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Blueprint for a New Gold Coin Standard

Making money was the highest activity of men before looters invaded the nerve-center of capitalism and abolished the gold-reserve requirement for the issuance of Federal Reserve notes in 1968. Ever since "making money" has been the lowest activity of men whereby the savers and producers are fleeced of their substance. Watch for the day when the last meaningful productive job in America is exported to China. On that day American society will become a zoo, and American citizens will be reduced to the station of animals in the cage, totally dependent on the zoo-keeper for food and shelter.

Is it still possible that Americans will find their virtue, reinvent their Country of Money, and restart their essential activity of "making money" in the sense of Ayn Rand? Yes, provided that they open the Mint to gold, as ordained by the Constitution. In what follows we present a blueprint for the new gold coin standard for America.

Open the Mint to Gold!

Fixing the price of gold in terms of the dollar is a non-starter. It would lead to endless bickering between creditors who want a low, and debtors who want a high fixed price of gold, guaranteeing failure. Luckily, there is no compelling reason to fix the price of gold in dollars. On the contrary, the dollar had better be left to fend for itself. The one-ounce Gold Eagle coin, already in existence, could serve as the new monetary unit. Let it soar, free of the heavy baggage of dollar-denominated debt! Let the banks, first and foremost the Federal Reserve banks among them, try to save the dollar from the ignominy of ending up in the garbage heap of history! They have totally discredited themselves as guardians of the value of the money of the people, allowing the dollar to lose 99 percent of its purchasing power during the 88 years of operations of the Federal Reserve System. Member banks should not be allowed to carry deposit accounts denominated in gold coins, lest they repeat the feat and make the value of these deposits disappear, too.

An Act of Congress on Opening the Mint to Gold will reestablish the constitutional right of the people to convert gold in their possession into coins of the realm. On M-Day, the Mint will be declared open to gold, and those who prefer to trade and save in terms of gold coins will, once more, be free to do so.

You may object saying that the Mint is already open to gold as shown by its production of Gold Eagle coinage, and laws are in place to allow you to make contracts in terms of gold. People have been given the choice, but they are not interested. Not so! The Gold Eagle coin program, as it exists, has been designed to throw dust into the eyes of the public. The fact is that the coins' denomination fails to be proportional to their gold content. To be sure, this idiotic provision is not the result of an oversight. It is the result of deliberate sabotage on the part of the Treasury, its own version of the "poison pill", to make these coins unfit for the purposes of a gold standard. More importantly, these coins are struck exclusively for the account of the Treasury, then promoted not as money but souvenirs. Opening the Mint to gold would mandate that the one ounce Gold Eagle coin, the monetary unit, be struck for the account of anyone tendering the correct amount and fineness of gold bullion free of charge. Once this is done, then - after a 70-year hiatus - the Constitutional right of the citizen to free coinage will be re-established. The assertion that the public has been offered gold coins to trade and to make contracts in, but declined the offer, is a lie.

Credit Unions: New Guardian of the Value of Money

The banks must not be given a federal charter to carry deposit accounts denominated in Gold Eagles for reasons spelled out above. A better guardian for the value of money will be the labor organizations of the country, including organizations of the pensioners and retired people. Each of these will be invited to apply for a federal charter to establish its own Credit Union that would carry deposit accounts in Gold Eagles. An Act of Congress on Credit Unions will authorize the mobilization of the gold reserves owned by the Treasury for the purpose of capitalizing Credit Unions, old and new. In order to be eligible for a federal charter, the Credit Union must eschew the practice of borrowing short and lending long.

Bill Market and the Discount Rate

This grass-root movement to gold coin circulation is essential to ensure that laborers be able to make their purchases with gold coins so that, in turn, they be able to get paid in gold coins. There will be no banks to extend Eagle-currency credits to productive enterprise. Such credit will, nevertheless, still be available through the bill market. An Act of Congress on the Circulation of Bills of Exchange will provide for the limited monetization of self-liquidating bills of exchange, drawn by the producer on his distributor, representing merchandise shipped by the former to the latter that is moving sufficiently fast to the ultimate cash-paying consumer, so that the liability will be discharged in no more than 91 days (or 13 weeks, or 3 months) out of the gold coins released by the consumer. The number 13 is not arbitrary. Thirteen weeks is the length of the seasons, marking the change in the stock of merchandise in the temperate climates such as food, fuel, clothing, recreational equipment, etc.

