founding Fathers were opposed to the Bank.
Thomas Jefferson saw it as a venture for speculation, manipulation and corruption. In 1811, its charter expired and was not renewed by Congress.
In 1816, the government authorized the establishment of the Second Bank of the United States. The charter was not renewed in 1836 after a period of runaway inflation
which led to a four-year-long depression in 1837. Between
1837 and 1862, only state-chartered banks existed.
During this free banking era, many banks were short-lived with an average lifespan of five years. The American people were against a central bank in private hands because they believed that the crises of 1873, 1893 and 1907
had been caused by the operating methods of bankers..
They also feared that too much power would be concentrated
on the East Coast of America. Unfortunately, we now know that they were right..
When was the Federal Reserve created?

John Pierpont Morgan was the most famous and powerful banker of the early 1900s. After he was compelled to use his private fortune to stem the banking panic of 1907, he decided it was time for a new fijinancial architecture.
Soon, New York bankers came up with a brilliant idea. Their idea was start a new central bank that would be run and owned by New York bankers.
By this time, the US was the only major country without a
central bank. In Nov1910, Republican senator Aldrich joined a number of the most powerful Wall Street bankers for a secretly organized, private ten-day conference on Jekyll Island, the private island of J.P. Morgan.
There was only 1 topic on the agenda: the establishment of a new central bank. In 1910, Aldrich told the Wall Street bankers: It is a disgrace to this country, with its vast resources, that we are obliged to pay our bills in sterling drafts or in drafts drawn payable in marks ..
It was agreed that this bank had to gain the monopoly on printing dollars and should become a private organization owned by the founders (Wall Street bankers). To the outside world, it would not be called a central bank and would act as if it was operated by the government.
In order to allow the Aldrich plan to succeed, it had to first
be heavily promoted among the people and the government. As illustrated above, the establishment of two earlier central banks had ended in fiascos.
This may explain why, despite Wall Street’s best efforts, the members of the US House of Representatives did not support the Aldrich plan. Then, during the elections of 1912, a wind of change blew through Washington.
Although the Republicans once again presented their plan for establishing a central bank, it was the Democrats who presented the Federal Reserve Act, also in cooperation
with the New York bankers group around J.P. Morgan.
The thinking behind the Democrats’ plan was almost identical to the Aldrich plan but was received much more enthusiastically, although there still was a certain amount of criticism. This was a smart political move by the Wall Street bankers.
The Federal Reserve Act contained many features that were needed to overcome the anticipated objections to a US central bank by the American public. The new entity would be a Federal Reserve System instead of a central bank.
It would present itself as a collection of regional banks with a Federal Reserve Board to supervise them. The board would not be selected by bankers but by the President of the United States.
In December 1913, many senators assumed that the deciding
vote on the Federal Reserve Act would not take place until the
New Year. They left Congress to celebrate Christmas at home.
Shortly before the holidays, however, a few controversial topics were scrapped from the bill..
.. enabling the law to be passed in the last meeting before the Christmas holidays. The establishment of the Federal Reserve was a fact.
It was the most beautiful Christmas present Wall Street could
have wished for. For the third time in US history, the monopoly
on the printing of dollars was transferred from government to private banks.
Not many politicians realized the far-reaching consequences this decision would have. Immediately after the introduction of the law, all US banks became compulsory shareholders of the Fed.
Is the Fed really independent?

