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Source link: http://archive.mises.org/7662/the-political-and-economic-agenda-for-a-real-gold-standard/

The Political and Economic Agenda for a Real Gold Standard

January 17, 2008 by

Ron Paul explains his position on gold money:

One of the basic insights of the great Austrian economists, both Carl Menger and Ludwig von Mises, is that money emerged by evolution from the market process. It was not invented by governments. There are basic economic forces today that are contributing to the further evolution of the monetary system, and there is a political strategy that I believe will make it possible to liberate those forces and restore the monetary role for gold. Because of the current economic and political climate, it is important to understand what we can do — and what we cannot hope to do in the short run.

I believe the goal of a market economy, not paralyzed by government sabotage on behalf of vested interests and pressure groups is an ideal worth fighting for. FULL ARTICLE

{ 57 comments }

Niko January 17, 2008 at 10:26 am

Funny, the gold standard seams to be the cure for everything. Well, it isn’t, there were problems during the gold standard, including a Great Depression. The entire Middle Ages was a Great Depression and I guess they kind of used a Gold Standard. What people believe is that gold will somehow stop people from making mistakes. It does not, it never did. What it does it puts breaks to those that can actually fix those mistakes. Breaking from the gold revealed the true value of gold and it’s importance to humanity’s well being: almost nothing.

Matt Curtiss January 17, 2008 at 10:28 am

Niko, it says to post an INTELLIGENT and civil comment. You’re batting .500.

N. Joseph Potts January 17, 2008 at 10:51 am

‘Happily, the second step that Mises described has already been achieved: “All restrictions on trading and holding gold must be repealed.”‘

Not so happy, there, Ron (he wrote just after Congress had repealed the 1934 prohibition on Americans owning monetary gold, in 1975). Certain very important restrictions remain. For one thing, increases in the DOLLAR value of your gold are taxed as capital gains at such time as you might exchange the gold for dollars (who would do that?) and/or other possessions. Not only that, the rate of this tax is not the usual rate applied to, say, pork bellies or shares of British Petroleum – it is the HIGHER rate applied to “collectibles” such as wine, old cars, and oil paintings. It’s currently 28%, versus 20% for the first-mentioned kind of asset.

Secondly, purchases and sales of gold are subject to (state) sales taxes, at least when the transaction occurs within a state having such a tax.

Yes, gold can be traded and owned “freely,” but it is still subject to restrictions NOT applied to money that keep it from competing on a level playing field against money.

Garrett Schmitt January 17, 2008 at 10:55 am

Since 1986 the US Mint produces bullion coinage in different weights and sells it on to resellers based on market prices (147,500 1 oz. coins in 2007–198,500 oz. total when you include smaller weights).

Out of sincere curiousity, I ask whether this means gold-standard supporters following Dr. Paul’s plan are now perhaps waiting for the groundswell-of-popular-support stage. Do there remain, perhaps, legal and institutional obstacles to really completing his first stage of re-establishing a circulating medium (legal tender laws, flaws or manipulation in US Mint marketing and distribution, etc.)?

Garrett Schmitt January 17, 2008 at 10:58 am

Ah, tax treatment. That completely slipped my mind. Thanks!

Kavius January 17, 2008 at 11:00 am

Adopting the name of the standard unit of bullion weight as the denomination of the coinage will bring together two important concepts about money that we must actively teach

If I am not mistaken, the British Pound Sterling, derives its name from the fact that it used to be, literally, a pound of sterling silver. Yet now we can see that there is no correlation between the pound and the value of silver.

While I think denominating coinage in weight is a necessary step (you cannot acheive a commodity standard without it), it is not going to (in and of itself) force people to realize what they are dealing in. Britian is a living example that contradicts that.

The educational job becomes that much easier.

Alright… that much I can accept. Its important, but when I first read it, I misunderstood it to mean that people would suddenly realize what was going on.

Also… Please, oh American neighbors of mine, use grams. I can’t bear to have to count change in fractions at the till. Use grams and let me stick to my nice little decimal system :)

Niko January 17, 2008 at 11:01 am

@Matt Curtis: Sorry, didn’t mean to offend the elite of this site. In order to add insult to injury, where was I wrong?

