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Gold's Hidden Secret
The Moral Hazard Of Fiat Money

Douglas V. Gnazzo
Dec 15, 2005

"Thus, our national circulating medium is now at
the mercy of loan transactions of banks, which lend, not
money, but promises to supply money they do not possess." [1]


The U.S. Federal Reserve Note's price of gold has breached the high-water mark of $540 dollar bills. Now, I trust many are thinking to themselves: "that's pretty odd language to use to describe the recent move in the price of gold - why not just say the dollar price of gold is up to $540 dollars?"

Because it isn't - it can't be. It is impossible under the present system of irredeemable paper fiat debt-money. Here's why:

Federal Reserve Notes are dollar bills. A dollar bill (FRN) is not a dollar. A dollar bill is the complete antithesis of a dollar. They are to one another, as darkness is to light. This is one of the secrets of the temple they don't want you to know.

A dollar is 371.25 grains of pure silver - commonly known as a Silver Dollar.

Bills And Certificates

Here is a photo of a $10,000.00 dollar bill or Federal Reserve Note, from 1918, which is no longer in print. Notice at the top it states, "Will pay to the bearer on demand." Federal Reserve Notes no longer have that notation on them - why?

Photo courtesy of the Federal Reserve Bank of San Francisco
A Brief History of Money

Let's here what the Fed has to say:

"In 1914, Federal Reserve Notes, which comprise more than 99 percent of today's paper money, were issued by Federal Reserve Banks as direct obligations of the Federal Reserve System. They replaced National Bank Notes as the dominant form of paper money." [2]

"Fiat money is similar to representative money except it can't be redeemed for a commodity, such as gold or silver. The Federal Reserve notes we use today are an example of fiat money." [3]

Promissory Notes And Promises To Pay

As the above photo of the Federal Reserve Note from 1918 clearly shows, the note had written across it the words: "will pay to the bearer on demand." Originally all such FRN's were legal promissory notes, as they had written on them the four necessary stipulations to be a legal promissory note:

  • A specific date when payment is due (on demand)
  • The amount to be paid (the amount written on the face of the note)
  • A person or entity that will make payment known as the maker (The Federal Reserve)
  • A person or entity that will receive payment called the payee (the bearer in possession of the note)

Starting in 1963 Federal Reserve Notes omitted the specific due date (on demand), and the payee (bearer). Two of the four stipulations required for qualification as a legal promissory note were no longer on the face of the notes, yet the Federal Reserve Notes have continued to be issued up to the present day.

It would appear that present day Federal Reserve Notes are not even legal promissory notes, but simply promises to pay - commonly known as a debt obligation or i.o.u.

Silver And Gold Certificates

The following is a photo of a silver certificate from 1878, courtesy of the Federal Reserve Bank of San Francisco.

Courtesy of The Federal Reserve Bank Of San Francisco
A Brief History of Money

Notice the wording that starts at the very top of the certificate, and continues down the face of the certificate. It says, "This certifies that there have been deposited with the Assistant Treasurer U.S. in New York, N.Y. payable at this office to the bearer on demand One Hundred Silver Dollars."

From this we see that silver certificates, which came before Federal Reserve Notes, were redeemable or payable on demand in Silver Dollars.

We also see, as stated in the quote just prior to the silver certificate, that paper fiat money, a.k.a. Federal Reserve Notes, are not redeemable in gold or silver.

"In 1967 Congress authorized the US Treasury to stop redeeming silver certificates in silver dollars or bullion beginning the following year." [4]

Here is a photo of a very rare gold certificate, courtesy of the Federal Reserve Bank of San Francisco's website.

Courtesy of The Federal Reserve Bank of San Francisco
A Brief History of Money

The certificate is repayable (redeemable in gold coin) to the bearer on demand.

Silver Dollar

Now we will look at the dollar that came before all the different forms of money we have seen so far - the dollar of the Constitution - the Silver Dollar. Some of the other earlier forms of money were redeemable in Silver Dollars. The Silver Dollar had no need of being redeemable - as it was real honest money that stood on its own.

