How can we end the Federal Reserve System? Prior to 2008, this question would have been entirely hypothetical. It is still entirely hypothetical, because the Federal Reserve System is in charge of monetary policy; the Congress of the United States is not. Certainly, the voters of the United States are not. Nevertheless, I wish to indulge myself in a completely hypothetical speculation. I wish it were less hypothetical than it is, but things are better than they were before 2008. "All hypothetical possibilities are equal, but some are more equal than others."
Let us assume that the voters of the United States know what the central bank is. Let us also assume that they have decided that the nation would be far better off if control over monetary policy were removed from the Federal Reserve System, meaning removed from the cartel of large banks which the Federal Reserve defends. Let us also assume that somehow, by means of political mobilization not presently visible, they convinced the majority of both houses of Congress to pass a bill abolishing the Fed, and the President of the United States signs the bill into law. What should the law look like?
The law would be very simple. "The Federal Reserve Act of 1913 is hereby abolished." This wording leaves nothing to the imagination. Anyone can understand this. There do not have to be any additional qualifications, exemptions, or anything else. There is no need for an army of lobbyists to recommend the insertion of all kinds of special-interest language.
WHO GETS THE GOLD?
There would have to be a second law. This law has to do with the ownership of the gold that is supposedly stored by the Federal Reserve System on behalf of the United States government. The law would specify that the Federal Reserve System must return all of the gold belonging to the United States government at the official price of $42.22 per ounce. The gold would then be transferred from the Federal Reserve Bank of New York to Fort Knox, Kentucky.
To pay for this gold, United States government would issue Treasury bonds to the Federal Reserve System. Where will the Treasury get the money to pay off these bonds? Here is where the fun part begins.
The Treasury will sell the gold in the form of tenth-ounce gold coins to any American voter at a price of $42.22 per ounce. Every American voter would receive a tax-free option to purchase tenth-ounce gold coins at a price of $42.22 per ounce.
How many coins would each voter be allowed to purchase? This would be determined on a strict mathematical formula. The total quantity of gold would be divided into tenth-ounce coins. This gold would be 90% fine. The other 10% would be hard metal, thereby enabling the coins to be used in circulation. This was what the old double eagles were back in 1933.
Every American voter would receive the same quality of coins. Rich man, poor man, beggar man, thief: everybody gets the same number of tenth-ounce gold coins. It would be about ten coins. There would have to be an audit.
Of course, they could not be sent the coins immediately. The coins must first be minted. Voters would be issued IOUs to their gold coins. They would receive a guarantee of purchase within one year of the transfer of the gold to the Treasury.
The United States Mint could not possibly fulfill this task. It could not produce this many coins. The coins would be produced by private mints. The coins would be produced according to rigorous standards enforceable by the government. There would be no mixing of base metals to such a degree that the coins would be anything less than 90% gold.
The government would pay a small fee per coin to private companies producing the coins. The private mints could lawfully put their own names on the coins, but every coin would have to say "1/10 ounce of gold, 90% fine."
This would get the government out of the money business. The Mint would cease producing gold coins. The government would cease authorizing gold coins. All that the government would do would be to establish standards regarding the testing of the weight and fineness of the coins. It would enforce these standards in courts of law.
Every American voter would be allowed to sell all of the gold coin options to anyone. In other words, if the price of gold is $1,342.22 per ounce, he would be allowed to sell his gold, pay the Treasury $42.22 per ounce for whatever gold he had received, and pocket $1,000 per once, tax-free.
The reason why I think every American voter ought to be allowed an equal share of all the coins is because that would create considerable political pressure on the government to get that gold out of the hands of the Federal Reserve System and into the hands of the voters. If we are going to do this, we might as well let everybody have a piece of the action.
The government would pay off the bonds with money from the sale of the coins. The Federal Reserve could then buy more bonds or not. The reason why the government should pay the Federal Reserve $42.22 per ounce is because the Federal Reserve paid the government $20 an ounce back in 1933. That money was spent into circulation. The contraction of the gold supply was offset by an increase in the money supply. In other words, the decision in 1933 was to keep the money supply stable. This is a good policy.
