Let’s Meet The Hard Money Extremists

Let’s Meet The Hard Money Extremists
November 13, 2014

(This item originally appeared in Forbes.com on November 13, 2014.)


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.