Okay, today's lecture, or this afternoon's lecture, is on the topic of the gold standard in theory and in myth.
And the mythology of gold, as we might call it, really grew up with John Maynard Keynes.
Actually, myths were starting to develop about the gold standard even before Keynes wrote it in the 1930s.
They began to grow up with the quantity theorists at the turn of the century, including Irving Fischer.
In today's world, in the post-World War II era, the mythology of gold substitutes for any sort of sound analysis of the gold standard.
So what I want to do is to give some of the more prominent myths and then to show how they are not
based on sound theoretical reasoning, at least from the Austrian point of view.
And then I want to talk a little bit about the plans for a transition back to the gold standard
and some of the difficulties that we will face in such an endeavor.
Let me just show you some of these myths.
Okay, these are the six myths I'll deal with. The first is that the gold standard is unable to accommodate the monetary needs of a growing economy.
Since our economy is growing from year to year, it is said that we require an increased money supply to accommodate the exchange of these additional goods.
Secondly, under the gold standard, the quantity of money is arbitrarily determined.
That is, it's determined by the costs of mining and by other factors that may influence the demand for money.
Or rather, the demand for the use of gold as a non-monetary commodity.
It's not in any sense planned in a rational way. That's what this means to say.
Thirdly, the gold standard is a government price-fixing scheme writ large.
This is a particularly monetarist critique that setting a fixed price of gold between the dollar and a unit of gold is nothing but a price-fixing scheme.
And why would Austrians who believe so passionately in a free market fall victim or advocate such a scheme?
Fourth, the international gold standard subjects a country to alternating balance of inflation and deflation.
That is, the money supply depends almost solely on what is happening to the balance of payments in a country.
So if you have a surplus in the balance of payments, gold flows in, your money supply increases.
Whereas, a deficit will result in a contraction of the money supply.
And with corresponding effects on the price levels of those countries.
Fifth, the gold standard involves high costs in terms of resources devoted to gold mining as well, and even more importantly, as a sacrifice of productive uses of gold in industry, for example in electronics, in dentistry, in jewelry.
And sixth and last, the gold standard results in high interest rates that discourage investment and retard economic growth.
This is a particular critique of Keynes of the gold standard.
Well, I think basic supply and demand analysis in most cases will show us that these are certainly just myths and are not correct representations of how the gold standard actually works.
So let me start with the first myth, the fact that the gold standard is unable to accommodate the needs of a growing economy.
We might begin by pointing out that the decade in which we've had one of the greatest rates of growth in the United States was in the 1880s.
Okay, and I have some statistics here regarding that.
So, historically, it's certainly not true that the gold standard stunted growth.
In fact, throughout the 19th century and up until World War II, a mild deflationary trend prevailed in the industrialized nations.
So, despite the rapid growth that occurred as country after country industrialized in the 19th century, we had a gold standard in place.
And this certainly didn't prevent that rapid growth.
To go on, the reason for this was that the supply of goods did outstrip the supply of gold money.
of Gold Money and yet there was growth and falling prices at the same time and for example in the US from 1880 to 1896 the wholesale price level fell by about 30% in 16 years that's about 1.7% per year and those figures come from Friedman and Swartz at the same time that the price level was declining after the US had gone back to gold in 1879 at the same time that we had this decline in the price
Real income rose by about 85% or around 5% per year, one of the most rapid, prolonged rates of growth in U.S. history.
Aside from infrequent discoveries of major new sources of gold, this inflationary trend was only interrupted during periods of major wars, such as the Napoleonic Wars that Britain fought.
that Britain fought and from, as I said, 1797 to 1821 Britain had gone off the gold standard
and as a result did experience rapid inflation and also, of course, the US during the Civil War.
But yet, after they returned to the gold standard, prices then continued to fall and that didn't impede growth.
Well, that's the history of it.
And there are many other instances of increases or high rates of growth coinciding with the gold standard.
But what about the theory?
Well, the theory can be explained, I think, with a simple supply and demand diagram,
in which we put the total stock of money in the economy on the horizontal axis,
and the purchasing power of money, the value of a money unit,
The amount of various units of goods that can be purchased by a unit of money, we can put that on the price axis, that's equal to 1 over P.
So, for example, if you pay $10 for a compact disc, well then the value of money in terms of the compact disc is one-tenth of a compact disc.
If a personal computer costs or has a price of a thousand dollars, well then the value of money of a dollar in terms of personal computers is one thousandth, one one thousandth of a personal computer.
So as we said earlier in the week, the purchasing power of money is an array of alternative quantities of goods that can be purchased by a unit of money, in this case a dollar.
Let's take a simple example. Let's say the quantity of gold at a given point in time is fixed, and so we draw a vertical supply of money, M.
Let's have M as for money supply. And we have a certain demand for money, a certain amount of money that people wish to hold and wish to purchase with their labor and other goods that they're selling.
And let's say that the money supply in billions of dollars is 100 billion dollars.
Now what would happen if suddenly we had a 10% increase in the supplies of goods and services
produced in this economy? Well, in effect, the sellers of those goods would want to sell those
at going prices, that would mean you would need 10% more money for the economy to be able to absorb those goods.
So in effect, if this is the money demand before growth, MD1, in effect what would occur is that the demand for money would increase.
So now the demand for money would be 10% greater.
So now you would have quantity demanded for money at the given purchasing power of money, at the given amount that money can purchase, PPM 1.
It would now be $110 billion. But there's no Fed to create this additional $10 billion that we need.
So how did the gold standard handle that? Very simply.
Okay? If I can direct your attention for a moment to the high-tech industries in the last 20 to 30 years,
how did they handle the fact that the supply of personal computers and software and so on was increasing so rapidly
that it was outstripping even the inflationary rate of growth of the money supply caused by the Fed in the 80s and 90s?
How did those additional computers get sold?
The point is that because of the technological advances and increase in investment in those industries, costs fell so that when these supplies of computers increased on the market, their prices fell.
So, again, to give you an idea of the magnitude of this fall, we can go back to history, recent history in this case,
A mainframe computer sold for $4.7 million in 1970, while today one can purchase a personal computer that is 20 times faster for less than $1,000.
Okay, so we had a substantial price deflation in high-tech industries and that did not impair the growth in those industries, this fall in prices, because it corresponded to falling costs due to technological advances.
In fact, we can point out that there was an enormous expansion of profits, productivity and outputs in these industries.
This is reflected in the fact that in 1980, computer firms shipped a total of just about 1.5 million PCs.
While in 1999, their shipments exceeded 43 million units, so it increased 86 times.
And that's despite the fact that quality-adjusted prices had fallen by over 90%.
So the point is here, as people bring their goods to market, there's been an increase in supply of goods because there's been technological improvement, as I said, at lower costs, they bring these goods to market, what happens is exactly what happens in the high-tech industries, except it happens economy-wide, or not necessarily economy-wide, in those industries in which you have growth. So their prices will begin to fall. As their prices fall, each dollar will be able to purchase more of that.
