This is Rothbard's proposal for returning to the gold standard and free banking (slightly modified, I've included savings deposits in calculating the new par, whereas for some reason Rothbard did not, even though he agrees that they are demand liabilities).
1. Divide the quantity of gold in official reserves by the quantity of federal reserve notes, demand deposits, other checkable deposits, and savings deposits. This yields the weight per dollar required to disgorge all gold from official holdings, and return it to private hands; this is the new par, or "price" of gold in dollars.
2. Send to the treasury a proportion of official gold sufficient to redeem all outstanding FRN at the new par, which the treasury will redeem at par for a limited period of time (e.g. 60 days). All incoming FRN are to be destroyed, and no new ones or any other State-created paper notes are to be produced. Nor is the State to participate in minting coins. The gold disgorged can thereafter be minted if and however the market pleases.
3. Send to the commercial banks the remainder of the gold, which is sufficient to meet all their demand liabilities in gold at the new par. Now the banks find themselves with 100% reserves against demand liabilities, and operating in a free banking environment. We can presume they will start issuing their own bank notes once again, to replace FRN which are rapidly being removed from circulation.
Now, here's my question: if the US official gold reserves constituted all the gold in the world, then the program, described above would cause a seamless transition, with neither inflation nor deflation. However, that is not the case. In addition to the official reserves, there are large quantities of gold in private hands, and in other official hoards, both in the US and around the world. How does this gold effect things? Suppose the market price for gold is $1000/oz at present, and the price of a TV is $100. I can sell my one ounce of gold for $1000 and buy ten TVs. Suppose the new par is $10,000/oz. After the reform, then, I can deposit my gold in a bank and receive a $10,000 credit in my account, with which (either via checks, or bank notes, or debit cards, et al) I can now purchase 100 of the same TVs. Two things have happened to cause this change. Firstly, gold was previously an asset (like land, or shoe laces, or stocks, or anything else) which could be sold for money, whereas now gold is money. Secondly, gold now is 10x the amount of money for which it could formerly be sold. Essentially, all the gold in private hands that could make its way into the US economy, either circulating as gold, or being deposited as demand deposits in banks, represents an expansion of the money supply. Suppose there are ten million ounces in question. At the new par, that is $100 billion: added to the money supply. If the money supply was, say, $1 trillion before, that means a 10% monetary expansion, and roughly proportional increase in the general price level. Unless I'm missing something, this means that a return to the gold standard by the aforementioned plan would be inflationary - possibly quite inflationary, depending on the amount of gold likely to enter the US economy relative the size of the previous money supply.
It seems to me (though I'm not 100% on this, and I'd appreciate your thoughts), that the influx of gold to the US and the increased production within the US would continue as long as gold was overvalued relative goods and services. That is, until relative prices returned to their pre-reform levels. For example, when one ounce of gold would once again buy just 10 TVs instead of 100. This would require a ten-fold increase in prices. Let me put it another way: as a result of the reform, gold in the US suddenly becomes 10x more valuable than it was relative all goods and services. This would have the same affect as if in reality right now the market price of gold increased ten-fold in the US while all other prices in the US remained the same: i.e. huge increase in production until gold prices fell back down (but w/ a gold standard, it's not the "gold price" that falls, it's the purchasing power of gold that has to fall - i.e. prices of goods and services have to rise), and huge influx of gold to buy goods in the US (which are now 1/10th the cost as before in terms of gold), either export goods or assets (stocks, real estate, etc), until those goods reassert their previous prices relative gold in the US, or (for export goods), until their prices in foreign markets drop sufficiently due to increased supply.
Thoughts? Am I missing something?
The only one worth following is the one who leads... not the one who pulls; for it is not the direction that condemns the puller, it is the rope that he holds.
@Phi est aureum
I'd say, given the numbers you use, then yes, there would be inflation. However, this is not a result of going to a gold standard, I don't think. If it were, then the assumption would be that adhering to a fiat currency – with legal tender laws and a monopoly on the creation of said currency granted to the federal reserve, whom would likely continue devaluing the currency by inflation, which enables an ever-increasing expansion of the welfare/warfare state – would not result in a similar scenario. Or in other words, sticking to the same monetary, military, and welfare policies wouldn't lead to (eventually) the destruction of the fiat currency. I believe the Austrian view is that it will.
I'm not criticizing the gold standard at all, or suggesting that the current system is better. I just wanted to see if you all agree with my basic analysis here, because, if it's correct, it suggests to me that perhaps there is a better way of transitioning to a gold standard, as a sudden, one-time inflation of 1000% doesn't sound all that appealing. I used $10,000 as the new par in my example, but the reality is actually much worse. To give 100% backing to all demand liabilities of the commercial banks ($6.607 trillion) and for all FRN ($1.085 trillion), with a USG gold reserve of 261.5 million ounces, that would be a "price" of about $29,400 per ounce. With a current gold price of $1700/oz, that would be more like 17x increase in the general price level. That's not just unpleasant, that's catastrophic. Can you imagine promising people that the gold standard would end inflation, and then delivering a sudden 1700% inflation! It would ruin the image of the gold standard forever. There has to be a better way.