Inquisitor January 17, 2008 at 11:07 am

The problem is that you give the impression of being a troll, since the arguments you put forth portray a total ignorance of the relevant time periods, that is what.

Mike Sproul January 17, 2008 at 11:24 am

If the central bank has enough assets to buy back all the currency it has issued, then that currency will hold its value, gold standard or no gold standard. If the central bank does not have sufficient assets, then that currency will lose value, gold standard or no. But if the gold standard requires the bank to maintain convertibility at $1=1 oz., and the bank only has enough assets to maintain $1=.99 oz, then maintenance of the gold standard will cause a bank run, which is a disaster.

Matt Curtiss January 17, 2008 at 11:25 am

Niko, an understanding of Austrian Business Cycle Theory will show you where your comments are flawed. You speak of the gold standard in perfect terms. But, we do not pretend that a gold standard eliminates all mistakes, because no matter what, no one knows the future. What a gold standard would do is put the brakes on the manipulation and inflation of the monetary system by central banks, which would cease these boom and bust cycles. We (common people, businesses) would then have more realistic data on which to make assumptions about the future.

Manipulation would cease, that’s not a bad thing.

Niko January 17, 2008 at 11:26 am

@Inquisitor: I didn’t mean to be a troll. As far as I know, and I might be wrong, during the Great Depression there was a form of Gold Standard. In 1907 there was a form of Gold Standard. During all the crises before 1933 there was a form of Gold Standard. Of course, sometimes it was silver, or, I don’t know, something else. But there was an asset behind and I just call it “gold.” The Middle Ages is one of the darkest periods in human history and they used precious metal for coins. If you look at that period it look a lot like a loooong depression. I’m not going to argue with that because I may be wrong.

I think you guys right now ar so fixated with gold that you don’t see that we are in the middle of a cycle and this could be fascinating for an austrian.

My opinion is that gold doesn’t matter outside it’s monetary value. Decoupled from that, is irelevant.

Jake January 17, 2008 at 12:26 pm

Reading some of the above comments, some questions comes to mind:

1) If gold is so irrelevant, why do Central Banks hoard it (including the IMF)?

2) If Gold doesn’t matter, why call it “Precious”?

3) Why do the Rothchilds like gold?

4) Gold has been used for 5000 years, if not longer. Egyptians used it, it’s referenced in the Bible, etc. etc. etc., not just in the fricken middle ages.

5) Governments fixed their currencies against weight, but they “fixed” the gold price. It wasn’t free to float.

6) Bretton-Woods I fell apart because of more government intervention, idiotic monetary policies and political power games.

7) And I like the idea of private coinage. I’d love having a business making my own brand of gold coins!

Nahhh…gold has a good place in the natural economic system. Supply and demand is a natural economical phenomenon. Not human intervention and manipulation.

What will you accept when offered: A)A fist-full of Kruger Ra€nds valued at, for example $10,000, or B)a fist-full of fiat tioletpaper, perceived to be valued at $10,000? ;-)

Inquisitor January 17, 2008 at 12:48 pm

Niko, alright. Just checking. It’s a myth that the middle ages were as bad as they are portrayed to be, and it absolutely does not follow that what malaise did exist was due to commodity money (if anything, look at Zimbabwe and its paper money regime as indicative of an actual disaster in the making.) One work dealing with the Middle Ages is Grant’s “The Foundations of Modern Science in the Middle Ages”. Hoppe’s Democracy – The god that failed” also includes ample references to the period.

As for the other time frames you mentioned, a central bank was the culprit in all cases. These were not pure gold standards, but rather gold standards in name alone. The artificial gold standard was dealt its final deathblow in the 1970s.

J D January 17, 2008 at 1:18 pm

The coins should be metric weights.

fundamentalist January 17, 2008 at 1:21 pm

Niko: “I think you guys right now ar so fixated with gold that you don’t see that we are in the middle of a cycle and this could be fascinating for an austrian.”

