The Fleecing of the Sheeple--America Discovers "What That Thing Will Bring"

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There is a very old legal maxim: "The value of a thing, is what that thing will bring." It was developed by the courts to establish the value of a loss, in civil claims. The maxim has been perhaps over-used in central Europe, where if you recklessly drive your car and run down a farmer's laying hen, you can be held liable for for not only the replacement cost of the chicken, but also the value of its future offspring for the next year--or perhaps even two years if the judge is in a bad mood.

That ancient maxim is important to keep in mind when we consider the slips of paper that we presently carry around in our wallets and call "money." Most citizens are ignorant about money. The history of money is not taught in public schools, and legal tender laws are taken for granted. Not one citizen in a hundred realizes that we have a currency that is based on debt. (Most mistakenly believe our currency has some connection to the gold stored at Fort Knox. From a practical standpoint, there is no connection whatsoever)

There is no substantive backing behind the US dollar and the world's other fiat currencies. But it wasn't always this way: Up until 1933, our currency was "bi-metallic" and was 100% redeemable in gold and silver. Gold and silver certificates were issued, that read "Pay the bearer, on demand..." Then, in the midst of the Great Depression, the FDR Administration craftily banned private possession of gold coins and bullion. Any non-numismatic gold coins in circulation were called in, by executive decree. The government "paid" for these at face value, with paper money--$20 in Federal Reserve Notes in exchange for each $20 gold piece. Any gold bullion not already in government hands was "purchased" at the officially pegged price of of $20.67 per ounce. The only exceptions to the law were for a limit of $100 face value of gold coins for each private citizen, gold nuggets, gold dust, and dental gold. (FDR's bully boys didn't go quite so far as to pry gold teeth out of pensioner's mouths.) Then, shortly after the owners of this small mountain of gold had been duly "compensated", the government raised the official price of gold to $35 per ounce, realizing a tidy profit. This was nothing short of legalized grand larceny. After 1933, US citizens could no longer redeem their paper money for gold, or possess gold bullion. (Private ownership of gold bullion was banned in the US from 1933 to 1974.) The redeemability privilege was reserved to foreign banks and governments, who could still demand gold. This redeemability "window"was kept open so that the US Dollar did not suffer in foreign exchange. Redemptions in gold started to increase dramatically in the 1960s, once the open market value of gold rose above $35 per ounce. When given the choice of paper money and gold, many trading partners quite logically chose gold. (Economist John Maynard Keynes might have decried gold as a "barbarous relic", but realists opt for genuine value whenever they can.)

While the American citizenry was getting fleeced, similar abandonment of the gold was going on elsewhere. For example, Australia stopped minting gold sovereigns in 1931. The same happened in England in 1935. France went off the gold standard in 1936, much to the detriment of the Franc. By 1959, the French Franc had just 1/40th of the purchasing power that it had in 1936. Nation after nation went off the gold standard: Argentina, Brazil, and Canada in 1929; Australia, New Zealand, and Venezuela in 1930; Austria, Denmark, England, Germany, India, Mexico, Norway, and Sweden in 1931; Greece, Romania and Yugoslavia in 1932; Honduras, South Africa, and teh U.S. in 1933; Italy in 1934; Belgium and China in 1935; and France and Switzerland in 1936. On and on, they eventually all succumbed and gave up both minting gold coins and providing convertibility.

Even though gold had been banned, for the next three decades Americans could still redeem their paper dollars for silver. Silver coinage circulated freely, trading 1-for-1 with paper dollars. But in 1965, the US Treasury stopped minting 90% silver content dimes, quarters and half dollars. The dimes and quarters were replaced with cupronickel tokens that were merely sandwiched with a thin layer of silver, so that that they would still look pretty. (The copper visible on their rims betrays the perfidy that lies beneath the silver veneer.) The new coin issue, although blatantly unconstitutional, went largely uncontested. Once the"clad" coins entered circulation, people quite logically started to hoard every 90% silver coin that they could find. (This was Gresham's Law in action: "Bad money drives good money out of circulation.") To not appear entirely sans cullottes, the Treasury still produced half dollars with a reduced 40% silver content, for another five and a half years (from 1965 to 1970.)

Once clad coinage entered circulation, the value of the hoarded pre-1965 silver coins naturally started to rise. Now accumulated in rolls and in $500 or $1,000 face value bags, these coins sell as a commodity. (As bullion, rather than as numismatic coins.) Their value is calculated by their silver content at a multiplier to Federal Reserve Notes (FRNs). Currently, that multiplier is around 14.2 times their face value. Hence, a $1,000 face value bag of pre-'65 quarters at present wholesales for around $14,200.

