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Achieving a Stable Dollar

I gave the following talk this morning at the Heritage Foundation Conference on a Stable Dollar, held at the Ritz-Carlton Hotel in Arlington, VA.

I’m going to talk about some of the choices we face among monetary regimes, including choices among various types of gold standards. But let me begin with a story.

One day I saw this guy about to jump off a bridge. I said to him, "Don't do it!" He said, "Why not? Nobody loves me." I said, "God loves you. Do you believe in God?" He said, "Yes." I said, Me, too!”

"Are you a Christian or a Jew?," I asked. He said, "A Christian." I said, "Me, too! Protestant or Catholic?" He said, "Protestant." I said, "Me, too! What franchise?" He said, "Baptist." I said, "Me, too! Northern Baptist or Southern Baptist?" He said, "Northern Baptist." I said, "Me, too! Northern Conservative Baptist or Northern Liberal Baptist?"

He said, "Northern Conservative Baptist." I said, "Me, too! Northern Conservative Baptist Council of 1879, or Northern Conservative Baptist Council of 1912?" He said, "Northern Conservative Baptist Great Lakes Region Council of 1912." I said, "Die, heretic!" And I pushed him off the bridge.

I tell this story – borrowed from the comedian Emo Phillips—in order to emphasize that in discussing the choices among types of gold standars I don’t intend to declare anyone a heretic. If you think that the questions of whether and how to completely privatize money can wait until after we re-establish a gold dollar, I don't propose to push you off the bridge.

What should Congress do?

1) Immediately allow private individuals to put themselves on a parallel gold standard if they so choose. Ron Paul’s HR1098, the Free Competition in Currency Act of 2011, is one approach: ensure the enforceability of contracts denominated in units other than fiat dollars, remove taxes on gold and silver coins that FR notes do not face, and remove federal statutes that criminalize the victimless activity of minting distinctive private pieces of metal intended to circulate as money. (See my testimony on the Act at

2) Re-establish a gold definition for the US dollar. Why isn’t free competition in standards enough? Incumbency advantage / network properties. People don’t abandon pesos until inflation is very high, measured per month rather than per year.

3) Direct the Fed to withdraw most or all of the $1.6 trillion in excess reserves that the Fed is currently paying banks to hold (eliminate interest on reserves and sell the MBSs that the Fed acquired in QE1), then redeem FR liabilities in gold at the current market price.

4) There is more than enough gold in Fort Knox, at current prices, to provide banks with sufficient reserves for backing the current money supply. Redeeming FR liabilities at the current price of gold is necessary to avoid both painful transitional deflation (as experienced in Britain in the 1920s, after it returned to gold at a parity too high for the price level) or transitional inflation (from returning at a parity too low). Here are the relevant numbers: Fort Knox contains 245.2m fine Troy ounces of gold. At $1615 / oz., that gold is worth $396b. This well exceeds currently required US bank reserves, which are only $83b. Current M1 is $2105b. Dividing the gold stock value by the M1 value, we find the available reserve ratio: $396b / $2105b = 18.8%, a gold reserve ratio more than sufficient for a stable monetary system, based on historical evidence.

5) Why not establish 100% reserves for M1, as some advocate?

a. At today’s price of gold, the difference between M1 (~$2.1 t) and the current stock of Ft. Knox gold (~$400b) is ~$1.7t. The US taxpayers would have to buy $1.7t worth of gold, a very expensive proposition.

b. Or, to back M1 100% with Fort Knox gold, the US dollar would have to be defined such that 1 oz. Au = $8479. This is not a costless fix. At that gold/dollar rate, with our current level of goods prices, gold would come flooding into the US. The purchasing power of $8479 available in the US for one ounce of gold, would greatly exceed the purchasing power of one ounce of gold elsewhere in the world. US citizens would again end up paying about $1.7 trillion in exports of goods in exchange for the incoming gold. On top of that the US would suffer massive price inflation in the transition as M and P rose to support the high dollar price of gold.

c. Plus, with 100% reserves, circulating banknotes are infeasible without an ongoing taxpayer subsidy to cover storage costs. Warehouse owners couldn’t collect storage fees on bearer notes given that the holders are anonymous, because they would know whom to assess for storage costs.