Inquisitor is right. The periods defined as the use of the gold standard, especially the 1930′s, had the gold standard in name only. They did not permit the supply of gold to limit the money supply. When paper money was used, especially in the 1920′s, paper money was printed without regard for the amount of gold in reserve. So while we had a gold standard in name, i.e., you could theoretically exchange paper for gold, we have never had a true gold standard. One thing that made the Great Depression worse than it should have been was that the feds had printed so much paper currency during the 1920′s that people lost confidence in it and wanted to hold gold instead. That’s why FDR outlawed private possession of gold.

Besides, it’s not that Austrians value gold so much, but that gold and silver are the only lasting forms of money that people freely chose in the market place, and that the increase in gold would limit the increase in the money supply to 3% annually. The whole reason for the interest in a true gold standard is to limit the growth of the money supply.

As for the feds being able to stop a recession or help us recover from one with their money pumping, that’s all Keynesian propaganda. It never has happened and never will. Theory shows it to be impossible and historical data proves it never happened. If anything, the Fed has made every recession worse than it should have been. Study the Austrian Business Cycle Theory and you’ll see why.

fundamentalist January 17, 2008 at 1:22 pm

The plan sounds good, but could take a long while. In the short run, I think our best bet is to get OPEC to switch to pricing oil in ounces of gold.

Niko January 17, 2008 at 1:41 pm

fundamentalist: So the gold standard can be abused just as well. No, the fed can’t get us out of a recession, I know that. Actually the Japan asset bubble proved that the Austrian school is right, and it proved it works also in a fiat money system. Yes, I’ve read about the business cycle and right now we are at the moment when there is a flight to commodity products.

I didn’t want to be inflammatory, I just think that gold is only a believe system. And in the end, without a strong economy, or a viable business model, no matter how much gold a country holds, it will fail.

J D January 17, 2008 at 1:49 pm

http://www.constitution.org/gb/gb-plea.txt

and

http://www.constitution.org/gb/gb-plea.htm

are two formats of a well documented discussion on the deliberate mucking up of a good money system in the late 19th century.

The author, George Bancroft, had recently completed a multi-volume history of the United States and more than qualified to protest fiat money.

His introduction:

“Good money must have an intrinsic value. The United States of America cannot make its shadow legal tender for debts payable in money without ultimately bringing upon their foreign commerce and their home industry a catastrophe, which will be the more overwhelming the longer the day of wrath puts off its coming. Our federal constitution was designed to end forever the emission of bills of credit as legal tender in payment of debts, alike by the individual states and the United States; and it will have that effect, if it is rightly interpreted and firmly enforced.

“The supreme court of the United States was endowed by our fathers with a peculiar tenure of office and high powers of jurisdiction, that it might be able to keep watch over the life and integrity of the constitution. On the third of March, 1884, without having listened to any public argument on the case which was made the occasion of its utterance, it pronounced before a crowd of listeners an opinion in these words: ‘The power to make the notes of the government a legal tender in payment of private debts being one of the powers belonging to sovereignty in other civilized nations, and not expressly withheld from congress by the constitution; we are irresistibly impelled to the conclusion that the impressing upon the treasury notes of the United States the quality of being a legal tender in payment of private debts is an appropriate means, conducive and plainly adapted to the execution of the undoubted powers of congress.’

“The opinion thus confidently expressed, if it should be accepted as law, would be a death blow to the constitution; in defiance of which it not only gives a sanction to irredeemable paper money, but clothes the government with powers that have no defined limit in its relations to the people. Of the nine who composed the court, Stephen J. Field alone gave a dissenting opinion; but there stood at his side, invincible vouchers for the rightness of his dissent, James Wilson, Oliver Ellsworth, and William Paterson, all three of whom the president of the convention which formed our constitution selected from among its framers to be its earliest judicial interpreters. And with them are to be counted a cloud of witnesses, among whom are the master-builders of the constitution. Roger Sherman, George Washington, Charles Cotesworth Pinckney, James Madison, and Alexander Hamilton.

