A Proposal for a Gold Standard
System for the United States
May 27, 2012
Today we have something a little special -- a proposal for a gold
standard system for the United States.
I've been making the point recently that a "gold standard system" is
a system with two basic characteristics:
It has a policy goal: to maintain the value of the currency
at a specified ratio (or "parity" or "price") compared to gold
bullion. It is therefore a fixed-value system.
2) It has to have an
operating mechanism which consistently and reliably achieves the
policy goal, into the indefinite future.
Within this basic framework, you can devise a great many systems,
each with their individual characteristics. That's why the title of
this piece is for "a gold
standard system," not "the
gold standard." We talked about this in greater depth earlier this
29, 2012: Gold Standard Technical Operating Discussions 3:
Automaticity Vs. Discretion
Gold Standard Technical Operating Discussions 2: More Variations
2012: Some Gold Standand Technical Operating Discussions
13, 2012: The "Gold Exchange Standard"
10, 2012: The Gold Standard System: Why and How?
What Is the Best Type of Gold Standard System?
Simplest Practical Gold Standard System
16, 2012: $100 Per Blender
Given this wide variety of options, what would be an appropriate
system for the United States?
The United States is something of a special case, due to the very
large size of the monetary base and the U.S.'s present leadership
position in world monetary affairs. Some systems that could work for
a small country, like Ethiopia or Sri Lanka, would become
problematic for the United States.
I made the Federal Reserve the manager of the currency, as it is
today. Although I am not unfriendly to an "end the Fed" policy and
establishment of some other currency-managing body, we haven't
reached that point politically yet, I think. Maybe we will later,
and at that time I would be happy to design some sort of
Federal-Reserve-free gold standard system.
I decided to include full redeemability of all base money, which is
banknotes and bank reserves recorded at the Federal Reserve. This is
a traditional component of gold standard systems in the U.S. and
Britain for the last two hundred years, particularly before 1930.
Also, I think that many gold standard advocates today, particularly
of the "Austrian" flavor, would insist on it. Technically,
redeemability is not necessary. Any method that properly manages
base money in accordance to a gold parity will work. Historically,
redeemability seems to be a political necessity; whenever
redeemability is suspended, monetary foolishness soon follows, even
if this was not exactly the purpose of suspending redeemability in
the first place. When the Bank of England suspended redeemability in
1914, the pound soon lost value, even though devaluation was not the
purpose of the act at all. We tend to forget that the official
suspension of redeemability for U.S. dollars, in 1971, was supposed
to be temporary.
Base money management is the core of any gold standard system. This
proposal has two parallel systems to manage base money; open-market
operations in non-bullion assets (primarily government debt), and
redeemability and monetization (buying bullion and giving base
money, the opposite of redeemability) as another system. Either
system would be sufficient on its own, so you could say it is a sort
of belt-and-suspenders system.
The system of redeemability and monetization is instigated by the
private market. In other words, the process of when to buy or sell
assets (and, consequently, expand or contract the monetary base),
and in what size, is decided by private market participants. The
system of open-market operations in non-bullion assets is instigated
by the currency managers, in this case the Federal Reserve. These
open-market operations are discretionary in nature; in other words,
the question of when and how much to adjust base money via
open-market operations is decided by the currency managers. However,
they must always operate in line with the principles of the gold
parity policy. This means that base money can be expanded when the
currency is higher in value than its policy target, and base money
is contracted when the currency is lower in value than its policy
You could develop fixed rules for open-market operations, thus
removing the discretionary element. However, this proposal is
somewhat traditionalist in nature, so here we are basically
mimicking how things were done by the Bank of England in 1910 or the
Federal Reserve in 1925.
The process of open-market operations is designed to be the first
avenue of base money adjustment. In other words, base money
adjustments are to be done first and foremost by open-market
operations. If this is done correctly, then the value of the
currency should not diverge from the policy target so much that
private market participants would be interested in either buying or
selling bullion (redeemability and monetization) with the currency
manager. Thus, proponents of "no-redeemability gold standard
systems" in effect get what they wanted. The redeemability option
would only be used if the value of the currency moved far enough
away from the parity target that transactions in bullion became
attractive. This primacy of open-market operations in non-bullion
assets as the first avenue of base money adjustment is further
reinforced by the introduction of an optional redemption fee not to
exceed 2% of the parity value, and a monetization fee not to exceed
1%. By adjusting the fees, the currency manager can widen the
"buy-sell spread" on bullion up to a maximum of 3%. In effect,
bullion transport and storage would add a few more costs, thus
widening the effective "buy-sell spread" a bit wider than the fees
Bullion reserve holdings of not less than 15% of base money
outstanding are mandated. However, this is structured as an annual
average, giving the currency manager greater flexibility on a
day-to-day basis. Bullion reserve holdings of greater than 15%, even
up to or exceeding 100%, are allowed.
The ratio of bullion to non-bullion reserve holdings can be adjusted
by transactions in bullion and non-bullion assets (high-quality
debt). In other words, if the bullion reserves are deemed to be low
(below 15% annual average), then the currency manager (Federal
Reserve) would sell bonds, and then, using the proceeds of the sale,
buy bullion on the open market. This does not change the monetary
base. If bullion holdings are deemed to be too high, then the
currency manager would sell bullion, and then, using the proceeds,
buy debt on the open market. This does not change the monetary base.
In principle, such transactions should be as least disruptive of
market conditions in either bullion or debt as possible.
Some instructions on how the Federal Reserve would act as a "lender
of last resort" -- in the 19th century meaning of the term -- within
the context of the gold standard system are given. This is very much
in line with the Bank of England's operating principles during the
15, 2011: How to Run a Central Bank with a Gold Standard
All in all, this is a very traditionalist proposal, as mentioned
much like the Bank of England operated in the 1880-1914 period or
the Federal Reserve operated in the 1920-1932 period. I think this
sort of system can certainly work today, with no particular
drawbacks. Since it demonstrably did work for many decades, it
avoids many criticisms. Also, I think there is strong political
support for this sort of traditionalist system. It is somewhat
complicated, and thus depends somewhat on the understanding and good
judgement of the currency managers, i.e. Federal Reserve
bureaucrats. Most everything you need to know is written here and in
the proposal, so it is not really all that difficult. However, these
people really are rather stupid, and I think it is important for a
broad range of people to understand how this system works, to keep
those bureaucrats in line and identify their mistakes if mistakes
Even if you did want some other sort of system -- and a great many
other ones would work, and work well -- I think it helps the debate
if we at least understand how things were done in the past.
I included a little protocol to decide on a new parity value for the
system. It is based on a Congressional committee. I have been told
that this committee idea won't be very popular in Congress. I'm not
sure that is true, but there are a great many other ways you could
find a reasonable parity value. It is not a hard problem to solve.
So, if you don't like my proposal, just make up your own. My only
demand is that it works: that is, it comes up with a parity value
that is not silly, and which would have broad political support.
10, 2012: The Gold Standard System: Why and How?
2012: Why $1600 Is My Price At Which to Return to a Gold Standard
So, with that, here's the proposal, in .pdf format:
Click here to read the "Gold Standard Act of 2012"