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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.