Flowing Hair Silver Dollar

The Constitution stated that the money of the United States was to be coined, not printed. It also stated that nothing but silver and gold coin were acceptable as legal tender (legal tender being a questionable issue which will be discussed in a future article).

Constitutional Definition Of A Dollar

The Coinage Act of 1792 clearly defined the U.S. unit of account - the dollar:

"DOLLARS OR UNITS -each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver." [5]

From this we see that according to the Constitution and the Coinage Act of 1792 that a dollar is:
371.25 Grains Of Pure Silver - A Silver Dollar.

The U.S. Silver Dollar had its genesis from the Spanish Silver Dollar known as Pieces of Eight. As the Federal Reserve Bank of San Francisco states:

"During much of the 17th and 18th centuries, the Spanish Dollar coin served as the unofficial national currency of the American colonies." [6]

Gold & Silver Certificates

Gold certificates were not issued until 1863-65. They continued to be issued until 1934. They were redeemable in real honest gold coin. From 1878 through 1957 silver certificates were issued. They were payable on demand in real honest Silver Dollars.

President Roosevelt made gold certificates illegal to own as of January 17, 1934. In March 1964, the Secretary of the Treasury halted redemption of silver certificates for silver dollars.

Federal Reserve Notes

Beginning in 1914 Federal Reserve Notes were issued by The Federal Reserve. As stated in the Federal Reserve Act of 1913:


SECTION 16-Note Issues

1. Issuance of Federal Reserve Notes; Nature of Obligation; Where Redeemable
Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of making advances to Federal Reserve banks through the Federal Reserve agents as hereinafter set forth and for no other purpose, are hereby authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal Reserve banks and for all taxes, customs, and other public dues. They shall be redeemed in lawful money on demand at the Treasury Department of the United States, in the city of Washington, District of Columbia, or at any Federal Reserve Bank. [12 USC 411. As amended by act of Jan. 30, 1934 (48 Stat. 337). For redemption of Federal Reserve notes whose bank of issue cannot be identified, see act of June 13, 1933.] [7]

A Dollar Bill Is Not A Dollar

So, we see that a dollar is not a dollar bill. One is a weight of silver; the other is a piece of paper (FRN) that is not backed by anything except promises to pay. And what are Federal Reserve Notes redeemable in? - Lawful money as stated in the above quote.

Lawful Money

Which begs the question - what is lawful money? Are Federal Reserve Notes lawful money? If Federal Reserve Notes were lawful money, why would they need to be redeemable in lawful money?

All of which means that our money has not evolved, it has devolved.

It has gone from the high-water mark of Honest Money - of silver and gold coin, to certificates redeemable in Honest Money of silver and gold coin, to pieces of paper not redeemable in anything - other than lawful money, whatever that is. Perhaps Ben will be able to enlighten us.

Currency Debasement - From High To Low

  • Silver and Gold Coin - 1792 - Honest Money
  • Silver and Gold Certificates - 1863
    (redeemable in silver and gold coin)
  • Federal Reserve Notes - 1913-14 to present
    (non-redeemable paper fiat)

Pandora's Box

The secret is out of the bag:

A Dollar Bill Or Federal Reserve Note Is Not The Dollar Of The Constitution.

This is the secret the elite international bankers do not want us to know. This is why the global collectivists are afraid of silver and gold - because they are HONEST MONEY.

Honest Money keeps the bankers honest, they cannot just create money at will - by fiat. Under the ever-watchful eye of gold and silver, bankers cannot loan money that they do not have on deposit, and create by the very act of loaning.

Moral Hazard

This is the moral hazard of paper fiat debt-money, of Federal Reserve Notes or dollar bills. Banking is the only business allowed to function where the moral hazard to honor contracts
is called into question.

