The Appeal of the Gold Standard
The appeal of the Gold Standard is that classic image of the Gold Coin in the minds of people. It is a concrete mental picture. Our paper money system is something else. People know the Federal Reserve dollars are slowly losing value (“inflating”). The gold coin you see in your mind’s eye is more than just a physical object; it is a belief in permanence, a belief in objective reality (and in some sense, “natural law,” i.e. chemistry, physics, mechanics, ethics).
Economists would want to promise a “Stable Price Level” as a monetary standard. It is not believable. The Federal Reserve cannot even “manage expectations” about their plans for interest rates in 2016. In seeking this elusive ideal, government “planning” crowds out financial planning by individual families and businesses, because “the language of future prices/values” becomes fuzzy – what is the future value of One Dollar?
It is an ideal policy but it entails the assumption of “management.” That is what fails. The ideal of their success – a “stable price level” – is not believable (another example, perhaps, like believing in unicorns? A holy grail?).
What Can We Believe?
Do we believe that a One Ounce Coin in my hands or promised to me in 10 years will be pretty much the same One Ounce Coin, or its twin? There is “object permanence” in my mind, and that is an important detail about any monetary system. Gold coins, in particular, communicate this sense of permanence to us because they do not tarnish and by their unusual weight (high density). Their appeal of permanence is subliminal.
Like a professor in front of a class, however, advocates for the Federal Reserve talk as if they can step outside of real time and draw a “marker line” on a whiteboard, with a time-line along the horizontal axis. This is the goal of “managing the money supply” or “managing interest rates” or “targeting” of … [Taylor Rule?].
The managers’ impossible target: a “stable price level” (purchasing power of money):
- Not zero inflation, but whatever the magic model of the macro-economists recommends this decade.
[ The astoundingly false Phillips Curve idea is still taught to first-year students in macro-economics. Why? ]
Nobody can watch “past and future time” in your human-daily-life except by imagination in a mathematical 5th Dimension; an abstract model, not empirical reality. But it is only in such a 5th Dimension, on a “price graph,” that a “stable Price Level” might theoretically exist. [ Unicorns live in the 5th Dimension. ] The professors try to design a “Macro-economic Model” of the economy, and try statistically to measure its parameters. Then central planners at the Federal Reserve are supposed “to use it.”
F.A. Hayek warned about this “pretense of knowledge” in his Nobel Lecture, 1974.
Advocates for faith in this macro-economic modeling by the Federal Reserve are asking us to put our individual faith in the future policy of government. That is not a “standard.” When has government policy ever been reliable? When has the Federal Reserve ever gotten business cycle predictions right?
Nobody can believe the professor’s “marker line” showing [future prices of goods?] will be a flat, horizontal, straight line over time charted against the exchange ratios of all other commodities, even in the imaginary 5th Dimension where the unicorns romp and play (not even for the next few years in our real 4-Dimension world).
The Federal Reserve in Dec.2015 raised interest rates because “nobody could believe” they might be able to keep them at Zero forever. Who can believe they know how to keep a stable price level? Certainly 100 years of history show otherwise. Part of our problem is the monopoly on what is allowed for tax payments (and the tax basis of assets).
Financial Planning Requires a “Concrete” Unit of Accounting
If you want to see a financial system that promotes savings and investments, a society needs a “concrete” Unit of Accounting. Economists have taught for 100 years that “money” is just worth the trust people put into it. What happens when such trust fades?
- The conceptual “concrete” detail of this idea is that it makes the financial paper (bonds, deferred payments), which could use this Unit of Accounting seem “more trustworthy.”
Visualize the problem most people face when challenged by financial planning decisions, such as for a distant retirement. What is the frame of reference in which someone is supposed to weigh some future value (in “dollars”)?
- [ Pretend you are not as well-informed about finance and economics as the professionals you are consulting. How well can they predict the future?]
A lifetime of retirement beginning in 20 years, planned in “dollars,” cannot be compared to any standard of living referent (rental costs, food costs, taxation) in terms of familiar “dollars” today. The numbers do not allow a comparison of values because they have no relation except as the passage of time may reveal. You have to predict the Consumer Price Index 20-40 years from now.
