The Gold Standard, Part 7

This entry is part 2 of 31 in the series 2011B

Plan Two

Many who want some type of gold standard to increase our financial stability think that a 100% gold standard would be impractical but we should return to fractional banking where the dollar is backed by gold reserves.  Under this system, instead of issuing a dollar for each dollar’s worth of gold, we could issue $4-$10 for a dollar’s worth. In other words, up to 90% of our paper or digital money would be by fiat.

Something like this was allowed during most of the years the nation was on a gold/silver standard. Under this standard people are allowed to exchange their dollars for gold, but the theory is that not enough of them would do this to cause a depletion of gold reserves.  Besides, if a person wanted gold he could purchase it from a dealer as well as bothering Uncle Sam for redemption.

Gold coins would also be allowed to circulate as money so if anyone preferred that over the partial fiat backed paper or deposited money he could use physical coins.

When we were on the gold standard the danger of gold depletion came not as much from individuals redeeming dollars for gold, but from other nations.  Attacking another nation’s gold reserves was a way to destabilize or control them.

From FDR to Nixon we were on a gold standard but it was illegal for people to own gold neither could they redeem dollars for gold.

Before FDR it was legal to own gold and the dollar was redeemable for gold.  I do not know any gold standard advocates who want to return to the FDR model but many want to return a standard where their dollar is redeemable for gold with private ownership allowed.

Suppose Congress was willing to cooperate with gold standard advocates.  Would it be practical or even possible to return to even a fractional standard, let alone the fully gold backed one?  Let’s take a look at the problems.

To make the gold standard work, not only would the United States have to go on it but the majority of nations that we deal with would need to also.

This is a point that I haven’t seen examined much by gold standard advocates.  When we were on the gold standard on bygone days other nations were on it with us.  We were all in the same boat.  If another nation threatened to deplete our gold reserves they could be threatened in return.

Today no major nation operates on the gold standard so if we went on it we would be on it alone.  This would be unprecedented in the history of the world.  What makes this idea even more precarious is the dollar has replaced gold as the standard of world currency.  This is a fact of which many seem not aware.

This means that it would be much more dangerous for the USA to go on the gold standard than any other nation.


Let me put it this way.  If France were to go on the gold standard and its currency collapsed because of a run on its gold then the French currency would collapse but the rest of the world would survive.

But if we unilaterally went on the gold standard and there was a run on our gold then not only would the dollar collapse, but the economy of most of the world would be destroyed.

Of all the nations that would be injured China would be the most immune because its currency is the least tried to the dollar and world banking system as a whole. In a world financial collapse they just may be the last man standing.

It would be ironic indeed if a communist country outsmarted the capitalists at their own game.

If we unilaterally went on the gold standard we would place ourselves in a precarious situation indeed.

For one thing, to return to the gold standard we first need to have enough gold in stock to back up any demand there may be for dollars that are presented for gold redemption.

We presently have 147.3 million ounces of gold in reserve.  At the time of this writing the value of gold is around $1400.  This means that our government owns just over $206 billion worth of gold in which to back currency.  How far would this go?

Not far.  That would hardly cover the amount of money we are currently borrowing in a month.

The budget for 2011 is $3.82 trillion.  This amount alone is 18.5 times the value of our gold stock. Our Gross National Product is over $14 trillion or 67 times as much as the value of our gold supplies.  We couldn’t come close to backing the money in circulation with gold.
On top of this the United States owes over $14 trillion in debt.  If we were on the gold standard then less than 2% of those loans turned in for gold would completely deplete us and destroy the dollar on a gold standard.

If we were on the gold standard China alone could destroy us by demanding only a portion of their U.S. dollars (totaling $1,160,000,000,000) be redeemed for gold. Even Britain who holds a mere $272,100,000,000 has enough to break our potential gold bank.

Let us suppose for a moment that we were somehow blessed with enough security so our gold reserves would not be depleted. Could we safely transition to a gold standard? What would happen to the value of a dollar?

