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Sunday, December 16, 2007

going back to the gold standard

I had a discussion earlier today with my co-blogger, jmc, about the gold standard. We were both wondering how a transition from our current fiat standard money to a commodity-based money might be managed. I pointed out that passing the Honest Money Act (HR 2756), introduced by Congressman Ron Paul, would be a good start. There's a good explanation of the bill over at Downsize DC:
Congressman Paul has hit upon the easiest way to end inflation, and the booms and busts that follow in its wake. Simply repeal the legal tender monopoly enjoyed by FRNs, and allow monetary competition. Not only would this help to end inflation and recessions, it would also limit the ability of politicians to hide the true cost of government through the inflation tax.
Text of the law can be found here and as Congressman Paul's website summary states, it would simply repeal section 5103 of title 31, United States Code.

Of course, that's only the beginning. Once Legal Tender laws are abolished, people would be free to use whatever medium they wanted for exchange. But what would happen to all the Federal Reserve Notes in circulation? I fear that the transition would be pretty painful because the currency has been so badly inflated over the years. I think that if the Fed slowly reduced the amount of money circulating, it could ease the pain, but that assumes the Fed could do a good job of it.

At the very end of The Case Against the Fed, Murray Rothbard spends several pages suggesting how the Fed might be abolished with a return to the gold standard. Basically, Rothbard argues that the Fed should be treated as a bankrupt corporation and be liquidated, with its gold stock being revalued to pay off its "debts". Using Rothbard's 1994 figures, this means that an ounce of gold would be worth $1555. Rothbard's plan is so simple it's hard to believe, but it's also hard to believe that his plan wouldn't cause massive financial disruption.

Frankly, I just don't see how we can move to a gold standard without a lot of pain.

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