…gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
— Alan Greenspan in Gold and Economic Freedom (1966), Chair of the Federal Reserve System, 1987–20063
Returning to a gold standard is another option that steps backwards. Proponents of gold money are of different minds: some mean a gold standard, others mean 100% gold money.
Some people want us to return to the gold standard, which means a fractional reserve system in which a small amount of gold backs up the IOUs of private bankers. Gold is the reference measure of the value of the money – the standard. Nearly every money system that used gold as a standard for the past 700 years has been a fractional reserve system – an unstable system that relies on confidence and so needs some gravitas. The false idea that there was gold backing your certificate provided this gravitas.
Proponents see gold as a consistent measure for the value of all currencies, whether its marketplace value floats, or is controlled at a set price. Here is a common thread about a new gold standard from Steve Forbes, of Forbes magazine:
What should a new gold standard look like? Representative Ted Poe (R-Tex.) has introduced an original and practical version. Unlike in days of old, we don’t need piles of the yellow metal for a new standard to operate. Under Poe’s plan – an approach I have long favored – the dollar would be fixed to gold at a specific price. For argument’s sake let’s say the peg is $1,300. If the price of gold were to go above that, the Federal Reserve would sell bonds from its portfolio, thereby removing dollars from the economy to maintain the $1,300 level. Conversely, if the gold price were to drop below $1,300, the Fed would ‘print’ new money by buying bonds, thereby injecting cash into the banking system. An effective gold standard can be that simple. What gets lost in the discussion is that the yellow metal is merely a means of measuring the value of the dollar. The fact that a foot has 12 inches doesn’t restrict the number of square feet you can have in a house. The fact that a pound has 16 ounces doesn’t restrict your weight, alas – it’s simply a measurement. The virtue of a properly constructed gold standard is that it’s both stable and flexible – stable in value and flexible in meeting the marketplace’s natural need for money. (May 27, 2013)4
Let’s unpack this argument.
“…We don’t need piles of the yellow metal for a new standard to operate.” This tells us Mr. Forbes is not talking about a 100% gold money or 100% receipt money system. He is referring to a fractional reserve or no reserve, IOU-future value money system, using gold as a measure only – a standard.
“…The Federal Reserve would sell…” Here he is talking about supply, demand and value. The amount of money in a system changes the value of everything, including the value of a commodity like gold. So, when there is more money in the system than is needed, the price of everything goes up, including the price of gold. He’s noting the Fed will use its power to buy and sell government IOUs to change the amount of money in the system, just as it does now. He is suggesting the Fed use the price of gold as the indicator for when to buy or sell.
“…The yellow metal is merely a means of measuring the value of the dollar.” This is a curious circular argument. Fix the price of gold, then peg the value of money to the price of gold. If the price of gold changes, increase or decrease the amount of money in the system until the price of gold returns to its peg. This argument assumes the price of gold as a commodity will not change in the marketplace. It ignores the fact that gold’s commodity value might change dramatically, having nothing to do with how much money is in the system. For example, gold might become the only metal that works for some new technology and the commodity demand could skyrocket.
Forbes wants to use gold as the indicator light on when there is too much or too little money in the economy. Since the very rich control the amount of gold available in the marketplace and consequently its price, a gold standard assures the very wealthy have power over the economy as a whole. However, they have more power in our current system, which is why we haven’t gone back to a gold standard.
100% gold money
Some say that they want to switch to a 100% gold system, in which either the government or private entities offer gold certificates to be used as money. These certificates would be for a 100% corresponding value of gold in storage somewhere.
Commodity banks already exist in the marketplace. You can buy and sell gold, gold shares, and even trade your gold shares for goods and services, using them essentially as money. How is trust established? How do you know the stored gold is really there? How do you know whether a gold seller and storage facility is trustworthy? They may be running their gold sales/warehouses like the old gold sellers, and hoping only a small percentage of gold certificate holders will want their gold at any given time. I’d be quite skeptical of purveyors of gold who give you warehouse certificates for the gold you buy from them – especially in an unregulated marketplace! Only some form of independent oversight can answer those questions and protect the public.