Now consider the TV salesman. He used to sell TVs for $100. He exchanged his dollars for gold, and $100 netted him 1/100 of an ounce of gold. Would he not simply sell his TVs for approximately 1/100 of an ounce of gold? This way, anyone who previously had $100, but exchanged it for 1/100 of an ounce of gold, can still purchase the same TV.
That's right.. If there were no gold in existence outside the USG hoard, there would be no inflation, and no rising prices.
But there is....
Yes, there will be many people, foreign and domestic, who held gold before the return to sound money. They were the ones wise enough to drop the dollar before the collapse. These people's circumstances are greatly changed, in that they can afford more things than previously. Their spending will be a large driver of the market moving towards the correction in prices. If these people decide to buy lots more TVs, the TV salesman will raise prices accordingly. If they do not, and instead buy TVs in the same manner as they always had, the TV salesman might not be able to change his prices very much.
Right, but they're going to spend it on something, doesn't matter what. Before the reform, gold was an asset, a good, not money. If gold was sold for money, and the money was sold for TVs, and the money supply remained the same, the increase in the price of TVs would have been offset by a decrease in the price of gold, right? The general price level would remain unchanged. But now, after the reform, when a goldbug spends his gold on a TV, there is no offsetting decline in other prices. He is spending new money into the economy; no different than if he had counterfeited some FRNs and spent them. There's no way to get around it, this is inflationary.
Again, maybe I am missing what exactly you are asking. Sorry if I have been of little help.
Not at all. I think we're on the same page. I want the gold standard, my problem is in figuring out exactly how to transition from the present system to the gold standard without catastrophic economic disruptions (like 1700% price inflation). I've searched through many books and articles and there is surprisingly little on the mechanics of such a transition. Rothbard gives the fullest account, but he apparently fails to appreciate the inflation problem that I've identified - which, considering Rothbard's economic expertise relative my own, makes me think I've got it wrong, but I can't find an actual flaw in my reasoning. It seems pretty straightforward. The gold in private hand now is not money. After the transition, it is money. Therefore, the money supply has increased.
I guess my basic question is this: what is the best way to transition to a gold standard?
My thoughts right now are that, to avoid the aforementioned inflation, we need market prices to more or less equal the par (or be higher than the par) at the time of revaluation. That way, you don't get a massive influx of gold from abroad. Secondly, we need a lower par, so that the privately held gold within the US, once monetized, represents a smaller addition to the money supply. The USG could achieve both goals by buying up gold on the open market prior to revaluation. The more gold it accumulates, the lower can be the eventual par, so the less inflation resulting from monetization of privately held gold in the US. And, as the par comes down with each accumulation of gold by the USG, the market price rises. At some point they meet, or the market price surpasses the par, and then the USG should do the revaluation. You might think, if it's inflationary for the gold-holders to set the par above the market price, wouldn't it be deflationary to set it below the market price? No, because the privately held gold in the US is not yet at all part of the money supply. Whether it enters valued at $1/oz of $1 million, it is still inflation. Right? So, no matter how low the par relative the market price, that just means less inflation, it can never mean deflation. Now, in this scenario, the gold-holders (o at least those of them who bought during this USG buying boom) would get screwed, rather than rewarded, but I say that's a small price to pay to avoid 1700% inflation. And the long-time goldbugs would still be fine, as the par will still be much higher than current prices.
EDIT: I might add, it's not necessary to give the banks 100% reserves. Surely they can sustain themselves through a bank run with 95%, 90%, 80%, 70%....? Anyway, whatever the level, the lower it is the lower the par (i.e. more gold devoted to each dollar, since you're backing a smaller number of dollars), and therefore the lower the inflation from monetizing privately held gold, as I described above.
I once asked about this: http://mises.org/community/forums/t/6206.aspx Didn't really get any answers. I also ran the numbers for the UK and the £, as if Rothbard's plan was implemented here, and the numbers were even more extreme. The ratio came out to about £20k per oz of gold - over 20 times what the gold price was at the time. I just can't see how Rothbard's transition could happen without causing massive market shocks, unless perhaps all governments / central banks agreed to go back to a gold standard at the same time.
Contra what I said in that thread nearly 4 years ago, I now think Hayek's simpler idea for getting back to sound money was better than Rothbard's. Rothbard's criticisms of Hayek's ducats idea are good as far as they go, but if Hayek's ducats had "something extra" beyond being just the paper tickets he imagined, Rothbard's criticisms - that a new currency basically can't get off the ground - are nullified to a large degree. I think Bitcoins are like Hayek's ducats with that "someting extra" being it's unique qualities stemming from it being a cryptocurrency rather than paper, which have enabled it to get off the ground in a way that Rothbard did not or could not have predicted.
