In 1913, President Woodrow Wilson was successful in publishing the Federal Reserve Act through Congress. The act allowed the government to establish the third central bank in the nation’s history.

Think of the Fed as the bank of banks, and the government’s bank — the gatekeeper of the U.S. economy. The board, which is run by seven governors and presided over by a chairman and vice chairman, is charged with managing the supply of money and credit to the economy. By manipulating interest rates and creating money, the Fed can either stimulate or stifle the economy. The Federal Reserve is the primary force in determining our nation’s money supply. The Fed’s two main goals are (1) to help stimulate economic growth and (2) to try to keep inflation low. These goals often conflict.

The central bank Federal Reserve System has a tremendous amount of power and a monopoly control over money and credit. The chairman of the Federal Reserves is more powerful than even the president because he has so much control over the economy. The Fed is the key to how much money and credit is in the U.S. economy in any given time. This is due to the fact that the United States currency is a fiat money — in other words, it is not backed by anything tangible, and therefore it can be created out of thin air.

The U.S. dollar was not always a faith-based currency. There was a time when for every dollar in circulation, there was a coinciding amount of gold to back it up — a gold standard.

“In the nineteenth century, starting with the Napoleonic Era, all the major money systems of Europe were anchored by gold,” Bill Bonner explains. “All of these countries had gold lining their systems, so when they traded with one another they could either trade their gold, or if you traded paper money, it was certain that there was gold backing their currency.

“And that system was very, very successful. The prosperity of the nineteenth century was amazing,” Bonner continues. “But that system broke down in World War I; the governments, as they always do, spent too much money. Britain borrowed too much, the French borrowed too much, and then they couldn’t pay it back because they didn’t have enough gold to pay that kind of expense.”

Even so, that gold-backed system lingered on throughout the twentieth century — but not perfectly — and the last stage of this system was Bretton Woods, which lasted until 1971.

Bonner tells us: “Prior to 1971, we had the Johnson administration, we had the Great Society and the Vietnam War, and those things were very, very expensive. And somebody told Johnson, ‘Wait a minute, you can’t have both guns and butter. You can’t have a huge domestic spending program and the Great Society, at the same time that you have a huge war going on in Asia. That won’t work, we can’t afford that.’ At the time the Democrats, led by Johnson, said, ‘Oh yes we can; we’re a big rich country, we can afford both guns and butter.’ Well, sure enough it wasn’t true, and they couldn’t afford that much without raising taxes, and they didn’t want to raise taxes because then they wouldn’t be reelected. So they had this big problem. And what resulted from that was a run on America’s money.”

Other countries, especially the French, led by Charles de Gaulle, noticed that the dollar was weakening. So de Gaulle told then-President Nixon that he wanted to exchange the dollars France had for gold. Nixon examined the situation and realized that if France took all of that gold, the United States would not have much gold left, and in turn decided to close the gold window. That was August 15, 1971, and since then, no foreign government could trade dollars for gold.

Money Supply and Inflation

Now, with the Bretton Woods System a thing of the past, when the Fed determines that the economy needs a stimulus, interest rates are lowered, borrowing becomes easier, and more money flows into the economy. This is known as opening the Fed window, and the result is an increase in the money supply. If the money supply is increasing, consumers are feeling wealthier and more money is changing hands as they buy goods and services.

This puts a chain of events into motion. Businesses see increased sales and therefore order more materials and increase production. This, in turn, increases the demand for labor and goods. What happens after that, in a buoyant economy, is that prices of stocks rise and firms issue equity and debt. If the money supply continues to expand, the prices for these goods and services begin to rise, especially if output growth reaches capacity limits — in other words, a bubble is formed. As the public begins to expect inflation, lenders insist on higher interest rates to offset an expected decline in purchasing power over the life of their loans. When inflation is rising, the dollar is quickly losing value, and the Fed raises interest rates, which means borrowing becomes more expensive and money eventually flows out of the economy.

When the supply of money fails, or when its rate of growth declines, economic activity declines and either disinflation (reduced inflation) or deflation (falling prices) results. Closing the Fed window decreases the money supply.

In a worst-case scenario, the economy can become stagnant and inflation can rise simultaneously, a situation called stagflation. The Fed is then faced with an extremely difficult choice, because it can’t raise interest rates and lower them at the same time. It must choose either to stimulate the economy or to fight inflation. This last happened in the United States in the late 1970s, and it proved to be very difficult time for the country.

