To save
our economy from destruction and from the eventual holocaust
of run away inflation, we the people must take the money-supply
function back from the government. Money is far too important
to be left in the hands of bankers and of Establishment economists
and financiers. To accomplish this goal, money must be returned
to the market economy, with all monetary functions performed
within the structure of the rights of private property and
of the free-market economy.
It might be thought that the mix of government and money is
too far gone, too pervasive in the economic system, too inextricably
bound up in the economy, to be eliminated without economic
destruction. Conservatives are accustomed to denouncing the
"terrible simplifiers" who wreck everything by imposing simplistic
and unworkable schemes. Our major problem, however, is precisely
the opposite: mystification by the ruling elite of technocrats
and intellectuals, who, whenever some public spokesman arises
to call for large-scale tax cuts or deregulation, intone sarcastically
about the dimwit masses who "seek simple solutions for complex
problems." Well, in most cases, the solutions are indeed clear-cut
and simple, but are deliberately obfuscated by people whom
we might call "terrible complicators." In truth, taking back
our money would be relatively simple and straightforward,
much less difficult than the daunting task of denationalizing
and decommunizing the Communist countries of Eastern Europe
and the former Soviet Union.
Our goal may be summed up simply as the privatization of our
monetary system, the separation of government from money and
banking. The central means to accomplish this task is also
straightforward: the abolition, the liquidation of the Federal
Reserve System – the abolition of central banking. How
could the Federal Reserve System possibly be abolished? Elementary:
simply repeal its federal charter, the Federal Reserve Act
of 1913. Moreover, Federal Reserve obligations (its notes
and deposits) were originally redeemable in gold on demand.
Since Franklin Roosevelt's monstrous actions in 1933, "dollars"
issued by the Federal Reserve, and deposits by the Fed and
its member banks, have no longer been redeemable in gold.
Bank deposits are redeemable in Federal Reserve Notes, while
Federal Reserve Notes are redeemable in nothing, or alternatively
in other Federal Reserve Notes. Yet, these Notes are our money,
our monetary "standard," and all creditors are obliged to
accept payment in these fiat notes, no matter how depreciated
they might be.
In addition to cancelling the redemption of dollars into gold,
Roosevelt in 1933 committed another criminal act: literally
confiscating all gold and bullion held by Americans, exchanging
them for arbitrarily valued "dollars." It is curious that,
even though the Fed and the government establishment continually
proclaim the obsolescence and worthlessness of gold as a monetary
metal, the Fed (as well as all other central banks) clings
to its gold for dear life. Our confiscated gold is still owned
by the Federal Reserve, which keeps it on deposit with the
Treasury at Fort Knox and other gold depositaries. Indeed,
from 1933 until the 1970s, it continued to be illegal for
any Americans to own monetary gold of any kind, whether coin
or bullion or even in safe deposit boxes at home or abroad.
All these measures, supposedly drafted for the Depression
emergency, have continued as part of the great heritage of
the New Deal ever since. For four decades, any gold flowing
into private American hands had to be deposited in the banks,
which in turn had to deposit it at the Fed. Gold for "legitimate"
non-monetary purposes, such as dental fillings, industrial
drills, or jewelry, was carefully rationed for such purposes
by the Treasury Department.
Fortunately, due to the heroic efforts of Congressman Ron
Paul it is now legal for Americans to own gold, whether coin
or bullion. But the ill-gotten gold confiscated and sequestered
by the Fed remains in Federal Reserve hands. How to get the
gold out from the Fed? How privatize the Fed's stock of gold?
Privatizing Federal Gold
The answer is revealed by the fact that the Fed, which had
promised to redeem its liabilities in gold, has been in default
of that promise since Roosevelt's repudiation of the gold
standard in 1933. The Federal Reserve System, being in default,
should be liquidated, and the way to liquidate it is the way
any insolvent business firm is liquidated: its assets are
parceled out, pro rata, to its creditors. The Federal Reserve's
gold assets are listed, as of October 30, 1991, at $11.1 billion.
The Federal Reserve's liabilities as of that date consist
of $295.5 billion in Federal Reserve Notes in circulation,
and $24.4 billion in deposits owed to member banks of the
Federal Reserve System, for a total of $319.9 billion. Of
the assets of the Fed, other than gold, the bulk are securities
of the U.S. government, which amounted to $262.5 billion.
