The Gold Standard

Libertarian Rants
Dear John,

There are two ways to have a gold "standard." One is simply to decree that gold is the legal tender of the United States, and the other is to allow the government to hold the gold and issue receipts for an amount of gold as denominated in dollars.

If gold is the legal tender, then there is no reason for the government to have any in storage. The gold would be distributed among the populace and stored wherever.

If the government is to be entrusted with issuing gold receipts, then the government does need to hold an amount of gold in its vaults to redeem the receipts it issues.

Unfortunately, the government does not have a real good track record.

Allow me to rehash a little history.

Putting aside for a moment the government's disastrous foray into the bimetallic standard, $20 would buy you an ounce of gold until 1933. In fact the government issued official signed promises to that effect for 20 years starting in 1913. Prior to that time, the regional banks did the work with the same result since the price was guaranteed at $20 per ounce.

In 1933 the federal government realized that it had issued way too many of these paper receipts, and that it did not have the gold to back them up, so they defaulted.

Well, they couldn't admit to such gross mismanagement so they used the depression as a shield and outlawed the ownership of gold. People were required to turn in their actual coins at $20 per ounce and were issued new receipts that made no mention of gold, but simply said "$20."

As soon as the gov figured that all of the suckers that were going to be suckered had been suckered, it raised the price at which you could not own gold to $35 per ounce. An instant 75% windfall profit.

There was a loophole, and it was (fortunately) exploited by a surprisingly large number of non-suckers, and that was that you could still buy and sell "numismatic" coins and jewelry. Suddenly an awful lot of formerly circulated coins became "numismatic," and were spared from the smelter at Ft. Knox.

For nearly 40 years (until 1971) the U.S. was sort of and somewhat constrained from rampant inflation because, although we (the US citizen) could not own gold, it was still used to settle international accounts at $35/oz.

There was a little dust up in the late 50's when the French figured out that the US was printing up too much paper money and demanded that the actual gold be actually shipped from the US to Paris. The US authorities reacted with surprise and asked of the French, "What? You don't trust us?" The French replied as how, well, yeah sure, they trusted us, but they wanted the gold anyway. They got it, and other countries started to get nervous.

Well, by the late 60's the run on the US gold bank was on, and, to make a long story short, Nixon told anybody who wanted to exchange their dollars for gold to shove it. By any other name, it was a default on solemn promises made by the U.S. government.

Not content with stiffing foreigners, Nixon decided to spread the pain to the locals by instituting wage and price controls and proclaiming, "We are all Keynesians now." Within nano-months the economy did something that the Keynesians had for 40 years proclaimed was mathematically impossible: High unemployment along with high inflation. We coined a new term for it: Stagflation. The revered Phillips Curve which was a sacred cornerstone of Keynesian economics was shown to be as permanent as a fart in a windstorm. The stock market fell by over 50%, and the arabs decided to pile on with the first oil embargo in 1973. Armageddon was upon us.

At that point, the gov threw in the towel and said it was going to be OK to own bullion gold again. In anticipation of that event, in December, 1974, the market turned around (the DJ was about 475), and on January 1st, 1975, U.S. citizens were allowed to own gold in any form they wished. Gold overshot to $200/oz. , reacted to $100/oz., then really overshot to nearly $800/oz., and finally settled at roughly $300 + or - $50 for about 20 years.

So, now, that's the history and on to address your e-mail.

First with regard to counterfeiting. What I meant was that you cannot make a fake bullion gold coin. The fakes are way too easy to spot. Anybody with a scale and a glass of water can determine whether or not the coin he is handed is gold or not. A home made replica of a bullion coin would not be a problem since it would have to have the requisite amount of gold in it to be passed. Not so with paper. Witness the almost perfect currency coming in from North Korea.

To be sure counterfeiting could be a problem with a gold standard in that the receipts might be counterfeited. For example today counterfeiters find it easier to pass fake cashiers checks or even company checks. Interestingly, I have not heard of much of a problem with the Traveller Check people.

You say that the traditional gold standard means that each paper note is backed up by a set amount of gold in the US Treasury. Not true. What the notes said was that they could be turned in for, say, $20 in gold coin. There is nothing to stop the treasury from minting a gold coin 1/2 the size of a dime and stamping the words "$20" on it.

I unclear on your worry that a big boat from China will load up with all our gold. First of all, China has a fiat currency even more tightly controlled than the dollar. When the boat (junk?) shows up here, it's not the government that would give them gold, but rather Wal-Mart or some other retailer. You can bet that they are not going to give away more gold than the incoming products are worth.

As far as the deficit and debt are concerned, the US government will do what it has always done and default. Oh, they won't call it that, but you can bet that all those folks holding dollars overseas will end up taking it in the shorts.

Of course the real solution to stabilizing money would be to get the government out of the banking business all together. Not gonna happen because then the government would lose the power of inflation which has been called the invisible tax.

You say that you don't agree with a fixed standard, but I think you do. I mean you don't want to wake up every morning with all the prices on everything changed from the day before. In the very short term, the dollar is pretty well fixed, and you and I count on that, but that could change at the whim of the government. They have done it before.

I am not saying that a return to an anchor of gold would solve all problems. Even smart people get carried away sometimes. We would still have booms and busts, but they would be shorter, more localized and less severe than what we are headed for right now.

Hope this helps and please don't hesitate to write if you have more questions.

"jimmy"