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Chapter 7
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"CALLING IN THE SILVER" Chapter VII Proverbs 14:12 "I certainly never expected this kind of dissertation on the money system today. I guess its good for me to try to understand." "Would you like for me to go on, David?" "Yes, please do. All of us knew something was terribly wrong but things were better in America than in other countries, even with our inflation and depressions." "Perhaps you would like to think about what we have already said and ask a few questions," said Dr. Karoll. "Yes...yes, I would," I said simply. We both were silent while I turned his words over in my mind. "Well," I said slowly, "the whole business about rediscount rates, gold reserves, commercial paper, going off the gold standard, the Bretton Woods Agreement and news stories using these terms were like Greek to me. I hardly know how to ask a question. Is there some simple way that you could tell where this wonderful new approach to issuing money went so wrong that it turned the whole world against us?" Dr. Karoll was silent for some time, "Of course, David, there is no simple answer to such a question. The seed was sown for the destruction of the new system almost before the ink was dry on the original bill." "How was that?" "The amendment of a key paragraph in such a way that it undermined the very principle on which the law was founded." "The amendment of one paragraph could do that?" I asked in astonishment. "Yes," spoke Dr. Karoll thoughtfully. "It was only necessary to change a few words to destroy the sound principles of the original law." "What was the change?" "That money could also be issued against wealth of longstanding instead of just against newly created wealth in the form of commodities which actually changed hands and were under contract to be paid for in not more than four months." "I don't see why that would make any difference." "Neither did your lawmakers. They were not bankers but were dealing with a long and complex law which outlined the entire setting up of the Federal Reserve Bank system. They never imagined that this minor change introduced an unsound principle and that their error would cause the crash of 1929, and later, the great devastation of America in 1985." "Well," I said, "I'm so little informed about the money system that I'm not sure I understand very much of what you've said. Please tell me the way this change made the whole law unsound. Just what did it do?" "Well, you might say that it opened up Pandora's box, could you see how it allowed greed to consume the lives of men and destroy a great part of earth's natural environment." I was beginning to feel impatient and frustrated with my ignorance of how our money system had worked. Dr. Karoll's last comment was too much for me. "Dr. Karoll, I thought I was understanding you when you described what a great thing America had in The Federal Reserve Bank law. Now, I'm feeling that I must be very dull, since I can't imagine how a little change, which hardly even seems like a change, could make a monstrous fraud of such a fine law. What did the change do?" "It allowed the Federal Reserve Bank to issue the money for the purchase of stocks, bonds and real estate, using those very stocks, bonds and real estate purchases as the security for the money issued." "But," I said, "the Treasury Department actually issued the money, didn't it?" "Technically, yes, but the bankers were actually running the operation and the Treasury Department simply carried out their instructions. The Federal Reserve Board appointees were all bankers and their appointments were for such an extended period that no president could change the character of the Board." "Well, what was wrong with using stocks and real estate as security for loans?' "Ordinarily, there would be no harm in this but you have used the wrong term. This was not the loan of existing money but the issue of new money. If it were the loan of existing money, there would have been no inflation." "You make it sound simple but I still don't see why it was wrong. Wasn't the stock buyer risking his money and wasn't it right and good for companies to raise money to expand by selling stocks?" "There would have been no real harm and much benefit if stocks were bought with actual savings but they were not. Of course, there were many honest working people who earned their savings and invested them but these people did not cause the crash of 1929. You wouldn't remember the stock market failure of 1929 but surely there was some discussion of it in your time, David?" "Oh, yes, certainly! The crash of twenty-nine...I was born right in the midst of the depression...terrible times." "Well, then, surely you know what caused the stock market crash?" "That's odd," I hesitated, "now that I think about it, as much talk about it as there was, I really can't say I've ever listened to a clear explanation. I do remember an old gentleman who had worked in the shipyards during World War I...1914 to 1918," I added, "and he told me about investing money in stocks. Let me think about this to see if I can recall his story." Dr. Karoll waited as I strained my memory about the old shipfitter I worked with as an apprentice in Norfolk's Navy yard. "He said it hardly took any money to buy stocks. Everybody was doing it...carpenters, painters, working men...everybody! They kept going up...you borrowed the money on the stock and never saw it...the bank held it...bought stocks on the margin he said...whatever that meant." "That's a good description, David, very good. It took only a small percentage of cash, the stock was security to borrow ninety percent of the money. When it increased in dollar value, the increase was treated as cash to allow the purchase of more stock. Actually, by the terms of the Federal Reserve Bank law, as it was amended, the money was not loaned but issued against the value of the real estate, productive facilities and other assets of the corporation that the stock was assumed to represent." "Well," I said in surprise, "I never would have imagined that! You mean money was issued to pay for a stock certificate which represented the corporation assets...but what difference did it make, just so long as the money was issued against a real value?" "The money was issued, David, to pay for a stock certificate representing previously earned wealth. The money was not earned by the buyer. In making the purchase, the buyer was spending dishonest money, a false issue of currency which was not based on productivity at all. The stock certificate's value was based upon speculation of future activities of a business, as well as actual assets, and was an equivalent of honestly issued money in part. But to issue money against it, as if it were a commodity, was like issuing two dollars for one." "But it was still wealth in terms of actual property, so why did it matter?" "It caused the banking system to furnish money for speculation. The language of the banking industry concealed what was actually going on. Few knew what the implications were when money was furnished by the Federal Reserve Bank system using stocks as the security for rediscounting. This term `rediscounting' was a most confusing word for the general public to understand. The public had no idea that it made reference to the actual issue, rather than the loan, of money against securities." "What was wrong with that?" "Nothing at