These should be written off posthaste, since they are worse
than an accounting fiction: the taxpayers are forced to pay
interest and principle on debt which the Federal Government
owes to its own creature, the Federal Reserve. The largest
remaining asset is Treasury Currency, $21.0 billion, which
should also be written off, plus $10 billion in SDRs, which
are mere paper creatures of international central banks, and
which should be abolished as well. We are left (apart from
various buildings and fixtures and other assets owned by the
Fed, and amounting to some $35 billion) with $11.1 billion
of assets needed to pay off liabilities totalling $319.9 billion.
Fortunately, the situation is not as dire as it seems, for
the $11.1 billion of Fed gold is a purely phoney evaluation;
indeed it is one of the most bizarre aspects of our fraudulent
monetary system. The Fed's gold stock consists of 262.9 million
ounces of gold; the dollar valuation of $11.1 billion is the
result of the government's artificially evaluating its own
stock of gold at $42.22 an ounce. Since the market price of
gold is now about $350 an ounce, this already presents a glaring
anomaly in the system.
Definitions and Debasement
Where did the $42.22 come from?
The essence of a gold standard is that the monetary unit (the
"dollar," "franc," "mark," etc.) is defined as a certain weight
of gold. Under the gold standard, the dollar or franc is not
a thing-in-itself, a mere name or the name of a paper ticket
issued by the State or a central bank; it is the name of a
unit of weight of gold. It is every bit as much a unit of
weight as the more general "ounce," "grain," or "gram." For
a century before 1933, the "dollar" was defined as being equal
to 23.22 grains of gold; since there are 480 grains to the
ounce, this meant that the dollar was also defined as .048
gold ounce. Put another way, the gold ounce was defined as
equal to $20.67.
In addition to taking us off the gold standard domestically,
Franklin Roosevelt's New Deal "debased" the dollar by redefining
it, or "lightening its weight," as equal to 13.714 grains
of gold, which also defined the gold ounce as equal to $35.
The dollar was still redeemable in gold to foreign central
banks and governments at the lighter $35 weight; so that the
United States stayed on a hybrid form of international gold
standard until August 1971, when President Nixon completed
the job of scuttling the gold standard altogether. Since 1971,
the United States has been on a totally fiat paper standard;
not coincidentally, it has suffered an unprecedented degree
of peace-time inflation since that date. Since 1971, the dollar
has no longer been tied to gold at a fixed weight, and so
it has become a commodity separate from gold, free to fluctuate
on world markets.
When the dollar and gold were set loose from each other, we
saw the closest thing to a laboratory experiment we can get
in human affairs. All Establishment economists – from
Keynesians to Chicagoite monetarists – insisted that
gold had long lost its value as a money, that gold had only
reached its exalted value of $35 an ounce because its value
was "fixed" at that amount by the government. The dollar allegedly
conferred value upon gold rather than the other way round,
and if gold and the dollar were ever cut loose, we would see
the price of gold sink rapidly to its estimated non-monetary
value (for jewelry, dental fillings, etc.) of approximately
$6 an ounce. In contrast to this unanimous Establishment prediction,
the followers of Ludwig von Mises and other "gold bugs" insisted
that gold was undervalued at 35 debased dollars, and claimed
that the price of gold would rise far higher, perhaps as high
as $70.
Suffice it to say that the gold price never fell below $35,
and in fact vaulted upward, at one point reaching $850 an
ounce, in recent years settling at somewhere around $350 an
ounce. And yet since 1973, the Treasury and Fed have persistently
evaluated their gold stock, not at the old and obsolete $35,
to be sure, but only slightly higher, at $42.22 an ounce.
In other words, if the U.S. government only made the simple
adjustment that accounting requires of everyone – evaluating
one's assets at their market price – the value of the
Fed's gold stock would immediately rise from $11.1 to $92.0
billion.
From 1933 to 1971, the once very large but later dwindling
number of economists championing a return to the gold standard
mainly urged a return to $35 an ounce. Mises and his followers
advocated a higher gold "price," inasmuch as the $35 rate
no longer applied to Americans. But the majority did have
a point: that any measure or definition, once adopted, should
be adhered to from then on. But since 1971, with the death
of the once-sacred $35 an ounce, all bets are off. While definitions
once adopted should be maintained permanently, there is nothing
sacred about any initial definition, which should be selected
at its most useful point. If we wish to restore the gold standard,
we are free to select whatever definition of the dollar is
most useful; there are no longer any obligations to the obsolete
definitions of $20.67 or $35 an ounce.
