First Time Home Buyers


How The US Dollar Gets 

Diluted, and

How to Protect Yourself

Humankind cannot resist temptation.

Since the days of Adam and Eve, we have all succumbed to our own weaknesses. That's life. How does it apply to money? Read on....

If you read our article What Causes Inflation, you may be wondering how exactly our money gets diluted. We know that inflation is caused by the dilution in the value of money, but how does the money get diluted? That is the subject of this article.

The Constitution of the United States, Article 1, Section 8 grants to the Congress the power to "coin money, and regulate the value thereof." The printing press was invented in China by Bi Sheng around the year 1041. In the 1440's, Johann Gutenberg, of Germany, improved upon the design and made mass produced printed works readily available.

Curious, then, that Congress wasn't granted power to "print" money, but rather to "coin" it. You see, our forefathers were excellent history students. They knew that paper forms of money were very easily abused, and had been throughout history. It must be noted, however, that governments will abuse any form of money, whether it be coin or paper. Paper forms of money are simply much easier to abuse, as citizens are much less aware of the abuses.

You see, if all money in circulation was in the form of metal coins with intrinsic value (traditionally gold, silver, and copper), in order for governments to abuse this form of money, it would involve mixing base metals with the precious metal content of the coins. Because each metal has specific weights relative to size, this type of dilution is easily recognizable by the general public.

However, with paper money, the general public is completely unaware when dilution takes place. It is completely hidden from view. Do you know how many paper dollars are in circulation? Do you know when more are added? The answers are no and no. While the Federal Reserve does publish statistics on the overall money supply, the Federal Reserve is a group of private, elitist bankers, and has never been publicly audited. How do you know their figures are accurate?

Which brings us to how it is that money is diluted in our modern day society. In 1913, under very questionable circumstances, the Federal Reserve System was created by Congress. The stated purpose of the Federal Reserve Act was to create "a new central bank designed to add both flexibility and strength to the nation's financial system." The net effect of this act was to transfer the power of Congress to coin money into the hands of elitist, private aristocratic bankers. Congress soon would no longer coin money, but private bankers would instead be allowed to print it.

Would you let the fox guard the henhouse? No? Then why would you let private, for-profit bankers, have control over the issuance of money? That makes no sense, but that is the current law of the land. After the establishment of the Federal Reserve, it did not take long before all the gold coins were driven out of circulation. A few decades later, all the silver coins were also driven out. And in 1982, even the copper was removed from the penny (today pennies are made of zinc and are coated with an ultra-thin layer of copper to retain their traditional look).

Since the creation of the Federal Reserve in 1913, the US Dollar has lost over 90% of its purchasing power. Those same gold coins that were in circulation at that time have retained their purchasing power. Why? Because it is beyond the ability of mankind to resist trying to get something for nothing. And that is precisely what the process of diluting money is: an attempt to benefit from nothing. Simply creating money out of thin air to be used to pay for purchases. And that is how money is created these days.

The Federal Reserve is a system of fractional reserve banking. The money in the United States comes into being by loans. The Federal Reserve notes that you have in your purse or wallet are not backed by any commodity of value. They can be created without limit, and have been by various governments throughout history. The textbook example is Germany in the 1920's. It literally took a wheelbarrow full of paper money to buy a loaf of bread. And this is not something that only happened in the distant past. On January 1, 2005, the old Turkish Lira was replaced by the new Turkish Lira at a conversion rate of One new one to one million old ones. Humankind always wants something for nothing.

In our modern society, when the United States Government runs an annual deficit, where does the money come from to fund the shortfall? Well, the government borrows it. Some of it is borrowed from other governments, some of it is borrowed from citizens, and some of it is borrowed from the Federal Reserve. And where does the Federal Reserve get the money? Well, they loan it into existence. They have the legal authority, granted to them by the Congress of the United States in 1913, to "issue" as much as they deem is needed. And if someone came to you and wanted to borrow money, and you had the authority to "issue" as much as you deem is needed, how much would you create? Something to think about........

How can you protect yourself from your money losing its value through dilution? Buy assets and/or commodities whose supply is finite and is essential. Energy fits this description. So does real estate, as well as precious metals. Some real estate will fare better in inflationary times than others. Property close to major centers of trade is always in demand. Luxury property located on the waterfront within and hour's drive of major centers of trade will also benefit substantially in times of inflation. Essentially, in times of inflation, it is better to have your wealth in assets that will appreciate in value, rather than in cash (and its substitutes, i.e. a savings account) which will go down in value.

And when are times of inflation? Inflation runs in major cycles, and is a subject of another article. But as long as humankind cannot resist the temptation for trying to gain something for nothing and we have a paper-based currency, we will have inflation. Protect yourself.

It is highly recommend that you also visit the First Time Home Buyer Grants page for free assistance with the down payment. This will make it possible for many people to qualify for a first time home buyer loan who wouldn't have qualified without the grant assistance.

Return to the First Time Home Buyer Programs for other types of 1st Home Buying assistance.


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