The forces of inflation had been picking up steam throughout the 1970s, and the prices of just about everything were hitting record highs. Pete Peterson, then secretary of Commerce under the Nixon Administration, remembers this period in U.S. history clearly. “I was in the Nixon White House,” Peterson recalls, “first as an economic adviser to President Nixon and then as secretary of Commerce. History will record the Federal Reserve was part of the problem. They let money supply get out of control. When Paul Volcker took over he realized he had to take truly courageous action. And he did.”

Dr. Volcker’s office in New York City is adorned with poster-size caricatures depicting the former Fed chairman as a warrior, battling runaway inflation. And these cartoons are hardly exaggerating. Over the din of the ice skaters enjoying themselves at Rockefeller Center, 20-odd stories below. Dr. Volcker told us the tough medicine he had to spoon-feed the United States when he took the helm of the Federal Reserve in 1979. Inflation had reached a “crisis point,” he said, and in less than a year, the Fed’s key rate rose from 10 to 19 percent.

“Inflation,” explained Dr. Volcker, “gets built into expectations, and when people think it’s going to happen it affects their wage demands, it affects pricing policies, and it has a certain built-in momentum, which clearly happened during the 1970s.”

While his raising rates to an all-time high certainly caused some controversy, Dr. Volcker did what was necessary to achieve and sustain stability in the U.S. economy — and found that, overall, the country was ready for him to step in.

“I think the mood of the country was willing to accept action, which ten years earlier they wouldn’t have been willing to accept,” he told us. “And once the country got caught up in an anti-inflationary effort, while they were difficult years, I think there was a certain acceptance of a willingness to take, among other things, very high interest rates and eventually a rather severe recession, [because] there was this underlying core that the country had not been on the right path economically and that it needed to be shaken up, in a sense, to restore stability. And that faith not only sustained me, it sustained the country.

“One of the lessons of the early 1980s is don’t let inflation get started because once it gets momentum it’s very difficult to deal with, but it’s also destructive for economic growth and prosperity. If that happens — and right now it seems like there is a little flavor of it — we will all find ourselves in the days of stagflation and unacceptable economic performance.”

As Dr. Volcker suggested, current economic indicators show we’re entering a similar cycle in the economy. In the second half of 2008, Americans’ inflation expectations have jumped to their highest level since 1981, according to the Reuters/University of Michigan Surveys of Consumers. Not only that, but growing concerns over the country’s two largest buyers of U.S. home loans, Fannie Mae and Freddie Mac, drag down the already hurting U.S. stocks; the price of crude oil hits a new high every day; and consumers are seeing their grocery and energy bills grow by leaps and bounds.

“With respect to the fiscal crisis looming out there in the future,” says Paul Volcker, “We’ll see whether a democracy can deal with an obvious problem that’s going to be present in not too many years. The earlier we take action to deal with it, the better.”

Addison Wiggin
Executive Publisher, Agora Financial
Executive Producer, I.O.U.S.A.
October 6, 2008

Greg’s Endnote: Addison and co-author Kate Incontrera have a lot more to tell us along with some fantastic interviews with Bill Bonner, Pete Peterson, Ron Paul, Paul Volcker, Alan Greenspan, Warren Buffett, and more. You can get your copy of I.O.U.S.A. at Amazon.com by clicking here.

“I.O.U.S.A.” Excerpts was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

A Parting Gift, Part II

“I’ll be back.”

— Arnold Schwarzenegger, as The Terminator, 1984

Yesterday I gave you some of my highlights from last year’s Agora Financial Investment Symposium. While last year’s experience is one that I’ll remember forever, what you can expect this year will be even better. And there’s a big reason for that. I teased you yesterday, but now I’ll let you know why you really can’t afford to miss it this year.

The “Indiana Jones of Investing” Rides with Agora

You probably already know that I’m talking about Jim Rogers.

That’s right, the world-renowned co-founder (with George Soros) of the Quantum Fund, originator of the Rogers International Commodities Index, and author of bestselling financial titles Investment Biker, Adventure Capitalist, Hot Commodities, and A Bull in China has just been inked as the keynote speaker at this year’s Agora Financial Investment Symposium.

For those few who may not know, Rogers is without doubt the most in-demand speaker on the finance and business circuit. And believe me when I tell you that RIGHT NOW may be the only chance you’ll ever get to see, hear, and maybe even meet and talk money with the man they call the “Indiana Jones of Investing”…

Especially for the relatively low cost of the 2008 Agora Financial Investing Symposium. (For some of you reading this, it may even be FREE to attend .)

