Will the U.S. Monetary System Be Reformed?

Over at mises.org, Brendan Brown has a proposal for reforming the Federal Reserve. I’m sorry, but it’s not going to happen. His proposal will be completely ignored. Back in 1960, a number of monetary experts published “A Proper Monetary and Banking System for the United States,” edited by James Washington Bell and Walter Earl Spahr. In 2008, I bought a used copy that was a discard from the University of Idaho Library. This is fitting since its proposal was likewise discarded by legislators.

This useful book provides clear commentary on critical defects in the FED and suggests reform. On pp. 17-18, Prof. Frederick Alden Bradford has a proposed congressional bill with 20 sections. The proposed title is the Gold Redemption Act of 19xx. All kinds of good stuff is in this bill. It says that “the standard money unit of the United States shall be the dollar consisting of fifteen and five twenty-firsts grains of gold nine-tenths fine. Gold shall be freely coined and issued upon demand in any amount not less than one hundred dollars.” Silver coins were to be maintained. All provisions authorizing the President to alter the size, weight or fineness of gold and silver coins were to be repealed. Mint charges were to be the moderate charges in effect in 1932. Standard gold coins and gold certificates were to be full legal tender. Other legal tender provisions would be repealed. Federal Reserve Banks would be required to hold 25% reserves in gold and silver against deposits and against Federal Reserve notes. Banks could not count Federal Reserve notes as reserves. Federal Reserve notes would have to be redeemable in gold. Major sections of the Gold Reserve Act of 1934 would be repealed, and the power of the President to suspend payment in gold would be ended.

I am sure that you get the idea, which was to re-institute a gold coin standard in which gold bullion, gold certificates and silver coin would also have a place. This book discussed why each of these and other provisions were in the model bill and why they would give rise to a proper monetary system. The writers clearly regarded the system at that time as improper.

There were nine experts who contributed to this book. They were all professors at major universities and they also had extensive other experience in monetary matters in many roles as economists, bankers and monetary regulators. Needless to say, legislators completely ignored these experts. In fact, 11 years later, Nixon removed the dollar from its remaining attachment to gold.

Their proposal could have been implemented painlessly in 1960 and it could still be implemented painlessly today, with a change in the number of grains in the gold dollar. Painlessly to whom? That’s the critical question. Painless to anyone who benefits from sound money, and that includes most anyone participating in the money economy. Not painlessly to the U.S. government. Not painlessly to the FED. Not painlessly to banks that want to lend more than is prudent. Not painlessly to a number of other industries and to those who benefit from inflation. Not painlessly to Keynesians who want to manipulate the economy. It would cause a smaller government. It would make warfare less likely. It would crimp the empire, so not painlessly to the government.

Sound money would be a boon generally, its benefits spread widely through the economy. That’s one reason why we do not have sound money and why these proposals do not pass. There is no focused lobby for sound money, whereas there are several lobbies for inflationary finance and the U.S. government is one of them.

The late great financial crisis produced zero impetus to sound money. It produced the opposite, with a huge expansion of the FED’s balance sheet. The unsound money advocates in control of the political process have seen to it that people like Bernanke and Yellen are appointed as the faithful followers needed to carry out the unsound money policies. These FED overseers believe in improper monetary policy. They rationalize it to themselves and others. If a crisis like that in 2007-2009 only resulted in expanding the purview of the FED, we can hardly expect that any proposal to create a proper monetary system is going to be adopted willingly by the Congress. The Congress will not fundamentally alter the monetary system of the U.S. unless it is forced to do so either by internal political-economic pressures and/or by external such pressures.

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12:37 pm on July 23, 2014