So, there's an excess demand for money, a so-called shortage of money, but it's only temporary on the market.
What happens is that as the value of each dollar increases, we move up along the demand curve to this point.
So that at the end of the process, prices are 10% lower, or roughly 10% lower, and the purchasing power of money is roughly 10% higher.
So, each gold dollar can now purchase 10% more than it did before.
Now, what does that mean?
If you look at the total amount of goods that can be purchased, for example,
if we have a situation where the good was originally, let's say, $10,
so that means that a dollar could purchase one-tenth, and now it's $11,
So now the dollar can purchase approximately 10% more.
What happens is that the real supply of money increases.
The real supply of money is the money supply over the prices.
So if we take this particular good, initially we had a money supply of $100 billion
and we had a price of ten.
So the number of units that could be purchased by that money supply was ten billion.
Okay.
But as the price falls,
Okay, I'll move it over.
Oh, I hit the button.
Okay.
There we go.
If it falls to the nine dollars,
The same $100 billion of gold, which hasn't changed, there's no Fed, increasing the money supply, can now purchase over or around 11 billion units of the good.
So the market process will adjust the purchasing power of money so as to enable the additional goods and services to be sold on the market.
And they will be sold profitably on the market because costs are also falling.
That is the reason for economic growth.
So that's the simple supply and demand, or the basic supply and demand theory that shows that the first argument against the gold standard is purely a myth.
It's refuted by theory and by history.
What about two? Under the gold standard, the quantity of money is arbitrarily determined.
And what the Keynesians and monetarists generally mean by this is it's not determined by some central government agency that decides that the economy demands for more money and therefore they will rationally supply this additional money.
Under the gold standard, as in the case of any other commodity on the market, costs of production in conjunction with demand determine the quantity of money.
So I gave you an example here of the gold standard at a particular point in time, but if you look over a prolonged period of time, you'll find that the supply of gold does react to an increase in demand for gold.
It takes a while to do that.
So we have the purchasing power of money here again, and we have whatever the purchasing power may be at a given point in time, the equilibrium purchasing power, and a certain money supply here, let's just call it M1 as the money supply, this is the money supply, this is the money demand, M is the quantity of money at a given point in time.
All right, let's say for a moment that there is a decrease in the cost of supplying gold, okay?
A better technique is discovered for abstracting gold from the ore,
or possibly better mines are found, okay, from which it's easier to extract the gold.
For whatever reason now, you suddenly have a decrease in the cost of mining gold.
Well, what would that mean?
That would mean now that you would have an increase in the supply of gold, as in any other, in the case of any other industry in the economy.
So you would have a shift to the right of the supply curve, the MS prime, let's say.
You'd have more gold in the economy and as a result, prices would rise.
Now, how would this come about?
What would happen is that as the price of extracting gold from the ground dropped,
That would mean that you would have a situation where an ounce of gold could be purchased from the ground, could be gotten from the ground for less than an ounce of gold that you have to pay in wages.
So, now you would have higher, more workers, paying them the going wage rates, and there would be a higher profit, in other words, to producing gold.
It would be if the price of apples fell, or if the price of computers fell, you would expand the industry.
And so gold mining would expand, and what would happen is that more gold would come out of the ground, and the price of gold, or the value of gold would drop.
In other words, there'll be more gold in circulation and drive prices up.
But that's not the only or not the end of the effect.
Some of that additional gold, since gold is now cheaper,
as the price of, for example, of jewelry goes up and so on,
it would now be more profitable to produce jewelry
and more profitable to use gold in dentistry
Because those prices have risen, so part of the new gold would go to directly satisfying consumer wants, and part of it would go into the money supply.
In either case, you would have a higher price level, but you would also have more goods that would be produced by gold.
So, society would benefit.
That would occur with any sort of a particular good, whether it's gold or any other type of commodity.
Now, why is that arbitrary? Why do they say that the quantity of money is arbitrarily determined?
It's not arbitrarily determined. It's determined by the market.
On the other hand, I'm going to draw it here, if you had an increase in demand for gold, prices would fall, okay?
And as prices fell, the prices of those inputs or resources that you use to mine gold would fall.
So you'd have a fall in the price of capital goods, a fall in the prices of the various raw materials and energy that you use to mine gold.
What would that do to gold production?
In the long run, it would be more profitable to mine gold from the existing mines using existing techniques.
So, when there's an increase in demand for gold, in the short run, yes, prices fall, but in the longer run, what tends to happen?
As those prices fall, it spurs or stimulates the development of new sources of gold and also stimulates the production from existing gold mines.
And as a result, you get an increase in the supply of gold that pushes prices up back towards their former level.
Now, what's so arbitrary about that?
That's not arbitrary.
Basically, what the critics of gold call arbitrary
simply means that the quantity of gold is not determined by governments.
It's determined by people's demands for gold,
and it's determined by the cost, the cost of gold
based on technology and the availability of specific resources such as gold mines.
I don't see that as arbitrary one bit.
Thirdly, what about this whole idea that gold is a government price-fixing scheme on a large level?
This is a particular criticism by Milton Friedman of the gold standard.
But in fact, under a genuine gold standard, it's not price-fixing.
If we go back to the 19th century, when we had genuine gold standards existing in most of the world,
or silver standards, but let's focus on gold,
we had a situation where for at least for about a hundred years in the US from 1834 until 1933,
The dollar was defined legally as equal to one twentieth of an ounce of gold.
That's not price fixing.
When people brought their gold into banks, that meant that they formed a contract with the bank to return their property when they redeemed the bank note.
banknote. The banknote itself was not money under a genuine gold standard. It was a receipt that permitted you to redeem that note for money. You could use it as a money substitute in an exchange because it was more convenient. But it itself was not the money and people understood that.
It's as if someone says the pink slip, the title, to an automobile, which changes hands.
I can sell you my automobile, my Grand Prix competition series.
I could sell you that, and here in Alabama give you the pink slip, and the car could remain in New Jersey.
I could store it for you for a few months, okay?
I'd beat it into the ground at that point, but anyway, you wouldn't be deluded into believing that the pink slip, the so-called pink slip, which is the title to the car, is the car itself.
Obviously, it's a title to the car.
So keeping that in mind, when all nations were on the gold standard, everybody had the same money.
They just use different names to designate their unit of money.
So, for example, the British pound was equal to one-fourth of an ounce of gold.
The French franc was equal to one-hundredth of an ounce of gold, and so on.
So, for about a hundred years, the U.S. dollar, the exchange rate between the U.S. dollar was $4.86 per one British pound.
Why was that? That wasn't arbitrary. There was no price fixing there.
The reason why that exists is because there was five times the amount of gold in a British pound, since the fine is one-fourth of an ounce, as it was in an American dollar, which was defined as one-twentieth of an ounce.
