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[This paper was originally delivered at the Mises Institute's 1985 conference on the gold standard. It later appeared as the final chapter in The Gold Standard: Perspectives in the Austrian School.]

One of the basic insights of the great Austrian economists, both Carl Menger and Ludwig von Mises, is that money emerged by evolution from the market process. It was not invented by governments. There are basic economic forces today that are contributing to the further evolution of the monetary system, and there is a political strategy that I believe will make it possible to liberate those forces and restore the monetary role for gold. Because of the current economic and political climate, it is important to understand what we can do — and what we cannot hope to do in the short run.

The Political Climate for Reform

In his 1952 epilogue to The Theory of Money and Credit, Mises included a section with the title, "The United States' Return to a Sound Currency." The Korean War inflation was fresh in most people's minds that year, when Mises prepared his proposal. Food prices in 1951 had jumped 11.1 percent, with consumer prices in general jumping 7.9 percent. Yet by the mid-1950s, the public interest in monetary reform seemed to abate. Changes in the consumer price index were in the vicinity of 1 percent per year for the next decade, and food prices even declined in 1952–53.

The political and economic agenda for creating a real gold standard in the United States — a new international gold standard led by monetary reform in this country — depends very much upon the climate of political and economic opinion. If the Korean War inflation had continued, I believe Ludwig von Mises's proposal would have received much wider attention.

My belief that periods of monetary disorder always focus attention on gold as the solution is strengthened by the recent occasion of a congressionally mandated Gold Commission, on which I was proud to serve. It was created in response to the high rates of inflation in the late 1970s and a rising cry from the general public to restore gold to its rightful monetary role.

Most people know of the Gold Commission merely what the press reported — that it rejected a return to the gold standard. I believe the true significance of the Gold Commission is that the politicians and central bankers were so alarmed at such a thing that they made sure it was packed by an array of Keynesians and monetarists. These advocates of the established institutions and arrangements certainly don't want any role for gold to threaten their cozy theories about scientific monetary management and macroeconomic planning.

The dramatic reduction in average price increases during the recent recession has once again diverted attention from fundamental monetary reform, but it is clear to me that our present unstable arrangement will break down once more, and there will be another Gold Commission in the future.

The Mises Proposal

I want briefly to review the plan Mises described, and then set down the steps I believe would achieve his goal. Any differences in the proposals I am supporting in Congress from the plan he described in 1952 are based on my judgments about the progressive deterioration in our monetary and fiscal system during the intervening thirty years and the politics of the task today.

In The Theory of Money and Credit, Mises wrote, "The first step must be a radical and unconditional abandonment of any further inflation." Although I strongly support this objective, I do not believe it would ever be possible to achieve such a requirement if we place it as "the first step."

Banishing inflation is, in fact, the ultimate objective we expect to achieve by creating a new gold standard. The US government has moved so far in the direction of fiscal irresponsibility that the reform of our basic monetary and financial institutions has become much more complex. For political reasons, ending inflation cannot be the "first" step. We must subdivide it into many smaller preparatory steps even to approach the task.

Happily, the second step that Mises described has already been achieved: "All restrictions on trading and holding gold must be repealed."

In January 1975 it became legal for Americans to own and trade gold, and in 1977 the remaining prohibitions on gold clauses in contracts were repealed. In my view, this restoration of liberty is the most important change in circumstances since 1952, and the one condition that is today most favorable to the restoration of gold to its proper monetary role.

One of the points on which Mises was adamant is the role of the Federal Reserve System: "It is essential for the reform suggested that the Federal Reserve System should be kept out of its way." Mises advocated the creation of a "Conversion Agency" that would be responsible for issuing gold coins and bullion to the public, and redeeming excess quantities of gold in circulation if the public should choose to exchange gold for paper. The Federal Reserve would continue to have some responsibility under his plan, as a fiscal agent for the Treasury in managing the national debt, but the Conversion Agency would maintain the domestic and international exchange value of the dollar.

This is one of the most distinctive differences between Mises and other advocates of the gold standard, who want the Federal Reserve to buy and sell gold at a fixed conversion for dollars. The government's fiscal agent necessarily performs a banking function as it collects and disburses tax money. It would have to be separate from a conversion agency that would function more like an office of the National Bureau of Standards than like a bank. Mises's analysis of financial institutions and the market process led him to favor free, decentralized banking. He was thus a consistent advocate of a separation of powers.

