Dialogue #4 on the American Gold Standard:
Trust and Distrust in Banking

by Gary North
by Gary North

The private money guy and the state money guy go at it again.

PMG: If a gold standard is really a standard, who sets it?

SMG: The government.

PMG: Why not the free market?

SMG: Because someone has to enforce the law.

PMG: What law?

SMG: The law governing money.

PMG: What law governing money?

SMG: The law that says the government should govern money.

PMG: What about the law of supply and demand?

SMG: That works for economics.

PMG: Isn't money part of economics?

SMG: Yes, but only partially. It's also the realm of government.

PMG: Who says so, other than government officials?

SMG: All academic economists except Austrian School economists.

PMG: Austrian School economists don't trust the civil government.

SMG: That's what I've heard.

PMG: Especially in monetary policy.

SMG: That's what I've heard.

PMG: But if the law of supply and demand works for allocating scarce resources, and money is a scarce resource, why won't it work for money?

SMG: Because there are counterfeiters.

PMG: You mean like the Federal Reserve System?

SMG: There you go again. The Federal Reserve System is a government agency.

PMG: The Board of Governors is. The 12 regional banks are not.

SMG: But the 12 regional banks do what the Board of Governors tells them to do.

PMG: Who advises the Board of Governors on what to do?

SMG: Economists at the 12 regional banks.

PMG: But why do we need the Federal Reserve?

SMG: Because we need rational planning of the nation's money supply.

PMG: Why not just let the costs of mining gold set the limits, just like copper and lead and zinc?

SMG: Because gold is a unique commodity. It's not like other commodities.

PMG: How is it different?

SMG: It's valuable mostly because it serves as money.

PMG: But there is no gold standard any longer, so where does it serve as money?

SMG: Among central banks, who hold most of the world's gold.

PMG: Why do they use it as money?

SMG: Because central bankers don't trust other central bankers.

PMG: Neither do I.

SMG: Then we are all agreed on central bankers.

PMG: But why should we allow them to keep the people's gold as reserves for central bank-created money?

SMG: Because the public isn't trustworthy either.

PMG: Aren't people more trustworthy with their own money than central bankers are with the government's money?

SMG: But every government lets its central bankers use the gold as if it were the central bankers' money.

PMG: Except for Gordon Brown. When he was Chancellor of the Exchequer, he forced the Bank of England to sell half its gold at under $300 an ounce.

SMG: He is an idiot.

PMG: He is indeed, but why was that idiotic? Didn't the public get access to gold that had been confiscated by the government in World War I?

SMG: It did, but the gold probably went to India to be used for jewelry.

PMG: Isn't that better than allowing central bankers to hoard it?

SMG: We need central bankers to hoard it. It's safer in their vaults.

PMG: Where thieves can't get their hands on it.

SMG: Precisely.

PMG: Because no private citizen can get his hands on it.

SMG: Precisely.

PMG: How does the public know these vaults are secure?

SMG: Because every nation's gold is stored in one huge, fully secured vault at 33 Liberty Street, New York City.

PMG: The New York Federal Reserve Bank.

SMG: Yes.

PMG: Why do all the central banks leave the gold there?

SMG: Because it's convenient and safe.

PMG: But isn't all that gold at the mercy of the Federal Reserve Bank of New York?

SMG: Yes, but the Bank is trustworthy. It has a reputation to defend.

PMG: But can't the U.S. government at any time tell the Federal Reserve's Board of Governors not to return that gold to the other central banks?

SMG: The government would never do such a thing.

PMG: Why not?

SMG: It would be dishonest.

PMG: That did not bother Nixon in 1971.

SMG: If the U.S. government were to refuse to return other nations' gold, they could sell all their Treasury debt, which would send U.S. interest rates soaring.

PMG: The Federal Reserve would then create new money and buy all the debt to get rates back down.

SMG: But that would be inflationary.

PMG: Which would raise the price of gold.

SMG: Yes.

PMG: Which the U.S. government would now own – almost all of it.

SMG: Yes.

PMG: Which would mean that the Federal government would be in control of the most valuable asset during an inflation.

SMG: Yes. But it would have to spend the gold into circulation to take advantage of this.

PMG: You mean return it to the private sector.

SMG: Yes.

PMG: What's wrong with that?

SMG: It would be stolen gold.

