1857 was a year to remember in America. It began with a “run on a bank,” which must be explained, as it can happen tomorrow, if the right circumstances occur. A “run on the bank,” means that depositors become suspicious of the bank’s solvency, and seemingly all at once, go to the bank to draw out their savings, or get cash for the funds in their checking account. I say it can happen tomorrow, because few banks have much cash in their hands. I mean it! If you wish to obtain, say $25,000 in cash, even though you may have $500,000 on deposit with the bank, the bank will usually require that a “notice to withdraw cash,” be given, so it can get the cash because they don’t have it. No matter the size of the bank, it is doubtful that any have more than 1% of deposits in actual cash on hand. A run on any bank today, would spread instantly to other banks, because no bank has any cash to speak of, and word would spread instantly.
At any rate, in 1857 there was a run on the Seaman’s Bank. Not unusual really, but it triggered chaos. In 1857, dollars were backed by gold, but gold was also freely circulated, and gold coins were held by everyone, as well as paper money. Paper money never really was at a par with actual gold, even though it was backed by such. Gold was being exported by the US government, and this reduced the actual backing percentage. Word got out, and the populace became suspicious. What will trigger trouble in 200?
Banks can loan dollars to irresponsible individuals, or individuals can come on hard times. It’s the same with businesses and corporations. In Japan, real estate had become so expensive and over-priced, that when the real estate bubble burst, banks had outstanding loans, which had far more owed, than the properties which secured the loans, were worth. Japanese banks today, have trillions of yen in “non-performing” loans, which will never be collected, and which they refuse to get off the books. Loans are an “asset” to a bank, and deposits are a “liability.” So when a loan is still on the books, even if it is dead in the water, it is still counted as an “asset.” This is why Japanese banks keep bad loans on their books. China has the same situation with its banks.
In August of 1857, gold in circulation, bank deposits, and bank loans, all fell to alarming levels. A few bank runs and failures gave the populace the jitters, and gold coins went into bureau drawers. People went to withdraw paper dollars, and loans became behind in payments or actual default. It was close to harvest time, and farmers kept cash and gold to pay for harvesting expenses. Railroads were heavily in debt, and traffic was down, awaiting the harvest business. Ohio Life and Trust was heavily into railroad financing and crop futures, and it failed. Then the Michigan Central Railroad declared bankruptcy, which a month later, caused several more banks to fail. There were runs on big New York banks, such as Hanover, Metropolitan, and The Bank of Commerce. The Mechanics Banking Association closed its doors forever, and depositors lost everything. On September 25th, Philadelphia banks suspended gold payments for paper money, and this caused unprecedented hoarding of gold by the populace. By October 13th, the treasury suspended paper dollar convertibility into gold. This caused more bank failures and railroad bankruptcies. The stock market fell precipitously. The only part of the US that wasn’t injured from the panic was California, which produced ample gold. Georgia had gold mines which produced some, thereby Georgia felt panic to a lesser degree.
“So what?” you say. We now have the FDIC, which insures deposits to $100,000, so this can’t happen again. The FDIC has cash in its vaults of about 1% of what it “insures,” if that is the correct term, which it isn’t. Would you insure your life or health with an insurance company, which has 1% in assets? Now suppose, suddenly, millions of people went to their local bank, and lined up to withdraw? Banks probably don’t have enough paper dollars on hand to satisfy more than 1% of withdrawals. The presses would roll, but they’re already rolling to capacity, so that would be no solution. Truckloads of rapidly decreasing value currency (if any were available) would be rushed to banks to satisfy anxious depositors, but the spell would have been broken.
“Well, we have credit cards now, to buy things,” you say. Far too many are maxed out, so this wouldn’t solve the problem for more than a brief moment. The myth of dollar paper money ’value,’ would have been broken in a quick few days. You think prices are going up fast now? As I write this, I have been informed that my health insurance has gone up 37% . We are having a true 12% inflation now, but if bank runs began, I’ll guarantee you that (1) the counterfeit trade would blossom overnight, and (2) prices would be raised instantly by retailers and wholesalers, because of a shortage of paper dollars. Counterfeit dollars raises the supply, just like genuine ones.
There has never, in recorded history, been a paper money that has survived. This is absolutely true. Gold and silver have, throughout history, in all nations, been true money and security. While 99% of the world sneers at us gold and silver bugs, they will eventually learn the value of tangible, scarce, beautiful, fungible, gold and silver coinage. In 1857, things were smoothed out with a large shipment of gold from California. Within a few months, things were a lot better, but it took years for the economy to fully be restored. In 1857, there was a gold standard, and people carried gold and silver coins in their pockets. Today, there is no gold standard, and nothing to prohibit Uncle Sam from printing trillions of unbacked paper dollars and writing checks, thereby making dollars lose value. Paper dollars lose value in a direct, although sometimes a delayed ratio, to the number in circulation. The numbers in circulation, are increasing by over a trillion a year, and in every facet of life, prices are zooming up. Be at gas stations, grocery stores, department stores, hardware stores, or the local newspaper subscription rate, prices are now going up very fast.
Government spending, be it for Iraq, Afghanistan, Medicaid, Social Security, welfare, Homeland Defense, or a thousand other foolish expenditures, is out of control. Government is printing more money, and increasing the currency supply, at a greater rate than any time since WW II. Prices actually doubled during WW II. Autos costing $650 in 1941, cost $1300 in 1946. (compare that to a $45,000 Dodge truck today) The checks are being written and cash being printed, all without a silver dime in the treasury. There isn’t any gold or silver in the treasury, regardless of the fictions they spout. The gold in US possession, has others names on it, and the mint at West Point, New York, which turns out the Gold and Silver Eagles by the thousands, buys the gold and silver it needs, on the open market every couple of weeks. Europe is said not to be able to get silver, which may or may not be true, and in the US, several metals outfits say that they have no silver. I do, so I don’t know what their problems are, but things economically to me are looking dreadful as I write this. The stock market is down 700 points, while gold and silver are recovering nicely after their correction.
This isn’t 1857. It is a lot different, and in a terrible way. Everything economic, is now fluff, bluff, and charades. It is a huge stage show, with the actors being the Federal Reserve, Treasury Department, and for that matter the entire US government, and governments around the world. None have a currency backed by anything. The US government’s currency, by far, is the one most likely to collapse, because the US owes more than the rest of the world combined probably, and the debt load of its citizens and government itself, defies comprehension. The debt load of the US government and US citizens, is so extreme, that re-payment is a virtual impossibility. In 1857, the bubble was pricked by a single bank failure, which within a couple of months, practically brought the entire country down. It recovered, thanks to an infusion of gold from California, plus there was gold and silver in the US vaults, and the citizenry owned and used gold and silver. They felt safe with it. The gold and silver coinage the citizens had and used, was hoarded, because they knew it was absolutely safe and valuable. Paper was discarded, even though it was backed. It was mere PAPER, after all. Physical gold, rejuvenated the economy in 1858. What could government do now? More paper? It’s the only power they have, and it is no solution. If it all goes down now, with over-priced real estate, maxed out credit cards, $500 billion trade deficit, and all time high rates of bankruptcies and foreclosures, the financial institutions will have millions of loans which will be un-collectible, (non performing), and it all can be really gruesome. Believe me, gruesome is a mild under-statement. I shudder at how it can all come out.
Think about it, if suddenly bank runs started around America! Quickly, the dollar would become virtually worthless, as trillions would have to be printed to save the FDIC, and all confidence and value would be lost. With teeny amounts of cash in all banks compared to deposits, this could happen tomorrow, with gold and silver going to thousands and hundreds per ounce. Protect yourself.