What other business is allowed to loan that which they have not earned - that which is not in their possession - that which doesn't even exist?

Ask the Chairman of the Fed if the money is on deposit, ask him if ten percent of the people wanted their money all at the same time, if the money is there - if it really exists.

Or is the money merely in electronic book-entry form - shades cast by the magic of slight of hand: the wonders of double-entry bookkeeping? Now you see it, now you don't. The more there is for me, the less there is for you.

Money that circulates only because it has been forced upon the people by legal tender laws is not Honest Money. What the State enforces as acceptable for payment of taxes is not Honest Money. It is not the stuff of free markets. It is not the money of the Constitution.

Is it honest to lend that which one has does not have? Is it honest to lend that which one has not earned? Is it honest to create that which one loans out, and then to charge interest on it, for doing nothing? Fractional reserve lending of paper fiat debt-money evokes the epitome of moral hazard, and thereby pays homage at the altar of the money-god Lucre.

Cui Bono

Why has our money been allowed to devolve from honest silver and gold coin to the present dishonest paper fiat known as Federal Reserve Notes?

Why under the watch of The Federal Reserve since 1913 has Federal Reserve Notes lost 95% of their purchasing power?

Why are we not taught in school the importance of purchasing power? Why are we not taught in school the constitutional definition of a dollar?

If you say we are honestly taught these things, then I ask: why can't the smartest monetary minds at the Fed prevent our money from becoming worth less and less, almost to the point of worthlessness? If they were taught such, they sure aren't practicing what they were taught.

How can the greatest nation on Earth idly sit by and sheepishly accept the debasement and destruction of its money? Cui Bono?

The Yellow Brick Road

Follow the money is the answer, back to the wizard behind the curtain - the emperor without any clothes. Loans start out where? They begin at banks - commercial banks.

Where do commercial banks get money to loan? They get it from the people. Where do the people get the money? They get it as payment - payment from the government, for services rendered to the government.

Where does the government get the money to pay its workers, vendors, and other employees? It gets it from the collection of taxes.

But aren't we just going around in circles? Before the people could pay money in taxes, they had to get it from somewhere. Where did they get it? Ah yes - at work. Where then did their employers get it?

The Circuitous Money Trail

The people get money from their employers and banks. Employers get money from their customers, and banks. The banks get money from government employees, vendors, and contractors. The government gets money to pay its employees from the Federal Reserve. The Federal Reserve gets money by monetizing the debt of the U.S. Treasury - the debt of the State. See The Federal Reserve: Fractional Reserve Lending for a detailed explanation.

This is the reason the bankers are allowed to function by a different set of rules than other businesses.

The Federal Reserve Monetizes The Government's Debt.

Without one hand washing the other, the State would have to get their financial house in order; they would not be able to run the deficits they presently do. They would not be able to run up the debt they do. And the bankers would not be able to lend out that which they do not have on deposit; and to then charge interest on it - to make a profit thereby.

The greatest monetary mind of the century - Sir Alan Greenspan has decreed such to be the case:

"Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights." [8]

Those are the words of The Chairman of The Federal Reserve - Alan Greenspan, whom some say is the greatest Fed Chairman to have graced the hallowed halls of the temple.

The writing is on the wall, patiently waiting on the fullness of time - to render its verdict.

What Price For Gold

A savvy analyst in the gold market made a very keen observation regarding the inflation-adjusted price of gold the other day:

"At $500, gold's real price (as deflated by the CPI) is still lower than the peak of every rally since 1972. It would take a nominal gold price of $860 to match the deflated $500 high of 1987 and $1,020 to match the $510 seen in 1982. In order to test the 1980 high of $850 the nominal value would need to trade at $2,177." [9]

This is an important point wanting further discussion. Gold's "real price" is lower than all rallies since 1972 when adjusted for inflation. As discussed in many previous articles, paper fiat debt-money looses purchasing power over time. See GOLD: Sovereign of Sovereigns.

