This thoughtful, well-researched examination of America’s monetary predicament has only become more relevant in the 31 years since it was first published.
The book originally appeared in the Congressional Record as the minority report of the Gold Commission formed by the U.S. Congress at the prompting of Ronald Reagan shortly after he became president. The majority of the commission did not see a role for gold in the American monetary system, but Representative Ron Paul did. Along with coauthor Lewis Lehrman, his opinion, upon surveying the history of U.S. money and banking, was and is that the only path to the creation of a prosperous, just, and decent society in the United States would be to restore gold and silver to their original place as the foundation of the monetary system.
After all, this would appear to be the explicit intention of the framers of the U.S. Constitution, whose Article 1, Section 10 states that no state shall
make anything but gold and silver coin a tender in payment of debts
At the time the Constitution was drafted, everyone had had recent personal experience of the debasement and collapse of a paper currencyin that case, the Continental dollar. As a currency collapses through ever-greater printing of it by the monetary authority, inflation gives way to hyperinflation, with widespread panic, suffering, and injustice. If this provision for gold and silver coin had not been put in the Constitution, many of the states would not have signed off on it.
But the issue of how money is managed by a political authority is a complex one, with many players kicking the football. Most of this book, 125 pages, is taken up with the history of money and banking in the United States, and an interesting and little-known history it is. The authors show how the image of banks as bastions of sober, sound managers of money and risk is mostly contradicted by history (not to mention the more recent history of titanic bank bailouts). The history of banking has been largely a history of recklessness, bank runs, and busts, with depositors footing the bill.
The fundamental reason for this is the practice known as fractional-reserve banking: the ability of a bank to lend out more money than it has in its vaults. This is made possible by the substitution of metal currency by paper. Instead of carrying around gold and silver coins, the depositor could carry around more portable paper notes insteadnotes that he could present to his bank to redeem for gold or silver whenever he wanted. Very convenient. And the bank, which makes its living by lending money, can now lend more of it than it actually possesses. It just needs to keep enough gold and silver on hand to satisfy those depositors who present their notes for coin. And as long as things are going well and everyone’s calm, that is not very many. So the profits of a bank can accordingly be very large compared to its “reserve” of deposits.
The problems occur when things are not going well and everyone is not calm. As soon as people suspect that they might not be able to redeem their notes for gold, they rush to the bank to do so, and when a number of people do this at the same time, there is a bank run, and the bank often will collapse as a result. And because of the interrelationship of banks, lending to each other and honoring each other’s notes, the collapse of one bank usually meant the collapse of more. In the process, depositors’ savings would be wiped out.
The history of banking is largely a history of efforts to prevent these recurring disasters, while hanging on to the oh-so-profitable practice of fractional-reserve banking that is their cause. One of the main wheezes in this effort was the creation of a “central” bank: a government-backed or government-associated entity that would guarantee the banking system as a whole by providing emergency funding in the event of bank runs. The United States has experimented with a few of these, culminating in the Federal Reserve system, launched in 1913 and still operating today. But as the bank runs of the Great Depression showed, banking panics had not been altogether eliminated. As one of his first acts upon taking office as president in 1933, Franklin Roosevelt, trying to clean up the banking mess, made it a criminal offense for Americans to own gold, and ordered them all to surrender their private gold. He also devalued the dollar from 25.8 grains of gold to 15.25 grains.
Apart from domestic ructions in banking, another problem has been international flows of gold and silver. For in the course of trade American dollars have made their way abroad, and foreign countries holding these dollars, if they suspected that the dollar has been overproduced relative to the underlying supply of gold, have turned in the dollars in exchange for the gold. In the 1960s, with the massive printing of money to finance the Vietnam War and Lyndon Johnson’s Great Society welfare programs, other countries were doing exactly this at an accelerating rate. For although Americans could no longer redeem their dollars for gold, foreign governments could, and did. The outflow was so great that in 1971 President Richard Nixon, alarmed at the hemorrhage, finally closed the “gold window”, and suspended all redemption of dollars. The final link between the dollar and gold was severed, and the dollar has floated without backing of any kind ever since.
Paul and Lehrman ably narrate the twists and turns in this story. Then they turn to describing how the United States might be returned to a gold standard. It would require several legislative steps over a period of years, such as repealing the “legal tender” legislation that obliges Americans to accept paper dollars in payment of debts. The authors contend that such legislation is unconstitutional in the first place.
Why should we care? For one thing, the authors assert that much of the unpleasantness of contemporary economic life would be eliminated or greatly reduced, for booms, busts, and bubbles are all products of inflationthe practice of promiscuously printing ever more paper money. Beyond that, a proper gold standard forces discipline on governments, who can no longer spend beyond their means, and it also allows businesses and citizens to plan more rationally for longer periods, while also encouraging thrift: the saving of some of our earnings, so that the true wealth of society can grow.
I was surprised to discover that this book was a Congressional “report.” For unlike most reports, it is passionate, well researched, well argued, and well written. The biggest obstacle to restoring a gold standard is probably that people regard the topic as dull and technical. We’re not interested in monetary theory; we just like money and we want it to work. Unfortunately, this attitude has been a costly one, not just in vague social terms but in a reduced standard of living for each one of us, unless we happen to be members of those elites who actually profit from monetary inflation.
This book offers a pleasant and stimulating way to start healing that ignorance. And each of us would be well advised to set about this as soon as may be, for the fate of all paper currencies in history has been collapse and destruction. Ultimately it’s not a question for experts, but a question for citizens. It’s not an abstract issue, but a practical one, even an urgent one. The supply of dollars is exploding; the next currency is probably going to be gold. This book is a briefing for that new order.