The Mechanics of Returning to a Gold Standard

Economics Economics Questions
1

This is Rothbard’s proposal for returning to the gold standard and free banking (slightly modified, I’ve included savings deposits in calculating the new par, whereas for some reason Rothbard did not, even though he agrees that they are demand liabilities).

  1. Divide the quantity of gold in official reserves by the quantity of federal reserve notes, demand deposits, other checkable deposits, and savings deposits. This yields the weight per dollar required to disgorge all gold from official holdings, and return it to private hands; this is the new par, or “price” of gold in dollars.

  2. Send to the treasury a proportion of official gold sufficient to redeem all outstanding FRN at the new par, which the treasury will redeem at par for a limited period of time (e.g. 60 days). All incoming FRN are to be destroyed, and no new ones or any other State-created paper notes are to be produced. Nor is the State to participate in minting coins. The gold disgorged can thereafter be minted if and however the market pleases.

  3. Send to the commercial banks the remainder of the gold, which is sufficient to meet all their demand liabilities in gold at the new par. Now the banks find themselves with 100% reserves against demand liabilities, and operating in a free banking environment. We can presume they will start issuing their own bank notes once again, to replace FRN which are rapidly being removed from circulation.

Now, here’s my question: if the US official gold reserves constituted all the gold in the world, then the program, described above would cause a seamless transition, with neither inflation nor deflation. However, that is not the case. In addition to the official reserves, there are large quantities of gold in private hands, and in other official hoards, both in the US and around the world. How does this gold effect things? Suppose the market price for gold is $1000/oz at present, and the price of a TV is $100. I can sell my one ounce of gold for $1000 and buy ten TVs. Suppose the new par is $10,000/oz. After the reform, then, I can deposit my gold in a bank and receive a $10,000 credit in my account, with which (either via checks, or bank notes, or debit cards, et al) I can now purchase 100 of the same TVs. Two things have happened to cause this change. Firstly, gold was previously an asset (like land, or shoe laces, or stocks, or anything else) which could be sold for money, whereas now gold is money. Secondly, gold now is 10x the amount of money for which it could formerly be sold. Essentially, all the gold in private hands that could make its way into the US economy, either circulating as gold, or being deposited as demand deposits in banks, represents an expansion of the money supply. Suppose there are ten million ounces in question. At the new par, that is $100 billion: added to the money supply. If the money supply was, say, $1 trillion before, that means a 10% monetary expansion, and roughly proportional increase in the general price level. Unless I’m missing something, this means that a return to the gold standard by the aforementioned plan would be inflationary - possibly quite inflationary, depending on the amount of gold likely to enter the US economy relative the size of the previous money supply.

It seems to me (though I’m not 100% on this, and I’d appreciate your thoughts), that the influx of gold to the US and the increased production within the US would continue as long as gold was overvalued relative goods and services. That is, until relative prices returned to their pre-reform levels. For example, when one ounce of gold would once again buy just 10 TVs instead of 100. This would require a ten-fold increase in prices. Let me put it another way: as a result of the reform, gold in the US suddenly becomes 10x more valuable than it was relative all goods and services. This would have the same affect as if in reality right now the market price of gold increased ten-fold in the US while all other prices in the US remained the same: i.e. huge increase in production until gold prices fell back down (but w/ a gold standard, it’s not the “gold price” that falls, it’s the purchasing power of gold that has to fall - i.e. prices of goods and services have to rise), and huge influx of gold to buy goods in the US (which are now 1/10th the cost as before in terms of gold), either export goods or assets (stocks, real estate, etc), until those goods reassert their previous prices relative gold in the US, or (for export goods), until their prices in foreign markets drop sufficiently due to increased supply.

Thoughts? Am I missing something?

2

I’d say, given the numbers you use, then yes, there would be inflation. However, this is not a result of going to a gold standard, I don’t think. If it were, then the assumption would be that adhering to a fiat currency – with legal tender laws and a monopoly on the creation of said currency granted to the federal reserve, whom would likely continue devaluing the currency by inflation, which enables an ever-increasing expansion of the welfare/warfare state – would not result in a similar scenario. Or in other words, sticking to the same monetary, military, and welfare policies wouldn’t lead to (eventually) the destruction of the fiat currency. I believe the Austrian view is that it will.

