[This talk was delivered at the Mises Institute’s Supporters Summit, November 1, 2008, Auburn, Alabama. An MP3 audio version of this talk is available for download.]
Today we stand at a point in time that is the beginning of the end of an economic era when the US dollar dominated the global economy. The dollar still dominates world financial markets and many currencies around the world are still linked with the dollar, including China. However, the dollar has now ceased to gain additional influence in the world economy and it now has two new competitors, the Euro and the Chinese Yuan.
Gold has now exceeded $1,000 per ounce and our trading partners are growing worried, both about the inflation we are exporting to them, as well as the value of their own central bank holdings of US government securities.
As we enter the era of decline for the dollar all sorts of reforms will be used to address this decline and the economic instability it causes. However, reforms designed on Wall Street or in Washington will not work and will amount to nothing more than rear guard action by the moneyed interests that control the government.
The only true path to reform is monetary freedom. We have gone from a situation where money was entirely free from government intervention to one that is completely dominated by government. Instead of privately minted coins made from precious metals we now have a system of government-printed paper fiat currency. We have gone from a system of private banking that provided bank notes and checks for demand deposits to one where banks are completely regulated by the central bank and a host of other regulatory bodies. The idea that our current financial mess resulted from a lack of regulation is truly laughable. Of course this process has taken centuries to complete. By giving up our monetary freedom—particularly over the last one hundred years—we have given government the ability to grow in size and scope and to achieve unthinkable levels of power. Every step forward towards government control of money has resulted in social chaos and economic destruction. The real economy only grows in the interludes when monetary mischief is at a minimum.
We are now at a point in time when the US government is bankrupt. It cannot pay its bills, it cannot pay off its debt, and it has future unfunded liabilities with a current value in excess of $60 trillion dollars—and that was before all the current bailout packages!
Given that the political parties have done nothing to solve the government’s financial mess or to even reduce its magnitude, and given that everything they have done including the prescription drug benefit, the war in Iraq, and the bailouts of Wall Street only makes the problem worse, I can only conclude one of two things. Either they “plan” to resort to hyperinflation to pay for this mess, or they are collectively dumb as a sack of horse manure. Remember, hyperinflation is not just very high prices; it is social chaos and the breakdown of social order. At a basic level our lives are built on a structure of prices that we ourselves co-determine, but in a hyperinflation there is no solid basis for prices and therefore our lives are thrown into chaos. Society becomes more violent and criminal. Government, too, becomes more violent and criminal towards its own citizens.
Given all this, monetary reform is of the utmost importance and knowing the proper path of reform is more important than ever. I will begin by noting
- we should be moving in the direction of monetary freedom and away from government control and intervention;
- we want to get back as quickly as possible to a situation where government has no control over money and banking; and
- we want privately minted precious metal coins as the basis of money and banking and then let free market competition regulate and innovate from there.
There are some reforms that we obviously do not want and that will not work. For example, we don’t want the supply-sider solution of the Federal Reserve targeting the price of gold—that would be very dangerous. We clearly do not want a “new Bretton Woods System,” whatever that would amount to; it would surely leave government with too much power. The old Bretton Woods System did not work and was doomed to failure as predicted by Mises, Hazlitt and Rothbard.
We also do not want to return to a gold-exchange standard where governments are in charge of most of the gold and emit paper notes for people to use. This approach is unnecessary and inevitably harmful when too many notes are issued not matched with a corresponding amount of gold.
We actually do not even want to return to a gold standard system which still leaves government too much room for manipulation. In fact, we want no standard at all. “Standards” in money imply government regulation. Such a regulatory role resulted in the problems of bimetallism where government establishes a fixed ratio of gold to silver. As soon as reality deviates from the plans of government bureaucrats, either gold or silver money virtually disappears from circulation.