The transfer of the bonds to the Federal Reserve would be neither inflationary nor deflationary. The Federal Reserve would be allowed to hold onto Treasury bonds to compensate it for the loss of the gold. This would keep the monetary base from contracting. The goal is not to create mass deflation.
The Federal Reserve System would then be holding a pile of government IOUs. If the Federal Reserve follows deflationary policies, the United States government will then default on its IOUs, leaving the Federal Reserve holding a portfolio worth nothing. On the other hand, if the Federal Reserve inflates the currency, it will be sitting on top of the pile of IOUs to be paid off in money worth less and less. So, the Federal Reserve’s policy-makers will have to make a decision. Do they want to be stiffed by the government directly, or do they want to be stiffed by their own monetary policies? This is a tough decision. (This is the same long-run issue that faces Americans today: default vs. hyperinflation.)
What I am proposing is an exchange of assets exactly like the Federal Reserve pulled off in 2008. It sold liquid Treasury debt for illiquid toxic assets owned by the largest commercial banks. It did the exchange at book value, not actual market value of the toxic assets. So, the Federal Reserve System has already established the precedent that it is willing to exchange liquid Treasury assets for other assets that are worth far less.
Obviously, gold at $42.22 per ounce is not the free market price. The Federal Reserve will receive nice, liquid Treasury debt, and it will surrender a large pile of the barbarous relic. If the ideas of John Maynard Keynes are true, this is a very good deal for the Federal Reserve System. Let the FED have it, good and hard.
A TRANSFER OF AUTHORITY
The main goal here is to get the gold back into circulation in the form of coins. It must not be sold to investors in the form of large bars. The goal is to reestablish gold as a popular form of currency in the general economy. The best way to do this is to let Americans buy gold at $42.22 an ounce, but only in the form of tenth-ounce gold coins. The gold was confiscated in the form of gold coins in 1933, and this is the form in which it should be returned to the American voters.
The United States government confiscated the gold in 1933. It presently owns the gold based on massive theft. My proposal is a form of restitution. The agency that stole the gold will return the gold to the American voters, and it will do so in such a way that the American voters become the beneficiaries of the discrepancy between the official price of gold and the market price of gold.
There is no justification for the stolen gold to remain in the possession of the United States government. There is surely no justification for the stolen gold to remain an asset of the Federal Reserve System. My conclusion is simple: return the stolen goods to the judicial heirs of the victims. These are American voters.
This would restore a gold coin standard, or at least move in that direction. The proper gold standard is a gold coin standard. It is a standard in which gold coins are commonly used in the marketplace. People will become familiar with gold coins.
This transfers the veto over commercial bank policy into the hands of those individuals who own the gold coins. If they turn the gold coins over to a commercial bank in exchange for an IOU from that bank, and the bank abuses the privilege of expanding the number of IOUs to gold coins beyond the number of gold coins held in storage by the bank, individuals can then take their IOUs down to the bank and demand payment in gold coins. This is the great veto of the public over the policies of the banks.
Governments want to avoid this system for obvious reasons. Governments do not want the general public to have a veto over its fiscal policies, and gold coins in circulation would transfer this veto to the public. This is why the governments of Europe abolished the gold coin standard when World War I broke out in August of 1914. This is why the United States government abolished the gold coin standard in 1933.
Politicians want to spend lots of money, but they do not want to get blamed for collecting taxes necessary to fund all of the projects that they plan to fund. So, they can go to the central bank, and if the central bank wants to, it buys the debt of the government. The government can increase the amount of its debt, because it has the cooperation of the central bank.
When the central bank increases its holdings of government debt, this increases the nation’s monetary base. When the monetary base increases, commercial banks make more loans. But when they increase loans, they increase the money supply. They expand those loans with fiat money. When fiat money gets into the economy, this tends to raise prices.
