End The FED. Get The Gold By Gary North

The Federal Reserve System would then be holding a pile of government IOUs. If the Federal Reserve follows deflationary policies, the United States government will then default on its IOUs, leaving the Federal Reserve holding a portfolio worth nothing. On the other hand, if the Federal Reserve inflates the currency, it will be sitting on top of the pile of IOUs to be paid off in money worth less and less. So, the Federal Reserve’s policy-makers will have to make a decision. Do they want to be stiffed by the government directly, or do they want to be stiffed by their own monetary policies? This is a tough decision. (This is the same long-run issue that faces Americans today: default vs. hyperinflation.)

What I am proposing is an exchange of assets exactly like the Federal Reserve pulled off in 2008. It sold liquid Treasury debt for illiquid toxic assets owned by the largest commercial banks. It did the exchange at book value, not actual market value of the toxic assets. So, the Federal Reserve System has already established the precedent that it is willing to exchange liquid Treasury assets for other assets that are worth far less.

Obviously, gold at $42.22 per ounce is not the free market price. The Federal Reserve will receive nice, liquid Treasury debt, and it will surrender a large pile of the barbarous relic. If the ideas of John Maynard Keynes are true, this is a very good deal for the Federal Reserve System. Let the FED have it, good and hard.

A TRANSFER OF AUTHORITY

The main goal here is to get the gold back into circulation in the form of coins. It must not be sold to investors in the form of large bars. The goal is to reestablish gold as a popular form of currency in the general economy. The best way to do this is to let Americans buy gold at $42.22 an ounce, but only in the form of tenth-ounce gold coins. The gold was confiscated in the form of gold coins in 1933, and this is the form in which it should be returned to the American voters.

The United States government confiscated the gold in 1933. It presently owns the gold based on massive theft. My proposal is a form of restitution. The agency that stole the gold will return the gold to the American voters, and it will do so in such a way that the American voters become the beneficiaries of the discrepancy between the official price of gold and the market price of gold.

There is no justification for the stolen gold to remain in the possession of the United States government. There is surely no justification for the stolen gold to remain an asset of the Federal Reserve System. My conclusion is simple: return the stolen goods to the judicial heirs of the victims. These are American voters.

This would restore a gold coin standard, or at least move in that direction. The proper gold standard is a gold coin standard. It is a standard in which gold coins are commonly used in the marketplace. People will become familiar with gold coins.

THE VETO

This transfers the veto over commercial bank policy into the hands of those individuals who own the gold coins. If they turn the gold coins over to a commercial bank in exchange for an IOU from that bank, and the bank abuses the privilege of expanding the number of IOUs to gold coins beyond the number of gold coins held in storage by the bank, individuals can then take their IOUs down to the bank and demand payment in gold coins. This is the great veto of the public over the policies of the banks.

Governments want to avoid this system for obvious reasons. Governments do not want the general public to have a veto over its fiscal policies, and gold coins in circulation would transfer this veto to the public. This is why the governments of Europe abolished the gold coin standard when World War I broke out in August of 1914. This is why the United States government abolished the gold coin standard in 1933.

Politicians want to spend lots of money, but they do not want to get blamed for collecting taxes necessary to fund all of the projects that they plan to fund. So, they can go to the central bank, and if the central bank wants to, it buys the debt of the government. The government can increase the amount of its debt, because it has the cooperation of the central bank.

When the central bank increases its holdings of government debt, this increases the nation’s monetary base. When the monetary base increases, commercial banks make more loans. But when they increase loans, they increase the money supply. They expand those loans with fiat money. When fiat money gets into the economy, this tends to raise prices.

As prices rise, individuals decide that the price of gold will also rise. If the price of gold rises, it pays someone to own gold. So, people begin to buy gold. Gold-using producers start buying. The banks find that digital money is flowing in from the buyers of gold, and the gold is flowing out. This creates a crisis, because they have expanded the money supply based on the expansion of Federal Reserve credit, not based on the expansion of deposits by owners of gold coins.

So, when the common man goes down to his bank and turns in an IOU for gold, and he takes his gold coins home, this is a bank run. It is the same when the common man turns over his IOUs to gold to someone who sells gold to the general public. The IOUs’ buyer also presents the IOU to gold to the commercial banks. This is a run on the banks.

This means that the holders of gold coins can exercise a veto over the central bank’s decision to expand its ownership of government debt. This indirectly transfers a veto to the common man over the size of the government’s deficit. If the government cannot sell its debt to the central bank, it has to sell its debt to private investors. This tends to raise the interest rate, because the government has to offer a higher interest rate in order to persuade investors to buy its debt.