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This is an extremely important question and if you are to ever understand the dangers of an economic collapse in the United States and why so many of us fear this outcome, you must ask and answer this question.
This is going to be a long post, so I warn you up front. The history behind why the US Dollar is so important is both long and interesting (at least I hope to make it so). I will start with a simple concept that is at the heart of the global monetary system. It is a concept called FRACTIONAL RESERVE BANKING. I am sure you have heard this term and I am sure very few of you truly understand what this concept (system) means and why it is such a powerful and game changing event in world history. So I will start this lesson there.
FRACTIONAL RESERVE BANKING
Instead of boring you with all the exact dates and people and places, I will choose to explain this concept in the form of a story. The story though fiction will clearly expose how the fractional reserve system works and how it is so easily corrupted and turned against the people, for at its very core, it is meant to work this way.
Story: There once was a gold smith by the name of Robert. He owned the best and most secure gold smith foundry in this medium sized town. One day a man of considerable wealth showed up at the foundry and asked Robert a question. “Mr. Robert I have all this gold and I am afraid someone is going to rob my home. You have this marvelous and secure foundry and I am wondering if I could store my gold here?” Robert considered the request and decided that he would do it. He would charge the man ½ % of his gold to hold it securely for 1 year.
The man agreed. Robert wrote down the amount of gold that the man had given him and Robert placed his seal in wax upon the parchment. Over the next month hundreds of people began asking to store their gold with Robert. And he dutifully took their gold and gave them parchments marked with his seal for the full amount of their deposits.
Soon people began showing up asking to have some of the gold back. He dutifully gave them their gold and took the parchment and made the adjustment and again placed his seal upon the parchment. Soon the rich man who first stored his gold with Robert came back and asked if instead of only having one parchment that stated he had “X” amount of gold(with the seal upon it), he asked if Robert could give him 100 deposit slips, each with 1/100’th of his gold written upon the paper(with the seal). Robert complied.
Soon everyone came and asked for the same thing. Robert was a recluse and didn’t understand what was going on in the market. But he did notice something very peculiar. On any given day his deposit slips would come back to him and people were asking that gold be transferred from one person’s account to theirs. Upon the slip would be his original seal, and next to it the seal of the person who originally deposited the gold. Only the man had signed it over to this other person and put his seal upon the parchment. He compared the seals and found it legitimate and made the entry changes. But THAT WAS NOT THE PECULIAR PART.
After months and months of tracking the flow of gold and paper he noticed on any given day, ONLY 10% OF THE GOLD EVER LEFT HIS FOUNDRY. The other 90% just moved around from account to account. The 10% always showed back up though in the form of new deposits. The only time gold ever left his foundry was when one of his slips of paper was redeemed by someone outside of town.
But month after month the amount of gold kept rising and every day only 10% of it was ever needed. 90% just sat there in his vaults doing NOTHING.
It is not hard to imagine what happens next in this tale. Depending upon how evil or shady Robert is, we can imagine he would go to the market and realize that his paper deposit slips are acting as MONEY. We could imagine that if he were really evil, he would just print up a bunch of deposit slips and put his seal upon them and stroll into the market and start buying things up.
But this charade would be busted fast, because prices would rise as this fake money would bid up prices fairly quick. Also; people would notice Robert flinging deposit slips around and eventually there would be a run on the Foundry (Bank). People would lose confidence in Robert and they would all gather up their deposit slips and go and demand (demand deposit) their gold back(called a run on the bank). And depending upon how many “fake” deposit slips Robert injected into the economy, we could see 5,10 even 50% of the people not get their money back.
End of Story
THE BANK OF ENGLAND AND THE BEGINING OF MODERN BANKING;
This story illustrates the power of the fractional reserve system. This system was successfully used by England many centuries ago and is at the heart of why a small island nation held sway over the entire known world. It is the idea of LEVERAGE. Leverage is derived from the very ratio I introduced above. 9 to 1 is the ratio that the bank of England used in its fractional reserve banks. It is a ratio that remained constant for hundreds of years and only broke down at the end of multi decade cycles as the system eventually folded in upon itself.
At the beginning of a cycle confidence is high and the banks are able to keep their ratios right at 9 to 1. Remember from the story that on any given day a bank will only see 9 or 10% of its reserves go out the door. 90 % just sits in their vaults doing nothing. The Bank of England realized that this ratio was the most important thing in the economic world and they initiated a system that leveraged this system to its fullest potential.
Think about the power that this revelation places upon those that wield it successfully. England used this system to pump up its productivity and growth by a factor of nearly 9 to 1. Instead of being hamstrung by limits to gold production, English banks were able to take in gold and then pump up its value by a 9 to 1 factor.
Because the Bank of England was a private bank(though sanctioned by the crown), this allowed them a lot of flexibility in how they operated. They were not hamstrung by royalty and their idiotic rules. Instead they existed to grow the power of England. GROWTH was everything and is the central tenant of the fractional reserve system. Grow or die is at the heart of this system.
It works this way. If a bank has 100 ounces of gold; that 100 ounces is considered their reserve (again we are talking old English days here). This reserve they are allowed by law to pump up to nearly 1000 ounces of gold on paper. They can then use this “created” money to loan out to the public to allow them to grow their business or create brand new ones. In this system the bank is more powerful than the sovereign. But at all times the crown and the royalty retain control of the military, so the bankers must always be careful not to overstep their boundaries, lest they incur the wrath of the sovereigns.
