On the American Gold Standard: Winners and Losers
Gary North

The Private Money Guy and the State Money Guy do not seem to be communicating. Like ships in the night, they pass each other, each flying a flag called "Gold Standard."

PMG: You say that you favor a gold standard, even though it is enforced by the U.S. government.

SMG: I do.

PMG: We no longer have a gold standard.

SMG: Correct.

PMG: We have not had one since 1933.

SMG: Since 1971.

PMG: But Americans could not legally own gold from 1933 to 1975.

SMG: That did not matter. Foreign central banks and governments could buy gold from the U.S. Treasury for $35 per ounce.

PMG: Until they actually tried.

SMG: When they tried to buy gold, beginning in 1958, they got delivery.

PMG: But Lyndon Johnson balked in 1968. After the British devalued the pound, demand for gold rose. Its price rose. Central bankers set up a two-tier gold market.

SMG: Correct. They sold gold to each other at $35 an ounce, but sold it for more to the public.

PMG: That was a tip-off that the U.S. was running out of gold.

SMG: Then Nixon broke the 1944 Bretton Woods agreement on August 15, 1971. No more gold for sale. That ended the gold standard.

PMG: That was what Roosevelt did to Americans in 1933.

SMG: But the gold standard still restrained the creation of money.

PMG: Not in World War II, it didn't. Not in post-War America. Not under Lyndon Johnson' guns and butter economy.

SMG: I said "restrained." I did not say "stabilized."

PMG: Isn't the government-enforced gold standard the same story everywhere? Isn't it a series of restrictions on the original promise to redeem paper money for a fixed supply of gold?

SMG: It is all right to break contract with the public. It is not all right to break contract with central banks.

PMG: How do you figure?

SMG: Private central banks represent political sovereignty.

PMG: Even though they are privately owned.

SMG: Yes.

PMG: What is political sovereignty?

SMG: The widely accepted right of the government to stick a gun in your belly and say, "Fork over your money."

PMG: Even when the money is gold.

SMG: Especially when the money is gold.

PMG: That sounds like the phrase, "All power grows out of the barrel of a gun."

SMG: Yes, it does. What a catchy phase!

PMG: You've never heard it before.

SMG: Not that I recall.

PMG: Isn't the main benefit of a gold standard the reduction of the power of government?

SMG: Yes.

PMG: Then how does a gold standard take away the government's gun?

SMG: It doesn't. It just pressures the government to point the gun elsewhere.

PMG: Where?

SMG: At central banks.

PMG: Which hold the gold for their governments.

SMG: Yes.

PMG: So that governments cannot spend it.

SMG: Yes.

PMG: So the public won't get familiar with gold coins.

SMG: Yes.

PMG: Which reduces pressure on central banks.

SMG: Yes.

PMG: So, you think it's OK for central banks to put pressure on central banks, but not the public.

SMG: Yes.

PMG: Why is that?

SMG: Because central bankers attended the best universities. They have training in scientific economics.

PMG: You regard the public as ill-informed.

SMG: Yes.

PMG: Even about their own self-interest.

SMG: Their self-interest is not the nation's self-interest.

PMG: What is the nation's self-interest?

SMG: To provide stable prices and high employment. That's what the Employment Act of 1946 says.

PMG: But central banks have not supplied stable prices.

SMG: Not so far. But they are working on it.

PMG: Since 1914.

SMG: Yes.

PMG: So, all we need to do is go back to the gold standard of August 14, 1971.

SMG: Yes.

PMG: But with the public's right to own gold.

SMG: I suppose so. It's not important.

PMG: What is important?

SMG: The right of central banks to buy gold from each other at a fixed price.

PMG: What price?

SMG: I don't know. That is for economists at the central bank to determine.

PMG: Which central bank?

SMG: The international one.

PMG: What one is that?

SMG: The one that has not been set up yet. They are working on it.

PMG: For how long?

SMG: Since at least the early 1970's.

PMG: But they have not got it yet.

SMG: No.

PMG: That bank will set the price of gold.

SMG: Yes.

PMG: Will it pay this price to anyone who wants to sell it gold?

SMG: Yes.

PMG: Including gold mines.

SMG: Yes.

PMG: Will it sell gold at this price?

SMG: Only to national central banks.

PMG: So, the gold flows into the central banks, but it does not flow out.

SMG: Correct.

PMG: So, the central banks will control the price of gold.

SMG: For as long as the official price is above the market price.

PMG: What is to keep central banks from raising the price?