Am I missing what exactly it is that you are asking?

Also, keep in mind that, given your premises, I believe the price adjustment (that is, the market) would act much swifter to bring prices to their correct levels. For example, assume that by turning in $10,000, one will receive 1 ounce of gold in return. Remember, after, say 60 days has lapsed, the dollars will no longer have value, in that, they would no longer be redeemable for gold. I see no reason why anyone would try to keep the dollars instead of exchanging them for gold. Now consider the TV salesman. He used to sell TVs for $100. He exchanged his dollars for gold, and $100 netted him 1/100 of an ounce of gold. Would he not simply sell his TVs for approximately 1/100 of an ounce of gold? This way, anyone who previously had $100, but exchanged it for 1/100 of an ounce of gold, can still purchase the same TV. Yes, there will be many people, foreign and domestic, who held gold before the return to sound money. They were the ones wise enough to drop the dollar before the collapse. These people’s circumstances are greatly changed, in that they can afford more things than previously. Their spending will be a large driver of the market moving towards the correction in prices. If these people decide to buy lots more TVs, the TV salesman will raise prices accordingly. If they do not, and instead buy TVs in the same manner as they always had, the TV salesman might not be able to change his prices very much.

Again, maybe I am missing what exactly you are asking. Sorry if I have been of little help.

3

@Phi est aureum

I’d say, given the numbers you use, then yes, there would be inflation. However, this is not a result of going to a gold standard, I don’t think. If it were, then the assumption would be that adhering to a fiat currency – with legal tender laws and a monopoly on the creation of said currency granted to the federal reserve, whom would likely continue devaluing the currency by inflation, which enables an ever-increasing expansion of the welfare/warfare state – would not result in a similar scenario. Or in other words, sticking to the same monetary, military, and welfare policies wouldn’t lead to (eventually) the destruction of the fiat currency. I believe the Austrian view is that it will.

I’m not criticizing the gold standard at all, or suggesting that the current system is better. I just wanted to see if you all agree with my basic analysis here, because, if it’s correct, it suggests to me that perhaps there is a better way of transitioning to a gold standard, as a sudden, one-time inflation of 1000% doesn’t sound all that appealing. I used $10,000 as the new par in my example, but the reality is actually much worse. To give 100% backing to all demand liabilities of the commercial banks ($6.607 trillion) and for all FRN ($1.085 trillion), with a USG gold reserve of 261.5 million ounces, that would be a “price” of about $29,400 per ounce. With a current gold price of $1700/oz, that would be more like 17x increase in the general price level. That’s not just unpleasant, that’s catastrophic. Can you imagine promising people that the gold standard would end inflation, and then delivering a sudden 1700% inflation! It would ruin the image of the gold standard forever. There has to be a better way.

Now consider the TV salesman. He used to sell TVs for $100. He exchanged his dollars for gold, and $100 netted him 1/100 of an ounce of gold. Would he not simply sell his TVs for approximately 1/100 of an ounce of gold? This way, anyone who previously had $100, but exchanged it for 1/100 of an ounce of gold, can still purchase the same TV.

That’s right.. If there were no gold in existence outside the USG hoard, there would be no inflation, and no rising prices.

But there is…

Yes, there will be many people, foreign and domestic, who held gold before the return to sound money. They were the ones wise enough to drop the dollar before the collapse. These people’s circumstances are greatly changed, in that they can afford more things than previously. Their spending will be a large driver of the market moving towards the correction in prices. If these people decide to buy lots more TVs, the TV salesman will raise prices accordingly. If they do not, and instead buy TVs in the same manner as they always had, the TV salesman might not be able to change his prices very much.

Right, but they’re going to spend it on something, doesn’t matter what. Before the reform, gold was an asset, a good, not money. If gold was sold for money, and the money was sold for TVs, and the money supply remained the same, the increase in the price of TVs would have been offset by a decrease in the price of gold, right? The general price level would remain unchanged. But now, after the reform, when a goldbug spends his gold on a TV, there is no offsetting decline in other prices. He is spending new money into the economy; no different than if he had counterfeited some FRNs and spent them. There’s no way to get around it, this is inflationary.

Again, maybe I am missing what exactly you are asking. Sorry if I have been of little help.

