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End The FED. Get The Gold. by Gary North http://www.lewrockwell.com/north/north895.

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End The FED. Get The Gold.


by Gary North
by Gary North
Recently by Gary North: Ellen Brown Responds to My 31 Historical
Criticisms. Now It's My Turn Again.

How can we end the


Federal Reserve
System? Prior to
2008, this question
would have been
entirely hypothetical.
It is still entirely
hypothetical, because
the Federal Reserve
System is in charge of
monetary policy; the
Congress of the
United States is not.
Certainly, the voters
of the United States are not. Nevertheless, I wish to indulge myself in a
completely hypothetical speculation. I wish it were less hypothetical
than it is, but things are better than they were before 2008. "All
hypothetical possibilities are equal, but some are more equal than
others."

Let us assume that the voters of the United States know what the
central bank is. Let us also assume that they have decided that the
nation would be far better off if control over monetary policy were
removed from the Federal Reserve System, meaning removed from the
cartel of large banks which the Federal Reserve defends. Let us also

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assume that somehow, by means of political mobilization not presently


visible, they convinced the majority of both houses of Congress to pass
a bill abolishing the Fed, and the President of the United States signs
the bill into law. What should the law look like?

The law would be very simple. "The Federal Reserve Act of 1913 is
hereby abolished." This wording leaves nothing to the imagination.
Anyone can understand this. There do not have to be any additional
qualifications, exemptions, or anything else. There is no need for an
army of lobbyists to recommend the insertion of all kinds of special-
interest language.

WHO GETS THE GOLD?

There would have to be a second law. This law has to do with the
ownership of the gold that is supposedly stored by the Federal Reserve
System on behalf of the United States government. The law would
specify that the Federal Reserve System must return all of the gold
belonging to the United States government at the official price of
$42.22 per ounce. The gold would then be transferred from the Federal
Reserve Bank of New York to Fort Knox, Kentucky.

To pay for this gold, United States government would issue Treasury
bonds to the Federal Reserve System. Where will the Treasury get the
money to pay off these bonds? Here is where the fun part begins.

The Treasury will sell the gold in the form of tenth-ounce gold coins to
any American voter at a price of $42.22 per ounce. Every American
voter would receive a tax-free option to purchase tenth-ounce gold
coins at a price of $42.22 per ounce.

How many coins would each voter be allowed to


purchase? This would be determined on a strict
mathematical formula. The total quantity of gold
would be divided into tenth-ounce coins. This
gold would be 90% fine. The other 10% would be
hard metal, thereby enabling the coins to be used
in circulation. This was what the old double End The Fed
eagles were back in 1933. Ron Paul
Buy New $9.73

Every American voter would receive the same


quality of coins. Rich man, poor man, beggar
man, thief: everybody gets the same number of
Privacy Information
tenth-ounce gold coins. It would be about ten
coins. There would have to be an audit.

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Of course, they could not be sent the coins immediately. The coins
must first be minted. Voters would be issued IOUs to their gold coins.
They would receive a guarantee of purchase within one year of the
transfer of the gold to the Treasury.

The United States Mint could not possibly fulfill this task. It could not
produce this many coins. The coins would be produced by private
mints. The coins would be produced according to rigorous standards
enforceable by the government. There would be no mixing of base
metals to such a degree that the coins would be anything less than 90%
gold.

The government would pay a small fee per coin to private companies
producing the coins. The private mints could lawfully put their own
names on the coins, but every coin would have to say "1/10 ounce of
gold, 90% fine."

This would get the government out of the money business. The Mint
would cease producing gold coins. The government would cease
authorizing gold coins. All that the government would do would be to
establish standards regarding the testing of the weight and fineness of
the coins. It would enforce these standards in courts of law.

Every American voter would be allowed to sell all of the gold coin
options to anyone. In other words, if the price of gold is $1,342.22 per
ounce, he would be allowed to sell his gold, pay the Treasury $42.22
per ounce for whatever gold he had received, and pocket $1,000 per
once, tax-free.

The reason why I think every American voter ought to be allowed an


equal share of all the coins is because that would create considerable
political pressure on the government to get that gold out of the hands of
the Federal Reserve System and into the hands of the voters. If we are
going to do this, we might as well let everybody have a piece of the
action.