So, under the gold standard, the fixed exchange rates between the different goods is no different than the fixed exchange rate, it's not really an exchange rate, but we'll call it that for the moment.
The fixed exchange rate between, let's say, a nickel and a quarter.
A nickel is defined as one-twentieth of a dollar, a quarter is defined as one-quarter of a dollar, or one-fourth of a dollar.
Therefore, five nickels exchange for one-quarter.
That's not an exchange rate.
But that's not a government price-fixing scheme, that's simply a result of the laws of arithmetic, okay?
So Friedman is wrong under at least a genuine gold standard, and that's not true of the Bretton Woods system,
and we'll talk about some other gold standards in which it would be artificial price-fixing.
But under a genuine gold standard, it is not a price-fixing scheme, okay?
Fourth, the international gold standard subjects a country to alternating bouts of inflation and deflation.
For example, if the US were to run a surplus under the gold standard, gold would flow into the country, it would increase the money supply and drive prices up.
The country that was losing gold that had the deficit, let's say that was Great Britain, would find that its money supply is shrinking because gold is flowing out of the country and therefore its prices are falling.
So we have to ask ourselves, why do these deficits and surpluses occur? Are they an act of God?
Well, no, of course not.
Let's take the United States. The United States, just as the world was under the gold standard,
the United States today is a single currency area using dollars.
Do we worry about or even know whether, for example, New Jersey has a deficit or a surplus with California?
Or whether Nebraska has a deficit or a surplus with Indiana?
Fortunately, state governments don't keep those kinds of statistics, so no one worries about them.
If they did, of course, then people would be worrying about the balance of payments in their town and so on.
The point is this, let's say that there's an increase in output in California, an increase in productivity because of the high-tech industries in Silicon Valley, that's a good example, I would say.
And on the other hand, there's a fall in output, or a fall in demand for output from Michigan because U.S. cars are no longer in demand.
Well, Michigan's exports, the things that they sell to the rest of the country, would begin to decline.
On the other hand, California's exports to the rest of the country, the computers and software they sell, would increase.
Michigan's citizens and so on would find that they had fewer dollars, as their incomes fell.
California citizens on the other hand would find they had more dollars.
So money would be redistributed from Michigan to California.
But that's not deflation or deflation of Michigan inflation in California.
That's simply a result of the fact that the demand for output in a certain area has fallen
and therefore people's incomes in that area have fallen
and people want to hold less money when their incomes are less
so that the money supply falls.
It's a voluntary action on the part of the people of Michigan who are losing income.
Think about it, if your income was cut in half, hopefully that doesn't happen to you,
but if it's cut in half, you're not going to hold as much cash anymore.
So cash is going to flow out from your household for a while,
until you have the proper reduced amount that maximizes your utility.
Your household is going to have a deficit.
You lose your job or if you take a pay cut.
Paycut. On the other hand, if your household enjoys an increase in income, then because of the higher value of your labor that you're selling, you're going to find that money is going to flow in, you're going to hold a greater amount of money.
Money is going to be redistributed, and always is, continually, from minute to minute, from those areas that are losing, the demand for whose products are falling to those areas where the demand for the products are rising.
As Hayek pointed out, that's not deflation or inflation, because deflation or inflation means an increase or a fall in the money supply in a closed area.
So if the US is a dollar area and the number of dollars in the US falls, then you have monetary deflation, or if it rises you have monetary inflation.
Now, what's the closed area under the gold standard? It's not one country.
Every country's money, despite the names that they use, the differing names, every country's money is, in fact, gold.
So the reason why, for example, Great Britain would lose gold to the US under a genuine pure gold standard would be because the productivity in the US is increasing faster than in Great Britain.
Or, let's say, demand has shifted from textiles from Great Britain, world demand, to wheat.
So, wheat would be more valuable here in the U.S.
Farmers' incomes would rise in the U.S.
and that would be reflected in an increase in the amount of gold that they hold.
On the other hand, those people in the British textile industries, the stockholders and workers,
would find their incomes are falling.
When your incomes fall, you hold less money.
Okay, it's natural.
So, it's just a redistribution of gold within a closed system.
Countries don't have alternating bouts of deflation and inflation.
In fact, that occurs when you begin to get paper money pyramid on top of the gold standard.
Then, if gold flows out, not only do you lose, let's say you lose one million dollars worth of gold,
but then what happens is that the bank, as they lose gold, then have to decrease their loans and decrease the amount of paper money.
And what that does is to exacerbate the outflow. Hayek pointed that out also.
So it's fractional reserve banking that causes the added deflation or added inflation.
It's not the gold standard itself. Under a pure gold standard, the whole world is a closed system.
And as part of the world gets richer, faster than other parts of the world,
and the inflow of gold flows away from the parts that are lagging behind to those parts in which the income is increasing.
The gold itself doesn't cause people to be richer or poorer, the inflow of gold, it's a result of that, okay?
And it's the same thing with your household, right?
If your income increases, it's because your good, whatever you're selling has become more valuable
Therefore, the consequence of that is that you get an increase in your money income and you hold the larger proportion, or you hold more money income over the year than you would have.
What about the fifth objection to the gold standard?
that it allegedly involves extremely high costs in terms of resources.
Resources both that are used to mine new gold as well as the opportunity cost
of using gold not in jewelry or dentistry or in electronics but using it as money.
Adam Smith was one of the first economists to claim that the gold standard had a high resource cost.
Believe it or not, the early Ludwig von Mises actually accepted this.
What Adam Smith said was the following.
Replacing gold with paper money is like replacing a highway that goes through fertile land with a highway in the sky.
So he used that analogy.
Because a highway in the sky wouldn't have the opportunity cost of causing land that could have been used to grow various crops now to be used for a road.
and the materials that are used in the road could also be used for other uses.
So Smith basically said was this, as we, now he was in favor of a gold standard but he wanted a fractional reserve gold standard, he was very comfortable with that.
He says as we print more paper money and drive prices up in Great Britain, we send gold out of the country in exchange for capital goods and that makes us more productive.
So the paper money, in effect, allows us to create capital goods by pushing gold out to foreign countries in exchange for these capital goods that make our labor more productive.
So that was this argument. The French economists always rejected that argument, and later on von Mises did, and of course Rothbard did.
There's a couple of responses to this argument.
The first response is, well, even if gold standard has high resource costs,
those high resource costs are justified as a way of preventing the government from inflating.
If you lived in a world where, let's say, you could trust governments, which is a never-never land,
not to inflate the money supply, not to do what's natural and try to increase spending and buy votes by simply printing new money,
if you live in that kind of a world, then you might say, well, we really don't need a gold standard.
We don't live in that kind of a world.
Economists in the 19th century used to look on the gold standard as golden handcuffs to tie the hands of government and prevent the government from printing new money.
It's like saying, you know, if we could just get rid of, let's put it this way, there's a lot of, there's very high resource costs, there's a lot of resources tied up in steel bicycle locks.
