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Hidden Erosion of Corporate Worth Since
the Government Abandoned Money

From Elliot Wave Theorist Newsletter

For 173 years, the United States used money as a medium of exchange. In 1965, it switched to using a floating accounting unit. This change coincided with a dramatic yet hidden reversal in the net trend of worth for U.S. corporations.The Money Era: 1792-1964 In 1792, Congress passed the U.S. Coinage Act, which defined a dollar as a coin containing 371.25 grains — equal to 0.7734 Troy oz. — of silver (plus some alloy). Congress did not say a dollar was worth that amount of metal; it was that amount of metal. Conversely, an ounce of silver was $1.293.The same act declared that a new coin, the Eagle, would consist of 247.5 grains of gold (plus some alloy). It valued this coin at ten dollars, meaning 3712.5 grains of silver, a value ratio of 15:1. This ratio valued gold at $19.39 per oz.In 1834, Congress passed another coinage act valuing gold at $20.69 per ounce, thus tweaking the gold/silver value ratio closer to 16:1. In 1837, another law edged the gold content of an Eagle to 232.2 grains, meaning gold was now valued at $20.67 per ounce. A dollar, however, was still 0.7734 oz. of pure silver.The silver standard ended in 1873, when a new Coinage Act scrapped the definition of a dollar as a certain amount of silver and adopted a new definition based on gold, maintaining the formula of $1 = 1/20.67 ounce of gold. The Gold Standard Act of 1900 confirmed this definition.In 1913, Congress passed the Federal Reserve Act. This act created a new banking corporation and gave it monopoly power to issue dollar-denominated banknotes and checking accounts backed by bonds issued by the Treasury. In other words, it gave the Fed the power to use government debt as backing to create spendable dollar-denominated credits to benefit the government.The Fed issued its notes on dollars it never had. The Fed’s activities diluted the supply of dollar-denominated credits, reducing their value relative to gold. The government decided it did not want to pay its creditors. In January 1934, Congress passed the Gold Reserve Act, under which the government seized Americans’ gold, canceled all business contracts in gold, outlawed citizens’ possession of gold and reduced the amount of gold that would define a dollar. President Roosevelt personally dreamed up a new value for the dollar, which he pronounced to be 1/35 of an ounce of gold, thus raising the “price” of gold to $35.00 per ounce. In one stroke, the government seized 41% of the value of everyone’s dollars. Because the Act prohibited U.S. citizens from trading in gold, this new, lower, value of a dollar was thereafter applied only to international transactions.Incredibly, however, the U.S. remained on a money standard, because Congress simultaneously reinstated the silver standard for domestic transactions. It authorized the Treasury to issue paper dollar “certificates” redeemable in silver at the rate of $1.29/oz., the same statutory value the dollar had in 1792. With the silver price still low from the Great Depression, this was, briefly, a “fair” price. Congress passed the Silver Purchase Act of 1934 to allow the Treasury to acquire silver to back the notes.This scheme failed to last even three decades. With the government’s continued borrowing and the Fed’s monetization of much of it, the government’s bills soon outnumbered the dollars of silver backing them. Smart people began redeeming the bills for silver, and the Treasury’s supply of silver began to dwindle. In 1961, it plummeted by 80% as redemptions ballooned. That year, President Kennedy issued an Executive Order to halt the redemption of silver certificates and urged Congress to let the Fed take over the nation’s currency. In 1963, Congress obliged by passing Public Law 88-36, which revoked the Silver Purchase Act and authorized the Federal Reserve to issue banknotes unbacked by money. For a time, however, an enterprising citizen could still trade the Treasury’s paper notes for silver coins at par, and the U.S. mint continued to make silver coins through 1964 with what silver it had left.The Watershed Year: 1965 By 1965, the Fed had issued enough Federal Reserve notes to replace the circulation of silver-backed U.S. Treasury notes. On July 23, Congress passed the Coinage Act of 1965, which declared that commonly used U.S. coins would henceforth be tokens containing no precious metal.Through these maneuvers, Congress ceased exercising its Constitutional “power to coin money, and regulate [make regular] the value thereof.” Instead it outlawed money and replaced it with an elastic, non-regular unit of account.

The year 1965, then, marked the official end of money usage in America. That’s when the Fed’s notes and the Treasury’s tokens became the official currency, unredeemable in anything. The dollar became merely an accounting unit. The government was now fully free to extract value from its citizens’ savings accounts through the process of issuing debt and having the Fed turn it into checking accounts.

The gold standard for foreigners lasted only another six years, during which time the Treasury shipped most of its gold overseas at $35 per ounce. Finally, in 1971, President Nixon issued Executive Order 11615, which reneged on the government’s obligation to pay out gold to foreign creditors. From then on, the dollar was only an accounting unit internationally as well as domestically.

173 Years of Convertibility Abandoned

The United States dollar was a form of money for 173 years. Broadly speaking, we may delineate the key periods as follows:

1792-1873: silver money standard with gold convertibility

1873-1934: gold money standard

1934-1965: silver money standard

1965-present: Federal Reserve Accounting Units (no standard).

