How Gold Was Money; R. Timberlake

One such thing is the paper money and checks everyone uses to make ordinary transactions. The Constitution stipulates that, "No state shall ... coin money, ... or make anything but gold and silver coin a tender in payment of debts ... " (Article I, section 10). Yet on every unit of paper money the U.S. government asserts without apology: "This note is legal tender for all debts public and private. " By what political alchemy has gold and silver become paper? Not only is the paper money legal tender, meaningthat it must be accepted as payment for any debt owed by any person to another person or to a government, but the gold and silver specified in the Constitution are no where to be seen. Gold and silver coins rarely appear, and then only as collectible artifacts not as money. Dr. Timberlake, this month's guest editor, is Professor ofEconomics Emeritus at the Univer sity of Georgia, Athens.

This seeming contradiction between the fundamental monetary law of the Constitu tion and real life conditions might suggest to a thinking person that gold and silver had somehow disappeared from the face of the earth in the 200-plusyears since the Framers included that simple clause. However, such is not the case. The world's governments own more than 35,000tons of gold as bullion and coin, and private persons own another (estimated) 50,000tons. Silver is even more plentiful. Its current market price, reflecting its abundance, is only about one-eightieth the price of gold.1 The absence of gold money correlates with the accumulation of gold hoards in the possession of government central banks and treasuries. If it's there, it obviously cannot be out in markets transacting busi ness dealings, or in banks serving as a base for bank-issued notes and checks. It was not always this way. Until the time of the Civil War in the United States, banks routinely held gold and silver as redemption reserves for their outstanding notes and deposits while the federal government held just enough to expedite its minting opera tions. Congress had the constitutional power to "coin money," but that power did not presuppose that it keep any stock of gold and silver beyond the inventory require204 ments of its mints. Indeed, even though Congress had the power it was not required to coin money at all. Private mints flourished until the Civil War, often minting coins of slightly greater gold content than govern ment mints.

2. Paper Money and Gold after the Civil War CivilWar policies, however, changed fun damentally both the monetary system and the polity norms for governmental manage ment of money. Congress authorized two new paper moneys, U.S. notes, or "green backs, " which were declared full legal ten der, and national bank notes that were legal tender for debts due to and payment due from the federal government. For all prac tical purposes, both these issues of paper money were obligations that the U.S. Trea sury had to redeem in gold on demand after 1879. In addition, silver money at the spec ified mint price began to decline in real value starting about 1875 due to the bur geoning supplies of silver from the Ameri can West, so that it, too, was a viable currency only because it was redeemable in Treasury gold. Gold held for monetary pur poses in the 1880s and 1890s therefore became concentrated in the U.S. Treasury and sub-treasuries, whereas 50 years earlier several thousand commercial banks had held the gold to meet the demands of their local depositors and note holders.

The laws that authorized the three major fiat currencies changed the character of the gold standard from a widely dispersed gold standard, kept operational by thousands of local banks, to a "collectivist" gold stan dard operating from Washington and New York. Almost all the pressure for redemp tion of paper currency was transmitted to the U.S. Treasury and its sub-treasury of fices. During the Panic of 1893,for example, the Treasury allowed its gold reserve to decline from $259million (average for 1892) to $126 million (average for 1895), or by 51 percent. 2 The Federal Reserve Act that Congress passed in late 1913 continued and aggra205 vated the centralization of gold. The Trea sury still held gold as a reserve against its paper currencies outstanding, and the twelve new Federal Reserve Banks received the gold deposits of their "member" banks and .gave them in return a bookkeeping reserve asset labeled "Reserve Bank cred it." Presumably, the member banks could get these deposits converted into goldwhen ever they needed it-much as an ordinary householder or businessman could write a check against his deposit at a commercial bank to get cash.

The events of World War I witnessed an extraordinary gold flow into the United States to pay for war materials and services. By 1922 total gold in the U.S. Treasury, including the amount held for the Federal Reserve Banks, was $2,109million, or 3,188 tons. Treasury gold fluctuated somewhat during the 1920s,but by 1929 was at $3,278 million or 4,956 tons. 3. New Deal Gold Policy: The Government's Great Hoard of Gold As the Great Contraction began in 1929, the Treasury and Fed increased their hoards of gold-as though the stockpiling of gold in government vaults would serve as some kind of magical panacea that would reverse the disastrous ongoing contraction of money, bank credit, and employment. By 1931, Treasury gold was $3,696 million over 5,500 tons, while commercial banks were failing literally by the thousands for want of reserves. The compulsion of the U.S. Treasury and Federal Reserve Banks to hoard gold be tween 1929 and 1933 was in sharp contrast to Treasury policy between 1892 and 1896.

