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Source link: http://archive.mises.org/4511/rothbards-bracing-plan-for-gold/

Rothbard’s Bracing Plan for Gold

January 3, 2006 by

To answer a reader question, I revisited Rothbard’s transition plan for 100% gold. This is cut and pasted from the Mystery of Banking (Richardson and Synder, 1983), pp. 265-267.

Even though, for the past few years, private American citizens have once again been allowed to own gold, the gold stolen from them in 1933 is still locked away in Fort Knox and other U.S. government depositories. I propose that, in order to separate the government totally from money, its hoard of gold must be denationalized, that is, returned to the people. What better way to denationalize gold than to take every aliquot dollar and redeem it concretely and directly in the form of gold? And since demand deposits are part of the money supply, why not also assure 100% reserve banking at the same time by disgorging the gold at Fort Knox to each individual and bank holder, directly redeeming each aliquot dollar of currency and demand deposits? In short, the new dollar price of gold (or the weight of the dollar), is to be defined so that there will be enough gold dollars to redeem every Federal Reserve note and demand deposit, one for one. And then, the Federal Reserve System is to liquidate itself by disgorging the actual gold in exchange for Federal Reserve notes, and by giving the banks enough gold to have 100% reserve of gold behind their demand deposits. After that point, each bank will have 100% reserve of gold, so that a law holding fractional reserve banking as fraud and enforcing 100% reserve would not entail any deflation or contraction of the money supply. The 100% provision may be enforced by the courts and/or by free banking and the glare of public opinion.

Let us see how this plan would work.


The Fed has gold (technically, a 100% reserve claim on gold at the Treasury) amounting to $11.15 billion, valued at the totally arbitrary price of $42.22 an ounce, as set by the Nixon Administration in March 1973. So why keep the valuation at the absurd $42.22 an ounce? M-l, at the end of 1981, including Federal Reserve notes and checkable deposits, totaled $444.8 billion. Suppose that we set the price of gold as equal to $1,696 dollars an ounce. In other words that the dollar be defined as 1/1696 ounce. If that is done, the Fed’s gold certificate stock will immediately be valued at $444.8 billion.

I propose, then, the following:

1. That the dollar be defined as 1/1696 gold ounce.

2. That the Fed take the gold out of Fort Knox and the other Treasury depositories, and that the gold then be used (a) to redeem outright all Federal Reserve Notes, and (b) to be given to the commercial banks, liquidating in return all their deposit accounts at the Fed.

3. The Fed then be liquidated, and go out of existence.

4. Each bank will now have gold equal to 100% of its demand deposits. Each bank’s capital will be written up by the same amount; its capital will now match its loans and investments. At last, each commercial bank’s loan operations will be separate from its demand deposits.

5. That each bank be legally required, on the basis of the general law against fraud, to keep 100% of gold to its demand liabilities. These demand liabilities will now include bank notes as well as demand deposits. Once again, banks would be free, as they were before the Civil War, to issue bank notes, and much of the gold in the hands of the public after liquidation of [p. 266] Federal Reserve Notes would probably find its way back to the banks in exchange for bank notes backed 100% by gold, thus satisfying the public’s demand for a paper currency.

6. That the FDIC be abolished, so that no government guarantee can stand behind bank inflation, or prevent the healthy gale of bank runs assuring that banks remain sound and noninflationary.

7. That the U.S. Mint be abolished, and that the job of minting or melting down gold coins be turned over to privately competitive firms. There is no reason why the minting business cannot be free and competitive, and denationalizing the mint will insure against the debasement by official mints that have plagued the history of money.

In this way, at virtually one stroke, and with no deflation of the money supply, the Fed would be abolished, the nation’s gold stock would be denationalized, and free banking be established, with each bank based on the sound bottom of 100% reserve in gold. Not only gold and the Mint would be denationalized, but the dollar too would be denationalized, and would take its place as a privately minted and noninflationary creation of private firms.

Our plan would at long last separate money and banking from the State. Expansion of the money supply would be strictly limited to increases in the supply of gold, and there would no longer be any possibility of monetary deflation. Inflation would be virtually eliminated, and so therefore would infla tionary expectations of the future. Interest rates would fall, while thrift, savings, and investment would be greatly stimulated. And the dread specter of the business cycle would be over and done with, once and for all.

{ 28 comments }

Paul Edwards January 3, 2006 at 3:51 pm

I like it. But what about having a contraction of the money supply first, and don’t give the banks such a bonus? Or is that too harsh.

