WHAT, we may well wonder, does the Federal Reserve Bank imagine it is doing? What we have seen it do was reduce significantly the cost of borrowing currency; this can only mean that more people will borrow more from their banks, there will be more currency in circulation, and prices will go up.
Higher prices, particularly the price of labor, seem to be a Good Thing, perhaps – except that they result in higher taxes. But there is a serious snag. Every business, if not every person, keeps accounts, so as to know whether it is making a profit or a loss. If prices go up between January 1st. and December 31st., then the value of the inventory is over-estimated and the expense of depreciation is under-estimated: the accounts are flattering, businesses that should have been closed remain open. The very point of keeping accounts is to be sure you are not losing money!
One would expect that, after money has been in use for millennia – the Gospels are full of references to money, and paying taxes – problems like this would have been solved. And so they have been! The Constitution, in Article I, Section 10, requires that “No State shall . . . make any thing but gold and silver coin a tender in payment of debts.” If some of the States are keeping accounts in gold, and others in silver, then if new deposits of either metal are discovered and mined and coined, then some of the States will seem to be thriving and others seem to be struggling: people will realize that something unusual is happening.
The States are usually all too eager to tell their citizens what to do with their own land, or buildings, or automobiles, or firearms, but, strange to relate, only three States, Colorado, Missouri, and Nevada, have exercised this power (and they have abused it, by admitting both silver and gold coins!) The result has been “stagflation;” the accounts show profits, but people do not find themselves better off.
` Sooner or later, more and more and more people will realize that the Federal Reserve Accounting Unit Dollar is only currency, and neither a store of value nor a money of account. Thus we must expect that it will follow the example of all other currencies, and degenerate faster and faster and faster . . . .
The price of silver today is $13.80 per ounce, ten times what the fractional silver coins are worth: it can hardly be hoped that Colorado or the other States will, after 150 years, begin to enforce their legal money statutes. However, there is one measure the Congress could take to avoid the utter collapse of the social order; I call it “Currency as Seigniorage.”
The “Double Eagle,” the $20 gold coin, contains 20/20.67 ounces of gold. If Congress mandated that the Treasury deliver a Double Eagle to whomsoever brings into the Mint 20/20.67 ounces of gold and twenty Federal Reserve Accounting Unit Dollars, then today, with gold at $720 per ounce, the seigniorage (the fee claimed by the Mint) would be 20/(720x20/20.67) = 3%. This is just slightly higher than the seigniorage on foreign coins, such as the Krugerrand, but American people would undoubtedly want U. S. coins for presentations and curiosities. However, when gold reaches $1000/oz., the seigniorage would be under 2%, less than that of all other gold coins, and gold from all over the world would come to our Mint. And as gold rises to $2000, $5000, $10,000 . . . there would always be at least one use for Federal Reserve Accounting Unit Dollars; they would never become “not worth a Continental.”
Incidentally, this is not a new idea: I proposed it to the Commission on the Role of Gold in the Monetary System twenty-five years ago. Congress did nothing then, and is doing the same thing now . . . .