Not at all. I think we’re on the same page. I want the gold standard, my problem is in figuring out exactly how to transition from the present system to the gold standard without catastrophic economic disruptions (like 1700% price inflation). I’ve searched through many books and articles and there is surprisingly little on the mechanics of such a transition. Rothbard gives the fullest account, but he apparently fails to appreciate the inflation problem that I’ve identified - which, considering Rothbard’s economic expertise relative my own, makes me think I’ve got it wrong, but I can’t find an actual flaw in my reasoning. It seems pretty straightforward. The gold in private hand now is not money. After the transition, it is money. Therefore, the money supply has increased.

I guess my basic question is this: what is the best way to transition to a gold standard?

My thoughts right now are that, to avoid the aforementioned inflation, we need market prices to more or less equal the par (or be higher than the par) at the time of revaluation. That way, you don’t get a massive influx of gold from abroad. Secondly, we need a lower par, so that the privately held gold within the US, once monetized, represents a smaller addition to the money supply. The USG could achieve both goals by buying up gold on the open market prior to revaluation. The more gold it accumulates, the lower can be the eventual par, so the less inflation resulting from monetization of privately held gold in the US. And, as the par comes down with each accumulation of gold by the USG, the market price rises. At some point they meet, or the market price surpasses the par, and then the USG should do the revaluation. You might think, if it’s inflationary for the gold-holders to set the par above the market price, wouldn’t it be deflationary to set it below the market price? No, because the privately held gold in the US is not yet at all part of the money supply. Whether it enters valued at $1/oz of $1 million, it is still inflation. Right? So, no matter how low the par relative the market price, that just means less inflation, it can never mean deflation. Now, in this scenario, the gold-holders (o at least those of them who bought during this USG buying boom) would get screwed, rather than rewarded, but I say that’s a small price to pay to avoid 1700% inflation. And the long-time goldbugs would still be fine, as the par will still be much higher than current prices.

EDIT: I might add, it’s not necessary to give the banks 100% reserves. Surely they can sustain themselves through a bank run with 95%, 90%, 80%, 70%…? Anyway, whatever the level, the lower it is the lower the par (i.e. more gold devoted to each dollar, since you’re backing a smaller number of dollars), and therefore the lower the inflation from monetizing privately held gold, as I described above.

4

I once asked about this: https://forum.freecapitalists.org/t/rothbards-plan-for-gold-and-the-dollar-how-would-the-markets-react/4379 Didn’t really get any answers. I also ran the numbers for the UK and the £, as if Rothbard’s plan was implemented here, and the numbers were even more extreme. The ratio came out to about £20k per oz of gold - over 20 times what the gold price was at the time. I just can’t see how Rothbard’s transition could happen without causing massive market shocks, unless perhaps all governments / central banks agreed to go back to a gold standard at the same time.

Contra what I said in that thread nearly 4 years ago, I now think Hayek’s simpler idea for getting back to sound money was better than Rothbard’s. Rothbard’s criticisms of Hayek’s ducats idea are good as far as they go, but if Hayek’s ducats had “something extra” beyond being just the paper tickets he imagined, Rothbard’s criticisms - that a new currency basically can’t get off the ground - are nullified to a large degree. I think Bitcoins are like Hayek’s ducats with that “someting extra” being it’s unique qualities stemming from it being a cryptocurrency rather than paper, which have enabled it to get off the ground in a way that Rothbard did not or could not have predicted.

5

That’s an interesting point, I hadn’t considered the relative speeds of adjustments in different markets. Barring any kind of controls imposed by governments, financial markets should adjust much quicker than “real” goods markets. However, there are also US financial markets to consider, which can adjust just as quickly as foreign gold markets. If financial assets in the US are bid up, no big deal…except for commodities. That could be a bit of a problem.

EDIT: I wonder if it would be useful to look at the immediate consequences of the gold revaluation in the 1930s; what happened in the forex markets, and what happened in US financial (especially commodities futures) markets?

6

No need to implement anything. Just repeal legal tender laws and capital gains taxes and allow the free market to converge to whatever media of exchange it prefers.

