Feb

9

The question of the gold standard has come up, and there are the predictable responses that involved (1) not identifying what the authors of the Constitution and their 19th century successors meant by a gold standard and (2) confusing the question of a gold standard with the issues involved in fractional reserve banking. A question for the List: can anyone explain why Murray Rothbard and the Misesians are so adamantly prohibitionist about free banking - i.e. letting the bankers decide how much specie will back their dealings in credit? It still puzzles me, given the fact that the ideas of free banking (where the government is neither the guarantor nor the owner of any bank, let alone a central one) were an integral part of the Constitutional gold standard.

Here is a reprint of my latest anonymous commentary:

The Constitutional gold standard did not set the price of the dollar; it established the weight and measure of gold and silver and copper that would be in U.S. coin. In the Anglo-French-Spanish-Dutch world of trade in 1787 gold and silver were the reference standards for Foreign Coin; the authors of our Constitution wanted the same standards to apply to U.S. coin. The difficulty came in trying to set ratios between competing precious metals. Copper was never a problem because small denominations were always fiduciary currency - i.e. their stated value as legal tender was less than their monetary content. Small denominations were in such chronic shortage that private script was often used as a substitute for "half-dimes", etc. The more commercially astute members of the Convention and subsequent Congresses understood that bi-metallism was unworkable because Gresham's law would always drive the good money - i.e. the coins worth more than the legal tender amounts - into hiding. Gouverneur Morris, the shrewdest of all of them, wanted only gold to be the reference standard. He thought fractional reserve banking was the best way for the country to expand the availability of credit; but he opposed outright Hamilton's notion that the government itself should get into the banking business. Morris, as a merchant, understood what Hamilton, as a lawyer, never quite grasped: if the government can make its own bank drafts legal tender, then the Constitution's fundamental restraint on spending - the requirement that Money be Coin - will be nullified. A true Constitutional gold standard has only existed during one period in U.S. history - from the date of Grant's Resumption Act (1875) to the enactment of the Federal Reserve system (1912). It is only during that 37 year period that all the conditions of the Constitutional gold standard were met: (1) no States would coin Money or emit Bills of Credit (Art. I Sec. 10) and (2) all obligations of the U.S. Treasury, whether Notes, Bills or Bonds, were payable in gold, on demand, (3) the U.S. would, on demand, mint gold into coin and (4) only coin and convertible Bills of Credit of the U.S. were legal tender.

Resumption would not be difficult. It simply requires a President who has Grant and Morris's understanding of the importance of a Constitutional gold standard. The Treasury would have to limit further production of Federal Reserve Notes to replacement of worn/defaced bills, and the Congress would have to enact into law a date on which U.S. dollar currency, as legal tender, would be freely exchangeable into gold. What should NOT be done is to set the price; the market exists to do that. (Note: when the U.S. resumed the gold standard in 1875 the "price" of the dollar was already being set by the market in gold; the Resumption Act simply restored - with a slight adjustment - what had been the original weight and measure of U.S. coin.) Resumption would also have to follow the path set out by 1875; the Federal Reserve's greenbacks would be treated as being direct obligation of the U.S. Treasury but there would be no more "printing". The U.S. Treasury would guarantee the convertibility of the currency but the Bills of Credit of the Federal Reserve and its member banks - i.e. their checks - would receive not Federal guarantee. The banks, including the central one, would be free to succeed or fail on their own.

This may sound like a plan for the apocalypse. That was certainly what President Grant's critics and political opponents said after the Panic of 1873; they even blamed that collapse in speculation on Grant's insistence that the country return to the gold standard. Yet, when the day of Resumption came, there were no bank runs and no mass conversion of currency into coin. On the contrary, the dollar became - for the first time - an equivalent to the British pound in world markets. Requiring the U.S. government to honor its Constitutional obligations under Art. I Sec. 9 would be a dramatic change; the markets would finally have a direct mechanism for discounting the never-never promises of the Congress and the President - and the Treasury would lose the captive customer for its Credit - i.e. the Federal Reserve. But, one has to ask the simple question: would the Credit of the U.S. be greater under a system that restored the Constitutional check and balance of the gold standard or under a continuation of the present fiat greenback fictions?


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