18 May 2011

Selling Fort Knox: A Distinction Without a Difference?

Economics 38 Comments

Robert Wenzel doesn’t agree with Ron Paul and others (like me) that the US government should sell off its gold in order to close the deficit. Wenzel writes:

Bottom line, it was a series of steps taken by the United States government to obliterate the connection between those holding dollars and their legitimate claim on the Fort Knox gold.

Thus, the gold doesn’t belong to the United States government. It was stolen by contract breach by FDR and the contract was further breached by President Nixon by refusing to redeem dollars by foreign central banks holding dollars.(Note Federal Reserve notes at one time either stated that they were reedemable in silver or gold)

This gold doesn’t belong to the United States government. It belongs to the people holding Federal Reserve notes.

Yep, I totally agree Bob. So what do you propose we do, instead of having the US government sell the gold? Wenzel proposes: “The dollar should be made redeemable into gold for those holding such Federal Reserve notes.”

Now if I wanted to be a funny guy I would just stop the post there. Ha ha. But Wenzel elaborates:

Thus, the call on gold is clear here, it belongs to the holders of US dollars. The current supply of gold owned by the United Sates should be divided by the number of dollars (Some version of M1) and made fully redeemable to those holders.

So I think in practice Wenzel is saying the government should sell the gold at way way way above market prices, in order to stick it to The Man.

For the record, if the government tries to give me an ounce of gold while subtracting (say) $5,000 from my checking account, I will pass on the reparations. Please give my portion to Bob Wenzel.

If, on the other hand, Wenzel is saying the gold should just be given to people, in proportion to how many US dollars they possess (on what date?), then my particular objection falls away, but then I think it raises a bunch of different problems.

38 Responses to “Selling Fort Knox: A Distinction Without a Difference?”

  1. Rick Hull says:

    Mish is claiming the Sun had a mixup, whereby *Ron Utt* proposed selling gold. I tend to agree with Mish that selling the gold would run counter to a national gold-backed currency, which RP is ostensibly in favor of. That said, I’m not sure what his concrete proposals are beyond ‘End The Fed’.


    • david (not henderson) says:

      Sale by the government of its gold is not inconsistent with a free banking gold standard. Under free banking, it is the commercial banks that would back their privately-issued currencies with gold, not the US government or the Fed.

      In addition, large government gold holdings can be disruptive to the private market. If you believe that a return to a gold standard of some kind is inevitable then perhaps it is best to minimize government gold holdings so that the risk of future of future gold market manipulation is minimized and the amount of gold in private hands (and therefore available to commercial banks as reserves) is maximized.

      The Bob Wenzel idea doesn’t really work either (for perhaps several reasons) in that, even under a return to the gold standard (which it appears he is implicitly suggesting by proposing that US dollars be made convertible), there would not need to be a one-for-one correspondence between gold and dollars (under fractional reserve banking).

      Finally, I suspect Ron Paul is being slightly mischievous in his support for the gold sale. Like many, he probably suspects that the government’s gold holdings are not what they claim, hence the repeated requests for an audit. Forcing a sale is good way to find out..

      • Major_Freedom says:

        Finally, I suspect Ron Paul is being slightly mischievous in his support for the gold sale. Like many, he probably suspects that the government’s gold holdings are not what they claim, hence the repeated requests for an audit. Forcing a sale is good way to find out..

        This is my inclination as well. I imagine that if the truth came out, the price of gold would skyrocket.

  2. Desolation Jones says:

    Why not sell the gold and hand out some rebate checks to every household?

  3. Jonathan M. F. Catalán says:

    I think what Bob (Wenzel) is arguing for is the re-establishment of the gold standard. However, claims to property rights and theft aside (let’s be a little practical), what other problems would there be with selling U.S. government gold in order to close the debt (other than the fact that the debt would simply be re-opened through more spending)? I mean, what type of implications would that have in regards to our monetary system?

  4. AP Lerner says:

    Mr. Murphy – slightly off topic, but thought I’d pass this along to you since it made me think of your blog (and many other neo-liberal influenced econ related blogs – including Krugmans)


    For the lazy, the money line from the post is as follows:

    Well, that’s one of the many things that must change if economics and economists are to emerge from this crisis with anything more than warmed-over excuses and rationalizations. Other professionals — lawyers, doctors, accountants — have faced up to requirements of staying current in fields that change rapidly. Economists must do so too. Any economics professor and/or professional who would purport to opine, teach and/or advise on any of the following topics ought to be required to demonstrate competence…….