And what “inflation” are you talking about? The “price” of gold going from $1700/oz to $30,000/oz is actually the price of (a basically worthless) dollar collapsing from 1/1700 oz/$ to 1/30,000 oz/$ and this (facing reality!) would happen regardless of the way sound money is allowed to compete in the economy. The fact that the dollar is worthless is not Rothbard’s problem. It’s a fact.

7

@z1235

And what “inflation” are you talking about?

The addition of new money to the money supply from two sources: (1) privately held gold in the US prior to revaluation, and (2) the influx of foreign gold.

The fact that the dollar is worthless is not Rothbard’s problem. It’s a fact.

I didn’t say it was “Rothbard’s problem,” I said it was a problem. I find hyperinflation to be problematic, don’t you?

No need to implement anything. Just repeal legal tender laws and capital gains taxes and allow the free market to converge to whatever media of exchange it prefers.

What of banking? If free banking were implemented right now, virtually all the major banks would fail. How does your proposal address this problem? In Rothbard’s proposal, or my modification of it, the banks are given gold to back their deposits. What happens in your scenario?

8

First, I wouldn’t say that a gold bug spending his goldbug is no different than counterfeiting. Counterfeiting is illegitimate; acquiring gold prior to the collapse of a currency is not. Similarly, someone who mines gold is not on the same level as a counterfeiter. Although they do spend their gold into the market, they used capital and labor to acquire the gold, just as a goldbug did as well (since he used capital and/or labor to get the money to buy the gold).

Next, I’d like to ask why you advocate for a gold standard. Perhaps I need to ask what you mean by gold standard.

I prefer that we simply repeal all legal tender laws and let the market choose the money. This allows for a gradual (how gradual, who can know?) adjustment of prices. After all, there MUST be an adjustment, right? The fact that we can see approximations of 1500-2000%+ clearly demonstrates that the prices are incorrect, for nearly everything. So, one way or another, someone is going to take a loss. I say let the market decide. Better yet, since nothing assumed indicates that the state has collapsed yet, let us repeal all legal tender laws as thy stand, and reapply them only to the state.

That is, no one shall be forced to accept any one thing as payment for debt; payments of debts must be made contractually, voluntarily, and mutually agreeable; the only exception is that the federal government can only collect taxes and fees in federal reserve notes; however, no person or entity will be required to accept federal reserve notes from the federal government as payment for any debt.

Perhaps the last line can be changed to allow government workers to be paid in federal reserve notes, along with all entitlement payments. I’m not sure which way is preferable.

However, if done this way, is it not likely that people will more clearly understand that any inflation seen is not the cause of the market choosing gold or silver as money, the the result of the policy of the state? Also, by forcing the state to accept the (increasingly worthless) federal reserve notes that it created, the public will understand why it is being forced to accept them as payment for taxes and fees. We could also sell off the gold held by the state at some determined price as part of the repeal of legal tender laws. Would this not help the public come to realize the value of the market over the power of the state? Perhaps this likely sway of opinion of the public in tandem with the federal government’s decreasing ability to buy anything will lead to the demise of the federal government, at least as we know it.

Done otherwise, is it not likely that the federal government remains nearly as powerful as it is? Isn’t (or shouldn’t) the main reason for a return to sound, market-chosen money to VASTLY decrease the power of the state in relation to the individual?

9

@Phi est aureum

First, I wouldn’t say that a gold bug spending his goldbug is no different than counterfeiting. Counterfeiting is illegitimate; acquiring gold prior to the collapse of a currency is not. Similarly, someone who mines gold is not on the same level as a counterfeiter. Although they do spend their gold into the market, they used capital and labor to acquire the gold, just as a goldbug did as well (since he used capital and/or labor to get the money to buy the gold).

I meant only that they’re economically equivalent, in that each is inflationary, not that they’re ethically-legally equivalent.

Next, I’d like to ask why you advocate for a gold standard. Perhaps I need to ask what you mean by gold standard.

In advocating a “gold standard,” I’m advocating for a purely free market in money, and I’m assuming that the market will choose gold for its money. Of course, if I’m wrong in that assumption, no harm done; once this operation I’ve described is completed, the issue is entirely in the hands of the market, which can go in any direction it likes.

