our economy from destruction and from the eventual holocaust of
run away inflation, we the people must take the money-supply function
back from the government. Money is far too important to be left
in the hands of bankers and of Establishment economists and financiers.
To accomplish this goal, money must be returned to the market economy,
with all monetary functions performed within the structure of the
rights of private property and of the free-market economy.
It might be thought that the mix of government and money is too
far gone, too pervasive in the economic system, too inextricably
bound up in the economy, to be eliminated without economic destruction.
Conservatives are accustomed to denouncing the “terrible simplifiers”
who wreck everything by imposing simplistic and unworkable schemes.
Our major problem, however, is precisely the opposite: mystification
by the ruling elite of technocrats and intellectuals, who, whenever
some public spokesman arises to call for large-scale tax cuts or
deregulation, intone sarcastically about the dimwit masses who “seek
simple solutions for complex problems.” Well, in most cases, the
solutions are indeed clear-cut and simple, but are deliberately
obfuscated by people whom we might call “terrible complicators.”
In truth, taking back our money would be relatively simple and straightforward,
much less difficult than the daunting task of denationalizing and
decommunizing the Communist countries of Eastern Europe and the
former Soviet Union.
Our goal may be summed up simply as the privatization of our monetary
system, the separation of government from money and banking. The
central means to accomplish this task is also straightforward: the
abolition, the liquidation of the Federal Reserve System –
the abolition of central banking. How could the Federal Reserve
System possibly be abolished? Elementary: simply repeal its federal
charter, the Federal Reserve Act of 1913. Moreover, Federal Reserve
obligations (its notes and deposits) were originally redeemable
in gold on demand. Since Franklin Roosevelt’s monstrous actions
in 1933, “dollars” issued by the Federal Reserve, and deposits by
the Fed and its member banks, have no longer been redeemable in
gold. Bank deposits are redeemable in Federal Reserve Notes, while
Federal Reserve Notes are redeemable in nothing, or alternatively
in other Federal Reserve Notes. Yet, these Notes are our money,
our monetary “standard,” and all creditors are obliged to accept
payment in these fiat notes, no matter how depreciated they might
In addition to cancelling the redemption of dollars into gold, Roosevelt
in 1933 committed another criminal act: literally confiscating all
gold and bullion held by Americans, exchanging them for arbitrarily
valued “dollars.” It is curious that, even though the Fed and the
government establishment continually proclaim the obsolescence and
worthlessness of gold as a monetary metal, the Fed (as well as all
other central banks) clings to its gold for dear life. Our confiscated
gold is still owned by the Federal Reserve, which keeps it on deposit
with the Treasury at Fort Knox and other gold depositaries. Indeed,
from 1933 until the 1970s, it continued to be illegal for any Americans
to own monetary gold of any kind, whether coin or bullion or even
in safe deposit boxes at home or abroad. All these measures, supposedly
drafted for the Depression emergency, have continued as part of
the great heritage of the New Deal ever since. For four decades,
any gold flowing into private American hands had to be deposited
in the banks, which in turn had to deposit it at the Fed. Gold for
“legitimate” non-monetary purposes, such as dental fillings, industrial
drills, or jewelry, was carefully rationed for such purposes by
the Treasury Department.
Fortunately, due to the heroic efforts of Congressman Ron Paul it
is now legal for Americans to own gold, whether coin or bullion.
But the ill-gotten gold confiscated and sequestered by the Fed remains
in Federal Reserve hands. How to get the gold out from the Fed?
How privatize the Fed’s stock of gold?
Privatizing Federal Gold
The answer is revealed by the fact that the Fed, which had promised
to redeem its liabilities in gold, has been in default of that promise
since Roosevelt’s repudiation of the gold standard in 1933. The
Federal Reserve System, being in default, should be liquidated,
and the way to liquidate it is the way any insolvent business firm
is liquidated: its assets are parceled out, pro rata, to its creditors.
The Federal Reserve’s gold assets are listed, as of October 30,
1991, at $11.1 billion. The Federal Reserve’s liabilities as of
that date consist of $295.5 billion in Federal Reserve Notes in
circulation, and $24.4 billion in deposits owed to member banks
of the Federal Reserve System, for a total of $319.9 billion. Of
the assets of the Fed, other than gold, the bulk are securities
of the U.S. government, which amounted to $262.5 billion. These
should be written off posthaste, since they are worse than an accounting
fiction: the taxpayers are forced to pay interest and principle
on debt which the Federal Government owes to its own creature, the
Federal Reserve. The largest remaining asset is Treasury Currency,
$21.0 billion, which should also be written off, plus $10 billion
in SDRs, which are mere paper creatures of international central
banks, and which should be abolished as well. We are left (apart
from various buildings and fixtures and other assets owned by the
Fed, and amounting to some $35 billion) with $11.1 billion of assets
needed to pay off liabilities totalling $319.9 billion.