For example, the Fed has an Inflation calculator that figures out the loss of the purchasing power of our money from any given year to the present. If you plug in the year 1913 (that's the year the Fed took control of monetary policy) and you put in the present year of 2005 - you find that what cost $1 dollar bill in 1913 costs $19.66 today.

Now you know why some claim the Fed has done a really lousy job of providing a sound monetary policy, as the dollar bill or Federal Reserve Note has lost over 95% of its purchasing power since the Fed took control - or perhaps took over would be closer to the mark.

Everything is priced in U.S. dollar bills or Federal Reserve Notes - even the "price" of gold. Because Federal Reserve Notes (dollar bills) keep loosing more and more of their purchasing power, all other items priced in dollar bills, keep get costlier - including gold.

But there is much more to the story then meets the eye - another one of those hidden secrets of the temple looms large, and obfuscates the view - laying waste to the land.

Purchasing Power vs. Price

Let's take a closer look at exactly what it means for the price of a good to go up. On one hand it means that it takes more dollar bills to purchase it, just as the Fed's Inflation calculator clearly shows. Many say that inflation is the price of stuff going up - of it costing more, as in higher prices. See Gold: Is It Really All in the Name for a more detailed account.

But what makes prices, in aggregate, go up? If individual producers are doing a good job, production should be going up. If the latest technological advances are being put to work, production should be going up. Sir Alan has often spoken about the "production miracle".

If the economy as a whole is getting better at producing goods and services, then general prices over time should be falling, not rising. Naturally, certain cutting edge technologies will at first cost more to discover and implement, but once implemented, in aggregate, society should become more efficient; and not just in regards to how many (quantity) widgets can be made, but in the cost (quality of efficiency) of making the widgets, as well.

Yet debt is rising, not falling. Stuff is getting more expensive, not cheaper. What gives?
The moral hazard of paper fiat debt-money is what gives.

When money can be created out of thin air, and loaned out with interest, no means of production can overcome such a hideous monetary system that sucks the blood of life (purchasing power) out of its unwary host. Shades of The House of Dragon flitter about.

When money is created by the monetization of government debt, those under its shadow are involved in a vicious game that cannot be won. We become shackled to a life of debt servitude from which there is no escape: under the present monetary system of paper fiat debt-money that is.

The Only True Power Evil Has Is The Power To Destroy Itself

Illusion And Deceit

But remember what the Constitution states is money: gold and silver coin, not paper. Remember the devolution of our monetary system from coin, to certificates, to paper fiat.

When our money is allowed to be dishonest, to be mere promises to pay - our monetary system is on self-destruct. Federal Reserve Notes are doomed to lose their purchasing power, just as the Fed's Inflation calculator shows.

So beguiling is paper fiat that even those who favor gold as Honest Money are deceived into accepting the "pricing" of gold in dollar bills, or Federal Reserve Notes.

To Do So Is To Accept The Unacceptable.

The dollar of the Constitution is a weight of silver: one ounce of silver - the Silver Dollar.

The Dollar Bill Or Federal Reserve Note Is Not The Constitutional Silver Dollar.

One is an honest weight of silver - the other is a piece of paper that represents a debt obligation. One is the means of payment (silver), the other is a promise to pay - but pay with what?

Delusions Of Price

Prices go up only because THE VALUE OF THE MONEY GOES DOWN, causing a larger quantity (price) of dollar bills needed to buy the same amount of goods - even gold.

Gold And Silver Should Not Be Priced In Dollar Bills Or Federal Reserve Notes.

The Constitution and the Coinage Act of 1792 clearly state the same.

Gold And Silver Should Be Priced In Honest Weights Of Gold And Silver.

Our money is gold and silver coin, not paper Federal Reserve Notes of debt-obligation. Gold and silver are the standard by which the dollar is defined - the unit of account - so says the Constitution.