Ludwig von Mises understood that the problem with monetary institutions is first of all a political problem. By proposing this separation of powers between the central bank and a conversion agency, he was an early proponent of an institutionalized competition in currency. Even the government of a constitutional republic like the United States could not be trusted with discretionary monetary power:

The President, Congress, and the Supreme Court have clearly proved their inability or unwillingness to protect the common man, the voter, from being victimized by inflationary machinations. The function of securing a sound currency must pass into new hands, into those of the whole nation.

Restoring the monetary role for gold must become a popular crusade in the United States. In the political sphere, popular crusades require tangible — as opposed to ideological or intellectual — benefits that people can recognize and subscribe to.

The heart of Mises's proposal to restore gold to our monetary system is a gold coinage. He wrote,

Gold must be in the cash holdings of everyone. Everybody must see gold coins changing hands, must be used to having gold coins in his pockets, to receiving gold coins when he cashes his paycheck, and to spending gold coins when he buys in a store.

In this one detail — the critical importance of the gold coinage — I believe lies the key to establishing a new gold standard.

We should make no mistake about it: the more progress we make toward reestablishing the gold standard, the more aggressive our opposition will become. Some vested interests, as you know, have a lot to lose if we succeed in getting the monetary system reconstructed on a gold basis. The first political step is, therefore, to get the coinage into circulation.

One objective might be to aim for every American to become a gold owner. We must encourage a broader base of political support for gold ownership and the availability of gold for personal economic objectives. Certainly a broader base of gold ownership in the country would help to reduce the threats of discriminatory taxation or regulation of gold ownership and gold coin transactions, which are seriously favored in Congress today.

Ludwig von Mises and most advocates of a gold-coin standard have understood the coinage as something similar to what we had in the 19th century, until 1933. Under this concept, coins would be various sizes, with face values in "dollars" but not exact sizes in any system of weights. We could advocate a coinage of $50.00 denominations, about one-eleventh of an ounce, or $100.00 denominations, about one-fifth ounce; but that would start the process of rebuilding the gold monetary system at the wrong end. It would require, first, a majority in Congress to vote to establish a new par value for the dollar.

By starting with the necessity for a congressional majority to decide on the sizes and weights of gold coins, we must presume in advance that we know the "correct" par value for the dollar. We must presume that a majority of the public already supports the restoration of a gold standard. The political task becomes a gigantic educational problem. Before anything constructive could be accomplished, millions of people who understand nothing about the causes of inflation or the advantage of a free-market monetary system would have to be persuaded to join a political movement. All the misconceptions that are propounded today by academic economists, all the mysticism of the central bankers, all the objections of the politicians would have to be expunged from the popular mind. I do not believe this would be an efficient way to approach the problem.

What we must first do is get the coinage into circulation, and then build the political base to lock the government's fiscal folly with golden handcuffs. People have always understood the tangible value of gold coins in circulation. They don't need to agree or even understand the fine points of monetary theory to own gold coins, trade gold coins, or use gold coins to satisfy part of their marginal-utility demand for cash balances.

Most people understand very little about economics or monetary theory. When they see supposed experts in disagreement, the status quo wins by default, because nobody with the power to change it has the courage of conviction. The majority of voters see the debate among experts and hesitate to support any leaders with comprehensive reform schemes. This is why all efforts to rebuild a gold monetary system have met with frustration and stalemate in the past.

The demonstrated popularity in the United States of Krugerrand coins, and all the imitators of the Krugerrand (Maple Leaf, Panda, Onza, and the US Gold medallions) have shown us that it is possible to adopt another tactic, that of getting gold coins into circulation prior to setting a new par value for the dollar. Indeed, the only affirmative recommendation of the Gold Commission was to create a new US gold coinage in units of weight.

I would love to see a purely private, free-market monetary system with any honest manufacturer able to produce coins, as Americans saw in California from 1849 to 1864. There must certainly be no restrictions on the private production of coins, but I believe that getting the US Mint further into the act, producing a gold coinage with some of the mystique of the government, will be useful in the further political stages of monetary reform. Honest money, after all, is a political objective; it is fitting that people should demand honesty from their government, as well as an economic policy that permits individuals to compete honestly. An official coinage that reflects honest bullion weights is a powerful symbol of the gold standard we support.

The Transition to a Gold Standard

The coinage should be based on exact units of bullion weight. The coins should be denominated in troy ounces, half-ounces, and smaller sizes if feasible. The denomination of the coinage is the secret to our success in the later stages of the political agenda, so let me take a few moments to explain the central importance of the denominations.