    My point? As I have said on this blog a few times, one of the many criticisms I have of Mr. Murphy (and Krugman) is we are no longer on the gold standard. So much of Mr. Murphy’s analysis (and Krugmans) is flawed since it’s stuck in a gold standard framework. Time to update you’re thinking.

    FYI – I posted this on Krugmans blog as well. It’s not personal.

    • RS says:

      AP Lerner,

      Suppose everyone were forced to live their lives in Disney Land’s “It’s a Small World” ride because most people thought it was the “ideal” atmosphere for developing a happy howdy doody worldview, would you consider the minority’s analysis that the world does not really work and look that way as “flawed” because they were stuck in a “real world” standard framework?

      • AP Lerner says:

        At one point in history, the smartest minds in the world thought planet Earth was flat.

        • bobmurphy says:

          But then they realized an omnipotent Creator wouldn’t be constrained by two-dimensional geometry.

        • RS says:

          “the smartest minds in the world thought planet Earth was flat.”

          And Im sure the ones who asserted otherwise were criticized for using a “non-standard” or “unpopular” framework for thier observations.

    • Major_Freedom says:

      Economic laws are not overturned with the introduction of fiat money.

      Murphy’s logic does not depend on gold standard thinking. You’re just conflating your own nonsensical economic gibberish founded upon irrational beliefs of what fiat money can do, with new economic truths that have their own logic.

      • AP Lerner says:

        “Murphy’s logic does not depend on gold standard thinking”

        Citing fallacies such as ‘crowding out’ and the money multiplier is gold standard logic and not applicable under fiat money. Not endorseing fiat nor gold, just saying the analytical framework is different under the two.

        • RS says:

          “just saying the analytical framework is different under the two.”

          Actually, no it isnt. Consider what is actually being studied here. Economics is the study of production and trade, that is the only legitimate “framework” by which to analyze the effects of a currency, fiat or otherwise.

        • bobmurphy says:

          AP, you believe in “crowding out” too! We actually are very similar in our analysis of things, it’s just our predictions as to the empirical values are way different.

          I agree with you that the government doesn’t ever have to default on its nominal debt. The Treasury could simply issue more debt, and the Fed could monetize it, to pay off all existing holders. That might mean in practice that every last Treasury ends up on the Fed’s balance sheet, and that the nominal interest payments make that balance sheet continually rise. But yep, no reason whatsoever for the Treasury to be forced to default.

          However, in that case price inflation might go through the roof. And real resources might get diverted out of private hands into the channels dictated by government spending.

          I don’t think you disagree with any of the above analysis, we just disagree on what circumstances and how much government spending would trigger the outcome, right?

          So I think you should stop beating me up over “gold standard logic.”

          • AP Lerner says:

            “The Treasury could simply issue more debt, and the Fed could monetize it, to pay off all existing holders.”

            This is where we disagree. In my framework, the treasury does not issue ‘debt’. They should stop issuing tomorrow since it is not required to fund deficits. In my framework, there is no Fed! The treasury issuing fiat is just a zero interest bill, then the market determines the rates term structure. No Fed manipulating interest rates!

            “that the nominal interest payments make that balance sheet continually rise.”

            No reason for the treasury to issue interest bearing notes to fund deficits when they can issue all the interest free notes they desire. This does not shrink the loanable funds pool, it adds to the pool, adding net new financial assets.

            “we just disagree on what circumstances and how much government spending would trigger the outcome, right?”

            Not the absolute level of spending, but how much government spending relative to taxes. It’s all about the deficit. But yes I agree excessive spending relative to taxes that exceed the demands of the private sector is inflationary.

            “So I think you should stop beating me up over “gold standard logic.””

            Ok, deal! But part of the reason why I say that is many folks still believe reserves are required for banks to lend, which is a flawed view of banking that is no longer relevant. This is, in my opinion, the biggest issue with neo-liberal / mainstream economists across all ideologies. Many folks like to say the laws of economics are not changed with the introduction fiat, but they are missing the point. The rules of the game do in fact change when the monetary system changes. Isn’t that part of the reason why you want to return to the gold standard?

