Dialogue #2 on the American Gold Standard: A Temporary Interruption of Service
From 2009.
The Private Money Guy (PMG) and the State Money Guy (SMG) are still going at it. For Dialogue #1, click here.
PMG: You still believe in gold.
SMG: Yes, I do. I own gold coins.
PMG: Is that because you don’t trust the Federal Reserve System?
SMG: Yes.
PMG: Why don’t you trust the FED?
SMG: Because the country isn’t on a government-enforced gold standard.
PMG: So, if the country were on a government-enforced gold standard, you would trust the FED.
SMG: Yes.
PMG: Why did the country go off the government-enforced gold standard?
SMG: Because of the Great Depression.
PMG: What caused the Great Depression?
SMG: Federal Reserve monetary policy in the 1920’s.
PMG: So, you believe Murray Rothbard.
SMG: I believe Paul Johnson in Modern Times.
PMG: Johnson explains what happened by summarizing Rothbard’s book, America’s Great Depression.
SMG: Then I guess I believe Murray Rothbard.
PMG: FED policy in the mid-1920’s expanded the money supply by increasing the monetary base.
SMG: Yes.
PMG: This led to the Great Depression, when the FED stopped inflating in 1928.
SMG: Yes.
PMG: Then the government-enforced gold standard did not protect the country from the FED.
SMG: Not in the 1920’s.
PMG: Did it protect the country from the Great Depression, 1929—33?
SMG: No.
PMG: So, the FED was not trustworthy in the 1920’s.
SMG: Correct.
PMG: When we had a government-enforced gold standard.
SMG: Yes.
PMG: But you would trust the FED today if we had a government-enforced gold standard.
SMG: Yes.
PMG: Why now?
SMG: Because the FED has learned its lesson.
PMG: What lesson?
SMG: That the FED made a mistake 1929—33 by not inflating.
PMG: The way it inflated from 1924—28.
SMG: Yes.
PMG: The way it’s inflating today.
SMG: Yes.
PMG: Which is why you are buying gold coins.
SMG. Yes.
PMG: Where did the FED learn this lesson?
SMG: From Milton Friedman.
PMG: Who hated every variety of gold standard.
SMG: Yes.
PMG: Roosevelt took the country off the domestic gold coin standard in 1933.
SMG: Yes.
PMG: Why did he do this?
SMG: He wanted to jump-start the economy by spending more money.
PMG: What did that have to do with confiscating the public’s gold?
SMG: I thought we had come to an agreement. We do not use the word “confiscate” when speaking of U.S. government policy.
PMG: What should we call it?
SMG: A temporary emergency transfer for safekeeping of a non-industrial metal.
PMG: Safekeeping by whom?
SMG: The United States government.
PMG: How much did the government pay Americans for their gold?
SMG: $20 per ounce.
PMG: So, you are saying that the government did not confiscate the people’s gold.
SMG: Correct.
PMG: Because it paid $20 an ounce.
SMG: A fair price.
PMG: Set by whom?
SMG: The government.
PMG: So, the government sets the price of gold in a government-enforced gold standard.
SMG: Yes.
PMG: What did the government do with the gold?
SMG: It sold it to the Federal Reserve System.
PMG: What price did the government get for the gold?
SMG: $35 per ounce.
PMG: So, the government made a profit of $15 per ounce.
SMG: Yes.
PMG: Let’s see. I calculate that 15 is 75% of 20.
SMG: So do I.
PMG: So, the government made 75% on the deal.
SMG: Yes.
PMG: The FED paid the government $35.
SMG: Yes.
PMG: Did the FED complain about price gouging?
SMG: Are you trying to be funny?
PMG: I ask the questions here, remember?
SMG: Sorry.
PMG: Why didn’t the FED complain?
SMG: It’s part of the government.
PMG: What did the FED use for money?
SMG: Federal Reserve credit.
PMG: It created the money.
SMG: Yes.
PMG: Couldn’t the government have sold T-bills to the FED to get the same amount of newly created money?
SMG: But then the government would have owed interest payments to the FED.
PMG: In 1933, T-bills paid one-third of one percent.
SMG: But the government paid no interest at all on the sale of the gold. Paying nothing is always better than paying something. That’s free market economics. Plus, it made 75% on the deal. It was a sweet deal.
PMG: Whose gold was it after March of 1933?
SMG: The nation’s gold.
PMG: Not the people’s gold.
SMG: Not after the people sold their gold to the government.
PMG: Because it was a felony not to.
SMG: Yes.
PMG: Because Roosevelt made them an offer they could not refuse.
SMG: I get it. “Godfather” language. We’ve already agreed that the government is not a criminal conspiracy.
PMG: I’ve agreed because I need the interview.
SMG: A deal’s a deal.
PMG: Where is the gold now?
SMG: In Fort Knox.
PMG: All of it?
SMG: Some of it — we don’t know how much — is at 33 Liberty Street, New York City.
PMG: The Federal Reserve Bank of New York.
SMG: Yes.
PMG: A private corporation.