Ohhh Henry January 3, 2006 at 9:33 pm

Many goldbugs seem to be under the impression that the gold in Fort Knox has been mostly sold, or else has been lent out long ago. Apparently there has not been an audit of the gold reserves for many decades, and there has been speculation that among other reasons, much of the gold was dumped onto the markets in the 1980s by President Reagan as part of a plan to bankrupt the Soviet Union by reducing its foreign income from gold mining. According to one allegation I read, this dumping was done in concert with the Government of Canada, whose then Prime Minister Brian Mulroney was so enamoured of All Things Reagan. Perhaps your estimate of the exchange rate of dollar/fractions of an ounce of gold needs one or two zeroes added (to the denominator that is).

np January 4, 2006 at 11:12 am

according to the FED, M1 today is 1.3727 trillion. (3.08 X greater than in 1981)

assuming the amount of gold held by the Fed has NOT changed…

that would “value” gold at around 5200$

is this correct?

billwald January 4, 2006 at 1:27 pm

But less than 5% of the “money” in circulation is Federal Reserve notes and coins. 90% is electronic exchange. This plan would make the gold owners rich and would have no effect on the working class except that people would be killed for the gold in their teeth.

Paul Edwards January 4, 2006 at 2:02 pm

Bill,

Maybe the gold owners are already rich and the market just hasn’t recognized it yet. :)

Sounds to me like gold’s still at a bargain basement price. Let’s see what it’s at after another decade in Iraq.

Blah January 4, 2006 at 4:42 pm

Gold is currently valued at about $530, so how can an ounce of gold be “redefined” as $1,696? It seems to me that all the government can do is guarantee that if you give the government $1,696 dollars, then the government must give you one ounce of gold. However, that seems like the equivalent of a worthless stock option; why give the government $1,696 for 1 ounce of gold, when you can get 3.2 ounces of gold on the open market for the same amount of money?

I suppose that if the government said something like, “We’ll legalize counterfeiting of dollars in a year, so you better exchange dollars for ounces of gold before that happens, or all of the inevitable counterfeiting will cause hyperinflation and your dollars will be worthless!” However, nothing like that is mentioned in the plan. So, what will entice people to exchange dollars for gold ounces?

Or does the plan assume that dollars will still be around after all of the steps are carried out? If dollars will still be around, what could the government do that would make people undervalue dollars in relation to gold ounces (i.e. redefine a gold ounce as $1,696)?

Paul Edwards January 4, 2006 at 6:35 pm

Blah,

The idea is that gold would be re-monetized. That is, the dollar would become, once again, a certificate of ownership of real money, gold.

Right now, we view an ounce of gold only as a commodity that we can buy with 500 some odd dollars. We use it for jewelry and connectors, but not money. But under the gold standard, a dollar would simply be a certificate of ownership (or a warehouse receipt) of a certain weight in gold held in a vault in a bank. And that gold would be redeemable on demand always. That would make that dollar bill a money substitute and gold would be the actual money.

If you can twist your mind around that and imagine asking “How many (gold) grams is that hat?”, then you can see the logic in Rothbard’s calculation. How many dollars are outstanding vs how much gold is at Fort Knox backing up those dollars. The math gives you the value of that dollar as a simple certificate of ownership (not so much anymore I know).

If people realized from this simple math just how dramatically the dollar has been diluted via central banking over time, (from its original $20 == 1oz to whatever it is now), they might flip out, try to get out of dollars, and drive gold to quite a high price. They may yet do this even without this insight.

Peter January 4, 2006 at 6:41 pm

Blah: it the dollar was redefined as 1/1696oz of gold, who would be so foolish as to try to sell gold on the open market for less? But assume they did: many people would immediately run out and try to buy gold on the open market at, say, $530/oz, deposit it with their bank for dollars ($1696 per ounce), and go back to the gold market with their dollars – the market price of gold would very quickly rise to $1696/oz. If it went higher, people would do the reverse, pushing it back down. The “gold market” would then be locked on the definition of the dollar.

[But note: at today's value, it'd have to be over $5200/oz if all the gold on the Treasury books is actually physically there - and the chance of that being the case is zero]

A.B. Dada January 4, 2006 at 7:20 pm

I’ve already re-monetized gold — all my banking is performed with gold as my medium of storage. I’ve even found almost 60 proprietors within 45 minutes of my home (Chicago area) that accept gold and silver in exchange for goods and services. There is no need to continue supporting the banking cartels — if you’re a gold bug and you still sit on a bank account, don’t keep asking why the Fed exists.