In the earlier period the Treasury felt duty bound to redeem its paper currencies with gold and in so doing lost over 50 percent of its gold reserves. All through the 1929 1933period, except for a brief interval in the middle of 1932,the Treasury and Fed added to their gold holdings while the banking system collapsed as its reserves disap206 THE FREEMAN • APRIL 1995 peared. The net change in Treasury gold holdings was a minuscule decline of 1.8 percent. 3 Given the gold flow into the United States at this time, the commercial banks would have had significantly greater reserves for redemption purposes and credit expansion if the Treasury and Federal Reserve had not existed! Rather than an "engine of infla tion," the Federal Reserve System at this time was an absorber of gold and an "engine of contraction." Between 1929 and 1933 it allowed the economy's monetary stock of hand-to-hand currency and bank deposits to decline from $26.2billion to $19.2billion, or by 27 percent. 4 Instead of relieving the depressed mone tary and credit conditions of 1933 by getting the gold out of the hands of the Treasury and Federal Reserve Banks and into commercial banks and households, New Deal monetary legislation only made matters worse. Con gress and the Roosevelt Administration passed several acts in 1933-1934that added more gold to the government's holdings and at the same time induced the surviving banks to be even more squeamish about extending new credit. On May 12, 1933, Congress passed the Thomas Amendment to the Agricultural Adjustment Act. This provision, among other things, gave the President the power to raise the dollar value of gold by 60 percent. Then on June 5th, three weeks later, Congress passed the Act Abrogating the Gold Clause, which repudi ated all gold clauses in all contracts public and private, including the bonds issued by the government itself to help finance World War I.

Next came the expropriation of privately held gold. By the Gold Reserve Act of January 30, 1934, President Roosevelt called into the U.S. Treasury all domesti cally owned gold and paid for it at the official mint price of $20.67 per ounce. Then, by the fiat power of proclamation given to him in the Gold Reserve Act, he raised the mint price of gold by 59 percent to $35 per ounce. Since the government now owned all of the gold, none of the "profit" from the gold price increase went to private households, to banks, or to business firms where it was desperately needed. Rather it en hanced the already bloated hoard of gold in the U.S. Treasury. Treasury gold, which was valued at $4,033millionin January 1934 was accounted at $7,438millionin February 1934!5 The political uncertainty in Europe, in addition to the enhanced price of gold in the United States, caused significantexports of gold to the United States in the 1930s. By 1941,Treasury gold had reached $23 billion, which even at the new price amounted to over 20,000tons! At the same time, private persons and businesses by the Act of 1934 were not allowed to own gold or to use gold for monetary purposes. And certainly the Treasury gold was not their gold.

4. Treasury Gold Policy after World War II The gold in fact had become nothing more than a balance sheet adornment for the Treasury Department and the Federal Re serve Banks. Government spokesmen dis honestly claimed that the Treasury's hoard of gold "backed" Federal Reserve Banks' notes and reserves. But what does "backed" mean if no one is allowed to own or use the gold? It meant in this case that the U.s. government through its Federal Re serve Banks could issue almost as much paper money as it pleased. Paradoxical as it might seem, foreigners, unlike U.S. citizens, could legally claim the U.s. Treasury's gold through their central banks and treasuries. Consequently, in ac cordance with balance of payments adjust ments in the 1950sand 1960s,more than half of the Treasury's gold stock was exported to other countries. This continued outflow prompted President Nixon to discontinue even the pretense of a gold standard. On August 15, 1971, he barred any further gold redemptions to foreigners who held dollar claims. The price of gold then became an object of world market forces, but the U.S.

Treasury holding since 1971 has remained almost constant at around 260 million ounces, or 8,125 tons.6 HOW GOLD WAS MONEY-HOW GOLD COULD BE MONEY AGAIN 207 5. Why the Gold Should Be Separated from Government What should be done with all this gold the 8,000-plustons the U.S. Treasury holds as well as the other 27,000 tons that other governments sequester? It seems obvious from the history of the relationship between gold and the state that the more gold there is in the hands of governments the less surely the gold serves as money. Therefore, the only way to restore gold and silver as media of exchange is to get the metals out of the possession and control of govern ments. Certainly the gold has no current mone tary or fiscal function for its government owners. It generates no revenue of any sort. It has no effect whatsoever on central bank monetary policies nor on the credit volume of the private banking system. In its present status as a government-owned "surplus"