A dozen or so states have initiated bills to recognize gold and silver coins issued by the federal government as legal tender. Utah, Texas, Louisiana and Oklahoma have passed bills into law and established gold and silver exchange banks. However, the wording of the laws makes it clear the primary purpose is to exempt gold and silver traders from having to pay either sales or capital gains taxes on their investments stored in gold and silver. While these gold and silver coin exchanges can serve as a supplemental currency, they are primarily a means for the wealthy to store wealth without incurring any taxes.
In June 2015, Texas passed a law establishing a state-run gold bullion depository. The depository will store the state’s gold, which is currently in storage at the federal level, and the facility will be available to citizens for gold storage. It will provide gold-certificates for stored gold that can be exchanged. Texas is setting up its own supplemental money system: a 100% gold commodity system. The Constitutionality of this is questionable. Though Article 1, Section 10 certainly confuses the issue, “No State shall…coin money;…make anything but gold and silver Coin a Tender in payment of debts;…”
Here’s an advocates spiel (reported word for word in many online publications without citation):
Texas’ new depository could help supercharge the growing movement for an honest and sensible monetary system founded on real money rather than debt- based paper notes conjured into existence by a private banking cartel. Indeed, one of the chief aims of gold-and-silver-as-currency proponents is to restore sound money – and the Texas law could help pave the way.5
However, as explained in Chapter 4.28, commodity money is neither sound, nor honest, nor real money. As with any commodity money, it is vulnerable to the market machinations of the wealthy. Texas has a long history of advocates who firmly believe the more money one has, the worthier one is, and the greater power one should have over public decisions. For an exposition of this belief read the 1960 utopian fantasy, Alpaca, by Texas oil tycoon H.L. Hunt.6 Research and history tell us people of great wealth tend to do all they can to keep it and to get more. There are hundreds of years of reasons to be wary that the wealthy will manipulate this gold money to their advantage.
Demonstrating how unsound commodities can be and how much the rich love to game and conquer the markets, in 1979, Hunt’s sons, Nelson B. Hunt and William H. Hunt tried to corner the silver market. They bought and hoarded all the silver they could. They bought a lot of it on margin, which means they borrowed to buy it, and owned it like you own your house with a mortgage.
With just the power to borrow, they wreaked havoc on the silver market. The brothers were estimated to hold one third of the entire world supply of silver (other than that held by governments). As they accumulated more and more they sent the price skyrocketing from $ per troy ounce to a record high of $48.70 – an increase of 812 percent. The lack of silver in the marketplace and the consequently high prices made it difficult for anyone else to buy silver. The New York jeweler, Tiffany, took out a full page ad in the New York Times condemning the Hunts’ silver hoarding which was intended to run up the value of their stash.7
There are those who long for the days when gold was a primary money. Ironically, gold money tends to appeal most to those who want a bare minimum of government and who think if money is a commodity the choice to use it and its value will be determined by individuals in the marketplace. These gold money supporters want a minimum of government authority over the economy and think with gold money they will have more personal autonomy; they want freedom! Yet, they advocate a money system that gives the wealthy power to control the economy and their lives. They fail to understand how commodity money functions in an economy and turn a blind eye to the who and how of money creation, destruction, and the ease with which a gold currency can be manipulated by a wealthy few.
A lasting attraction
Gold is the stuff of myths and magic. It is elemental and beautiful. We make extraordinarily beautiful things of gold to adorn ourselves and bring us pleasure. Gold commodity value served well to develop money as an abstract measure. However, we have long moved past the period of always tangible exchanges into a world of virtual exchanges at the speed of light. This pushed us to really look at the essence of money and see beyond the glitter that is gold, to money’s role as a neutral intermediary.