Would it though? I’m not sure. It might be a “Qwerty-Dvorak” situation. Imagine there was a government law that existed prior to the year 2000 that mandated that all typewriters and keyboards use the Qwerty layout. Someone like you might have emphasised the superiority of the Dvorak layout (cf. emphasised the superiority of gold over paper) and said that if only the government repealed the “Qwerty-monopoly law”, then the market would converge on Dvorak. You’d have been wrong about that. The costs of changing from one layout to another would have been (are) greater than sticking with the inferior layout. For some types of goods, the benefits of the superior technology have to be very high to displace the inferior technology. I think money could be one of these types of goods.
What do you think would happen if legal tender laws and capital gains taxes were repealed? Who would be the early adopters of using gold as a medium of exchange and why would they start using it? Then how would it become commonly accepted and totally displace the dollar? I think Rothbard’s answer to these questions was that it wouldn’t happen… that there is a “lock-in” to using the dollar, just like the “lock-in” on Qwerty that has prevented any superior layouts displacing it as the standard. I think this is why Rothbard devised his plan in the first place, rather than just saying “abolish the monopoly; let the market sort it out” like he did for other monopolies.
Graham, different types of choices have different types of consequences. It is conceivable that more than one keyboard standard could coexist if the “cost” of choosing the suboptimal version was smaller than the disutility of making a switch. I don’t think that’s the case when money/finance is concerned. People who are too lazy to recognize the superiority of sound money over gun-less fiat money (no legal tender laws, no capital gains taxes) will simply be outcompeted in a free market by the people who do.
Not only do I think that government enforced “affirmative action” is needed for sound money, but I believe that it would be counter-productive – as most anything government-enforced is. The free market is the best regulator. Take the guns away and FRNs will converge to their fair value (zero) in no time. Sound money doesn’t need gun enforcement for it to become preferred and accepted – self-interest would do the job just fine.
Huh? Under Rothbard’s plan all the State does is give away its gold and allow free banking: i.e. giving away property which it stole decades ago, rather than selling it for profits it does not deserve, and eliminating restrictions on the free-market. How is that state-centered? What makes your plan less state-centered? You leave the banking cartel intact, you even want the Fed to print more. Yea, you eliminate capital gains tax and legal tender laws, so what, so would the Rothbard plan. Remember, under that plan, we are not creating a new currency (with new legal tender laws or other protections) we are simply handing out the gold in government hands on a pro rata basis to dollar holders. The market will take it from there. If people want to use the gold as money, then they can. If not, no one’s standing in their way, they’re free to use whatever they like.
Essentially, the Rothbard plan allows for a smooth transition to the system (gold money) which the free would almost certainly choose anyway (unless Graham is right), without forcing this on anyone, as there would be a free market in money going forward. Your plan offers a route to that same goal: except that route is littered with wrecked contracts, bonds, futures, bank deposits, etc. What am I missing???
Minarchist, I thought you had a problem with Rothbard’s plan. I never said his plan was bad, btw.
How is my plan littered with wrecked contracts, deposits, etc.? I thought we concluded that it wasn’t few posts ago.
As for the gov keeping all the gold, I don’t see how that makes much difference. FRN holders would be free to exchange their paper for gold in the open market (including buying it from the gov) just like they are today. They’d be screwed either way, though – regardless of whether the gov fixes the gold price according to Rothbard’s formula or the market determined the price according to supply/demand.
The main point of this thread, as I see it, is not whether Rothbard’s or my plan is better (for whom?) but that most holders of FRN-denominated demand deposits or bonds will realize that they have been majorly screwed. I claim that the screwing has already occured and that the introduction of sound money competition (be it by my or Rothbard’s plan) is merely revealing that fact.
Your quest for a painless transition is futile. So buckle up and try to enjoy the fireworks.
I do have concerns about Rothbard’s plan, about it’s potentially inflationary consequences, though I am less concerned now than when I started the thread. In light of Graham’s point about forex markets adjusting faster than goods markets, I expect the inflationary consequences of revaluing gold to, say, $10,000/oz would be not nearly as sever as I had been thinking. And further, the government could buy gold in advance of the revaluation, and set the par below the market price, as I suggested, which would entirely eliminate the risk of an influx of foreign gold, and minimize the inflationary effect of monetizing domestic gold. Basically, I am more in favor of Rothbard’s plan now than when I started the thread, though I’m still open to alternatives. I’m not saying Rothbard’s plan is the best, I’m just saying it’s the best of those I’ve heard so far.