All prices of all goods should be according to the constitutional definition of a weight of silver or gold, not of a number of Federal Reserve Notes. What good will it do for gold to rise to $3000 an ounce if the money of account is still paper fiat Federal Reserve Notes?

When you sell your ounce of gold for 3000-dollar bills - you will be accepting money that has lost as much purchasing power as your gold just "went up in price."

You will not be any better off. You will be back to square one. This is the shabby secret they do not want you to know or understand.

Only Honest Money can cure the ills of such a cancerous monetary system. Only gold and silver exchanged by weight and fineness alone can overcome the debasement and loss of purchasing power that paper fiat debt-money has caused.

Remember the words of the Maestro:

"Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."

Remember the words of Faust after making his deal with Mephisto:

"The first thing I did was print the bills
10's, 20's, 100's and all
The people were happy, both short and tall" [10]


A dollar bill is not the dollar of the Constitution. A dollar bill is a Federal Reserve Note that is a promise to pay. The dollar of the Constitution is the Silver Dollar - an honest weight and measure of 371.25 grains of pure silver.

Forced legal tender laws, backed by the enforcement of the State, decree that the people must accept the unacceptable - paper fiat debt-money that has lost 95% of its purchasing power, which means it is nothing more than a means of wealth transference.

To accept gold and silver to be priced in dollar bills or Federal Reserve Notes is to accept the unacceptable, it is playing by rules of the game that have by stealth been changed.

The Dollar of the Constitution is a Silver Dollar. Silver and gold are not defined or priced in dollar bills - Silver and Gold coin are money - Silver and Gold are the standard by which prices should be set, according to weight and fractions thereof.

To sell your gold and silver in exchange for paper fiat debt-money is to accept the unacceptable - to accept for your precious metal mere pieces of paper that are doomed to continually lose more and more purchasing power.

Be not deceived by the illusions they disperse as truth. Seek the return to Honest Money.

Too Many Are Walking In The Stubbornness Of Their Heart.

"Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed." [11]

Coming The Beginning of the New Year - Open Letter To Congress
Seeking Redress For The Return To Honest Money

[1] Irving Fisher, 100% Money
[2] Federal Reserve Bank of San Francisco A Brief History of Money
[3] Federal Reserve Bank of Minneapolis The History of Money
[4] A Brief History of Money
[6] A Brief History of Money
[7] Federal Reserve Act
[8] Alan Greenspan
[9] Ross Clark - ChartWorks
[10] Goethe's Faust
[11] The Declaration of Independence

Douglas V. Gnazzo

© 2004-2006 Douglas V. Gnazzo. All rights reserved.

Douglas V. Gnazzo is CEO of New England Renovation LLC, a historical restoration contractor that specializes in restoring older buildings that are vintage historic landmarks. He writes for numerous websites and his work appears both here and abroad. Just recently he was honored by being chosen as a Foundation Scholar for the Foundation for the Advancement of Monetary Education (FAME).

Disclaimer: The contents of this article represent the opinions of Douglas V. Gnazzo. Nothing contained herein is intended as investment advice or recommendations for specific investment decisions, and you should not rely on it as such. Douglas V. Gnazzo is not a registered investment advisor. Information and analysis above are derived from sources and using methods believed to be reliable, but Douglas. V. Gnazzo cannot accept responsibility for any trading losses you may incur as a result of your reliance on this analysis and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions. This article may contain information that is confidential and/or protected by law. The purpose of this article is intended to be used as an educational discussion of the issues involved. Douglas V. Gnazzo is not a lawyer or a legal scholar. Information and analysis derived from the quoted sources are believed to be reliable and are offered in good faith. Only a highly trained and certified and registered legal professional should be regarded as an authority on the issues involved; and all those seeking such an authoritative opinion should do their own due diligence and seek out the advice of a legal professional. Lastly Douglas V. Gnazzo believes that The United States of America is the greatest country on Earth, but that it can yet become greater. This article is written to help facilitate that greater becoming. God Bless America.

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