Topic: Monetary Policy
Free Market Transition to Sound Money Is a gold backed currency just a relic of our past?by Harry P
(Libertarian)
Monday, January 14, 2008
Many people, including our government leaders, scoff at the idea of going back to a "Gold Standard" as a form of sound money. Sound money meaning a dollar backed by something other the the current fiat money system (see: What backs the US Dollar? ). They claim that gold backed money is old fashioned and has already been abandoned because it didn't work.
What they really mean is that they don't want a money system that curtails big government spending by imposing a limit on creating money that a commodity backed system would entail. Big government with all of its warfare/welfare big business entitlements depends on fiat money. It also depends on the ability to tax our labor and property as a re-payment and collateral structure for the debt that fiat money creates.
Money is simply a unit of trade. Its purpose is to make trade more efficient by using a common value between the buyer and seller of goods. This unit should be portable, resilient and commonly acceptable. Gold has been used as this common value for thousands of years so it has a pretty sound history for maintaining its usefulness as money. If this is true then why did the "old gold standard" fail?
I believe that our original gold standard failed because it was based on a "controlled market strategy". The "old gold standard" was never based on free market price action. Arbitrarily setting the value of gold at a price of $20 or $35 or even higher sets the currency up for failure. When one country tries to control the price of anything, while the rest of the world allows market conditions to set the price, inevitably a price anomaly will occur. When the world gold prices began to exceed our US controlled price a "run" on our gold took place. I believe this is what caused the Bretton Woods agreement to be discarded. Even if most of the major world powers agreed to a controlled price, this would only slow down but not stop "free market" effects on global prices.
Our Constitution states Congress has the power to coin money, regulate the value thereof (and) Fix the standards of Weights and Measures. When Congress instituted gold backed paper currency instead of setting the weight and quality of the gold backing the dollar unit, they set the price of gold itself. Setting the price represents a controlled market and our Founders would have been against this just as they were against a central bank (at least that's my opinion).
So how does our country change back to sound money backed by a "hard asset" namely gold?
Step One: Congressman Ron Paul has already sponsored a bill to repeal the "legal tender" law that gives the Federal Reserve Bank (FRB) a monopoly on issuing our currency.
Step Two: Give the function of issuing our currency back to our US Treasury eliminating the FRB middleman. Note: You would not have to shut down the FRB but instead have a US gold-backed currency compete in the open market with the FRB fiat money. Our new gold currency would not create new debt as it would be redeemable in gold. In other words, we would replace gold as the "collateral" behind our money instead of our American labor and property.
Step Three: Make our new US gold-backed currency available on the open market. Let it compete with the rest of the world currencies including the FRB fiat money. You would simply exchange (buy) the new currency with the fiat currency. The "price" would be based on the market value of the quantity of gold backing the new currency.
Now here's the tricky part because it depends on who owns the gold in Fort Knox (assuming all of it hasn't already been sold off). I believe that over the years our gold has been confiscated and sold by the bankers in order to "artificially depress" the market price of gold. With gold now trading at nearly $900 an oz, I doubt we have much left but I could be wrong. The higher gold prices could simply be a function of run-away inflation but I think it is probably a combination of both.
If our government still owns our gold, the US Treasury could issue new gold backed currency immediately to compete with the fiat money. However, I'm going to assume that the central bankers have confiscated all of our US gold as partial payments against our national debt and that we no longer have or at least no longer own any of the gold at Fort Knox or any at the gold reserve banks.
In order to determine the "fair market value" of our new currency, we need to set the standard for our gold money as per Constitutional authority. Here's an example. One of the smallest units of gold is the grain. There are 480 grains in one ounce of gold. At today's current price (we'll use $864 per oz) each grain is worth $1.80 in Federal Reserve dollars (FR$). So we set each US gold dollar (US$) to represent 1 grain of gold. The exchange rate would be 1.8 FR$ to 1 US$ gold dollar.
Why not use a larger value such as a gram instead of a grain? The exchange rate would then be about $27.78 FR$. With such a large difference in values between the two currencies, we would certainly create a much more rapid contraction of the FR$ money supply. This might create economic destabilization through rapid deflation. I am not an economist so I'm not sure if a faster or slower transition is most effective. But the general idea is the same.
We and the world would be able to buy $1 US$ for $1.80 FR$. There are two scenarios, one; we, through our government, still own gold and two; we own no gold at all. This wouldn't effect the exchange, it would only effect how the FR$ received from the exchange could be used.
If we have gold, the FR$ received by our US Treasury from the sale of the US$ could be used to pay our national debt to the Federal Reserve Bank. We pay them back with their own fiat money. If we do not have gold, we would have to use the FR$ to buy the gold needed to back the US$. I would start by using the FR$ on hand to buy gold and then start offering that amount of gold-secured US$ to the world.
With a standard quantity of gold behind our dollar, the fluctuation prices of the gold market would have no effect on the US$ just on its exchange rate. If gold were to go up to $960 FR$, the exchange rate would be $2 FR$ to $1 US$. If gold went down to $480 FR$, the exchange rate would be $1 FR$ to $1 US$. The value of the US$ itself would always remain as 1 grain of gold.
The real benefit for the American people is in changing from a debt based fiat currency backed by our labor and property to a commodity based currency backed by gold. As our Treasury began to pay back the national debt, our labor and property would again belong to us.
There is one other more radical maneuver to get our country out of debt. Charge the FRB bankers with treason against the American people and confiscate all of their assets as penalty. Ops, did I go too far?
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The views expressed in this
article are those of Harry P only and do not represent
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I like the treason idea. That's the fastest way to send a message to someone, take their freedoms away. I may be going too far, but I also think that any elected official caught willfully violating their oath of office should be charged w/ treason, stripped of their citizenship, and then deported! I wonder how many people would run for office then?? Only the ones who actually mean to do what they say (like Ron Paul), and that's what we need more of!
I like Dr. Paul's idea of competing currencies. Going back to the gold standard actually means price fixing in the gold market-bad idea.
Just like with Nixon's gas price fixing, gold price fixing would create a shortage.
A gold currency would be great, as long as it wasn't the only one we had. There is not enough gold in the world to support our economy and gold has uses other than medium of exchange or store of value. Gold price-fixing would drive the cost of gold up for electrical connections, jewelry, etc.
Hi Joe, I think you are agreeing with me about competing currencies but it appears you think I was advocating setting gold prices. My article is specifically against that and advocates a free market solution. Only the quantity of gold would be set.
I don’t know what the world gold supply is but I suspect it is more than enough to create a viable currency to compete with the FR$. If you have researched gold supplies maybe you could inform me.
In any case, it is not specifically necessary to replace all of the FR$ with US$ dollar for dollar as the FR$ would continue to lose value. In fact, I wouldn’t be surprised if the competition with “real money” wouldn’t accelerate the FR$ loss of value. In any case it would take more and more FR$ to buy a US$. The ultimate goal, to me, is to remove the central banker’s debt money completely from our system and free Americans from being chattel. I’m sure we can agree on that goal.
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