Money, the Fed, Free Banking and the Gold Standard

Looking at the title, I am wondering if I have not bitten off more than I can chew. The emphasis here will be on free banking.

I have been fascinated by the subject of money for much of my adult life. I'd pretty much read up whatever the local library had on the subject whenever I'd move to a new place. The internet has been a godsend to me in this regard since allows me to move beyond what the local library happens to be offering.

In the course of my readings, I have become more and more an advocate of returning to a gold standard. I find it shocking the degree to which educated people (in the area of economics) are ignorant of how a gold standard works. A recent example of this was when Bernanke stated that there was not enough gold to return to a gold standard. Obviously a very smart man who knows a lot about money in particular and yet for him to make such a statement shows a depth of ignorance relating to the gold standard which I find disturbing. (By contrast, former Fed chairman Alan Greenspan is an advocate of returning to a gold standard and I am sure he would never have made such a statement.)

In simple cookies on the lowest shelf terms, all the Fed has to do is start managing the currency to keep it stable in terms of gold. Today that would mean that it would start selling debt with an eye on arresting the steady rise of the dollar price of gold. If it were to overshoot the mark somewhat, and the dollar price were to begin falling, it would do the opposite, it would buy debt, putting dollars into circulation, driving the dollar price back towards its target.

As a target, I would suggest whatever the current market price of gold is the day the policy is implemented. Today, that would be about $1880 per ounce. That would mean from this day forward, the Fed's policy would be maintain the dollar price of gold within a narrow range around $1800 per ounce.

And there you would have a de-facto gold standard and the amount of gold doesn't even enter into it.

Now I can just imagine the great collective screaming that would come from those who smoke Keneysian weed. You can't reduce the money supply at a time like this. The economy needs more stimulous not less.

First of all, it doesn't seem that all the additional liquidity that was added through QE and QE2 did much good so I don't see how taking liquidity out of the market would do much harm. Secondly, given that commodity price have been increasing even as the economy falters, I argue that there is too much liquidity in the market.

But beyond that, I am not so that there would be reduction of liquidity. The world is a dynamic place. And looking three moves out instead of just one, I see the money supply actually increasing but in a precisely controlled manner so as not to generate inflation.

If you were to stop the incase in dollar price of gold, you would cause many who own gold to trade their gold for dollars do that they could those dollars into investments that pay interest or a dividend. Which would you rather own? Gold whose dollar price will no longer increase or dollars which can be invested to pay interest or dividends? Which would you rather own? Foreign floating currencies which will continue to decline in value or dollars which would then be holding their value?

All things being equal, that would cause more capital to come into this country. (I say all things being equal, because our crappy dollar is but one of a number of factors that keep job creating capital from coming into this country).

One thing the recent stimulus has shown it that all that government spending here seems to do is create jobs in China. And the reason for that is that the U.S. is undercapitalized right now.

If you are trying to make money with your capital right now, you choose China over the U.S. It's that simple. And it's not going to change until the U.S. makes some changes and one of those changes would be to turn to a gold standard in the manner described.

Wow, I didn't even get to free banking. Maybe I should change the picture.

I'll keep the picture as a teaser for a future installment. Look at that note carefully. It was issued by a private bank in the 1800s. There was a period in our history when most notes in circulation were actually issued by private banks. There are some that advocate a return to where private banks would again be allowed to issue notes which would circulate along side of and compete against Federal Reserves Notes.