The government would pay off the bonds with money from the sale of
the coins. The Federal Reserve could then buy more bonds or not. The
reason why the government should pay the Federal Reserve $42.22 per
ounce is because the Federal Reserve paid the government $20 an
ounce back in 1933. That money was spent into circulation. The
contraction of the gold supply was offset by an increase in the money
supply. In other words, the decision in 1933 was to keep the money
supply stable. This is a good policy.

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The transfer of the bonds to the Federal Reserve would be neither


inflationary nor deflationary. The Federal Reserve would be allowed to
hold onto Treasury bonds to compensate it for the loss of the gold. This
would keep the monetary base from contracting. The goal is not to
create mass deflation.

The Federal Reserve System would then be holding a pile of


government IOUs. If the Federal Reserve follows deflationary policies,
the United States government will then default on its IOUs, leaving the
Federal Reserve holding a portfolio worth nothing. On the other hand,
if the Federal Reserve inflates the currency, it will be sitting on top of
the pile of IOUs to be paid off in money worth less and less. So, the
Federal Reserve’s policy-makers will have to make a decision. Do they
want to be stiffed by the government directly, or do they want to be
stiffed by their own monetary policies? This is a tough decision. (This
is the same long-run issue that faces Americans today: default vs.
hyperinflation.)

What I am proposing is an exchange of assets exactly like the Federal


Reserve pulled off in 2008. It sold liquid Treasury debt for illiquid
toxic assets owned by the largest commercial banks. It did the
exchange at book value, not actual market value of the toxic assets. So,
the Federal Reserve System has already established the precedent that
it is willing to exchange liquid Treasury assets for other assets that are
worth far less.

Obviously, gold at $42.22 per ounce is not the free market price. The
Federal Reserve will receive nice, liquid Treasury debt, and it will
surrender a large pile of the barbarous relic. If the ideas of John
Maynard Keynes are true, this is a very good deal for the Federal
Reserve System. Let the FED have it, good and hard.

A TRANSFER OF AUTHORITY

The main goal here is to get the gold back into circulation in the form
of coins. It must not be sold to investors in the form of large bars. The
goal is to reestablish gold as a popular form of currency in the general
economy. The best way to do this is to let Americans buy gold at
$42.22 an ounce, but only in the form of tenth-ounce gold coins. The
gold was confiscated in the form of gold coins in 1933, and this is the
form in which it should be returned to the American voters.

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The United States government confiscated the


gold in 1933. It presently owns the gold based on
massive theft. My proposal is a form of
restitution. The agency that stole the gold will
return the gold to the American voters, and it will
do so in such a way that the American voters The Case Against the Fed
become the beneficiaries of the discrepancy Murray N. Rothbard...
between the official price of gold and the market Buy New $9.95

price of gold.

There is no justification for the stolen gold to


remain in the possession of the United States Privacy Information

government. There is surely no justification for the stolen gold to


remain an asset of the Federal Reserve System. My conclusion is
simple: return the stolen goods to the judicial heirs of the victims.
These are American voters.

This would restore a gold coin standard, or at least move in that


direction. The proper gold standard is a gold coin standard. It is a
standard in which gold coins are commonly used in the marketplace.
People will become familiar with gold coins.

THE VETO

This transfers the veto over commercial bank policy into the hands of
those individuals who own the gold coins. If they turn the gold coins
over to a commercial bank in exchange for an IOU from that bank, and
the bank abuses the privilege of expanding the number of IOUs to gold
coins beyond the number of gold coins held in storage by the bank,
individuals can then take their IOUs down to the bank and demand
payment in gold coins. This is the great veto of the public over the
policies of the banks.

Governments want to avoid this system for obvious reasons.


Governments do not want the general public to have a veto over its
fiscal policies, and gold coins in circulation would transfer this veto to
the public. This is why the governments of Europe abolished the gold
coin standard when World War I broke out in August of 1914. This is
why the United States government abolished the gold coin standard in
1933.

Politicians want to spend lots of money, but they do not want to get
blamed for collecting taxes necessary to fund all of the projects that
they plan to fund. So, they can go to the central bank, and if the central

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bank wants to, it buys the debt of the government. The government can
increase the amount of its debt, because it has the cooperation of the
central bank.

When the central bank increases its holdings of government debt, this
increases the nation’s monetary base. When the monetary base
increases, commercial banks make more loans. But when they increase
loans, they increase the money supply. They expand those loans with
fiat money. When fiat money gets into the economy, this tends to raise
prices.