If we got rid of the steel bicycle locks and simply put a piece of paper around it and wrote lock on it,
wouldn't we have all the steel to produce other things that are useful to human beings?
Well, if we lived in a world where no one stole bicycles, yeah, sure, that's not the case in New Jersey.
We put two locks on our bikes.
Okay, so first of all, even if there are high resource costs, think of it as buying insurance against inflation.
But secondly, as Roger Garrison has pointed out, these are economists that are making this point, and yet they're not taking into account the alternatives.
Remember, you have to compare institutions. What about the resource costs of paper money that causes the economy to go through a business cycle in which you have inflation and misdirection of capital that is then revealed in a recession and layoffs of workers?
I would venture to say the resource costs that we've suffered from paper money business cycles,
business cycles that are induced by paper money, are greater than the resource costs of a gold standard.
But beyond that, and actually this is Roger Garrison's point,
What happened when we had inflation in the 1970s and beyond, when we had crises in the 1980s, when we had financial crises?
What do people do when they're confronted with rapid inflation or fear of bank collapses and financial collapses?
Well, they rush out and they buy gold, don't they?
In fact, in the late 1970s, the price of gold shot up to around $800 an ounce.
What did that do to the amount of resources in gold mining?
It pushed more resources into gold mining.
Why? Because people wanted to use gold as a hedge.
So, governments haven't gotten rid of their gold.
All governments hold big stocks of gold.
I don't think government is selling that gold off, allowing the market to use that gold to produce more products for dentistry, more electronics, and so on.
In fact, the stocks of gold held now out of production may be greater than they were under the gold standard.
Resources devoted to gold mining might be greater. You don't know what would happen under the gold standard.
So, first, so we can respond is, first of all, even if it is high, that is resource cost, it's a form of insurance against government inflation,
two, government, fiat money inflation has caused a repetition of the business cycle, okay, to recur again and again, and that has resource cost,
No monetarist has tried to add that up and compare that to the resource cost of gold
Though they have come up with figures, Friedman has and others have, of what the resource cost of gold are
But you want to compare it to something, to the alternative institution
And finally, paper money doesn't save on the resource cost of gold because people use gold as a hedge
It's the first hedge against inflation or against crisis
Lastly, the gold standard results in high interest rates that discourage investment and
record economic growth.
Basically this is a Keynesian criticism.
Again, if you have a gold standard, especially a genuine pure gold standard, it's impossible
for the Fed to increase bank reserves and push down interest rates, bringing about a
business cycle.
And we know in the short run of the business cycle, you do seem to get a boom in output.
And that's what they're talking about.
Alan Greenspan would not be able to manipulate interest rates.
Well, I think that's a good thing.
I think it's a good thing not to have overinvestment.
So basically, the response to that is that we don't want low interest rates
if low interest rates are the result of manipulation by central banks.
Because low interest rates result in misallocation of resources
and eventual recession.
So, those are my critiques of the objections to the gold standard.
Let's talk about returning to the gold standard.
I think this is an interesting and important and unresolved area of the theory of the gold standard.
The thing that we do not want to do is to return to what we might call a pseudo-gold standard or a phony gold standard.
and the gold standard, because when that breaks down, like when Bretton Woods broke down, they will blame, that is the Keynesians and monetarists and others, will blame the gold standard for the breakdown.
So if you return to a gold standard, you want to go back to a genuine gold standard.
So let's look at some of these plans to return to pseudo-gold standards.
When Alan Greenspan first took office as chairman of the Fed, he and others on the Board of Governors of the Fed, Wayne Angel being someone else,
began to talk about using the price of gold as one of a number of indicators of inflation or deflation, along with some other commodity prices.
So if the price of gold was suddenly rising, that would indicate to Greenspan and the others on the Federal Open Market Committee that there was inflation that is imminent in the US economy.
So that would indicate to them, ideally, that they should drain reserves from the banking system and slow down the rate of growth in the money supply.
Well, that's not a real gold standard. Just looking at gold as one price among many is certainly not a real gold standard.
And so we can criticize it as it really does still leave the monopoly of money squarely in the hands of the Fed.
It's just another indicator to them. They're using it as an indicator.
Also, it makes central bank policy gold-plated, meaning that it's not a true gold standard.
The true gold standard is not a gold standard under there, but it opens a gold standard for criticism, right?
And so gold can be blamed for the inevitable failure of this.
Now, we came a little bit closer in the early 1980s to a gold standard.
President Reagan's advisors, the supply-siders, most prominently Arthur Laffer, Robert Mundell and Jack Kemp,
and other writers at the Wall Street Journal were pushing for what they called a new Bretton Woods
which was a distorted form of the gold standard in which only the US dollar was, as I said, convertible into gold
and then only for foreign governments and official institutions, not for American citizens.
Plus, of course, there would be no gold coin in circulation and so on.
So they were pushing Reagan to institute a new Bretton Woods and in fact Reagan did convene a commission to study this question and they held hearings and it was dominated of course by monetarists and other right-wing Keynesian Republican economists and the majority report came out against instituting a new gold standard.
Murray Rothbard was asked to testify and he gave a talk and was one of the people that wrote up the minority report.
I think George Reisman also testified before Congress on this point.
And again, he was one of the few that argued for going back to a genuine gold standard.
What was the blueprint though that these supply-siders set forth?
One thing about the supply-siders, they want sound money and plenty of it.
So they want a gold standard, but they want a lot of money.
They want money to be, you know, they want a gold standard that can be inflated in some sense.
Well, the first, this is called a Laffer blueprint.
He wrote a blueprint on this, Arthur Laffer.
He wants the Fed to convert dollars into gold at a fixed price, a range.
Now, this is a price fixing scheme. He wanted the Fed to fix the price of gold, let's say, $400 per ounce, plus or minus $10.
So, if suddenly the price of gold began to rise towards $410, that would indicate to the supply-siders,
who believe that gold was a very sensitive indicator of what was going to happen to the rest of the prices in the economy very quickly,
They would look on that rise of the price of gold as a warning that inflation was about to break out.
And at that point then, they would go out into the market and they would sell gold and dollars would come in, would return and the monetary, the money supply would be reduced.
On the other hand, if the price of gold fell towards $390, that meant that we were going to have an inflation,
or there was an impending deflation, excuse me, and the way they would react, the Fed in that case, would be to go into the market,
print dollars and buy gold to drive the price back up to $400.
So now, gold really takes the place of government securities as open market operations.
If you want to increase the money supply, well, you print dollars and you buy gold.
If you want to decrease the money supply, you sell gold for dollars.
And you try to keep the price fixed at around $400.
Also, they put in here, which they didn't really need, that there would be what was called a target reserve quantity,
that 40% of the Fed's liabilities had to be covered by gold.
So the Fed would have gold backing up 40% of its liabilities, which meant 40% of currency and circulation plus bank reserves.
And then the Fed would retain full discretion in monetary policy as long as this target reserve quantity of gold was within 10% of 40%.