SMG: Yes.
PMG: Which still stores the government’s gold for safekeeping.
SMG: Yes.
PMG: You’re sure.
SMG: Yes.
PMG: How do you know?
SMG: The Board of Governors of the FED has said so.
PMG: A government organization.
SMG: Yes.
PMG: Which has hired a private corporation to execute its policy.
SMG: Yes.
PMG: Therefore, to safeguard the government’s gold, the government has turned over the gold to a private corporation.
SMG: Yes.
PMG: Is this because a private corporation is more efficient than the government?
SMG: Yes.
PMG: We are agreed. But why should the gold be safer in the vault of a private corporation instead of in the possession of millions of Americans?
SMG: Economies of scale.
PMG: A safer vault?
SMG: Yes.
PMG: So, you didn’t believe Die Hard 3?
SMG: Of course not. No thieves could have broken into the vault at 33 Liberty Street. The Federal Reserve Bank of New York is not like the Post Office. It’s private.
PMG: Let’s review. How did the gold get there?
SMG: Because the Federal Reserve System bought it.
PMG: With what?
SMG: With a check.
PMG: Drawn on what bank?
SMG: The Federal Reserve Bank of New York.
PMG: A private corporation.
SMG: Yes.
PMG: Which now holds the gold for safekeeping.
SMG: Yes.
PMG: So that thieves cannot get at it.
SMG: Yes.
PMG: Where the public also cannot get at it.
SMG: Temporarily.
PMG: Since 1933.
SMG: Yes.
PMG: And you’re sure it’s still in the vault.
SMG: Yes.
PMG: Even though it has not been audited by an outside agency.
SMG: Yes.
PMG: Why hasn’t it been audited by an outside agency?
SMG: It’s too risky.
PMG: What risk?
SMG: Didn’t you see Die Hard 3?
PMG: You mean the auditors might be part of a criminal conspiracy?
SMG: Yes.
PMG: And we wouldn’t want a criminal conspiracy to get its corporate hands on the nation’s gold.
SMG: Correct.
PMG: What would a criminal conspiracy do with all that gold?
SMG: It would sell it.
PMG: To the public.
SMG: Yes.
PMG: To individuals who want to own gold, you mean.
SMG: Yes.
PMG: To individuals in the free market.
SMG: Yes.
PMG: Where it would not be safe.
SMG: Exactly.
PMG: Where it was no longer safe in early 1933.
SMG: Yes.
PMG: When will it be safe to return the gold to the public?
SMG: When the economic turmoil stops.
PMG: When will that be?
SMG: When the country goes back on the gold standard.
PMG: The way it was in early 1933.
SMG: Yes.
PMG: When the country was in economic turmoil.
SMG: Yes.
PMG: Forcing Roosevelt to call in the gold for safekeeping.
SMG: Yes.
PMG: Was the extra 75% that the government got for the gold a safekeeping fee?
SMG: No. The Federal Reserve Bank of New York stores the gold.
PMG: What does it charge the government for this service?
SMG: I don’t know. There are no public receipts.
PMG: Why are there no public receipts?
SMG: You don’t need public receipts when you are not subject to an independent audit.
PMG: But Congress is audited.
SMG: By auditors hired by Congress.
PMG: These auditors don’t ask Congress for receipts from the Federal Reserve Bank of New York.
SMG: Correct.
PMG: Why not?
SMG: It’s not necessary.
PMG: Why not?
SMG: Because the Federal Reserve System pays about $20 billion a year to the Treasury.
PMG: Where does it get all that money?
SMG: From the Treasury.
PMG: Which pays interest to the FED.
SMG: Yes.
PMG: Part of which the FED returns to the Treasury.
SMG: Yes.
PMG: After deducting expenses.
SMG: Yes.
PMG: Does the FED provide receipts for these expenses?
SMG: No.
PMG: The Treasury takes the FED’s word for this.
SMG: Yes.
PMG: The government does not audit the FED.
SMG: No.
PMG: Why not?
SMG: It’s not necessary.
PMG: Why not?
SMG: Because the FED conducts its own audit.
PMG: Can Congress see this audit and verify it?
SMG: No.
PMG: Why not?
SMG: Because the Federal Reserve System executes its policy through the Federal Reserve Bank of New York, which is not a government agency.
PMG: Why can’t the Internal Revenue Service audit the Federal Reserve Bank of New York?
SMG: It lacks the legal authority.
PMG: From Congress.
SMG: Correct.
PMG: Can the public get access to the receipts?
SMG: Bloomberg News tried that in 2008.
PMG: How?
SMG: Using the Freedom of Information Act.
PMG: What was the result?
SMG: The Federal Reserve Bank of New York refused to comply.
PMG: On what basis?
SMG: The FOIA protects trade secrets.
PMG: What trade secrets are involved?
SMG: We don’t know. It’s a secret.
PMG: That’s all the space I have for today’s interview.
SMG: Will this be the last interview?
PMG: Probably not. I always need more copy.
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Published on February 21, 2009. The original is here.