Abolishing the Fed
In particular, if we wish to liquidate the Federal Reserve
System, we can select a new definition of the "dollar" sufficient
to pay off all Federal Reserve liabilities at 100 cents to
the dollar. In the case of our example above, we can now redefine
"the dollar" as equivalent to 0.394 grains of gold, or as
1 ounce of gold equalling $1,217. With such redefinition,
the entire Federal Reserve stock of gold could be minted by
the Treasury into gold coins that would replace the Federal
Reserve Notes in circulation, and also constitute gold coin
reserves of $24.4 billion at the various commercial banks.
The Federal Reserve System would be abolished, gold coins
would now be in circulation replacing Federal Reserve Notes,
gold would be the circulating medium, and gold dollars the
unit of account and reckoning, at the new rate of $1,217 per
ounce. Two great desiderata – the return of the gold
standard, and the abolition of the Federal Reserve –
would both be accomplished at one stroke.
A corollary step, of course, would be the abolition of the
already bankrupt Federal Deposit Insurance Corporation. The
very concept of "deposit insurance" is fraudulent; how can
you "insure" an entire industry that is inherently insolvent?
It would be like insuring the Titanic after it hit the iceberg.
Some free-market economists advocate "privatizing" deposit
insurance by encouraging private firms, or the banks themselves,
to "insure" each others' deposits. But that would return us
to the unsavory days of Florentine bank cartels, in which
every bank tried to shore up each other's liabilities. It
won't work; let us not forget that the first S&Ls to collapse
in the 1980s were those in Ohio and in Maryland, which enjoyed
the dubious benefits of "private" deposit insurance.
This issue points up an important error often made by libertarians
and free-market economists who believe that all government
activities should be privatized; or as a corollary, hold that
any actions, so long as they are private, are legitimate.
But, on the contrary, activities such as fraud, embezzlement,
or counterfeiting should not be "privatized"; they should
be abolished.
This would leave the commercial banks still in a state of
fractional reserve, and, in the past, I have advocated going
straight to 100 percent, nonfraudulent banking by raising
the gold price enough to constitute 100 percent of bank demand
liabilities. After that, of course, 100 percent banking would
be legally required. At current estimates, establishing 100
percent to all commercial bank demand deposit accounts would
require going back to gold at $2,000 an ounce; to include
all checkable deposits would require establishing gold at
$3,350 an ounce, and to establish 100 percent banking for
all checking and savings deposits (which are treated by everyone
as redeemable on demand) would require a gold standard at
$7,500 an ounce.
But there are problems with such a solution. A minor problem
is that the higher the newly established gold value over the
current market price, the greater the consequent increase
in gold production. This increase would cause an admittedly
modest and one-shot price inflation. A more important problem
is the moral one: do banks deserve what amounts to a free
gift, in which the Fed, before liquidating, would bring every
bank's gold assets high enough to be 100 percent of its liabilities?
Clearly, the banks scarcely deserve such benign treatment,
even in the name of smoothing the transition to sound money;
bankers should consider themselves lucky they are not tried
for embezzlement. Furthermore, it would be difficult to enforce
and police 100 percent banking on an administrative basis.
It would be easier, and more libertarian, to go through the
courts. Before the Civil War, the notes of unsound fractional
reserve banks in the United States, if geographically far
from home base, were bought up at a discount by professional
"money brokers," who would then travel to the banks' home
base and demand massive redemption of these notes in gold.
The same could be done today, and more efficiently, using
advanced electronic technology, as professional money brokers
try to make profits by detecting unsound banks and bringing
them to heel. A particular favorite of mine is the concept
of ideological Anti-Bank Vigilante Leagues, who would keep
tabs on banks, spot the errant ones, and go on television
to proclaim that banks are unsound, and urge note and deposit
holders to call upon them for redemption without delay. If
the Vigilante Leagues could whip up hysteria and consequent
bank runs, in which noteholders and depositors scramble to
get their money out before the bank goes under, then so much
the better: for then, the people themselves, and not simply
the government, would ride herd on fractional reserve banks.
The important point, it must be emphasized, is that at the
very first sign of a bank's failing to redeem its notes or
deposits on demand, the police and courts must put them out
of business. Instant justice, period, with no mercy and no
bailouts.