“The language of the court is of such import to all American industry and intercourse from the most humble to the highest, and is moreover so subversive of a republic composed of states in union, and threatens such injury to the honor and hope of republicanism throughout the world, that I have thought it right to bestow upon it many of the few hours that may remain to me for labor. The decision of the question depends upon facts which are beyond the reach of change, and which for their establishment require only the strict application of the rules of evidence to historical investigations.

“When questions of science arise, I shall cite only men that command the confidence of the civilized world; and I shall call the immortal framers of our constitution themselves as my witnesses to prove that it was their deliberate, unalterable purpose to withhold from the federal government the power to emit the promise of money as a legal tender for debt in money; and that they did beyond dispute withhold the power by very large and most determined majorities.

“To set the subject in the clearest light, it will be proper to trace the history of American bills of credit until they were abolished by Massachusetts and Connecticut; to revive the memory of the great struggle for their suppression by the separate colonies or states to the end of 1786; and to ascertain what decision on paper money was made by the constitutional convention, and accepted, one by one, by every state. It will then be the time to examine the new interpretation of the constitution by the present court; and ask after the defenses of the people against the revolution with which they are threatened.

Niko January 17, 2008 at 1:51 pm

Jake: I would take the “toilet paper” :). That is because I would still have to sell the Kruger in order to take 10 000$ of “toilet paper” and buy stuff I use, like toilet paper.

Let’s say tomorrow there is a hot day for the market and gold hits 5000$, while oil reaches 200$. Which one would affect you affect you more?

PS: I know you probably don’t like me, but I really appreciate your responses. It is nice to have opinions from intelligent people.

Jonathan Bostwick January 17, 2008 at 1:54 pm

“Funny, the gold standard seams to be the cure for everything. Well, it isn’t, there were problems during the gold standard, including a Great Depression. The entire Middle Ages was a Great Depression and I guess they kind of used a Gold Standard. What people believe is that gold will somehow stop people from making mistakes. It does not, it never did. What it does it puts breaks to those that can actually fix those mistakes. Breaking from the gold revealed the true value of gold and it’s importance to humanity’s well being: almost nothing.”

The dollar was taken off of gold because foreign nations were redeeming debt for gold and the US had more debt than gold.
If gold really means “almost nothing” why did Nixon not continue paying out gold until it was all gone?
The fact that the US still sits on its gold(which it stole from the American people only 40 years before Nixon ended the gold standard) and refuses to be parted from it says a lot of their valuation of gold.

Niko January 17, 2008 at 2:22 pm

Jonathan Bostwick: so why the lenders didn’t say no, and just take as much gold as possible? Was it because they needed the american market just as much as US needed them? So if US would’ve just give all the gold to the lenders, everything would be ok then. I don’t know, but was US just a debtor country, they could not call on any debt of their own?

Jake January 17, 2008 at 2:31 pm

Niko,

No one is hating, unless you think you are being hated. That’s the difference between perception and reality…like fiat and gold ;-)

jdelehanty January 17, 2008 at 2:37 pm

I am with RP one hundred percent. Due to a shortsighted Fed and near term financier’s planning, the money men must have decided the shock of ending fiat paper would not immediately benefit them as they do not hold their wealth in gold. Is this hypothesis (wild guess) even plausible? As an aside,Who bought all of England’s gold? And is Ft Knox empty?

Niko January 17, 2008 at 2:49 pm

Jake: I haven’t said anything about being hated, just not liked, which is actually a reality. It’s a lovely debate. It’s to bad I’m a minority here, … like being the only one.

The way I see it, you like gold because you think it’s a hedge against inflation. I don’t think the fiat system is a guarantee for inflation. The economy functions as a body. Let’s say your body needs vitamin C, so you give it a large dose. The body takes as much as is needed and disposes of the rest. Japan is the best and most recent example of that.

fundamentalist January 17, 2008 at 2:57 pm

Niko: “…right now we are at the moment when there is a flight to commodity products.”

Actually, it’s not a flight, but the expected result of the Fed’s monetary policy since 2001. The Fed dropped its rate to 1% in 2002 and commodity prices soared soon afterwards, just as the ABCT predicts.