I prefer that we simply repeal all legal tender laws and let the market choose the money. This allows for a gradual (how gradual, who can know?) adjustment of prices. After all, there MUST be an adjustment, right? The fact that we can see approximations of 1500-2000%+ clearly demonstrates that the prices are incorrect, for nearly everything. So, one way or another, someone is going to take a loss. I say let the market decide. Better yet, since nothing assumed indicates that the state has collapsed yet, let us repeal all legal tender laws as thy stand, and reapply them only to the state.

That is, no one shall be forced to accept any one thing as payment for debt; payments of debts must be made contractually, voluntarily, and mutually agreeable; the only exception is that the federal government can only collect taxes and fees in federal reserve notes; however, no person or entity will be required to accept federal reserve notes from the federal government as payment for any debt.

Perhaps the last line can be changed to allow government workers to be paid in federal reserve notes, along with all entitlement payments. I’m not sure which way is preferable.

However, if done this way, is it not likely that people will more clearly understand that any inflation seen is not the cause of the market choosing gold or silver as money, the the result of the policy of the state? Also, by forcing the state to accept the (increasingly worthless) federal reserve notes that it created, the public will understand why it is being forced to accept them as payment for taxes and fees. We could also sell off the gold held by the state at some determined price as part of the repeal of legal tender laws. Would this not help the public come to realize the value of the market over the power of the state? Perhaps this likely sway of opinion of the public in tandem with the federal government’s decreasing ability to buy anything will lead to the demise of the federal government, at least as we know it.

Done otherwise, is it not likely that the federal government remains nearly as powerful as it is? Isn’t (or shouldn’t) the main reason for a return to sound, market-chosen money to VASTLY decrease the power of the state in relation to the individual?

I’m very sympathetic to that approach, but I’m not sure it’s feasible, for the reason that you can’t have a free market in money without a free market in banking. How do we get a free market in banking? How can we go from massively overextended banks with very low reserve ratios to banks which can survive in a free market without massive bank failures and liquidations? I consider that a sine qua non in this discussion, because allowing that to happen would be not only bad in itself but political suicide for us. We need a less traumatic transition. Now, maybe there’s a way for this transition in banking to occur under your proposal, but I don’t see it at the moment. How would you get the banks to be in the position to operate in a free market, without the FDIC, without the “lender of last resort,” without giving them a ‘gift of free capital’ (as Rothbard calls it), in the form of gold to back their reserves? The trouble is that they need those reserves right away, as soon as the banking cartel is busted and free banking becomes a reality, otherwise they’ll be facing bankruptcy in short order. It can’t be that they’re gradually restored to health somehow by market processes - at least not as far as I can see.

10

Why/how would a repeal of legal tender laws and capital gains taxes eliminate FDIC and the lender of last resort?

11

@z1235

Why/how would a repeal of legal tender laws and capital gains taxes eliminate FDIC and the lender of last resort?

It wouldn’t. I’m saying if the goal is a free market in money, you need a free market in banking as well, as the two are obviously linked inextricably. Is your plan to eliminate legal tender laws and capital gains taxes but leave the Fed? No, I’m sure you want to eliminate the Fed, and all the rest of the laws/programs (like FDIC) that sustain the banking cartel, right? Alright, so then how do you prevent the banks from collapsing immediately when you do this? That is what will happen if you suddenly remove their supports. That means that millions of people lose their savings, poof, gone. Trillions of dollars. The purist in me would like nothing more than to see the banks crushed into a pulp, and the suckers punished for their stupidity, but that’s not a practical course of action. If nothing else, it would be political suicide. You’d end up with a demagogue in office elected by all the angry and now violently anti-market people who lost their savings.

A virtue of Rothbard’s plan is that it moves to a gold dollar (purely in the hands of the market, with no government role at all), but it prevents a deflationary collapse of the banking system by providing the banks with the reserves needed to back their deposits.

12

No elimination of the Fed would be necessary. Every USD-related institution and law can remain the same. You only need to allow competition for the USD by repealing legal tender laws and capital (USD price) “gains” taxes. Then allow people to choose their preferred media of exchange and the institutions in which they will deposit it or through which they would transact in it.

