Return to Gold Standard and price per ounce

Well, OK. I haven't heard the 1901 earthquake causes the Panic of 1907 theory. But I have heard the Tariff of Abominations (1832) causes civil war in 1861 theory, so I am familiar with how economic politics can distort perspectives, even across generations.

As for knowing "everything worth knowing", I'm not close to that.

 

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Couple of things:

The Fed doesn't actually profit from issuing currency. Whenever the Fed ships out $1000 in ones to a commercial bank, that $1000 in outstanding FRNs becomes a liability on the Fed's books, and is balanced by the $1000 in assets received from the commercial bank in payment for the currency. The transaction is a wash from the Fed's perspective.

It's true that the Fed obtains the physical dollar bills from the BEP for the cost of production, which is far below face value. But at that point, the dollar bills aren't *money* yet because the Fed hasn't issued them. It's like when you order checks from your bank: you might pay, say, $15 for 150 checks, or 10 cents per check. But if you write a check for $100 and cash it, then even though you only paid 10 cents for the check, obviously you haven't just made $99.90 in profit--the $100 is going to come out of your account when the check clears, so you're actually negative 10 cents on the deal. Likewise for the Fed: the cost of printing the currency is an expense, but the asset and liability involved in issuing the currency cancel each other out.

Also, your last sentence.... If the Treasury decided to bypass the Fed and issue its own currency (U.S. Notes) instead, there'd still be debt--the U.S. Notes *are* debt. They're zero-interest debt, yes, which might sound like an improvement--until you remember that the interest paid to the Fed winds up back in the Treasury anyway, so as Rush said above, the Treasury is essentially paying interest to itself, which is equivalent to not paying interest at all. The overall cost to the Treasury of maintaining a currency system is the same whether we use FRNs or USNs; the reason why we've gone with FRNs instead of USNs is mostly so that the system will be run by economists rather than politicians. (Which is widely considered to be a good thing.)

 

Money is a medium of exchange. It's not something meant to be valued for itself, it's meant to be valued for what can be obtained in exchange for it.

If you don't understand that, you don't understand modern monetary theory.

 

Not quite but close. Money issued directly by the Treasury, which they did until 1971, is considered lawful or constitutional money. This means that it is subject to constitutional restrictions and essentially if this was the only form of money, would force the federal government to balance it's budget or at least, but big time bounds on debt. Until 1971, US Bank notes circulated along side Federal Reserve Notes and they were directly exchangeable one to one. This is because FRNs were still redeemable in gold for international trade. Once that link was broken by Nixon, they had to eliminate the Treasury issued notes lest they get caught up in the legal paradox of people attempting to redeem a FRN which was now complete confetti for a USBN with the constitutional restrictions.

The excuse they give for keeping the Fed independent, and not subject to politics is nothing but a farce. It's really done so that what they are doing can't be scrutinized. The Federal Reserve exists to get politicians elected because it lets them borrow money without accountability. Not one dime of debt run up this way since 1971 has been paid back and I don't expect that it will ever be. The danger is when the interest payments exceed the ability of the taxpayer to cover and/or no one will buy the bonds.

 

Nixon's closing of the gold window is a red herring here...the last U.S. Notes were issued in 1994, not 1971. The last *printing* was in 1971 (dated Series 1966A), but by that time the turnover of USNs in circulation was so small that those notes were still being paid out twenty-odd years later. (They would've lasted a lot longer if Congress hadn't finally discontinued them in 1994; almost 80% of the 1966A printing was still in the brand-new BEP bricks at the time. There was a lot of griping when the Treasury shredded all those notes instead of selling them into the collector market at a premium a la the GSA silver dollar sales. They could've raised a fair amount of money that way, but they decided that the wording of the law discontinuing the USNs didn't allow it. But I digress....)

The Constitution doesn't put any limit on the amount of debt the Treasury may take on. Congress has legislated a debt ceiling (which they always increase whenever the actual debt gets close to reaching it), but that's not in the Constitution. In practice, during most of the period that U.S. Notes were issued, the law capped the total outstanding dollar value of such notes at some number in the $300-million range...but again, Congress could've increased that number as much as they liked, and in fact they did change it several times in the early years.

Besides which, something under 10% of the Treasury's total debt is owed to the Federal Reserve (anybody have a precise figure on this?). Getting rid of the Fed wouldn't significantly impair the Treasury's ability to go into debt; they'd just borrow a bit more from China instead....

Also, some of the debt was indeed repaid in the 1999-2000 timeframe, when the government was actually running surpluses.... For a while, there was discussion of what would happen to the currency system if the entire debt were eventually paid off. Interestingly, the answer was pretty much nothing: Federal Reserve Notes are now backed mostly by government bonds, but that's not a requirement, and if government bonds were no longer available a seamless transition to other forms of backing would've been possible.

In short, there's basically no connection between the crazy-high level of the national debt and the existence of Federal Reserve Notes. We could theoretically have either one without the other....

 

I didn't say the the Constitution puts limit on debt. That isn't the purpose. But it does put limits on how congress has to account for the debt. Basically it comes down to raising taxes when the debt is issued. No such problems with the Federal Reserve. There are also constitutional issues with the income tax and how it has been codified from a Constitutional standpoint.

US Notes are always payable to the holder, this didn't stop in 1994, but anyone now would be foolish to redeem them at face value because of the numismatic value. They were last circulated in 1971. This is on the US Treasury's website.

[FONT=geneva, arial, sans-serif]Because United States Notes serve no function that is not already adequately served by Federal Reserve Notes, their issuance was discontinued, and none have been placed into circulation since January 21, 1971.[/FONT]
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Not all Treasuries are owned by the Fed, and most of the interest does not come back to the Treasury. And even for the Treasuries owned by the Fed, only the income in excess of their allowed income is returned. So if currency was issued by the Treasury, it would hardly be a zero sum game. Also, the Fed can spend money on just about anything and deduct it from income.