There are several important advantages to starting with a gold coinage denominated in troy ounce and fractional units of an ounce. Since the unit of money should be defined as a definite weight of bullion, a coinage denominated by units of troy weight contributes significantly to the reeducation of the public. This knowledge, which is now almost completely lost to three generations of Americans, must be reimplanted.

Murray N. Rothbard has made this point most forcefully:

The transition from gold to fiat money will be greatly smoothed if the State has previously abandoned ounces, grams, grains, and other units of weight in naming its monetary units and substituted unique names, such as dollar, mark, franc, etc. It will then be far easier to eliminate the public's association of monetary units with weight and to teach the public to value the names themselves. Furthermore, if each national government sponsors its own unique name, it will be far easier for each State to control its own fiat issue absolutely.

Some writers have resisted the suggestion of a coinage denominated only by units of weight, arguing that the "dollar" was originally a unit of weight; but I think this is a misstatement. "Dollar" was the name of a coin that had a definite weight, but it was not a "unit" of weight. Adopting the name of the standard unit of bullion weight as the denomination of the coinage will bring together two important concepts about money that we must actively teach to a majority of Americans if we are ever going to restore a gold standard. The educational job becomes that much easier.

Second, as Mises understood, the Federal Reserve and existing banks have to be kept separate from the remonetization of gold until the progress of popular support is broad and deep enough that special interest lobbying will not pervert the system. By avoiding any use of a dollar denomination on the coins, the Federal Reserve System is automatically kept out of the picture during this developmental period. The dollar denomination is today a monopoly trademark for the Federal Reserve System.

Third, when the date finally arrives, at the end of the transition period, to provide the US dollar with a fixed definition in terms of gold, it will be a very easy detail to announce to the public that the conversion agency stipulated by Mises is starting to buy and resell the troy-ounce coins at a fixed price. The dollar was defined as 25.8 grains of standard gold in 1900. Today it might be defined as one grain of standard 0.900 gold. There is nothing inconsistent with this requirement if the coins are denominated in troy ounce, half-ounce, or quarter-ounce sizes.

In Mises's monetary reform proposal, and under the classical gold standard, the various substitutes for coin — bank notes, bank drafts and acceptances, and demand deposits — are supposed to be fixed in value to the underlying coin and exchangeable for it. The conversion agency would function as a resale buyer and wholesale distributor of the coins, and equally as a buyer of last resort for the paper money of the Federal Reserve.

The question that is most difficult to answer about the transition to a new gold standard is how long it should take. The transition plan envisioned by Mises called for a period of time in which the free market in gold discovered the new parity rate that would produce neither inflation nor deflation.

It is probable that the price of gold established after some oscillations on the American market will be higher than $35 per ounce … maybe somewhere between $36 and $38, perhaps even somewhat higher. Once the market price has attained some stability, the time has come to decree this market rate as the new legal parity of the dollar and to secure its unconditional convertibility at this parity.

Mises did not discuss how long this transition period should last before fixing the new par value for the dollar, but it would have to last as long as it might take to build a political majority. This is almost a truism, because Congress would have to enact legislation to fix the gold weight of the US dollar.

The choice for advocates of a gold-coin monetary system, therefore, is straightforward: either we move ahead with a program for US gold coins denominated by weight, with no face value in terms of dollars — thereby starting the transition period immediately — or we sit on our hands, perhaps for decades, debating the fine points of banking theory, until the paper money system collapses around us. Even then, it is not obvious that the collapse of the paper money system would bring about the political pressure necessary to restore a gold standard. We might end up with controls on wages, prices, credit, and exchange controls instead of a gold-coin standard.

Over the longer term, assuming the transition to a new gold standard is successful (with Congress enacting a gold value for the dollar and fiscal policy disciplined by monetary convertibility), there are still distinct advantages to retaining the coinage in units of troy weight rather than assigning an official, stamped dollar value on the face of the coins.

First, Gresham's law — Bad money drives out good — tends to affect even the most perfect gold-coin standard. If we want gold coins to circulate freely in an economy where all prices are quoted in dollars, the coins themselves should not be denominated in dollars. Gresham's law operates even when bank notes are 100 percent warehouse receipts for gold. People might be able to trust that bank notes are fully backed by gold, but given the choice of which to spend and which to keep in the cash box, the paper will be spent and the coin will be saved because each monetary instrument has its own subjective value qualities.

