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October 8, 1998
I have been a contributor to various Usenet newsgroups and Web-based discussion forums in which the gold standard has been a hotly discussed issue. I am very much in favor of some sort of gold standard. This article is my feeble attempt at describing how a gold standard might work in an economic environment in which a government has become libertarian enough that it allows its citizens to use gold as a medium of exchange. I will not go through the arguments for and against using gold as money. I'm for it. I understand that most of my readers are not.
Gold would be used as money in two forms: as actual gold coins, and as substitute instruments such as checks, credit cards and debit cards. The main problem with using gold coins is the risk of counterfeiting, i.e., creating substandard coins which contain less gold than their face value would indicate. With the widespread use of checking accounts, credit cards and debit cards, the use of gold as money would not necessarily entail the use of much actual gold coinage in retail trade. Transactions could be done using these money substitutes.
Gold would be denominated in the actual weight of gold in the coin, in grams. The most obvious problem with using a currency whose smallest denomination is a gold gram is that small purchases would be impossible. There are two easy solutions for this. One is to allow account holders to use checks, credit cards and debit cards for fractional amounts, i.e., .05 gold grams for, perhaps, two candy bars. The other solution is to mint coinage from other metals and use these metals at their own values for small purchases. Silver coins would be appropriate for purchases of less than a few gold grams, while copper coins would be appropriate for purchases of less than a few silver grams. This would not make the accounting easy, but with computerized accounting systems in widespread use, the regular updating of silver and copper balances to their gold values would be a trivial problem.
The use of gold as money would necessarily require that banks and other gold depositories not engage in fractional reserve banking and currency issuance. The institutions would, as a matter of law, have on hand the actual gold in the amounts of the deposit balances. This doesn’t mean that an institution couldn’t place the gold in a main office instead of in small branch offices, or even in separate gold storage facilities. But if those practices were used, the institution would be required to inform its depositors of such an arrangement.
Gold deposits would be divided into the two traditional types of deposits: demand accounts and savings accounts.
Demand accounts would be available to the depositors on demand, and therefore could not be lent out to others. One would expect to pay a fee commensurate with the costs entailed in the maintenance of these accounts and the safeguarding of the gold deposits.
Savings accounts would pay interest, but would not be available to the depositors on demand. Savings accounts and bank loans using the funds supplied by those accounts would be structured so as to guarantee that the loans are due and payable at least as early as the savings account funds are. Savings account depositors would be informed of this arrangement. Likewise, they would be informed that, in the event the lenders became unable to repay their loans, the savings account depositors could lose their deposits.
In the event of loan defaults, the bank would lose its own capital first. Then the money of the savings account depositors would be lost. Under no circumstances would the demand accounts be lent out, so they would not be lost except as a result of fraud on the part of the bank’s officials.
Banks would take out insurance against robbery. The details of this insurance, as well as the methods to be used for assigning losses to savings account depositors in the event of large loan defaults, would be a matter for advertisement and negotiation between the banks and their depositors. But let me again emphasize that savings account depositors would not lose their money until the bank’s own capital was depleted, and demand account depositors would not lose their money unless the bank’s officials were committing fraud. I would favor making bank fraud a serious felony, punishable by a long term of confinement in a maximum security prison, instead of an occasion for some soft time at a "Club Fed" white collar minimum security institution.
Banks could operate a check clearing system similar to what they do now. As the balances were calculated and the funds moved, actual gold would have to be moved as well. This would not be as onerous as it sounds, since only the net changes in account balances would necessitate transfers. And if the banks agreed to use common storage facilities, they could simply send instructions to these facilities to alter their gold account balances to conform to the new totals. The bank fraud laws would, of course, also apply to these gold storage facilities.
What do you think? Send your fiat money loving, pro-inflation, and New Deal-inspired hate-lacedto rsturge@inreach.com.
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