The Act will give the needed buoyancy to the bill of exchange so as to enable it to circulate by endorsement almost as easily as cash. The producer who gets paid for his merchandise, not in the form of gold coins but of bills accepted by distributors, will be able to use it to pay his own suppliers by endorsing the bill once more. Thus each subsequent recipient will be able to use the same bill in payment for his own supplies by further endorsement. Alternatively, any one of the recipients could discount the bill of exchange at the discount window of his Credit Union. Discounting means selling the bill for gold coins at a discount. The amount of discount applied to the face value is determined by the discount rate and the number of days the bill has to run to maturity. Credit Unions make a market in bills. They trade them. They will sell them to you if you want to have them as an earning asset. They will buy them back from you, and will be happy to carry them to maturity, as these instruments are their most liquid earning assets. At maturity the Credit Union collects the face value of the bill from the distributor on whom the bill was originally drawn. The point is that, by that time, the distributor will have the gold coins from the sale of merchandise to the ultimate, cash-paying consumer. In this way the source of gold coins with which to pay labor along the production channels of the merchandise, and with which to liquidate the liability upon maturity of the bill, is secure. It is for this reason that bills of exchange are called self-liquidating.

The Act provides that non-self-liquidating bills such as anticipation bills, accommodation bills, etc., drawn on imaginary merchandise sent on world-wide trips in imaginary bottoms, will be denied monetary privileges. Treasury bills are self-liquidating only to the extent that the Treasury has tax revenues coming to it, during the next 91-day period, in the form of gold coins. If it has cash needs in excess of these receivables, the Treasury has no authority to issue bills but must ask Congress for fresh appropriations. A bill drawn with maturity exceeding 91 days, or one that has been rolled over for a further period, is not self-liquidating and will be denied monetary privileges, too.

Bond Market and the Interest Rate

An Act of Congress on Gold Life Insurance will authorize the federal government to charter financial institutions for the purposes of underwriting gold life policies and gold annuities. They would be holders of gold bonds issued by the government and by companies wanting to re-capitalize in Gold Eagles. The Act will specify that these institutions may only invest in gold bonds with sinking fund protection.

The Act will authorize custom duties and excise taxes to be levied in Gold Eagles, in order to capitalize the sinking fund the government will need to stabilize the value of its gold bonds. The total outstanding gold-bonded debt of the federal government must not exceed the level that can be serviced by the sinking fund.

The interest rate on the gold-bonded debt of the government will be the lowest possible, indicating that gold is the best money available to man. The depreciation premium on gold-bonded debt is zero. Lenders know exactly what will be returned to them at the end of the loan period. By contrast, in case of debt denominated in the irredeemable dollar there is a depreciation premium incorporated in the rate of interest, representing compensation lenders demand, and receive, for the expected depreciation in the value of the monetary unit.

The Question of Legal Tender

It is understood that the paper dollar will circulate side-by-side with Gold Eagle coins, at a floating exchange rate. People can discharge their debt contracted before M-Day in either paper dollars or gold coins, at the option of the debtor. As concerning debt contracted after M-Day, provisions in the contract will apply.

Certified labor organizations will be free to bargain with the employers and sign labor contracts calling for wages to be paid either in paper dollars, or in gold coins, as decided by the membership. If the decision calls for wages to be paid in gold coins, the management of the company will immediately start drawing bills of exchange on the distributors of the products of its factories, and after a 91-day transitional period the gold coins will be available from the proceeds of bills with which wages can be paid.

Gold coin circulation is not compulsory. No legal tender laws force anyone to accept payment in the form of Gold Eagle coins. People will have the choice to demand irredeemable paper dollars in exchange for their goods and services, or in which to carry their savings, if this is what they want. But they shall not be coerced to do so: there will be no legal tender laws to force the circulation of the irredeemable dollar. The legal tender status of the Federal Reserve notes is withdrawn forthwith, effective on M-Day.