So in other words, as long as it was plus or minus, 40% plus or minus 10%.
What would happen if the amount of gold suddenly fell, meaning that there was inflation, below 30%?
Well then at that point the Fed could not, its liabilities would be frozen, it could not create any more reserves.
It was an attempt to force the Fed to restrict its inflation.
If the gold backing fell below 20% of its liabilities, then they had to reduce the monetary base by 1% per year.
In other words, they had to begin to actually reduce the money supply.
And finally, if the target reserve quantity fell below 10% of the Fed's liabilities,
Well, what would happen? Nothing. What would happen would be, well, you have to raise the price of gold now, okay?
So there was no punishment for inflating to the point where they began to lose their gold stock, okay?
So this was not a real gold standard, okay? This was a phony gold standard. It was a price-fixing scheme.
In fact, some of the supply-siders later on said, you know what? We don't even have to buy and sell gold or keep gold.
All we have to do is look at the price of gold.
So, if the price of gold went towards $410, we'll simply take government securities,
sell them on the market, absorb some of the dollars and bring the price of gold back to $400.
And if we had a deflation, we would do the opposite.
We'd go out and we'd print money and we'd buy securities.
So that gold didn't need to be what they call the intervention asset.
Okay, so they're talking in bureaucratic, technocratic terms.
They had no intention of allowing gold to be the real medium of exchange.
Well, it could be the intervention asset, the asset that you buy and sell to keep the price of gold fixed, or you could use government securities, it didn't matter.
And one of these supply-siders, who happened to be my professor at Rutgers when I was getting my PhD, his name was Mark Miles,
he wrote a book on this and he basically came out and said, look, we don't need gold in this scheme.
We just need to use government securities to fix the price of gold.
So that, Friedman would be right, and the monetarists would be right to call that a price-fixing scheme.
In fact, later on, I named it price-rule monetarism. It's simply monetarism.
Regular monetarism, the brand that Milton Friedman promotes, is quantity-rule monetarism.
Under Friedman's scheme, you would simply increase the money supplied at about 3% per year to try to keep the price level stable.
Under price rule monetarism, you keep the price of gold fixed to try to keep the price level stable.
So it was basically monetarism which took into account the fact that the demand for money may change, which quantity rule monetarism doesn't take into account.
And if the demand for money changes, well then you're going to have a change in the price of gold.
So, in fact, in Mark Miles' book on this, he said, we're a better brand of monetarism, okay?
The monetarists want to increase money supply at the same rate as the quantity of goods are increasing.
But what if the velocity of circulation is changing?
There's no way to adjust the quantity rule.
But with a price rule, that would affect the price of gold and we could react to it.
All right, so it came down to basically giving, coming up with a rule to kind of, like monetarism, to restrain a government monopoly.
And any rule that you try to come up with to restrain a government monopoly is simply a pious wish.
It's basically saying, please don't increase the money supply too fast if you're a monetarist, or please don't let the price of gold rise too high.
There's nothing to stop the Fed from doing that.
People aren't there ready to turn in their dollars for gold like in the old days, causing the Fed to fear, and the bank is in the fear that they're going to lose their gold reserves.
So those are the fake gold standards.
Now there was an interesting plan, I think which Guido Hulsman supports, I think this may have been introduced by Henry Hazlitt, it was later picked up by Hans Sendholz,
by Professor Timberlake, who I did criticize this morning.
He actually at one time promoted this plan.
I thought it's a step in the right direction, away from monetarism.
It's called parallel private goal standards, or a parallel private goal standard.
Basically, you don't get rid of the monopoly fiat money.
What you do is you allow individuals, and you give them the means,
to make exchanges and contracts in gold.
Now how would that work?
And Hazlitt and Sennholz's, and even I think in Timberlake's plan,
you would abolish the Fed.
They get rid of the Fed.
Now, you wouldn't get rid of the Fed notes,
and you wouldn't get rid of fractional reserve banking.
You'd simply abolish the Fed, which means that
you could never have any further increase in bank reserves or currency.
or currency. They would be frozen. So you do get rid of the agency that can increase these things, though the government treasury could increase them if it wanted to, but you get rid of the Fed.
And then you freeze the monetary base. There's no more Fed notes, there's no more Fed deposits which are held by banks as reserves, all that's gone.
You then convert member bank reserve deposit accounts into Fed notes.
In other words, if your bank is holding a certain amount of reserves
as 10% backing for the checking deposits that you have,
they would go and get Fed notes in return.
So you got rid of the Fed deposit, you get rid of the Fed,
the only reserve now is actual Fed notes, and that's frozen.
You can't change the number of them in the economy because there is no Fed to do that.
The Treasury has 260 million ounces of gold, which it stole from the American people in 1933 when President Roosevelt forced all Americans to turn their gold in for Fed notes.
You would either do one of two things.
You would either give it away proportionally,
a proportional amount of this gold to each American citizen,
which, take an example, if you have 260 million citizens
and there's 260 million ounces of gold,
each person would get one ounce.
Or you could sell it.
But whatever you do, you have to get it into private hands.
You would then abolish legal tender laws.
In other words, people would no longer be forced to accept, for their debts, paper FedNotes.
And you would make gold clauses in contracts enforceable.
So, if myself and Simon made a contract in gold, that I would pay him next week for that scarf,
one-tenth of an ounce of gold, I love that scarf.
Anyway, he gave me the scarf and then I was going to pay him a tenth of an ounce of gold next week.
I could not come to him and say, I'm paying in paper dollars because they're legal tender.
They're not legal tender any longer, so I can't force him to take them in payment, as you can today, and the gold clause is enforced.
Now, according to Senholtz, Hazlitt, I think, I believe Guido, once you get rid of the legal tender laws and you get gold in the people's hands, then you can have two monies.
Then people can take the gold if they wish and they can begin to deposit it in banks or have it minted privately and begin to use it.
Now, I have an objection to this. I think it's a pretty strong objection. And Murray Rothbard has voiced an objection to this kind of a scheme.
First of all, you get rid of the Fed.
The government can still, at some point,
I mean, people are still tied to these notes.
These Fed notes are dollars in their minds.
So if there is some sort of national emergency,
quote unquote, if we expand the war on terrorism
and they want to finance a greater deficit,
or if there's a recession for some reason
and they want to push down interest rates.
They can, remember this is paper, they can have Congress pass an emergency exception
to the rule that you have to have, that these liabilities have to be frozen
and the Treasury can print them up and finance a deficit with them, okay?
So you don't get rid of the dollar, but more importantly, you don't get rid of the paper dollar.
But more importantly, if it actually begins to work, and these things are frozen for time, why would people use gold?
You and I and businessmen and everyone in the economy think, calculate, compare in terms of dollars.
So if you go back to the regression theorem, somehow, if you want to get gold back into circulation as money and not just give it back to people,
If you want to get back into circulation as money, what you need to do is to make them think of gold as dollars again.
