Mises Daily Articles
The Transition to Monetary Freedom
Specific Reforms Required
The growth of the American government in the late 19th and 20th centuries is reflected in its increasing presence and finally monopolization of the monetary system. Any attempt at restoring monetary freedom must be part of a comprehensive plan to roll back government and once again confine it within the limits of the Constitution. That comprehensive plan may be divided into four sections: monetary legislation, the budget, taxation, and regulation. We shall begin with monetary reforms, and conclude with a word about international cooperation and agreement.
As we have seen, the Constitution forbids the states to make anything but gold and silver coin a tender in payment of debt, nor does it permit the federal government to make anything a legal tender. One of the most important pieces of legislation that could be enacted would be the repeal of all federal legal-tender laws. Such laws, which have the effect of forcing creditors to accept something in payment for the debts due them that they do not wish to accept, are one of the most tyrannical devices of the present monetary authorities.
Not only does the Federal Reserve have a coercive monopoly in issuing "money," but every American is forced to accept it. Each Federal Reserve note bears the words, "This note is legal tender for all debts, public and private." The freedom to conduct business in something else — such as gold and silver coin — cannot exist so long as the government forces everyone to accept its paper notes. Monetary freedom ends where legal-tender laws begin.
The United States had no such laws until 1862, when the Congress — in violation of the Constitution — enacted them in order to ensure the acceptance of the Lincoln greenbacks, the paper notes printed by the US Treasury during the wartime emergency. That "emergency" has now lasted for 120 years; it is time that this unconstitutional action by the Congress be repealed. Freedom of contract — and the right to have such contracts enforced, not abrogated, by the government — is one of the fundamental pillars of a free society.
Defining the Dollar
A second major reform needed is a legal definition of the term "dollar." The Constitution uses the word "dollar" at least twice, and it is quite clear that by it the framers meant the Spanish-milled dollar of 371 ¼ grains of silver. Since 1968, however, there has been no domestic definition of "dollar," for in that year redemption of silver certificates and delivery of silver in exchange for the notes ended, and silver coins were removed from circulation.
In 1971, the international definition of the "dollar" as 1/42 of an ounce of gold was also dropped. The Treasury and Federal Reserve still value gold at $42.22 per ounce, but that is a mere accounting device. In addition, IMF rules now prohibit any member country from externally defining its currency in terms of gold. The word "dollar," quite literally, is legally meaningless, and it has been meaningless for the past decade. Federal Reserve notes are not "dollars"; they are notes denominated in "dollars." But what a "dollar" is, no one knows.
This absurdity at the basis of our monetary system must be corrected. It is of secondary importance whether we define a "dollar" as a weight of gold or as a weight of silver. What is important is that it be defined. The current situation permits the Federal Reserve — and the Internal Revenue Service for that matter — to use the word any way they please, just like the Red Queen in Alice in Wonderland.
No rational economic activity can be conducted when the unit of account is undefined. The use of the meaningless term "dollar" has all but wrecked the capital markets of this country. If the "dollar" changes in meaning from day-to-day, even hour-to-hour, long-term contracts denominated in "dollars" become traps that all wish to avoid. The breakdown of long-term financing and planning in the past decade is a result of the absurd nature of the "dollar." There is very little long-term planning occurring at the present. The only way to restore rationality to the system is to restore a definition for the term "dollar." We suggest defining a "dollar" as a weight of gold of a certain fineness, .999 fine. Such a fixed definition is the only way to restore confidence in the markets and in the "dollar." Capitalism cannot survive the type of irrationality that lies at the basis of our present monetary arrangements.
A New Coinage
We are extremely pleased that the Gold Commission has recommended to the Congress a new gold coinage. It has been almost 50 years since the last United States gold coins were struck, and renewing this constitutional function would indeed be a cause for celebration and jubilee.
We believe that the coins should be struck in one-ounce, one-half-ounce, one-quarter-ounce, and one-tenth-ounce weights, using the most beautiful of coin designs, that designed by Augustus Saint Gaudens in 1907. A coinage in such weights would allow Americans to exchange their greenbacks for genuine American coins; there would no longer be any need for purchasing Canadian, Mexican, South African, or other foreign coins. Combined with the removal of capital-gains taxation on the coins and the elimination of all transaction taxes, such as excise and sales taxes, the new American coinage could quickly become an alternative monetary system to our present paper monopoly.