As prices rise, individuals decide that the price of gold will also rise. If the price of gold rises, it pays someone to own gold. So, people begin to buy gold. Gold-using producers start buying. The banks find that digital money is flowing in from the buyers of gold, and the gold is flowing out. This creates a crisis, because they have expanded the money supply based on the expansion of Federal Reserve credit, not based on the expansion of deposits by owners of gold coins.
So, when the common man goes down to his bank and turns in an IOU for gold, and he takes his gold coins home, this is a bank run. It is the same when the common man turns over his IOUs to gold to someone who sells gold to the general public. The IOUs’ buyer also presents the IOU to gold to the commercial banks. This is a run on the banks.
This means that the holders of gold coins can exercise a veto over the central bank’s decision to expand its ownership of government debt. This indirectly transfers a veto to the common man over the size of the government’s deficit. If the government cannot sell its debt to the central bank, it has to sell its debt to private investors. This tends to raise the interest rate, because the government has to offer a higher interest rate in order to persuade investors to buy its debt.
The essence of a gold coin standard is the veto. Where should the veto be lodged? Defenders of the gold coin standard say that it should be lodged with those people who use gold coins, or who use IOUs to gold coins in their economic decisions. The defender of the gold coin standard says that the individuals who use gold coins or own IOUs to gold coins are the most reliable people to exercise a veto over the commercial banks, and therefore over the central bank, and therefore over the national government.
STATIST GOLD STANDARDS
There are some people who say they are in favor of a gold standard, but they do not want a gold coin standard. They do not want the authority to exercise the veto held by the common man. They want a gold standard based on cooperation among central banks. This was the gold standard that was established in 1922 at the Genoa conference. It was extended by the Bretton Woods agreement of 1944. It was the gold standard that Nixon abolished unilaterally on August 15, 1971.
This gold standard places authority in the hands of government-licensed monopolies called central banks. Its defenders trust the wisdom of central bankers. It does not trust the wisdom of individual citizens. So, the defenders of non-coin gold standards are impressed with the wisdom and reliability of central bankers.
William F. Buckley over a half century ago came up with a delightful quip. He said that he would prefer to be governed by the first 200 names in the Boston telephone directory than by the faculty of Harvard University. He did not say this because he was a graduate of Yale. He said it because he did not trust the wisdom of a self-selected, tenured or tenure-seeking faculty at the most prestigious academic institution in the United States. In other words, he did not trust the judgment of academicians. He believed that the common sense of the average man is more reliable than the highly rarefied academic skills of the University faculty. I am in agreement with him.
Buckley was talking about political sovereignty. I am talking about economic authority. I believe in decentralized political authority. I believe that governments are more responsive to voters at the local level than they are at the state or national level. But I also believe that the transfer of economic authority in the form of private property, especially the ownership of gold or silver coins, is more important for the preservation of liberty than the transfer of political sovereignty back to local units of civil government.
People are more careful about spending their money than they are about voting. They spend their money constantly. They vote only occasionally. They spend their money on aspects of their lives that they are closely familiar with. They are barely familiar with local politicians.
So, with respect to that crucial resource, knowledge, it is more important to decentralize ownership than it is to decentralize political power. They both should be decentralized, but if local voters do not have authority over the monetary system, by means of a gold coin standard, their right to vote locally will be compromised politically. The major decisions will still be made by the central government.
This is why various forms of gold standards that do not transfer complete authority over gold in the hands of common citizens are phony gold standards. They are gold standards that favor the expansion of centralized political power. They do not favor lodging the veto in the hands of the common man.
I am proposing the transfer of all authority over money to the free market. The only standards that should be enforced by law are standards of contract law. When a bank issues an IOU to a specific fineness and weight of gold coin, that bank by law must have coins and reserve to enable it to honor its contracts for gold coins. The government should be out of the money business.
The government does have the right to establish the form of money that citizens must use to pay their taxes. The government should limit itself to a statement regarding the weight and fineness of the tax coins. If private enterprise produces coins that meet these standards, the government must accept such coins as valid for the payment of taxes. The government lawfully controls the form of taxation; but it should not have any power to monopolize the production of coins. Governments have always asserted this authority, and they have always done so to the detriment of liberty.
