Part 9: Monetary Reform
by Gary North
by Gary North
Recently by Gary North: When Frankie Met Johnny: The 1934 Meeting of Roosevelt and Keynes
An obvious response to the information that I have presented in the first eight parts of this series is this: "What should we do to reform the system?" This is a nice sentiment. It ignores the obvious: "we" have nothing to say about monetary reform.
Central banking is the most brilliant device of profit-seeking monopolists and oligopolists in human history. Nothing else comes close. Hardly anyone understands it, so there is no organized opposition.
In the case of the grandmother of all central banks, the Bank of England, a group of profit-seeking counterfeiters persuaded Parliament and the king to let them take control over the central economic institution: banking. The Little Old Lady of Threadneedle Street has controlled Britain's monetary policy ever since. The Bank was officially nationalized in 1946. Monetary policy in Great Britain since 1946 has been no worse than it was from 1914 to 1946. That is, it has been inflationary. Central banking is an extension of state power. It functions much as a state bureaucracy does.
Few people understand fractional reserve banking. Even among those few specialists who do understand it, few of them are in favor of a free market in money, governed by contract law. Banking is mysterious to most people. So, it has been easy for central bankers to gain control over money, nation by nation. The legislators do not understand or care. The voters do not understand or care. The academic economists are favorable to central planning, just so long as it is central planning by central bankers. This is central planning for economists who call themselves free marketeers.
The only hold-outs for a free market in money are Austrian School economists. There are not many of them, and there were none who had a theoretically sound case for sound money prior to 1912, when Ludwig von Mises's book appeared, The Theory of Money and Credit. The next year, 1913, the United States government passed the Federal Reserve Act. After that, the FED was politically untouchable until October 2008, when a FED-administered, FED-created worldwide financial crisis shook the confidence of the Establishment. That event has done more to promote Austrian School economic theory than anything in the last century.
Today, there is no agreed-upon economic theory, no agreed-upon monetary theory, and no well-organized political special-interest group in favor of monetary reform. It is not 1832, when President Jackson could successfully mobilize voters against the Second Bank of the United States.
The entire Establishment, in every nation, under every banking system, and in every university is unified on this issue, and only this confession of faith: "Central banking is the only rational way to control a nation's money supply." I can think of no other topic in economic science in which there is greater agreement. I can think of no other issue in social science in which there is equal agreement.
You may think: "Everyone is in favor of democracy." You are wrong. Almost no one is in favor of democracy in the area of central banking. On this single issue, and no other, social scientists agree: the necessity of central bank control over money. Defenders of the Federal Reserve System openly insist that it must be separate from the Federal government. This is basic to the standard college textbooks in economics. In short, democracy cannot be trusted in the area of monetary policy. No one bats an eye.
I, for one, do not trust Congress to be in charge of monetary policy. But I do not argue that the Federal Reserve System should maintain its independence from the Federal government. I maintain that it should be made completely independent of the Federal government: cut loose and left to fend for itself, just as the Second Bank of the United States was in 1836. It went bust.
I am not so naïve as to imagine that this will happen in my lifetime, short of a true social collapse in which several million people die because of the collapse of the division of labor due to hyperinflation. I do not expect this to happen. But I can dream.
Once again, I ask: Who are "we"? How will "we" implement a monetary reform?
But if we could....
A MODEST PROPOSAL
The Congress of the United States would pass a bill: The Sound Money Act of [year]. The President would sign it. The Supreme Court would refuse to hear any case related to it. Better yet, Congress would exclude the Court from any jurisdiction, which the Constitution allows: ". . . under such Regulations as the Congress shall make." The law would have the following provisions.
Section 1. All legal tender laws in the United States are hereby null and void, except state laws mandating gold or silver coins.
Section 2. All taxes owed to the United States government must henceforth be paid in American eagle gold coins or their equivalent by weight and fineness, or by warehouse receipts for such gold coins.
Section 3. All warehouse receipts to tax-authorized gold coins must be backed 100 percent by such coins. The penalty for issuing receipts to gold coins that are not in the possession of the firm or a bonded storage facility acting on behalf of the firm is for the firm's Board of Directors be made personally liable for all excess receipts.
Section 4. The United States Treasury will keep all coins received in a system of bonded warehouses. Receipts for coins issued by warehouses must be kept in the Treasury's possession. These revenues may not be lent to any third party, including any government agency. This money is to be used exclusively for paying the obligations of the United States government.
