Dialogue #5 On the American Gold Standard: Winners and Losers

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The Private Money Guy and the State Money Guy do not seem to be communicating. Like ships in the night, they pass each other, each flying a flag called "Gold Standard."

PMG: You say that you favor a gold standard, even though it is enforced by the U.S. government.

SMG: I do.

PMG: We no longer have a gold standard.

SMG: Correct.

PMG: We have not had one since 1933.

SMG: Since 1971.

PMG: But Americans could not legally own gold from 1933 to 1975.

SMG: That did not matter. Foreign central banks and governments could buy gold from the U.S. Treasury for $35 per ounce.

PMG: Until they actually tried.

SMG: When they tried to buy gold, beginning in 1958, they got delivery.

PMG: But Lyndon Johnson balked in 1968. After the British devalued the pound, demand for gold rose. Its price rose. Central bankers set up a two-tier gold market.

SMG: Correct. They sold gold to each other at $35 an ounce, but sold it for more to the public.

PMG: That was a tip-off that the U.S. was running out of gold.

SMG: Then Nixon broke the 1944 Bretton Woods agreement on August 15, 1971. No more gold for sale. That ended the gold standard.

PMG: That was what Roosevelt did to Americans in 1933.

SMG: But the gold standard still restrained the creation of money.

PMG: Not in World War II, it didn’t. Not in post-War America. Not under Lyndon Johnson’ guns and butter economy.

SMG: I said "restrained." I did not say "stabilized."

PMG: Isn’t the government-enforced gold standard the same story everywhere? Isn’t it a series of restrictions on the original promise to redeem paper money for a fixed supply of gold?

SMG: It is all right to break contract with the public. It is not all right to break contract with central banks.

PMG: How do you figure?

SMG: Private central banks represent political sovereignty.

PMG: Even though they are privately owned.

SMG: Yes.

PMG: What is political sovereignty?

SMG: The widely accepted right of the government to stick a gun in your belly and say, "Fork over your money."

PMG: Even when the money is gold.

SMG: Especially when the money is gold.

PMG: That sounds like the phrase, "All power grows out of the barrel of a gun."

SMG: Yes, it does. What a catchy phase!

PMG: You’ve never heard it before.

SMG: Not that I recall.

PMG: Isn’t the main benefit of a gold standard the reduction of the power of government?

SMG: Yes.

PMG: Then how does a gold standard take away the government’s gun?

SMG: It doesn’t. It just pressures the government to point the gun elsewhere.

PMG: Where?

SMG: At central banks.

PMG: Which hold the gold for their governments.

SMG: Yes.

PMG: So that governments cannot spend it.

SMG: Yes.

PMG: So the public won’t get familiar with gold coins.

SMG: Yes.

PMG: Which reduces pressure on central banks.

SMG: Yes.

PMG: So, you think it’s OK for central banks to put pressure on central banks, but not the public.

SMG: Yes.

PMG: Why is that?

SMG: Because central bankers attended the best universities. They have training in scientific economics.

PMG: You regard the public as ill-informed.

SMG: Yes.

PMG: Even about their own self-interest.

SMG: Their self-interest is not the nation’s self-interest.

PMG: What is the nation’s self-interest?

SMG: To provide stable prices and high employment. That’s what the Employment Act of 1946 says.

PMG: But central banks have not supplied stable prices.

SMG: Not so far. But they are working on it.

PMG: Since 1914.

SMG: Yes.

PMG: So, all we need to do is go back to the gold standard of August 14, 1971.

SMG: Yes.

PMG: But with the public’s right to own gold.

SMG: I suppose so. It’s not important.

PMG: What is important?

SMG: The right of central banks to buy gold from each other at a fixed price.

PMG: What price?

SMG: I don’t know. That is for economists at the central bank to determine.

PMG: Which central bank?

SMG: The international one.

PMG: What one is that?

SMG: The one that has not been set up yet. They are working on it.

PMG: For how long?

SMG: Since at least the early 1970’s.

PMG: But they have not got it yet.

SMG: No.

PMG: That bank will set the price of gold.

SMG: Yes.

PMG: Will it pay this price to anyone who wants to sell it gold?

SMG: Yes.

PMG: Including gold mines.

SMG: Yes.

PMG: Will it sell gold at this price?

SMG: Only to national central banks.

PMG: So, the gold flows into the central banks, but it does not flow out.

SMG: Correct.

PMG: So, the central banks will control the price of gold.

SMG: For as long as the official price is above the market price.

PMG: What is to keep central banks from raising the price?

SMG: Only the supply of money.

PMG: But they can create money to buy the gold.

SMG: Yes.