As prices rise, individuals decide that the price of gold will also rise. If
the price of gold rises, it pays someone to own gold. So, people begin
to buy gold. Gold-using producers start buying. The banks find that
digital money is flowing in from the buyers of gold, and the gold is
flowing out. This creates a crisis, because they have expanded the
money supply based on the expansion of Federal Reserve credit, not
based on the expansion of deposits by owners of gold coins.

So, when the common man goes down to his bank and turns in an IOU
for gold, and he takes his gold coins home, this is a bank run. It is the
same when the common man turns over his IOUs to gold to someone
who sells gold to the general public. The IOUs’ buyer also presents the
IOU to gold to the commercial banks. This is a run on the banks.

This means that the holders of gold coins can exercise a veto over the
central bank’s decision to expand its ownership of government debt.
This indirectly transfers a veto to the common man over the size of the
government’s deficit. If the government cannot sell its debt to the
central bank, it has to sell its debt to private investors. This tends to
raise the interest rate, because the government has to offer a higher
interest rate in order to persuade investors to buy its debt.

The essence of a gold coin standard is the veto. Where should the veto
be lodged? Defenders of the gold coin standard say that it should be
lodged with those people who use gold coins, or who use IOUs to gold
coins in their economic decisions. The defender of the gold coin
standard says that the individuals who use gold coins or own IOUs to
gold coins are the most reliable people to exercise a veto over the
commercial banks, and therefore over the central bank, and therefore
over the national government.

STATIST GOLD STANDARDS

There are some people who say they are in favor of a gold standard,

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but they do not want a gold coin standard. They do not want the
authority to exercise the veto held by the common man. They want a
gold standard based on cooperation among central banks. This was the
gold standard that was established in 1922 at the Genoa conference. It
was extended by the Bretton Woods agreement of 1944. It was the gold
standard that Nixon abolished unilaterally on August 15, 1971.

This gold standard places authority in the hands of government-


licensed monopolies called central banks. Its defenders trust the
wisdom of central bankers. It does not trust the wisdom of individual
citizens. So, the defenders of non-coin gold standards are impressed
with the wisdom and reliability of central bankers.

William F. Buckley over a half century ago came up with a delightful


quip. He said that he would prefer to be governed by the first 200
names in the Boston telephone directory than by the faculty of Harvard
University. He did not say this because he was a graduate of Yale. He
said it because he did not trust the wisdom of a self-selected, tenured or
tenure-seeking faculty at the most prestigious academic institution in
the United States. In other words, he did not trust the judgment of
academicians. He believed that the common sense of the average man
is more reliable than the highly rarefied academic skills of the
University faculty. I am in agreement with him.

Buckley was talking about political sovereignty. I


am talking about economic authority. I believe in
decentralized political authority. I believe that
governments are more responsive to voters at the
local level than they are at the state or national
level. But I also believe that the transfer of
economic authority in the form of private What Has Government
Done to Our Mone...
property, especially the ownership of gold or
Murray N. Rothbard...
silver coins, is more important for the Buy New $17.00
preservation of liberty than the transfer of political
sovereignty back to local units of civil
government.
Privacy Information

People are more careful about spending their money than they are
about voting. They spend their money constantly. They vote only
occasionally. They spend their money on aspects of their lives that they
are closely familiar with. They are barely familiar with local
politicians.

So, with respect to that crucial resource, knowledge, it is more

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important to decentralize ownership than it is to decentralize political


power. They both should be decentralized, but if local voters do not
have authority over the monetary system, by means of a gold coin
standard, their right to vote locally will be compromised politically.
The major decisions will still be made by the central government.

This is why various forms of gold standards that do not transfer


complete authority over gold in the hands of common citizens are
phony gold standards. They are gold standards that favor the expansion
of centralized political power. They do not favor lodging the veto in the
hands of the common man.

I am proposing the transfer of all authority over money to the free


market. The only standards that should be enforced by law are
standards of contract law. When a bank issues an IOU to a specific
fineness and weight of gold coin, that bank by law must have coins and
reserve to enable it to honor its contracts for gold coins. The
government should be out of the money business.

The government does have the right to establish the form of money that
citizens must use to pay their taxes. The government should limit itself
to a statement regarding the weight and fineness of the tax coins. If
private enterprise produces coins that meet these standards, the
government must accept such coins as valid for the payment of taxes.
The government lawfully controls the form of taxation; but it should
not have any power to monopolize the production of coins.
Governments have always asserted this authority, and they have always
done so to the detriment of liberty.

