Saturday, December 20th, 2014 MST

Book Review: The Case for a 100 Percent Gold Dollar

Some half a century ago, Murray Rothbard produced the essay The Case for a 100 Percent Gold Dollar, which provided the answer as to why our past gold standard had failed and how it could be corrected.  In 1971 the United States officially broke the last remaining link between the dollar and gold.  Since then the dollar has existed as a fully fiat currency whose supply has been expanded at a continually increasing rate. Why should this be of concern to the average person?  Because, as Rothbard points out, money and freedom are fundamentally related.

Money is the heart of any economy.  In fact, it is the very basis of modern civilization itself.  Without an effective medium of exchange, society cannot advance beyond a primitive barter system.  Things that we take for granted, such as specialization of labor – and its associated advancements in technology, are all enabled by the existence of money.  Just imagine the plight of a violin teacher in a barter economy.  Every time he requires food, he is dependent upon finding a farmer who desires violin lessons.

Money then is the lifeblood of an economy. When the government comes to control the money and its creation, it effectively comes to control society itself.  The ability to create new money at will is done so for the benefit of the government and its favored citizens and at the expense of everyone else.  The private sector is deprived of resources and capital while the purchasing power of its savings are continually eroded.

Rothbard’s solution to this problem is a 100 percent gold dollar.  In this arrangement gold backs not only the physical currency in circulation but dollar denominated bank credit as well.  The gold standard employed in the United States prior to 1933 did not account for the expansion of bank credit.  This is a critical difference as the bulk of the US money supply exists in the form of banking accounts and not physical currency.  When banks issue credit they effectively create new money out of thin air.  When they are allowed to do this, the entire supply of dollars is increased beyond the amount of gold that backs it.  Eventually the imbalances become so great that calls for redemption by holders of dollars threaten to drain the treasury of all of its gold.

The crux of Rothbard’s proposal is that our system of fractional reserve banking is incompatible with a gold standard.  Under the current system, deposits in savings and checking accounts are available for full redemption on demand by depositors.  At the same time, almost all of those deposits have been loaned out for repayment at some point in the future.  How can both of these situations coexist?  The answer is they cannot.  The bank relies on the fact that, under normal circumstances, only a small fraction of the money deposited will be required for withdrawals at any given time.  As long as the reserves are large enough to cover those transactions, then the operation can continue.  This arrangement in any other business, Rothbard notes, would be considered fraud.

To be compatible with a gold standard, all deposits that could be withdrawn upon demand would have to be covered 100 percent by reserves at the bank.  Deposits that are loaned out by the bank would not be redeemable by the depositor until such time as they are paid back.  By enforcing these subtle requirements, dollars are not allowed to do double duty within the money supply.

The far more radical implication of such a reform – by today’s standards anyway – would be the effective elimination of the Federal Reserve.  Contrary to its stated mission of fighting inflation, the Federal Reserve serves as a backstop to maintain the inflationary system of fractional reserve banking in times of crisis.  In the past, a run on a bank resulted in its failure as its insolvency was exposed.  The role of the central bank is to act as a lender of last resort under such circumstances – ultimately resorting to its ability create new physical currency if necessary.

The purpose of a gold standard to is to provide stability to the money supply, thereby preventing theft through inflation and placing limits on the power of government.  What Rothbard makes clear is that the existence of a gold backed dollar alongside a fractional reserve banking system reduces the notion of a gold standard to fiction.   It begins the ticking of a time bomb that will ultimately lead to its destruction.  Although such discussions may seem relevant only to those interested in monetary theory, they are quite useful in making sense of our current situation.  At the heart of the expanding global financial crisis is the failure of its underlying monetary system.  The battle between gold and the banking system will play a central role its resolution.  Gold and silver investors will benefit from understanding the stakes that are in play.

14 Responses to “Book Review: The Case for a 100 Percent Gold Dollar”

  1. Lawrence Grover

    The way I see it..who has all the gold?..some say that Fort Knox is empty..when gold was confiscated in 1933, much of the gold held by Americans found its way to Europe..how much is held by the United States Treasury?..how much is owned by small time investors in our country?..how much by the uber-rich international bankers?..perhaps it may be better if the Fed were gradually phased out, and, the money supply printed by the Fed, was gradually replaced with “greenbacks” issued by the US government. Fractional Reserve Banking is the most sinister criminal enterprise ever conceived by man.

    Reply
    • Bill Haynes

      It is interesting that when foreign media write about “US gold holdings,” they talk about how much the Federal Reserve owns, not the US Treasury. Although I’ve never looked into the issue in detail, I suspect title to the gold (at least most of it) passed to the Fed over the years.

      As for the Fed being sinister, that’s in agreement with Murray Rothbard’s writings about the Fed. His “Case Against the Fed” is another excellent book.

      Reply
  2. Jeff Simberg

    Bill
    Do you think we will ever have a silver or gold back currency? I’ve heard the USA (I don’t know if they meant the govt. or the Fed.) has about 40 billion dollars of gold in Ft. Knox.

    Reply
    • Bill Haynes

      I’m doubtful about another gold standard in the U.S.

      We had one, but the politicians abused it for the benefit of the big bankers. First, they installed a central bank (the Fed) to inflate our currency, and then they devalued the dollar before finally denying Americans to even own gold bullion.

      Now, their schemes are coming to light, and more Americans are learning the truth about central banks and fractional reserve banking, which permits banks to inflate the currency right along side the Fed.

