My Unreasonable Demands for the New Year

With the new year coming on, I am kind of getting the feeling that I have been missing out. It seems every where you turn you find people making unreasonable demands. Everytime the bond vigilantes threaten to not buy more more Greek bonds, people in Greece take to the streets, breaking stuff, burning stuff, demand that the people of the world continue to lend to them.

Then you have the students in Quebec. The Quebec government was proposing modest increases to what are the lowest tuition rates in North America and the students go on strike! For those who don't know, I have been there and done that. While I was attending the French language College Jean-de-Brébeuf in the late 70s, we did the strike thing. So I have a bit of a perspective on what is going on there today.

What I find hilarious is that one of the things the students there were bugged about was proposals to have the universities there work more to meet the needs of business. My take on that is that this means that they were protesting for their degrees to have no economic value even as they wanted others to pay for them!

So obviously, I need to make my own list of unreasonable demands. This is what I have come up with so far.

End Legal Tender Status of Federal Reserve Notes

This does not means necessarily that Federal Reserve Notes cease to be accepted as a form of payment. It simply means that Federal Reserves Notes would take on a status similar to that of checks. People may accept them as a form of payment or they may not. What then is a dollar? For that see my next demand.

Define the dollar as a fixed weight of gold

Have Congress pass legislation legally defining the dollar in terms of gold. Based on recent market rates, I'd define the dollar as 1/1600th ounce of gold.

Issue the following coins
- $1000 gold coin containing 0.625 ounce of gold,
- $ 100 bimetalic coin with the middle portion consisting of 0.0625 oz. of gold,
- $ 20 bimetalic coin with the middle portion consisting of 0.0125 oz. of gold.

These would be coins issued by the U.S. Treasury right alongside pennies, nickles, dimes and quarters. These coins would carry legal status as $1000, $100, and $20 along with small change in amounts less than $20. The bimetalic coins would be similar to the Canadian toonies. It is a practical way to inject gold into circulation.

With Federal Reserve Notes losing their legal tender status, people could insist on payment in gold just like people today can insist on payment in cash rather than by check. The continued acceptance of Federal Reserve Notes as a form of payment would depend on the ability of the Federal Reserve to maintain the credibility of the notes they issue.

All this begs the question: as a practical matter, where will Treasury get the gold to mint into coins? Interesting question. If Federal Reserve Notes have lost their legal tender status, the Treasury can't very well use those. And if the Federal Reserve is cut loose as its own entity, one would have to assume that all that gold on the Federal Reserve's balance sheet belongs to the Federal Reserve and not to the Treasury.

Look back how things used to be. It used to be that a gold mine would take their gold, 1000 ounces say, to the U.S. mint and the mint would give the mine 1000 gold coins each worth $20 (when the dollar was by statute worth $20.00) or the Treasury would issue gold certificates redeemable in gold coin.

So one source would be mines bring their gold to the U.S. mint and exchanging it for dollars in the form of coins or gold certificates at the statutory rate. This would actually be a better deal for mines because they typically sell their gold privately for rendering into gold bullion.

Another source of gold to the Treasury would actually be the Federal Reserve. Since Federal Reserve Notes would then be redeemable for gold, the Federal Reserve would need to convert their gold bullion into gold coin.

The net result of the above demands is to tie the dollar, not to the Federal Reserve's balance sheet but to to gold in physical form that is actually spent. It gets away from Central Bank centered gold standard schemes which all have one glaring weakness: the inabilit to maintain the peg of its currency to gold. There is also the fact of the U.S.'s chronic trafe deficit and the tremendous amount of dollars sitting over-seas. If the Federal Reserve were to prove unable to maintain the gold peg, all those dollars started would started being presented to the Federal Reserve for redemption. This is what knocked us off of the gold standard in the first place.

What my above demands do is that they de-couple the dollar from Federal Reserve Notes. Federal Reserve Notes would cease to be dollars, they would become claims on the Federal Reserve to redeem in dollars. That would transform, for example, all those dollars sitting in China into claims to the Federal Reaerve to redeem in dollars (i.e. gold at the statutory rate). Should the Fedeeral Reserve prove incapable of honoring those claims, that would between the PBC and the FR.

Together, the above demands would get rid of one of the persistent flaws in our current financial system. Currently, when we

Make All Federal Debt Redeemable in Gold Coin

This includes T bills and T Bonds. When I say redeemable, I mean people may choose to receive interest and principal payments in Federal Reserve Notes or Treasury notes or gold coin at their option. I'd take this a step further. All Federal disbursements shall be in gold at the option of the payee. The intent of all this to tie our money hard to gold and to severely restrict the printing of money as a means of funding the government.

End Automatic Escalation of Fed Pay Schedules

This includes employee, military, retiremeny, social security, and medicare pay scales. With the dollar defined very strictly in terms of gold, there is no reason to continue with continually increasing the pay scales. This doesn't mean prices won't change for they will. But there won't be an upward bias to price changes that would require continually changing price scales upward.