Officially, the Federal Reserve Bank of New York is only one
of twelve regional Reserve Banks which make up the Federal
Reserve System, together with the Board of Governors in Washington.
But while the New York Fed serves only a geographically
small area compared with the other Federal Reserve Banks, the New York Fed is the largest Reserve Bank in terms of assets and volume of activity.
As a result, the New York Fed is far more important in the Fed system than all the other 11 regional Reserve Banks combined.
When the Federal Reserve Act was signed in 1913, the powerful New York banker Benjamin Strong became president of the Federal Reserve Board (FRB) of New York up until his death in 1928. He drew a lot of power to himself, also within the Federal Open Market Committee (FOMC) ..
.. where monetary policies were decided, and he often took decisions unilaterally. The FOMC, which happens to be based in New York, consists of seven governors who are chosen by the US President and fijive directors of the regional Federal Reserve banks.
One of those five always comes from the New York Fed. So while the Federal Reserve presents itself as a normal central bank with twelve districts, the New York Fed is actually running the show.
One hundred years after the Federal Reserve started, it is still unknown who precisely owns its shares and how much
they paid for them. But it is well known that shareholders are
predominantly Wall Street banks.
After Strong’s death, power remained centralized in New York.
Up to this very day, only the New York Fed has a permanent seat on the FOMC and a permanent seat at the Bank for International Settlements, as the official US representation.
Furthermore, the New York Fed has the following unique responsibilities:
• Conducting open market operations;
• Intervening in foreign exchange markets (including gold);
• Storing monetary gold
• Implementing monetary policy and international operations
At the outset, the founders of the Fed were wary of meddling by the government. For this reason, they decided that the presidents of the twelve regional Federal Reserve Banks (FRD) would be appointed by the participating banks.
This means that these are almost completely under the control of the banks. A great deal of this information is still withheld from students of economics at most universities. Even most economists are not aware that the government does not own the shares of the Fed.
Benjamin Strong, in his position as President of the New York Fed, pursued a successful policy of toppling the pound sterling from its position as the dominant international currency and replacing it with the dollar.
The final blow to the pound sterling came when the currency was forced off the gold standard for a second time in September 1931. During both world wars, the dollar had become increasingly important outside of the US, ..
..and the US decided in early 1944 that it was time to take advantage of their anticipated victory. The Americans knew that upgrading the status of the dollar to that of a world currency would bring with it signifijicant benefits.
As the war drew to a close and after two and a half years of
planning for postwar reconstruction, the US decided to present its proposal for a new international financial system. Finance ministers from 44 countries were invited to attend a conference in 1944 ..
on the future of the world’s financial system. This was the Bretton Woods conference, named after the forest
surrounding the hotel where the conference took place. The US wanted to persuade countries to support a move to a new monetary system built around the $ instead of gold.
There were two plans on the drawing board for a new world
currency. The economists John Maynard Keynes and Ernst Friedrich Schumacher proposed the creation of a new supranational currency, the Bancor.
This idea was backed by the British, who resisted the idea of handing over the benefits of owning the world’s reserve currency to the Americans. The new Bancor was to be issued by the yet-to-be-formed International Monetary Fund.
No single country would then enjoy the privileged position
of owning the world’s reserve currency. The 2nd plan, developed by Harry Dexter White, the chief international economist at the US Treasury during World War II, was a blueprint for the $ to become the new world currency.
As the main creditor nation, the US was eager to take on the role of the world’s economic powerhouse. The American plan meant that all commodities would have to be traded in dollars, forcing all countries to buy dollars in order to be able to pay for them.
The US would only need to turn on the printing press in order to be able to satisfy the permanent demand for dollars.
An important benefijit of having its own currency as the world
reserve currency is that the US could finance its trade deficits
inexhaustibly by simply printing $
Wary of the repercussions of such an arrangement,
Europe demanded that the dollars be exchangeable for
gold. After some discussion, it was agreed that countries would be allowed to exchange their excess dollars with the US against a fixed exchange rate of $ 35 for one ounce
US reluctantly accepted, secretly hoping that this agreement
would be quickly forgotten. Because of the overwhelming economic and military power of the US and the promise that the dollar would be backed by gold, in the end the participating countries agreed on White’s plan.
It would mark the start of the United States as the economic
superpower for the rest of the 20th century.
Why did Europe accept the dollar system?