The mere fact that honest coins are more secure than even the most secure paper is a sufficient qualitative difference to give them a premium value. The subjective evaluation of every person in the free-market economy must be employed to help keep the monetary system honest and noninflationary. To assure that gold coins move in active commerce, rather than sitting in vaults, we must let free-market pricing operate. Let the coins command a slight premium everywhere except at the conversion agency, which would have to redeem any excess Federal Reserve dollar bank notes (token money) for honest coin at the par value in response to public demand.

Gresham's law is a natural consequence of price fixing, mandating the exchange of items with different marginal utilities at a ratio not determined by the free market. It is, in fact, a special case of setting a price by law slightly too low for gold coins, the preferred form of money for long-term savings. Only the conversion agency should be mandated by law to exchange genuine coin for paper dollars at the par value. There are costs in terms of real resources, opportunity costs in the operations of a gold coin monetary system. These costs are worth paying; they must be paid to have an operational monetary constitution that prevents financial exploitation, but the issue of "Who pays?" must also be considered.

Most economists who support a gold-coin standard do not recognize the importance of distributing the marginal costs of coinage throughout the entire spectrum of the monetary economy. In the 19th century, this system of fixing the face value of gold coins in terms of paper bank notes, rather than by units of weight, led to the centralization of gold hoards in bank vaults, which made it all the easier for governments to confiscate them. The simple confusion of the coin and the denomination of the money produced the effect of Gresham's law during the classical period. If it is left up to the government, the central bank, or the banking system to absorb the costs of having coin always on hand to redeem bank notes at face value, the managers at each stage will attempt to economize these costs, rather than charging the consumer for them, and there will be a constant pressure to take coins out of circulation and replace them with substitutes: paper bank notes and demand deposits.

If the coinage is denominated only in terms of troy ounces and fractions of an ounce, the free-market pricing structure takes care of this problem instantly and effortlessly. The official conversion agency must redeem Federal Reserve notes at par, but others should be free to charge a competitive premium for gold coins (that is, to discount Federal Reserve notes). This would tend to assure a continuing flow of gold coins into private ownership.

Ludwig von Mises proposed to solve this problem by forcing the circulation of gold coins by prohibiting any paper bank notes in the $5, $10, and $20 denominations. In 1952 it seemed reasonable to him that the dollar might be worth something nearer l/40th ounce, so gold coins could replace those denominations. Today only the $100 bill would be affected by this proposal, since gold coins now would be too tiny for most commercial transactions. Where they would find most popular utility would be in financial transactions and in the purchase of consumer durables, because of the generally higher prices. Over time, the Federal Reserve dollar will come to be recognized as a form of token money that is just a tiny fraction of a gold ounce.

We can only make political use of the fact that the public treasures hard money over paper money if we make it clear that there is a difference. A different denomination for each form — "dollars" for paper and "troy ounces" for coin — is the easiest and most obvious way to achieve this objective. There is a specious similarity in this proposal to the gold exchange standard of the 1920s, but the active circulation of small-denomination gold coins would defeat any such criticism. The denial of any small-denomination coins was the distinguishing feature of the pseudo gold standard adopted in the 1920s and perpetuated under the Bretton Woods arrangement in 1944.

So long as the conversion agency performed its role, it would also be impossible for the Federal Reserve System to produce a monetary inflation because the conversion agency, which would be completely separate from the government's banking activities, would be engaged in the process of absorbing excess dollars from circulation, in exchange for the troy-ounce coins that it issues. If the Federal Reserve made the opposite mistake, as it has often done in the past, of overly restricting the money supply, the market could always sell coins to the conversion agency to obtain any dollars demanded. A precise balance would be achieved between the general public's demand for money in the form of coin and its demand in the form of bank notes or deposit account with banks by the existence of the conversion agency as something separate from the Federal Reserve.

The genius of Ludwig von Mises was his profound insight into the free-market process, the science of catallactics. The most important thing I have learned from his work is that the achievement of a new gold standard in our society will have to come from the free market itself. This is why I believe the first step must be a new troy-ounce gold coinage, even without any legal tender qualities or special tax treatment. As we have found in recent banking deregulation, the market develops new procedures and techniques in the monetary and financial system, and Congress follows with repeal of old, restrictive laws. This is the political and economic dynamic process that we also can harness to restore gold to its proper monetary role.

