By Steven J. Grisafi, PhD.
When President Nixon removed the American dollar from any link to a quantity of gold on August 15, 1971 it was alleged that he proclaimed that now we are all Keynesians. Mr. Nixon vowed that his administration would fine-tune the economy as he allowed the dollar to float in value relative to all of the worlds” other currencies. This, in the mind of former Congressman Ron Paul, was a terrible thing, and he has written his book, End the Fed1 to explain why he thinks this way. If it were only his goal to return the American dollar to a commodity standard, then Dr. Paul”s presentation would be persuasive. However, it is his more ambitious objective of eliminating the Federal Reserve Bank of the United States that weakens his arguments and leaves him vulnerable to disparaging commentary from his adversaries. I have nothing but admiration for Dr. Paul; but I do most certainly wish that he would evaluate his position in current terms as the world economy presently operates. A return of the American dollar to a commodity standard would strip the Federal Reserve Bank of much of the abusive authority that Dr. Paul believes it now to possess without requiring the complete elimination of the central bank. I believe that the complete elimination of the Federal Reserve Bank would put the American economy at a disadvantage to other economies that retain a central bank. Therefore, allow me to suggest a more modest alternative to Dr. Paul”s proposal.
Prior to the establishment of the Federal Reserve Bank in 1913 there had been two central banks of United States. The first Bank of the United States was chartered in 1791 and expired in 1811. A second Bank of the United States was chartered in 1816 to expire in 1836; but was effectively terminated by President Andrew Jackson in 1833 when he withdrew all federal funds from the bank and deposited them into state banks. The Panic 0f 1837 led President Martin van Buren to propose the Independent Treasury System because the perception was that some form of central banking was needed. Throughout this time, from the inception of the nation until 1873, the United States monetary system was based upon bimetallism utilizing both gold and silver as specie. The Bland-Allison Act of 1878 returned a limited coinage of silver dollars to the American economy; however this form of weakened bimetallism was terminated by the Gold Standard Act of 1900. The experience of the United States in its first one hundred twenty-five years indicated that for the proper functioning of the economy both a commodity standard for the currency and a central bank are required.
The use of gold and silver as commodity standards for currencies was determined by the characteristics of markets as they were practiced prior centuries ago and was based upon valuations of the metals to human society that are not especially cogent for today. The Federal Reserve Bank is a compromise banking system composed of twelve regional banks, which were meant to calm the protestations that a central bank would serve only the wealthy commercial classes. In his book, Dr. Paul does argue convincingly regarding the arrogance of the central bankers and their seemingly aloof stance taken towards the representatives of the people. Yet for all his arguments, Dr. Paul cannot convince me that elimination of the Federal Reserve banking system would not leave the American economy at a disadvantage to the astute manipulators practicing at, for example, the European Central Bank. It seems to me that most of Dr. Paul”s arguments for the elimination of our Federal Reserve Bank are focused entirely upon domestic concerns amongst the American people that should be moot since we are all obliged by law to use the same domestic currency. The valid points made by Dr. Paul in support of his proposal appertain to the lack of a commodity standard for our currency and could be corrected by the imposition of a new commodity standard for the dollar while still retaining our central banking system. Hence, the value I perceive in the concerns raised by Dr. Paul pertains to the deployment of a commodity standard for our dollar to degrade the capacity of the Federal Reserve Bank to monetize federal debt.
Economists relish the authority we the American people have allotted to them through the use of a freely floating currency. In his book The Mind of the Market, Michael Shermer2, repeats the admonishment of Ludwig von Mises that socialist economies need capitalist ones to determine the prices of goods that the central planners of government must set by fiat. Mr. Shermer”s book is a fascinating read of a social science that I categorize as psychological economy. His exposition rests heavily upon the psychology of man within society as identified through both physiological studies of the human brain as well as the more traditional studies of animal behavior. Mr. Shermer makes clear that human behavior within markets exhibits both selfishness and selflessness. Purely objective behavior can be said only to appear in the aggregate. That is to say that, while individual behaviors can and do range the gamut of all possibilities, it is only the aggregate system performance that can be said to possess no proclivities toward any subjective bias. Hence, we regard that the best course of action to take within an economy, is to allow the markets to float themselves freely to determine their stable equilibrium positions. While the medium for exchange within economies can be any agreed upon form of currency, the chosen currency must bear some representation toward the capacity of the market participants to create wealth. A currency that floats without any tether to the capacity of the people to produce affords central bankers the authority to inflate, or deflate, the value of the currency solely at their own discretion, which we now understand can never be wholly objective. So, like Dr. Paul, I think it is time for us, the American people, to restrict the central bankers” ability to debase our currency.
We cannot return to the gold standard for the dollar; nor should we want to. We need to retain the Federal Reserve Bank to perform the functions of a national bank, such as settling our national accounts, as well as to act as a lender of last resort for the commercial banking system. Hence, the palliative I prescribe for our economic ills is to deploy a commodity standard for the dollar appropriate for operation within a global economy, which utilizes instantaneous electronic communications, while still retaining our central bank. The commodity standard must not only be linked to the capacity of the American people to produce, but it should also encourage production. Yet, the commodity must also be the limiting factor within all human activity such that it always retains value regardless of its capability for renewal. In times past, gold and silver could always be mined to increase wealth; yet their relative scarcity and the difficulty of production always insured their high value. In the twenty-first century, I believe it should be promptly recognized by all that it is energy that serves as the limiting constraint upon all human activity. While energy can be transformed within several renewable forms, it will always remain precious to human society, and vital to our existence. Hence, I propose that the American dollar be placed upon a commodity standard fixed to energy permitting any bearer upon demand to redeem dollars for energy in any of its various forms. In essence, energy is de facto money. If so desired, Congress could restrict the forms of energy acceptable for redemption such as, for example, electricity produced
through environmentally friendly processes. The details would be left to the discretion of the people”s representatives.
1. Ron Paul End the Fed New York: Grand Central Publishing 2009.
2. Michael Shermer The Mind of the Market: Compassionate Apes, Competitive Humans, and Other Tales from Evolutionary Economics New York: Times Books 2008.