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3. How to Return to Sound Money

Given this dismal monetary and banking situation, given a 39:1 pyramiding of checkable deposits and

currency on top of gold, given a Fed unchecked and out of control, given a world of fiat moneys, how can we

possibly return to a sound noninflationary market money? The objectives, after the discussion in this work,

should be clear: (a) to return to a gold standard, a commodity standard unhampered by government

intervention; (b) to abolish the Federal Reserve System and return to a system of free and competitive banking;

(c) to separate the government from money; and (d) either to enforce 100% reserve banking on the

commercial banks, or at least to arrive at a system where any bank, at the slightest hint of nonpayment of its

demand lia bilities, is forced quickly into bankruptcy and liquidation. While the outlawing of fractional reserve

as fraud would be preferable if it could be enforced, the problems of enforcement, especially where banks can

continually innovate in forms of credit, make free banking an attractive alternative. But how to achieve this

system, and as rapidly as humanly possible?

First, a gold standard must be a true gold standard, that is, the dollar must be redeemable on demand

not only in gold bullion, but also in full-bodied gold coin, the metal in which the dollar is defined. There must be

no provision for emergency suspensions of redeemability, for in that case everyone will know that the gold

standard is phony, and that the Federal government and its central bank remain in charge. The currency will

then still be a fiat paper currency with a gold veneer.

But the crucial question remains: For there to be a gold standard the dollar must be defined as a unit of

weight of gold, and what definition shall be chosen? Or, to put it in the more popular but erroneous form, at

what price should gold be fixed in terms of dollars? The old definition of the dollar as 1/35 gold ounce is

outdated and irrelevant to the current world; it has [p. 264] been violated too many times by government to be

taken seriously now. Ludwig von Mises proposed, in the final edition of his Theory of Money and Credit,

that the current market price be taken as the definition of gold weight But this suggestion violates the spirit of

his own analysis, which demonstrates that gold and the dollar are not truly separate commodities with a price

in terms of the other, but rather simple definitions of unit of weight But any initial definition is arbitrary, and

we should therefore return to gold at the most conveniently defined weight After a definition is chosen,

however, it should be eternally fixed, and continue permanently in the same way as the defined unit of the

meter, the gram, or the pound.

Since we must adopt some definition of weight, I propose that the most convenient definition is one

that will enable us, at one and the same time as returning to a gold standard, to denationalize gold and to

abolish the Federal Reserve System.

Even though, for the past few years, private American citizens have once again been allowed to own

gold, the gold stolen from them in 1933 is still locked away in Fort Knox and other U.S. government

depositories. I propose that, in order to separate the government totally from money, its hoard of gold must be

denationalized, that is, returned to the people. What better way to denationalize gold than to take every

aliquot dollar and redeem it concretely and directly in the form of gold? And since demand deposits are part of

the money supply, why not also assure 100% reserve banking at the same time by disgorging the gold at Fort

Knox to each individual and bank holder, directly redeeming each aliquot dollar of currency and demand

deposits? In short, the new dollar price of gold (or the weight of the dollar), is to be defined so that there will

be enough gold dollars to redeem every Federal Reserve note and demand deposit, one for one. And then,

the Federal Reserve System is to liquidate itself by disgorging the actual gold in exchange for Federal Reserve

notes, and by giving the banks enough gold to have 100% reserve of gold behind their demand deposits. After

[p. 265] that point, each bank will have 100% reserve of gold, so that a law holding fractional reserve banking

as fraud and enforcing 100% reserve would not entail any deflation or contraction of the money supply. The

100% provision may be enforced by the courts and/or by free banking and the glare of public opinion.

Let us see how this plan would work. The Fed has gold (technically, a 100% reserve claim on gold at

the Treasury) amounting to $11.15 billion, valued at the totally arbitrary price of $42.22 an ounce, as set by

the Nixon Administration in March 1973. So why keep the valuation at the absurd $42.22 an ounce? M-l, at

the end of 1981, including Federal Reserve notes and checkable deposits, totaled $444.8 billion. Suppose that

we set the price of gold as equal to $1,696 dollars an ounce. In other words that the dollar be defined as

1/1696 ounce. If that is done, the Fed’s gold certificate stock will immediately be valued at $444.8 billion.

I propose, then, the following:

1. That the dollar be defined as 1/1696 gold ounce.

2. That the Fed take the gold out of Fort Knox and the other Treasury depositories, and that the gold

then be used (a) to redeem outright all Federal Reserve Notes, and (b) to be given to the commercial banks,

liquidating in return all their deposit accounts at the Fed.

3. The Fed then be liquidated, and go out of existence.

4. Each bank will now have gold equal to 100% of its demand deposits. Each bank’s capital will be

written up by the same amount; its capital will now match its loans and investments. At last, each commercial

bank’s loan operations will be separate from its demand deposits.

5. That each bank be legally required, on the basis of the general law against fraud, to keep 100% of

gold to its demand liabilities. These demand liabilities will now include bank notes as well as demand deposits.