Rogers is a big part of the reason there are now only 97 seats to this conference left. Actually, it’s probably way less than this — no doubt some Whiskey & Gunpowder subscribers have already jumped ahead and signed up while you’ve been reading…

Now, if this isn’t enough incentive to make you go to the bottom of the page and sign up for this incredible event right now, I don’t know what would seal the deal.

But in case it isn’t (and in case meeting me isn’t enough of a draw), here are a few other things that might help you make up your mind to come to Vancouver and learn how to become a multi-millionaire…

An Advance Screening of the Biggest Budget Movie in American History

“…(An} alternately amusing and alarming primer on America’s off-the-charts fiscal irresponsibility…”

— Variety.com

“I.O.U.S.A. is crucial viewing for anyone who claims to care about America.”

— IndieWIRE.com

Agora Financial’s first foray into the Tinseltown scene, I.O.U.S.A., is a feature-length documentary about America’s real inconvenient truth: Our alarming budget, trade, savings, and leadership deficits…

Inspired by Bill Bonner/Addison Wiggins’ New York Times bestselling book, Empire of Debt: The Rise of an Epic Financial Crisis, I.O.U.S.A. drew rave reviews at this year’s Sundance Film Festival — and was the only film to sell out all three of its showings at the recent Maryland Film Festival. I attended one of these that was oversold, and people were literally sitting in the aisles.

Told with flair and frighteningly clear graphic illustration by director Patrick Creadon (Wordplay), I.O.U.S.A. is completely non-partisan — and features interviews with such financial luminaries as former U.S. Comptroller General David Walker (slated to attend this year’s Symposium, by the way), former Chairman of the Federal Reserve Paul Volcker, investing legend Warren Buffett, Robert Rudin, Paul O’Neill and Arthur Laffer.

Also featured are plenty of revealing sound bites from average Americans (who seem universally to know almost nothing about how our budget or currency system works), Chinese industrialists and their employees, heads of U.S. companies whose businesses are in transition because of Asian demand and competition — and key media snipetts from Ron Paul, Alan Greenspan, numerous U.S. Presidents and more…

I.O.U.S.A. also follows then-Comptroller General Walker and Tab-swilling Concord Coalition Executive Director Robert Bixby’s Fiscal Wakeup Tour as it travels from city to U.S. city, warning rank and file Americans of the dangers of our $9 trillion national debt. Watch (or cry) as their incredibly important message gets bumped from nightly newscasts for segments on lost-then-found-again diamond rings and other piffle…

This is an important film. And were it not for its engaging and even-handed, yet magnetic narrative style, I’d very nearly classify as a horror movie. Its all-too-true message is that disturbing. The film is scheduled for theatrical release sometime in late summer…

But at the 2008 Agora Financial Investment Symposium, you can see this groundbreaking film on the big screen before everyone else — and even meet director Creadon, author Wiggin, and “star” Walker — on opening night of the conference in the Fairmount Hotel Vancouver’s spacious British Columbia Hall.

Trust me, you don’t want to miss it. And remember, there’s only room in this venue for 97 more lucky investors. This is not including those who may be signing up right now with each passing minute. Jump to the sign-up link below to lock in your spot now!

But there’s so much more you won’t want to miss…

Viva Vancouver!

I used to wonder why Agora Financial chose Vancouver for it’s annual symposium…

Now I understand.

I’ve been to a fair amount of places, but I’ve never been anywhere on this side of the Atlantic that’s anywhere near as beautiful and wonderful to be in as Vancouver. It’s not only gorgeous, temperate, clean, and reasonably priced, but it’s an incredibly progressive and cutting-edge place. It’s more of a melting pot that anywhere I’ve been in America — and very nearly qualifies as an Asian city, so great are the Eastern cultures’ influence there. Bubble tea, anyone? Vancouver’s got a shop that sells it on every corner, it seems…

But don’t let that fool you. The options for entertainment and dining are as diverse as you can get. You want a great steak, like I always crave? Remember, you’re in Canada, home of some of the best red meat you can get anywhere. I can name you four places to get a fine slab of cow-meat cooked any way you like, all within walking distance of the Fairmount.

Jonesing for some seafood? With the cool waters of the Pacific only minutes away, Vancouver’s naturally got some of the world’s finest ocean-fare (the best tuna I’ve ever tasted was in a restaurant there — incredible).