Under such a regime, it should not take long for the banks
to go under, or else to contract their notes and deposits
until they are down to 100 percent banking. Such monetary
deflation, while leading to various adjustments, would be
clearly one-shot, and would obviously have to stop permanently
when the total of bank liabilities contracted down to 100
percent of gold assets. One crucial difference between inflation
and deflation, is that inflation can escalate up to an infinity
of money supply and prices, whereas the money supply can only
deflate as far as the total amount of standard money, under
the gold standard the supply of gold money. Gold constitutes
an absolute floor against further deflation.
If this proposal seems harsh on the banks, we have to realize
that the banking system is headed for a mighty crash in any
case. As a result of the S&L collapse, the terribly shaky
nature of our banking system is at last being realized. People
are openly talking of the FDIC being insolvent, and of the
entire banking structure crashing to the ground. And if the
people ever get to realize this in their bones, they will
precipitate a mighty "bank run" by trying to get their money
out of the banks and into their own pockets. And the banks
would then come tumbling down, because the people's money
isn't there. The only thing that could save the banks in such
a mighty bank run is if the Federal Reserve prints the $1.6
trillion in cash and gives it to the banks – igniting
an immediate and devastating runaway inflation and destruction
of the dollar.
Liberals are fond of blaming our economic crisis on the "greed
of the 1980s." And yet "greed" was no more intense in the
1980s than it was in the 1970s or previous decades or than
it will be in the future. What happened in the 1980s was a
virulent episode of government deficits and of Federal Reserve-inspired
credit expansion by the banks. As the Fed purchased assets
and pumped in reserves to the banking system, the banks happily
multiplied bank credit and created new money on top of those
reserves.
There has been a lot of focus on poor quality bank loans:
on loans to bankrupt Third World countries or to bloated and,
in retrospect, unsound real estate schemes and shopping malls
in the middle of nowhere. But poor quality loans and investments
are always the consequence of central bank and bank-credit
expansion. The all-too-familiar cycle of boom and bust, euphoria
and crash, prosperity and depression, did not begin in the
1980s. Nor is it a creature of civilization or the market
economy. The boom-bust cycle began in the eighteenth century
with the beginnings of central banking, and has spread and
intensified ever since, as central banking spread and took
control of the economic systems of the Western world. Only
the abolition of the Federal Reserve System and a return to
the gold standard can put an end to cyclical booms and busts,
and finally eliminate chronic and accelerating inflation.
Inflation, credit expansion, business cycles, heavy government
debt, and high taxes are not, as Establishment historians
claim, inevitable attributes of capitalism or of "modernization."
On the contrary, these are profoundly anti-capitalist and
parasitic excrescences grafted onto the system by the interventionist
State, which rewards its banker and insider clients with hidden
special privileges at the expense of everyone else.
Crucial to free enterprise and capitalism is a system of firm
rights of private property, with everyone secure in the property
that he earns. Also crucial to capitalism is an ethic that
encourages and rewards savings, thrift, hard work, and productive
enterprise, and that discourages profligacy and cracks down
sternly on any invasion of property rights. And yet, as we
have seen, cheap money and credit expansion gnaw away at those
rights and at those virtues. Inflation overturns and transvalues
values by rewarding the spendthrift and the inside fixer and
by making a mockery of the older "Victorian" virtues.
Restoring the Old Republic
The restoration of American liberty and of the Old Republic
is a multi-faceted task. It requires excising the cancer of
the Leviathan State from our midst. It requires removing Washington,
D.C., as the power center of the country. It requires restoring
the ethics and virtues of the nineteenth century, the taking
back of our culture from nihilism and victimology, and restoring
that culture to health and sanity. In the long run, politics,
culture, and the economy are indivisible. The restoration
of the Old Republic requires an economic system built solidly
on the inviolable rights of private property, on the right
of every person to keep what he earns, and to exchange the
products of his labor. To accomplish that task, we must once
again have money that is produced on the market, that is gold
rather than paper, with the monetary unit a weight of gold
rather than the name of a paper ticket issued ad lib by the
government. We must have investment determined by voluntary
savings on the market, and not by counterfeit money and credit
issued by a knavish and State-privileged banking system. In
short, we must abolish central banking, and force the banks
to meet their obligations as promptly as anyone else. Money
and banking have been made to appear as mysterious and arcane
processes that must be guided and operated by a technocratic
elite. They are nothing of the sort. In money, even more than
the rest of our affairs, we have been tricked by a malignant
Wizard of Oz. In money, as in other areas of our lives, restoring
common sense and the Old Republic go hand in hand.
This
article originally appeared in the November 1995 issue of
The
Freeman and is reprinted with permission.