first, that is, as securities against which money would be issued were originally defined by the Federal Reserve law. After the amendment to the law, there was issued a mixture of honest money and dishonest money." "What do you call `dishonest' money?" "Money which was issued against previously earned wealth, such as stocks, bonds, deeds to property and similar instruments. If existing money had been loaned against them as security, there would have been no problem; but, new money was being put into circulation." "Was that why stocks kept going up in 1929?" "Well, David, not only did it take only a small percentage of cash to buy the stock, the ever increasing amount of money being issued was reducing the value of all money in circulation. Only things that had actual substance retained their value; and, they did this by going up in dollar price. Stocks were deeds, in effect, to something that had actual substance." "What did `buying on the margin' mean?" "It meant that as a stock went up in dollar cost, the difference between what had been paid for it and the higher price could be used just like cash to have more money issued to buy eight or nine times the amount of the increase in more stock." "This is too confusing for me. I do not follow how such an insane sounding system could possibly have been in effect in America. And I still don't see why money issued against gold or farm produce was all right but money issued against a house or farm was all wrong. You make it sound like money was being printed and given away just because it was issued against previously earned wealth." "You are illustrating how easily one can be deceived by abstract terms. The effect of this minor seeming change of a few words in the law would be very obvious if you could see the whole fiasco acted out in three dimensions, David. The issue of new money, unrelated to productivity, is the equivalent of counterfeit currency. This kind of money was put into circulation in unlimited quantities and competed in purchasing goods with money earned by people who worked. To imagine that such a dishonest system could function very long seems childish." I was silent for a moment and not inclined to pursue the money issue any further. "I know that you are leading up to the answer to my question about what could have happened to my four close friends. The crash of 1929, which we have been talking about, brought a banking reform. That crash was surely a terrible thing, but it would not explain anything like the chaos you say took millions of lives in America." "In the crash of 1985 your money suddenly became valueless, David, just the opposite of 1929." The effort to follow this conversation was beginning to be too much for my nerves. "Wait just a moment, please!" I interrupted. "All that I asked was how could calling in the silver by our government have anything to do with my three friends and Dr. Darch simultaneously meeting with some kind of disaster, and you have been giving me a dissertation on the banking system before the crash of 1929! I understand that you said the Federal Reserve Bank was privately owned but it was government regulated. The whole business about rediscount rates, gold reserves and devaluation of currencies was not clear to me because I didn't know exactly what the terms meant, nor did anyone else I knew, for that matter. In the last of the 1970's and the early 80's there were waves of news about runaway inflation and what the newspapers called an "Attack on the Dollar" by the Europeans. I never did hear anyone give an intelligent reason why the dollar was subject to attack. You'll have to start back again with the silver being called in and tell me from there just what actually happened and how it could have affected four men who were responsible to awaken me in 1984." "All right, David. We'll talk about why the collapse of `84 happened at another time; but, here is what took place. European governments and Japan demanded that America take immediate steps to hold up the value of American currency. First, the country's stock pile of valuable metals were offered, tin, zinc, copper, titanium and similar metals, to act as bullion to redeem our currency. They were sold below current world prices in relation to the exchange rates between United States currency and those of other nations. This allowed other countries to exchange their fast depreciating dollars for something which would retain its value. Temporarily, this measure prevented further inflation. When these metals were gone, the inflation continued again. Several years later the government began to auction off its gold reserves, then after silver had increased to more than the old price of gold, it called in all the silver in the hands of the public, silverware, serving pieces, everything made of silver, so that it could be melted down into bullion to redeem our currency." "That should've stopped the inflation indefinitely," I commented. "No, David, there were billions of dollars in cash in Europe to redeem. Within six months after the silver was first called in it became exhausted. The nations of Europe and Japan were forced to take a drastic measure. America had entirely depleted its stock pile of valuable metals and its inflation was progressing so rapidly that immediate action was necessary. All of Europe had formed a coalition in order to correct the conditions created by America's abuse of the currency system. When America could no longer make the needed corrections, then, to prevent the inflation of the American dollar from bringing financial ruin upon the world, the major financial powers refused to honor American currency. Once Europe refused American money, there was a total collapse in the value of currency in the United States. Without even silver to use for money, the nation was reduced to barter alone. There were no means to continue normal business activity. Law and order broke down in the cities. The people panicked. There was no way for them to continue on their jobs after the money failed. Without labor, all public utilities, such as water and electricity, were discontinued. Without water, the great cities became stench filled death traps. There was a mad exodus from metropolitan areas by the frantic masses. Millions of Americans perished in the months that followed." "Impossible," I gasped in shock. "David, this did happen. It occurred with such suddenness that one can easily visualize how your three friends and the professor may all have lost their lives. They evidently were rendered incapable of returning to awaken you from your unconscious state. In as well concealed a chamber in the mountains as we found you, it is certainly no wonder that you were not discovered until now." My emotions were in a precarious state. This idea of my whole world having vanished with all the people I knew was at last becoming terribly real to me. As I thought about the people who were close to me, the gentle friends and many good people I knew, my blood relations, all these gone forever, an overwhelming sense of grief came upon me. As I dwelt upon Dr. Karoll's last words, the whole picture began to become an actuality in my mind. The tragic scene became intensely personal. As this sentiment welled up, I completely lost control of my emotions. I was sobbing convulsively when the good doctor led me to my room and suggested that I might want to lie down. He said that he would put off our plans for the evening until another time. |