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.
PMG: Because no private citizen can get his hands on it.
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.
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.
PMG: Which the U.S. government would now own — almost all of it.
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.
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.
PMG: Didn't the banks promise to redeem gold coins on demand by the depositors?
PMG: Didn't the IOUs lent to borrowers also constitute a legal claim on the deposited gold?
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.
PMG: Wouldn't that be a run on the banks?
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.
PMG: So, the real issue was the enforcement of contracts.
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: Because the governments needed to sell their wartime debts to banks.
PMG: Especially central banks.
PMG: Then the biggest threat to the international gold standard is government.
SMG: In the past, yes.
PMG: But not today.
PMG: Why not today?
SMG: Because central banks control the gold.
PMG: But you don't trust central bankers.
PMG: Do you trust the government?
PMG: Why not?
SMG: Because Nixon killed the international gold standard.
PMG: Not Roosevelt in 1933.
PMG: Not Europe's central banks in 1914.
PMG: Nixon's the one.
PMG: Yet you still think a government gold standard could work.
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?
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
- Who Ya Gonna Trust?
- A Temporary Interruption of Service
- Science Is as Science Does
- Trust and Distrust in Banking
- Winners and Losers
Copyright © 2009 Gary North.