Similar debasement of silver coinage took place worldwide in the 1940s, 1950s, and 1960s. Country after after country phased out minting silver coins, as part of "demonetization". England started the trend when they stopped minting circulating silver coins in 1946. As I recall, some of the last countries to mint circulating silver coins with 50% or more silver content were: Canada and Switzerland (until 1967), Lebanon (until around 1969, IIRC), and France (until 1974).

All over the world, if one of the old silver coins now accidentally slip into circulation, it is quickly snapped up and hoarded. Gresham's law is in full force, globally. In the present day, just copper, nickel, cupronickel, zinc, and aluminum tokens are in circulation. Granted, many mints still produce gold and silver coins, but those are intended for the collector and investor market. They are not intended for circulation, and few of them are still considered legal tender.

On June 24, 1968--a sad day--the US Treasury ended redemption of silver certificates for bullion or pre-1965 coinage.

In 1970, the last circulating US silver coins--the 40% silver half dollars were phased out, putting the last nail in the coffin for the dollar as a genuine currency. All that we have now in circulation are unredeemable FRN "notes" and tokens that--other than nickels--now have a metal value that is far below their face value. (See the Coinflation web site for details on metal content and the real value of circulating US coins.)

On January 1, 1975, it once again became legal to own gold bullion in the United States. A personal aside: When I was 16 years old, I rode my bicycle to Bob's Coin Corner and bought my first Krugerrand. That was in 1976. I bought that coin with money that I had saved from mowing lawns and working at the local library (the latter, for $2.05 per hour). As I recall, that 1975-dated one ounce Kruger cost me $155. I spent a lot of time fingering it, feeling its heft in my hand, and admiring the design--especially the Springbok on the reverse side. Holding it in my hand, I knew that it was real money. I sold that coin in early 1980 for $715. Soon after, I invested the profit in my first M1A and my first Colt M1911 .45 Automatic. I've bought and sold a lot of gold and silver coins since then, but that first shiny Kruger--and its hiding place under the corner of my bedroom carpet--hold a special place in my memory.

By 1981, the US Dollar had become so debased that the copper metal value of the lowly penny exceeded its face value. So Congress authorized the US Treasury to replace them with zinc tokens that are merely flashed with copper. (Recently, the penny has become an embarrassment, since in these days of inflated dollars, the worthlessness of the penny has become blatant. (Even "penny candy" sells for 5 cents or more.) There have been calls to do away with penny coins entirely.)

In 1971, facing a massive hemorrhaging of gold, president Nixon closed the "gold window" for redemption by foreign banks and governments. Many foreign governments, most notably France, raised howls of protest. John Connally, who was the Treasury Secretary at the time, had the nerve to comment "It may be our currency, but it's your problem." He was able to be snide about it because he knew that the US was the dominant nation in global commerce, and that the US Dollar would continue--based on sheer inertia if nothing else--to carry on as the world's reserve currency. It has indeed carried on, despite its unredeemability. But ever since 1971, the dollar has suffered markedly in foreign exchange. Today, the US dollar seems about ready to lose its reserve currency status.

Let's get back to the legal maxim that I mentioned at the beginning of this post: What is the real value of a "dollar"? The current Federal Reserve Notes (FRNs) are only redeemable for other Federal Reserve Notes. You can of course use them to purchase goods and services, but with FRNs you are at the mercy of inflation. In contrast, "junk" silver coins are essentially inflation proof. Times may change, but today you can still walk into your local coin shop and salvage some value from the paper notes that now pass for "money." As I mentioned before, the real money to funny money trading ratio is presently around 14.2-to-1 to buy pre-1965 dimes, quarters, and half dollars. Given the inherent value of the FRN (which is essentially an "IOU Nothing"), I am surprised that the ratio is not already 100-to-1 or higher. I suspect that within a year or two, that ratio will come and go.

I am big believer in tangibles investing. I am suspicious of any investment--aside, perhaps, for some mining shares--that are denominated in dollars. When the currency unit itself is in flux, all dollar denominated investments are risky. I recommend that SurvivalBlog readers first get their essential "beans, bullets and band-aids" squared away, to ensure your physical survival. After that, you might consider investing in other tangibles such as productive farm land, common caliber ammunition, magazines (the kind that hold rifle and pistol cartridges--not the kind that you read!), tools, and other nonperishable barter items. Following that, you might put any excess cash into silver.