What I am describing is the restoration of a free market in money. This means that the authority over money must be removed from the United States government and transferred to the users of gold coins. They would exercise this authority over money, not as voters, but simply as residents of the United States. They would have the right to use this money as currency, or deposited in warehouses on their behalf, or sell to jewelry companies, or hoard the coins. This would be a free-market system in coinage.
A LITMUS TEST FOR FREE MARKET ECONOMISTS
Very few people believe in the free market. This is true of virtually all academic economists. The proof that they do not believe in the free market is that they oppose the creation of a full gold coin standard. They say they believe in the free market in many areas of life, but they do not believe in the free market with respect to the monetary system. Yet, above all other areas of the economy that ought to be governed by the free market, the money system should be. Why is this? Because money is the central institution in a market economy. Control over money is the central form of economic control.
We have seen this with a vengeance with the passing of the banking reform bill of 2010. The great winner in the reform is the Federal Reserve System. It receives the authority over the banking system. It is not limited merely to control over the money supply; it now possesses the authority of direct regulation and intervention.
The central banks of the world have now become allocators of capital. They are making the decisions as to who gets what and on what terms. Central planning over money increasingly has become central planning over the entire economy. This is not a mistake. This is consistent with the original logic of central banking. It means government control over the money supply.
When you hear a self-designated free market economist defend the idea of central banking, meaning a government-licensed monopoly over the monetary base, you can be sure that this person does not believe in the free market. He does not believe in the logic of decentralized private property. He believes in central planning, and he sees the central bank as the agency of such planning.
The few academic economists who are willing to accept even a pseudo-gold standard do not believe the government should be out of the money business. They do not believe in the widespread use of gold coins by the general population. They believe in central banks, and they believe in government control over the banking system.
What I recommend is simple: the removal of all government authority possessed by the Federal Reserve System. There would be no further legal connection between the Federal Reserve System and the United States government.
What would the result be? Within a few years, the Federal Reserve System would go bankrupt. This has been the fate of the two previous central banks of the United States. They could not operate in a competitive environment. They could operate only by means of a grant of monopolistic power by the United States government. So, I am not at all worried about the operation of the Federal Reserve System without government supervision. Besides, there is no government supervision of the Federal Reserve System. There is supervision of the government by the Federal Reserve System. Congress does not control the FED: the FED controls Congress. This has been true since 1914, and it is not likely to change.
Should this ever change, however, the power of money will be transferred to the United States Congress. That is far more fearful then idea of control over money by the Federal Reserve System. The Federal Reserve System at least tries to make its clients some money. Congress would be unrestrained by any fear of inflation. The Congress would simply buy votes directly with newly created money. There would be no concern about the proper allocation of capital. There be no concern about profit and loss potential of the banking system. There would simply be the printing press in the hands of the Congress.
There are people out there ("Greenbackers") who call themselves conservatives, but who believe that the Congress of the United States is reliable in the area monetary policy. They oppose the Federal Reserve System, but only on the assumption that all power over money should be transferred to Congress. I can think of no better prescription for mass inflation, followed by hyperinflation, than this recommendation.
If we were to abolish the Federal Reserve System, and if the government would then transfer to American voters all of the gold presently said to be in the vaults of the Federal Reserve Bank of New York and Fort Knox, we would see the restoration of liberty. I can think of no other pair of laws that would transfer more authority to the voters the abolition of the Federal Reserve system and transfer of the gold in the form of tenth-ounce coins back to the voters. This is why this essay is hypothetical.
Who are the opponents of such a procedure? First, the Congress of the United States. Second, all the bureaucrats who work for the Federal government. Third, all of the decision-makers of the Federal Reserve System. Fourth, the vast majority of all commercial bankers. Fifth, the entire academic economics profession. This is why we are unlikely to see this pair of laws passed in our generation.
The Powers That Be fear the transfer of authority over money to the general population, because that would transfer enormous power politically into the hands of the people. It would let them veto the spending policies of the Federal government. The fear of that veto is great inside the Washington Beltway.