America's Money Machine

Into the Pit 255
That bankruptcy was inevitable should have been apparent from the
steady dilution of the reserves to meet the obligations of the System. By
1933, total note and deposit obligations of the System convertible into
gold amounted to $5.9 billion against gold holdings of$3.8 billion. This,
of course, is only the tip of the iceberg. Since the Federal Reserve bank
deposits were the prime reserve ofthe banking system generally, the total
demand obligations ofthe banking system, provisionally convertible into
gold, amounted to some $15 billion.
Circumstances at home and abroad continued to increase the gold
reserve of the System through the Great Depression and World War II
to a maximum of some $27 billion by 1949-some 70 per cent of world
monetary gold stocks. But the obligations of the System, both direct and
indirect, continued to outrace the reserve. After 1949 the gold reserve
began a steady decline, while, as we have noted, succeeding enactments
of Congress freed the System of any mathematical relationship between
its obligations and its gold reserves.
By 1968, when the central banks of the world ceased to deliver gold
to the market at monetary parities,· the- Federal Reserve note circulation
had increased to $42.3 billion in addition to which were some $5.3 billion
in debased coinage. Demand liabilities of the banking system had risen
to $148.5 billion. The gold stock had dropped to $10.9 billion. During
the following ten years the "money stock," as the note and coin circulation
and demand deposits were now called, rose to $361 billion, and if
all banking obligations are included (savings accounts and time deposits),
the total ran to upwards of $500 billion-a forbidding sum of dollar
liabilities to blanch the advocates of a circulating metallic currency.
The consequences of a depreciating currency-consequences that are
immediately economic but spread from there to tincture the social and
political fabric of a country, infecting it with the virus of moral decayhave
been the subject ofmany treatises and will only be summarized here.
Mommsen's history of the Roman Empire and Andrew White's classic
Fiat Money Injlation in France describe in vivid terms these effects; those
in post-war Germany are of too recent memory to require retelling.
Despite the tragic history ofdepreciating currencies advocates ofmonetary
expansion continue to be lured by the prospect of cheap moneyeasier
credit, abundant purchasing power for everyone. Paradoxically,
the effects are the opposite, and here we find the core of the moral
malaise implicit in the process-that avarice, the desire for unearned
wealth, is self-defeating.
Thus, we find that as a fiat circulation increases, its purchasing power