Government Explained 2: The Special Piece of Paper
Law without Government
Graham Wright:Suppose Murray Rothbard's plan to restore the link between the dollar and gold was carried out. What would be the effect on the markets? The dollar will be redefined as a weight in gold. The banks would be capitalized with Fed gold and allowed to print bank notes, and Federal Reserve Notes would be redeemable in gold, and then the Fed would be abolished, along with the FDIC and U.S. Mint. To make the numbers simpler, suppose the dollar is redefined as 1/4000 oz of gold. The "price of gold in dollars" would obviously then be fixed at $4000 per oz. Suppose that previously the market price of gold was $1000 per oz, and that $2 exchanged for £1, with the price of gold in pounds being £500 per oz. Now, since dollars are just tokens for gold, the "dollar price in pounds" will be the same as the "gold price in pounds". So immediately, the exchange rate would become $4000 to £500, or $8 to £1. With the exchange rate altered, there would be incentives for individuals to import gold into the US, and export goods overseas. If a good, say, guitars, previously cost $800 in the US and £400 in the UK, Brits will exchange £400 for $3200 and buy 4 US guitars, then sell them in the UK for £1600. They will either buy gold in the UK and deposit it in a US bank, or buy American dollar bank notes. Either way, gold will flow from the UK into the US and goods will flow from the US into the UK. This will happen until any of the following occur: The gold price in pounds is bid up to £2000 per oz (i.e. $2 exchanges for £1 again). The guitar price in dollars is bid up to $3200 (with the UK price at £400). The guitar price in pounds is bid down to £100 (with the US price at $800). Some combination of these three will occur until the correct relations are restored. I have been thinking about how long it will take for the relations to be restored, what factors determine where prices will settle, how much gold will flow into the US, and who benefits most and least from this process. I'd like to hear what other people think about these questions. I think it would happen very quickly (months, maybe even weeks), and it would primarily be the price of gold in pounds (and all other currencies) that is bid up, rather than goods prices in the US. Therefore there would only be a small period of goods flowing out of the US and gold flowing in. The transition period would not be devastating to the economy (barring government intervention) and it would be fairly painless for all. What do you think would happen? Do you agree or disagree that the shock to the economy would be fairly minor?
The dollar will be redefined as a weight in gold. The banks would be capitalized with Fed gold and allowed to print bank notes, and Federal Reserve Notes would be redeemable in gold, and then the Fed would be abolished, along with the FDIC and U.S. Mint. To make the numbers simpler, suppose the dollar is redefined as 1/4000 oz of gold. The "price of gold in dollars" would obviously then be fixed at $4000 per oz.
Suppose that previously the market price of gold was $1000 per oz, and that $2 exchanged for £1, with the price of gold in pounds being £500 per oz. Now, since dollars are just tokens for gold, the "dollar price in pounds" will be the same as the "gold price in pounds". So immediately, the exchange rate would become $4000 to £500, or $8 to £1.
With the exchange rate altered, there would be incentives for individuals to import gold into the US, and export goods overseas. If a good, say, guitars, previously cost $800 in the US and £400 in the UK, Brits will exchange £400 for $3200 and buy 4 US guitars, then sell them in the UK for £1600. They will either buy gold in the UK and deposit it in a US bank, or buy American dollar bank notes. Either way, gold will flow from the UK into the US and goods will flow from the US into the UK.
This will happen until any of the following occur:
Some combination of these three will occur until the correct relations are restored.
I have been thinking about how long it will take for the relations to be restored, what factors determine where prices will settle, how much gold will flow into the US, and who benefits most and least from this process. I'd like to hear what other people think about these questions.
I think it would happen very quickly (months, maybe even weeks), and it would primarily be the price of gold in pounds (and all other currencies) that is bid up, rather than goods prices in the US. Therefore there would only be a small period of goods flowing out of the US and gold flowing in. The transition period would not be devastating to the economy (barring government intervention) and it would be fairly painless for all.
What do you think would happen? Do you agree or disagree that the shock to the economy would be fairly minor?
That's an interesting point, I hadn't considered the relative speeds of adjustments in different markets. Barring any kind of controls imposed by governments, financial markets should adjust much quicker than "real" goods markets. However, there are also US financial markets to consider, which can adjust just as quickly as foreign gold markets. If financial assets in the US are bid up, no big deal....except for commodities. That could be a bit of a problem.
EDIT: I wonder if it would be useful to look at the immediate consequences of the gold revaluation in the 1930s; what happened in the forex markets, and what happened in US financial (especially commodities futures) markets?
No need to implement anything. Just repeal legal tender laws and capital gains taxes and allow the free market to converge to whatever media of exchange it prefers.
And what "inflation" are you talking about? The "price" of gold going from $1700/oz to $30,000/oz is actually the price of (a basically worthless) dollar collapsing from 1/1700 oz/$ to 1/30,000 oz/$ and this (facing reality!) would happen regardless of the way sound money is allowed to compete in the economy. The fact that the dollar is worthless is not Rothbard's problem. It's a fact.
@z1235
And what "inflation" are you talking about?
The addition of new money to the money supply from two sources: (1) privately held gold in the US prior to revaluation, and (2) the influx of foreign gold.
The fact that the dollar is worthless is not Rothbard's problem. It's a fact.
I didn't say it was "Rothbard's problem," I said it was a problem. I find hyperinflation to be problematic, don't you?
What of banking? If free banking were implemented right now, virtually all the major banks would fail. How does your proposal address this problem? In Rothbard's proposal, or my modification of it, the banks are given gold to back their deposits. What happens in your scenario?