      We trusted them once. Will we trust them again when this financial crisis finally washes out? I don’t know. I suspect that Ron Paul’s concept of “competing currencies” will gain strength and we will see multiple currencies. This may sound bizzare to people who have known only dollars, but we have multiple choices when it comes to other items, why not currencies?

      As for the gold at Ft. Knox, offically the US has about 261 million ounces, which, at today’s prices, is worth about $373 billion. Title to the gold is not clear. Some say the Treasury has title; others say the Fed owns it.

      Reply
  3. Stan

    Under the government abuse of the previous gold standard, the price of gold was artificially frozen [at a low price considering the inflation of the 1920s] so that dollars were exchanged, depleting the gold. [To stop the run] the government confiscated gold, and removed the gold standard.

    With an established gold standard, the price of gold should not be frozen, to provide a market value for the gold. This will reduce the money supply, prevent inflation, and remove fiat money printed by the Fed. Money deposited in the banks would thereby increase in value, to provide the resources to buy more goods.

    Therefore, the demand for goods would increase, supply would compensate with increased productivity. Balance of payments would reverse for the U.S. Instead of being consumers, we would be providers to the global economy.

    Reply
  4. Buy Gold UK

    The only nation capable of pulling this off is America, providing the people vote against the Obama, Bush and Clinton types of politicians who all seem to promote the same agenda.

    Reply
    • Bill Haynes

      A return to the gold standard could happen only if there is total collapse, which, considering what the Fed is doing may be a possibility.

      Reply
      • Marvin Yahnke

        From the time that the Federal Reserve Act took place in 1913, until 2010, Swiss America’s book claims that the purchasing power of the dollar has declined 98%. Now that it is 2013, and the increase in the money supply has accelerated since then, one would conclude that the game is about up and that the collapse of the dollar is imminent.

        Do you wish to refute your competitor’s conclusion about the extent to which the value of the dollar has been inflated away in the last 100 years? Do you have research on prices over the last 100 years that would allow you to logically reach a different conclusion? I’m all about facts, Bill. The first man to speak always seems right until his competitor gets up to refute him. Have at it!

        Reply
        • bill

          What in Paul’s review of this Murray Rothbard classic suggests that the dollar has not declined in value 98% since the Fed’s inception? That the dollar has declined in value at least — if not more — than 98% over the last 100 years is fairly much an accepted fact. Even the proponents of fiat money do not bother to attempt to refute that.

          To conclude that a collapse of the dollar is imminent because the dollar declined 90% from 1913 through 2010 ignores the fact that a currency does not decline in value 100% until it is completely refuted and no longer used. The dollar is a long way from collapsing. That is not to mean that it will not continue to be debased but that it will continue to be used, albeit at a lower value, for a long time.

          Because of the high degree of specialization of labor today, money is essential to economy, even a bad money such as the fiat dollar.

          BTW, you say “Swiss America’s book.” Are you talking about the Swiss America that marks up it products as much as 100%?

          Reply
  5. John Cox

    If we ever did go back to the gold standard, what would happen to the price of gold in current dollars? Where do you see gold heading over the next five years versus silver? The ratio is historically still out of kilter. Also what ratio of gold to silver should investors have?

    Reply
    • Bill Haynes

      A gold standard requires a fixed dollar price for gold. The price would have to be at a level that paper dollars holders would believe that their dollars could be redeemed. Further, for a gold standard to be implemented, the people would have trust the government to stand by its promise to redeem. To regain the people’s trust may be harded to do than the start redeeming.

      It appears that no workable solution to deficit spending is on the horizon, which means that the price of gold and the price of silver cannot be estimated. No way of knowing how many dollars the Fed will print.

      The price ratio of gold to silver is headed lower. This is not to say that it cannot go higher before going lower, but the long-term outlook is for a lower gold/silver price ratio. Before this is over, I would not be surprised to see a ratio of 20:1, maybe even 15:1.

      Reply
  6. Paul Carter

    I think one of the great economic lessons of history is that all governments will eventually steal from its citizens through inflation, regardless of whether a gold standard is in place. So to that end, I’m personally not really interested in any promises of redemption in gold as they are simply retracted in times of monetary crisis anyway.

    I believe the ultimate solution will be provided by the free market. Privately run vaults will contain precious metals that are owned by its customers. Physical metal would leave and enter through fixed weights but once digitally represented in an account, any amount could be used in a transaction. The metal could be converted to any fiat currency on the fly to cover individual purchases via a debit card system.

    Eventually, with a reform of legal tender laws, employers could have gold accounts and pay employees wages that are fixed by weight of metal. Since almost all of our transactions these days are performed electronically, nothing would change much from an end user perspective. Under such a system governments could debase their currencies to their heart’s content while individuals would be largely insulated from the effects.

    Ron Paul’s Free Competition in Currency Act for 2011 would make such a system legal.

    Reply
  7. Major Wiley B. Channell USMC (ret)

    People of the world do and will determine the value of gold or silver or gold and silver it has nothing whatever to do with the federal government or the federal reserve system and the central banks.

    Buying and selling trading and bartering is a universal phenomenon for which no government or entity such as the central banks will ever control for the instinct for survival is stronger by far than any one group thinking they will have the power to control.

    Printing of fiat monies and the act of inflation it causes will only last for its season which is fast becoming to and end.

    Accountability will be dramatic.

    Reply

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