Russell and Duenes

The Gold Standard, the Federal Reserve and your economic security

with 5 comments

The more I read about the current economic bust and as I await the next economic boom, a cyclical problem keeps arising with the lack of anchored money in the U.S. Ever since Richard Nixon abandoned the Gold Standard in the early 1970s, inflation has been on the rise. With no real basis for the value of the dollar, prices, jobs and the market fluctuate like a financial boat ride with 30 ft. swells every 5 seconds; A sea-faring financial disaster that even the most potent dose of Bonine won’t quell. This is one of the most unsung culprits of our financial mess: the lack of a gold standard. Banks become very unstable due to their inability to keep the amount of money required for debtors on hand. Banks rely way too much on the FDIC as an insurance policy set for poor lending habits than the safety net it was created to be under the New Deal. With the ability of banks to loan without a standard for each dollar, banks are bottom heavy; meaning they have little weight in secured loans and a breezeway of unsecured, air-filled promissory loans at “the top.” This doesn’t anchor the system, instead banks are set to topple.  The 1980s Savings and Loan scandals and closings were only a precursor to our current bank problems that required the Government not only to secure loans but to “take over” many of the U.S.’s top creditory lenders. So, I can only hope that as our Congress discusses altering our economic position domestically and around the world, they consider reinstating the Gold Standard. To do this, however, they would almost assuredly need to end the Federal Reserve’s role in our economy.

As it stands today, the Federal Reserve obviously has the power to control the economic tide of the U.S. by creating interest rate changes. What many people do not know is that the Federal Reserve also initiates the coining of money, a Constitutional power given directly to Congress, NOT to an outside agency like the Fed. With these two massive powers at the disposal of the Fed, one would assume the accountability to Congress and the Executive branch would be overwhelming. This is where one would be in error. The Fed controls ITSELF. I liken it to the fourth branch of Federal Power minus the checks and balances. The Fed never allows outsiders into their meetings and they never have to provide documented minutes from those meetings to anyone. The business reports put out daily by print and electronic media are constantly speculating about what the Fed will do. Why? Because no one has any idea what the Fed will do until it happens. And then it is set until the Fed changes its collective mind. As tax payers, you don’t have a say, the President doesn’t have a say and (thankfully) Barney Frank and his Congressional economic team don’t have a say as to what the Fed will ultimately decide.

Now there was a solid attempt to bring accountability to the Fed in 1993, when the head of the House Banking Committee, Henry Gonzalez, called for the Fed to both succumb to an independent audit and video tape their meetings for public release within one week. Gonzalez also proposed that the President choose the 12 banking heads who sit on the Federal Reserve committee. Then Fed Chairmen Alan Greenspan wholeheartedly resisted the proposed changes and convinced his pal, President Clinton, to announce how dangerous this move would be. Clinton said that the proposed changes would “run the risk of undermining market confidence” and without further “adieu” the accountability attempt ended. Actually, if Americans were more poised to investigate their Government, they would lose confidence in the market due to the way the Federal Reserve sets economic policy for the entire country and fails miserably. So, it would most sufficient for President Obama to not only work toward job creation and market stability with current proposals but to also consider removing the Federal Reserve’s complete control of the marketplace. It would be most reassuring to me to have President Obama demand a return to the Gold Standard, which would stabilize the dollar and move to securing bank deposits, loans and create jobs. The Federal Reserve and lack of Gold Standard have much blame in our current economic woes. I only hope the President will act in a way that makes this a “teachable moment” for the country.



Written by Michael Duenes

August 1, 2009 at 10:53 pm

Posted in Economics, Russell

5 Responses

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  1. The federal reserve and fractional reserve banking absolutely need to be abolished. There shouldn’t be a gold standard in the money market anymore than there should be a Civic standard in the car market, however. A free market in money is necessary.

    Nathaniel Hill

    August 3, 2009 at 5:35 am

  2. Gompers,

    I might be able to be persuaded to change my views on reinitiating the Gold Standard. I doubt it, but it is possible. I’m glad we are in agreement about the Federal Reserve and fractional reserves. It is irresponsible, and at points, criminal.



