AUSTIN “BUD’ BURRELL:Exclusive: America’s Inexorable March toward a Monetary and Inflationary Abyss
Exclusive: America’s Inexorable March toward a Monetary and Inflationary AbyssC. Austin Burrell
On a quiet weekend when I expected little external stimulation other than another historical lesson from the pen of the now legendary former Librarian of Congress Daniel Boorstin from his book The Americans, I was presented a lesson in the gross monetary economics of both the collapse of the dollar since 1913, and an explosion in inflation in dollar terms since the same 1913. I have fallen into a pattern of rarely being provoked to comment by two or three small pieces of data, but this has become something I could not drop. Much was happening in the United States in 1913 or thereabouts, beginning with the extra-Constitutional establishment of the Federal Reserve, and the beginning of the march towards what today has become a confiscatory personal income tax, which was also outside the provisions of the Constitution.
What many Americans fail to realize was that there was an explosion of discoveries in the oil and gas arena at this time, which drove not only the entire U.S. economy into a boom post WWI. It would support the explosion of the internal combustion engines applications, which focused particularly on cars and trucks and in the process, an economic dynamic for technical innovation that would be repeated in the consecutive booms that began with Western range land farming in the 1860s and ended most recently with the Internet boom.
Between 1776 and 1913, the U.S. dollar appreciated in value by a solid but not flashy 11 percent and the currency earned respect worldwide. This was the era of the economic dominance of the British Empire, which was ultimately hammered to dust by its losses of its best and brightest beginning in the insane trench warfare of WWI. We in the U.S. had booms and busts in the 1800s, but if anything, it was controlled with a couple of key exceptions from becoming something that would be used by government in such a manner that would destroy its core residual value.
I grew up in a city dominated by the petroleum industry. Its southern boundaries abutted the now legendary Glen Pool Oil Field in 1907, growing a small town to support just that business. Shortly thereafter, in just five decades, 100 major oil fields would be discovered in a boom that created enormous fortunes all over the State of Oklahoma, but even more so Texas, Louisiana, New Mexico and more (mostly Western) States.
In 1913, the dollar did not reflect these enormous pools of assets and indeed, even today, the country with the largest proven and unproven reserves of oil and gas remains not Saudi Arabia as most would guess, but the U.S. – particularly Alaska.
This country boomed beginning in the early 1900s with the explosion of spread of electric power, radio, telephony, automobiles, aviation and more as part of an unprecedented growth of economic power that not even WWII could exhaust. On the heels of these explosions, built huge companies were built that serviced businesses and consumers. These service companies ranged all the way from specific examples like oil drilling and oil field services, to consumer electronics that produced such products as the electric fan, the phonograph, the refrigerator, the radio, to parts for a diverse automobile manufacturing industry that first touched on vertical integration in it earliest known modern form, to heavy industry and much, much more.
Inventors like Edison, Tesla, Ford, and thousands more unleashed a frenzied period of creativity that has produced even to this day such a wide array of visionary products as to not be seen in any other country in any other part of the world – at least, not yet.
If you know this story, and if you were able to live during a significant part of it, then you must wonder where things went so wrong, so fast. Why does 1913 become such a pivotal point in a negative history?
The answer boils down to federal government intervention in monetary policies in an elitist, greedy and arrogant attempt to influence free market economics. The privately owned Federal Reserve was the idea pushed on the U.S. government by big banks and visionary Wall Street gurus, whose first objective was profit above all else. If consumers were to lose their homes or their retirements or their jobs, that was fine as long as their profits kept flowing. Some 14 States opted out of joining the Federal Reserve System in 1913, mostly the Western States which were so resource rich, and thereby, more independent. All but two were reeled in with the Tax Reform Act of 1986.
The promise of the Federal Reserve was that its private entity, not subject to political influence, would be a more astute and objective observer and controller of our currency, and thereby, our Treasury and our banks. Would but that were so. What consideration did the Federal Reserve seek in exchange for providing this service to the American government and people? They assumed the role of the sole issuer of U.S. currency for the Treasury, providing liquidity to the banking system through its “Discount Window,†which generally took a conservative three percent haircut off every dollar it put out to supplicant banks. This turned out to be an enormously profitable activity for the Federal Reserve.
Where did these profits go? To the owners of the Federal Reserve including America’s biggest banks and brokers, and most major national banks of our trading partners. This compensation was set in accord with a preferred yield of 6 percent to said partners/owners, certainly not a parsimonious amount to the uninformed eye.
I could write many books about this, but I would rather draw another eye to this issue. If, without the Federal Reserve, the dollar was worth 11 percent more in 1913 than 1776, and if it is worth 93 percent less now than 1913 after the Fed’s creation, where has the value of the Federal Reserve been proven? Because of a series of entitlement actions and government deficits undertaken by the US Government through actions of our Congress, total US contingent liabilities stand at over $105 Trillion.
Inflation since 1913 has been over 2,000 percent. The two principal foci of the Federal Reserve by legislative mandate were to preserve our currency, and in particular, to manage a consistent inflation that could be tolerated of say 2 to 3 percent. If you can’t see the outline of this picture as it stands today, you need more than a prescription for new eyeglasses. The Keynesian economics that have controlled the actions of the Federal Reserve stand damned with faint credit.
In conclusion, I again ask that each citizen inform him or herself, the citizen’s first duty in a democracy. Some numbers are not subjective. Neither are some causations and responsibilities. First, always ask the question “Quo Bene?†Who benefits? If it isn’t the American people as a whole first, then there is no other right answer.
FamilySecurityMatters.org Contributing Editor C. Austin Burrell is a corporate finance generalist with over 30 years of Wall Street and related experience. He was a senior derivatives specialist and development stage company investment banker for more than 35 years on Wall Street.He is a 1968 Graduate of the U.S. Military Academy and a graduate of the Army’s Finance Officer Advanced Course.
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