Niko: “And in the end, without a strong economy, or a viable business model, no matter how much gold a country holds, it will fail.”

That’s true, but no one thinks that a gold standard will fix flat tires. Its only purpose is to prevent the Fed from artificially pumping up the money supply as it has done since 2001. The ABCT also predicts that the Fed’s current stimulus will only make matters worse when the next, inevitable recession happens. However, Austrians believe a gold standard will increase our wealth because the Fed-induced business cycle destroys a great deal of wealth with each cycle.

Niko: “I don’t think the fiat system is a guarantee for inflation. The economy functions as a body. Let’s say your body needs vitamin C, so you give it a large dose.”

That’s Keynesian econ, which I’m sure you know is the opposite of Austrian. Austrian econ teaches that the economy will work fine with any constant level of money. It’s the sudden and large changes that cause the damage and fiat money is notorious for sudden, large changes. But the economy never needs more money; that’s a mistake of the Banking School or Real Bills Docrine, and the Keynesian school. In a recession, what the economy needs is more savings, not more paper money or credit. Pumping in more fiat money only covers up the mistakes of the past for a short time. They appear again soon. Besides, according to the ABCT, the monetary pumping of the Fed caused the recession in the first place. If the Fed would quit pumping up the money supply and causing artificial booms, the busts would be much smaller and shorter.

Chad Parish January 17, 2008 at 3:06 pm

Paul also wrote (in the footnote on p.20 of “Gold Peace, and Prosperity: The Birth of a New Currency”), “Although this booklet was written to encourage the establishment of a gold-coin standard, it does not suggest the discouragement of other, non-fraudulent commodity money.”

Niko January 17, 2008 at 3:17 pm

fundamentalist: The complete quote is “The economy functions as a body. Let’s say your body needs vitamin C, so you give it a large dose. The body takes as much as is needed and disposes of the rest.” I think you assume that the disposable dose transforms in inflation. Japan, and the Great Depression, which you said that can not be considered representative for the Gold Standard, proved that this is not the case. A study showed that the last recessions were acknowledged by the people in charge after they passed, which would make interventions less efective (a recession lasts 6 months, in order for a messure from the FED to make it’s way throw the economy it takes … 6 months). Just for fun, I’ve read that the recessions since 1980 were much more middler then those before 1980. I think that before 1980 there was some kind of gold standard in function.

“Actually, it’s not a flight, but the expected result of the Fed’s monetary policy since 2001. The Fed dropped its rate to 1% in 2002 and commodity prices soared soon afterwards, just as the ABCT predicts.”

Right now there is much pressure on raw materials and oil because of speculation of demand from China and India etc.

Niko January 17, 2008 at 3:49 pm

To everybody: thank you all for a great discussion. I have to confess that I’m from an “emergent market” and all this, although I do believe in all I’ve said, was an English exercise for me. I’ve been introduced to the Austrian school by reading “America’s Great Depression” and “The Road To Serfdom” and I find it the closest to human understanding. I hate all the new stuff, with mathematical models and all the mambo jumbo which in the proves nothing.

In the ’90′s we had some kind of a depression because of all kind of things of the era. It lasted about 10 years. They tried to inflate us, they printed money like crazy, they maintained employment, then decreased employment, rised wages, maintained wages (which with inflation …) , nothing worked. We didn’t even used money anymore, we tried to pay in products for other products (let’s call it the wine standard), I put on the same shoes for five years, I still use some shirts from that period. I met an ex high school colleague and we were laughing: we were wearing some clothes which were 8 years old. Now it is much better, but I don’t want to go through that again.

What I want it to say is that it is nice to believe in gold, in silver etc., and that this will help, but it wont. It doesn’t matter what monetary standard you use, as long as the economy is sound.

Have a good day.

compuirv January 17, 2008 at 8:05 pm

Where does silver fit in to this plan to restore the gold standard? I can’t remember if Mises was for silver too. I think silver was considered a means to inflate in the 19th century after the Civil War. But I also believe it is constitutional money at least as much as gold.It seems to be less abundant today and may be necessary if you want ample circulation coinage.