    August 3, 2009 at 4:37 pm

    • Gompers – With my knowledge such as it is, I agree with you. Milton Friedman remarks: “In 1930 and 1931, [the Federal Reserve] exercised this [monetary policy] responsibility so ineptly as to convert what otherwise would have been a moderate contraction into a major catastrophe…The problem is to establish institutional arrangements that will enable government to exercise responsibility for money, yet at the same time limit the power thereby given to government and prevent this power from being used in ways that will tend to weaken rather than strengthen a free society (Capitalism and Freedom, 38-39).” One of the problems with a commodities standard is that, well, you have to have great amounts of the commodity. So governments, of course, have operated under a mixed system, which allows for the kinds of government shenanigans to which you refer. Friedman points out that those who advocate a return to a gold standard “are almost invariably talking about the present kind of standard, or the kind of standard that was maintained in the 1930’s; a gold standard managed by a central bank or other governmental bureau, which holds a small amount of gold as ‘backing’ – to use that very misleading term – for fiduciary money (ibid., 41).” Thus, power in the hands of a central bank is not much better than what we’ve got now; we’d still have large scale centralized governmental control. So what to do? Friedman argues that we ought to legislate rules for the conduct of monetary policy instead of having such policy subject to the whims of men. I don’t know if he’s right, mainly because I’m still learning about monetary policy. But the FED was established to deal with the problems that were cropping up under the gold standard, and now we see what we’ve apparently gotten with the FED, namely, even more monetary instability. I’d like to hear more from my colleague and one Mr. Gompers (Messr. Hill) on this topic, if for nothing else than my own continuing education.



      August 3, 2009 at 9:14 pm

  3. What I am saying is that gold, or some other commodity, is vital for providing a sort of “international money” whereby all nations can trade and settle their accounts. From what I know about Friedman’s plan, it sounds like what the Confederates attempted to do with their currency during the Civil War. The Friedman plan would consist of each government providing its own fiat money. This sounds very unstable to me. Under the Friedman plan, everyone, and I mean everyone, would be able to issue its own money. Freedman’s plan would allow states and cities, villages and towns, or even individual people to create its own fiat. Friedman envisions this as a freely fluctuating exchange rate between all these millions of currencies. I find this absurd. Money itself would be worth nothing and we would be reduced to a barter/trade system. This is the very reason why the Gold Standard, or something like it, should be reinstituted. The reason why I could be persuaded away from the Gold Standard is twofold. First, I truly hate the Central Government model and reinstating the Gold Standard would obviously require Government oversight to some degree. This is always a problem. Second, those countries with massive gold reserves (African countries and Middle-Eastern countries particularly) would become instantly and furiously financially stable. Now, I don’t mind the gold standard providing economic stability to these regions, but many of these countries have irrational or brutal dictators. Others have direct connections and loyalties to terrorists. Adding a tremendous amount of gold into a realigned world gold standard could cause the other countries around the world serious hurt. I think this the main reason I would be interested in hearing about a different standard than gold. Regardless, the Friedman model seems absurd and we need a standard.


    August 4, 2009 at 1:04 am

    • What I need to hear from Messr. Russell, which is something I DO hear from Friedman, and would be happy to recount here at length, is an explanation as to why the nations left the gold standard in the first place. Friedman gives a detailed historical account as to why the gold standard was eschewed. I think you have seriously mis-characterized his position. I find it hard to believe that a man of his economic stature and mind would actually propose something that would allow for millions of currencies and, in your words, would be “absurd.” He may be wrong, just like Paul Krugman is almost always wrong, but neither of them is “absurd.” I mean, Friedman has written two books on the topic: “A Program for Monetary Stability,” and “A Monetary History of the United States: 1867-1960.” Again, this does not make him right, but it does mean he’s given the subject very considerable thought. I think you also have to explain why it was wrong for the Confederate States to issue their own currency. Don’t sovereign nations do this? Their moral repugnance has nothing to do with it. I assume they were attempting to issue currency just like other nations do.

      You assume in your original post that these “wild fluctuations” in the economy are the inevitable result of free market forces. However, I would argue that government measures create entirely more instability and lack of economic growth than ever the free market does. Tariffs, restrictions, changes in interest rates, printing of money, high taxes, inequitable taxes, price and wage fixing, and a generally constant tinkering with the economy is what produces the problems. It was government, after all, that relaxed restrictions on loans, which then freed up banks to loan to risky people. The free market did not produce that problem.

      Why do we need such a standard as gold? Nations trade and settle accounts right now without it. From what I can tell, we abandoned the gold standard in this country in part due to instability. So it doesn’t seem to solve the problem of instability.



      August 4, 2009 at 3:46 am

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