First, I wouldn't say that a gold bug spending his goldbug is no different than counterfeiting. Counterfeiting is illegitimate; acquiring gold prior to the collapse of a currency is not. Similarly, someone who mines gold is not on the same level as a counterfeiter. Although they do spend their gold into the market, they used capital and labor to acquire the gold, just as a goldbug did as well (since he used capital and/or labor to get the money to buy the gold).
I meant only that they're economically equivalent, in that each is inflationary, not that they're ethically-legally equivalent.
Next, I'd like to ask why you advocate for a gold standard. Perhaps I need to ask what you mean by gold standard.
In advocating a "gold standard," I'm advocating for a purely free market in money, and I'm assuming that the market will choose gold for its money. Of course, if I'm wrong in that assumption, no harm done; once this operation I've described is completed, the issue is entirely in the hands of the market, which can go in any direction it likes.
I prefer that we simply repeal all legal tender laws and let the market choose the money. This allows for a gradual (how gradual, who can know?) adjustment of prices. After all, there MUST be an adjustment, right? The fact that we can see approximations of 1500-2000%+ clearly demonstrates that the prices are incorrect, for nearly everything. So, one way or another, someone is going to take a loss. I say let the market decide. Better yet, since nothing assumed indicates that the state has collapsed yet, let us repeal all legal tender laws as thy stand, and reapply them only to the state. That is, no one shall be forced to accept any one thing as payment for debt; payments of debts must be made contractually, voluntarily, and mutually agreeable; the only exception is that the federal government can only collect taxes and fees in federal reserve notes; however, no person or entity will be required to accept federal reserve notes from the federal government as payment for any debt. Perhaps the last line can be changed to allow government workers to be paid in federal reserve notes, along with all entitlement payments. I'm not sure which way is preferable. However, if done this way, is it not likely that people will more clearly understand that any inflation seen is not the cause of the market choosing gold or silver as money, the the result of the policy of the state? Also, by forcing the state to accept the (increasingly worthless) federal reserve notes that it created, the public will understand why it is being forced to accept them as payment for taxes and fees. We could also sell off the gold held by the state at some determined price as part of the repeal of legal tender laws. Would this not help the public come to realize the value of the market over the power of the state? Perhaps this likely sway of opinion of the public in tandem with the federal government's decreasing ability to buy anything will lead to the demise of the federal government, at least as we know it. Done otherwise, is it not likely that the federal government remains nearly as powerful as it is? Isn't (or shouldn't) the main reason for a return to sound, market-chosen money to VASTLY decrease the power of the state in relation to the individual?
Why/how would a repeal of legal tender laws and capital gains taxes eliminate FDIC and the lender of last resort?
It wouldn't. I'm saying if the goal is a free market in money, you need a free market in banking as well, as the two are obviously linked inextricably. Is your plan to eliminate legal tender laws and capital gains taxes but leave the Fed? No, I'm sure you want to eliminate the Fed, and all the rest of the laws/programs (like FDIC) that sustain the banking cartel, right? Alright, so then how do you prevent the banks from collapsing immediately when you do this? That is what will happen if you suddenly remove their supports. That means that millions of people lose their savings, poof, gone. Trillions of dollars. The purist in me would like nothing more than to see the banks crushed into a pulp, and the suckers punished for their stupidity, but that's not a practical course of action. If nothing else, it would be political suicide. You'd end up with a demagogue in office elected by all the angry and now violently anti-market people who lost their savings.
A virtue of Rothbard's plan is that it moves to a gold dollar (purely in the hands of the market, with no government role at all), but it prevents a deflationary collapse of the banking system by providing the banks with the reserves needed to back their deposits.
No elimination of the Fed would be necessary. Every USD-related institution and law can remain the same. You only need to allow competition for the USD by repealing legal tender laws and capital (USD price) "gains" taxes. Then allow people to choose their preferred media of exchange and the institutions in which they will deposit it or through which they would transact in it.
If you repeal legal tender and capital gains laws, you expect a market-chosen money to start replacing federal reserve notes, as the federal reserve notes rapidly depreciate against that new money and against goods and services, correct? So what happens with the banking system - people are going to either (a) leave their savings in the banks as federal reserve notes and lose them to depreciation, or (b) withdraw them and cause bank failures.Either way people lose much of their savings. Right? The problem is that all those savings are currently denominated in FRN. Under your proposal, the only way to convert them to the new money is for people to make withdrawels (right?), but that will cause bank failures, because the banks haven't got the reserve to meet those withdrawels.
Not to ignore the rest of your post, but right now I want to focus on this:
As for how to get a free market in banking with my proposal, I feel that it is built into what I have suggested. I'd assume that with my proposed change in legal tender laws, the demand for gold and silver would increase, and the demand for federal reserve notes would decrease. Therefore, the banks that do the best will be the ones that adjust to this change in the market. They will, along with many individuals (I'd hope) move to exchange their federal reserve notes for gold. They could get it from the same source individuals can: the federal holdings of gold (as I proposed). This can be done in one of two ways: either sell the federal holdings of gold at a set price of, say $1750 an ounce, first come, first served; or sell the gold at a market determined price, as in, as the demand for the gold increases, increase the number of federal reserve notes needed to buy an ounce.
