With President Trump’s nomination of Judy Shelton to the Federal Reserve Board some gold supporters are hopeful the precious metal will make a comeback if she’s confirmed by the Senate. “As it happens, Ms. Shelton is a believer in the gold standard and a critic of current Federal Reserve policies,” wrote a contributor to GoldTelegraph.com. Sounds encouraging until we think about the world at large and who calls the shots.
Money, as Mises defined it, is the most marketable commodity. Today in the US and many other places, federal reserve notes are the most marketable commodity. One reason the notes are the most marketable is that competing monies are outlawed — a nice arrangement for the Fed and for those who profit from its policies.
Every central bank ever created has been a creature of the State. Or more precisely, the biggest bankers used the coercive apparatus of the State to establish a monetary monopoly, always in the name of serving the public interest. A central bank “is not a natural product of banking development,” Vera Smith wrote in her famous study of 1936. “It comes into being as a result of government favors.” Rothbard hammers this home in The Case Against the Fed as does G. Edward Griffin in The Creature from Jekyll Island, along with many others.
Why would bankers need government favors? Recall the Panics of the 19th century in which banks were overwhelmed with the rush of depositors demanding redemption in gold or silver coins. Bankers have had a habit throughout history of loaning more money than they have on deposit, an honored practice called fractional-reserve banking, a euphemism for embezzlement. When their loans become noticeable the public gets suspicious and starts withdrawing their deposits. Those who arrive too late on the scene leave without their money. Eventually the banks close or get a temporary reprieve from the state to keep their doors open while legally declining to redeem any deposits. A well-structured central bank, using paper or digital fiat money, can forestall this development. Throw in federally-supported deposit insurance and bank runs of old disappear. When money enters the world by means of digital decree the only limit to its quantity is how high Fed bureaucrats can count.
If confirmed Ms. Shelton will be one of seven members of the federal reserve board and one of 12 on the FOMC who decide how much money The Wall Street - Government Complex should get. Wall Street would be Pall Street without easy money. The hyper-bloated state with its endless handouts and wars can’t survive without an endless revenue stream. A market-controlled monetary standard such as a gold coin standard would kill the State. As wonderful as that sounds, at least to me, it will not be allowed to happen.
There was great enthusiasm among libertarians when Alan Greenspan took over the Fed in 1987. Like Ms. Sheldon, Greenspan understood how a gold standard put severe limits on government theft. As he wrote in his famous essay Gold and Economic Freedom, “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.”
But look again at his essay. He also wrote “Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits . . .”
“Only a fraction of his total deposits”?
But the government sides with the bankers. “As Murray Rothbard observed [source], a bank that fails to meet its deposit obligations is just another insolvent, not an embezzler. Following the British ruling in Foley v. Hill and Others in 1848, US courts consider that money left with a banker is, ‘to all intents and purposes, the money of the banker, to do with as he pleases.’
“This holds even if the banker engages in ‘hazardous speculation.’ Thus, according to the state, there can be no embezzlement because the money belongs to the bank, not the depositor. But was there ever a depositor who thought he was turning his money over to the banker so he could ‘do as he pleases’ with it?”
Returning to some variation of a government-controlled gold standard will work about as well as it once did, with elite decision-makers deciding whether to permit gold’s discipline or abandon it altogether. An honest money arises only when free market participants agree on what to use for a medium of exchange, without state interference, ever.
