The gold standard has advocates, but the problem is, there are competing versions. The government-enforced gold standard is the one that gets all the space in the history textbooks. This is because it is the only version governments allow.
The Private Money Guy (PMG) continues to cross-examine the State Money GUY (SMG), who advocates a government-enforced gold standard.
PMG: What are the main features of a government-enforced gold standard?
SMG: The government fixes the price of gold by selling gold at a specified price or buying gold at this price.
PMG: Where does it get the money to buy gold?
SMG: From the Federal Reserve System.
PMG: Where does the Federal Reserve System get the money?
SMG: It creates it.
PMG: Out of nothing?
SMG: Out of nothing.
PMG: Isn’t this inflationary?
SMG: Not at all. It removes the gold from circulation.
PMG: Why can’t a commercial bank do this?
SMG: That was what commercial banks did for years, until 1933.
PMG: Then why can’t I do this?
SMG: You can. Just be sure you store the gold in a safe place. Your promise to pay gold on demand is a warehouse receipt.
PMG: How could I afford to do this? That’s money out of my pocket.
SMG: I guess that’s why you don’t do it.
PMG: Then how can the Federal Reserve afford to do it?
SMG: Because it makes money lending money to the Treasury.
PMG: By buying Treasury debt.
PMG: With money created out of nothing.
PMG: What can’t I do this?
SMG: You’re not a central bank.
PMG: But how did commercial banks pay money to buy gold at a fixed price, then store it?
SMG: Because they lent it out again at interest.
PMG: You mean they did not keep the gold in storage?
SMG: They didn’t. They turned it over to the Federal Reserve, which stored it.
PMG: Why did they do this?
SMG: Because the FED counted this gold as legal reserves, which allowed the banks to issue new loans and earn interest.
PMG: But isn’t issuing more receipts for gold than you have gold in reserve inflationary?
PMG: But isn’t the idea of the gold standard to restrict the expansion of money?
PMG: Then why should commercial banks be allowed to inflate?
SMG: Because that’s how they stay in business.
PMG: But that’s how counterfeiters stay in business.
SMG: But they don’t make loans to people.
PMG: No, but they spend money. Isn’t that good for the economy?
SMG: They spend too much money. They are not scientific in the amount of money they spend.
PMG: But bankers are.
PMG: What makes them scientific?
SMG: They are afraid of runs on their banks.
PMG: When people demand gold.
PMG: And currency.
PMG: What happens historically when there are runs on banks?
SMG: Some banks collapse.
PMG: The unscientific ones.
PMG: This shrinks the money supply.
PMG: Like in the Great Depression.
PMG: So, Roosevelt made it illegal for Americans to own gold.
PMG: So that banks would not have to pay gold.
PMG: Then the Federal Reserve bought the gold from the Treasury.
PMG: Was that the end of the gold standard?
SMG: No. The dollar was still backed by gold.
PMG: And Treasury debt.
PMG: Lots of Treasury debt.
PMG: Mostly Treasury debt.
PMG: But there was still a gold standard internationally.
PMG: Until August 15, 1971, when Nixon ordered the Treasury to stop delivering gold to foreign nations and central banks.
PMG: When did the United States government go off the gold standard?
SMG: August 15, 1971.
PMG: Not in 1933.
PMG: Why not in 1933?
SMG: Because the government still bought and sold gold at a fixed price.
PMG: Who did it buy gold from?
SMG: Gold-mining firms.
PMG: That got rich in 1934 because of a 75% increase in gold prices.
PMG: Which was why gold-mining shares were a great investment in 1933.
PMG: Because gold was not a free market commodity.
PMG: Because it had a government-guaranteed price floor.
PMG: Is a government-enforced gold standard a rigged standard?
SMG: It is a scientifically administered procedure for balancing supply and demand of gold.
PMG: Increasing the supply of gold by a 75% price hike.
PMG: Decreasing demand for gold by making it a felony for Americans to own gold.
PMG: Until 1975.
PMG: What is the scientifically administered price for balancing supply and demand today?
PMG: With gold over $900.
PMG: I would like to buy gold at $42.22.
SMG: I would, too.
PMG: Why can’t we?
SMG: Because the country went off the gold standard on August 15, 1971.
PMG: Not 1933.
PMG: So, under a government-enforced gold standard, the government can buy gold at a fixed price.
PMG: And it can change that price at any time without warning.
PMG: Commercial banks could buy gold at the government-fixed price until 1933.
PMG: And they could make loans based on the gold in their warehouses.
SMG: Or stored at the Federal Reserve.
PMG: Which means the banking system could issue warehouse receipts for more gold than they have gold is reserve.
PMG: Just like they do with currency.
PMG: But private citizens are not allowed to do this.
PMG: Why not?
SMG: Because they are not licensed by the government or regulated by the Federal Reserve System.
PMG: In a scientific way.
PMG: Banks do not store gold today.
PMG: Why not?
SMG: Because the government removed the gold at $20 an ounce in 1933 and sold it to the Federal Reserve System for $35 in 1934.
PMG: So, depositors lost their gold.
SMG: Yes, but that didn’t matter.
PMG: Why not?
SMG: Because, beginning in 1933, it was illegal for them to own gold.
PMG: But foreign central banks and governments could buy gold from the U.S. government.
PMG: Until 1971.
PMG: Why was the law changed in 1971?
SMG: Foreign governments and central banks were buying gold.
PMG: So, governments could buy gold from the Treasury for $35/oz until they actually did.
PMG: Then they couldn’t.
PMG: And that was the end of the gold standard.
SMG: Yes. A tragedy.
PMG: Because governments could not trust our government.
PMG: So, with a government-enforced gold standard, the government winds up owning the gold.
PMG: Other governments can buy gold.
SMG: As long as they don’t sell it to the public.
PMG: Or until the U.S. government starts running out of gold, as it did in 1971.
PMG: With a government-enforced gold standard, the money is as good as gold.
PMG: Until the rules change.
PMG: Who has the right to change the rules?
SMG: The government.
PMG: So, money that is as good as gold really is no better than the government’s willingness to honor contracts.
PMG: So, the government-enforced gold standard is a government standard.
PMG: We need a gold standard to keep governments honest.
PMG: Then we turn enforcement over to government.
PMG: Why not let anyone mine gold, or coin gold, or store gold for a fee, all based on contract?
SMG: It’s not scientific.
PMG: Because there is no government-fixed price of gold.
PMG: Because it’s not a free market price based on supply and demand.
PMG: Then why do we need government money?
PMG: But the tradition is that governments wind up with the gold and then debase the currency.
SMG: Except for the Byzantine Empire, 323—1453, yes.
PMG: What made the Byzantine Empire different?
SMG: Just lucky, I guess.
PMG: Not because the public used gold coins and there was no central bank.
SMG: Highly doubtful.
PMG: But you favor a gold standard.
SMG: If it’s scientific.
American Gold Standard Dialogues
- Who Ya Gonna Trust?
- A Temporary Interruption of Service
- Science Is as Science Does
- Trust and Distrust in Banking
- Winners and Losers