At the Cato Institute’s 29th Annual Monetary Conference (V)



Moderator: Steve H. Hanke
Professor of Economics, Johns Hopkins University

DM: Steve Hanke was a professor of mine when I went to Hopkins.

Targeting NGDP — Cato Institute — 2003 — Nominal Gross Domestic purchases or final sales

Richard H. Timberlake
Emeritus Professor of Economics, University of Georgia

Why did we go off the gold standard?

Dual Mandate is the main problem at the Fed.

Fed very different animal than at its inception.

Legal tender laws — goes back to the Civil war, 2.5x inflation afterward.  Debts paid off with depreciated greenbacks.  Tested by Supreme Court — Salmon Chase, Lincoln’s Treasury Secretary in 1864, was the Chief Justice at the time in 1869, and he changed his mind, on the ability to pay off pre-1862 debts with the greenbacks.

Rankled Grant administration — appointed 2 new justices, and a new case reversed the ruling. 1871

1884 — Congress can issue any currency it likes because it has sovereignty.

1913 — System needed a lender of last resort, thus Fed creation.

1922-1929 — Stabilized the price level, amid a gold standard…

Benjamin Strong dies, and power shifts from the NY Fed to the Board.  New leader opposes speculation; banks needing liquidity could not get it if they had been lending to the stock market. 1929-1933 huge contractions and bank failures.

FDR abandons the gold standard; devalues; collects gold; eliminates gold clauses.

Supreme Court relies on legal tender laws saying that Congress could define money as it chose.  He thinks the precedents should have been re-argued.

Judy Shelton
Author, Money Meltdown

Ruble collapse — Why back to gold standard?

Thinks all candidates should be talking about monetary reforms.

Money should be a stable unit of account and should be liquid.  It should allow us measure value well.  Convey the price signals of the market accurately.

Jefferson wanted a hard currency defined in terms of precious metals.

Offer Treasury Trust Bonds with a an optional conversion feature to gold.  Would receive par back or an ounce of gold.  Priced initially with par of an ounce of gold, no interest paid.

Argues for a balanced budget amendment.

Thinks other nations would mimic the ideas if a US Government gold bond would be issued.

Greenspan proposed this idea 40 years ago.

Lawrence H. White
Professor of Economics, George Mason University

How to go back to the gold standard?

A lot is calculating the proper initial parity with gold.

Treasury owns enough gold to re-establish a gold standard at $1600/ounce.

“At least I assume it is there, Fort Knox hasn’t been audited in a while.”

1) Eliminate excess reserve by eliminating interest paid on reserves.

2) Redeem reserves at Fed with gold.

Back M1 100% with gold — $8000/oz, Inflationary, reduction in wealth, etc.  Warehouse notes w/storage fees.

Central bank?  No monetary policy needed.  People would buy and sell gold daily.

Single mandate has not worked well for the ECB.  Inflation there running at 4% or so.

Competing private banks worked better than with central banks.

Or, the Fed could become a currency board in the short run.


Taxation of Tsy Trust Bonds?

Shelton: Would confuse some of the issues.  Just get this out there so it can be tried.

Will the gov’t take action?  Guesses as to when?

Shelton, White: No idea.

Would would trust the Treasury w/Treasury Trust bonds?

Shelton: They would be collateralized.

Why is monetary reform important?

Hanke: because the Fed ran a reckless monetary policy, and did not regulate leverage of banks well.