The same can be true of the housing market — if you continue to get a loan that has any tie to the Fed, FNMA or any federal housing organization, don’t be surprised when they continue to grow in power.

Step 1 to freedom: do what you say.

SteamshipTime January 4, 2006 at 8:31 pm

A.B.,

There is no financial reason I can think of to trade appreciating assets like gold and silver for depreciating assets like groceries and appliances when you don’t have to.

Paul Edwards January 4, 2006 at 11:12 pm

A.B,

I really do empathize. But forgive me while I ask a few blunt questions. Do you buy your gasoline priced in units of weight in gold? Do you buy milk and potatoes that are priced in terms of gold? Was your mortgage negotiated in units of gold? Your heating bill? Does your employer pay you in units of gold? If you are self-employed, do you price your goods or services in terms of weight of gold? Is all of your banking really done in units of gold? Are most of your cash transactions done in gold?

I’m speculating the answer is no and without explicit and insider abolition of the fed, you should expect that answer to persist. I am with you on the goal of real money. However, the problem with the approach you advocate is that it ignores or attempts to abolish sound economic theory. Money comes about in a particular way as defined by Mises’s regression theorem. A new money does not and cannot be forced to arise as a revolt against banking cartels which happen to inflate the popular currency.

People are very comfortable with the names and the look of their paper currency and are almost universally ignorant of what inflation is or what theft is implied in it. Therefore, those very names and looks must be put squarely back on direct terms with gold by the fed itself. Anything less will lose to the fed.

Peter January 5, 2006 at 4:20 am

Paul: Mises’ regression theorem isn’t being ignored, because it’s not “a new money” – it’s the same money as has existed for thousands of years, which presumably came about just as Mises described. US Federal Reserve Nots (sic) are the “new money”, if anything; they’ve only been fully detached from gold for barely 30 years – not enough for everyone to have forgotten.

Paul Edwards January 5, 2006 at 12:38 pm

Peter,

Unfortunately, gold is in fact no longer money and it hasn’t been since 1933, or arguably since 1913. The way to confirm this is to look at the price of eggs and milk in a typical grocery store. They will be marked in terms of dollars, not gold. The value of goods in terms of gold fluctuates daily inversely with the fluctuations of the price of gold in terms of the dollar, yet dollar prices in consumables currently remain stable at least day to day. Gold simply has a price in terms of the dollar, just as all other non-monetary commodities do.

Since gold is no longer money and since the dollar is money, the only way to make gold money again (short of demolishing our economy back to barter), is to once again, define the dollar in terms of gold as Rothbard lays out and abolish the fed and ideally abolish FR banking as well. After that, a dollar is a true blue fixed amount of gold, just as an inch is a fixed amount of a foot.

Adem Kupi January 5, 2006 at 3:14 pm

Actually, free (i.e. fully de-regulated) banking, sale of all gold held by the government and elimination of legal tender laws would accomplish this also, with less formality.

There would probably be a lot more short term chaos however.

Paul Edwards January 5, 2006 at 4:35 pm

Adem,

I haven’t given that approach much thought. It does seem potentially chaotic, as you suggest. Maybe it parallels what an instantaneous government declared hyperinflation would seem like: dollars are going to be worthless soon, trade it for gold as soon as you can.

Do you see this approach as having any advantages over Rothbard’s?

Chance H January 5, 2006 at 5:44 pm

Hope I don’t get branded as Keynsian Inflationist for suggesting this, but the way I think I’d do it is this:

I’d stop using the bond markets as the “dumping ground” when I wanted to inject new dollars in to the economy to “manage” it. And instead start buying gold. Since inflation is always the goal, you could always be in accumulation mode. This would drive the price of gold up. When the amount of gold actually owned got to be high enough to back all the dollars at the current market rate, then you go cold turkey.

People holding bullion still come out ahead, but its gradual, and there aren’t any instantaneous gold-dollar repricings needed.

Peter January 5, 2006 at 7:44 pm

The value of goods in terms of gold fluctuates daily inversely with the fluctuations of the price of gold in terms of the dollar,

The value of goods in terms of British pounds fluctuates daily inversely with the fluctuations of the price of pounds in terms of the dollar.

Therefore British pounds aren’t money.

Paul Edwards January 5, 2006 at 8:23 pm

Go try to buy some groceries in the US with a British Pound. You will find the BP also is not money in the US. However, at least the BP is accepted as money universally in Britain, which is much more than can be said of gold. So in the US, the BP and gold are very similar, neither are money and both must be sold like a commodity for US money before you can buy something with it.

