Blind Monkeys Could Have Managed Money Better Than the Federal Reserve

Published February 21, 2011

In 2013, we Americans will commemorate a century of wealth destruction in the United States—the Federal Reserve will be 100 years old.

In 1913, the Federal Reserve Act became law—granting sole authority to the Federal Reserve to “issue legal tender.” Armed with its new power and its good intentions, the Fed embarked on a 98-year process of currency debasement. That’s not what the Fed set out to do; it’s just what it did do.

In the early days of the Federal Reserve, this monetary authority enjoyed the support of a gold standard. Few Americans doubted that the Fed’s new greenbacks would be as good as gold. As such, gold coinage and paper dollars intermingled effortlessly in the U.S. economy for most of the Fed’s first two decades.

Hard Money, Soft Promises
But as the wheels of progress roared ahead, America’s “hard money” coinage disappeared and soft promises took its place—soft promises and lots of chatter about hard money. As it turns out, chattering about hard money does not preserve wealth as well as hard money itself.

The purchasing power of a one-dollar bill has plummeted more than 95 percent since the Federal Reserve first began printing its legal tender in 1914. Although the dollar’s epic decline began glacially, it has gathered luge-like momentum.

The greenback’s value dropped only 50 percent during the first 33 years of the Fed’s stewardship – i.e. between 1913 and 1946. But the 1946 dollar would lose half its value in just 24 years, while the 1970 dollar would lose half its value in just nine years. The rate of decay slowed somewhat during the Volcker years, as the 1979 dollar did not lose half its value until 14 years later.

Nevertheless, the dollar’s progression toward zero since 1913 feels more geometric than arithmetic.

In 1914, the year the Federal Reserve began conjuring dollar bills into existence, 700,000 shimmering new $10 Indian Head Gold Eagles rolled out of the Philadelphia, San Francisco, and Denver Mints. Once in the hands of a working stiff, each $10 coin would buy $10 worth of goods and services. Likewise, the Fed’s crisp, new McKinley $10 bill would also buy $10 worth of goods and services.

Golds’ Gains, Paper’s Losses
Over the ensuing 98 years, a succession of Federal Reserve Chairmen labored to “preserve” the purchasing power of their McKinleys, Washingtons, and Lincolns. The Gold Eagles had to take care of themselves. The results are in; the unprotected Gold Eagles flourished, while the “protected” McKinleys withered. Based on its metal content, a 1914 $10 Indian Head Gold Eagle is worth $643.45. A 1914 $10 bill is still worth ten dollars.

To examine this contrast from a slightly different perspective, consider the divergent paths of the two $50 bills pictured below.

Comparison of $50 bills

The first $50 bill is a 1913 “Gold Certificate,” issued directly by the U.S. Treasury and fully convertible into gold. The second $50 bill was issued by the Federal Reserve in 1914 and was convertible into nothing. Both versions of this $50 bill circulated freely in American commerce.

Any holder of the $50 Gold Certificate held title to 2.41896 troy oz. of gold—at the fixed rate of $US20.67 per troy oz. These certificates could be redeemed at any bank or from the U.S. Treasury itself at any time … until 1933, when FDR outlawed gold ownership.

Notwithstanding this little nuance, let’s consider the plight of two hypothetical buddies from 1914. The first buddy, Caleb, stashes a $500 “rainy day” fund under the floorboards of his house—a roll of ten $50 Ulysses S. Grant dollar bills. The second buddy, Josiah, also stashes $500 under the floorboards—he walks into the neighborhood bank with ten $50 Ulysses S. Grant Gold Certificates and exchanges them for gold. Josiah then takes his gold and hides it under his floorboards.

$32,000+ from $500
Both buddies forget about their hidden stashes. Eventually, let’s say 2010, the respective heirs of these two long-deceased buddies happen to conduct simultaneous renovations of their respective residences. Caleb’s heirs find the ten ancient $50 bills. “How quaint,” they think to themselves. Josiah’s heirs find $32,172 worth of gold!

Thus, 98 years of history demonstrates conclusively that a blind monkey could have preserved the dollar’s purchasing power better than a Federal Reserve Chairman. Unfortunately, it’s tough to find a blind monkey who will take the job.

Eric J. Fry ([email protected]) is Agora Financial, LLC’s editorial director and a specialist in international equities since the early 1980s. Mr. Fry also publishes investment insights and commentary under his own byline as editor of The Daily Reckoning (, where this article first appeared. Used with permission.

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