The Private Money Guy and the State Money Guy do not seem to be communicating. Like ships in the night, they pass each other, each flying a flag called “Gold Standard.”
PMG: You say that you favor a gold standard, even though it is enforced by the U.S. government.
SMG: I do.
PMG: We no longer have a gold standard.
SMG: Correct.
PMG: We have not had one since 1933.
SMG: Since 1971.
PMG: But Americans could not legally own gold from 1933 to 1975.
SMG: That did not matter. Foreign central banks and governments could buy gold from the U.S. Treasury for $35 per ounce.
PMG: Until they actually tried.
SMG: When they tried to buy gold, beginning in 1958, they got delivery.
PMG: But Lyndon Johnson balked in 1968. After the British devalued the pound, demand for gold rose. Its price rose. Central bankers set up a two-tier gold market.
SMG: Correct. They sold gold to each other at $35 an ounce, but sold it for more to the public.
PMG: That was a tip-off that the U.S. was running out of gold.
SMG: Then Nixon broke the 1944 Bretton Woods agreement on August 15, 1971. No more gold for sale. That ended the gold standard.
PMG: That was what Roosevelt did to Americans in 1933.
SMG: But the gold standard still restrained the creation of money.
PMG: Not in World War II, it didn’t. Not in post-War America. Not under Lyndon Johnson’ guns and butter economy.
SMG: I said “restrained.” I did not say “stabilized.”
PMG: Isn’t the government-enforced gold standard the same story everywhere? Isn’t it a series of restrictions on the original promise to redeem paper money for a fixed supply of gold?
SMG: It is all right to break contract with the public. It is not all right to break contract with central banks.
PMG: How do you figure?
SMG: Private central banks represent political sovereignty.
PMG: Even though they are privately owned.
SMG: Yes.
PMG: What is political sovereignty?
SMG: The widely accepted right of the government to stick a gun in your belly and say, “Fork over your money.”
PMG: Even when the money is gold.
SMG: Especially when the money is gold.
PMG: That sounds like the phrase, “All power grows out of the barrel of a gun.”
SMG: Yes, it does. What a catchy phase!
PMG: You’ve never heard it before.
SMG: Not that I recall.
PMG: Isn’t the main benefit of a gold standard the reduction of the power of government?
SMG: Yes.
PMG: Then how does a gold standard take away the government’s gun?
SMG: It doesn’t. It just pressures the government to point the gun elsewhere.
PMG: Where?
SMG: At central banks.
PMG: Which hold the gold for their governments.
SMG: Yes.
PMG: So that governments cannot spend it.
SMG: Yes.
PMG: So the public won’t get familiar with gold coins.
SMG: Yes.
PMG: Which reduces pressure on central banks.
SMG: Yes.
PMG: So, you think it’s OK for central banks to put pressure on central banks, but not the public.
SMG: Yes.
PMG: Why is that?
SMG: Because central bankers attended the best universities. They have training in scientific economics.
PMG: You regard the public as ill-informed.
SMG: Yes.
PMG: Even about their own self-interest.
SMG: Their self-interest is not the nation’s self-interest.
PMG: What is the nation’s self-interest?
SMG: To provide stable prices and high employment. That’s what the Employment Act of 1946 says.
PMG: But central banks have not supplied stable prices.
SMG: Not so far. But they are working on it.
PMG: Since 1914.
SMG: Yes.
PMG: So, all we need to do is go back to the gold standard of August 14, 1971.
SMG: Yes.
PMG: But with the public’s right to own gold.
SMG: I suppose so. It’s not important.
PMG: What is important?
SMG: The right of central banks to buy gold from each other at a fixed price.
PMG: What price?
SMG: I don’t know. That is for economists at the central bank to determine.
PMG: Which central bank?
SMG: The international one.
PMG: What one is that?
SMG: The one that has not been set up yet. They are working on it.
PMG: For how long?
SMG: Since at least the early 1970’s.
PMG: But they have not got it yet.
SMG: No.
PMG: That bank will set the price of gold.
SMG: Yes.
PMG: Will it pay this price to anyone who wants to sell it gold?
SMG: Yes.
PMG: Including gold mines.
SMG: Yes.
PMG: Will it sell gold at this price?
SMG: Only to national central banks.
PMG: So, the gold flows into the central banks, but it does not flow out.
SMG: Correct.
PMG: So, the central banks will control the price of gold.
SMG: For as long as the official price is above the market price.
PMG: What is to keep central banks from raising the price?
SMG: Only the supply of money.