Fortunately, the situation is not as dire as it seems, for the $11.1
billion of Fed gold is a purely phoney evaluation; indeed it is
one of the most bizarre aspects of our fraudulent monetary system.
The Fed’s gold stock consists of 262.9 million ounces of gold; the
dollar valuation of $11.1 billion is the result of the government’s
artificially evaluating its own stock of gold at $42.22 an ounce.
Since the market price of gold is now about $350 an ounce, this
already presents a glaring anomaly in the system.
Definitions and Debasement
Where did the $42.22 come from?
The essence of a gold standard is that the monetary unit (the “dollar,”
“franc,” “mark,” etc.) is defined as a certain weight of gold. Under
the gold standard, the dollar or franc is not a thing-in-itself,
a mere name or the name of a paper ticket issued by the State or
a central bank; it is the name of a unit of weight of gold. It is
every bit as much a unit of weight as the more general “ounce,”
“grain,” or “gram.” For a century before 1933, the “dollar” was
defined as being equal to 23.22 grains of gold; since there are
480 grains to the ounce, this meant that the dollar was also defined
as .048 gold ounce. Put another way, the gold ounce was defined
as equal to $20.67.
addition to taking us off the gold standard domestically, Franklin
Roosevelt’s New Deal “debased” the dollar by redefining it, or “lightening
its weight,” as equal to 13.714 grains of gold, which also defined
the gold ounce as equal to $35. The dollar was still redeemable
in gold to foreign central banks and governments at the lighter
$35 weight; so that the United States stayed on a hybrid form of
international gold standard until August 1971, when President Nixon
completed the job of scuttling the gold standard altogether. Since
1971, the United States has been on a totally fiat paper standard;
not coincidentally, it has suffered an unprecedented degree of peace-time
inflation since that date. Since 1971, the dollar has no longer
been tied to gold at a fixed weight, and so it has become a commodity
separate from gold, free to fluctuate on world markets.
When the dollar and gold were set loose from each other, we saw
the closest thing to a laboratory experiment we can get in human
affairs. All Establishment economists – from Keynesians to
Chicagoite monetarists – insisted that gold had long lost its
value as a money, that gold had only reached its exalted value of
$35 an ounce because its value was “fixed” at that amount by the
government. The dollar allegedly conferred value upon gold rather
than the other way round, and if gold and the dollar were ever cut
loose, we would see the price of gold sink rapidly to its estimated
non-monetary value (for jewelry, dental fillings, etc.) of approximately
$6 an ounce. In contrast to this unanimous Establishment prediction,
the followers of Ludwig von Mises and other “gold bugs” insisted
that gold was undervalued at 35 debased dollars, and claimed that
the price of gold would rise far higher, perhaps as high as $70.
Suffice it to say that the gold price never fell below $35, and
in fact vaulted upward, at one point reaching $850 an ounce, in
recent years settling at somewhere around $350 an ounce. And yet
since 1973, the Treasury and Fed have persistently evaluated their
gold stock, not at the old and obsolete $35, to be sure, but only
slightly higher, at $42.22 an ounce. In other words, if the U.S.
government only made the simple adjustment that accounting requires
of everyone – evaluating one’s assets at their market price
– the value of the Fed’s gold stock would immediately rise
from $11.1 to $92.0 billion.
From 1933 to 1971, the once very large but later dwindling number
of economists championing a return to the gold standard mainly urged
a return to $35 an ounce. Mises and his followers advocated a higher
gold “price,” inasmuch as the $35 rate no longer applied to Americans.
But the majority did have a point: that any measure or definition,
once adopted, should be adhered to from then on. But since 1971,
with the death of the once-sacred $35 an ounce, all bets are off.
While definitions once adopted should be maintained permanently,
there is nothing sacred about any initial definition, which should
be selected at its most useful point. If we wish to restore the
gold standard, we are free to select whatever definition of the
dollar is most useful; there are no longer any obligations to the
obsolete definitions of $20.67 or $35 an ounce.
Abolishing the Fed
In particular, if we wish to liquidate the Federal Reserve System,
we can select a new definition of the “dollar” sufficient to pay
off all Federal Reserve liabilities at 100 cents to the dollar.