The change in 1965 shifted the basis of the nation’s accounting unit from money to the policies of politicians and central bankers. It set the government and the Fed completely free to create and spend new accounting units at their pleasure. No longer would the Fed’s notes or the Treasury’s IOUs be redeemable in anything. Officials still call the unit of account a “dollar” and “money,” but purists might accuse them of fraud on both counts. Or, if Congress merely re-defined these terms, it did so without telling anybody plainly what the changes meant.

Corporate Worth in the Era of Money vs. the Era of Unbacked Accounting Units

The shift to fake money in 1965 just happens to coincide with the year that divides the long term trend of corporate worth in the United States from mostly up to mostly down.

Here is a chart you have never seen elsewhere. The left-hand scale prices the Dow Jones Industrial Average in original U.S. money per its statutory definition during 1837-1933 in terms of ounces of gold. The right-hand scale shows exactly where the DJIA would have been priced in dollars (normalized to 1837-1933’s 1/20.67 oz.) each year since 1933 had the U.S. remained on that gold-money standard.

1965 - Bull Market vs. Bear Market
This chart reveals the breathtaking rise in total U.S. corporate worth during the money period and exposes the stunning net destruction of U.S. corporate worth since the start of the non-money period. From 1792, when a money standard was first made official, to 1965, when Congress abandoned the money standard, U.S. stock values, normalized to the Dow Jones Industrial Average, rose from being worth 0.09 ounces of gold to being worth 27.59 ounces, a difference of +30,556%. Since 1965, when the government abandoned the money standard, this stock average has fallen in value from 27.59 ounces of gold to 11.86 ounces, a difference of -57%.The price of the Dow at year-end 2013 was not 16,500 but 245. This is not a made-up figure. This is the Dow’s true price. That’s the price you would be reading in the paper had the dollar maintained its purchasing power in terms of gold. The Dow at year-end 2013 is worth less than it was at year-end 1928, 85 years ago.The only reason people do not know the stock market’s true pricing history and its current true value is that accounting-unit inflation has hidden the deteriorating worth of corporate America. But our chart tells the truth: There has been a net loss in corporate worth since 1965. A record overvaluation of the Dow’s dividends — by twice that of 1929 — at the peak of the investment mania in 2000 provided a new high, but it was only temporary.Despite our delineation of the money era from the accounting-unit era, the Fed deserves only part of the proximate-cause blame for the monetary and economic conditions of the bearish period since 1965. Congress is primarily responsible for bloating credit and for burdening the economy, by means of its debt engines (FHLBs, FNM, FMAC, GNMA, student loans), speculation guarantees (FDIC, FSLIC, bank and corporate bailouts), regulations (OSHA, EPA, EEOC, etc.), taxes (income tax, social security tax, inheritance tax, gift tax, capital gains tax, excise tax, gas tax, medical tax, etc.) and criminalization of enterprise (via thousands of state and local laws prohibiting free enterprise); and its own creation — the Fed — has helped finance it all.The Fed has benefited three groups: the government, bankers and speculators. Its exchange of new accounting units for Treasury bonds has stealthily sucked value out of savers’ accounts and transferred it to the government. It has also enabled reckless bank loans and bailed out profligate speculators. These policies have burdened the American economy.Hiding the Trend So, why do so many people seem to think the country has been prosperous? The Dow is at 16,500! The S&P is at 1880! But, of course, they’re not. In less than a century, government through its debt-fostering engines and the Fed through its monetary policies served to reduce the value of the original dollar by almost exactly 99%. From the dollar’s original value of 1/19.39 of an ounce of gold in 1792-1834, it slid all the way to 1/1921.5 of an ounce in 2011. With the dollar’s recent gain against gold (fall in dollar price), the reduction from original value to date is about 98.5%. So everything today is dollar-priced about 67 times where it would be had the dollar remained approximately 1/20 of an ounce of gold. Yet people have been complacent, even giddy, over their “prosperity” while they are secretly losing principal and being taxed on phony capital gains.Stocks Are Not Cheap One might look at our graph and think that the Dow is now so cheap in gold terms that it has nowhere to go but up. But thinking so would be to underestimate the deep deterioration in the U.S. economy.Incredibly, the year-end-2013 price of the Dow — 11.86 ounces of gold, or just 245 original dollars — is nonetheless ridiculously expensive for what you get: a lousy 2.1% annualized dividend yield, even lower than it was at top tick in 1929; a P/E ratio in the high end of the range for the past century and three times what it was at major bear market bottoms of the 20th century; and a 4.7 price-to-book-value ratio (adjusted to the pre-2004 data series) on the S&P, which is two to four times its range from year-ends 1929 through 1987. The Dow is not cheap; it’s absurdly overpriced. At the same time, stock-market optimism today, by many measures, is as extreme as it was at the Dow’s record overvaluation in 2000.The miserable value shown in the chart for December 2013 comes from a snapshot of the Dow at its second-greatest overvaluation in history. This condition virtually assures that the worst of the devastation of U.S. corporate worth in the non-money era still lies ahead.The next bear market in stocks will expose the hidden weakness in the U.S. economy, and truth will come to light. It will be a horrible day and a glorious day at the same time.

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