- What will a dollar get you next year? Less?
No one can successfully do financial planning today in terms of “dollars.”
A gold coin would remain a gold coin and whatever your deferred-payment contract says, it would promise to pay you that equivalent way (in the same kind of gold coinage). Creditors could be paid in a gold coin, but more likely in some transfer of ownership of other paper assets to discharge the debt, but denominated in the gold coinage. Final settlements could be done by any other, different paper-credit methods (at the option of the obligee).
The supposed “stable price level” objective of measuring, would be knowing or trusting the relative value of something you want/need, and what you can trade to obtain it. We might not be able to predict the exchange rate of an ounce of gold vs. a pound of beef in 25 years, but it would not be a whim of imagination.
- I would be more comfortable thinking about coin vs. beef than about $100 today vs. $1,000,000 in 25 years, and wondering which would be more valuable?
Net present value calculations collapse to the shortest time horizon when future money values are uncertain. “Uncertainty” is subjective.
The “unit of accounting” in your mind should possess some “object permanence.” It ought to be a foundation of “Constitutional Money” to have the government’s Unit of Accounting be a concrete thing. In the old days of 1785 and 1792, the “dollar” was an object – a silver coin. Your property is your private ownership; so would a coin-object be;
- . . . but what is the status of the “account balance” your bankers owe you in promised bank-draft credit to pay your expenses? Do you use direct debits or checking? If your “account balance” happens to be denominated in government-accounting units ( “d-o-l-l-a-r-s” ), you should have a right to know if those are not shrinking or “melting away” as a matter of government (or Federal Reserve “central planning”) policy?
Your banker relies on Federal Reserve Accounting-Unit U$D, his reserves on deposit with the Fed.
“F.R.A.U.D.s” would be an insulting acronym for those accounting units.
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[ Editor’s note: nothing in the proposal below should be interpreted as undermining the strength of the US Dollar nor of the “full faith and credit of the United States.” ]
A Modest Proposal
Let Congress do something about the weights and measures of Money. Manufacturing physical coins is no longer very important in the electronic money era, nor is printing greenbacks. Certainly physical coins would not be used in much retail trade. But the government would always need to choose its own bureaucracy’s Unit of Accounting, just to make budgets, appropriations, and payments to vendors and employees. Whatever unit is selected, it will define a major measurement of financial value in the fiduciary sphere of the nation.
- People may quarrel over a definition of “money” but a common “name” is useful, and a weight-name is Concrete. It fits the mental image and it is available for price quoting and balance sheet asset measurements.
- We just need to have the government “play in the same sandbox” as private sector financial innovators, who can try to create new investment and payments instruments denominated in gold (without fixing a “dollar price” for gold).
A parallel currency should be as unburdened-by-transactions-costs as the prior monopoly Units of Accounting. The Mint is a “big kid” in the sandbox, regarding Units of Accounting. The Treasury is a “big kid” in respect to government bonds.
The goal of the modest proposal is to set up the Unit of Accounting for new financial instruments in terms of gold bullion.
This is a “Schelling point” in the financial system – the Unit of Accounting in which the bonds are denominated.
Issue Long-term Bonds
The USA has a lot of gold. The inventory at Fort Knox could be identified and pledged/indentured in kilograms as the principal for long-term Treasury bonds. The credit those bonds would collateralize in banks would likely become the basis for several new credit instruments, annuities, and private bonds, but we do not want a government monopoly of money. There is no reason the government should “create” any “money” nor any new Unit of Accounting different from the common measurements of gold weight.
- The Kilogram Bonds would be sold for dollars, euro, pounds, yen, yuan and whatever. The dollars received could be used for normal roll-over maturities in outstanding Treasury debt. Gradually the outstanding “dollar denominated” Treasury debt would fall to Zero. Entitlement fund values would be converted to gold grams when the Congress authorizes that change.
The proposal below is intended “to cut free” the legal tender “dollar” from the U.S. Treasury and entrust it entirely to the Federal Reserve, which should manage it like a Hayek-competitive currency to be stronger than the others. (If it could become stronger than gold, the US Treasury would be either delighted or embarrassed, but it would be a fun game to see the Fed maintain a strong dollar.)