All the government needs to do is to get out of the way. The political and economic agenda for monetary reform, therefore, consists of the following steps:

Congress must adopt the legislation recommended by the Gold Commission to bring a new US gold coinage into circulation, denominated only in troy-ounce units and fractions thereof. Advocates of the remonetization of gold must work both in the political arena and in the marketplace to get as many of these new coins into the possession of the public as possible. Politically, this means resisting taxation or any regulations on the utility of the new gold coins for purposes of exchange either for other goods and services or for dollars. As Ludwig von Mises demonstrated in his Theory of Money and Credit, it is the marketability of a good that gives it a monetary character. The more easily recognized and marketable the new gold coinage becomes, the more it will be recognized as genuine pieces of money. The fact that the troy ounce of gold is well defined and the paper dollar has no fixed referent at all should be made the focus of continued education and debate, just as we are now doing. The continuing academic work by students of Carl Menger and Ludwig von Mises in monetary and financial theory is vitally important, particularly to expose the fallacies of centralized macroeconomic planning and the failure of "managed money." The acquiescence of the economics profession, which is today disdainful of gold, will have to be secured. Serious academic work will stimulate interest in a new Gold Commission, which would be able to focus this research in economic theory on the political issue of monetary reform. It is essential to move the center of monetary debate from the question of how the central bank should perform monetary management to the more general question of managed money versus market-process money. The objective would remain to persuade a majority of Congress to enact a new par value for the US dollar in terms of gold. When every American family is familiar with gold coins and understands the intrinsic defects in a managed paper standard, a majority in Congress can be persuaded by the demands of voters to enact a new par value for the US dollar and to establish the conversion agency described by Mises.

Except for random shocks in the financial markets, due to Federal Reserve central-planning mistakes, and occasional political disturbances, such as a Middle East war or troubles in South Africa, the dollar value of the troy-ounce coins should stabilize, just as we saw in 1984. The old myth that "gold is too unstable to serve as money" will be disproven by the common popular experience.

The strategy set forth in these four steps, I believe, is the only politically feasible way it can be done. All of the wishful thinking about restoring the gold standard by electing the "right person" to be president, or by attempting to educate the general public, will fail without first making available a tangible gold coinage as something they can see, touch, use for a portion of their savings, and become accustomed to using for many kinds of transactions. Public opinion polls have shown strong support for monetary stability. There is substantial support for a gold standard among the American public, yet the various proposals for enacting a par value for the dollar are dismissed by congressmen, the financial and business press, and "experts" of all stripes.

The task at hand, therefore, is to remove every roadblock to the realization of the will of the majority. The sentiment for gold must be mobilized. The question is no longer "Why do we need a gold standard?" but "How do we get it enacted?" To restore the gold standard to its central role in our system of constitutional government, we must lead a second kind of American revolution, a popular movement for honest money.

As Mises wrote, "Without such a check all other constitutional safeguards can be rendered vain."

The gold standard as a constitutional restraint on our government was abolished in the United States, not in 1934 nor in 1971, but in 1819 with the US Supreme Court case of McCulloch v. Maryland. With this famous Supreme Court interpretation of the Constitution, the federal government acquired the sovereign power to manipulate the nation's money, from which the legal tender laws of the Civil War, the central-banking powers of the Federal Reserve System, and the ultimate prohibition on any private use of gold as money in 1934 derived. This link between sovereignty and currency manipulation has been ably argued by Henry Mark Holzer.

The key to the government's power to manipulate money is its control over the definition of the word "dollar." A troy ounce coinage in widespread circulation would significantly alter the public's perception of the government's monetary role. If the Congress should ever attempt to change the par value of the dollar in terms of the gold coinage, the holders of coins would be fully protected. Financial promises to pay coins would be protected, in a way that promises to pay dollars would not be. Best of all, as a result of the separation of currency and coin denominations, there would be no public purpose served by asking citizens to turn in old coins for new ones; the crime of January 1934 would not be repeated.

Restoring a gold coinage is also the highest duty we now face, as citizens of this country. We no longer live in a world where the free market is taken for granted. On the contrary, most people assume government must control and guide the economic system for the benefit of all. Ludwig von Mises suffered during most of his career because he understood too well the stakes of this ideological conflict:

"Cynics dispose of the advocacy of the restitution of the gold standard by calling it Utopian. Yet we have only the choice between two Utopias: the Utopia of a market economy, not paralysed by government sabotage, on the one hand, and the Utopia of totalitarian all-round planning on the other hand. The choice of the first alternative implies the decision in favour of the gold standard."

I believe the goal of a market economy, not paralyzed by government sabotage on behalf of vested interests and pressure groups is an ideal worth fighting for. This is why I first ran for Congress, and it is the only reason I believe justifies political action.