This system works incredibly well in the early years as growth is spurred and new and innovative business’ crop up all over the areas where this system is used. Those places where this “new” system bumps up against areas that are using old monetary system, will soon find themselves falling behind very quickly. The new system allows growth to occur at unnatural rates, much faster than anything before. But it comes at a price.
As this new money keeps entering the system, prices rise. But this can be kept in check by making sure that reserves are below this 9 to 1 level. This is where a central bank comes into play and is the role of the Bank of England. They watch over the banks and make sure they are playing within the rules they set. But eventually one bank or another starts to stretch past the 9 to 1 and this causes price inflation in those areas to spike. The Bank of England can stretch out how long a prosperous era last, simply by pulling money out of the economy.
This is the idea of deflation. As people pay taxes to the crown, this extracts money out of the system. All the Bank of England has to do is slow down how much money is re-loaned back out by lowering the ratio to maybe 7 to 1 for awhile. This has the effect of slowing down economic activity and eventually prices level out and even fall for a short time. Once things have stabilized, the ratio is slowly raised again, and once again economic activity grows.
But history shows that there is about a 70 to 90 year cycle that has occurred ever since this system has been in use. England eventually controlled the largest part of the known world on the back of a strong military and the use of this economic system. In fact it is the combination of these two entities that is at the backbone of our modern economic system. England masterfully used both Gunboat diplomacy and its deceitful banking system to hold sway over large swaths of the globe for literally centuries.
But within this century’s long domination of the globe, there were significant and devastating times where the system seized up and caused serious global problem, even in the pre-globalized world. The South Sea Bubble and the Tulip Craze in Holland are but a few instances of a world gone crazy in the Crack up Boom phase of the fractional reserve system. This system goes from growth in the beginning, to a long period of slow growth follow by periods of decline. But over the course of the cycle the trend is ALWAYS GROWTH. This continues until finally growth is no longer possible and people start to lose confidence. This loss of confidence almost always occurs after a period called the Crack up Boom. This is the point where tinkering with reserve ratios no longer has the desired affect. And at some point the 9 to 1 ratio is abandoned and it rises to 15 to 1. Then to 30 to 1 and then finally it is unhinged from reality.
But history shows that people will continue to play the game as long as is humanly possible, because no one wants the good times to end; this is particularly evident in the Tulip craze in Holland. This is as clear a case of Crack up Boom as you will ever see. People continued to bid up the price of Tulip bulbs even in the face of overwhelming evidence that a bubble was about to burst. No one felt they would be the last fool holding the bag. But eventually the bubble popped and the economic devastation that followed destroyed entire regions for decades after the collapse.
The collapse of the South Sea bubble was even worse. But throughout it all, the system was never seen as the problem; rather it was greedy businessmen and greedy bankers. And after decades of strife and hardship, the bubbles would deflate and growth could once again resume at a much lower level. And again the Bank of England was there to shepherd in the next glorious era of growth.
WHY A RESERVE CURRENCY IS SO IMPORTANT:
Finally we get to the question of why the US dollar system is so important. Our history lesson brings us all the way to the 1920’s and the end of the England centric reserve currency system. All the way to this point, England was the reserve currency of the world. The use of the British Sterling Pound was at the heart of almost all transactions the world over. Even if you used US Dollars or French Francs, you eventually had to convert them to British Pounds to do anything of worth in the world of finance.
This system started to die in the 1920’s as England over extended itself militarily and domestically. It is this collapse that can be directly linked to the global depression that ultimately led to World War II in the later part of the 1930’s.
A world without a reserve currency is a world in a vacuum. And that is exactly what was being fought for in World War II; to take the mantle of Reserve currency of the world and the domination of the planet. When the dust settled the allies won and it was the United States that took the mantle. We had been groomed for decades as we had finally succumbed to the forces that wanted the United States to adopt a British style central bank in 1913. We had a large military, lots of resources, and a fully functioning and intact industrial base. We were a perfect vessel to place the mantle of the fractional reserve system upon.
From World War II to present, we have seen growth rates that were simply unthinkable just 100 years ago. This system is a conveyor belt of growth that stripped the resources of first the United States and then the rest of the 3rd world and turns it into “wealth”. The U.S Centric system has ensnared the lion’s share of the world’s population and has slowly but surely made them fatally dependent upon its growth paradigm.
It has allowed the earth’s population to double and double again in a matter of a century. The only way this large population can sustain itself under the current system IS TO GROW! Remember that is all the Fractional Reserve System knows and that is GROWTH. It cannot deal with stagnation and it sure as hell cannot deal with contraction.
We are on the cusp of a Crack Up Boom of global proportions. As I type, the central bankers of the world are doing everything they can to keep growth moving forward and yet they continue to fail. WHY? Because growth for growth sake has come to an end and like a hammer, those in charge see all problems as nails. They keep applying the tenants of the growth only system that has worked for literally centuries.
As I stated in previous posts, the end of the American system is going to come much faster than the English system. We are already at the point where other suitors of the fractional reserve crown are lining up to take it away from us. But like England we have a large and ready military and that fact alone can prolong things well past the “Full Retard” moment we see all around us. But the end game is in sight. And I hope now you can understand why the ending of the American centric monetary system should be viewed with such fear and apprehension.
The ending of a global monetary system has only happened once before in modern times (meaning post dark ages) and it ended in a World War and the explosion of the only two atomic weapons on the planet. How will the next one end? Lets just hope it doesn’t involve the remaining several thousand atomic weapons we have left.
(Oh in case you were wondering what happened before the dark ages, at least in the non-Islamic side of the world? The ending of another global monetary system in a little place called the Roman Empire, resulted in centuries of strife and misery. Just so you know.)