The banks' cash holdings are mostly on deposit at the Fed as reserves. They could convert these into gold as you say. What I'm wondering is what kind of reserve ratio would they have as a result? The banks current reserve ratio is about 20%. If, after all is said and done, their reserve ratio (with reserves and liabilities now priced in gold) is still 20%, I don't see how they can possibly survive a free market. Historically, in the closest period approxiomating free banking (the US from the abolition of the 2nd central bank to the civil war), banks had much higher reserve ratios. I could find some data, but off the top of my head it's more like 70-80% than 20%. And that's because, without government protection, they get hit by net redemption claims and bank runs from depositors pretty easily.
Here's another issue. Not only for the banks, but in general, how do you deal with contracts denominated in FRN? Presumably, FRN are going to be worthless pretty quickly without the support of legal tender laws et al. So will all FRN-denominated bonds be worthless? How could they be converted into gold (or whatever the money is) denominated contracts? The same with futures, options, etc.
Minarchist: If you repeal legal tender and capital gains laws, you expect a market-chosen money to start replacing federal reserve notes, as the federal reserve notes rapidly depreciate against that new money and against goods and services, correct? So what happens with the banking system - people are going to either (a) leave their savings in the banks as federal reserve notes and lose them to depreciation, or (b) withdraw them and cause bank failures.Either way people lose much of their savings. Right? The problem is that all those savings are currently denominated in FRN. Under your proposal, the only way to convert them to the new money is for people to make withdrawels (right?), but that will cause bank failures, because the banks haven't got the reserve to meet those withdrawels.
No bank needs to fail, and no depositor needs to lose their FRN deposit. They'd still have their lender of last resort ready to create as many FRNs are needed (withdrawn).
So we have the US government accepting FRN for gold at a certain price, while the Fed prints up enough money to ensure that all depositors can get their money out of the banks and exchange it for gold at that same price. This sounds like a more roundabout version of the Rothbard plan, no? The only difference is that, instead of shipping gold to the banks so that they can redeem all demand liabilities in gold, you ship FRN to the banks so they can can redeem all demand liabilities in FRN, which can then be converted to gold.
Still, you have the contract problem. If bonds, for example, are denominated in FRN, do they become worthless eventually, once FRN become worthless (or at least worth much less) or can they be re-denominated in the new money somehow?
Minarchist: So we have the US government accepting FRN for gold at a certain price
So we have the US government accepting FRN for gold at a certain price
No, we don't.
...while the Fed prints up enough money to ensure that all depositors can get their money out of the banks and exchange it for gold at that same price.
When did I mention that the gov must exchange FRNs for gold at a certain price? My only prescription is the elimination of legal tender laws and capital gains taxes. That's all. Everything else can stay the same.
Whose problem is this? There will be no defaults on contracts denominated in FRN. The Fed can print as many of them as is needed. Everybody will have back whatever FRNs they are being owed.
You seem to be concerned that a lot of people will get screwed if/when the money monopoly was eliminated by allowing competition. The problem is that the screwing has already happened. Bringing in sound money would amount to merely awakening the victims to the fact.
When did I mention that the gov must exchange FRNs for gold at a certain price?
Sorry, I had you mixed up with Phi, who had mentioned the government selling its gold stocks either at a fixed price or by auction. But, I assume you want to get that gold out of government hands as well, no? Or is it just going to sit there in the NY Fed vaults indefinitely?
There will be no defaults on contracts denominated in FRN. The Fed can print as many of them as is needed. Everybody will have back whatever FRNs they are being owed.
Default isn't the issue, it's the fact that the currency in which the bonds are denominated will become worthless before the bonds are mature. The Fed printing more FRN makes the problem worse, not better.
Whose problem is this?
The problem of everyone who doesn't want to see the credit markets destroyed by hyperinflation?
My only prescription is the elimination of legal tender laws and capital gains taxes. That's all. Everything else can stay the same.
You've now suggested that the Fed (1) print enough money to back demand liabilities (trillions of dollars), and (2) print enough money to allow for bond repayment somehow (even though that's counterproductive, as I explained). I'm having a hard time seeing the advantage of your proposal over the Rothbardian approach. It seems it would cause most people to lose their savings: either due to bank failures if the Fed doesn't print up huge amounts of money, or due to to inflation if they do.
No, that's not true. Some kind of correction is required, sure, but there are different methods of doing this, with different consequences. Some are clearly better than others. Likewise, if you've been shot in the leg, some treatments are better than others. Penicillin or amputation, take your pick. Consider a classic historical example. Britain returned to the gold standard after WWI. They could have chosen to return at a realistic par given the wartime inflation, and everything would have gone smoothly. Instead, they chose to go back at the pre-war par and caused a depression, and eventually a run on the pound forcing them back off gold. It does very much matter how you do these things.
