Let's End the Money Racket (IX)
Specie Redemption and the Real Money League
Last time we showed how the market value of the US dollar would be established. Further, we stated that there would be no curtailment in the outstanding 20 trillion US dollars currently in circulation world-wide. We noted that, because there would be no contraction in the money supply, and because the value of the US dollar would now be permanently pegged (firstly by presidential decree and then by constitutional amendment) to a specific quantity of metal, the global reputation of the US dollar would be greatly enhanced, and the current fear of an eventual dollar sell-off and subsequent implosion of the US economy would disappear.
We also noted that incremental price deflation would replace incremental price inflation as the modus operandi of financial markets that trade in US dollars, that the mild bout of hyper-inflation that we are currently experiencing would disappear over night, and that — short of a technological revolution in the discovery and refinement of precious metal — all future bouts of generalized, across-the-board hyper-inflation would be rendered impossible. Finally, we showed that the value of specie-based money — despite some initial adjustment — would grow at a near constant rate of two percent, and that the wide price fluctuations in the price of the selected metal would disappear due to the low, stable growth in the supply of the selected metal (either gold or silver), as well as the largely democratic nature of the demand for money.1
What we must now consider is the initial adjustment to the price of the selected metal and the need for an export ban of the metal in all countries that decide to move forward with a true specie standard (gold or silver, but not both).
In order to reassure the general public that none of the above is hocus-pocus American citizens and other US residents must be able to trade their paper, plastic, and electrons for the selected metal at the pegged rate of equivalence. In order to insure that this occurs the selected metal must not only be available, but it must be available in a tradable form.
Further, in order for the metal to be available, not only must banks hold enough of it in reserve to meet the current demand for specie, but there must be enough of the metal in the United States to meet the demand.
In consideration of the estimated 8.4 trillion US dollars in circulation outside of the United States (some 40 percent of all US dollars in circulation) one could easily imagine a sudden inflow of these dollars into the United States as foreign “investors” sought to buy up the real thing! The resulting outflow of the selected metal would not only dry up the market for the metal within the United States, but it would also pose a national security threat to the newly instituted, real money regimen. It is for this reason that the export of the selected metal in any form that is not strictly industrial in nature must be forbidden. In contrast, the selected metal would be welcome as an import, and it would be approved for export to other countries who adopt a similar real money regimen — including the ban of the metal’s export in any form that is not for industrial use.
The end-goal of this new American monetary regimen is, of course, to establish a Real Money League and make real money the global standard. This said, each nation must be able to join The League on its own volition.
With the exception of new dollars that would be issued as coin or bullion within the United States the USD trillions of dollars already in circulation would continue to be traded as before. In other words, the international real economy would not be directly effected by the newly instituted domestic — potentially international — monetary regimen. US dollars that do not contain the selected metal would trade freely across US borders.
There will be important indirect effects in the established markets for borrowing and lending that we will address further ahead. There are some really cool surprises coming down the road!
To what extent residents within the United States would want to replace their current plastic, electrons, and new paper for the real thing is difficult to say. Certainly those who already hold gold and silver coin embossed with the phrase “One Dollar” would be well-advised not to use it in trade. Hopefully, it is obvious that such “dollars” are already worth far more than the value currently stamped on their surface. Indeed, new coin must be minted by the US Government — what is a constitutional right of Congress by the way.
“The Congress shall have Power …
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; …”
We the People. 1789. US Constitution. Article I, Section 8, § 5.
There are various ways in which this new coin could be made. Important is that we acknowledge the overriding weight and size constraint of the selected metal.
Already we have stated that, if gold were to become the selected metal, then a US dollar would be worth 0.18 grains of gold. Alternatively, if silver were selected, then one US dollar would be equivalent to 15.3 grains of silver.2 In other words, the size of a US dollar made from either pure gold or silver would be far too small to hold in one’s hand. By way of example, 15.3 grains of silver is about the weight of an average-size paper clip. Can you even imagine how big 0.18 grains of gold might be? One way to get around this problem might be to mesh gold or silver (but, not both) nano particles with synthetic polymers into light-weight plastic coins that glitter in the light. The amount of glitter would be a clear indication of the amount of the metal. As the number of nano particles can be adjusted and these can be separated from their polymer encasement once merged, they might very well make an excellent source of new coin at any denominated fraction of a dollar. Important is that the coin be made available to everyone on demand.
Each bank would decide how much of its assets it would want to hold in coin or bullion. Banks that were readily able to meet consumer demand would, of course, be preferred over those that could not. This said, no bank would be considered insolvent, if it could not meet the demand. The system of fractional reserve banking that once underpinned the “gold standard” of the British empire, and the “gold-exchange standard” of the post-World War I epoch would not be revisited. Any addition to the supply of real money would be mined, and all US dollars — be they paper, plastic, or electrons currently in circulation would remain. Further, their value would be fixed according to the new amendment to the Constitution.
So that there is no confusion about how the future supply of the US dollar, its supply would be defined as follows:
such that
Fraction of specie (gold or silver, but not both) refers to that fraction of the supply of the selected metal devoted to specie. This fraction would be weighed in grains and its dollar equivalent calculated (see Part VIII). League members that wished to use the US dollar as their own money would be prohibited from coining new dollars. This said, they would be free, like any private citizen of the United States, to present the selected metal to a US mint for conversion into US coin.
Outstanding currency refers to all US dollars currently held in the form of paper, plastic, electrons, and coin currently in circulation. As stated earlier, dollars held in paper and coin would eventually be replaced with new paper and hopefully the kind of coin recommended above.
Token coins that are replaced by the real thing in whatever form would be subtracted from outstanding currency (C), because they would now form a part of total specie (S) in circulation.
Indeed, any increase in the amount of paper, plastic, or electrons would have to be offset by a diminishment in the supply of specie in circulation. In other words, an equivalent amount of specie would have to be removed from circulation — i.e., set aside and held in reserve by the issuer of the new currency. Such reserves would be enforced by the newly transformed Federal Reserve System that would be administered by the Office of the Comptroller of the Currency (OCC) under the direction of the US Treasury Secretary.
In effect, the only way in which M could grow is with an increase in the fraction of the selected metal used as money or an increase in the supply of the metal.
This concludes the general outline of the new money supply and the formation of the Real Money League. Next time we will look at the effect of a real money regimen on interest rates, the bond markets, and real investment and real economic growth in general.
You are invited to post questions and comment on any matter of relevance to the discussion at hand. Your feedback would be well-appreciated. Remember it is our nation and our money. This means that it is up to YOU and me!
In liberty,
Roddy A. Stegemann, First Hill, Seattle 98104
Author of Mount Cambitas - The Story of Real Money and “A Call for the Restoration of Monetary Order (Parts I and II)
The demand for money in this context has nothing to do with that currently taught in modern, mainstream, macroeconomics textbooks. The market for borrowing and lending money and the market for money would be disjoint markets. For an absolutely lucid explanation of the true meaning of real balances and a truly different and more useful approach to the theory of money see my paper entitled “A Call for the Restoration of Monetary Order - Part II”.
Recall how these weights were determined. We simply took the going price of one Troy ounce of gold or silver measured in current US dollars and divided that ounce by the number of dollars that it would take to purchase the ounce. In other words what would eventually become the value of a US dollar would be determined at the point in time in which the US President issued his decree. It is in this sense that the designated weight of either metal is rather arbitrary and not necessarily the weight that we are using for the sake of elaboration of the proposed money regimen.