“All the Perplexities, Confusions and Distresses in America arise not from defects in their Constitutions or Confederation, not from a want of Honour or Virtue, So much as from downright Ignorance of the Nature of Coin, Credit and Circulation.”
– Letter from John Adams to Thomas Jefferson, August 25, 1787
Illegal Money
“Let’s rip the waste out of our great nation’s budget, even if it’s a penny at a time,” wrote President Trump on February 9. This statement came after he directed the Secretary of the Treasury to cease penny production.
The reasoning behind Trump’s decision is that it costs more to mint a penny than its actual value. Notably, the U.S. Mint incurs nearly four cents to produce a single penny.
This situation provides a penetrating insight into the erosion of our currency since the Federal Reserve Act was enacted by President Woodrow Wilson on December 23, 1913. In essence, the collaboration between the federal government and the Federal Reserve has systematically devalued our money, impacting every dollar you’ve earned, saved, and invested over your lifetime.
How severe is this devaluation? According to the Bureau of Labor Statistics’ inflation calculator, the purchasing power of a U.S. dollar has plummeted by 97 percent since 1913. Essentially, the dollar is now worth approximately $0.03.
While Trump’s intentions to curb government spending and waste are commendable, eliminating the penny does little to rectify the underlying issues of wastefulness and restore fiscal integrity to the American populace.
For nearly 150 years, the currency in the United States was backed by gold and silver coins, as mandated by the U.S. Constitution, which restricts payment in debts to gold and silver tender. Furthermore, the Constitution entrusts the authority to coin money exclusively to Congress.
Today, however, the dollar only exists as a Federal Reserve Note. Although these notes are legal tender, they exist illegally under the Constitution, as they are neither gold nor silver coins, nor have they been minted by Congress.
The prevalence of Federal Reserve Notes has contributed significantly to the challenges faced by everyday workers in meeting family financial needs. Without a return to a sound monetary system, the situation may deteriorate even further.
Pesos and Dollars
To grasp the transformation of currency over the last century, it’s helpful to compare the examples of the U.S. and Mexico.
Both the U.S. dollar and the Mexican peso were once reliable indicators of value. Today, they are often perceived as unpredictable, much like the shifting loyalties of politicians.
This understanding doesn’t come solely from history books, but also from the tangible reality presented by the silver coins we hold: the Peace Dollar, minted in 1921, and the 1922 Un Peso. At the time they were produced, one Peace Dollar was equivalent to one dollar, containing 0.77344 troy ounces of silver, while one Un Peso equaled one peso, possessing 0.3856 troy ounces of silver.
The conversion was straightforward: the silver content made two pesos equal to one dollar.
In today’s world, however, both currencies have been reduced to mere paper notes issued by their respective central banks. Their value now hinges on government credibility, military strength, and the global market’s perception of each country’s ability to honor its debts.
Currently, the exchange rate stands at approximately 20.30 pesos for one dollar. This shows that the Mexican government has historically managed its currency less effectively than the U.S. government, with the exchange rate shifting from 2:1 to over 20:1.
When measuring value with silver, the picture becomes even more striking for both currencies.
Value Destruction
In the early 1920s, an ounce of silver cost around $1.29, while today, it costs about $33.50. This shift signifies that silver is currently valued at 2,496 percent more in dollar terms than it was a century ago.
In contrast, the peso’s collapse in value is even more alarming. In 1922, it took 2.58 pesos to purchase an ounce of silver; today, that price has skyrocketed to 680.05 pesos—an appalling increase of 26,258 percent.
Although inflation in the U.S. has been insidiously gradual, it has instilled a certain level of trust in the dollar as a global reserve currency.
However, with rampant government spending this century, and particularly after the coronavirus outbreak, we now witness a shift from subtle inflation to more pronounced price hikes for the first time in decades.
It is apparent that the peso, the dollar, and nearly all paper currencies will continue to be devalued by their respective governments. However, the dollar may face accelerated devaluation compared to other currencies. This could require a significant dollar decline to reach a point where two pesos equal one dollar.
This shift is indeed necessary to make U.S. manufacturing more competitive internationally. If Trump’s goal is to revitalize American manufacturing, then a weaker dollar is essential. Import tariffs and diplomatic pressure on foreign governments to buy ‘Made in the USA’ products have their limits.
Death of the Penny and What This Means for Gold
The decline of the penny—a mere token—may be a practical decision to avoid manufacturing losses. More critically, it symbolizes decades of reckless spending in Washington.
This situation mirrors the excessive government spending seen during the Roman Empire, which was financed through a chronic cycle of currency devaluation—melting coins and reminting them with increased amounts of base metal over time.
In 54 A.D., a denarius was composed of 94 percent silver; by 218 A.D., it had dropped to 43 percent. Within fifty years, it was less than one percent silver.
This potential for a sudden dollar devaluation is why central banks globally are diversifying their reserves away from dollars and accumulating gold. This likewise underscores the necessity for individuals to consider holding physical gold.
As the dollar depreciates, the price of gold tends to rise in dollar terms. Thus, owning gold becomes a practical measure for individuals looking to safeguard their wealth.
As Trump advances policies that could weaken the dollar to rejuvenate American industry, there may simultaneously be an effort to reset the financial system on a more stable footing while addressing national debts.
“We’re going to monetize the asset side of the U.S. balance sheet for the American people,” stated Treasury Secretary Scott Bessent recently.
The specifics of this statement remain vague, but a prevalent theory suggests that it may involve updating the value of U.S. gold reserves to match market prices. However, questions linger regarding the actual existence of the gold purportedly held in Fort Knox, which has not been audited in over fifty years.
According to the Treasury’s financial reports, the U.S. possesses approximately 261.6 million troy ounces of gold. These reserves hold a statutory value of $42.22 per ounce, equating to a book value of $11 billion. However, with gold currently priced around $2,950 per ounce, its market value is nearing $771 billion.
Clearly, a $760 billion increase in Treasury monetary assets would be significant. Yet, for the fiscal year 2024, the U.S. government is projected to spend $6.75 trillion, suggesting that these gold assets would only cover government funding for about six weeks.
So, what is the true implication here?
Could this be merely an accounting maneuver to secure short-term funding? Or is it an attempt to alleviate the financial system—essentially deflating debt—by lowering the dollar’s value against gold?
If it is the latter, mere adjustments to U.S. gold asset values will be insufficient.
With a national debt of $36.5 trillion and unfunded liabilities exceeding $226 trillion, any genuine effort to restore the financial system on a gold basis would necessitate a significant increase in gold’s price in dollar terms. In tandem, prices for goods and services would need to rise proportionately.
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Sincerely,
MN Gordon
for Economic Prism
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