If the Fed is abolished, what next?

If Ron Paul's Federal Reserve Board Abolition Act passes, what will be the next step for restoring a sound monetary system?

Ron Paul clearly sees the restoration of a dollar gold standard as the goal. But how will this be achieved?

This article presents the three basic alternatives:
- At an artifically high rate
- At an artifically low rate
- At the market rate

I favor fixing at an artifically low rate so that the Fed's gold assets cover all outstanding notes and bank deposits, which was also Rothbard's favored method.

I favor the free market determining what the individuals within it decide to use as sound money. That's how the goal will be achieved. By taking away the monopoly on money that the Fed has been granted by the gang called Government. The counter-economy will always take care of things like this.

Artificially low rate.

George Reismann (Capitalism) pointed out that if all outstanding notes are traded directly for gold (i.e., Outstanding Notes in Dollars/Ozs. of US Gold = Exchange Ratio), this might cause a depression. According to him, the velocity of money would probably slow done after the switch to gold, and the best way to counteract it would be to overvalue it (i think, like you mentioned Rothbard shared this view). 

He also suggested that the an even lower artificial rate might be something to consider because one last burst of inflation might help people get out of debt.  He doesn't say anything about it (to my knowledge) in the book, but I think that this wouldn't be such a bad thing since the distribution effect wouldn't apply here.  From what I understand, the distribution effect only applies if the new money has specific injection points.  In this case, the injection points would be spread evenly over the economy (so to speak).

Comments? Criticisms?

Anytime any writer mentions the "velocity of money" and inflation or deflation I immediately take the rest of the article with a grain of salt.  The MV=PY quantity theory is flawed and too many mainstream economists put too much faith in it.  Money is only the medium of exchange when one good or service is exchanged for another good or service.  Reduced velocity of circulation implies a reduction in the exchanging of goods.

From what I remember reading by Hazlitt (or was it Mises?), the new exchange rate between dollar and gold must be properly determined or else the new gold standard will fail.  There are ways to determine the new exchange rate.  You can let the market determine it and it will likely end up somewhere around what todays price of gold is.  If you attempt to enforce a lower gold price (in dollars) then gold will leave the country.  That's what happened in England during the great depression where gold started to leave England.  England pursuaded the USA to inflate its money supply so less gold would leave England.  Therefore, other countries had to suffer as a consequence of England's improper gold:pound valuation.

As far as any inflationary policy to aid debtors in repay their debts, in the overall big picture only harm will come from inflation.  Gold should be valued in terms of dollars based on what the free market determines it should be.  Not what some gov't body enforces it to be.

bearing01:

Anytime any writer mentions the "velocity of money" and inflation or deflation I immediately take the rest of the article with a grain of salt.  The MV=PY quantity theory is flawed and too many mainstream economists put too much faith in it.

Yeah, I was kind of iffy on that part, too. I thought the MV=PY equation was a product of the Chicago School (which is clearly full of errors when it comes to monetary theory).  I'll have to read some more on Rothbard's opinion of it.  He's always reliable, but I was sure that he thought along the same lines (minus the "velocity of money" part i think). Thanks for the input.

Hear hear. The government should be COMPLETELY out of the money business.

...and the post office business...and the education business...

luckyday:

Artificially low rate.

George Reismann (Capitalism) pointed out that if all outstanding notes are traded directly for gold (i.e., Outstanding Notes in Dollars/Ozs. of US Gold = Exchange Ratio), this might cause a depression. According to him, the velocity of money would probably slow done after the switch to gold, and the best way to counteract it would be to overvalue it (i think, like you mentioned Rothbard shared this view). 

I have not read that book. Is Reismann saying that returning at the market rate would cause a depression? That is possible, because it may cause a complete banking collapse. I don't see how returning at an artificially low rate would cause a depression, just a quick inflation. "Velocity of money" is a Chicago-school term that doesn't have any real meaning (at least, not to me). Can you explain this a bit more?

luckyday:

He also suggested that the an even lower artificial rate might be something to consider because one last burst of inflation might help people get out of debt.  He doesn't say anything about it (to my knowledge) in the book, but I think that this wouldn't be such a bad thing since the distribution effect wouldn't apply here.  From what I understand, the distribution effect only applies if the new money has specific injection points.  In this case, the injection points would be spread evenly over the economy (so to speak).

I'm not sure about this. Why should we help people get out of debt? What about the savers and creditors? I think this would be unnecessary pain for them, with no real justification.

There would be no redistribution effect at all at the moment the dollar is defined. Afterward, when gold would rush into the US, exporters and manufacturers would benefit by being the recipients of the "new money". But I don't think this would be very severe because the price re-adjustment would happen very quickly (see my post here about this: http://mises.org/Community/forums/t/6206.aspx).

bearing01:

If you attempt to enforce a lower gold price (in dollars) then gold will leave the country.  That's what happened in England during the great depression where gold started to leave England.  England pursuaded the USA to inflate its money supply so less gold would leave England.  Therefore, other countries had to suffer as a consequence of England's improper gold:pound valuation.

I agree with you that returning at artificially hgh rate would be catastrophic.

bearing01:

Gold should be valued in terms of dollars based on what the free market determines it should be.  Not what some gov't body enforces it to be.

Any redefinition of the dollar in terms of gold will require government enforcement (the government must force the Fed to redeem Notes and bank reserves in gold). While there are good arguments in favor of returning at the market price (no immediate inflation), I believe any definition would be arbitrary.

It is of vital importance that the gold standard does not fail due to a bad definition of the dollar. Defining it at the current market price risks a banking collapse, as people discover that there is not enough gold at their bank or the Fed to cover all outstanding Notes and deposits.

What do you think about returning at an artificially low rate, to restore a 100% reserve banking system?