Does it really matter whether the US Government sells its gold?

Recently, The New York Sun posted a response by Ron Paul to the question of whether the US should sell its gold to pay its debt. His typically principled answer was that it would be “a good and moral decision. An individual would have to do the same.” What followed was an outpouring of protestations from proponents of both fiat currencies and sound money alike.

Why are so many people from both sides of the monetary debate against such a proposal? The answer is simple: Everyone understands that gold is the basis of the global monetary and banking systems regardless of whether there exists a formal stated relationship. The US Government’s ability to print the world’s reserve currency, and run massive deficits every year, is at least in part due to its substantial gold reserves. From that standpoint, the administration’s outright rejection of such a proposal makes perfect sense.

What ultimately makes less sense is the outrage coming from the gold community. Of course I understand why some are upset. They envision a future return to a gold standard in which the US Dollar can be formally redeemed for some fixed weight of gold. Something that would be impossible if the Treasury were to sell the gold that would be used for such a purpose. But, let’s back up for a moment.

Why is a Dollar gold standard even desirable? The usual answer is that it prevents inflation of the money supply and the theft of purchasing power. It also returns power to the American people who can effectively rein in reckless fiscal policies by exchanging all of their dollars for gold. All worthy goals, I agree. But, the fact is we’ve already done that experiment, and it was a hopeless failure.

The first fundamental problem is that our system of fractional reserve banking is incompatible with a gold standard. The majority of the nation’s money supply exists not as physical currency but as credit created by banks when making a loan. New gold does not appear at Fort Knox every time a bank lends out its demand deposits. Making a bad system worse, the creation of the Federal Reserve in 1913 unleashed an engine of inflation so powerful that the gold standard was helpless against it. The roaring twenties were testament to the size of the credit expansion as was the inevitable bust of the thirties. This brings us to the second fundamental problem: Governments always renege on obligations that threaten their power.

Not only did the federal government end the Dollar convertibility to gold in 1933; they actually made it a felony to even possess gold. In fact, much of the gold listed on the Treasury’s balance sheet today is gold that was taken from the American people after the gold standard had failed. So what good is a gold standard again? And why is it so important that the government retains its stolen loot?

The reality is, if you want to stop theft through inflation, and put the reins on out of control federal spending, then you are simply going to have to get the US Government out of the money business and turn it back over to the free market where it belongs. Fittingly enough, this is exactly what Ron Paul’s “Free Competition in Currency Act” sets out to do. It accomplishes this through three primary initiatives: First, it repeals legal tender laws which allows all debts to be settled with Dollars even when contracted in gold; second, it ends the government monopoly on coining money; and third, it eliminates capital gains taxes on gold and silver.

With these obstacles out of the way it is then possible for individuals and businesses to use whatever money they see fit for their transactions.  How would the ‘barbarous relic’ of gold be used in the digital age? Quite easily, as it turns out. Already, around the world, private companies are offering Digital Gold Currencies (DGC). A 100% backing is provided by gold stored in vaults. Clients own the gold in their accounts and may transact directly with other account holders in any quantity they like.

As the DGCs grow in popularity, expect to see a debit card system put in place where retail purchases can be made using gold. Eventually businesses transacting in gold will offer to pay employees with gold, digitally, in their accounts. At that point, fiat money printed by central banks will suffer from dramatically reduced appeal.

Of course individuals will have to perform due diligence in selecting what money they choose to use. But that is part of the checks and balances of a free market. Without this, moral hazard creeps into the system. Companies will compete, in part, on the basis of transparency and accountability. Even the hint of impropriety could be disastrous for a company as it could literally lose its client base overnight. No system is perfect, but free market money offers Americans a much better chance of retaining their purchasing power than what is currently provided by the US Government and the Federal Reserve.

We have lived in a system of government issued money for so long now that most Americans don’t even realize there is an alternative. Individuals calling for a return to the gold standard don’t realize it, but what they are really calling for is free market money, and as such, it is far more important for individual Americans to own gold than it is for their government to do so.