13

If you repeal legal tender and capital gains laws, you expect a market-chosen money to start replacing federal reserve notes, as the federal reserve notes rapidly depreciate against that new money and against goods and services, correct? So what happens with the banking system - people are going to either (a) leave their savings in the banks as federal reserve notes and lose them to depreciation, or (b) withdraw them and cause bank failures.Either way people lose much of their savings. Right? The problem is that all those savings are currently denominated in FRN. Under your proposal, the only way to convert them to the new money is for people to make withdrawels (right?), but that will cause bank failures, because the banks haven’t got the reserve to meet those withdrawels.

14

Are they exactly economically equivalent?

In the case of a counterfeiter, he expends negligible capital and labor to produce something that is perceived to have value (negligible due to the fact that he can print as many dollars as he wishes). Therefore, he trades the counterfeits for things that did require an appreciable amount of capital and labor, and this devalues the the currency (or increases the value of the good or service he traded for, if one prefers to see it this way). He causes inflation.

In the case of the person who held gold prior to the switch to gold as money, they did have to expend capital and labor to acquire the gold. Someone else accepted the fiat currency in exchange for the gold, but that is not the fault of the goldbug. When he later trades the gold for goods or services, he hasn’t changed the supply of gold (the gold already existed beforehand), nor has a negligible amount of capital or labor been traded for an appreciable amount.

Similarly, when someone mines new gold, although they do increase the supply of gold, they aren’t causing inflation in the sense that the counterfeiter is. They used capital and labor to acquire a good. The prices of capital and labor adjust accordingly. With the gold miner as well as the goldbug, the prices changing are not a “problem,” like inflation cause by counterfeiting is a “problem.” The responsibility rests on the market to adjust accordingly. This means that the TV salesman as well as the purchaser of the TV must attempt to gauge what the market value for the trade is. If they under- or over-estimate, they will recognize the mistake, and the market as a whole will learn from it.

To complain about that is, in my mind, similar to complaining when one has been buying the same good for the same price for some amount of time, and then the price goes up because the supply decreases faster than it is replenished because the seller wasn’t able to predict where the market was headed. It is just the market at work.

As for how to get a free market in banking with my proposal, I feel that it is built into what I have suggested. I’d assume that with my proposed change in legal tender laws, the demand for gold and silver would increase, and the demand for federal reserve notes would decrease. Therefore, the banks that do the best will be the ones that adjust to this change in the market. They will, along with many individuals (I’d hope) move to exchange their federal reserve notes for gold. They could get it from the same source individuals can: the federal holdings of gold (as I proposed). This can be done in one of two ways: either sell the federal holdings of gold at a set price of, say $1750 an ounce, first come, first served; or sell the gold at a market determined price, as in, as the demand for the gold increases, increase the number of federal reserve notes needed to buy an ounce.

I’m no bigger a fan of hyperinflation than you. However, the reality is that it will come (the collapse of the dollar as we know it) and someone will end up on the short end of the stick. If there is a way around this, I currently cannot think of one. But under my proposal (which may very well be far from ideal), I would think that the federal government and the federal reserve would bear the biggest burden of the loss of wealth and power.

15

Not to ignore the rest of your post, but right now I want to focus on this:

As for how to get a free market in banking with my proposal, I feel that it is built into what I have suggested. I’d assume that with my proposed change in legal tender laws, the demand for gold and silver would increase, and the demand for federal reserve notes would decrease. Therefore, the banks that do the best will be the ones that adjust to this change in the market. They will, along with many individuals (I’d hope) move to exchange their federal reserve notes for gold. They could get it from the same source individuals can: the federal holdings of gold (as I proposed). This can be done in one of two ways: either sell the federal holdings of gold at a set price of, say $1750 an ounce, first come, first served; or sell the gold at a market determined price, as in, as the demand for the gold increases, increase the number of federal reserve notes needed to buy an ounce.

The banks’ cash holdings are mostly on deposit at the Fed as reserves. They could convert these into gold as you say. What I’m wondering is what kind of reserve ratio would they have as a result? The banks current reserve ratio is about 20%. If, after all is said and done, their reserve ratio (with reserves and liabilities now priced in gold) is still 20%, I don’t see how they can possibly survive a free market. Historically, in the closest period approxiomating free banking (the US from the abolition of the 2nd central bank to the civil war), banks had much higher reserve ratios. I could find some data, but off the top of my head it’s more like 70-80% than 20%. And that’s because, without government protection, they get hit by net redemption claims and bank runs from depositors pretty easily.

