Bob Prechter on the Quality of Money and Stock Prices
Regardless of whether one is a fan of Elliott Wave Theory, it is undeniable that Bob Prechter frequently presents extremely interesting insights. An article published in the most recent (March 2014) issue of the ‘Elliott Wave Theorist’ is a very good example. The article is entitled: “Government, the Fed and the Nation’s Money: 200 Years of Ineptitude; 100 Years of Theft and Failure; 50 Years of Economic Regressionâ€.
Prechter recounts US monetary history and brings it into context with the stock market. In the beginning, the ‘dollar’ was not an independent monetary unit at all: it was simply a specific weight of silver (0.7734 oz.). Later Congress made a first major mistake when it decided to fix the exchange rate between silver and gold instead of letting it be dictated by market forces. The result of the artificial parity was initially that gold coins were driven out of circulation, and later the same happened to silver coins (following the discovery of gold in California).
Attempts were made to ‘fix’ this mistake by introducing a different parity, but such price controls can of course never work. Over time, the character of the nation’s money was altered step by step, with the biggest change arriving with the founding of the Federal Reserve. No longer was the dollar simply a certain weight of metal: henceforth, notes issued by the central bank could also be ‘backed’ by treasury debt. Then came FDR’s gold confiscation, coupled with a dollar devaluation by about 70%, with the new gold/dollar exchange rate simply made up by the president on the basis that he ‘liked the number’.
Contracts involving payment in gold were retroactively and prospectively abrogated by law, and citizens were forced to use paper money. Private ownership of gold was made illegal. However, the treasury still issued notes backed by silver until 1965. That was the last year when the government issued money that was actually backed by metal. In 1971, the final step toward a pure fiat money was taken when Nixon defaulted on the Bretton Woods gold exchange clause.