Our current money supply in circulation is around $14 trillion, not counting the additional $14 trillion of debt for which we are responsible.

Our country claims to have 147.3 million ounces of gold in reserves.  I say “claims” because many are suspicious that backroom deals have been made with the gold and it may no longer even belong to us.  Even so, for the sake of this treatise we’ll assume we have the gold.

If we attempted to back up $14 trillion with $206 billion dollars worth of gold this would mean that each ounce of gold would represent over $95,000!  If we think the price of gold is high now, well… just consider this figure.

This would lead to a deflation of the money supply to adjust to a market value of gold that would make the deflation during the Great Depression seem like the good old days.

Gold standard advocates admit there could be a big adjustment in the money supply and the value of a dollar but they blithely state that the amount of gold we have in reserves does not matter for our economy will adjust and then all will be well. Some go so far to say that we could be on the gold standard even if there was only one ounce of gold in all the world.  That once would be worth trillions and each dollar would only represent a few atoms of gold.

Theoretically this is possible though such a value system would certainly eliminate the possibility of minting gold coins.

Some give examples less extreme.  They say that if the money supply contracted so each of the new dollars was worth ten of our present dollars that the prices of everything would just adjust.  They say that a loaf of bread that now sells for $3.00 would sell or 30¢ after the adjustment.  A car that sells for $20,000 would cost just $2,000 and a $300,000 house would go for $30,000. They admit that the adjustment would be painful for a while but afterwards things would be better than ever.

During the Great Depression we had a contraction of money supply by about a third.  Imagine the misery we would go through if the contraction was 90% or more. There would be misery, starvation and thievery like the world has never seen.

And do you think that foreign nations to which we owe trillions would accept only 10% of their debt as payment?  Of course not.  They would want the whole thing and if we attempted to pay them off 10¢ on the dollar war may wind up being the end result.
The obvious conclusion is this.  Going back to the gold old days of the gold standard would be as difficult as going back to the good old days of relying on the whale oil standard rather than electricity.

That doesn’t mean that gold standard advocates do not have some good points.  Their idea of allowing gold, silver or other items of solid value to be exchanged as legal money is good and such implementation could do much to increase stability and allow us to prepare for a potential economic collapse.

The Utah legislature sees the value of doing this and on March 10, 2011 passed a bill which would allow “gold and silver coins to be used as legal tender in the state — and for the value of their precious metal, not just the face value of the coins.”
Washington Times; March 11, 2011
The government does mint some gold and silver coins but their value is artificial.  The one ounce silver eagle is only worth a dollar and the one ounce gold coin $50 for legal exchange.  Since the real value of these coins is around $40 and $1400 (at the time of this writing) then the only people who purchase these coins are collectors.

Utah is changing the game so gold and silver coins can be used as money for their real value. The bill also has another great idea incorporated in it.  It allows people to exchange coins without having to account for capital gains.  This means that if you receive a gold coin valued at $1000 and spend it when it is worth $1400 you do not owe a tax on the $400 profit.

There is still a huge disadvantage for people in Utah though. The bill only deals with state laws and not the federal.  This means you will not be able to pay federal taxes with gold or silver (who wants to) but you still have to report the $400 as a capital gain on your federal income tax. This could mean that keeping track of all the receiving and spending of coined money may be a bigger inconvenience than the tax itself.

Utah made a positive move in getting the dialog started, but we need federal law changed as well as state law if the use of gold and silver coins is to approach a practical level.

If gold and silver coins, as well as other private tender, were to become fully legal with no capital gains then we would see a gradual influx of solid money into system that could operate as a security net to the current Federal Reserve notes, or whatever other issue the government approves of in the future.  It would also stimulate gold and silver production in order to infuse additional coins into the system.

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Copyright 2011 by J J Dewey

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13 thoughts on “The Gold Standard, Part 7

  1. JJ Quote from the Archives for Today

    Dark Molecules

    “As we progress we will see the wisdom of having the Song to enhance protection
    in this age. The main purpose of the Song is to protect from negative psychic
    energies that will be sent to discourage the workers in the Light. The second
    major purpose will be to neutralize the authority of the Beast so it will not be
    able to prevent the workers of light from working on the physical plane.