'The US Dollar is not unique. There are now no national currencies that are officially redeemable in circulating gold or silver coins. (Although there are rumors that redeemable gold Dinars and silver Dirhams may soon be widely circulated in parts of the Islamic world.) To various degrees, all of the world's governments are fleecing their citizens, through legal tender laws, lack of redeemability, restrictions on offshore banking, excessive taxation, currency controls, and inflation. They are all engaged in larceny. It is just the rate and scale of the theft that varies. (In Zimbabwe, inflation is running at the incredible rate of more than 100,000%, annually!)

Currency inflation is insidious and inexorable. Inflation is little more than robbery, in slow motion. It gradually robs us of our buying power, and is essentially a hidden form of taxation. Given the track record of the 20th Century, we can certainly expect inflation to continue. My advice is to protect yourself, by taking some of your greenbacks and converting them into silver. Don't expect to profit from that silver. (Although there may be some profits in the near future.) Instead, consider these silver coins your fire insurance for the dollar. When the dollar collapses, your silver coins will at least hold their store of value.

Taking the long view, we can look at the current "bull market in commodities" as nothing more than a bear market in un-backed paper currencies. Markets cannot be fooled, at least not for very long. They always find equilibrium. Prices shift. Currencies adjust. Inflation marches on, and the paper money-holding sheeple suffer. But those of us that diversified into precious metals can take solace in the time-proven resiliency of gold and silver.

For any of our readers in Europe that are feeling smug, knowing that they are holding Euros, consider this: All of the world's fiat currencies are in a race to the bottom. Some of them are just presently farther ahead than others. Eventually, all fiat currencies are all doomed to collapse. The US Dollar will probably be the next to exit the stage. (This is nicely illustrated in a short documentary by a Dutch filmmaker.)

In addition to buying pre-1965 silver coins and barter goods, I have written before in SurvivalBlog about another strategy to combat inflation: Gathering nickels (US 5 cent pieces), before their long-standing 75% copper and 25% nickel alloy is superceded, most likely by just zinc tokens. (This is very likely to happen in 2008 or 2009.) At present, the base metal value of a nickel is about seven cents. (See the Coinflation web site for details on the metallic content and value of a nickel.) In my opinion, getting five cent pieces that have seven cents in base metal value for just their face value is a bargain. Think about it: If you asked a bank teller or a store clerk "Can I have a $1.40 in change for this dollar?", they would think that you were crazy. But when you get nickels in exchange for a paper dollar, that is effectively what you are getting: $1.40 worth! Although the potential gain for nickel is smaller than with silver, the situation today is not unlike that back in 1963 and 1964. My advice: buy up as many rolls of nickels as you can, at banks and casinos. I predict that in just a few years, nickel rolls will sell at a substantial premium, much like pre-1965 silver coins do now. If silver is the working man's gold, then nickels are the poor man's silver. BTW, I should mention that pre-1982 copper pennies are now worth about 2.5 cents each. But since the old and the new issue coins now circulate co-mingled, it is hardly worth your time to sort out (by date) the real copper pennies from the more common post-1981 copper-flashed zinc tokens. But at least for now, you can squirrel away some rolls of nickels. Do so before the debased non-nickel "nickels" get into circulation!

One closing thought: All un-backed paper currencies share the same fate. Eventually, and inevitably they all reach a value of near ZERO, where they are only suitable for use as kindling or perhaps as novelty wallpaper. Someday, the value of the US dollar is bound to collapse. This will most likely be in an orgy of Zimbabwean-scale hyperinflation. After this happens there will doubtless be immediate calls for the issuance of a new "safe" currency. I just pray that our elected representatives have the wisdom to not repeat their old mistakes. Hopefully they will feel convicted to obey the constitutional stricture: "No State shall... ...coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts..." Granted, this section was directed at the states rather than congress, but it clearly shows the intent of the Constitution's framers. Clearly, they wanted our nation to have coinage with genuine tangible value, and sound, specie-backed, currency. The recent dramatic failure of the un-backed Continental Currency undoubtedly weighed heavily on their minds when they drafted the Constitution.

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This page contains a single entry by Jim Rawles published on March 4, 2008 1:53 PM.

Letter Re: Calculating The Bullion Value of US Silver Coins was the previous entry in this blog.

Note from JWR: is the next entry in this blog.

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