Section 5. To promote gold coin awareness, the United States government hereby declares a tax rebate to every American household that paid any Federal taxes in at least one of the five previous fiscal years. The rebate will be in the form of tenth-ounce American gold eagle coins or their equivalent by weight and fineness. Each household will receive the same number of coins, until such time as the United States government has distributed all of its gold. The United States Mint is hereby mandated to produce coins in sufficient quantities to distribute all of the gold within twenty-four (24) months of the date of this law. If it cannot meet this schedule, it is authorized to contract out the operation, beginning within twelve (12) months of this law.
Section 6. The United States Bureau of Engraving and Printing is no longer authorized to print paper currency except to replace old currency.
There is nothing judicially revolutionary in this proposed law. The Constitution authorizes Congress to collect taxes. Congress can therefore determine in what form these taxes will be paid (Article I, Section 8).
This reform would not extend the authority of the United States government beyond the United States Constitution. It would be best if there were no legal tender laws, but the Constitution does allow states to pass such laws for gold or silver (Article I, Section 10). If we have the votes, we can amend the Constitution on this point later.
The goal of this reform is to re-establish the public's awareness of gold coins as money. If people must pay taxes in gold coins or receipts to gold coins, they will surely become familiar with gold coins.
No banks would get their digital hands on this money until the Treasury spent it.
This law would create monetary deflation whenever the Federal government runs a surplus. When this happens, send me an email: [email protected]
The tax code would have to be re-written annually to establish the tax obligation in gold ounces rather than digital dollars. Congress would have to establish a gold-dollar ratio each year, which would let taxpayers know how much gold they will owe the Federal government for each dollar received as net income. This would force Congress to estimate the following year's value on the dollar in terms of gold.
If Congress says that the ratio is $1,000 to one ounce, and gold goes from $1,000 to $2,000, taxpayers will scream. If gold falls from $1,000 to $500, taxpayers will profit. Congress dreads both outcomes. It will have to pay attention to the price of gold every year.
Americans' gold was stolen by Roosevelt in 1933. The best way to get it back into circulation is to promote a law in which everyone gets some coins. It is politically expedient. Time is of the essence. Let us be content with getting our gold back. Let every taxpayer get a piece of the action. Share the wealth!
There would be two other minor provisions. They would involve severing existing legal connections.
Section 7. The Federal Reserve System no longer represents the United States government in its dealings with commercial banks or other central banks. The United States government hereby severs all connection with the Board of Governors of the Federal Reserve System. The Federal Reserve System, as a private banking enterprise, is hereby obligated to pay taxes owed by any other commercial bank.
Section 8. The United States government hereby severs all connection with the Federal Deposit Insurance Corporation (FDIC), a private insurance company. This law hereby repeals all previous laws guaranteeing payments to the FDIC by the United States government.
This would involve shrinking the Federal government's control over banking. Shrinking the Federal government is a pro—free market position. Surely, no one calling himself a free market economist could object to these two reforms. (As the Mogambo Guru would say, hahahahaha.)
AVOIDING GRAND SCHEMES
Any attempt to formulate a monetary reform that would restore a full gold coin standard in one fell swoop is revolutionary. There is no support for it. It would have extensive unintended consequences. Who is wise enough to think through all of the fallout?
Those of us who believe in the free market should recognize that the decentralized knowledge and capital within society will make hash of any grand scheme. It will do so in short order.
What about setting the price of gold in dollars? No need. Within two years, the United States government would have no gold in reserve under my reform.
Anyone could use any currency he chooses. As long as he pays his taxes in gold coins, it does not matter what currency he uses. It is none of the government's business, except to establish a currency-gold ration for the following year. What about the gold/silver ratio? Let the free market decide.
What if the government inflates? People can use a different currency. They can use gold. What if the government deflates? Same answer.
Does this solve the problem of fractional reserve banking? It is a start. The market can solve it, as Mises said. With no FDIC to protect them, and with the Federal Reserve System just one more profit-seeking, tax-paying bank, let the bankers look out for themselves.
But what about depositors? Who will look after their interests? I have a suggestion: depositors.
If this sounds crazy to you, then I suggest that the public schools, the economists, the pundits, and the folks on tout TV have done a number on you.
The #1 goal of monetary reform ought to be to get the government out of the money and banking business. This is a radical suggestion.
It is a better strategy to get the Federal government out of the banking business than it is to propose a grand strategy of monetary reform that relies on the wisdom of politicians to restore sound money.
Let the free market restore sound money. Let us be content with Congress getting out of the money game, thereby cutting loose the Federal Reserve and the FDIC. Let those two sweetheart deals fend for themselves.
I do not seek a revolutionary reform. I merely suggest returning to the Constitution. What conservative could oppose that? (Hahahahaha!)
October 24, 2009
Copyright © 2009 Gary North