SMG: Only the supply of money.

PMG: But they can create money to buy the gold.

SMG: Yes.

PMG: Then they can buy up the world's gold.

SMG: In theory, yes. But they won't.

PMG: Why not?

SMG: This would raise the price of gold. That would break the agreement.

PMG: But they can change the agreement.

SMG: Legally, yes.

PMG: So they can buy up more gold.

SMG: Yes.

PMG: And store it at their expense.

SMG: Yes.

PMG: Then of what possible use is all that stored gold?

SMG: It keeps it away from the public.

PMG: Who might use gold in trade.

SMG: Yes.

PMG: And get familiar with gold coins.

SMG: Yes.

PMG: As people were before 1914.

SMG: Yes.

PMG: Then the primary purpose of the Bretton Woods gold standard from 1944 to 1971 was to keep gold coins away from the public.

SMG: Yes.

PMG: Which reduced pressure on central bankers to stabilize the money supply.

SMG: Yes.

PMG: Do you think that this lack of pressure on central banks to stabilize money led to the universal rise of prices under the Bretton Woods gold standard?

SMG: No.

PMG: Then what did cause the rise in prices?

SMG: Economists at central banks are studying this topic very carefully.

PMG: What have they decided?

SMG: That there needs to be further study.

PMG: Why wouldn't a gold coin standard work?

SMG: Because there is not enough gold.

PMG: To do what?

SMG: To facilitate trade.

PMG: But isn't trade conducted on the basis of supply and demand?

SMG: Yes.

PMG: So, there is a supply of gold, and demand by individuals to obtain gold.

SMG: Yes.

PMG: The supply of gold is close to constant. New gold from mines in a year is a tiny fraction of the world's gold supply.

SMG: True.

PMG: Then why can't prices in gold adjust to the supply of gold?

SMG: You mean more goods chasing a fixed supply of gold.

PMG: Yes.

SMG: But that would lead to falling prices.

PMG: Yes.

SMG: But that's deflationary.

PMG: Just like falling computer prices are deflationary.

SMG: That would create a depression.

PMG: Do falling computer prices create a depression?

SMG: No. But falling prices for everything else would.

PMG: Why?

SMG: Because Milton Friedman taught that.

PMG: True.

SMG: And so did Irving Fisher before him.

PMG: True.

SMG: So, that settles it.

PMG: Settles what?

SMG: That falling prices are bad.

PMG: But Fisher and Friedman opposed the gold standard.

SMG: Yes.

PMG: But you want a gold standard.

SMG: A state-enforced gold standard.

PMG: Where central banks create fiat money to buy gold.

SMG: Yes.

PMG: And then they refuse to sell gold.

SMG: Yes.

PMG: But they lease gold at half of a percent interest per year.

SMG: That is not the same as selling gold.

PMG: But they turn over the gold to private banks, called bullion banks.

SMG: Yes.

PMG: And these banks sell the leased gold.

SMG: Yes, they do.

PMG: And this isn't selling a nation's gold?

SMG: No, it isn't.

PMG: But the gold is gone.

SMG: Yes, but the bullion banks have given central banks IOU's for the gold.

PMG: But the gold is gone. It's in jewelry in India. It's part of some daughter's dowry.

SMG: But the IOU's are as good as gold.

PMG: Has any central bank demanded the return of its gold?

SMG: Not as far as any government knows.

PMG: But if they did, wouldn't the price of gold soar?

SMG: To the moon. That's why they won't demand payment in gold. They will roll over the loans.

PMG: Just as the Federal government does with its debt.

SMG: Exactly.

PMG: So, the present system is an IOU gold standard.

SMG: Yes.

PMG: The bullion banks gave IOU's to the central banks.

SMG: Yes.

PMG: The central banks gave IOU's to their governments.

SMG: Yes.

PNG: Then the present system is based on IOU's to gold.

SMG: Yes.

PMG: But you say it's not a gold standard.

SMG: Not since 1971.

PMG: But for all we know, all the gold belongs to Indians.

SMG: For all we know, yes.

PMG: And if the central banks demanded payment from the bullion banks, the price of gold would soar.

SMG: Yes.

PMG: I can see what would happen. Slumdog millionaires.

SMG: I blame Nixon.

PMG: I blame Woodrow Wilson.

SMG: It's clear to me who won.

PMG: Who?

SMG: William Jennings Bryan.

PMG: It was the only thing he ever won.

SMG: But it was a biggie.

March 24, 2009

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.