Once again, banks would be free, as they were before the Civil War, to issue bank notes, and much of the

gold in the hands of the public after liquidation of [p. 266] Federal Reserve Notes would probably find its way

back to the banks in exchange for bank notes backed 100% by gold, thus satisfying the public’s demand for a

paper currency.

6. That the FDIC be abolished, so that no government guarantee can stand behind bank inflation, or

prevent the healthy gale of bank runs assuring that banks remain sound and noninflationary.

7. That the U.S. Mint be abolished, and that the job of minting or melting down gold coins be turned

over to privately competitive firms. There is no reason why the minting business cannot be free and

competitive, and denationalizing the mint will insure against the debasement by official mints that have plagued

the history of money.

In this way, at virtually one stroke, and with no deflation of the money supply, the Fed would be

abolished, the nation’s gold stock would be denationalized, and free banking be established, with each bank

based on the sound bottom of 100% reserve in gold. Not only gold and the Mint would be denationalized, but

the dollar too would be denationalized, and would take its place as a privately minted and noninflationary

creation of private firms.8

Our plan would at long last separate money and banking from the State. Expansion of the money

supply would be strictly limited to increases in the supply of gold, and there would no longer be any possibility

of monetary deflation. Inflation would be virtually eliminated, and so therefore would infla tionary expectations

of the future. Interest rates would fall, while thrift, savings, and investment would be greatly stimulated. And the

dread specter of the business cycle would be over and done with, once and for all.

To clarify how the plan would affect the commercial banks, let us turn, once more, to a simplified

T-account Let us assume, for purposes of clarity, that the commercial banks’ major liability is demand

deposits, which, along with other checkable deposits, totaled $317 billion at the end of December 1981. Total

bank reserves, either in Federal Reserve notes in the vaults or [p. 267] deposits at the Fed, were

approximately $47 billion. Let us assume arbitrarily that bank capital was about $35 billion, and then we have

the following aggregate balance sheet for commercial banks at the end of December 1981 (Figure 17.1).

Figure 17.1 The State of the Commercial Banks: Before the Plan

We are proposing, then, that the federal government disgorge its gold at a level of 100% to total

dollars, and that the Fed, in the process of its liquidation, give the gold pro rata to the individual banks, thereby

raising their equity by the same amount. Thus, in the hypothetical situation for all commercial banks starting in

Figure 17.1, the new plan would lead to the following balance sheet (Figure 17.2):

Figure 17.2 The State of the Commercial Banks: After the Plan

In short, what has happened is that the Treasury and the Fed have turned over $270 billion in gold to

the banking system. The banks have written up their equity accordingly, and now have 100% gold reserves to

demand liabilities. Their loan and deposit operations are now separated. [p. 268]

The most cogent criticism of this plan is simply this: Why should the banks receive a gift, even a gift in

the process of privatizing the nationalized hoard of gold? The banks, as fractional reserve institutions are and

have been responsible for inflation and unsound banking.

Since on the free market every firm should rest on its own bottom, the banks should get no gifts at all.

Let the nation return to gold at 100% of its Federal Reserve notes only, runs this criticism, and then let the

banks take their chances like everyone else. In that case, the new gold price would only have to be high

enough to redeem outfight the existing $131.91 billion in Federal Reserve notes. The new gold price would

then be, not $1,690, but $500 an ounce.

There is admittedly a great deal of charm to this position. Why shouldn’t the banks be open to the

winds of a harsh but rigorous justice? Why shouldn’t they at last receive their due? But against this rigor, we

have the advantage of starting from Point Zero, of letting bygones be bygones, and of insuring against a

wracking deflation that would lead to a severe recession and numerous bankruptcies. For the logic of returning

at $500 would require a deflation of the money supply down to the level of existing bank reserves. This would

be a massive deflationary wringer indeed, and one wonders whether a policy, equally sound and free market

oriented, which can avoid such a virtual if short-lived economic holocaust might not be a more sensible


Our plan differs markedly from other gold standard plans that have been put forward in recent years.

Among other flaws, many of them, such as those of Arthur Laffer and Lewis Lehrman, retain the Federal

Reserve System as a monopoly central bank. Others, such as that of F. A. Hayek, doyen of the Austrian

School of Economics, abandon the gold standard altogether and attempt to urge private banks to issue their

own currencies, with their own particular names, which the government would allow to compete with its own money.9 But [p. 269] such proposals ignore the fact that the public is now irrevocably used to such currency

names as the dollar, franc, mark, and so on, and are not likely to abandon the use of such names as their

money units. It is vital, then, not only to denationalize the issuing of money as well as the stock of gold, but also

to denationalize the dollar, to remove the good old American dollar from the hands of government and tie it

firmly once again to a unit of weight of gold. Only such a plan as ours will return, or rather advance, the

economy to a truly free market and noninflationary money, where the monetary unit is solidly tied to the weight

of a commodity produced on the free market Only such a plan will totally separate money from the pernicious

and inflationary domination of the State. [p. 270] [p. 271]