    A third purpose of the Song is to gather the Lights. If a person says it
    continually without altering the words, this is a sign that he is capable of
    blending with the molecular energies.

    A trickle down benefit will be the individual enhancement of greater personal
    peace as well as physical vitality. The Song is not a cure-all for personal
    problems we may have but it will indeed help.

    It also does not mean that it will not be a great struggle against great
    obstacles to manifest the Kingdom of God. It will indeed take a Herculean
    effort, but the difference in this age is that it is in the plan that the work
    will be accomplished and not destroyed. The Song is to help insure that the
    negative forces are sufficiently neutralized to create success.”

    Copyright 1999 by J.J. Dewey, All Rights Reserved

  2. JJ wrote: “This means you will not be able to pay federal taxes with gold or silver (who wants to) but you still have to report the $400 as a capital gain on your federal income tax.”

    I am not sure that is accurate, as of right now I believe there is no tax on US minted gold and silver coins and they are not a capital gain as they are legal tender not a commodity. Its been a while so I am not 100% sure on this and will have to look into it again. However I think their would have to be same major change in law to allow US gold and silver coins to be taxed. Now if you have non us minted gold and silver coins or bullion then those are considered a commodity and could be taxed under capital gains also if you exchange them for FRN’s they might be taxable at that point.

    We should vigorously oppose any laws allowing state or federal tax to be paid in gold and silver In my opinion. As the current taxing schemes are born of and a product of the fiat systems and carrying that over into sound money would be a mistake… More later.

    1. Thanks for bringing this up as I want to be accurate. I double checked and it seems that one does owe a capital gains tax on the increase in value of coins when sold. This is from a coin collectors site:

      “There are many additional benefits to beginning coin collecting. Since neither gold nor silver can be duplicated or manufactured by humans, so their value remains constant, which is very reassuring to investors.

      “Another appealing benefit is that because gold and silver are legal tender, they can easily be transferable into immediate cash should an emergency or disaster arise.

      “A collector can also defer taxation on their investment. That is because as the value of their collection increases, the investment is not subject to taxes until the coins are liquidated or sold. Only profits are subjected to the capital gains taxes. There are also no taxes imposed if the investor chooses to exchange or trade their coins for an equal or higher valued coin collection.”

      1. What you posted says if they sell thier collection it is subject to capital gains. So they would be exhanging it for Cash. Some guy won a big case a few years ago in Nevada I believe, the IRS brought against him 50 counts cause he was paying his employees in US Minted gold and silver coins and no taxes taken out etc.. They had 50 counts against him and he won everyone. I think the issue was since they were legal tender they could only be taxed at thier face value which made then come in to law to be taxed there wer other issues also but Id have to look them up. Thing might have changed since then though too. I’ll look it up when I get a chance.

        1. Sounds like an interesting case. The guy was legally correct but going against City Hall is always a risk.

          1. That would be one way to force the law to change – if many started paying employees in gold and silver coin so they would owe little or no taxes.

  3. You wrote that:

    “But if [the United States] unilaterally went on the gold standard and there was a run on our gold then not only would the dollar collapse, but the economy of most of the world would be destroyed.”

    It would appear that we are in the process of destorying the economy of the world as it is, and driving other countries to find another currency other than the dollar for the world currency anyway. Obviously any change to a different system would take time and could not be done overnight. Probably the most important thing the United States could do today – and unfortunately is unlikely to do in the very near future – is to make America once again friendly to business. That would mean, among other things, reducing or completely eliminating corporate taxes. What is really needed, regardless of the currency, is to put America back to work and again make its motto “the business of America is business.”


    1. You are right. The dollar is being destroyed as we speak and we are headed for collapse unless something is done to reverse the trend. Hopefully the next president will be intelligent enough to realize you cannot borrow your way to prosperity. And you don’t kill the goose that lays the golden egg – private enterprise.

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