When Britain overvalued silver vs. gold, all but the most worn silver coins left the market and the British people were left without money for everyday exchanges and payments. This was the beginning of the gold standard, pretty good compared to today’s “standard,” but still the unnatural result of government control. I urge you to read George Selgin’s brand new book which gives the history of how the market came to the rescue and prevented the derailing of the industrial revolution in England by producing the much needed coin money privately.
The list of things we do not want in our monetary system is short. First, we do not want the Federal Reserve—the central bank—in any form, including Federal Reserve notes. Any legitimate roles it now plays, such as serving as a clearinghouse for checks, can be and in many cases already is handled by the private sector. We do not want government control—in any form—over money, banking, interest rates and the money supply.
Second, we do not want Federal deposit insurance. This creates a moral hazard that puts the taxpayers at risk for the bad decisions of bankers. Deposit insurance is a natural moral hazard and therefore bank deposits are not an insurable risk. Banks and depositors can overcome this problem simply by being certified as holding 100% reserves against all their demand deposits. In a market economy, depositors pay fees to have their money deposited in banks and to write checks on those deposits.
The list of things that we do want in our monetary system is also short. First, we know that money emerged on the market and was produced by the market. After the world had achieved substantial integration, gold, silver, and copper emerged as money. Their most useful form as money was coins and the dominant form of money was silver coins. The most obvious thing we want is a return to silver coin money denominated by weight. This is the money that the world used as a basis of economic prosperity and higher standards of living because it enhanced trade and economic calculation. Checks, debit and credit cards, and everything else can be adapted to gold and silver. We need the freedom to hold our money in both gold and silver forms with no fixed government ratio between.
What do “we” need now?
The first step is to repeal legal tender laws which would begin to eliminate the monopoly that government and the Federal Reserve has on the money we use. This would give us back our right to decide what money we will offer in transactions and what money we would be willing to accept in transactions.
Second, we must begin to allow other monies to compete with Federal Reserve notes, such as privately minted gold and silver coins, by taking away any hindrance to the use of gold and silver as money, such as the application of the capital gains tax on gold profits.
These two moves would go a long way to reducing the Fed’s ability to inflate the money supply and manipulate the economy. Any inflation by the Fed would eventually result in higher dollar prices of goods, lower gold prices of goods, and more people switching their accounts from paper to gold.
Ultimately we need to send the Federal Reserve into a receivership process whereby Federal Reserve assets including the US gold hoard at Fort Knox and all other depositories, as well as the Fed’s real estate portfolio should be used to satisfy the holders of Federal Reserve notes. This process would be conducted by accountants and lawyers just like they do in any bankruptcy process with Austrian economists serving as consultants as to what exactly would be redeemed. Rothbard offers a specific plan in his Mystery of Banking. The dollar would henceforth just be a name of a monetary unit that represented a very small amount of gold.
The restoration of monetary freedom would also force a sharp reduction in the size and power of government. The Federal government would immediately have a hard time borrowing money and would be forced to cut expenditures. Just as government control of money allowed government to expand, monetary freedom would force government to contract. New spending would have to be paid for by new taxes because borrowing and the inflation tax would not be an option. Balanced budgets would force Congress to start making tough decisions. For example, the invasion of Iraq would have never been contemplated; neither would the prescription drug benefit legislation and a whole host of other spending programs. Budget cutting would be put on an even keel with spending, if not at an advantage, and politicians would become more open to shutting down entire programs and selling government assets.
What do we need to do as individuals?
Mises wrote that the era of inflation will come to an end once people realize that the process of inflation is ongoing with no end in sight. At that point people will stop holding dollars and dollar-denominated assets. Individuals who understand inflation should be in a process where they convert their dollars and dollar-denominated assets into non-dollar assets. For example, you can effectively put yourself onto your own personal gold standard by holding gold and silver as your savings, rather than dollars.
In conclusion: What we need is monetary freedom and we must tear down and destroy its opposite, the Federal Reserve. To celebrate the return of monetary freedom in the US, a giant bonfire should be used to destroy all existing Federal Reserve Notes.