            But you are correct, we are on the same page in some ways. Just in different chapters.

            You seem like a stand up guy, which is rare for blog debates.. Thanks for the back and forth.

            • RS says:

              So, in AP Lerners “framework”, people do not “produce and trade”, instead they consume unlimited amounts of “zero interest bills” that stimulate them into actions that make the things we call goods and services “appear” in what is called an “economy”.

              No further analysis needed, only a central authority who can issue these “zero interest bills” that everyone seems to need but somehow cannot get enough of.

              Is this your version of how economics works AP?

              Correct me if I misinterpret but it seems that you focus only on the nonessentials while leaving out virtually everything else essential about the study of what economics is.

              • AP Lerner says:

                Complete misinterpretation.

        • Major_Freedom says:

          Citing fallacies such as ‘crowding out’ and the money multiplier is gold standard logic and not applicable under fiat money.

          Crowding out also applies to fiat money. It is not a fallacy.

          In order for fiat paper to be money, it has to be scarce and an object of action. That means opportunity costs, exclusionary principles, etc.

          Thus, if the government spends more money, it means the private market spends less money. This is true even if the government spends money into the private market. Those particular dollars, at the time they are spent, were spent by government and not the market. It means at that time, when those dollars were spent, the private market did not spend.

          • MamMoTh says:

            You are right. When the government buys a new software license, the private sector cannot buy the same one. And the hard disks get crowded out.

          • AP Lerner says:

            The fallacy is there is a finite pool of loanable funds. Crowding out implies in order for the public sector to fund the deficit, it steals from a finite pool of private sector savings, and pushes interest rates higher. This is false. The increased deficit increases private sector savings (don’t your savings go up if your tax burden goes down?), thus, no crowding. Banks are free to continue to lend to any and all customers they deem profitable up to their capital position.

            “Thus, if the government spends more money, it means the private market spends less money. ”

            Not true. See above. The risk to public sector spending is inflation, not lowering private sector spending.

            This is different than saying the government buys up the software in the private sector and now the private sector has no software. That’s not crowding out. That’s poorly allocated spending. I’m all for eliminating this kind of spending. Deficits also occur from lower taxes, not just increased spending. Currently, the size of government is too large given current tax burdens. No financial or operational reason why deficit funded tax decreases can not occur.

  5. Chris K says:

    So selling $370B in gold to pay off a $14T debt makes sense because..?

    You couldn’t even justify it in helping to pay down the budget deficit of $1.4T.

    It’s nothing but silliness. Selling a few hundred billion in assets to pay off trillions in debt will not accomplish anything. At the end of the day we will still be trillions in debt and the government will continue to spend like there’s no tomorow.

    • bobmurphy says:

      Chris it makes sense because Geithner is saying they need to borrow more. There is $80 billion in oil, hundreds of billions in offshore resources, a bunch in student loans, and the government owns most of the real estate in the country.

      What is your alternative? You seem to be saying, “This one thing won’t work. The government will keep spending money.” OK, so what will work?

      • Chris K says:

        I guess my point was that gold is too valuable a resource for the purposes you laid out. It’s all that we have left. If the Fed did liquidate it’s gold assets would it not well it to other central banks?
        They wouldn’t put it in the hands of the people (not sure if you were making that point).

        I’m all for selling off assets, but gold is not one of them. Nor
        would I sell oil. Land, building. student loans (good call) are fair
        game but in the end I feel your point could be made using assets other than gold.

        My concern is that Ron Paul and the Austrian free market movement constantly advocate a sound currency, and it seems counter-productive to all of a sudden liquidate what gold we do have.

        I think your argument is spot on in terms of proving to congress and the people that raising the debt ceiling isn’t a sensible policy. I just have hesitations on using gold to make that point when other assets can drive the same point home.

        • bobmurphy says:

          Chris, OK fair enough, that’s what Wenzel was saying too. But in my defense, that’s not what you originally said. 🙂

          • Chris K says:

            Understood. It’s what I was thinking…if that counts for anything!

