Gold Backing Could Help Bolster Confidence in the Dollar

To believe in a pure fiat money system, such as the United States has now, one must believe in the wisdom of the Federal Reserve. The problem is that belief is hardly justified:The Fed cannot know the economic and financial future — it can’t make reliable forecasts, know what the results of its own actions will be, or know what it will do in the future in unpredictable circumstances. The Fed will often enough unintentionally create systemic risk by its own monetary actions. Too, the Fed cannot “manage the economy.” It is impossible for any central authority to ever know enough to do that, as Ludwig von Mises and Friedrich Hayek demonstrated a century ago. A key part of this problem is that the Fed cannot know what the right interest rate is.The Fed cannot resist urgent pressure from the Treasury to finance the government’s deficits. If the Treasury is running out of borrowing capacity, it will borrow money from the Fed, which, as a cooperative part of the government, will print it up.These profound limitations, which contrast so strongly with the Fed’s pretensions, mean the Fed should not be able to print up however much money it wants, but be disciplined by a kind of money it cannot print. The classic choice for this fundamental function is, of course, gold. In the fateful year 1971, 55 years ago, President Nixon ended the last link of currency to gold for the dollar and thus for the world. The resulting global fiat money system is what we live in and what the world now accepts as normal, so “We are all Nixonians now. “After 55 years, though, is there a way to reintroduce a monetary role for gold? Now a counselor in the office of the secretary of the Treasury, Judy Shelton, has suggested that the United States Treasury should issue gold bonds, i.e. bonds payable in ounces of gold. It is certainly possible to do that, especially as a pilot program. There is available collateral, since the United States Treasury owns about 8,000 tons of gold. The Treasury has issued gold bonds in the past. To do it now, the outdated statute setting the official price of gold in dollars would need to be amended.If Treasury did issue gold bonds again, there would be three fundamentally different kinds of Treasury bonds: nominal bonds payable in their dollar face amount; inflation-adjusted bonds, which already exist, payable in purchasing power; and gold-backed bonds, payable in gold. They could compete for investor favor. We can further consider whether the Treasury could also issue a gold-backed currency. That is, dollar bills that are gold certificates, payable in gold coin on demand. Would that be possible? It certainly is financially possible because such Treasury gold certificates existed historically for decades.One can easily find on the internet lots of historical examples of them. They carry on their face a promise like this: “This certifies that there has been deposited in the Treasury of the United States of America 20 dollars in gold coin payable to the bearer on demand.” It is possible to have multiple kinds of American currency circulating. In the 1920s, for example, there were circulating Treasury gold certificates, Treasury silver certificates payable in silver dollars, Federal Reserve notes, and national bank notes. In those days, individual national banks still had circulating currency.A particularly suggestive example of multiple currencies is the Legal Tender Act of 1863, which is famous — or infamous — for authorizing “greenbacks,” pure paper currency to finance the Civil War. That act, though, actually authorized two different kinds of United States currency to be issued by the Treasury.It authorized greenbacks that meant “just print it up because we have to pay to carry on the war.” Yet the very same act also authorized gold certificates to be issued by the Treasury, which were by law redeemable in gold coin. As the war went on, in a natural development, gold currency went to a premium against the paper currency, or in other words, the paper currency went to a discount against gold currency. At their low point, the greenbacks traded for 39 cents in gold dollars. We might imagine that the United States Treasury could today, as it could under the Legal Tender Act of 1863 in the Lincoln administration, issue gold certificates, and that these certificates would be payable in gold coin that the Treasury actually had on hand.Would those dollars go to a premium against the Federal Reserve’s paper dollars? That would be a good lesson for the Fed. Which of those dollars would Americans prefer if the two currencies were competing in the market: a Treasury gold certificate or a Federal Reserve paper dollar?

Gold Backing Could Help Bolster Confidence in the Dollar

Gold Backing Could Help Bolster Confidence in the Dollar

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