Debunking The Gold Standard: The Myth of Legality

And how about the 'debt repayment' to the banks issuing the currency? That's generally the main complaint I hear, private banks raking in the money for doing nothing other than minting currency. I don't see that as looking like something you're going to address in part 3.

I'm talking about the national debt, where the Fed merely loans money to the government and then charges interest on the loan, so that every dollar printed needs more than a dollar to be paid back. That's another thing I simply do not understand about our system.

This may be related to fractional reserve. I really don't understand the system.

He is referring to predatory lending and the idea of lending money than doesn't exist...

These securities, in conjunction with the authorities granted to private banks to lend in excess of deposits...

Where is this money coming from on the global scale?

Do you propose we just continue to spend more than we earn?

I was asking only about the debt controlled by the Fed. Why do these private banks get to collect interest on the public debt? Doesn't that seem wrong, and just fraught with peril?

What are they loaning exactly?

Except that the government pays its debts by taxing the public, so these lenders are being "compensated" for privileged access to the treasury. It would not be unfair to call the Federal Reserve system the world's largest corporate welfare program.

What are they loaning exactly?

Digits on a color screen that give you the ability to purchase true wealth, a home, in return for your labor through work, with the hope you will build the home, go broke, and have to turn the home over to the banks.

Killfile, what are they loaning exactly?

With interest payments on the debt the fastest growing part of the federal budget those interest payments are a serious concern.

http://www.federalbudget.com/

In Fiscal Year 2006, the U. S. Government spent $406 Billion of your money on interest payments* to the holders of the National Debt. Compare that to NASA at $15 Billion, Education at $61 Billion, and Department of Transportation at $56 Billion.

I am uncertain whether we need to revisit our currency system to correct that situation or not, but what we're doing now isn't working. Having had credit card debt problems in my past, I am entirely unsympathetic at this point to a system that is this out of control. $406 billion per year on debt interest? Why bother complaining about the cost of the war when the debt payments are the huge elephant in the room?

Back to the topic though, my complaint is that they are taking loans, with all the interest payment problems that raises, rather than issuing currency.

Yes, the bank does better than everyone else by virtue of being close to the transaction, but the transaction does have to occur someplace and if Government competed in the private equity market the results would be catastrophic.

There's an assumption here that the government will always be going into debt. A government that operated on a balanced budget and only took out loans for sudden large expenditures (wars, for the most part) would be preferable to the current system.

It's possible that if we didn't have the Fed the government would also be much less willing to take on the debt needed to wage war. Frankly, it's hard to see that as a bad thing.

If you eliminate the Fed the government will continue to borrow from elsewhere.

Not at anywhere near current rates. Prior to 1933, there was always at least some specie currency available. Afterwards none. Average US public debt 1791 to 1932 is about 13% of GDP, while from 1933 to the present the average is 55%. In the one extended period of US history where we had no central bank and fully specie backed currency (1836 to 1861) average public debt was a mere 1.25% of GDP. The US did have significant debt at the end of the Revolution, but adjusted for GDP, the first year in which debt exceeded that amount was 1933. Since 1933, public debt has almost always exceeded the post-Revolutionary amount.

That the Fed facilitates a higher level of public debt is beyond doubt.

Killfile,

I have honestly enjoyed this series. I maintain that the Fed is only constitutional based on overly broad interpretations of the Constitution and Supreme Court precedent.

In Searight v Stokes (1845) the Supreme Court ruled that the Congress could accomplish this by entering into a contract with a State to undertake the construction and upkeep of a postal road. In short, Searight upholds the Congress' authority to charge some other entity with the inaction of its powers

The Supreme Court upheld that Congress may enter into a contract with a State. Do you think it to be constitutional that "a State" in that ruling be interpreted as "some other entity", even a privately owned entity?

As a governmental entity it is, by design, cautious and concerned for the long term viability of the money supply

I think you give government too much credit here.

The US Government can borrow money through the issuance of bonds sold on the open market... but debt can also be monetized through the Fed. This is key -- the Fed is not the only route by which the government can borrow money.

Now the decision to monetize debt or not monetize debt is one that the Fed makes and I won't say that I always agree with that decision, but that's not to say that the ability to so monetize debt is a bad thing.

I would say that, in my opinion, we've been too zealous in the monetization of our debt, in large part because we've seen a number of years of very intentional weak-dollar policies intended to drive down the value of the dollar to make US exports more attractive.

