No subject

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 one 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, DC, 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.

_____

Article printed from The Freeman | Ideas On Liberty:
http://www.thefreemanonline.org

Copyright (c) 2008 The Freeman | Ideas On Liberty. All rights reserved.

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