PMG: Then they can buy up the world’s gold.

SMG: In theory, yes. But they won’t.

PMG: Why not?

SMG: This would raise the price of gold. That would break the agreement.

PMG: But they can change the agreement.

SMG: Legally, yes.

PMG: So they can buy up more gold.

SMG: Yes.

PMG: And store it at their expense.

SMG: Yes.

PMG: Then of what possible use is all that stored gold?

SMG: It keeps it away from the public.

PMG: Who might use gold in trade.

SMG: Yes.

PMG: And get familiar with gold coins.

SMG: Yes.

PMG: As people were before 1914.

SMG: Yes.

PMG: Then the primary purpose of the Bretton Woods gold standard from 1944 to 1971 was to keep gold coins away from the public.

SMG: Yes.

PMG: Which reduced pressure on central bankers to stabilize the money supply.

SMG: Yes.

PMG: Do you think that this lack of pressure on central banks to stabilize money led to the universal rise of prices under the Bretton Woods gold standard?

SMG: No.

PMG: Then what did cause the rise in prices?

SMG: Economists at central banks are studying this topic very carefully.

PMG: What have they decided?

SMG: That there needs to be further study.

PMG: Why wouldn’t a gold coin standard work?

SMG: Because there is not enough gold.

PMG: To do what?

SMG: To facilitate trade.

PMG: But isn’t trade conducted on the basis of supply and demand?

SMG: Yes.

PMG: So, there is a supply of gold, and demand by individuals to obtain gold.

SMG: Yes.

PMG: The supply of gold is close to constant. New gold from mines in a year is a tiny fraction of the world’s gold supply.

SMG: True.

PMG: Then why can’t prices in gold adjust to the supply of gold?

SMG: You mean more goods chasing a fixed supply of gold.

PMG: Yes.

SMG: But that would lead to falling prices.

PMG: Yes.

SMG: But that’s deflationary.

PMG: Just like falling computer prices are deflationary.

SMG: That would create a depression.

PMG: Do falling computer prices create a depression?

SMG: No. But falling prices for everything else would.

PMG: Why?

SMG: Because Milton Friedman taught that.

PMG: True.

SMG: And so did Irving Fisher before him.

PMG: True.

SMG: So, that settles it.

PMG: Settles what?

SMG: That falling prices are bad.

PMG: But Fisher and Friedman opposed the gold standard.

SMG: Yes.

PMG: But you want a gold standard.

SMG: A state-enforced gold standard.

PMG: Where central banks create fiat money to buy gold.

SMG: Yes.

PMG: And then they refuse to sell gold.

SMG: Yes.

PMG: But they lease gold at half of a percent interest per year.

SMG: That is not the same as selling gold.

PMG: But they turn over the gold to private banks, called bullion banks.

SMG: Yes.

PMG: And these banks sell the leased gold.

SMG: Yes, they do.

PMG: And this isn’t selling a nation’s gold?

SMG: No, it isn’t.

PMG: But the gold is gone.

SMG: Yes, but the bullion banks have given central banks IOU’s for the gold.

PMG: But the gold is gone. It’s in jewelry in India. It’s part of some daughter’s dowry.

SMG: But the IOU’s are as good as gold.

PMG: Has any central bank demanded the return of its gold?

SMG: Not as far as any government knows.

PMG: But if they did, wouldn’t the price of gold soar?

SMG: To the moon. That’s why they won’t demand payment in gold. They will roll over the loans.

PMG: Just as the Federal government does with its debt.

SMG: Exactly.

PMG: So, the present system is an IOU gold standard.

SMG: Yes.

PMG: The bullion banks gave IOU’s to the central banks.

SMG: Yes.

PMG: The central banks gave IOU’s to their governments.

SMG: Yes.

PNG: Then the present system is based on IOU’s to gold.

SMG: Yes.

PMG: But you say it’s not a gold standard.

SMG: Not since 1971.

PMG: But for all we know, all the gold belongs to Indians.

SMG: For all we know, yes.

PMG: And if the central banks demanded payment from the bullion banks, the price of gold would soar.

SMG: Yes.

PMG: I can see what would happen. Slumdog millionaires.

SMG: I blame Nixon.

PMG: I blame Woodrow Wilson.

SMG: It’s clear to me who won.

PMG: Who?

SMG: William Jennings Bryan.

PMG: It was the only thing he ever won.

SMG: But it was a biggie.

American Gold Standard Dialogues

  1. Who Ya Gonna Trust?
  2. A Temporary Interruption of Service
  3. Science Is as Science Does
  4. Trust and Distrust in Banking
  5. Winners and Losers

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

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