How is this then "cautious and concerned for long term viability"? It seems that the Fed has been all too eager to loan out as much money as the government desires from it, knowing that while the full payment may never come, a steady stream of a huge quantity of taxpayer money will continue to poor in.

... the Fed is not under the constant and direct control of Congress. Congress and the President appoint a Board of Governors for the Fed which provide governmental representation and oversight ...

OK. So Congress and the President directly control the Fed? While also being the main organization that is constantly borrowing from it?

I am no economist, nor constitutional scholar, but common sense tells me that the current system, while perhaps sound in theory, and legal, has been subverted and is not working the way it should. I don't know that a return to the gold standard is the way to go, but surely there are changes that we should make to keep us from continuing down this cycle that Congress and the Fed have set up of borrow, spend, and tax?

You have said that you don't always agree with the decisions of the Fed. Are there some suggestions you have for reform? Do you think the system needs reform? Perhaps that is a topic for another article, rather than a discussion in the comments.

But the Fed existed in 1913, not just 1932.

The Fed had essentially the same structure as today, except for one important detail. The dollar was still redeemable in specie. The Depression demonstrated (as if such demonstration were needed) that the fiat structure of the Fed and specie redemption were incompatible. Once specie redemption ended, we were essentially on a pure fiat currency.

Look at what we did from 1932 onwards.

How much of that could or would have been done without a fiat currency to facilitate the massive amount of debt? Which came first, the Fed or the empire?

Honestly no, I don't think the system needs reform.

Perhaps not a change to the Fed system but something legislative at the Congressional level? A balanced budget amendment with exceptions for wars, natural disasters, financial crises, etc?

It seems to me that as long as congress is able to borrow and spend as much as it damn well pleases, while passing the taxes of the general population back to the privately owned Fed, that things will continue to get worse for the average American. I suppose that I don't really have a problem with the Fed, just their enabling of Congress's liberal borrow and spend attitude with tax payer money.

Killfile,

A balanced budget amendment, on its own doesn't make any sense. In any case, with that number of exceptions and the loosely defined nature of "war" to say nothing of "financial crisis" there's not much meaning to that anyhow.

Why would it not make sense by itself? What more would be needed? Three exceptions is too many?

Constitutionally, war is really very simple to define. Now, it might lead Congress to start declaring war on everything and everyone, just so that it can continue to borrow money at the rate it has been, but that is beside the point. Natural Disasters are equally easily definable under law. "Financial crisis" is pretty nebulous by itself, but I am pretty confident that some agreeable standards could be fashioned. I'm certain it wouldn't be bulletproof, but if it would help stop, or slow the cycle we are in, I could support it.

Killfile, doesn't your state of Virginia have a statewide balanced budget requirement? That leads to tough choices like cutting services when tax receipts aren't sufficient? Have you been unhappy with that system or are your concerns something else? There doesn't seem to be any way for Congress to exercise restraint absent such a mechanism.

Borrowing money is how our system creates new currency. If we had a balanced budget, we'd quickly spiral into deflation, and that's less fun than inflation.

Wait, what? You mean all the presidents who started paying down the national debt were actually destroying the country?

Well, currency is only worth what it buys...

Most wars seem to be used to stabilize the price of a necessary commodity. They want to keep the product at just the right price maximize profits without impacting demand. On something like gas, that price is pretty high, because we use gas for just about everything outside our homes. Not to mention the gas used to stabilize your own life, i.e shipping food, luxury goods and even the gas we put in our cars.

Killfile, do you agree with Jimmy Havok that paying off the debt would be bad?

Paying off the debt? That would be bad. Paying down the debt, however, wouldn't be such a bad idea.

Exactly. Debt creates money, taxation gets rid of it. If we're going to have such an enormous deb, were going to need a tax rate to match it, at some point. I suspect that the only thing that keeps us from drowning in inflation right now is how much of our money is going overseas. That situation will only last until the people who are hoarding dollars overseas get wise.

Right now we are propped up by the fact that OPEC takes payment in dollars. But switching those dollars to euros has made some folks a lot of money.

Time to repeal that part. I'm tired of waiting for my title of nobility.

;)

That section is geared more towards say if NY decided they wanted their own NY currency, it could only be gold or silver. This wasn't meant to say that the states couldn't use national currency not backed by gold or silver.