In the case of our example above, we can now redefine “the dollar”
as equivalent to 0.394 grains of gold, or as 1 ounce of gold equalling
$1,217. With such redefinition, the entire Federal Reserve stock
of gold could be minted by the Treasury into gold coins that would
replace the Federal Reserve Notes in circulation, and also constitute
gold coin reserves of $24.4 billion at the various commercial banks.
The Federal Reserve System would be abolished, gold coins would
now be in circulation replacing Federal Reserve Notes, gold would
be the circulating medium, and gold dollars the unit of account
and reckoning, at the new rate of $1,217 per ounce. Two great desiderata
– the return of the gold standard, and the abolition of the
Federal Reserve – would both be accomplished at one stroke.
A corollary step, of course, would be the abolition of the already
bankrupt Federal Deposit Insurance Corporation. The very concept
of “deposit insurance” is fraudulent; how can you “insure” an entire
industry that is inherently insolvent? It would be like insuring
the Titanic after it hit the iceberg. Some free-market economists
advocate “privatizing” deposit insurance by encouraging private
firms, or the banks themselves, to “insure” each others’ deposits.
But that would return us to the unsavory days of Florentine bank
cartels, in which every bank tried to shore up each other’s liabilities.
It won’t work; let us not forget that the first S&Ls to collapse
in the 1980s were those in Ohio and in Maryland, which enjoyed the
dubious benefits of “private” deposit insurance.
This issue points up an important error often made by libertarians
and free-market economists who believe that all government activities
should be privatized; or as a corollary, hold that any actions,
so long as they are private, are legitimate. But, on the contrary,
activities such as fraud, embezzlement, or counterfeiting should
not be “privatized”; they should be abolished.
This would leave the commercial banks still in a state of fractional
reserve, and, in the past, I have advocated going straight to 100
percent, nonfraudulent banking by raising the gold price enough
to constitute 100 percent of bank demand liabilities. After that,
of course, 100 percent banking would be legally required. At current
estimates, establishing 100 percent to all commercial bank demand
deposit accounts would require going back to gold at $2,000 an ounce;
to include all checkable deposits would require establishing gold
at $3,350 an ounce, and to establish 100 percent banking for all
checking and savings deposits (which are treated by everyone as
redeemable on demand) would require a gold standard at $7,500 an
But there are problems with such a solution. A minor problem is
that the higher the newly established gold value over the current
market price, the greater the consequent increase in gold production.
This increase would cause an admittedly modest and one-shot price
inflation. A more important problem is the moral one: do banks deserve
what amounts to a free gift, in which the Fed, before liquidating,
would bring every bank’s gold assets high enough to be 100 percent
of its liabilities? Clearly, the banks scarcely deserve such benign
treatment, even in the name of smoothing the transition to sound
money; bankers should consider themselves lucky they are not tried
for embezzlement. Furthermore, it would be difficult to enforce
and police 100 percent banking on an administrative basis. It would
be easier, and more libertarian, to go through the courts. Before
the Civil War, the notes of unsound fractional reserve banks in
the United States, if geographically far from home base, were bought
up at a discount by professional “money brokers,” who would then
travel to the banks’ home base and demand massive redemption of
these notes in gold.
The same could be done today, and more efficiently, using advanced
electronic technology, as professional money brokers try to make
profits by detecting unsound banks and bringing them to heel. A
particular favorite of mine is the concept of ideological Anti-Bank
Vigilante Leagues, who would keep tabs on banks, spot the errant
ones, and go on television to proclaim that banks are unsound, and
urge note and deposit holders to call upon them for redemption without
delay. If the Vigilante Leagues could whip up hysteria and consequent
bank runs, in which noteholders and depositors scramble to get their
money out before the bank goes under, then so much the better: for
then, the people themselves, and not simply the government, would
ride herd on fractional reserve banks. The important point, it must
be emphasized, is that at the very first sign of a bank’s failing
to redeem its notes or deposits on demand, the police and courts
must put them out of business. Instant justice, period, with no
mercy and no bailouts.
Under such a regime, it should not take long for the banks to go
under, or else to contract their notes and deposits until they are
down to 100 percent banking. Such monetary deflation, while leading
to various adjustments, would be clearly one-shot, and would obviously
have to stop permanently when the total of bank liabilities contracted
down to 100 percent of gold assets. One crucial difference between
inflation and deflation, is that inflation can escalate up to an
infinity of money supply and prices, whereas the money supply can
only deflate as far as the total amount of standard money, under
the gold standard the supply of gold money. Gold constitutes an
absolute floor against further deflation.