Here’s another issue. Not only for the banks, but in general, how do you deal with contracts denominated in FRN? Presumably, FRN are going to be worthless pretty quickly without the support of legal tender laws et al. So will all FRN-denominated bonds be worthless? How could they be converted into gold (or whatever the money is) denominated contracts? The same with futures, options, etc.

16

No bank needs to fail, and no depositor needs to lose their FRN deposit. They’d still have their lender of last resort ready to create as many FRNs are needed (withdrawn).

17

So we have the US government accepting FRN for gold at a certain price, while the Fed prints up enough money to ensure that all depositors can get their money out of the banks and exchange it for gold at that same price. This sounds like a more roundabout version of the Rothbard plan, no? The only difference is that, instead of shipping gold to the banks so that they can redeem all demand liabilities in gold, you ship FRN to the banks so they can can redeem all demand liabilities in FRN, which can then be converted to gold.

Still, you have the contract problem. If bonds, for example, are denominated in FRN, do they become worthless eventually, once FRN become worthless (or at least worth much less) or can they be re-denominated in the new money somehow?

18

No, we don’t.

When did I mention that the gov must exchange FRNs for gold at a certain price? My only prescription is the elimination of legal tender laws and capital gains taxes. That’s all. Everything else can stay the same.

Whose problem is this? There will be no defaults on contracts denominated in FRN. The Fed can print as many of them as is needed. Everybody will have back whatever FRNs they are being owed.

You seem to be concerned that a lot of people will get screwed if/when the money monopoly was eliminated by allowing competition. The problem is that the screwing has already happened. Bringing in sound money would amount to merely awakening the victims to the fact.

19

When did I mention that the gov must exchange FRNs for gold at a certain price?

Sorry, I had you mixed up with Phi, who had mentioned the government selling its gold stocks either at a fixed price or by auction. But, I assume you want to get that gold out of government hands as well, no? Or is it just going to sit there in the NY Fed vaults indefinitely?

There will be no defaults on contracts denominated in FRN. The Fed can print as many of them as is needed. Everybody will have back whatever FRNs they are being owed.

Default isn’t the issue, it’s the fact that the currency in which the bonds are denominated will become worthless before the bonds are mature. The Fed printing more FRN makes the problem worse, not better.

Whose problem is this?

The problem of everyone who doesn’t want to see the credit markets destroyed by hyperinflation?

My only prescription is the elimination of legal tender laws and capital gains taxes. That’s all. Everything else can stay the same.

You’ve now suggested that the Fed (1) print enough money to back demand liabilities (trillions of dollars), and (2) print enough money to allow for bond repayment somehow (even though that’s counterproductive, as I explained). I’m having a hard time seeing the advantage of your proposal over the Rothbardian approach. It seems it would cause most people to lose their savings: either due to bank failures if the Fed doesn’t print up huge amounts of money, or due to to inflation if they do.

You seem to be concerned that a lot of people will get screwed if/when the money monopoly was eliminated by allowing competition. The problem is that the screwing has already happened. Bringing in sound money would amount to merely awakening the victims to the fact.

No, that’s not true. Some kind of correction is required, sure, but there are different methods of doing this, with different consequences. Some are clearly better than others. Likewise, if you’ve been shot in the leg, some treatments are better than others. Penicillin or amputation, take your pick. Consider a classic historical example. Britain returned to the gold standard after WWI. They could have chosen to return at a realistic par given the wartime inflation, and everything would have gone smoothly. Instead, they chose to go back at the pre-war par and caused a depression, and eventually a run on the pound forcing them back off gold. It does very much matter how you do these things.

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You don’t seem to get the gravity of your patient’s condition. The leg has already been cut off. Only aliens or time travel could possibly make your patient whole going forward (pun intended). This has been the goal of fiat money and central banking all along. (Gnawing on the flesh of a productive victim.) Their designers and benefactors have been extremely successful at achieving it with your current patient.

My proposal acknowledges this fact and deals with reality as it is. Any other “solution” merely drugs up the patient and keeps deluding him that his leg is still there.

EDIT: And perhaps you should question the wisdom in seeking yet another state-centered solution for your problem. That would be like empowering the same doctors who administered the loss of one leg to “take care” of the other.