Rothbard's Plan for Gold and the Dollar - How would the markets react?

Economics Economics Questions
1

Suppose Murray Rothbard’s plan to restore the link between the dollar and gold was carried out. What would be the effect on the markets?

The dollar will be redefined as a weight in gold. The banks would be capitalized with Fed gold and allowed to print bank notes, and Federal Reserve Notes would be redeemable in gold, and then the Fed would be abolished, along with the FDIC and U.S. Mint. To make the numbers simpler, suppose the dollar is redefined as 1/4000 oz of gold. The “price of gold in dollars” would obviously then be fixed at $4000 per oz.

Suppose that previously the market price of gold was $1000 per oz, and that $2 exchanged for £1, with the price of gold in pounds being £500 per oz. Now, since dollars are just tokens for gold, the “dollar price in pounds” will be the same as the “gold price in pounds”. So immediately, the exchange rate would become $4000 to £500, or $8 to £1.

With the exchange rate altered, there would be incentives for individuals to import gold into the US, and export goods overseas. If a good, say, guitars, previously cost $800 in the US and £400 in the UK, Brits will exchange £400 for $3200 and buy 4 US guitars, then sell them in the UK for £1600. They will either buy gold in the UK and deposit it in a US bank, or buy American dollar bank notes. Either way, gold will flow from the UK into the US and goods will flow from the US into the UK.

This will happen until any of the following occur:

  1. The gold price in pounds is bid up to £2000 per oz (i.e. $2 exchanges for £1 again).
  2. The guitar price in dollars is bid up to $3200 (with the UK price at £400).
  3. The guitar price in pounds is bid down to £100 (with the US price at $800).

Some combination of these three will occur until the correct relations are restored.

I have been thinking about how long it will take for the relations to be restored, what factors determine where prices will settle, how much gold will flow into the US, and who benefits most and least from this process. I’d like to hear what other people think about these questions.

I think it would happen very quickly (months, maybe even weeks), and it would primarily be the price of gold in pounds (and all other currencies) that is bid up, rather than goods prices in the US. Therefore there would only be a small period of goods flowing out of the US and gold flowing in. The transition period would not be devastating to the economy (barring government intervention) and it would be fairly painless for all.

What do you think would happen? Do you agree or disagree that the shock to the economy would be fairly minor?

2

I don’t really know how big of a real shock would be caused by Rothbard’s plan, but I much prefer Hayek’s idea of money denationalization and the use of money that is indexed to a large group of comodities versus the gold standard or fiat currency.

3

I doubt that Hayek’s plan would work. Mises’ regression theorem shows that new paper tickets - “ducats” or “Hayeks” - won’t be accepted as money. Even if a new paper ticket was backed by a commodity, it is unlikely to replace the dollar, just because people are so familiar with the name “dollar”. A complete dollar collapse would be the only thing that may do it, and this is not even certain; the Germans clung to the name “mark” despite the collapse of 1923.

Hayek’s plan is similar to Rothbard’s, except that Rothbard would return the dollar to the gold standard and abolish the Federal Reserve in one stroke. I think this extra step would save us from the pain necessary for Hayek’s plan to (possibly) work. We would instantly have a sound banking system, and people could continue using dollars. If fiat money, silver money or money backed by a basket of commodities really is better than gold-backed dollars, then gentle competition will ensure it emerges as the dominant money.

4

If the link between the dollar and gold was restored, who would determine the ratio of dollar to gold convertibility?

The government?

5

If you want to reintroduce gold you have to be super careful in choosing the exchange ratio.

I would rather have the monetary base frozen and then free banking on the top of it. The treasury could be charged to destroy and replace worn out notes.

6

So basically the government decides the convertibility ratio?

How is that any better from what we have now? They could just change the ratio and devalue the dollar by printing more.

7

The Federal Reserve would be abolished. If the government decided to start printing Federal Reserve Notes, it would have to compete against the banks producing their own notes (backed by gold). Competition would eliminate the Federal Reserve Note, as banks/individuals would not accept it if they suspected there was no gold backing it.