In addition to the new official coinage, private mints should also be permitted to issue their own coins under their own trademarks. Such trademarks should be protected by law, just as other trademarks are. Furthermore, private citizens should once again enjoy the right to bring gold bullion to the Treasury and exchange it for coins of the United States for a nominal minting fee.
In the last six years, Nobel laureate Friedrich Hayek has called attention once again to the economic advantages of a system of competing currencies. In two books, Choice in Currency and Denationalization of Money, Professor Hayek proposes that all legal obstacles be removed and that the people be allowed to choose freely what they wish to use in transactions. Those competing monies might be foreign currencies, private coins, government coins, private bank notes, and so on. Such unrestricted freedom of choice would result in the most reliable currencies or coins winning public acceptance and displacing less reliable competitors. Good money — in the absence of government coercion — drives out bad. The new coinage that the Gold Commission has recommended and which we strongly endorse is a first step in the direction of allowing currencies to compete freely.
The Failure of Central Banking
By a strict interpretation of the Constitution, one of the most unconstitutional (if there are degrees of unconstitutionality) of federal agencies is the Federal Reserve. The Constitution grants no power to the Congress to set up such an institution, and the Fed is the major cause of our present monetary problems. The alleged constitutional authority stems from a loose and imaginative interpretation of the implied powers clause.
Functioning as the central bank of the United States, the Federal Reserve is an anachronism. It was created at a time when faith in control of the economy by Washington was growing, but since it started operations in 1914, it has caused the greatest depressions (1929-1939), recessions (too numerous to mention), inflations, and unemployment levels in our nation's history. The only useful function it performs, the clearing of checks between banks, could be much better handled through private clearinghouses or eliminated entirely by electronic funds transfer. Given its record, there simply is no good reason for allowing the Federal Reserve a monopoly over the nation's money and banking system. Eliminating the power to conduct market operations must be achieved if we expect to stop inflation and restore monetary freedom.
Such a step may alarm some, however. They might be concerned about what will happen to all the Federal Reserve notes now in circulation and what they will be replaced with. First, the present Federal Reserve notes would be retired and replaced by notes redeemable in gold or silver or some other commodity. Such notes would be similar to traveler's checks now in use which are, at the present time, redeemable only in paper notes. Like traveler's checks, such notes would not be legal tender and no one would be forced to accept them in payment. And since they would be promises to pay, any institution that issued them and then failed to redeem them as promised would be subject to both civil and criminal prosecution, unlike the Federal Reserve, which is subject to neither.
As for the present circulating Federal Reserve notes, they could be made redeemable for gold once a "dollar" is defined as a weight of gold. Anyone who wishes to redeem them could simply do so by exchanging them for gold coins at his bank.
It is important to note that should we institute a gold standard before the Federal Reserve System is ended, that system must function along classical gold standard lines. As Friedman and Schwartz pointed out, it was the failure of the Federal Reserve to abide by the classical gold standard rules that caused the panic of 1929 and the subsequent depression.
In chapters 2 and 3, we demonstrated the disruptive effects fractional-reserve banking has caused in the United States. Since we still suffer with that system, it is imperative that a fundamental reform of it be made. That reform is simply that all promises to pay on demand, whether made in the form of notes or deposits, be backed 100 percent by whatever is promised, be it silver, gold, or watermelons. If there is any failure to carry 100 percent reserves or to make delivery when demanded, such persons or institutions would be subject to severe penalties. The fractional-reserve system has created the business cycle, and if that is to be eliminated, its cause must be also.
Audit, Inventory, Assay, and Confiscation
One of the areas in which we believe a majority of the Gold Commission erred is in not requiring a thorough and complete assay, inventory, and audit of the gold reserves of the United States on a regular basis. Perhaps there is less of an argument for such a procedure when the gold reserves are essentially stable, but when there is any significant change in them — as will happen when a new coinage is issued — careful scrutiny of the government's gold supplies is necessary.
There have been cases of employee thefts at government bullion depositories, unrecorded shipments of gold from one depository to another, and numerous press reports about millions of dollars worth of gold missing. It seems elementary that the government ought to ascertain accurately its reserves of this precious metal, and that the present ten-year "audit" of the gold inventory is totally inadequate for this purpose. We are quite sure that the Federal Reserve has a much better idea of how many Federal Reserve notes are printed and circulating than the Treasury does of the weight and fineness of its gold assets. This irrational treatment of paper and gold must be corrected immediately.
Finally, there are laws on the books empowering the president to compel delivery, that is, to confiscate privately owned gold bullion, gold coins, and gold certificates in time of war. There can be no monetary freedom when the possibility of such a confiscation exists.