I get that, but as it's written, it seems to say that they can't use a national currency not backed by gold/silver.

Would it be better if we said "the state tendering US currency for payment of a debt is unconstitutional"?

The National government can make currency from anything they want. That chunk just says the states can not use any thing but gold and silver coin as tender for payment of debts. That means when a state uses the US Dollar as tender for a payment of a debt, that the act is unconstitutional.

If that clause of the Constitution bans non-metal currency, then it also bans Treaties, Alliances, and Confederations.

Legality and constitutionality are two separate entities, something can be legal without being constitutional. If something goes against the constitution it is unconstitutional. The federal government printing the cash is fine. The state using the cash as currency, while legal, is not constitutional.

My understanding is that tender, in the sense used, means 'money that may be legally offered'(ref).

and will be struck down by the Court

That is assuming the Court accepts to hear the challenge. We have quite a few Constitutionally-fuzzy programs going on now that the Court has just never even ruled on.

I recognize that 'legally' and 'constitutionally' your points are valid.

In the common sense world, if mom says to wash the dishes and you don't, then you didn't follow mom's directions. To common folks if the constitution says you don't do something and you do it, you were unconstitutional. Doesn't matter in the least what the lawyers say, or the judges say. Doesn't matter what anybody says, you went and did something you were told not to.

When the state pays somebody in anything other than gold or silver coin they are doing what they were told not to. To me that sounds like unconstitutional, even if they have great arguments for why its ok, even if the federal government has ordered them to.

We disagree, simple as that. I don't see your interpretation there, and you don't see mine. Fair enough, people have been bickering over this document for a long time.

Hell, we can't even get folks to give up their dollar bills and start using dollar coins instead. And although I hate to say it, we're going plastic!

A gold standard does not mean you carry around gold coins. (Seriously, schools need to provide some monetary history so that the ahem, iGeneration can actually understand them.)

A gold standard means that the currency has value relative to a particular weight in gold and that currency can be exchanged for gold. You can still have paper certificates, plastic cards, etc.

A gold standard does not mean you carry around gold coins. (Seriously, schools need to provide some monetary history so that the ahem, iGeneration can actually understand them.)

Sorry, but you either misunderstood my intention with the above post or I might've not explained it fully. I understand that a return to the Gold Standard is about monetary policy and not carrying around gold coins. However, given that our government can't even issue currency effectively I have little doubt that it would be able to implement an efficient monetary system centered on Gold. Furthermore, given the extremely hyperplasticity of money and 'worth' in our current economy such a system is at best antiquated and at worst inadequate. It's hard enough to adjust interest rates to protect against inflation. Instead of looking backwards, we should be creative and look towards a new more adaptive approach to monetary policy that takes into account current and future economic challenges.

I don't advocate it, but the fact of the matter is that even under a "gold standard," you still end up with fiat money. Even coins function as fiat money, since their value, due to the fact of minting, is higher within the sovereignty of the mint than that of their strict weight.

Maybe someone who advocates the gold standard could explain to me why not a single country on Earth is actually using it?

Consider the act of counterfeiting. You get lots of money without any real effort. Now imagine that you aren't just some small-time crook, but a powerful leader with police and soldiers that can, if necessary, force people to accept your fake money. Pretty good deal, eh?

If the gold standard was so great, then a country that was using it ought to be at a competitive advantage to other countries, and so the gold stnadard ought to prevail eventually by means of that advantage. You are saying that every single head of state is a thug, only interested in his own benefit, and that is why the experiment has never been tried.

Perhaps you'd be bettter off in a cabin in Montana.

Jimmy Havok:

then a country that was using it ought to be at a competitive advantage to other countries

They are, but only economically. Nations with fiat systems have a "competitive advantage" for waging offensive war. So, in a world with a handful of great powers, the dominant powers will have a debased currency and will compel minor nations to adopt their system. In a more multipolar world (such as during the 19th century) specie currency is more likely.

Killfile:

Not just every single head of state Jimmy, but the majority of every single parliamentary body.

Political myths can persist for quite some time. Take for example the Divine Right of Kings. Why do silly ideas persist in politics? Because someone benefits from them.

Many people, yourself included, believe that the gold standard contributed to the Depression. This is superficially correct, and that disaster was quite dramatic. It's completely reasonable that most people are skeptical of specie currency. I don't need to posit conspiracy to explain the permanence of the current system.