Several other large companies affected by this had what is now known as "shotgun marriages", much like the Bear Stearns - JP Morgan marriage in 2008. Coincidentally, one of the biggest of the 1907 shotgun marriages was between JP Morgan's US Steel Corp and essentially insolvent Tennessee Coal Iron and Railroad Co. JP Morgan himself had plenty of experience in these affairs; during the Panic of 1893, JP Morgan had rescued the US Treasury itself. President Teddy Roosevelt, tiring of these constant panics, pushed through the Aldric-Vreeland Act of 1908, which did nothing but create the National Monetary Commission (1909-1912). Their goal was to create a better banking and currency system that would avoid and better deal with these endless panics. The NMC wrote what is now called the Federal Reserve Act of 1913, which was signed by newly elected US President Woodrow Wilson. At the heart of this new currency system was the idea of "Fractional Reserve Lending". In this type of system, it was seen as important to have a way to provide currency liquidity and so in this system, a bank would be able to loan out ten dollars for every dollar they had in their vault-- Fractional Reserve Lending. The 10-1 rule was the Law of the Land from 1913 to the early 1980s, which along with the Depression's Glass-Steagal Act, provided forty years of relative prosperity. But it is in truth a dangerous system by design: if more than a tenth of your loans went under, your bank was toast.
Also in this system, all currency would be introduced into the system as debt: your local bank borrows from the Federal Reserve, and then your bank loans it out to businessmen and consumers. It is a top-down system built on debt. In the 1980s, Fed Chairman Alan Greenspan got rid of the core 10-1 rule for big banks, famously saying that these bankers are adults and can be trusted not to be foolish with the money. Big banks then loaned out vast sums of money; the Reagan, Clinton and Bush boom decades were built upon a mountain of debt. Some US financial institutions found themselves leveraged 40-1 loans/cash. People with no documented incomes were given mortgages; my ex-wife among them. This madness resulted in the Lehman Meltdown of 2008. Given the rate at which new dollars are being printed, there is at this junction little doubt that our currency system and the value of the currency itself is in serious doubt. Peter Schiff, a former US Senate candidate and investor who very publicly called the housing bubble and the stock market meltdown years before it happened, has said that a currency crisis is coming within the next couple of years. This is echoed by Canada's Eric Sprott, who runs Canada's largest and most successful investment fund.
Currently there is only one US politician who consistently and endlessly calls for the repeal of the Federal Reserve Act and the creation of a new currency system.. Texas Rep Ron Paul. I fully believe a new system is in order. But what will replace the Federal Reserve Fractional Lending System ? Many, Paul included, believe that the answer lies in handcuffing the amount of currency in the system to the value of Gold or Silver. Paul also calls for a credit based system instead of the current top-down debt based system. No such system has ever really existed, although gold and silver based currencies have.
As I see it, part of the problem with a gold or silver based currency is that the value of these metals (and thus the value of the currency) can be manipulated. In late 1978, the Hunt brothers from Texas began accumulating vast quantities of silver. Between September 1979 and January of 1980, the value of silver went from $11/oz to over $50/oz.. in four months. Sadly for Nelson Bunker Hunt, his attempt to corner the market failed. Shortly thereafter, silver collapsed down back below the original $11/oz. If a couple of Texas billionaires can do this, imagine what a large sized nation or group of nations can do. This could result in complete havoc for any currency based in silver. The US did in fact have a gold standard as late as the 1970's-- but herein lies another problem. US President Richard Nixon and his Fed Chairman began to print US dollars well in excess of the nation's gold reserves to fund the war in Vietnam and the accompanying deficits. As there was no higher authority, there was nobody watching-- or so they thought. The Arab nations noticed. They began to exchange dollars for gold in titanic amounts. On August 15th 1971, Nixon took several steps to combat inflation caused by money printing-- the biggest one being his decision to end the convertibility of Dollars into Gold. The whole premise of tying the currency to a metal in order to prevent overprinting had just come crashing down.
So.. if Schiff and Sprott are correct and there is a currency crisis, what would replace it ? Since this is my blog and I believe I'm the Fountain of All Wisdom, I'm going to take a stab at this. Lets take a look at what we need: 1. There needs to be a viable way to prevent the printing of too many of them. 2. There needs to be a way to introduce currency into the system other than as debt (the top-down model). 3. If you are going to handcuff the currency to something physical, take care to make it something which would be immensely difficult to manipulate.4. Have a means to temporarily inject currency in the case of another panic and/or crash-- it was the lack of currency in the system which really caused the hardships of the Depression, something Bernanke is keenly aware of.
Therefore-- I would establish a National Currency Board, with each state electing a new member every four years, who's job it is to determine the amount of currency needed in the system based on growth (or contraction) of the economy. For example, if the Currency Board determines that the US economy grew by 1.1% in the first quarter, the nation would need to increase the monetary base by the same amount. If it contracts, no additional currency. Secondly, the currency would be introduced into the system by simply mailing checks (or electronic credits now a days) to all of the nation's citizens.. the first bottom-up system ever tried. Banks, stocks and bonds would compete for the investment capital from the citizenry instead of Central Bank lending, thus achieving Paul's dream.Thirdly I would handcuff the value of the currency to a certain value of a whole group of agricultural commodities such as corn, wheat, lumber, oats etc. So under my scenario, twenty dollars would be able to purchase four bushels of corn, two bushels of wheat, five bushels of oats, etc.. with the party expected to cough up the commodity having the choice in which commodity he wishes to pay the presenter. The idea here is to have some sort of constraining influence on the printing of money, but make it so that the commodity is not easily manipulated. Also, if a 7/8ths majority of the Currency Board agrees, a mechanism to loan cash to savings banks (not investment houses) and/or the Federal Government will exist; the limit of these loans will not exceed 1/20th of the nation's GDP. 5. Glass-Steagal will be reinstated.. verbatim.
Will this happen ? Not while the bankers and politicians have the power to prevent it. Only by revolution will we ever have a bottom-up currency system, and I don't see that happening. If Schiff's Day of Reckoning does arrive, the new system will very likely be much the same as the old one, condemning yet more generations to indentured servitude. Wash, Rinse, Repeat.
PS 4pm: In the Greek bailout, one of the major parts of "The Plan" is to ask creditors to voluntarily accept new, longer dated bonds as a way of easing the short term demands on the Greek Treasury. My question is.. if you are holding a credit default swap and were watching this, how comfortable would you be that your CDS was worth anything when it appears Greece deftly scooted around it's obligations without anybody benefitting from the insurance policy they took out against precisely this outcome ? Jamie Dimon will be fielding some interesting phone calls from those he's insuring come monday morn.