I'll use Ron Paul as a counter-example to my position on this. He knows where the problem is, generally, but beyond that he's not real tight on what to do about it. We agree some, and we disagree a lot. Metallic-backed money is no more sound than fiat money. Dr. Paul will tell you about how coins have been debased since their invention, and then ramble on about hard money. The only thing that can protect the value of a currency of any kind is a responsible sovereign, in this case the American people as represented by the Congress (I'm thinking wishfully here). Congress is currently failing to protect the value of the fiat dollar (April 2011) because coming off the gold standard has led to the Federal Reserve allowing private banks to create money out of nothing for themselves, but that is a usurpation of that power by the banks. Congress never gave them that power, (more on that later), and I have a bill working its way around the Hill that clarifies and thus fixes that. If Congress decides when new money is created, fiat money is as sound as metallic-backed money, or even metal coin.
I'm told that the guy that I agree with about some of my basic axioms is F. Von Hayek of The Austrian School of economists. I don't know about that, but my grandmother was from Vienna. Dr. Paul likes to invoke The Austrian School, and he'll turn right around and contradict them as well. One of their axioms, I'm told, is that the value of money is a function of the amount of it in circulation. Consider the game of Monopoly. Increase the price of everything by a factor of ten, increase all payments by a factor of ten, increase the amount of money in the bank by ten, and it's the same game. Who wins and who loses will respond exactly the same to the same player decisions and dice rolls. Rupees, cowries, dollars, same game, as long as the change is game-wide, i.e. economy-wide. Now, if the value of money changes during the game, that's inflation/deflation, and who wins depends on who is getting the new money (in the case of inflation). That is Federal Reserve Banks in the USA these days. It's also probably why Bernanke likes a little inflation. It's profit for the banks he's supposed to be overseeing. The problem with current Fed policy is they will eventually wind up owning the entire economy, and that has been the trend for decades, and is now in a death-spiral under Obomber. But not because we went off the gold standard. Because we then accidentally allowed private banks to print money. That's like allowing them to create gold, or like allowing them to set the price of it, which will kill the economy eventually. The situation we have now is that the banks can create money at will, and buy up everything on the board as time progresses, which they are doing. And holding down the value of your house, debasing your long-term dollar-denominated assets like pensions, etc.
In the case of metallic-backed money, the sovereign can debase the currency by declaring a new backing rate, which was done when the US was on, and in fact set, the gold standard. Even in the case of precious metal coins, if the sovereign can declare a face value for a coin, they can debase it. It's all about creating new money, and who the new money goes to.
The gold standard can be a huge screwing of the public, as it was under LBJ. In that case, gold was undervalued, and the government coerced the sale of a lot of it. That's a missing Article of the Bill of Rights, which I put in my Amendment; the government can not force the sale of metals at a particular price. You heard it from me. And having metal money would make it worse.
Therefore, fiat money can be sound, if the controller/producer of it is sound. The question is when is legal tender created. Legal tender is money a plaintiff has to accept as compensation in a court. An old term for creating legal tender is seignorage. This is usually used to denote making the face value of a coin greater than the metallic value, thus creating money for the creator of the coin, usually the guy stamped on the coin. US coin has been reduced from metallic coin to fiat coin in my lifetime. Remember silver dimes? A penny now isn't even copper. It's zinc, copper plated, which is cheaper, but since the overall currency has been devalued so much, it still costs 1.7 cents to make a modern cheapo fiat penny.
Seignorage more generally is creating monetary value. Federal reserve banks do that now with no involvement from the people, and the Federal Reserve Banks get the money. The problem is not seignorage, the problem is seignorage that is direct huge profit to a few private entities.
Going back to a gold standard is also impossible without destroying the current system. Also, going back to a metallic standard requires removing a huge amount of metal from other purposes, which is a cost of such currencies, and an efficiency of fiat money.