6) Once the Fed’s liabilities are converted into gold, my own preference is to decommission the Fed.

a. We already rely on commercial banks to issue most of M1, which consists of dollar-redeemable checking deposits. Let them issue gold-dollar redeemable circulating currency notes as well.

b. Privatize the Fed’s other useful functions by returning them to private CHAs: payments clearing and settlement, membership rules for solvency and liquidity, lender of last resort (not bailouts, but in the true sense of temporary liquidity support to solvent banks).

c. No monetary policy needed once we’re on a gold standard. Retaining the FOMC to “manage” the gold standard would do more harm than good. The classical gold standard of 1879-1914 functioned quite well without a central bank in the US, thank you very much. Despite the financial panics, which could have been avoided with banking deregulation, the business cycle wasn’t worse than under the Fed’s watch. For the evidence see George Selgin, William Lastrapes, and Lawrence H. White, “Has the Fed Been a Failure?,” available at in the Cato Working Papers series.

d. Why end the Fed? Wouldn’t a gold standard constrain it strictly enough to render it harmless? It would if the Fed would play by the “rules of the game.” But it wouldn’t. Note that the ECB had a constitution that was supposed to constrain it to the single goal of 2% inflation. That constraint lies in tatters—Eurozone inflation is running close to 4%–as the ECB loads up on junk sovereign bonds to help Greece, Ireland, Portugal, Spain and Italy.

e. In general, central banks face temptations to pursue monetary policies that are inconsistent with redemption for gold at a fixed rate. They can alter the redemption rate at will, and can do so with legal impunity. Private banks historically have a better track record for maintaining the gold standard.

Closing remark: Now that fiat money and central banking have failed, let’s try letting the monetary system regulate itself.

  • jehoceanwave

    Dr. White, how fast could your list of five recommended actions be implemented if there was the political will to do so? one month, one year? Could it be technically be possible to implement overnight or are there parts that require a transition time period?

  • Richard Schulman

    Very nice exposition. Please have a try at getting it into the Wall Street Journal as an op ed!

    I'd like to ask a few questions that, admittedly, are jumping way ahead of current realities.

    1) If the US dollar were to be pegged to gold in the manner you describe above, it would become the de facto unit of account for other domestic competitive currencies, would it not?

    2) Whereas if the dollar remained a fiat currency managed by the Fed but in competition with other legal currencies under HR 1098, we'd be facing multiple competitive domestic units of account, at least for a transitional period, would we not?

    3) If the US dollar were put on a gold standard again, wouldn't the secondary fiat reserve currencies, the euro and yen, have to follow suit, or face capital flight to the dollar area?

  • Paul Marks

    The joke was a good one, but it does not (as I think Larry White would agree) alter the facts. First the title – a "stable" Dollar is not in the gift of humans, a "stable price level" should not be a goal of policy (if prices fall over time as people find cheaper ways to provide goods and services – this is a GOOD thing).

    On restoring freedom of contract – agreed. Buyers and sellers should be allowed to make contracts in what they voluntarily agree upon.

    Gold (of certain purity), silver (ditto), bits of paper – what they like. It is their choice (or should be).

    Defining the Dollar as a certain weight of gold (of a certain purity). Well I have no objection to that – but then the government must actually have the gold it would be claiming to have.

    I do not know how much gold there is at Fort Knox (or in the vaults of the Federal Reserve in New York – and a lot of that gold belongs to other governments, although that did not stop the American government taking gold that belonged to the Swiss and other governments during World War II…. but that is another story).

    However, the amount of gold the government owns divided by the number of Dollars can not be a very large amount (a tiny amount would be my guess – a speck of gold).

    Even if a "Dollar" (in relation to the gold) was held to be just notes and coins (with all "broad money", bank credit, accepted to be a worthless bubble), I doubt that the amount of gold per Dollar would be very large (still just a tiny bit – perhaps one could enclose it in clear plastic).

    It could work – the banking system might well collapse (but that is, most likely, going to happen anyway, whether franctional reserve banking, theoretically, can survive – this particular form of fractional reserve banking most likely can not, the credit bubble nature of the "financial system" has reached an extreme level). So yes the government could declare that its gold reserves, divided by the number of paper Dollars, were the value of the Dollar.

    As for talk of a gold STANDARD.

    Oh dear – that takes us back to credit money bubbles (as with the late 1920s).

    "Standards" just confuse the issue. Either the gold is the money or it is not the money.

    If it is the money then the value of the paper Dollar is the government gold reserve (however much there actually is a Fort Knox – and it is funny that so few people are allowed to visit, even key Congressmen have been turned down) divided by the number of paper Dollars.

    That is it – no more (not a grain more).

    By the way I fully accept that some clever scheme is not technical "fraud" (as government and its courts define what technical "fraud" is), but that does not mean that clever schemes are good things.

    I repeat – if you want to restore the Dollar to being a certain weight of gold, then you must measure how much gold the government really has, and then divide it by the number of paper Dolllars (and the credit ones as well – if you wish to do that, which I do not).

    That is how much gold a Dollar would be worth – not a grain more.

    If you do not wish to do this – then stopping talking about gold.

    Implying that the Dollar is gold when it is not (i.e. saying the Dollar is worth X amount of gold – when the gold is not really in the government vault) is not helpful, indeed it is very unhelpful (as it confuses everything).

    As for the banks……

    The Federal Reserve has massively increased the monetary base in recent years (not gold – as the Dollar has nothing to do with gold, the fiat monetary base) if this is not enough to bail out the banks……. well it is time they were no longer about. Certainly the Federal Reserve should be abolished – the banks have had all the corporate welfare, they must have no more.