PMG: But they can create money to buy the gold.
SMG: Yes.
PMG: Then they can buy up the world’s gold.
SMG: In theory, yes. But they won’t.
PMG: Why not?
SMG: This would raise the price of gold. That would break the agreement.
PMG: But they can change the agreement.
SMG: Legally, yes.
PMG: So they can buy up more gold.
SMG: Yes.
PMG: And store it at their expense.
SMG: Yes.
PMG: Then of what possible use is all that stored gold?
SMG: It keeps it away from the public.
PMG: Who might use gold in trade.
SMG: Yes.
PMG: And get familiar with gold coins.
SMG: Yes.
PMG: As people were before 1914.
SMG: Yes.
PMG: Then the primary purpose of the Bretton Woods gold standard from 1944 to 1971 was to keep gold coins away from the public.
SMG: Yes.
PMG: Which reduced pressure on central bankers to stabilize the money supply.
SMG: Yes.
PMG: Do you think that this lack of pressure on central banks to stabilize money led to the universal rise of prices under the Bretton Woods gold standard?
SMG: No.
PMG: Then what did cause the rise in prices?
SMG: Economists at central banks are studying this topic very carefully.
PMG: What have they decided?
SMG: That there needs to be further study.
PMG: Why wouldn’t a gold coin standard work?
SMG: Because there is not enough gold.
PMG: To do what?
SMG: To facilitate trade.
PMG: But isn’t trade conducted on the basis of supply and demand?
SMG: Yes.
PMG: So, there is a supply of gold, and demand by individuals to obtain gold.
SMG: Yes.
PMG: The supply of gold is close to constant. New gold from mines in a year is a tiny fraction of the world’s gold supply.
SMG: True.
PMG: Then why can’t prices in gold adjust to the supply of gold?
SMG: You mean more goods chasing a fixed supply of gold.
PMG: Yes.
SMG: But that would lead to falling prices.
PMG: Yes.
SMG: But that’s deflationary.
PMG: Just like falling computer prices are deflationary.
SMG: That would create a depression.
PMG: Do falling computer prices create a depression?
SMG: No. But falling prices for everything else would.
PMG: Why?
SMG: Because Milton Friedman taught that.
PMG: True.
SMG: And so did Irving Fisher before him.
PMG: True.
SMG: So, that settles it.
PMG: Settles what?
SMG: That falling prices are bad.
PMG: But Fisher and Friedman opposed the gold standard.
SMG: Yes.
PMG: But you want a gold standard.
SMG: A state-enforced gold standard.
PMG: Where central banks create fiat money to buy gold.
SMG: Yes.
PMG: And then they refuse to sell gold.
SMG: Yes.
PMG: But they lease gold at half of a percent interest per year.
SMG: That is not the same as selling gold.
PMG: But they turn over the gold to private banks, called bullion banks.
SMG: Yes.
PMG: And these banks sell the leased gold.
SMG: Yes, they do.
PMG: And this isn’t selling a nation’s gold?
SMG: No, it isn’t.
PMG: But the gold is gone.
SMG: Yes, but the bullion banks have given central banks IOU’s for the gold.
PMG: But the gold is gone. It’s in jewelry in India. It’s part of some daughter’s dowry.
SMG: But the IOU’s are as good as gold.
PMG: Has any central bank demanded the return of its gold?
SMG: Not as far as any government knows.
PMG: But if they did, wouldn’t the price of gold soar?
SMG: To the moon. That’s why they won’t demand payment in gold. They will roll over the loans.
PMG: Just as the Federal government does with its debt.
SMG: Exactly.
PMG: So, the present system is an IOU gold standard.
SMG: Yes.
PMG: The bullion banks gave IOU’s to the central banks.
SMG: Yes.
PMG: The central banks gave IOU’s to their governments.
SMG: Yes.
PNG: Then the present system is based on IOU’s to gold.
SMG: Yes.
PMG: But you say it’s not a gold standard.
SMG: Not since 1971.
PMG: But for all we know, all the gold belongs to Indians.
SMG: For all we know, yes.
PMG: And if the central banks demanded payment from the bullion banks, the price of gold would soar.
SMG: Yes.
PMG: I can see what would happen. Slumdog millionaires.
SMG: I blame Nixon.
PMG: I blame Woodrow Wilson.
SMG: It’s clear to me who won.
PMG: Who?
SMG: William Jennings Bryan.
PMG: It was the only thing he ever won.
SMG: But it was a biggie.
March 23, 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 http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.
Copyright © 2009 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.
