The nickname wildcat came about because some of the
less reputable banks were located in low-population areas
and were said to attract more wildcats than customers.
People also called the notes broken bank notes because of
the frequency with which some of the banks failed, or
went broke.
Because these notes had varying degrees of
acceptability and were not always redeemable in gold or
silver on demand, they often circulated at substantial
discounts from face value. These conditions made
counterfeiting relatively easy and bogus notes abounded.
In 1861, in an effort to finance the Civil War, the
federal government issued the first paper money since
continentals. The demand notes of 1861 were popularly
called "greenbacks" because of the color on their reverse
side.
In 1862, Congress issued $150 million of legal
tender notes, more commonly known as United States notes,
and retired the greenbacks.
These new notes were the
first that were made legal tender for all debts, except
import duties and interest on the public debt.
Confidence in U. S. notes began to decline when the
Treasury stopped redeeming them in coins during the Civil
War to save gold and silver. However, redemption resumed
in 1879.
Even though U. S. notes were generally accepted,
most paper currency circulating between the Civil War and
the First World War consisted of national bank notes.
This currency, uniform in size and general appearance,
was issued by thousands of banks across the country. The
federal government granted charters to these banks under
the National Bank Acts of 1863 and 1864, allowing the
banks to issue notes using U. S. government securities as
backing. From 1863 to 1877, the notes were printed
privately, but in 1877, the Bureau of Engraving and
Printing -- a division of the U. S. Department of the
Treasury -- assumed responsibility for printing all
notes.
During the late 19th century, the U. S. government
increased its reserve of precious metals by offering
certificates in exchange for deposits of gold and silver.
In the late 1950s, rising world demand for silver as
an industrial metal began pushing up its price.
To avoid
the possibility that the value of silver in coins might
exceed the face value, the Treasury began selling silver
from its stockpile in the open market to keep the price
of silver low. However, demand continued to be high and
soon threatened the Treasury's silver inventory, so
Congress took steps to reduce the amount of silver in
American coins.
In 1964, the silver content of half dollars was
reduced from 90 percent to 40 percent and, in 1970, was
eliminated entirely. Silver also was eliminated from
quarters and dimes in 1965.
The elimination of silver from all U. S. coins
completed the transition of American currency from money
of intrinsic value to fiat money, the value of which lies
in its wide acceptability and purchasing power.
In 1971 the United States made a decision that
marked the beginning of the end of the international
system of fixed exchange rates. America closed its "gold
window". Foreign central banks were thus prevented from
converting their holdings of dollars into gold at the
official price. For the first time in history, the
world's principal currencies were shorn of all links to
the value of any real commodity. Henceforth the value of
money - that is, the stability of prices - was entirely
at the discretion of governments. Before long, inflation
was raging almost everywhere.
Governments throughout history have tampered with
the link between currencies and underlying measures of
value. Whenever wars or other emergencies required it,
they have become monetary cheats -- fiddling with the
convertibility of their currencies and at times
suspending it altogether, raising revenue either by
depreciating their coins (explicitly reducing their
weight) or debasing them (secretly reducing the
proportion of precious metal).
Since ancient times, whenever private mints found
that the fees (or seignorage) for weighing, certifying
and coining their customers' precious metal was earning
them a nice profit, governments began to monopolize the
business for themselves. That way, they found, the
currency could be more conveniently debased whenever
their battles for territory demanded extra money. This
technology of expropriation (monetary policy, as it is
now known) took its greatest leap forward with the advent
of fiat currency. Governments printed intrinsically
worthless bits of paper, called them legal tender, and
required their subjects on pain of imprisonment to give
them goods and labor in exchange.
For governments, the idea was understandably
attractive. They surrounded the process with the
mystique of sovereignty to make the confidence trick more
plausible. In many countries counterfeiting was not
merely fraud but treason. Similarly, in the present
debate over European monetary union, it is said that the
creation of a European central bank would be an attack on
the sovereignty of the member states. Viewed in a
historical perspective, that warrants a hollow laugh: the
sovereignty in question is the right of a government to
steal from its citizens.
The only check on these otherwise excellent
opportunities for theft was the promise to redeem paper
money for an asset of intrinsic value, such as gold.
For
a long time that was a serious inconvenience, because
until around the middle of this century people thought
the promise ought to be kept. By 1971 it had already
been badly undermined; the closing of the gold window
finished the job. The power of the state took another
large and possibly irreversible step forward.
The world will not return to the gold standard. As
history has shown, modern governments are now big enough
to rig the gold market, or the market for any other
single commodity, without much trouble. The dropping of
the gold standard by governments means that they have now
lost interest in manipulating the price of gold, since it
no longer has a relation to their currencies. This is
important to investors in gold, which now takes on a
private significance as a hedge of value.
The history of money has been given here at length
for a very important reason. It is important to not only
have a feeling that something is wrong, and that United
States currency and investments are at risk, but to
understand fully the reasons why this is so.
It is very
important to realize that these patterns of history
constantly repeat, and have done so for centuries. The
current political rhetoric of a new administration in
Washington cannot change the inevitable course of
history, nor can it reverse the downhill slide that is
well under way.
All governments and a fiat monies have their
problems, but some are better than others, and looking at
the comparative strengths and values is important to
preserving your wealth.
The Swiss franc is more than a paper currency -- it
is backed by gold -- the only currency left in the world
that still is backed by gold. Swiss law requires a
minimum 40% gold reserve for the Swiss franc, and the
actual reserves are about 56%. But this is very
misleading, because the gold is carried on the Swiss
central bank's books at the old "official" purchase price
of US$42 per ounce. So with the current prices of gold,
the gold backing per Swiss franc is actually many, many
times its face value. No other currency is in this
position.
To protect wealth properly, an investor must act on
his own, know why he is doing so, and not drift along
waiting for a political solution that history has shown
is impossible.