You don't seem to get the gravity of your patient's condition. The leg has already been cut off. Only aliens or time travel could possibly make your patient whole going forward (pun intended). This has been the goal of fiat money and central banking all along. (Gnawing on the flesh of a productive victim.) Their designers and benefactors have been extremely successful at achieving it with your current patient.
My proposal acknowledges this fact and deals with reality as it is. Any other "solution" merely drugs up the patient and keeps deluding him that his leg is still there.
EDIT: And perhaps you should question the wisdom in seeking yet another state-centered solution for your problem. That would be like empowering the same doctors who administered the loss of one leg to "take care" of the other.
z1235:No need to implement anything. Just repeal legal tender laws and capital gains taxes and allow the free market to converge to whatever media of exchange it prefers.
Would it though? I'm not sure. It might be a "Qwerty-Dvorak" situation. Imagine there was a government law that existed prior to the year 2000 that mandated that all typewriters and keyboards use the Qwerty layout. Someone like you might have emphasised the superiority of the Dvorak layout (cf. emphasised the superiority of gold over paper) and said that if only the government repealed the "Qwerty-monopoly law", then the market would converge on Dvorak. You'd have been wrong about that. The costs of changing from one layout to another would have been (are) greater than sticking with the inferior layout. For some types of goods, the benefits of the superior technology have to be very high to displace the inferior technology. I think money could be one of these types of goods.
What do you think would happen if legal tender laws and capital gains taxes were repealed? Who would be the early adopters of using gold as a medium of exchange and why would they start using it? Then how would it become commonly accepted and totally displace the dollar? I think Rothbard's answer to these questions was that it wouldn't happen... that there is a "lock-in" to using the dollar, just like the "lock-in" on Qwerty that has prevented any superior layouts displacing it as the standard. I think this is why Rothbard devised his plan in the first place, rather than just saying "abolish the monopoly; let the market sort it out" like he did for other monopolies.
Graham, different types of choices have different types of consequences. It is conceivable that more than one keyboard standard could coexist if the "cost" of choosing the suboptimal version was smaller than the disutility of making a switch. I don't think that's the case when money/finance is concerned. People who are too lazy to recognize the superiority of sound money over gun-less fiat money (no legal tender laws, no capital gains taxes) will simply be outcompeted in a free market by the people who do.
Not only do I think that government enforced "affirmative action" is needed for sound money, but I believe that it would be counter-productive -- as most anything government-enforced is. The free market is the best regulator. Take the guns away and FRNs will converge to their fair value (zero) in no time. Sound money doesn't need gun enforcement for it to become preferred and accepted -- self-interest would do the job just fine.
z1235:And perhaps you should question the wisdom in seeking yet another state-centered solution for your problem.
Huh? Under Rothbard's plan all the State does is give away its gold and allow free banking: i.e. giving away property which it stole decades ago, rather than selling it for profits it does not deserve, and eliminating restrictions on the free-market. How is that state-centered? What makes your plan less state-centered? You leave the banking cartel intact, you even want the Fed to print more. Yea, you eliminate capital gains tax and legal tender laws, so what, so would the Rothbard plan. Remember, under that plan, we are not creating a new currency (with new legal tender laws or other protections) we are simply handing out the gold in government hands on a pro rata basis to dollar holders. The market will take it from there. If people want to use the gold as money, then they can. If not, no one's standing in their way, they're free to use whatever they like.
Essentially, the Rothbard plan allows for a smooth transition to the system (gold money) which the free would almost certainly choose anyway (unless Graham is right), without forcing this on anyone, as there would be a free market in money going forward. Your plan offers a route to that same goal: except that route is littered with wrecked contracts, bonds, futures, bank deposits, etc. What am I missing???
Minarchist, I thought you had a problem with Rothbard's plan. I never said his plan was bad, btw.
How is my plan littered with wrecked contracts, deposits, etc.? I thought we concluded that it wasn't few posts ago.
As for the gov keeping all the gold, I don't see how that makes much difference. FRN holders would be free to exchange their paper for gold in the open market (including buying it from the gov) just like they are today. They'd be screwed either way, though -- regardless of whether the gov fixes the gold price according to Rothbard's formula or the market determined the price according to supply/demand.
The main point of this thread, as I see it, is not whether Rothbard's or my plan is better (for whom?) but that most holders of FRN-denominated demand deposits or bonds will realize that they have been majorly screwed. I claim that the screwing has already occured and that the introduction of sound money competition (be it by my or Rothbard's plan) is merely revealing that fact.
Your quest for a painless transition is futile. So buckle up and try to enjoy the fireworks.
z1235:Minarchist, I thought you had a problem with Rothbard's plan. I never said his plan was bad, btw.
I do have concerns about Rothbard's plan, about it's potentially inflationary consequences, though I am less concerned now than when I started the thread. In light of Graham's point about forex markets adjusting faster than goods markets, I expect the inflationary consequences of revaluing gold to, say, $10,000/oz would be not nearly as sever as I had been thinking. And further, the government could buy gold in advance of the revaluation, and set the par below the market price, as I suggested, which would entirely eliminate the risk of an influx of foreign gold, and minimize the inflationary effect of monetizing domestic gold. Basically, I am more in favor of Rothbard's plan now than when I started the thread, though I'm still open to alternatives. I'm not saying Rothbard's plan is the best, I'm just saying it's the best of those I've heard so far.