How do you do that? You have to establish a link between the dollar and the gold.
Under the parallel standard, all you do is have gold over here and you still have these dollars that people have been using all along.
So this is a potential problem with this.
Now, I'm still willing to entertain this as one way of going back because no one has come up, I think, with the perfect way of going back to gold.
This would work if we had a horrendous inflation.
If we had a very, very bad hyperinflation, then people would have the gold in their hands and they would be able to begin to use it in exchange.
But the whole point is to freeze the Fed notes and not allow inflation any longer.
So I don't see how you would get gold back into circulation.
Now, very interestingly, some of the free bankers have said,
you know, initially they said, well, we want free banking.
The Austrian free bankers like George Selgin, Larry White, Steve Horowitz.
They initially said, we want gold as at the base of our free banking system.
But then George Selgin said, you know what?
And I don't think the others have said this.
We don't really need gold.
If we get rid of the Fed and freeze the amount of paper dollars
So the problem is that it ignores the regression theorem, ignores the fact that people love the dollar, are used to the dollar, and compute and calculate in exchange in terms of dollars.
And secondly, it still leaves the Fed notes in existence, which I'll talk about in a minute.
are used to the dollar and compute and calculate and exchange in terms of dollars.
And secondly, it still leaves the Fed notes in existence, which allows government at some point,
because people believe it's money, to increase the money supply by having the Treasury print up new Fed notes.
Let's take Ludwig von Mises' plan.
Ludwig von Mises liked the currency school, but he just believed that they didn't go far enough.
Remember the currency school, what they wanted to do was, even though they were on back notes in circulation,
they wanted any new note that came into circulation to be 100% backed by gold.
But what they forgot was that checking account money is also part of the money supply.
And banks can increase checking account money and cause business cycles that way.
So von Mises recognized that and he said he wanted a strict currency school gold standard.
He put forth a plan in 1953 for the United States in an epilogue to his book, The Theory of Money and Credit,
and in it he said we should impose a 100% reserve on banks for all future checking account deposits and currency.
If banks were allowed to issue bank notes, that also would have to be 100% back, okay?
All new notes and all new checking deposits, okay?
Whatever was unbacked at the time of the reform can stay unbacked,
because it's really only the new injections of money into the system that pushes down interest rates and creates the business cycle.
He also, at the time, Americans couldn't buy and sell gold.
We only got that right back in 1976.
But anyway, he wanted to re-establish the freedom of buying and selling gold.
Once that was done, then there would be a gold market in the United States, as there is today,
and we could see then what the price of gold would be.
So after a period of time, after let's say three months of a gold market,
the U.S. government would announce that within another period of time,
within the month, the dollar would be convertible at whatever the price of gold was,
after three months. So, if it was $400 per ounce, then he would announce that in one month anybody who wants to come to the bank and convert dollars for gold at the rate of one 400th ounce of gold for a dollar, okay?
So, banks would then be buying and selling gold. That would be a genuine gold standard. It would be a fractional reserve gold standard, but it would be a genuine gold standard.
He would establish a conversion agency, not a central bank, but what he called a conversion agency, to buy and sell gold for dollars.
So actually it wouldn't be the commercial banks initially that did it, it would be this conversion agency.
Anyone who brought Fed notes to the bank or checks drawn on their checking account deposits at commercial banks,
would receive gold coin at the rate of one ounce of gold coin to $400 or if they wish they could sell gold for $400 to the conversion agency.
The Fed could still exist but it would no longer be able to buy any more government bonds or securities.
In other words, it could not print up money to perform open market operations with.
For some reason he didn't say that we should get rid of the Fed. He said that the Fed could not interfere with the operations of the conversion agency.
He would also have withdrawn all small denomination bills from circulation.
And I guess he meant one dollar bills and five dollar bills, maybe ten dollar bills.
And they could no longer be in circulation so that people would have to use gold for small purchases.
So gold coins would be in people's pockets.
Now, of course, at the price of gold as it is today, that would really be impossible.
You couldn't use gold for small purchases if an ounce is equal to $400.
Well, again, this is a good plan. This does not ignore the regression theorem.
Now, there's a link. The dollar is 1 400th of an ounce of gold.
So there's a link between the dollar and gold.
People can still think in dollars, but now their dollar is defined legally as a weight of gold.
So I think it's better than the parallel gold standard I talked about.
But it does leave the old Fed notes in existence, and again, the government can increase them.
Now, there's Rothbard 1 and there's Rothbard 2. There's two different plans that Rothbard puts forth.
His newer plan is the following. This came out in his book, The Case Against the Fed.
What he says is that we should liquidate the Fed. We have to get rid of the Fed.
We have to cancel all its assets except the gold that it owns.
And then we're going to reprice the gold.
And the way we're going to determine the price of gold according to Rothbard
would be to take the total amount of currency in the economy,
and I just checked online today, at the end of, on May 30th,
we had $707 billion of currency in the US economy held by the public.
divide into that the ounces of gold owned by the treasury, which is 260 million,
and that would give you a price of $2,272 per ounce, enormously higher than the market price.
I'll get to that point, but so then what Rothbard would do is abolish the Fed, then you would call it all Fed notes, at least you'd get rid of the Fed notes and people would bring their Fed notes in and exchange it for gold at that rate, okay, for every $2,272 you would get an ounce of gold, okay, so you and I would be able to do that as well as the banks, the banks that have reserved deposits at the Fed would also be able to
and how to turn them in for gold, okay?
Well, not melting down, but just people from all over the world would be coming to the U.S.
Basically what would happen is that all this gold would flow into the U.S.
and automobiles and everything else would flow out of the U.S.
Okay? Until there was an equilibrium reached, okay?
And so prices in the U.S. would rise rapidly to adjust to this very high price of gold.
That's one of the problems with this plan.
It would be a once and for all inflation and it wouldn't create a business cycle because it would be going on through the banking system.
So that's one of the problems with that.
And it would leave fractional reserve banking.
So, all the gold would either be held by people in their hands, or would be deposited in the banks, and they could go on with their fractional reserves, whatever reserves they wish they could hold, it would be a fractional reserve system still.
Demand deposits would not be 100% backed by gold, only the currency notes would be transformed into gold itself, so you get rid of the Fed notes.
So, once you got your gold and you deposit it in the bank, the bank wouldn't have to hold 100% reserves against your deposit.
They could create checking accounts that were, let's say, 10% backed by gold dollars.
There would no longer be a law limiting them to 10%.
Whatever they thought would be prudent would be what they would decide as the back reserves.
Rothbard's earlier plan would be to go back to a 100% gold standard and what you would have to do there is you would have to take the total amount of checking account money as well as currency
and that would determine what the price of gold was.
Again, I looked online, St. Louis Fed. Right now, M1 stands at that M1, which is basically currency plus demand deposit or checking accounts,
that's equal to $1,354 billion, so basically $1.3 trillion, okay?