PMG: Who owns it?

SMG: The other central banks.

PMG: Where did they get it?

SMG: From their governments.

PMG: Where did the governments get it?

SMG: From commercial banks in 1914, when World War I broke out.

PMG: Where did the commercial banks get it?

SMG: From their depositors.

PMG: Why did depositors give it to the commercial banks?

SMG: Because the commercial banks promised to pay the depositors interest.

PMG: How could they afford to do this?

SMG: By lending IOU's to the deposited gold and collecting interest.

PMG: That's fractional reserve banking: banks issue more IOUs to gold than they have gold to redeem them.

SMG: Yes.

PMG: Didn't the banks promise to redeem gold coins on demand by the depositors?

SMG: Yes.

PMG: Didn't the IOUs lent to borrowers also constitute a legal claim on the deposited gold?

SMG: Yes.

PMG: But isn't it counterfeiting when a bank lends out an IOU to gold that already has an IOU written to depositors?

SMG: I wouldn't call it counterfeiting.

PMG: What would you call it?

SMG: Leverage with risk management.

PMG: What risk?

SMG: Risk that all depositors would come down with their IOUs and demand payment in gold on the same day.

PMG: As when a war breaks out.

SMG: Yes.

PMG: Wouldn't that be a run on the banks?

SMG: Yes.

PMG: What can banks do to prevent this?

SMG: Get the government to suspend contracts regarding the redemption of gold on demand.

PMG: Wouldn't that mean that commercial banks would wind up with the public's gold?

SMG: No. The central banks would call in the gold from the commercial banks.

PMG: Which is what happened in 1914.

SMG: Yes.

PMG: So, the real issue was the enforcement of contracts.

SMG: Yes.

PMG: The governments of Europe killed the international gold standard, which was a private gold coin standard, in order to save the commercial banks.

SMG: Yes.

PMG: Why?

SMG: Because the governments needed to sell their wartime debts to banks.

PMG: Especially central banks.

SMG: Yes.

PMG: Then the biggest threat to the international gold standard is government.

SMG: In the past, yes.

PMG: But not today.

SMG: No.

PMG: Why not today?

SMG: Because central banks control the gold.

PMG: But you don't trust central bankers.

SMG: No.

PMG: Do you trust the government?

SMG: No.

PMG: Why not?

SMG: Because Nixon killed the international gold standard.

PMG: Not Roosevelt in 1933.

SMG: No.

PMG: Not Europe's central banks in 1914.

SMG: No.

PMG: Nixon's the one.

SMG: Yes.

PMG: Yet you still think a government gold standard could work.

SMG: Yes.

PMG: Even when there is a Nixon or a Gordon Brown?

SMG: There will never be another Nixon.

PMG: But there surely is Gordon Brown.

SMG: He has learned his lesson.

PMG: What lesson?

SMG: That when you sell half your nation's gold, you can still get elected Prime Minister.

PMG: And make a mess of things.

SMG: Like nothing Great Britain has seen in decades.

PMG: Why not just get government out of the money creation business?

SMG: Because we can't trust commercial bankers.

PMG: But with a 100% private system of contractual banking and warehousing of gold coins, wouldn't it pay conservative bankers to police the system by demanding payment in gold by all other bankers?

SMG: Yes.

PMG: Wouldn't that be preferable to entrusting the policing responsibility to civil government, which can change the rules at any time?

SMG: But government can change the rules of contract at any time, and thereby destroy a private gold coin standard.

PMG: That would not destroy it. It would let the public decide: put gold coins in a bank that honors its contracts or else put coins in a bank that breaks its contract to redeem gold, because the government allows it.

SMG: But that would favor one group of citizens at the expense of others.

PMG: It would favor citizens who did not trust their coins to bankers who issue lots of unbacked IOUs to gold.

SMG: It's better for everyone to trust all of the banks than to favor some citizens over others.

PMG: How do you figure?

SMG: It's more democratic.

PMG: Then we are stuck with central banks for as long as there is democracy.

SMG: So it seems.

PMG: But what if citizens figure out how central banking works to debase the currency and to create boom-bust cycles, and they tell their political representatives to abolish the central banks?

SMG: You need to stop smoking that stuff. It's illegal.

March 7, 2009

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.

Copyright © 2009 Gary North.

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