If this proposal seems harsh on the banks, we have to realize that
the banking system is headed for a mighty crash in any case. As
a result of the S&L collapse, the terribly shaky nature of our
banking system is at last being realized. People are openly talking
of the FDIC being insolvent, and of the entire banking structure
crashing to the ground. And if the people ever get to realize this
in their bones, they will precipitate a mighty “bank run” by trying
to get their money out of the banks and into their own pockets.
And the banks would then come tumbling down, because the people’s
money isn’t there. The only thing that could save the banks in such
a mighty bank run is if the Federal Reserve prints the $1.6 trillion
in cash and gives it to the banks – igniting an immediate and
devastating runaway inflation and destruction of the dollar.
Liberals are fond of blaming our economic crisis on the “greed of
the 1980s.” And yet “greed” was no more intense in the 1980s than
it was in the 1970s or previous decades or than it will be in the
future. What happened in the 1980s was a virulent episode of government
deficits and of Federal Reserve-inspired credit expansion by the
banks. As the Fed purchased assets and pumped in reserves to the
banking system, the banks happily multiplied bank credit and created
new money on top of those reserves.
There has been a lot of focus on poor quality bank loans: on loans
to bankrupt Third World countries or to bloated and, in retrospect,
unsound real estate schemes and shopping malls in the middle of
nowhere. But poor quality loans and investments are always the consequence
of central bank and bank-credit expansion. The all-too-familiar
cycle of boom and bust, euphoria and crash, prosperity and depression,
did not begin in the 1980s. Nor is it a creature of civilization
or the market economy. The boom-bust cycle began in the eighteenth
century with the beginnings of central banking, and has spread and
intensified ever since, as central banking spread and took control
of the economic systems of the Western world. Only the abolition
of the Federal Reserve System and a return to the gold standard
can put an end to cyclical booms and busts, and finally eliminate
chronic and accelerating inflation.
Inflation, credit expansion, business cycles, heavy government debt,
and high taxes are not, as Establishment historians claim, inevitable
attributes of capitalism or of “modernization.” On the contrary,
these are profoundly anti-capitalist and parasitic excrescences
grafted onto the system by the interventionist State, which rewards
its banker and insider clients with hidden special privileges at
the expense of everyone else.
Crucial to free enterprise and capitalism is a system of firm rights
of private property, with everyone secure in the property that he
earns. Also crucial to capitalism is an ethic that encourages and
rewards savings, thrift, hard work, and productive enterprise, and
that discourages profligacy and cracks down sternly on any invasion
of property rights. And yet, as we have seen, cheap money and credit
expansion gnaw away at those rights and at those virtues. Inflation
overturns and transvalues values by rewarding the spendthrift and
the inside fixer and by making a mockery of the older “Victorian”
Restoring the Old Republic
restoration of American liberty and of the Old Republic is a multi-faceted
task. It requires excising the cancer of the Leviathan State from
our midst. It requires removing Washington, D.C., as the power center
of the country. It requires restoring the ethics and virtues of
the nineteenth century, the taking back of our culture from nihilism
and victimology, and restoring that culture to health and sanity.
In the long run, politics, culture, and the economy are indivisible.
The restoration of the Old Republic requires an economic system
built solidly on the inviolable rights of private property, on the
right of every person to keep what he earns, and to exchange the
products of his labor. To accomplish that task, we must once again
have money that is produced on the market, that is gold rather than
paper, with the monetary unit a weight of gold rather than the name
of a paper ticket issued ad lib by the government. We must have
investment determined by voluntary savings on the market, and not
by counterfeit money and credit issued by a knavish and State-privileged
banking system. In short, we must abolish central banking, and force
the banks to meet their obligations as promptly as anyone else.
Money and banking have been made to appear as mysterious and arcane
processes that must be guided and operated by a technocratic elite.
They are nothing of the sort. In money, even more than the rest
of our affairs, we have been tricked by a malignant Wizard of Oz.
In money, as in other areas of our lives, restoring common sense
and the Old Republic go hand in hand.
article originally appeared in the November 1995 issue of The
Freeman and is reprinted with permission.
N. Rothbard (1926–1995) was dean of the Austrian School,
founder of modern libertarianism, and academic vice president of
the Mises Institute. He was also
editor — with Lew Rockwell — of The
Rothbard-Rockwell Report, and appointed Lew as his literary