    "You are very casual about all this Paul – have you know idea about the level of human suffering the collapse of the financial system will cause".

    I have quite a good idea – and I am (unfortunatly)a person with quite a lot of experience of suffering myself.

    My words, I admit, are casual – but my feelings are not casual. I do not trust myself to fully express my feelings in words.

    I will just confine myself to saying that I wish people would stop playing games.

    A paper Dollar – fiat money (based on government orders, fiat, force and fear).


    The Dollar being something (say the gold reserves) the governement actually has.

    Not some notional figure plucked from nowhere.

    Government Dollars can not be gold that the government does not have.

    Personally I would like the government out of all of this – with private mints returning (which were popular and of good reputation, before the government banned them in the 1850s).

    But if the government wants to produce Dollars – then at least the messing about should stop.

    No more game playing, no more deceptions.

    If the government claims (for example) that its Dollar is worth X amoung of gold it must have this gold. Or it must shut up and STOP TELLING LIES.

    As for banking.

    Without going over old ground too much……

    If 100 Dollars is lent out then someone (or more than one person) must really have saved this 100 Dollars (worked for it and then chosen not to spend it – to GIVE IT UP instead, so that it could be loaned out, in the hopes that it will be returned with interest, when and IF the loan is paid back).

    Loaning out more money than has really been saved is not really "fractional reserve banking".

    "Fractional reserve banking" implies that you have a certain amount of savings and loan out a certain percentage of them (say 90%) keeping 10% as the "fractional reserve".

    Not that you lend out MORE money than was really saved (a sort of perpetual motion machine – accept that it speeds up).

    That is something else – although it goes by the same name of "fractional reserve banking".

    "It is not fraud Paul" – I accept that (see above).

    But that does not mean that people who (for example) treat cheques as new "private money" (not as a way of requesting the moving of money from one account to another) are doing something good.

  • 1) O.K.

    2) I don't want gold as a legal tender, i.e. I don't want to be compelled to pay taxes (or any other obligation) in gold or banknotes promising gold. If we're redefining the currency in which the Treasury will collect trillions from taxpayers, I want a default first.

    3) and 4) Free banks may hold any reserves they like, but gold and promissory notes for gold is not my choice of a standard, so I don't want to do business with the banks replacing their FRN reserves with gold reserves. If other people want gold as their standard of value, that's their business and none of mine.

    6) O.K.

    In general, I'm not interested in a top down monetary reform. I don't want to replace the fiat dollar with a statutory gold standard or any other statutory standard. I want money to emerge from the bottom up through markets. When you talk about what the Congress should do, you aren't talking about free banking.

    The fiat dollar has an incumbency advantage, and I don't want this advantage transferred to gold by statute. I want the value of Treasury securities inflated away as people abandon the fiat dollar in favor of other currencies in a free market. If most people choose gold, so be it, but I don't want to be forced to seek gold by the necessity of paying taxes and other obligations imposed by statute.

  • Paul Marks


    People should be allowed to make voluntary contracts in any form of money that both buyers and sellers agree to.

    If they choose gold – that is fine.

    But if they choose silver (or bits of paper) that is fine also.

    The key point (totally missed by five of the Supreme Court justices in 1935) is that voluntary contracts should be upheld – not forbidden (let alone retrospectively voided – as F.D.R. did with private gold clause contracts in 1933).

    After that principle is accepted the financial system will evolve as people wish it to evolve.

    For example, if people do not wish to use gold as money – they will not.

    But by the way…..

    Please avoid the word "standard" in monetary matters – it invites fraud (or dishonesty – if people object to the word "fraud").

    For example, either gold is money or it is not.

    Saying the money is on a "gold standard" just confuses the issue.

    Just as saying "the Dollar should be legally declared to be worth a certain amount of gold" – what is this supposed to mean?

    After all F.D.R. declared that the 35 Dollars were worth an ounce of Gold – but that did not mean that the government would give you an ounce of gold for 35 paper Dollars (the thing was just a criminal farce).

    If the government says "we have such and such an amount of gold" (and actually proves they have got it – a "little" point that is often overlooked) then they might be able to honestly say "these bits of paper are worth such and such an amount of gold – because they are certificates of ownership of this gold we have got".

    If not it is all just a deception – a con trick. And such "confidence" games always end in tears.

    I repeat – people can use bits of paper as money if they wish.

    But that must be a matter of VOLUNTARY CHOICE – not a government (or banker) con trick.

    "But what should the government collect its taxes in?"

    Well if there must be taxes then the government should choose to use what people are using as money.

    After all "gold and silver coin" were what most people in the American colonies chose to use as money (when local legislatures allowed them to do so) and many of the coins were from all over the world.

    Even the word "Dollar" is not British (let alone American), it is a corruption of the name used for Hapsburg coins.