Abolish the Federal Reserve as a Central Bank

I could go all the way and simply abolish the Federal Reserve, full stop. At a minimum I would end its role as a lender of last resort. It's benefit to our country is questionable at best. People often forget that we made it all the way to 1913 without a Central Bank (with the exception of two 20 year periods in the late 1700s and early 1800s). The late 1800s as an example were a time of extra-ordinary growth with rising wages and falling prices due to increased productivity. People who oppose abolishing the Federal Reserve should ask themselves how the country did so well when we didn't have one.

The Federal Reserve could continue to exist, I don't know, as a bank for the Federal Government.

Allow Banks to Issue Notes

The goal of this and the last several demands is to change what a dollar is back to what it was previously in this country. Currently a dollar is a piece of paper we sometimes carry around in our wallets. Originally, the real dollar was the gold or silver coin. Paper notes were just promises to pay.

Currently, only the Federal Reserve issues paper money and they are not promises to pay anything. Paper money needs to be perceived more like checks with the real money being gold coins issued by the Treasury. Notes would be redeemable in gold coin on demand. Whether issued by private banks or by the Federal Reserve, these notes would function as money in addition to the coins issues.

What this does is it allows for the possibility for Federal Reserve Notes to trade at a discount to the dollar. If the Federal Reserve were to issue too many notes, they might only be accepted at say 80 cents on the dollar. That's because people would know what a real dollar is. That's not possible as things stand now. A Federal Reserve Note is a dollar. A Federal Reserve Note can't trade at a discount to itself.

End Reserve Requirements for Banks

The purpose of bank reserves is for banks to have enough funds on hand to meet all requests for redemption that might be presented to the bank. Currently reserve requirements are established by the Federal Reserve. This might not seem like much of a demand. Banks should be free to assess their own reserve requirements.

On the other hand, we should

Hold Banks Strictly Liable for their Liabilities

Currently there is a huge moral hazard built into our financial system. Banks are hugely leveraged institutions with the shareholders equity being a tiny fraction of the assets of the firm. This came home to me back in 08 when I was looking at the balance sheet of a bank I was considering as a potential stock purchase. What caught my attention wa the fact that the market capitalization, i.e. the total value of stock outstanding was about $10 billion. The net equity was $100 billion. Wow, I thought, I could buy a bank worth $100 billion for only $10 billion. What a deal! But then I noticed something else. That bank had assets of $1.9 trillion and liabilities of $1.8 trillion. The bank was mostly playing with other people's money!

With leveraging like that, banks essentially have no skin in the game. They are free to take huge risks with depositors money with very little risk of being held accountable. They get to keep the profits but get bailed out if they lose, least the depositors do. We should hold directors and officers of banks strictly liable for liabilities incurred. If they makes riskly loans that go bust, bank creditors should be able to recover from the bank officers going back five years of salary and compensation as well as five years dividends from current and former shareholders. Again this is an issue of moral hazard. A bank should be held accountable for the risks it takes.

I read recently that in England in the 1800s many of the banking institutions were in fact partnerships where each member of the partnership was fully liable for the liabilities of the bank. The point of that article was that banks in England behaved very differently from banks in the United States where shareholders could just walk away if a bank went broke.

End Deposit Insurance

But moral hazard lies not just the management of banks but also with depositors. Depositors should not be insulated from the hazards of making deposits with weak banks. Ending deposit insurance would force depositors to consider the possibility that they might not get all their money back should their bank go under. It would force them to take the health of the bank into account before making a deposit. They would flee weak banks and overrall make the financial system healthier.

Many would object to this demand evoking the image of little old ladies losing their life savings. We have been thinking of banks in socialist terms for so long that we have forgotten that there is a huge cost to guaranteeing deposits.

Allow People to Opt Out of our Fanancial System

This is probably the most important of my demands. For all the economic freedom we enjoy, there is no way to opt out of our fiat monetary system. Allowing people to buy gold is not enough. A hundred years ago, you could buy stocks and bonds and participate in a variety of other investments and they were all denominated in gold based currencies. For example, you could buy a railroad bond that paid so much percent in annual interest and promised to repay at the end of the term in gold coin. That was standard, You could sell stock that you owned and you'd receive dollars that were redeemable in gold. Today, there is not a single gold based currency. There are no bank accounts pay interest on gold deposits. And I believe this to be by design. Think about it. How is it, with all the demand for a gold standard that there is not even a private gold based currency?

Ron Paul's Free Competition in Currency Act drives right to heart of the matter. It would allow gold based currency compete right alongside fiat currencies. It would allow the market to decide which is the best currency.

I could think of more demands, the above are a good start mostly target our financial system because many of our problems are systemic. They won't go away until we fix our financial system.