Release Date: January 12, 2010

For immediate release
The Federal Reserve Board on Tuesday announced preliminary unaudited results indicating that the Reserve Banks provided for payments of approximately $46.1 billion of their estimated 2009 net income of $52.1 billion to the U.S. Treasury. This represents a $14.4 billion increase over the 2008 results ($31.7 billion of $35.5 billion of net income). The increase was primarily due to increased earnings on securities holdings during 2009.

Under the Board's policy, the Reserve Banks are required to transfer their net income to the U.S. Treasury after providing for the payment of statutory dividends to member banks and equating surplus to paid-in capital. In 2009, statutory dividends totaled $1.4 billion and approximately $4.6 billion of earnings were used to equate surplus to paid-in capital.

 

Except that the assets they receive are income producing and the notes issued are not. The quote below is from the NY Fed website.

Putting Coins into Circulation
The procedures for putting coins into circulation are similar to those for currency. The U.S. Mint produces coins in Philadelphia, Denver, and San Francisco, and ships them to the Federal Reserve Banks and to authorized armored carriers, which supply banks that need coins to meet the public's demand.

The distribution of coins differs from that of currency in some respects. First, when the Fed receives currency from the Treasury, it pays only for the cost of printing the notes. However, coins are a direct obligation of the Treasury, so the Reserve Banks pay the Treasury the face value of the coins. Second, large banks in some Federal Reserve Districts participate in a Direct Mint Shipment Program, and receive coins directly from the Mint. In the New York area, there also is an arrangement under which banks that need coins buy them from banks that have a surplus. To promote the arrangement, the New York Fed stands ready to match banks that have excess coins with those that need coins.

 

Hmmm...looks like some webmaster at the Treasury is confused. That January 1971 date is the last delivery of USNs *to* the Treasury by the BEP; they continued to be paid *out* by the Treasury for decades afterward, in order to maintain the total circulation of USNs at the statutory level. Somebody should get after the Treasury's website folks on that one....

I don't see where the Constitution requires Congress to raise taxes in order to take on debt. Certainly that would be the logical thing to do, most of the time, but it's not required by the Constitution. I don't think there's any basis for your claim that the Fed is somehow enabling Congress to behave more irresponsibly than it could otherwise....

 

By the way, the US Dollar is backed by gold... black, liquid gold. Almost all Arab countries (Save Iran?) price their oil in USD courtesy of an agreement we signed with OPEC (I think? Or maybe individual countries?) back in the 1970's. So, if the Chinese wanted to, they can take their billions of USD they hold as our debt, and turn it into oil to fuel their economy. They won't get dollar for dollar value, but they'll get a very good value for their holdings as US debt is considered the safest in the world.

 

The gold standard might lead to balance. Balance and stability is the last thing wanted. More power with folks feeling vulnerable.

 

The idea that the US economy could be balanced, like a gigantic inverted pyramid, on a little cube of gold less than fifty-foot square is absurd.

 

Does it make more or less sense to balance the US economy of a cube of paper? I think your problem is the confusion between currency in circulation and monetary value of assets or of GDP. If you go back and read Adam Smith's real bills doctrine, he will explain to you how this is accomplished. It takes very little actual currency to run a very large economy.

 

You can't eat gold. Gold is worth whatever anybody wants to pay you; if things go to hell, there are many, many things more valuable than gold.

 

Don't you mean the Arabs money is backed by oil.The U.S. really does not produce any oil,it is produced by foreign countries[B.P] which sells it back to the U.S. for huge profits.The U.S. dollar was backed by economic output [the high quality products it use to make] but now that most everything is made by foreigners[China] it is really backed up by nothing more than a promise to pay.Thats why Russia is switching to a different currency for it's reserves.Greedy Corporations have sold out to lowest bidder leaving high unemployment and the economy in shambles.Just phone about your credit card balance and you will be talking to somebody in India or some other country far, far away.Time for the U.S to nationalize it's oil reserves,keep some of the profits for yourself.Afterall it's your resource.
These are my thoughts only,if I am wrong please correct me.

 

You can't eat common stocks, bonds, futures, options, notes, bills, diamonds, trust funds, certificates of deposit, checking accounts, credit cards, real estate, mutual funds, ETFs, master limited partnerships, preferred stocks, artwork, currencies, warehouse receipts, pensions, insurance policies, gift cards, or any other financial instrument or form of wealth created in the last six thousand years.

Your's is the dumbest of all arguments against gold, but don't worry because others have made it too. It makes sense only if you plan to go back to a subsistance level of existence that existed in pre-Sumerian times. Good luck with that financial strategy.

 

I think you meant to say "100,000 cubic feet" which is equivalent to about 3,700 cubic yards. (Only a slight difference there.)

 

Whatever amount, 100,000 cubic yards of 100,000 cubic feet, the idea that you can base the economy on a little block of pretty but basically useless yellow metal is within the realm of crackpottery.

 

I think it would be more accurate to say that you don't understand how gold can be used as currency, and not that it can't be done. It's a bit of hubris to insist that because you don't know how something can be done, it is impossible.

 

I think the problem is that you don't understand that money is supposed to be a medium of exchange. As such, it's neither necessary nor desirable for money to be defined as an arbitrary amount of some commodity.

Using gold especially - a rare yet basically useless commodity - as the medium of exchange means adding an unnecessary variable to the valuation process, one that is vulnerable to chaotic fluctuation in the wake of the next unanticipated gold strike, or the next cynical attempt by a wealthy few to manipulate the price of gold, in order to obtain unearned wealth at the expense of the many, and of the stability of the economy overall.

Gold fever is a disease, not a sound public policy.