I don’t think it is necessary for either to actually circulate in a big way. Just that they be the only things defined as money and any money substitutes be backed 100% by the physical gold and silver on demand. Anything else is private credit and the market can sort out the value of these.

fundamentalist January 17, 2008 at 8:28 pm

Niko, Your English is excellent and you make some good points.

Niko: “I think you assume that the disposable dose transforms in inflation.”

Actually, I think a better analogy than vitamin C would be alcohol, because the economic body isn’t able to determine how much it needs and reject the rest. It uses all it gets, like an alcoholic. When an alcoholic is drinking, he thinkis he is bullet proof, superman. That’s the economy when the Fed pumps money into it. But the hangover always follows, just like the recession. The cure for the hangover is oxygen; for the economy, savings are oxygen.

Based on your description alone, I would guess that a lot of the problems in your country were caused by government manipulation of the money supply. A true gold standard would have prevented that from happening.

Niko: “It doesn’t matter what monetary standard you use, as long as the economy is sound.”

But the economy can’t be sound without a good monetary standard. Manipulation of money is the more harmful thing to an economy.

compuirv: “I think silver was considered a means to inflate in the 19th century after the Civil War.”

You’re right. Huge discoveries of silver were made after the Civil War and the value of silver plummeted just as it does with paper money. The owners of the silver mines wanted the US government to declare silver to be money and buy their silver for minting coins. The gold bugs knew that the huge supplies of silver would cause price inflation and opposed it. While silver supplies may have stabilized, silver is too abundant today to be a good commodity money, even though it was used as money for millenia.

Inquisitor January 17, 2008 at 8:41 pm

I’m not sure why a gold standard should fail. The idea is to divorce the government from the economy, and allow a free market in money, which will most likely choose gold as the medium of exchange (or perhaps some other precious metal.) All past banking failures are linked to central bank intervention, not any commodity standard, aside from what they were in name.

newson January 18, 2008 at 12:18 am

inquisitor says:
“All past banking failures are linked to central bank intervention, not any commodity standard, aside from what they were in name.”

bank failures were regular occurences even on a gold standard, as a result of fractional reserve banking (central banking was sold to the public as a way of eliminating/mitigating this problem).

borrowing short and lending long is always going to expose banks to insolvency. the rothbard solution would be for 100% reserve banking, where the duration of assets/liabilities would be perfectly matched, thereby avoiding any insolvency risk.

Yumi January 18, 2008 at 3:41 am

Hayek was quoted in the Daily Telegraph regarding gold. I’m very impressed as it doesn’t happen often

http://www.telegraph.co.uk/money/main.jhtml;jsessionid=24L4055AVQ0DZQFIQMFSFGGAVCBQ0IV0?xml=/money/2008/01/18/do1801.xml#comments

Peter January 18, 2008 at 4:07 am

Please, oh American neighbors of mine, use grams. I can’t bear to have to count change in fractions at the till. Use grams and let me stick to my nice little decimal system

And here I was thinking the old British system (20 shillings to the pound, 12 pence to the shilling) was preferable to decimal!

Curt Howland January 18, 2008 at 9:29 am

Niko, a commodity currency _will_ help, because it will remove one of the most destructive of economic interventions: fiat currency.

It doesn’t solve all problems, of course. No one except your straw-man is saying it would.

The middle ages suffered from far more than a lack of circulating currency, it suffered from a lack of circulating _anything_. Try a book by Henri Perine, “Medival Cities, their rise and the revival of trade”.

Curt Howland January 18, 2008 at 9:30 am

Niko, a commodity currency _will_ help, because it will remove one of the most destructive of economic interventions: fiat currency.

It doesn’t solve all problems, of course. No one except your straw-man is saying it would.

The middle ages suffered from far more than a lack of circulating currency, it suffered from a lack of circulating _anything_. Try a book by Henri Perine, “Medival Cities, their origins and the revival of trade”.

fusgerm January 18, 2008 at 9:51 am

I am curious just what is the value of the assets held by the Fed to back the currency that it has issued, in terms of both gold and non-gold assets. Also, what is the total face value in dollars of all US banknotes in existence? And just what intrinsic value does that assign to each dollar-note, in terms of its asset-backing, based on today’s gold-price?

