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Just as there are soft-money extremists (some Fed governors come to
mind), there are also hard-money extremists. I recently got a note
from a friend who wrote a piece called “Why Promoting the Gold
Standard Is a Mistake.”
With a title like that, you might think that he is a fiat-currency
fan, maybe even a “Modern Monetary Theory” enthusiast. Nope – he is
a gold-coin advocate, who thinks that any kind of representational
money (like a gold-linked paper banknote) is a mistake. For him, a
“gold standard” means a paper banknote or, perhaps, deposit at the
currency issuer, whose value is linked to gold, perhaps via a
redeemability function.
Unlike many people, my friend has thought out his stance quite
precisely. There is some basis for this in U.S. history. The U.S.
Constitution itself says that “No State … shall make any thing but
gold and silver coin a tender in payment of debts.” I think that is
pretty clear.
But, this described the situation of 1789 – a time when the former
colonies had been wracked by hyperinflation, caused by the
Continental Congress’ financing of the Revolutionary War with paper
note emissions. Also, the commercial and financial system was
simpler then – mostly subsistence farming — and making payments in
gold and silver coins was the normal daily practice. There were
apparently four banks in the U.S. at that time that were issuing
banknotes, used within their local area. Nobody declared them
illegal. But, most business was done with bullion coins, mostly of
foreign origin.
The Chinese too, when their paper money experiments collapsed in the
16th century, went to an all-bullion basis of commerce that lasted
until the 20th century. So, it was not a silly idea, in the 1780s.
However, as early as 1791, the First Bank of the United States was
chartered by Congress, after a long discussion. This was intended to
serve as a national bank, with branches throughout the country. It
issued its own paper banknotes, convertible into coin, which
provided a uniform paper currency throughout the two-year-old United
States. This was somewhat in the model of the Bank of England, which
had provided a uniform gold-linked paper currency for Britain since
the late 17th century, with a long history of success.
By 1810, there were 102 chartered banks in the U.S., each issuing
their own gold-linked paper banknotes in a standardized “dollar”
denomination. In 1818, there were 338. In 1859, the number of
banknote-issuing banks had risen to over 1,900.
The Industrial Revolution was just getting started, and it required
a more sophisticated financial system. Nevertheless, many remained
wary of the influence of bankers. (Many today think that the first
Treasury Secretary, Alexander Hamilton, was influenced in his
advocacy for the First Bank of the United States by certain European
interests.) In the 1830s, President Andrew Jackson fought diligently
against the influence of the “international bankers” in U.S.
affairs, and managed to shut down the then-dominant Second Bank of
the United States, a proto-central bank along the lines of the Bank
of England. Richard Timberlake’s book Monetary
Policy in the United States provides a wonderful account
of the history of U.S. money in the 19th and late 18th centuries.
This battle continued up through the Federal Reserve Act of 1913,
whose rather dubious creation was nicely described in G. Edward
Griffin’s book The
Creature from Jekyll Island.
Even then, the Federal Reserve did not have an effective monopoly on
money in the U.S. until after World War II. The United States clung
to the Founding Father’s vision of a place without the tyranny and
despotism of the Old World. Even today, in its dilapidated state,
the United States retains the outward functions of representative
democracy, while Europe is sinking into what amounts to an unelected
mandarinate government not so different than today’s China.
My friend has many reservations regarding the banking system, as it
existed then and today. I too think that banks, as they have existed
for the past 500 years of post-Renaissance capitalism, have had a
lot of problems associated with them, and should probably be
reorganized. I suggest something like splitting today’s typical
megabank into four independent entities. One entity would have, as
liabilities, only checkable demand deposits, usable in payments (in
other words, checking accounts), and holding as assets only
marketable debt securities with a maturity of less than one year,
and bank reserve deposits at the Federal Reserve. This would be a
lot like a money market fund. The second would hold, as assets, only
loans and marketable debt, and would have as liabilities time
deposits, term loans and bonds (no derivatives and other nonsense).
This would be, essentially, a traditional lending bank. The third
would basically be a broker-dealer, with all derivatives functions.
There should probably be a fourth, which is a securities custodian.
This would be “Glass-Steagall-Plus.” Some people like Boston
University professor Laurence Kotlikoff have already made proposals
along these lines.
Thus, I find these to be reasonable concerns as well, although I’m
not sure what it has to do with gold coins.
Perhaps it is time for the discussion to become a little more
sophisticated. I have long assumed that the Federal Reserve’s
seignorage profits (the interest income from its multi-trillions in
U.S. government debt) are not remitted to the Treasury, according to
the official story, but rather represent the profits of the Fed’s
founders and owners. These kinds of people just don’t give money
away.
Despite all this, I just can’t really see myself making a payment
for my latest Amazon.com order by sending Amazon some silver coins
via Fedex. Nor could I suggest others do so, with a straight face.
Although a coinage-only system is not practical today, nevertheless
the hard money extremists might help people become aware of some of
the more subtle aspects of money and influence in their history.
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