New Charter for the Federal Reserve

The Federal Reserve banks would be given a new Charter which would automatically expire should the demand for irredeemable dollars fall below 10 percent of the total demand for money, as measured in terms of gold.

It is understood that, under the new monetary regime, there would be no central bank to regulate the stock of gold-denominated money, the discount rate, or the rate of interest. These would be regulated by unfettered markets such as the gold market, the bill market, and the bond market.

Not Enough Gold in the World?

Gold is the best foundation for credit. The present monetary system has immobilized gold. In this way the world economy has been deprived of its most potent and most wholesome source of credit, gold, forced to replace it with the most unsound and most depraved kind, the irredeemable promises of devaluation-happy governments.

One often hears the argument that there is not enough gold to cement the basis of the credit structure for a dynamic world economy. This argument is not grounded in fact. There is no identifiable limit on the amount of credit that can be built on the monetary unit defined as a certain weight and fineness of gold. Another way of expressing this is that it is the flows of gold, as opposed to stocks, that matters. It is not a question how much gold a government (or, for that matter, any entity or individual) possesses, but how much it can attract. While there is a limit on the former, there is no limit on the latter, provided that gold flows fast enough.

Presently there appears to be a scarcity of gold in the world economy. However, this is merely an optical illusion. All it shows is that monetary policy lacks credibility as governments are unable to attract gold to their coffers. Worse yet, they are forced to let large chunks of their gold reserves go for a pittance as they are engaged in a desperate effort to prop up the world's shaky payments system. The anti-gold propaganda campaign has driven an increasing part of monetary gold underground. Governments have, rather unwisely, used the remaining monetary gold in their possession for backing the issuance of paper gold, that is, gold futures, options on gold futures, and other forms of forward commitments to pay gold. The outstanding commitments are in fact so huge, and they are growing so fast that, in the opinion of the private holders of monetary gold, there is no way to make good on them in an orderly way within the time period specified. The only way to keep the trading of paper gold going is through ever larger injections of central bank gold. But it is questionable that official gold will be available indefinitely for the purpose of propping up the trade in paper gold. They won't tell you this, but central banks are conscious of the fact that their bank notes may lose purchasing power precipitously if gold reserves fall below the comfort-level of the people.

A New Golden Age

The problem therefore is to mobilize the world stock of monetary gold. This is what opening the Mint to gold is all about. Private holders of monetary gold have to be convinced that governments and central banks are ready to own up to the chicanery they have been practicing for a hundred years, and are finally ready to return to the international gold standard they abandoned in 1914. In that year they stopped using bills of exchange to finance world trade; since that time imports and exports have been the business of governments subject to quotas and official credits. In that same year the Federal Reserve System was established as the engine to monetize the debt of the U.S. government. With this kind of backing the U.S. government went ahead to finance a number of world wars in the twentieth century, bankrupting the international monetary system in the process. It is time, in the interest of the savers and producers of the world, to abandon that dysfunctional and exploitative monetary regime threatening to collapse and bury the productive facilities of the world economy under the debris.

Once a credible international gold standard is in place, private holders of monetary gold will be happy to release their holdings to the bill or bond market. The world's gold stocks will be mobilized, and the world economy will be refinanced in terms of wholesome gold-based credit. The crisis-prone financial system will be gone, replaced by the free flow of goods and capital represented by gold movements. A new Golden Age will have dawned.

[The] America of Ayn Rand's vision, a country of reason, justice, freedom, production, achievement - a country of money - will emerge once more, and the regime of the irredeemable dollar will appear as a brief reactionary episode in the history of money.

Reference

Atlas Shrugged, by Ayn Rand, New York (Random House) 1957, pp 410-415
(slightly edited, title and captions added).

Antal E. Fekete
Professor Emeritus
Memorial University of Newfoundland
St.John's, CANADA A1C5S7
e-mail: aefekete@hotmail.com