I don’t think we settled that issue. How would a contract specifying future payment of FRN be changed to reflect future payment in gold (or whatever the new money is)? FRN are going to become increasingly worthless once legal tender laws and capital gains taxes are eliminated (even more so if the Fed is, as you suggested, printing them in large quantities to backstop demand liabilities of the banks as people withdraw and convert their FRN). Therefore, it follows that contracts involving future money (loans, bonds, futures, options, etc), still denominated in a failing currency (FRN), will increasingly lose their value. This drop in value could be sudden or gradual, depending on how quickly you think the FRN is going to be replaced by a new money.
I’m not searching for a painless transition, I’m searching for the least painful transition. For instance, I conclude that if Plan A and Plan B are equal in all respects but one - that A leaves the credit markets functioning, while B destroys the credit markets - then A is preferable.
My interest is in moving from the present situation to a future situation where the State has nothing to do with money or banking. This thread is about discussing different possible means of bringing about that desirable future state. So far, we’ve mostly discussed Rothbard and Hayek’s plans, but I don’t want to limit discussion to those. I’m all ears for any proposal anyone has for transitioning from the present situation to a free market in money and banking.
Minarchist, I agree. Why do you think governments and central banks started accumulating gold again? The race to the bottom (currency devaluation) has entered the final stages. The entities that are able to outprint the others and exchange their worthless paper for gold will come out as the winners on the other side of the black hole.
What ‘realistic par’ would have made things go smoothly? Do you mean the prevailing market price for gold? What is the difference between then and now?
You may be right, but I think it’s worth considering, and Rothbard appears to have felt it worth considering. Which is why I’d be interested in hearing from you a possible sequence of events that could lead us from where we are now to having a stable, sound currency based on gold. Step 1 is the government abolishes legal tender laws and capital gains taxes. What happens next? I’d just like a conceivable scenario.
I’d be interested to hear what a Rothbardian monetary theorist thinks about this - i.e. which good(s) and where would likely see the biggest price change before the new equilibrium is reached. If I’m right, the most significant change in price following the Rothbard plan would be on the price of gold in other currencies, and there would be no significant disruption to the prices of (non-money) goods anywhere. I think this was my original conclusion, though I was never totally sure about it. I wonder what would happen if a much smaller country, like the UK, went first… would the effect be the same? Then what about the second country to go?
That’s a very good question and we can only stipulate guesses as to what happens next but I’ll give it a shot. I envision businesses like Schiff’s gold debit card would start competing for gold deposits by offering low fees for storage and transactions. Perhaps even bitcoin could enter the party as venues would offer gold-to-bitcoin-to-gold services which would allow people to transact across the country or the globe. Businesses would start posting prices in gold or pegged “new dollar” proxies thereof. Employers would start offering wages in same. A gold loan market would emerge, and contracts (loans or otherwise) would start to be denominated in gold (or proxies thereof). All of these would compete with FRN-denominated equivalents. Personally, I know which ones I would prefer and I hope self-interest would guide most other people to do the same.
Undoubtedly this would lead to a large increase in the price of gold in FRN terms which would present a shock to many holders of FRNs or FRN denominated contracts (bonds) and a “windfall” to the prescient holders of gold, but as the market gradually moves from FRNs to gold and its proxies, the “damage” would subside and the money market would reach a new, much more stable state.
I’m no Rothbardian monetary theorist, btw. I don’t anticipate too large of a price change of anything in gold terms but I would predict a hyperinflationary death spiral in FRN terms, as the market devalues FRNs and moves to gold.
I disagree. Although it is reasonable to expect price inflation in FRN terms and price deflation in gold terms, I think that the prices of most other goods/services would change much more in FRN terms (up) than in gold terms (down).
I’ve pondered this myself. I think if a smaller country did this on its own, then the stronger (paper legal tender) ones would either manipulate the (gold) markets in a way that would hurt trade with it the most, impose an embargo, or maybe even outright “deliver freedom” to its citizens via bombs and assasins. That would be the lesson for any other country contemplating such move.