If you divided that, so 0.583, divide that by the amount of 260 million ounces of gold,
You come out with an enormously high price of $5,209 per ounce, but now all Fed notes would be redeemed at that rate and Federal Reserve deposits, as well as the checking account money.
So everything would be backed. Now what would you do about savings accounts?
Savings accounts could be turned into what they actually are. Really they're a claim on the bank's assets, on the bank's loans.
So you could turn them into a form of mutual fund. You could separate the bank into a 100% warehouse in which any notes they issue must be 100% backed by gold.
Any checking account that you have to be 100% backed by gold, that would be, let's say, the deposit part of the bank.
And on the other hand, you would have the loan part of the bank.
And there, all the bank's loans would be there, and people would own, their savings accounts would be turned into rights to pro-rata shares or pro-rated shares of the bank's loans.
and the same thing with their certificates of deposit, so they would become more like mutual funds.
So the banks could take in money and loan it out, but they would only do that through their loan department.
That's what the currency school did, they separated the Bank of England into a deposit department,
I'm sorry, into a deposit, they call it an issue department and a loan department.
So you'd have 100% back money and you would still have banks able to accept investments or savings from clients and then to loan them out of interest and pay the client's interest.
In the same way that mutual funds do that. And money market mutual funds are not part of the money supply and neither would be the loan banking operations that wouldn't cause any inflation at all.
Also, you then could abolish the FDIC because the banks are, all deposits are 100% backed, there's 100% reserve banking.
You'd abolish the mint and have private mints, minting coins, and you would transform the savings deposits either into mutual funds,
or you could tell people, we're going to turn them into certificates of deposit.
So, for example, if the banks, the average maturity of the bank's loans are nine months,
then you would tell people, well, you can't get your money out for nine months.
And then they would know from then on that anything that they put in that interest into the loan part of the bank
would be in a certificate of deposit that would be a true investment.
So you wouldn't have any inflation.
Okay, let me mention a plan that I recently came up with.
In the old days, for example, the U.S. after the Civil War in 1879, Great Britain in 1821 after the Napoleonic Wars,
Great Britain again in 1925, they would go back to the gold standard by simply deflating the money supply
and going back at some past price of gold, at some lower price of gold,
than was existing during the period of non-convertibility.
Now, there was a problem because of unions in 1925.
There was no problem going back after the Civil War in 1879 or 1821.
There was a little bit of a problem with the deflation, but it was nothing like it was in Britain in 1925.
So all economists today look back at 1925 and say it's wrong to go back to the gold standard,
even if you're a gold standard economist, by deflating, trying to deflate the money supply.
Even Rothbard and Mises believe that.
And let me just read you a little, or some comments by Rothbard and Mises.
Also, Hayek has the same view.
Mises opposes deflationist policy and went on to argue that it was erroneous,
even in the case in which a country was attempting to revalue its depreciated currency
in order to return to the gold standard at the previous mid-poor.
To avoid monetary contraction, Mises favored a restoration of gold parity at or near the currently prevailing price of gold, and we saw that was his plan.
Okay, figure out what the price of gold is right now, and then let's go back.
Even Murray Rothbard, although an enthusiastic proponent of bank credit deflation, that is, he likes when banks fail,
and you get bank credit deflation, that is a disappearance of these unbacked bank deposits.
However, he generally refrains from advocating a deliberate contraction of the money supplied by the Fed under an existing fiat money regime.
So, for example, he referred to, quote, the crucial British error and, quote, fateful decision of returning to the gold standard in the 1920s at the pre-war parity.
For Rothbard, the, quote, sensible thing to do would have been to recognize the facts of reality,
the fact of the depreciated pound, franc, mark, and to return to the gold standard at a redefined rate, a rate that would recognize the existing supply of money and price levels, unquote.
Additionally, in his proposals for the restoration of the 100% gold standard in the United States today, as I pointed out to you, a contraction of the supply of fiat dollars is avoided.
He doesn't want to reduce the number of fiat dollars. He simply wants to increase the price of gold to back them up.
But as we see, there are problems with increasing the price of gold to that great an extent.
So, in thinking about this, I looked at another comment that Rothbard made that was very interesting.
In talking about the kind of deflation that he's willing to accept, which is when banks fail, he doesn't want the Fed to bail them out.
He doesn't want the Fed to contract the money supply deliberately, but if during a recession banks are failing, then allow that to happen and allow the money supply to fall.
Supply to Fall. And so to defend this, he says, in a broad sense, this bank credit contraction takes away from the original coercive gainers from credit expansion and benefits the original coerced losers.
While this will certainly not be true in every case, in the broad sense, much the same groups will benefit and lose, but in reverse order from that of the redistributive effects of credit expansion.
Fixed income groups, widows and orphans, will gain, and businesses and owners of original factors previously reaping gains from inflation will lose.
What does he mean by this? Well, as I showed you, according to Mises' step-by-step process, when you have inflation, those people who receive the money first,
and they're usually the government itself and its favorites in the economy, they benefit because prices haven't gone up yet,
and people who receive the new money 18 months later or two years later are the ones that are hurt,
Especially people on fixed incomes who never get any of the new money, because they have to pay higher prices during 18 months, or they have to pay higher prices forever because they're on fixed incomes.
What Rothbard says is, if you reverse that, or allow that to be reversed, if you suddenly have a deflation, then those people who lose the money first while prices are still high, they're the ones that lose.
People on fixed incomes gain. The people who are hurt during the inflation gain during the deflation.
Well, if that's true then, if the welfare of those people who were coercively expropriated by the inflation process,
why not reverse the process and have the Fed do that?
So that if the Fed were to bring about a contraction of money, a slow contraction of money over time,
You would have these welfare effects, benefiting people that were hurt by the previous inflation.
But also, you would lower the amount of dollars in the economy at the same time,
and make it easier to go back to gold at a lower price.
So, let me just read you a little bit of my plan.
Again, it's not completely thought through. I think a lot more has to be done on this.
So, I wouldn't stand by it as a plan that I would want to implement.
So, in order to analyze the case within the context of contemporary institutions, it is necessary to provide some technical details of the relationship between the Fed and the Treasury.
Basically, the Treasury maintains two types of deposits. It has deposits at commercial banks, when you pay your taxes, those taxes go to the commercial banks, and it has deposits at the Fed.
When they want to spend, they use their deposit at the Fed. They write a check on the Fed to buy the things that the government needs.
Now, in between, when they take the money, the deposits out of the commercial banks, and they put them in the Fed, guess what happens to the money supply?
Well, because the banks lose reserves, those reserves go back to the Fed, the money supply shrinks.
Now, to prevent a deflation, what the treasury does is to make sure that funds are flowing,
that as you're taking funds out of the commercial banks to spend them through the Fed,
the same amount of funds are flowing into the commercial banks, okay,
so that the commercial banks reserves don't fall, so they prevent a deflation.