The French in particular found it difficult to accept the fact
the US would be able to fijinance budget defijicits by turning on the printing press. They protested both in 1944 and thereafter against the introduction of this dollar system.
But France, like many other European countries, needed financial help at the end of World War II. It therefore accepted the Bretton Woods plan and in return received millions of dollars in special aid. At Bretton Woods, the US also proposed the Marshall Plan, ..
..which was designed to help finance Europe after the devastations of the war. Europeans did not know at that time that the Marshall Plan also financed the formation of the Central Intelligence Agency (CIA).
Ten percent of Marshall Plan funds was used to fijinance
CIA operations in European countries. This was arranged in
secret, without any knowledge or approval by the US Congress.
General de Gaulle understood quite well that France and the
rest of the world would have to start fijinancing US deficits by
buying up government bonds.
Within a few years, American companies were buying up
European companies with their overvalued dollars. The US was able to run huge budget deficits. When other countries warned that this could weaken the dollar, the US always promised to bring its deficits down.
But this promise rang increasingly hollow amid sharply rising expenses of up to $ 100 billion from the Vietnam War.
The French had already clashed for more than a century with
the US over a number of issues.
Now they and other European countries became fearful that many more dollars were being created than could be backed by the amount of gold owned by the US.
In the latter part of the 1960s, France and some other countries started to exchange their surplus dollars for gold. President de Gaulle of France even gave a television address in which he explained the US dollar privilege
France started by demanding gold in exchange for $ 150 million of their financial reserves and was planning to convert another $150 million. De Gaulle even sent the French navy to the US to transport the gold bars back home.
Many other European countries followed. In this way, Germany’s gold reserves increased from zero to 3,500 metric tonnes, Italy from just over 220 to 2,500 t, France from almost 600 to 3,100 t, and the Netherlands from 300 to almost 1,700 metric tonnes.
In early 1971, the Dutch Central Bank (DNB) successfully
swapped nearly a billion dollars for gold. Paul Volcker, an important Treasury official who would later become Chairman of the Fed, was sent to Holland to try to change DNB President Jelle Zijlstra’s mind.
‘You are rocking the boat’, Volcker is said to have remarked.
Zijlstra then replied, ‘Well if this rocks the boat, then the boat
is not very solid’.
Between 1959 and 1971, the US lost over half of its gold reserves of over 20,000 metric tonnes. If this process had continued at the same rate, the US would have risked losing all its gold holdings within a few years’ time.
In the summer of 1971, President Richard Nixon refused a request by the Bank of England to exchange a few hundred million dollars for gold. After rejecting the British request, President Nixon asked his economic advisors for advice.
Their verdict was short but sweet: ‘Break the promise that the
dollar can be exchanged for gold.’ Nixon followed their advice and on 15 August 1971 gave a live TV address announcing what he called his New Economic Policy.
‘I have directed Secretary Connolly to suspend, temporarily,
the convertibility of the American dollar into gold… In full
cooperation with the IMF and those who trade with us, we
will press for the necessary reforms to set up an urgently
needed new international monetary system’
As we now know, the closing of the gold window was not temporary, of course. And this book argues that we are still waiting for the new international monetary system promised by Nixon. But 1971 was a big financial reset when gold was repriced to $ 38 per ounce
Free full download of The Big Reset here: en.cdfund.com/download-the-b…

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More from @wmiddelkoop

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In 2014 I wrote The Big Reset.

The most important part: Chapter 6 - The Big Reset

A Sunday thread - inspired by the IMF - calling for a 'New Bretton Woods Moment'

amazon.com/Big-Reset-Revi… or free download en.cdfund.com/download-the-b…
New rules have been discussed not only inside the advanced
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With the status of the US dollar as the international reserve
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#TBRchapter2
If the people ever allow private banks to control the
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19 Jul
In June I started a series of (TBR)tweets named #TheBigResetSynopsis

Today I will share the core of #TBRchapter1 – The History of
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The previous tweets can be found here
There’s no limit to central bank expanding its balance sheet in
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– Dennis Lockhart, Chairman of the board of the Federal
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#TBRchapter1
Inflation is a more fundamental danger than speculative investment. Some countries seem to be in the unusual situation where they are trying to create inflation. They will come to regret that.
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