Even if the mention of a “Gold Standard” makes your eyes glaze over, the video above and the article below show you how a monetary system SHOULD WORK. More importantly, you learn how the US can extract itself from ever-compounding debt. Currently, the FED is destroying savers in the name of “helping” the economy. Learn how credit can expand and contract WITHOUT booms and busts.
- Trump’s DOL Rescinds Obama-Era Franchise Rule
- The Fallacy Behind “Robots Will Steal Your Jobs” Fears
- Gold Moves Higher But Miners Don’t
The Unadulterated Gold Standard Part I
by Keith Weiner
The choice of the word “unadulterated” is not accidental. There were many different kinds of gold standard, including what we now call the Classical Gold Standard, the Gold Bullion Standard, and the Gold Exchange Standard. Each contained flaws; each was adulterated.
For example, in the Coinage Act of 1792, the government forced the price of one thing to be fixed in terms of another thing. The mechanism was in Section 11:
“And be it further enacted, That “the proportional value of gold to silver in all coins which shall by law be current as money within the United States, shall be as fifteen to one…”¹
Of course, people respond to such distortions. When the government fixes the price of something too low, then people will hoard or export it. If the price is fixed too high, then they will flood the market with it.
According to Craig K. Elwell, in his 2011 Congressional Research Service Report:
“Because world markets valued them [gold and silver] at a 15½ to 1 ratio, much of the gold left the country and silver was the de facto standard.”²
Subsequently, the government changed direction. Elwell notes:
“In 1834, the gold content of the dollar was reduced to make the ratio 16 to 1. As a result, silver left the country and gold became the de facto standard.”
If the law dictates the ratio between gold and silver, then only one metal–the one that is undervalued–will be used. It would be extremely difficult for the government to get the ratio exactly right. And even if so, as soon as the market value changed the ratio would be wrong and only one metal would circulate.
The government should not attempt to force a price onto the market. In the unadulterated gold standard, the market is allowed to set the price of silver, copper, oil, wheat, a fine wool suit, and everything else. It allows people to use gold, or silver, or seashells as money if they wish (the market has not chosen seashells in modern history).
Throughout the 19th century, there were various state laws to impose new kinds of restrictions on the banks. One popular restriction was that in order to obtain a charter (permission to operate as a bank), the bank had to buy state government bonds. This theme–forcing banks to buy government bonds–was to recur later.
This is a pernicious idea. Banks must have an earning asset to match the liability of the deposit accounts. Why not make them buy some government bonds as a condition for permission to operate? Because this is obviously blackmail. In a free country, one should not need to ask permission to be in business and one should not be forced to do something in exchange for that permission.
This policy has two economic effects. First, it pushes the price of the government bond higher than it would otherwise be, which means it pushes down the rate of interest. This distortion ripples throughout the entire economy.
Second, it exposes the state-chartered bank to the fiscal irresponsibility in the state capitol. And of course the state capitol is encouraged to borrow and spend by this very perverse policy, because they know that there is always a market for their bonds. This lasts until they default, of course. And when they do, the state-chartered banks become insolvent. This is not a failure of the gold standard, or of the free market. It is a failure of a deficit spending policy and central planning.
The Horror of Being a Deep Value Money Manager–KGGAX is Kopernik Global vs. SPY and FANG Stocks