So my plan revolves around the treasury allowing the, when they're spending money,
allowing the reserves to decline and the money supply to shrink.
So let me give you an example of what I mean by that.
Let's say that you have $1,000 of fiat money in the economy.
It's all held in commercial bank demand deposits.
And that the required reserve ratio is 10%.
So in this economy, we have $1,000 of checking account money.
That's the money supply.
And $100 backing that up in the banks.
So it's 10% reserves.
If all banks are fully loaned out, they are holding $100 in required reserves in the reserve deposits at the Fed.
When the Treasury shifts a surplus of, say, $20 to its general account at the Fed, it will leave the commercial banks with only $80.
In other words, they have to pay the Treasury in their reserves, the reserves flow out, $20 of reserves flow out.
So now they only have $80 of reserves and they have to reduce the money supply by the same 20%.
Reserves fall from $100 to $80, so the money supply has to fall from $1,000 to $800.
They call in loans, okay?
If you've had money in banking, you know how this works.
So, what I advocate is that as this money supply shrinks,
the Fed will then mandate an increase in the required reserve ratio to 12.5%, okay?
And simultaneously, the Treasury will spend its surplus funds
By transferring them to the reserve deposits of the commercial banks, permitting them to meet the new reserve requirements with total bank reserves once again equal to $100.
In other words, what would happen is that this would shrink, this is the money supply, it would shrink from $1,000 to, that's in time T0, in time T1 it would be $800.
If this is the reserves, the reserves would shrink initially from $100 to $80.
But then the money would be spent and would get back into the commercial banks.
But we don't want them to use that extra $20 in the multiple deposit expansion to increase the money supply back to $1,000.
So the Fed would increase the reserve requirement up to 12.5%, meaning that now $80 or rather $100 would be necessary as money gets back into the commercial banks.
Okay, so this could be, you know, I'll just take it a few more rounds.
This could continue to happen. The Fed will then manda...
In the following year, so you knew this each year, in the following year the Treasury again runs a surplus of $20.
Okay, so this is a fiscal deflation. What it's doing is it's deflating, okay,
which at the new higher purchasing power of money exceeds in real terms the prior year's surplus.
So, in the prior year, the surplus was $20, but now, since prices are lower, since you have a lower money supply, you have a greater real surplus.
Following the same procedure of disposing of the fiscal surplus, the money supply shrinks by another 20%, so now it's down to $640.
The Fed then raises the required reserve ratio to about 15% so that the $100 now supports $640, and so on.
So you can continue to reduce the money supply at some, maybe a slow rate, year after year, okay?
And that would mean that there are less dollars to back by gold.
So when you go back to the gold standard, that would imply that you're going to go back at a lower gold price.
Now, this has a problem too.
The problem is, can we depend on the Fed to continue to engage in this policy of slowly contracting the money supply?
Money Supply, especially when we know that it's going to bring about a temporary recession, okay?
Initially, it'll bring about a recession, but as people get used to the, and businesses get used to the slowly falling prices that will result,
the depression will be a recovery in the economy.
So, excuse me, my worry is that the Fed will say, oh, we have a recession, you know, we have to stop this program and so it's the length of the program that's a problem,
There's another possible solution here, and I'll just mention it and then end, and that is in Argentina,
when Argentina had problems with its currency board back in the late 1990s, early 2000s,
What happened was, Argentina had approximately $70 billion worth of pesos and dollars.
Now, remember, Argentina backed their peso with American dollars.
So whether you had a dollar checking account, which you could have in Argentina,
or a peso checking account, the Argentine Central or the Argentine Currency Board had to pay off in dollars.
But there was only five billion dollars, because of the massive inflation had gone on.
There was only five billion dollars backing up the seventy billion dollars of deposits, okay?
So you have your much greater deposits.
Well, my recommendation, which I had written up for an Indian journal, was this.
Give people back, the Argentine government, in this case dollar standard, and at the same time, you have a situation where banks, when that money is put back into banks, have to back it up by 100% if they put it back in the checking accounts.
And as I said that the savings component or the investment component of the bank's portfolio,
whatever it doesn't have in reserves, turn that over to the people in the sense that make it into a mutual fund, okay?
The bank is bankrupt, the shareholders should have nothing, should have no assets, all those assets should go to the people, okay?
All right, so then I'll stop there and take about one or two questions.
On your first about the policy of the gold standard, I would add, number seven, a friend of mine said that the problem with the gold standard, gold, what choice is too much in value?
So I tried to explain to him, no, what is gold?
going up and down. Once you link the dollar to gold, then gold is the money, and it's
simply the supply and demand for money that determines the value of gold at that point,
and it doesn't fluctuate wildly at all, because the supply of gold doesn't change very rapidly,
as we know, and people's demand for gold, if they trust the money, that doesn't change
very rapidly. It changes every year as the economy grows, it changes slowly, and prices
The people, it seems to me, in the European Union countries are still over from their local currency to the Euro pretty readily, I think. I'm not sure of that.
But you seem to be concerned about people's ability to change from dollars to ounces in gold.
From the local currency to the euro, it's pretty regular, I think. I'm not sure of that.
Yes.
But you seem to be concerned about people's ability to change from dollars to ounces to gold.
Well, that's a very good question.
The reason why they did it is because it didn't contradict the regression theorem.
The euro, there was an exchange rate between the euro and each individual currency.
So, in other words, the euro was based on the various national currencies, and they were fixed exchange rates, so you easily passed from, let's say, the franc to the euro.
But if you just put euros into circulation, print them up, and there was no exchange rate, transitional exchange rate to the existing currencies, no one would accept the euro.
With gold, it's a little bit better because gold is bought and sold in terms of dollars, but my concern is that people are not going to calculate in ounces of gold.
They don't look on it as money. Anyone who remembers gold as actually in circulation, if there is anyone, it's a very small portion of the population.
So, not having had recent experience with gold as money, people will still look on paper dollars as money and I don't think they're going to take this gold that they're given or sold and put it in banks and start gold banks and so on.
I think they're going to continue to operate in dollars. That's why I think the parallel gold standard will not come into operation.
It's a good start because you get rid of the Fed, you freeze the amount of dollars and so on.
I feel like the swing in public opinion that a planet that has the first step abolished at that would, you're already asking so much of people for gold, changing of opinion, is it so much to ask that they consider gold to be money?
I mean, if the Fed goes, it's one institution, it goes, but they don't run into the Fed,
they don't use the Fed as an institution on a daily basis, they do use dollars on a daily basis.
And I think, psychologically, that means a lot.
Now, we're just trying to get this, I mean, there's a second problem, which I won't go into,
but we're just trying to figure out the best theoretical way to go back, given our institutions.
Then there's the political problem, okay? That's a separate issue which, you know, you can write a lot on that.
But I think we ought to get straight what the best practical way to go back is if there were no political barriers, okay?
Okay, I'll stop here. Thanks.