Friday, September 26, 2008

The Gold Standard The Solution to Our Financial Crises

In the panic that has surrounded the present crisis, the best, most honest, and easiest way to save the financial system, a return to the gold standard, has been forgotten.

The problem with the banking system at present is a lack of capital and liquidity due to the bad lending practices encouraged, and in some cases required by the federal government. With their asset prices falling, the banks are on the verge of bankruptcy.

This is a problem for all of us. If banks fail, our money in the banks will go down with them, lending will dry up and the economy will grind to a halt, millions of people will be out of work. So we have to save the banking system, but at the same time we don’t want to reward them for the part of the crises that is their fault. We want to insure that the American people can get to the money in their checking accounts.

There is a way to do this. The Federal Government, holds about 260 million ounces of gold most of which was stolen from the banking system as an emergency measure during the great depression. I propose that the gold held by the Federal Government be returned to the people it was taken from, the people and banking system of the United States.

Under my proposal, gold would be declared money of the United States at the rate of $15,000 an ounce. Then 70 percent of the gold reserves of the United States would be transferred to banks in proportion to the dollar amount of the their checking accounts, sweep accounts, and retail money funds.

However this transfer would come with strings. First the banks would be required to maintain 100% gold reserves against their checking accounts, sweep accounts, and retail money fund accounts. They would be required to pay out gold on any withdrawal from any of the forgoing types of accounts when the amount of the withdrawal exceeded $500.

The rest of the gold reserve of the United States would be used to produce, a gold, silver, and copper coinage for the United States. This would be used first to redeem all of the outstanding notes of the federal reserve and the token coinage as it now exists and to pay off as much as possible of the federal debt.

The result of this would be a banking system which could not default on its payments to depositors, though savings account holders and CD holders would have risk, but the strengthening of the books of the banks would secure most of these obligations. It would end the current crises without cost to the taxpayers of the republic. It would end the possibility of such crises in the future because it would end the fractional reserve system that introduces great instability into our otherwise healthy economic system.

I will no doubt be denounced as a “gold bug” for proposing this, but it is the paper bugs of wall street and the federal government that have brought us to this crises. It is gold that can lead us out.

The above is inspired by the work of the economist George Reisman.


John said...

You're spot on with this. The gold standard is and has been the solution to these continued artificial business cycles we've been experiencing ever since the Fed was created.

william white said...

This would need to be multi-step and multi-metal to avoid wild currency swings that would end us up back where we are now. Gold, silver, copper and several platinum group metals would need to be represented so that the industrialization of space would not cause wild swings in the money supply. Given Murphy's law we would get hard currency inflation followed by gold becoming a critical industrial metal. I think the L-5 archives are on the web and unless I am misremember, the marginal cost for precious metals refining in space is measured in pennies.