I don't think we settled that issue. How would a contract specifying future payment of FRN be changed to reflect future payment in gold (or whatever the new money is)? FRN are going to become increasingly worthless once legal tender laws and capital gains taxes are eliminated (even more so if the Fed is, as you suggested, printing them in large quantities to backstop demand liabilities of the banks as people withdraw and convert their FRN). Therefore, it follows that contracts involving future money (loans, bonds, futures, options, etc), still denominated in a failing currency (FRN), will increasingly lose their value. This drop in value could be sudden or gradual, depending on how quickly you think the FRN is going to be replaced by a new money.
I'm not searching for a painless transition, I'm searching for the least painful transition. For instance, I conclude that if Plan A and Plan B are equal in all respects but one - that A leaves the credit markets functioning, while B destroys the credit markets - then A is preferable.
My interest is in moving from the present situation to a future situation where the State has nothing to do with money or banking. This thread is about discussing different possible means of bringing about that desirable future state. So far, we've mostly discussed Rothbard and Hayek's plans, but I don't want to limit discussion to those. I'm all ears for any proposal anyone has for transitioning from the present situation to a free market in money and banking.
Minarchist, I agree. Why do you think governments and central banks started accumulating gold again? The race to the bottom (currency devaluation) has entered the final stages. The entities that are able to outprint the others and exchange their worthless paper for gold will come out as the winners on the other side of the black hole.
Minarchist:Some kind of correction is required, sure, but there are different methods of doing this, with different consequences. Some are clearly better than others. Likewise, if you've been shot in the leg, some treatments are better than others. Penicillin or amputation, take your pick. Consider a classic historical example. Britain returned to the gold standard after WWI. They could have chosen to return at a realistic par given the wartime inflation, and everything would have gone smoothly. Instead, they chose to go back at the pre-war par and caused a depression, and eventually a run on the pound forcing them back off gold. It does very much matter how you do these things.
What 'realistic par' would have made things go smoothly? Do you mean the prevailing market price for gold? What is the difference between then and now?
z:Graham, different types of choices have different types of consequences. It is conceivable that more than one keyboard standard could coexist if the "cost" of choosing the suboptimal version was smaller than the disutility of making a switch. I don't think that's the case when money/finance is concerned. People who are too lazy to recognize the superiority of sound money over gun-less fiat money (no legal tender laws, no capital gains taxes) will simply be outcompeted in a free market by the people who do.
You may be right, but I think it's worth considering, and Rothbard appears to have felt it worth considering. Which is why I'd be interested in hearing from you a possible sequence of events that could lead us from where we are now to having a stable, sound currency based on gold. Step 1 is the government abolishes legal tender laws and capital gains taxes. What happens next? I'd just like a conceivable scenario.
Minarchist:In light of Graham's point about forex markets adjusting faster than goods markets, I expect the inflationary consequences of revaluing gold to, say, $10,000/oz would be not nearly as sever as I had been thinking.
I'd be interested to hear what a Rothbardian monetary theorist thinks about this - i.e. which good(s) and where would likely see the biggest price change before the new equilibrium is reached. If I'm right, the most significant change in price following the Rothbard plan would be on the price of gold in other currencies, and there would be no significant disruption to the prices of (non-money) goods anywhere. I think this was my original conclusion, though I was never totally sure about it. I wonder what would happen if a much smaller country, like the UK, went first... would the effect be the same? Then what about the second country to go?
Graham Wright:Which is why I'd be interested in hearing from you a possible sequence of events that could lead us from where we are now to having a stable, sound currency based on gold. Step 1 is the government abolishes legal tender laws and capital gains taxes. What happens next? I'd just like a conceivable scenario.
That's a very good question and we can only stipulate guesses as to what happens next but I'll give it a shot. I envision businesses like Schiff's gold debit card would start competing for gold deposits by offering low fees for storage and transactions. Perhaps even bitcoin could enter the party as venues would offer gold-to-bitcoin-to-gold services which would allow people to transact across the country or the globe. Businesses would start posting prices in gold or pegged "new dollar" proxies thereof. Employers would start offering wages in same. A gold loan market would emerge, and contracts (loans or otherwise) would start to be denominated in gold (or proxies thereof). All of these would compete with FRN-denominated equivalents. Personally, I know which ones I would prefer and I hope self-interest would guide most other people to do the same.
Undoubtedly this would lead to a large increase in the price of gold in FRN terms which would present a shock to many holders of FRNs or FRN denominated contracts (bonds) and a "windfall" to the prescient holders of gold, but as the market gradually moves from FRNs to gold and its proxies, the "damage" would subside and the money market would reach a new, much more stable state.
I'd be interested to hear what a Rothbardian monetary theorist thinks about this - i.e. which good(s) and where would likely see the biggest price change before the new equilibrium is reached.
I'm no Rothbardian monetary theorist, btw. I don't anticipate too large of a price change of anything in gold terms but I would predict a hyperinflationary death spiral in FRN terms, as the market devalues FRNs and moves to gold.
