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

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

Who Ya Gonna Trust?A Temporary Interruption of ServiceScience Is as Science DoesTrust and Distrust in BankingWinners and Losers

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North.