Bars your thing? Some of the coolest, hippest ones I’ve ever been to in my life (and I’ve been to a few) were in Vancouver’s entertainment district, down near the waterfront. Everything from ethnic-flavored joints to Irish pubs with fiddle-bands blaring to shi-shi hipster hangouts to good ol’ beer-and-billiards joints…

And speaking of the waterfront, you can take a night cruise of the harbor while you’re in town and catch some of the Celebration of Light — the world’s largest fireworks competition.

If you do nothing else while you’re in town, though, you simply must check out the glorious Stanley Park. It’s a pristine, thousand-acre peninsula of fir and hemlock intermingled with tracts of ancient, simply enormous (redwood-sized) cedar trees. Well-tended hike-or-bike trails wind through most sections of the forest, and many streams and ponds dot the landscape:

Multiple beaches border the outer edge of the park, and it’s not uncommon to spy dolphins, seals, and all manner of water birds — especially Cormorants. It’s worth the trip to Vancouver all by itself. You simply must rent a bike at one of the many cycle shops near the park (around $12 U.S.) and take a leisurely two-wheeled tour of one of the most breathtakingly beautiful places you’ll ever see…

Or, if art and culture’s your thing, catch whoever’s playing at the Vancouver Center for the Performing Arts. Last year, I lucked into a ticket to see the incredible Bobby McFerrin. Mind-bogglingly talented, and the perfect venue to showcase it.

In short, there are a million reasons to come join me in Vancouver this summer. Getting rich is only one of them…

Happy Trails, Then

Can you tell I’m excited about being invited back to the Agora Financial Investment Symposium? What with Jim Rogers as keynote, I.O.U.S.A. as and opening-night special event, and all the best speakers from last year already booked, it should be even better in 2008 than 2007’s sold-out event…

And this year’s theme — A View From the Peak: Seeking Profits in a Time of Risk and Scarcity — is just as urgent and timely as ever.

Last but not least, I want you to have a chance (what may be your last chance) to meet me and experience the singular thrill of the second annual Whiskey Bar, a good-natured, yet unpredictable and electric debate on all manner of audience-chosen topics featuring your favorite Whiskey & Gunpowder columnists and guests. All of it takes place over heaping plates of delicious meats and other lite fare — and of course, plenty of whiskey to choose from…

2007’s Whiskey Bar evening event was scheduled for 45 minutes, and we’d hoped for a solid turnout of around 300 attendees. But we were stunned when 700 people showed up — and took the panel to task for nearly two hours! According to our surveys, the Bar was one of last year’s highest-reviewed events. I expect nothing less this year, except perhaps we’ll order more food.

Here’s my bottom line with all this: This may be my last article ever for Whiskey & Gunpowder — and 2008’s A View From the Peak Agora Financial Investment Symposium in Vancouver will very likely be my last hurrah as Freedoms Editor. So I want to savor it with even more of my readers than the dozens I met, debated, ate, and drank with last year…

To those of you who’ve mostly agreed with me and written in with words of praise or encouragement over the years, come say goodbye — and let me give you something back that you’ll never forget. If you like me now, think how much you’ll love me in a few years, when you’re rolling in the dough from the things you learned at the 2008 Symposium…

To those who’ve I’ve butted heads with and who have loosed your bile upon me in print, let me offer your these secrets to wealth as an olive branch — in hopes that, once you get rich, you’ll be forced to re-evaluate me. After all, if I was right about this, perhaps I was right about a few other things, too…

But whatever your reason for wanting to come to the 2008 Agora Financial Investment Symposium this July 22-25 in Vancouver, British Columbia, I urge you not to wait to sign up. Click the link below and do it now. This event WILL sell out, especially with I.O.U.S.A. in the mix and with Jim Rogers keynoting.

I’ll be there, glad to be among friends, foes, readers, and some of the most incredible forward-thinkers in the investing and political universe…

But sad that it may be for the last time as your Freedoms Editor.

Happy trails to you, until we meet again.
Some trails are happy ones,
Others are blue.
It’s the way you ride the trail that counts,
Here’s a happy one for you.

Happy trails to you, ‘til we meet again!

— Happy Trails, Dale Evans

Jim Amrhein
Freedoms Editor, Whiskey and Gunpowder
May 30, 2008

Only 97 More of My Readers Can Get a View from the Peak was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.