People should be able to trade freely in metals, as well as own them securely. I have some proposals for that as well, but there is no reason to allow anyone but the Congress to create dollars, or call anything a dollar. To do otherwise is anarchy. If you want to trade gold coins with your face on them, or Ron Paul's, fine, but don't put "dollar" on them. That's a privilege of the sovereign people, acting as a whole. As far as not taxing such trades, I don 't support capital gains taxes, and I support not taxing any form of barter, but if I beat you in court and the judge says you owe me $5000, I want US dollars, not Ron Paul Dollars. This why you leave the coin of the realm to the sovereign. Dr. Paul's ideas about competing currencies went out several thousand years ago. And since the sovereign of the USA is theoretically the people, the potential is for a very stable fiat currency. Several decades of flim-flammery just need some exposure.
There's also a thing in my proposed overhaul of the constitution of the State of Maryland that they can coin "medallions" with a purity and a weight on them, and maybe a crab or a rockfish or an oyster, but they can't call them dollars. That is, let's call coins with a weight and purity, but no face value, "natural money". The US could do a series of deer species or something in gold and silver too. They already do eagles, but I believe they have archaic dollar denominations on them. A series is called for without that. Now, in a sense I agree with Dr. Paul here. If you BARTER a couple Maryland Gold Oysters or a couple US Moose for a car or something, that's barter. No business cost or revenue; no income tax under my tax plan (presidentbyamendment.com/issues/taxes2.html). But the value of the natural money is determined at each trade by the recipient, not the government, or some guy with a hydraulic jack in his garage. It's barter. The traders decide what both sides of the deal are worth. No seignorage. That's for Congress, and for dollars.
About the Fed never getting permission to print money, Bernanke will tell you they gave them that permission in 1913 in the Glass-Owen Act, BKA the Federal Reserve Act. Senator Carter Glass and friends never dreamed in their most fevered nightmares that the Fed would construe "elastic currency" to mean "and banks can create money out of nothing". That was impossible in 1913. We were on a gold standard. They were talking about elastic liquidity: float. Fractional reserves, leveraged off of gold. Interest rates. Normal bank powers and activities. They probably also wanted to see the money move around a lot better geographically. Not the sovereign power to create money in the hands of a few bankers. If there was a law allowing the Fed to create money, it would be in the section of the US Code on the Federal Open Market Committee, the FOMC. It isn't. The law says the FOMC can buy securities. It doesn't say they can invent the money to do so. Bernanke in recent days has said he's going on an openness offensive or some such. He can start by ending the incessant deceitful Fed practice of calling printing yourself money to purchase securities "purchasing securities". They call it that because purchasing securities IS legal. Fed funny money is not. He can also stop talking about pumping money into the economy. The Fed pumps debt into the economy, and onto the government, and keeps the money for it's (Federal Reserve Banks) stockholders. It would also be a good reminder if the Board was the Commission, so that the BANKS were the FRB, and the people who are supposed to prevent what is happening now would be the FRC. Bernanke seldom sounds like an overseer. He usually sounds like the bank. He's not. And he's not independent of the President either, but I digress. One thing Bernanke is honest about is his claim that he doesn't monetize debt. He doesn't. Monetizing debt gets rid of the debt. The Fed monetizes credit. My bill allows Congress to actually monetize debt. That would be a very bad practice, but clearly not as bad as the current insanity.
Dr. Paul and friends need to stop worrying about fractional reserve banking, which is an extension of the same kind of credit you see extended by a Chinese grocery store to its regular customers, and is perfectly sustainable for millenia, obviously, as are most habits of the Chinese, and start worrying about infinite reserve banking, which is currently killing the USA, and rapidly. The advantage of the gold standard was it took an act of Congress to change the backing rate. The same effect can be obtained by requiring Congress to change the supply of fiat money, with the added advantage that new money can go straight to the US Treasury, thus approximating giving all new money to the sovereign, the people. Let the banks whine about getting ripped off by inflation.
It bears mention that wars tend to create the greatest urge for currency debasement. Irresponsibility tends to be an across-the-board thing.
Bottom line, no we don't need to go back to the gold standard called for in the Constitution. We have severe problems, but archaic money isn't the solution. It takes two paragraphs to fix the worst fiscal problem in the world.
Rick Hohensee
April 16 2011
Also see presidentbyamendment.com/issues/money.html