To answer a reader question, I revisited Rothbard’s transition plan for 100% gold. This is cut and pasted from the Mystery of Banking (Richardson and Synder, 1983), pp. 265-267.
Even though, for the past few years, private American citizens have once again been allowed to own gold, the gold stolen from them in 1933 is still locked away in Fort Knox and other U.S. government depositories. I propose that, in order to separate the government totally from money, its hoard of gold must be denationalized, that is, returned to the people. What better way to denationalize gold than to take every aliquot dollar and redeem it concretely and directly in the form of gold? And since demand deposits are part of the money supply, why not also assure 100% reserve banking at the same time by disgorging the gold at Fort Knox to each individual and bank holder, directly redeeming each aliquot dollar of currency and demand deposits? In short, the new dollar price of gold (or the weight of the dollar), is to be defined so that there will be enough gold dollars to redeem every Federal Reserve note and demand deposit, one for one. And then, the Federal Reserve System is to liquidate itself by disgorging the actual gold in exchange for Federal Reserve notes, and by giving the banks enough gold to have 100% reserve of gold behind their demand deposits. After that point, each bank will have 100% reserve of gold, so that a law holding fractional reserve banking as fraud and enforcing 100% reserve would not entail any deflation or contraction of the money supply. The 100% provision may be enforced by the courts and/or by free banking and the glare of public opinion.
Let us see how this plan would work.
The Fed has gold (technically, a 100% reserve claim on gold at the Treasury) amounting to $11.15 billion, valued at the totally arbitrary price of $42.22 an ounce, as set by the Nixon Administration in March 1973. So why keep the valuation at the absurd $42.22 an ounce? M-l, at the end of 1981, including Federal Reserve notes and checkable deposits, totaled $444.8 billion. Suppose that we set the price of gold as equal to $1,696 dollars an ounce. In other words that the dollar be defined as 1/1696 ounce. If that is done, the Fed’s gold certificate stock will immediately be valued at $444.8 billion.
I propose, then, the following:
1. That the dollar be defined as 1/1696 gold ounce.
2. That the Fed take the gold out of Fort Knox and the other Treasury depositories, and that the gold then be used (a) to redeem outright all Federal Reserve Notes, and (b) to be given to the commercial banks, liquidating in return all their deposit accounts at the Fed.
3. The Fed then be liquidated, and go out of existence.
4. Each bank will now have gold equal to 100% of its demand deposits. Each bank’s capital will be written up by the same amount; its capital will now match its loans and investments. At last, each commercial bank’s loan operations will be separate from its demand deposits.
5. That each bank be legally required, on the basis of the general law against fraud, to keep 100% of gold to its demand liabilities. These demand liabilities will now include bank notes as well as demand deposits. Once again, banks would be free, as they were before the Civil War, to issue bank notes, and much of the gold in the hands of the public after liquidation of [p. 266] Federal Reserve Notes would probably find its way back to the banks in exchange for bank notes backed 100% by gold, thus satisfying the public’s demand for a paper currency.
6. That the FDIC be abolished, so that no government guarantee can stand behind bank inflation, or prevent the healthy gale of bank runs assuring that banks remain sound and noninflationary.
7. That the U.S. Mint be abolished, and that the job of minting or melting down gold coins be turned over to privately competitive firms. There is no reason why the minting business cannot be free and competitive, and denationalizing the mint will insure against the debasement by official mints that have plagued the history of money.
In this way, at virtually one stroke, and with no deflation of the money supply, the Fed would be abolished, the nation’s gold stock would be denationalized, and free banking be established, with each bank based on the sound bottom of 100% reserve in gold. Not only gold and the Mint would be denationalized, but the dollar too would be denationalized, and would take its place as a privately minted and noninflationary creation of private firms.
Our plan would at long last separate money and banking from the State. Expansion of the money supply would be strictly limited to increases in the supply of gold, and there would no longer be any possibility of monetary deflation. Inflation would be virtually eliminated, and so therefore would infla tionary expectations of the future. Interest rates would fall, while thrift, savings, and investment would be greatly stimulated. And the dread specter of the business cycle would be over and done with, once and for all.