If the gold-value of the non-gold assets (such as US bonds) drops over time, as seems quite likely, then the “Conversion Agency” will have to keep dropping the redemption-rate for dollar-notes, in order that all remaining banknotes may be redeemable for an equal share of a shrinking cake.

But the more that paper-dollars drop in value relative to gold, the more that people will prefer to hold gold rather than paper-dollars.

Will this end in a bank-run, as more and more depositors redeem their dollar-notes, with last-come worst-served? Or will the dwindling reserves in Fort Knox prompt the President to do a Nixon or Roosevelt?

pater tenebrarum January 18, 2008 at 12:05 pm

it is important to note that the debate is not really about a gold standard per se, but rather the question of whether money should be subject to central economic planning by a government bureaucracy. it does not matter in the end what the free market chooses as money – what matters is that the market is left free to choose. it is however likely that gold would once again emerge as money, since it has done so in the past after a long period of trial and error. gold simply has all the necessary attributes that make it useful as money (portability, divisibility, fungibility, durability, scarcity, and a pre-existing demand).

IMHO January 18, 2008 at 1:58 pm

Niko: “I haven’t said anything about being hated, just not liked, which is actually a reality. It’s a lovely debate. It’s to bad I’m a minority here, … like being the only one.”

Don’t worry about what people think of you. Your comments/questions generated some interesting discussion. I’ve found that some people are more patient with newcomers than others; i.e. Fundamentalist, who IMHO would make an excellent teacher.

Robert M January 18, 2008 at 2:48 pm

What people always ask me about 100% reserve banking, is where would the banks get the money to lend out?

I’m kinda stumped on that one. They could have investers I guess…but idk if that would work well.

Mike Sproul January 18, 2008 at 3:36 pm

Fusgerm:


I am curious just what is the value of the assets held by the Fed to back the currency that it has issued, in terms of both gold and non-gold assets. Also, what is the total face value in dollars of all US banknotes in existence? And just what intrinsic value does that assign to each dollar-note, in terms of its asset-backing, based on today’s gold-price?”

The fed’s balance sheet:

http://www.federalreserve.gov/releases/h41/Current/

shows that the fed holds bonds worth $728 billion plus gold worth $11 billion (officially valued at $42/oz, so it’s more like $200 billion), as backing for $813 billion in paper dollars. Note that $813 billion, spread over a population of 300 million, works out to $2700 per person, while surveys show the average American carries about $50 in paper dollars. Unless you want to claim that the missing $2650 is held by foreigners and drug dealers, the best explanation of the missing money is that it has been lost in house fires, landfills, etc. This would imply that the dollar is vastly over-backed. One way to find out how many paper dollars actually exist would be to find the Fed’s records, if any, of which dollar bills (by serial number) have been retired. If you find a serial number that was issued 50 years ago, and it hasn’t been retired, you’re pretty safe in thinking that is has been lost.

fundamentalist January 18, 2008 at 3:56 pm

Mike: “…the best explanation of the missing money is that it has been lost…”

There is a lot of currency overseas, too. Then there are the billions that Korea and Iran counterfeit each year.

fusgerm January 18, 2008 at 6:23 pm

Thanks Mike. Very interesting, but not entirely reassuring.

If 2% of the paper money in circulation is held in American wallets, I can easily believe that at least 75% is held in shops, ATMs, banks, safety-deposit boxes, private safes, and – yes – stashed away overseas.

And that is only the currency-ingredient of M1. What about the rest of M1, and at least some of M2? If people start turning up at the gold window with their cheque-books, or with borrowed money, or if they choose to hoard gold rather than retire debt, then a bank-run becomes even more plausible.

Mike Sproul January 18, 2008 at 6:59 pm

Fusgerm:

If the average person loses $20/year to house fires, accidental throwing in the trash, etc., then after 100 years, that person would have lost $2000. Assuming the fed has been printing dollars since 1913, that’s close to the amount missing. Anyway, it’s clear that the fed has more than enough assets to buy back all the paper dollars that still exist.