Peter January 5, 2006 at 9:59 pm

But you accept that the pound is money in Britain, right. What about smaller countries with smaller populations – their “money” is money there, right? Well, more people use (digital) gold as money than the populations of some countries. Is it the fact that they don’t all live within one political jurisdiction that makes it not-money? Or what?

Also, note that in Asia it’s common for stores to accept a variety of “foreign” currencies (US dollars, British pounds, Australian dollars, Deutchmarks (when I was there; I guess Euros now), etc.) as happily as they accept their own. In some places you’ll even find stores that only accept foreign monies. I never asked about gold, but my bet is they’d be really happy to accept gold! (In Vietnam, if you want to buy land, you need gold)

Paul Edwards January 6, 2006 at 1:13 am

“But you accept that the pound is money in Britain, right.”

Yes.

“What about smaller countries with smaller populations – their “money” is money there, right?”

Yes.

“Well, more people use (digital) gold as money than the populations of some countries.”

Really? Ok.

“Is it the fact that they don’t all live within one political jurisdiction that makes it not-money? Or what?”

What makes gold not money? In the US, what makes it not money is that only a very very tiny fraction of the population set their prices in terms of ounces of gold and pay with ounces of gold. I’m not even sure anyone really sets their prices in terms of gold.

“Also, note that in Asia it’s common for stores to accept a variety of “foreign” currencies (US dollars, British pounds, Australian dollars, Deutchmarks (when I was there; I guess Euros now), etc.) as happily as they accept their own.”

But the price tags will probably be in terms of one currency and all others will be based on a currency ratio. I’m not saying a store won’t provide the service of a currency exchange, I’m just saying gold isn’t money in the US, and in most other parts of the planet.

“In some places you’ll even find stores that only accept foreign monies.”

This means that the local currency is worthless or spiraling in that direction too fast. It doesn’t mean gold is money.

“I never asked about gold, but my bet is they’d be really happy to accept gold!”

Even you forgot to ask. Just think how much further the question would be from the minds of a typical consumer.

“(In Vietnam, if you want to buy land, you need gold)”

That is encouraging. But here the US, you need dollars.

Yancey Ward January 6, 2006 at 9:07 am

I think we return to gold only on collapse of the present system- fiat dollar, governments, etc.

A government sponsored return to the gold standard (with an almost zero chance of happening, but that is a debate for another day) would be structured so that the government were the only initial beneficiary. I suspect it would take the form of a complete confiscation of gold from the private market in exchange for the new currency, and then the price of gold would be set at a much higher level in terms of that new currency. There is no way the state would ever allow present gold holders to benefit from their foresight.

Paul Edwards January 6, 2006 at 10:41 am

But Yancey,

Let’s say, just for the fun of it, you were put in charge of the unlikely task of putting the nation back on gold. How would you proceed?

That is a more interesting question than how Greenspan or Bernanke might proceed because they would have another goal on their minds and would bungle it grotesquely.

Paul Edwards January 6, 2006 at 10:45 am

It occurred to me that one might view it that i am asking how Yancey might better central plan our money. But i think in reality it is as Rothbard says, government has stolen control over our money from the market, therefore only it can give it back.

Yancey Ward January 6, 2006 at 11:38 am

Paul,

Given that I expect only collapse of the present order (this could be far in the future), then I would simply go cold turkey get all of the fuss over with. Close the Federal Reserve and declare the legal tender laws void. For the citizens of the United States, I would redeem the outstanding dollar deposits and cash currency at whatever rate clears the precious metals from the government depositories and clears the dollar balances from the accounts. All foreigners and central banks would be out of luck.

billwald January 6, 2006 at 11:43 am

“I suspect it would take the form of a complete confiscation of gold from the private market in exchange for the new currency, and then the price of gold would be set at a much higher level in terms of that new currency.”

Been there, done that. Did it work?

Paul Edwards January 6, 2006 at 12:03 pm

Yancey,

You wrote, “All foreigners and central banks would be out of luck.” But wouldn’t you simply treat a dollar as a claim on a certain amount of gold held in the government vaults? Why would you make a point of stiffing foreigners holding dollars?

Yancey Ward January 6, 2006 at 1:45 pm

Paul,

I would be rebuilding the US system of commerce around the new free market money, not the whole world. Foreign governments and people are free to end their fiat systems as well while stiffing Americans. I would also add that I would not honor any US Government bonds of any kind from any source, just cash balances on day zero.

Yancey Ward January 6, 2006 at 1:47 pm

billwald,

It certainly worked for the State, did it not?

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