I’ve thought about a Rothbard style plan before so here they are.
Stop the Bank of England (FED over the pond) from printing notes and minting coins.
The Bank of England to sell all foriegn currency reserves and purchase gold to increase the holdings.
After this make the markets and the public the rest of the plan.
Reduce the money supply to actual level ie. give banks an 18-24 month period in which to hold 100% reserves. This will also include time deposits as well as demand deposits. Essentially in the former if you save £1000 in a 30 day account the bank must be able to pay you that money back after the 30 days, it can’t lend the £1000 out for 60 days since they only have title for it for 30 days. It is essentially fraudulent. See Block and Barnett on this here. As an aside, the banks could renagotiate deals such that the lender lends to the bank for an indefinite time period and can recall at will. Under such an agreement full reserves are not necessary since the money is the bank’s until noted otherwise and could lend it for as long as they wanted to. However I think this will be somewhat rare.
This would slowly bring about a deflation making each note worth more and the transition less painful.
After two years count up all the value of time and deposits and divide by the weight of gold to back the notes. This is more than an economic exercise: when leaving the gold standard the state essentially stole the gold of the populous; this is a very inexact method of the returning it but it’s one of the better ones.
Now this will bring a lot of gold into the country but the above measures should make it less extreme than it otherwise would be especially giving notice so that the markets can adjust in anticipation over a period of time. It will still be a large shock but we are going to have one anyway, even if we don’t go back to a gold standard so we better be prepared for it. The issue with just repealing legal tender laws is that many honest people could lose out and could possibly be more destablising than the above plan even if it would work on its own with the state still want tax payments in government issued notes.
Abolish legal tender laws and the Bank of England/ FED.
The mechanics of returning to a gold standard is a question/endeavor that misses the point. No one knows what the standard should be. If anything, the question should be reframed more along the lines of, “How to end the government monopoly on the issuance of currency so the market can find solutions.” The market will determine what standard(s) are necessary and useful, be it gold, silver, platinum, or gummy bears. And those solutions will likely coexist and change over time. Everything else is just playing Who Is The Better Central Planner.
Suppose the dollar was redeemable for 1 oz gold, and the pound was trading at $.50, i.e. 2 pounds are worth 1 dollar. In other words, the pound is worth 1/2 oz gold. Now suppose the BoE went back to gold at a par of 1oz gold per pound. The pound has doubled in value in terms of gold/dollars. The price of British goods in dollars has just doubled, stifling British exports to the US. The price of US goods in pounds has just halved, increasing British imports from the US. In other words, gold flows from Britain to the US, goods flow the other direction. This continues until either goods prices in the US rise, goods prices in Britain fall, the pound falls against the dollar, or some combination of these. This is why the British promoted the inflationary monetary policy in the US during this period, because they wanted to make the necessary price adjustments without having to suffer deflation in Britain. That is, in order to attain equilibrium without the pound faling against the dollar, and without British prices falling, US prices has to rise. Of course, it didn’t work. Even with Benjamin Strong printing like crazy at the NY Fed, there was a deflation in Britain as gold flowed to the US, causing massive unemployment (since labor prices were unable to adjust downward due to labor laws, unions, et al) especially in the export industries, and eventually a run on the BoE prompting them back off gold in 1931.
This could have all been avoided if Britain had just gone back to gold at the market price. There would have then been 100% backing for all pound liabilities*, and no need for any price adjustments.
*This is assuming that the market at the time was properly discounting the pound relative the dollar/gold to reflect the wartime inflation.
In what sense? One difference is that (I assume, I’d have to actually crunch the numbers) that the market in 1925 was discounting the pound to reflect the inflation since Britain went off gold in 1914. Today, in the US, that is not the case. The market has not properly discounted the dollar relative gold to reflect the inflation of the past several decades. Thus we cannot go back at the market price without major problems. Going back at the market price would avoid the need for general price adjustments, but at the current market price the US government would run out of gold before it redeemed most of the dollar claims.
The ideal situation is to go back at the market price if the market price reflects the actual supplies of official gold and money.