Those M1 dollars aren’t relevant to this particular issue, since the checking account dollars issued by a private bank are the liability of that private bank–not the Fed. The only kind of dollars the Fed would ever buy back are the ones the Fed issued–i.e., paper dollars and Federal Funds.

Curt Howland January 18, 2008 at 7:45 pm

Robert M., the money comes from investors. People will buy bonds with the bank, or put their money into accounts that may be loaned out.

The problem of 100% reserves is with what are called “demand” deposits, where the money must be available “on demand”.

There is nothing that says I cannot make a deposit that I know will not be available to me until maturity after a specific date. The bank then loans out that money at interest and, I assume, pays me a lower interest so that they make a profit.

The bank becomes literally a “middle man”, bringing investors and borrowers together.

TLWP Sam January 18, 2008 at 11:50 pm

Wouldn’t that make a bank an investment house? I s’pose if people wanted to deposit their money for safekeeping not investment then they have to pay the bank for the privilege.

fundamentalist January 19, 2008 at 8:24 am

fusgerm: “If people start turning up at the gold window with their cheque-books, or with borrowed money, or if they choose to hoard gold rather than retire debt, then a bank-run becomes even more plausible.”

There isn’t a gold window at banks anymore. When Nixon took the US off the gold standard in 1973 (?) the gov quit redeeming dollars for gold or silver. The only place you can exchange paper dollars for gold is at the local coin shop and those guys will happily exchange gold for paper at the current market price plus a small commission fee. The fed will exchange paper for paper, such as dollars for US gov bonds.

fusgerm January 20, 2008 at 10:08 am

Fundamentalist: “There isn’t a gold window at banks anymore.”

Yes, I’m referring to the proposed new “gold window” provided by the “Conversion Agency” discussed in the article.

I am in favor of a gold standard but I have some doubts about the solvency of the existing banking system if it is adopted.

fusgerm January 20, 2008 at 10:13 am

Mike Sproul:

Your rough estimate of how much money might have been lost each year does not take into account either the growth in population since 1913 or the inflation since then (losing $20 in 1913 is more like losing $200 today).

Such quibbles aside, I am not at all confident that the US will remain solvent enough to honour the payouts on all of its bonds, at least not in gold-redeemable dollars. The ensuing collapse in the value of US bonds would certainly blow a hole in the Fed’s assets.

The private banks are in an equally precarious position. Ultimately the loans which they extend are backed by the security which they accept as collateral. If the gold-value of that collateral plummets, and depositors take fright and seek to convert their deposits to gold, then the Fed is in a pickle. It either washes its hands of the bank, and allows the bank-run to continue until the bank closes its doors, or it lends the bank enough money to meet all its demands, in which case it further weakens its own balance-sheet.

At the very least, banks would have to impose far more stringent requirements for loans. The gold-value of an asset like a house can fall far more than its dollar-value, as we have seen recently.

Mike Sproul January 20, 2008 at 11:33 am

Fusgerm:

“I am not at all confident that the US will remain solvent enough to honour the payouts on all of its bonds, at least not in gold-redeemable dollars. The ensuing collapse in the value of US bonds would certainly blow a hole in the Fed’s assets.”

There are some separate issues here. One is whether the Fed can buy back all the dollars it has issued, and the other is whether the Treasury can repay all the bonds it has issued. I don’t think there’s any doubt that the Fed’s assets (worth about $900B) are sufficient to buy back the roughly $800B of dollars that it has issued, especially when you consider that a large portion of those dollars have been lost or destroyed.
The other issue–whether the Treasury can repay its bonds, is anyone’s guess. But last I checked, the Federal Government’s debt, relative to its income, was lower than mine. But certainly, if the Treasury did default on its bonds, and those bonds lost value, then the dollars issued by the Fed would have less backing, and would fall in value.
The private banks are yet another issue, but as before, if a private bank loses assets, then the checking account dollars issued by that bank would lose value.

This is all explained in my website about the real bills doctrine, which you’ll find by clicking on my name below.

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