Recently, Barron’s included an article from Robert Prechter, founder of Elliott Wave International (EWI), the world’s largest financial forecasting firm. It was adapted from a recent issue of Prechter’s Elliott Wave Theorist, the investment letter the famed market forecaster has published every month since 1979.
Part monetary history lesson, part big-picture market forecast, the full report — Barron’s published only part of it — uncovers “200 Years of Ineptitude, 100 Years of Theft and Failure, and 50 Years of Economic Regression.”
With permission from the folks at EWI, we are republishing an abbreviated form of the piece below. Also, EWI has made the complete 10-page report available for free download here.
Read this report, and you will come away with an expert-level understanding of the past 200 years of government intrusion into the U.S. money supply, economy and investment markets.
Hidden Erosion of Corporate Worth Since the Government Abandoned Money
By Robert Prechter
For 173 years, the United States used money as a medium of exchange. In 1965, it switched to using a floating accounting unit. This change coincided with a dramatic yet hidden reversal in the net trend of worth for U.S. corporations.
The Money Era: 1792-1964
In 1792, Congress passed the U.S. Coinage Act, which defined a dollar as a coin containing 371.25 grains — equal to 0.7734 Troy oz. — of silver (plus some alloy). Congress did not say a dollar was worth that amount of metal; it was that amount of metal. Conversely, an ounce of silver was $1.293.
The same act declared that a new coin, the Eagle, would consist of 247.5 grains of gold (plus some alloy). It valued this coin at 10 dollars, meaning 3712.5 grains of silver, a value ratio of 15:1. This ratio valued gold at $19.39 per oz.
In 1834, Congress passed another coinage act, valuing gold at $20.69 per ounce, thus tweaking the gold/silver value ratio closer to 16:1. In 1837, another law edged the gold content of an Eagle to 232.2 grains, meaning gold was now valued at $20.67 per ounce. A dollar, however, was still 0.7734 oz. of pure silver.
The silver standard ended in 1873, when a new Coinage Act scrapped the definition of a dollar as a certain amount of silver and adopted a new definition based on gold, maintaining the formula of $1 = 1/20.67 ounce of gold. The Gold Standard Act of 1900 confirmed this definition.
In 1913, Congress passed the Federal Reserve Act. This act created a new banking corporation and gave it monopoly power to issue dollar-denominated banknotes and checking accounts backed by bonds issued by the Treasury. In other words, it gave the Fed the power to use government debt as backing to create spendable dollar-denominated credits to benefit the government.
The Fed issued its notes on dollars it never had. The Fed’s activities diluted the supply of dollar-denominated credits, reducing their value relative to gold. The government decided it did not want to pay its creditors. In January 1934, Congress passed the Gold Reserve Act, under which the government seized Americans’ gold, canceled all business contracts in gold, outlawed citizens’ possession of gold and reduced the amount of gold that would define a dollar. President Franklin D. Roosevelt personally dreamed up a new value for the dollar, which he pronounced to be 1/35 of an ounce of gold, thus raising the “price” of gold to $35.00 per ounce. In one stroke, the government seized 41% of the value of everyone’s dollars. Because the Act prohibited U.S. citizens from trading in gold, this new, lower value of a dollar was thereafter applied only to international transactions.
Incredibly, however, the U.S. remained on a money standard, because Congress simultaneously reinstated the silver standard for domestic transactions. It authorized the Treasury to issue paper dollar “certificates” redeemable in silver at the rate of $1.29/oz., the same statutory value the dollar had in 1792. With the silver price still low from the Great Depression, this was, briefly, a “fair” price. Congress passed the Silver Purchase Act of 1934 to allow the Treasury to acquire silver to back the notes.
This scheme failed to last even three decades. With the government’s continued borrowing and the Fed’s monetization of much of it, the government’s bills soon outnumbered the dollars of silver backing them. Smart people began redeeming the bills for silver, and the Treasury’s supply of silver began to dwindle. In 1961, it plummeted by 80% as redemptions ballooned. That year, President John F. Kennedy issued an Executive Order to halt the redemption of silver certificates and urged Congress to let the Fed take over the nation’s currency. In 1963, Congress obliged by passing Public Law 88-36, which revoked the Silver Purchase Act and authorized the Federal Reserve to issue banknotes unbacked by money. For a time, however, an enterprising citizen could still trade the Treasury’s paper notes for silver coins at par, and the U.S. mint continued to make silver coins through 1964 with what silver it had left.
The Watershed Year: 1965
By 1965, the Fed had issued enough Federal Reserve notes to replace the circulation of silver-backed U.S. Treasury notes. On July 23, Congress passed the Coinage Act of 1965, which declared that commonly used U.S. coins would henceforth be tokens containing no precious metal.
Through these maneuvers, Congress ceased exercising its Constitutional “power to coin money, and regulate [make regular] the value thereof.” Instead it outlawed money and replaced it with an elastic, non-regular unit of account.
The year 1965, then, marked the official end of money usage in America. That’s when the Fed’s notes and the Treasury’s tokens became the official currency, unredeemable in anything. The dollar became merely an accounting unit. The government was now fully free to extract value from its citizens’ savings accounts through the process of issuing debt and having the Fed turn it into checking accounts.
The gold standard for foreigners lasted only another six years, during which time the Treasury shipped most of its gold overseas at $35 per ounce. Finally, in 1971, President Nixon issued Executive Order 11615, which reneged on the government’s obligation to pay out gold to foreign creditors. From then on, the dollar was only an accounting unit internationally as well as domestically.
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This was only a small portion of Prechter’s full report. For an eye-opening chart that divides what he calls the “real-money bull market era” from the “Fed-notes bear market era,” you will want to read the whole article. It includes additional sections with titles like these:
You can get the whole story when you download Prechter’s full 10-page report here.
As you know, threats are much less dangerous when you can prepare for them in advance. This report will help you prepare.