In the last post, we covered the first ~150 years of money in the United States.
In this article, we are going to discuss the most recent ~100 years, with a focus on the establishment of the Federal Reserve (the Fed), the end of the Gold Standard, and the future of money.
The Panic Of 1907
In October of 1907 a three-week financial crisis unfolded, involving bank runs, a stock market crash, and a near-crash of New York City's trust companies (financial institutions that primarily speculated on stocks).
The official story is that a failed stock manipulation scheme triggered a bank run on the trusts. With no central bank to intervene, financier J.P. Morgan pooled funds and came to the rescue, and had justification for establishing a central bank.
In 1910, a group of financiers and international bankers met on Jekyll Island, off the coast of Georgia, to draft the framework for a new central bank that would stabilize the financial system, and facilitate an "elastic" money supply.
In 1913, congressmen and senators rushed the bill through before Christmas, and the Federal Reserve Act was signed into law by Woodrow Wilson.
The Federal Reserve (1913)
As we discussed in the previous article, there had already been two federally chartered banks in United States history, namely the First and Second Bank of the United States.
These national banks acted as fiscal agents for the federal government, and were a de facto regulator of the state-chartered banks, but their scope was very limited compared to the Fed, which was granted additional powers:
- Lender of Last Resort (Discount Window) - If a bank cannot borrow money from another bank, it can get it from the Fed as a last resort, at a higher interest rate (the discount rate).
- Mandate Reserve Requirements - Although state-chartered banks applied reserve ratios, they weren't officially enforced until the establishment of the Fed. Reserve requirements have fluctuated since 1913, and depend on the location of the bank, as well as the type of deposit.
- Conducts Open Market Operations - In order to influence interest rates and control the money supply, the Federal Reserve has the authority to buy and sell US treasuries on the open market.
- Sets The Federal Funds Rate - The Federal Reserve sets the target federal funds rate (the interest rate at which depository institutions lend each other money overnight) through its influence on banking reserves and open market operations.
Although the Federal Reserve further centralized the banking system, the United States remained on the Gold Standard even after it was established.
The Gold Standard (1873 - 1933)
The United States was not always on a strict gold standard. The nation was actually on a bimetallic standard from 1792 until the 1870s. Throughout that time period, any individual could take gold or silver bullion to the US Mint and create dollars for free.
The US officially demonetized silver with the Coinage Act of 1873, halting the production of silver dollars. In 1900, the Gold Standard Act officially established gold as the sole standard for redeeming paper currency in the United States (at $20.67 per ounce).
The domestic Gold Standard remained in place until 1933, when president Theodore Roosevelt banned US citizens from holding it.
The ban was a result of the Great Depression, which caused deflation, panic, and the hoarding of gold.
While controversial, eliminating the Gold Standard allowed for expansion of the money supply to address economic needs.
The ban on gold ownership remained in place until 1974.
Bretton Woods Agreement (1945)
Due to America's dominant economic power and significant gold reserves, the US dollar became the World Reserve Currency after World War 2.
Under the Bretton Woods agreement (signed in New Hampshire), the currencies of the participating countries (44 allied nations) were pegged to the US dollar, which was backed by gold at $35 dollars per ounce. The peg prioritized trade expansion, economic recovery, and cooperation.
The central banks of participating nations held dollars as reserves on their balance sheets in order to defend the fixed exchange rate peg. When their currency depreciated in value, they would sell USD and purchase their own currency on foreign exchange markets. Conversely, when their currency appreciated, they would sell their own currency to purchase USD.
Although US citizens were still barred from redeeming dollars for gold, foreign countries and central banks could do so until the "Nixon Shock" of 1971.
Closing of the Gold Window (1971)
By the late 1960s, US balance-of-payments deficits (driven by Vietnam War spending, social programs, and inflation) led to foreign dollar holdings far exceeding US gold reserves. Countries like France began redeeming dollars for gold, and even sent a warship to New York to collect it.
In 1971, Richard Nixon announced the "temporary" suspension (closure of the gold window) of dollar convertibility into gold for foreign central banks and governments, severing the last link of the US dollar to a commodity.
With the elimination of the gold standard for US citizens in 1933, followed by the closing of the gold window for foreign entities in 1971, there was no limit on how far the US could expand the money (currency) supply.
Since this decoupling, the US government has increased the national debt from $1 trillion in 1981, to $38.5 trillion today:
Bitcoin Launch (2009)
In 2009, Satoshi Nakamoto unleashed a new form of money on the world. Decentralized, borderless, and limited in supply, the Bitcoin protocol cannot be manipulated by the international bankers.
Cryptocurrencies like Bitcoin enable peer-to-peer transactions, eliminating the need for the intermediaries and middle-men who have been slowly taking over finance since the establishment of the republic.
Bitcoin is open-source, meaning anyone can build atop it. Innovative blockchains like Ethereum and Solana, which have made tokenization possible, were inspired by it.
Decentralized exchanges, real-world assets, and DePINs continue to grow on these platforms.
Freedom vs Security
Before the establishment of chartered national banks and the Federal Reserve, we lived in a decentralized, competitive, "Free Banking Era", where the onus was on the depositor to do their due diligence on banks.
Now, the Federal Reserves keeps us "safe" from bank runs, but steals our purchasing power via unlimited currency creation (inflation).
Moreover, the powers that be have used their grip on the banking system to influence many aspects of society, from wokeness to mass migration.
Unlike the regulated banking system, we are still in a decentralized, competitive, "Free Crypto Era".
There is no central authority that can favor one cryptocurrency over another. Investors must do their on research in crypto, meaning it is still an industry that favors "survival of the fittest" over security.
Until next time...
Why are we in crypto? To gamble on memecoins? To get rich quick via 100x leveraged trades? Or are we here for the economic freedom the American founding fathers like Thomas Jefferson and Andrew Jackson wanted to bestow upon their descendants?
We are fast approaching the end of an unsustainable debt-based fiat monetary experiment, where the freedom crypto offers will far outweigh any safety provided by the banking overloads.
If you learned something new from this article, be sure to check out my other posts on crypto and finance here on the Hive blockchain. You can also follow me on X or InLeo for more frequent updates.
Sources
Federal Reserve Bank
Executive Order 6102
Federal Debt Chart