[These early months of 2016, for example, would have been a good time to introduce gold into an official Treasury payments system, as a test to see if the dollar weakened, as some economists favor.]
Meanwhile the Congress and people could begin to rely on a fixed Unit of Accounting. The country would then be officially on a Parallel Currency Standard for a transition period that could last for decades.
A Bookkeeping System for Government
The ‘Not-so-Modest’ Proposal
The government itself needs a bookkeeping system and a system for planning budgets, etc. Units of Accounting are important, and a system based strictly on bullion should be measured in bullion. The United States and all of the rest of the world measures commodities in the System International units, and so also should the fundamental unit of accounting for the government and debts of the United States. The “gram of fine .9999 gold” seems available.
I RECOMMEND a statute, adopted under Article I, Section 8, in which the Congress declares the official Unit of Accounting for the Federal government of the United States will be “the gram of .9999 fine gold.”
(5) The government would not issue any paper or credit “notes” in this Unit of Accounting, but it would vote appropriations in the Units, and Sec.Treasury would disburse those “value-amounts” in whatever paper money a person being paid wants to receive, using ACH methods, into her or his bank accounts.
Government Bookkeeping and Debts are Different from Payments
(4) Taxes similarly would be paid into the US Treasury in whatever paper units a taxpayer has in a bank for payments, but Sec.Treasury would convert any such payments, using the Exchange Stabilization Fund he now controls in the US Treasury, to convert those payments into the gold gram units of accounting used by the US government’s General Fund. The statutory authority is already in the law. [31USC5117] The bookkeeping would be computerized, and trivial.
Nothing Changes on Day-1 in Financial Markets
(3) The private market could issue and use whatever paper or credit system they wanted to adopt. The Federal Reserve System could keep on managing the “dollar denominated” US Debt on behalf of the US Treasury, and Congress would still be due to pay “dollar-denominated” interest on Treasury Debt until all dollar-denominated bonds would be matured and paid off.
- The “expectations” of the market regarding the future value of the exchange rate of the Federal Reserve Accounting Unit Dollar would be something for the Federal Reserve, not the Congress nor the Sec.Treasury, “to manage.”
The Federal Reserve instead of Sec.Treasury should be “managing” the foreign exchange rates of the USD. Those should be freely set by buyers and sellers, not by policy.
(2) The Federal Reserve would “manage the money supply and interest rates” just as it continues to do today. The national debt of the government of the United States, under the 14th Amendment, will not be questioned; it will be paid according to agreements, but no bond denominations now issued will be continued when the Gold Kilogram Bonds become available. Until then, business as usual in “dollars.”
Long-term Treasury Gold Bonds
(1) The US Congress should authorize the Sec.Treasury to begin issuing 50-year or even 100-year coupon Treasury Bonds denominated in Kilograms of .9999 Fine Gold. As old dollar-denominated Treasury Bonds mature, the new issues of Gold Kilogram Bonds to the market should easily command sufficient “dollar funds” to pay off the maturing bonds.
The coupon rates on the bonds could begin at 1% annually, or less; and should be indexed to some fiscal measure, but indexing is not essential. A “console” method of the bonds paying interest but never actually “maturing” is recommended, instead of institutionalizing “roll over” periods. The U.S. Treasury should make good delivery in specie upon maturity (or if console bonds, on surrender) if a holder requested redemption. If some investors wanted “to cash” the Treasury kg.bond in some other foreign exchange, or in US Dollars, ACH could credit accounts in whatever paper units the holder requested.
Paying a variable coupon amount as an indexing element would also be advisable. Fiscal indexing means that Congressional budget surplus or deficit appropriations would affect US bonds’ interest rates directly and immediately.
[ I wish to credit John H. Cochrane of the University of Chicago Booth School and the Hoover Institution for important new ideas about console financing and variable coupon rates, fiscal indexing, and new economic thinking about macro-economic models in a “large central bank balance sheet monetary system.” He, of course, bears no responsibility for my crackpot libertarian ideas.]
- SEE THE BLOG POST on this site Government Accounting with Gold Grams.