If I'm right, the most significant change in price following the Rothbard plan would be on the price of gold in other currencies, and there would be no significant disruption to the prices of (non-money) goods anywhere. I think this was my original conclusion, though I was never totally sure about it.
I disagree. Although it is reasonable to expect price inflation in FRN terms and price deflation in gold terms, I think that the prices of most other goods/services would change much more in FRN terms (up) than in gold terms (down).
I wonder what would happen if a much smaller country, like the UK, went first... would the effect be the same? Then what about the second country to go?
I've pondered this myself. I think if a smaller country did this on its own, then the stronger (paper legal tender) ones would either manipulate the (gold) markets in a way that would hurt trade with it the most, impose an embargo, or maybe even outright "deliver freedom" to its citizens via bombs and assasins. That would be the lesson for any other country contemplating such move.
I've thought about a Rothbard style plan before so here they are.
1) Stop the Bank of England (FED over the pond) from printing notes and minting coins.
2) The Bank of England to sell all foriegn currency reserves and purchase gold to increase the holdings.
After this make the markets and the public the rest of the plan.
3) Reduce the money supply to actual level ie. give banks an 18-24 month period in which to hold 100% reserves. This will also include time deposits as well as demand deposits. Essentially in the former if you save £1000 in a 30 day account the bank must be able to pay you that money back after the 30 days, it can't lend the £1000 out for 60 days since they only have title for it for 30 days. It is essentially fraudulent. See Block and Barnett on this here. As an aside, the banks could renagotiate deals such that the lender lends to the bank for an indefinite time period and can recall at will. Under such an agreement full reserves are not necessary since the money is the bank's until noted otherwise and could lend it for as long as they wanted to. However I think this will be somewhat rare.
This would slowly bring about a deflation making each note worth more and the transition less painful.
4) After two years count up all the value of time and deposits and divide by the weight of gold to back the notes. This is more than an economic exercise: when leaving the gold standard the state essentially stole the gold of the populous; this is a very inexact method of the returning it but it's one of the better ones.
Now this will bring a lot of gold into the country but the above measures should make it less extreme than it otherwise would be especially giving notice so that the markets can adjust in anticipation over a period of time. It will still be a large shock but we are going to have one anyway, even if we don't go back to a gold standard so we better be prepared for it. The issue with just repealing legal tender laws is that many honest people could lose out and could possibly be more destablising than the above plan even if it would work on its own with the state still want tax payments in government issued notes.
5) Abolish legal tender laws and the Bank of England/ FED.
The atoms tell the atoms so, for I never was or will but atoms forevermore be.
Yours sincerely,
Physiocrat
The mechanics of returning to a gold standard is a question/endeavor that misses the point. No one knows what the standard should be. If anything, the question should be reframed more along the lines of, "How to end the government monopoly on the issuance of currency so the market can find solutions." The market will determine what standard(s) are necessary and useful, be it gold, silver, platinum, or gummy bears. And those solutions will likely coexist and change over time. Everything else is just playing Who Is The Better Central Planner.
Graham Wright:What 'realistic par' would have made things go smoothly? Do you mean the prevailing market price for gold?
Suppose the dollar was redeemable for 1 oz gold, and the pound was trading at $.50, i.e. 2 pounds are worth 1 dollar. In other words, the pound is worth 1/2 oz gold. Now suppose the BoE went back to gold at a par of 1oz gold per pound. The pound has doubled in value in terms of gold/dollars. The price of British goods in dollars has just doubled, stifling British exports to the US. The price of US goods in pounds has just halved, increasing British imports from the US. In other words, gold flows from Britain to the US, goods flow the other direction. This continues until either goods prices in the US rise, goods prices in Britain fall, the pound falls against the dollar, or some combination of these. This is why the British promoted the inflationary monetary policy in the US during this period, because they wanted to make the necessary price adjustments without having to suffer deflation in Britain. That is, in order to attain equilibrium without the pound faling against the dollar, and without British prices falling, US prices has to rise. Of course, it didn't work. Even with Benjamin Strong printing like crazy at the NY Fed, there was a deflation in Britain as gold flowed to the US, causing massive unemployment (since labor prices were unable to adjust downward due to labor laws, unions, et al) especially in the export industries, and eventually a run on the BoE prompting them back off gold in 1931.
This could have all been avoided if Britain had just gone back to gold at the market price. There would have then been 100% backing for all pound liabilities*, and no need for any price adjustments.
*This is assuming that the market at the time was properly discounting the pound relative the dollar/gold to reflect the wartime inflation.
What is the difference between then and now?
In what sense? One difference is that (I assume, I'd have to actually crunch the numbers) that the market in 1925 was discounting the pound to reflect the inflation since Britain went off gold in 1914. Today, in the US, that is not the case. The market has not properly discounted the dollar relative gold to reflect the inflation of the past several decades. Thus we cannot go back at the market price without major problems. Going back at the market price would avoid the need for general price adjustments, but at the current market price the US government would run out of gold before it redeemed most of the dollar claims.
The ideal situation is to go back at the market price if the market price reflects the actual supplies of official gold and money.