Transition to sound money in country with zero gold in treasury

Dave Doctor posted on Fri, Jul 31 2009 9:15 PM

rated by 0 users

My questions deals with transitioning away from a fiat currency in a country with zero gold in its treasury. Rothbard, in The Case Against the Fed, states the U.S. can transition away from fiat currency by dividing the amount of dollars by the gold stored in the treasury. For the sake of discussion, allow me to present an easy equation: If there are 30 trillion dollars in circulation, and there are 30 trillioin ounces of gold in the U.S. treasury each dollar would be exchanged for an ounce of gold.  

What can be done if a country does not have any gold and wants to stop using its currency and allow a free market in money? Before answering, I need to add that for taxes, the country might accept a few types of money to avoid favoring one type of money. For the sake of this discussion, I will assume the country's currency unit is called the peso. 

To make the transition to a free market in money, I believe the country would need to do the following:

1. Value the fiat currency unit based on a recent actual value of the currency unit (one peso equals 1/1000 barrel of oil). The currency's value could be based on a date many months or even years prior to passing legislation enacting this plan to avoid a suddent interest in the currency, which could distort its value. I chose oil because gold will be accepted as payment in a later step and this may radically increase gold's valuation. 
2. Mutiply the value of the unit of currency by the quantity of outstanding currency to arrive at a total value for the outstanding currency (1 billion pesos x 1/1000 barrel of oil = 1 million barrels of oil)
3. Sell enough government property or land to raise amount equal to the total value of the currency (5 million acres of land + oil exploration rights in three regions  = 1 billion barrels of oil = 1,000 pounds of gold + 100,000 pounds of silver). The government would accept both gold and silver to avoid favoring one type of money..
4. Exchange the gold and silver for the currency (1 peso = 1 gram of silver and 1/10 ounce of silver) 
5. Stop using the currency
6. Accept gold and a few other forms of money for tax payments

The citizens of the country will likely protest the selling of government land and natural resources, but peso holders, who will mostly be citizens, would protest if the peso was suddenly deemed worthless.

The country will need to sell less land and natural resources as the sale of land and natural resources progresses, because buyers will need to obtain gold and silver to make purchases, and this will drive up the value of gold and silver, and the more valuable gold and silver will be equal to more oil barrels; less gold and silver will be needed to equal the fixed amount of oil barrels calculated in step 2. 

I welcome your thoughts on this topic.