What I am describing is the restoration of a free market in money. This


means that the authority over money must be removed from the United
States government and transferred to the users of gold coins. They
would exercise this authority over money, not as voters, but simply as
residents of the United States. They would have the right to use this
money as currency, or deposited in warehouses on their behalf, or sell
to jewelry companies, or hoard the coins. This would be a free-market
system in coinage.

A LITMUS TEST FOR FREE MARKET ECONOMISTS

Very few people believe in the free market. This is true of virtually all
academic economists. The proof that they do not believe in the free
market is that they oppose the creation of a full gold coin standard.
They say they believe in the free market in many areas of life, but they

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do not believe in the free market with respect to the monetary system.
Yet, above all other areas of the economy that ought to be governed by
the free market, the money system should be. Why is this? Because
money is the central institution in a market economy. Control over
money is the central form of economic control.

We have seen this with a vengeance with the passing of the banking
reform bill of 2010. The great winner in the reform is the Federal
Reserve System. It receives the authority over the banking system. It is
not limited merely to control over the money supply; it now possesses
the authority of direct regulation and intervention.

The central banks of the world have now become allocators of capital.
They are making the decisions as to who gets what and on what terms.
Central planning over money increasingly has become central planning
over the entire economy. This is not a mistake. This is consistent with
the original logic of central banking. It means government control over
the money supply.

When you hear a self-designated free market economist defend the idea
of central banking, meaning a government-licensed monopoly over the
monetary base, you can be sure that this person does not believe in the
free market. He does not believe in the logic of decentralized private
property. He believes in central planning, and he sees the central bank
as the agency of such planning.

The few academic economists who are willing to accept even a


pseudo-gold standard do not believe the government should be out of
the money business. They do not believe in the widespread use of gold
coins by the general population. They believe in central banks, and
they believe in government control over the banking system.

What I recommend is simple: the removal of all government authority


possessed by the Federal Reserve System. There would be no further
legal connection between the Federal Reserve System and the United
States government.

What would the result be? Within a few years, the Federal Reserve
System would go bankrupt. This has been the fate of the two previous
central banks of the United States. They could not operate in a
competitive environment. They could operate only by means of a grant
of monopolistic power by the United States government. So, I am not
at all worried about the operation of the Federal Reserve System
without government supervision. Besides, there is no government

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supervision of the Federal Reserve System. There is supervision of the


government by the Federal Reserve System. Congress does not control
the FED: the FED controls Congress. This has been true since 1914,
and it is not likely to change.

Should this ever change, however, the power of money will be


transferred to the United States Congress. That is far more fearful then
idea of control over money by the Federal Reserve System. The
Federal Reserve System at least tries to make its clients some money.
Congress would be unrestrained by any fear of inflation. The Congress
would simply buy votes directly with newly created money. There
would be no concern about the proper allocation of capital. There be no
concern about profit and loss potential of the banking system. There
would simply be the printing press in the hands of the Congress.

There are people out there ("Greenbackers") who call themselves


conservatives, but who believe that the Congress of the United States is
reliable in the area monetary policy. They oppose the Federal Reserve
System, but only on the assumption that all power over money should
be transferred to Congress. I can think of no better prescription for
mass inflation, followed by hyperinflation, than this recommendation.

CONCLUSION

If we were to abolish the Federal Reserve System, and if the


government would then transfer to American voters all of the gold
presently said to be in the vaults of the Federal Reserve Bank of New
York and Fort Knox, we would see the restoration of liberty. I can think
of no other pair of laws that would transfer more authority to the voters
the abolition of the Federal Reserve system and transfer of the gold in
the form of tenth-ounce coins back to the voters. This is why this essay
is hypothetical.

Who are the opponents of such a procedure?


First, the Congress of the United States.
Second, all the bureaucrats who work for the
Federal government. Third, all of the decision-
makers of the Federal Reserve System. Fourth,
the vast majority of all commercial bankers.
Fifth, the entire academic economics
profession. This is why we are unlikely to see
this pair of laws passed in our generation.

The Powers That Be fear the transfer of authority over money to the

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general population, because that would transfer enormous power


politically into the hands of the people. It would let them veto the
spending policies of the Federal government. The fear of that veto is
great inside the Washington Beltway.

October 16, 2010

Gary North [send him mail] is the author of Mises on Money. Visit
http://www.garynorth.com. He is also the author of a free 20-volume
series, An Economic Commentary on the Bible.

Copyright © 2010 Gary North

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