            But I guess either way the quickest way to prove the point would be gold/oil. Land could take years to sell off, and the government just took over student loans so thats out of question as well. What other options could we have given the time frame?

            Hypothetically, do you personally think liquidating our gold would be worth it to drive the point home?

  6. AP Lerner says:

    “OK, so what will work?”

    Stop issuing debt, period. It ‘funds’ absolutely nothing and only serves as a reserve drain.

    If issuing debt is required to fund anything, then how come spending bills are not passed on condition of a successful debt auction? How come, despite running $1T+ deficits for multiple years, invading Libya was not done on condition of a bond auction and/or higher taxes? How come TARP was not passed on condition of a successful bond auction?

    • bobmurphy says:

      AP, I’m aware of your views on that, but in this instance you and I are saying the same thing: My position is, “The feds don’t need to raise the debt ceiling, instead they can do a combo of slashing spending and selling off assets, like oil and gold of which they own hundreds of billions.” Then Chris is telling me that won’t clear that whole $14 trillion so it’s a dumb idea.

  7. AP Lerner says:

    And PS, the entire idea of a debt ceiling is unconstitutional. The Tea Party should read amendment 14 of the document they hold so sacred a little closer. Actually, they should start with reading the document. Any congress person with some guts would vote to eliminate the debt ceiling.

    • RG says:

      So is counterfeiting, but they found a way around that one.

    • Mattheus von Guttenberg says:

      Why is a debt ceiling unconstitutional?

      • RS says:

        its not. congress has the power of the purse and has the power to put a limit on how much is spent.. all amendment 14 states is that the public debt shall not bequestioned which was put there so that US debts incurred from the civil war would be garunteed to be repaid. it does not put a limit on “how much” debt could “not be questioned” as it explicitly grants that power to congress itself via its ability to tax and spend.

        • AP Lerner says:

          From section 4

          “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned”

          ‘Shall not be questioned’ seems pretty unquestionable to me, but I guess this is what makes the Constituition so well…

          • RS says:

            The “validity” shall not be questioned. it is quite a leap to go from what is “valid” to what is “limitted”.

            care to explain how you made that leap?

          • Bob Roddis says:

            SInce only Congress can authorize spending, if Congress cuts off spending, spending is cut off.

            “Shall not be questioned” suggests that the debt must be paid off in full, not with diluted funny money. Sounds to me like Congress and the government as a whole is CONSTRAINED.

        • RG says:

          Constitutional or not, it’s still theft.

  8. RG says:

    Moot point. There is absolutely no chance of them selling the gold. For as stupid as they portend to be, they must know fiat currency cannot keep them in power. When the dollar pops and the commoners’ holdings disappear, the new state and state bank will emerge with at around 10% of the world’s gold supply. I wager they could reorganize the states and rehash the last 100 years in toto.

  9. Joseph Fetz says:

    I emailed Dr. Murphy to cut him in on the news of the story of Ron Paul’s position (though, I am sure that he had already been made aware of it). In that email, I told him that I had not yet made a decision on how to feel about it. Later, I emailed him again stating that I felt that it was the most moral and consistent position with regard to the gold and the debt; that it is much more moral to sell assets to go toward the debt than to inflate the debt away (as we have been attempting to do). Also, I came to the realization that the government holding the gold confers no ownership to myself (or, any other American) because collective ownership is impossible. And, the gold held by the government does not have any bearing on our currency, as it is entirely fiat and without backing (unless you count debt). In the end, I think that it would be better to coin the gold and sell it back to the public in exchange for Federal Reserve notes, of which would be a credit to the Treasuries account, and which they can then credit to the accounts of the receivers of their coupon payments. Why not? I would much rather turn in my FRNs in exchange for the gold than to hold those notes for further debasement.

    It was not until early this morning that I found another lone voice in the wind, that of Dr. Gary North. While I do not always agree with Dr. North (there is quite an age difference), I do agree with his overall theme with regard to this matter. Here is what he said: http://www.garynorth.com/public/8028.cfm

    In essence, it sums up the same opinion that I had when I finally reconciled Ron Paul’s statement, and that in which I relayed to Dr. Murphy: that I would rather the gold be in the hands of the people, than in the hands of government.