One of the standard objections raised against a gold standard is that while it may have worked in the 19th century, it would not work today, for government has grown much larger in the past 100 years.
There is an element of truth in such an argument, for the gold standard is not compatible with a government that continually incurs deficits and lives beyond its means. Growing governments have always sought to be rid of the discipline of gold; historically they have abandoned gold during wars in order to finance them with paper dollars, and during other periods of massive government growth — the New Deal, for example.
Because gold is honest money, it is disliked by dishonest men. Politicians, prevented from buying votes with their own money, have learned how to buy votes with the people's money. They promise to vote for all sorts of programs, if elected, and they expect to pay for those programs through deficits and through the creation of money out of thin air, not higher taxes. Under a gold standard, such irresponsibility would immediately result in high interest rates (as the government borrowed money) and subsequent unemployment. But through the magic of the Federal Reserve, these effects can be postponed for awhile, allowing the politicians sufficient time to blame everyone else for the economic problems they have caused. The result is, as John Maynard Keynes said many years ago, that not one man in a million understands who is to blame for inflation.
Because the gold standard would be incompatible with deficit financing, a major reform needed would be a balanced budget. Such a balance could easily be achieved by cutting spending — surprising as it may be, no cuts have been made yet — to the level of revenue received by the government.
But beyond that, there should be massive cuts in both spending and taxes, something on the order of what President Truman did following World War II, when 75 percent of the federal budget was eliminated over a period of three years. Honest money and limited government are equally necessary in order to end our present economic crisis.
As part of this budget reform, the government should eventually be required to make all its payments in gold or in gold-denominated accounts. No longer would it be able to spend "money" created out of thin air by the Federal Reserve.
In order to make such gold payments, the government should begin accepting gold as payment for all taxes, duties, and dues. As a tax collector, the government must specify in what form taxes may be paid (or must be paid), and it should specify that taxes must be paid in either gold or silver coins or certificates. Such an action should occur, of course, as one of the last actions in moving toward a sound monetary system. All of the other reforms discussed here should be accomplished first. Such a requirement to pay taxes in gold or silver would yield the necessary flow to put the government on the gold standard and allow it to make all payments in gold.
But long before this is achieved, since gold is money, there should be no taxation of any sort on either gold coins or bullion. The commission has judged rightly in recommending that capital-gains and sales taxes be eliminated from the new American coinage. We would go further, in the interest of monetary freedom, and urge that all taxation of whatever sort be eliminated on all gold and silver coins and bullion. That would mean the elimination of not only capital-gains and sales taxes, but also the discriminatory treatment of gold coins in Individual Retirement Accounts, for example. Persons saving for their retirement should be free to keep their savings in gold coins without incurring a penalty. One reform that might be accomplished immediately would be to direct the Internal Revenue Service to accept all US money at face value for both the assessment and collection of taxes. At the present time, the IRS accepts pre-1965 silver coins at face value in the collection of taxes, but at market value in the assessment of taxes. This policy is grossly unfair, has no basis in law, and should be corrected immediately.
Together with monetary, tax, and budget reforms, a comprehensive plan for a gold standard and monetary freedom requires several improvements in our present regulatory structure.
For example, mining regulations, which make it difficult and expensive to open or operate gold and silver mines, would have to be eliminated. All regulations on the export, import, melting, minting, and hoarding of gold coins would also have to be repealed.
But the major reforms needed are in our banking laws. Under present law, there is no free entry into the banking industry; it is largely cartelized by the Federal Reserve and other federal and state regulatory agencies. Deregulation of banking, including free entry by simply filing the legal documents with the proper government clerk, is a must for monetary freedom. All discretion on the part of the regulators must be ended.
At the same time, there would need to be stricter enforcement of the constitutional prohibition against states "emitting bills of credit." It must be clearly recognized that the states, neither directly nor indirectly through their creatures, state chartered banks, may get into the paper money business.
A Constitutional Amendment
Although we believe that there is actually nothing in the Constitution that legitimizes our present banking and monetary arrangements, the present system has been with us for so long that a constitutional amendment is probably needed to reaffirm what the Constitution says.
We propose that the following language become the 27th Ammendment to the Constitution:
Neither Congress nor any state shall make anything a tender in payment of private debts, nor shall they charter any bank or note-issuing institution, and states shall make only gold and silver coins as tender in payment of public taxes, duties, and dues.