Index

Chapter XV
Questions And Answers

Why Did the U .S, Government Buy Gold?

The buying of gold by the federal government increases the money supply. Let us explain. When the government bought gold, it did not actually "buy" it because it did not tax the people to obtain currency with which to pay for the gold. It merely changed the gold into the current money supply, thereby increasing the money supply. Thus it diluted the exchange value of every dollar's worth of purchasing media in circulation. When the government receives gold coins as a payment, that transaction does not dilute the exchange value of the currency.

If a deflation of the money supply exists, the people will benefit when the government buys gold because in times of deflation the money supply should be increased. By buying gold in times of inflation of the money supply, the government increases the money supply, thus worsening the inflation unless some action is taken to offset the increase. That could be done by having the commercial banks reduce their loans of bank credit, or by having the Federal Reserve banks sell securities, or [p. 154] by increasing the amount of goods and services being offered for sale.

How Did the Government Pay for the Gold It Bought?

From 1792 to 1863, the United States government "paid" for the gold it received by making the gold into gold coins and returned those coins as payment to the seller. Thus, additional coins were placed into circulation and the total money supply was increased.

From 1863 to 1933, the government paid for gold with gold coins or with gold certificates equal in face value to the exchange value of the gold. Both methods caused an increase in the amount of currency in circulation.

Between 1933 and 1968, the government paid for gold with a check issued against its account in the Federal Reserve Bank of New York. When the check was deposited in any commercial bank, the commercial bank would send it to its Federal Reserve bank and receive a bookkeeping credit for the amount. The check was then sent to the Federal Reserve Bank of New York. The Federal Reserve Bank of New York would debit the United States account and credit the account of the Federal Reserve bank from which it received the check.

To make up its debit, the government would send to the Federal Reserve Bank of New York gold certificates equal in value to the check it issued as payment for the gold. The result was that the government "paid" for the gold without taxing the people for the payment. The gold was "paid" for by increasing the money supply. The demand deposits of the seller of the gold were increased. Those demand deposits are apart of the money supply. In addition to increasing the demand deposits, the Federal Reserve bank could deposit the gold certificates with Federal Reserve agent and receive four times their value in Federal Reserve notes. That would increase the money supply still more. [p. 155]

What Is Meant By the Term "Gold Standard?"

There are three types of gold standards:

1. Gold-coin standard.
2. Gold-bullion standard.
3. Gold-exchange standard.

When a nation is on a gold-coin standard it means the following:

(a) A specific number of grains of gold in the gold coins have a fixed legal tender value for the payment of each one-dollar debt.

(b) Unlimited coinage of gold coins.

(c) Unrestricted ownership and mobility of gold coins.

(d) All other currencies can be exchanged for gold coins at the fixed rate.

When a nation is on a gold-bullion standard it means that no gold coins are used as currency, but the currency in use may be exchanged for gold bullion at a set price or a set rate of exchange under certain conditions and limitations.

When a nation is on a gold-exchange standard it means that the government and the people in that country can make payments for the goods or services received from another country with currency that is equal in exchange value to a fixed exchange value of gold.

Note that the one common feature of all three types of gold standards is that the government has a set or fixed price on gold. It is for that reason that gold has not served well as a medium of exchange. It is not that gold is a poor medium of exchange. The fault lies in attempts by government officials to set a fixed price on the gold. [p. 156]

Do We Have Enough Gold to Return to the Full Gold Standard?

We can change all of our purchasing media into gold coins and/or certificates redeemable in gold if we do not care what price we set for the gold and at what price we are willing to exchange goods and services.

There are two ways to accomplish this. The first is to lower the price of all goods (except gold) and services to about one-fifth of present prices. (This calculation is based on the price of gold at $160 per ounce.) The second way is to raise the price of gold to about $800 an ounce.

Let us suppose that the United States possess 250 million ounces of gold and that the world price of gold is $160 per ounce. Assume, also, that we now have 200 billion dollars' worth of purchasing media in circulation in the United States. Now, if we are willing to reduce the price of all the goods and services being offered for sale to one-fifth of their present prices, the 250 million ounces of gold could be converted into coins and gold certificates and there would be enough purchasing media to exchange all the goods and services being offered for sale at the new reduced prices.

The 40 billion dollars' worth of the new all gold purchasing medium would then be equal in relation to the lower prices, as formerly the 200 billion dollars' worth of purchasing media was equal in relation to the higher prices of the goods and services. Each item would have the same exchange value in relation to every other item that it previously had. If no one had debts, people would not suffer an apparent gain or loss, except the owners of gold who would gain five times their previous buying power.

The second way to return to a full gold standard is to increase the price of gold five times the $160, i.e., to $800 per ounce, and leave all other prices as they are now. Then the 40 billion dollars' worth of gold would be worth 200 billion dollars, which is the hypothetical [p. 157] dollar amount of purchasing media with which we began.

This method also would not cause people to suffer an apparent gain or loss, provided no one had debts. Only the owners of gold would gain five times their previous buying power. But the non-owners of gold would suffer a serious loss of buying power (their buying power would be only one-fifth of what it was previously)

when they wanted to buy gold in either of the two ways. This might explain why the owners of gold advocate that gold be used as a medium of exchange.

The point is that if we wish to have 100% of our purchasing medium in gold coins at a fixed price for gold, we can do it either by adjusting the price of gold or by adjusting the prices of everything else.

The above ideas have been tried many times in the past. They never worked for a long period of time without causing injustices to the non-owners of gold. Gold coins could serve as media of exchange, but when the gold standard (a fixed price) is applied to the coins, they will serve well only until the market price of gold changes.

Is It Necessary That the Currency Used In International Trade Be Gold or Silver?

While it may be convenient, at times, to use gold or silver as currency in international trade it is not necessary. Buying and selling is bartering. When goods or services are sold to people in another country, they can be paid for only, with the goods or services of the purchasers. The only time people, other than speculators and moneychangers, really barter their goods or services for gold or silver is when they want gold or silver for some specific use.

If governments would stay out of all international transactions, gold and silver would be exchanged by private corporations and people in the same way other [p. 158] commodities are exchanged. It is the actions of governments in cooperation with international moneychangers that make it appear necessary to use gold or silver to carry on international trade.

Do Full Bodied Gold and Silver Coins Serve Well as a Medium of Exchange?

When the market value of the metal in a coin and the legal tender or the face value of the coin are equal, the coin is called a full bodied coin.

In order for any coin to serve as a medium of exchange, it must be profferable as well as acceptable. That is, the person who possesses the coin must be willing to exchange it for goods and services.

To discover how well the United States silver coins served as a medium of exchange, let us review briefly the history of their use.

The United States government first minted silver coins in 1794, declaring them to be legal tender at their face value. That was the market value of their silver content at the time they were authorized to be minted in 1792.

But after the authorization was given in 1792, the market price of silver increased about 2%. The result was that the coins then were not profferable as a medium of exchange. The people who happened to own silver coins exchanged them for their higher market value, instead of using them as a medium of exchange. Because many of the silver dollar coins were being sold for their silver content value instead of being used as media of exchange, President Jefferson in 1805 ordered the minting of the silver dollar coins stopped. No silver dollar coins were minted between 1805 and 1835.

The silver dollar coins were not really needed because bank notes were in circulation. But there was a serious shortage of fractional coins, which continued until 1853 when Congress reduced the amount of silver in the fractional silver coins by 7%.

The result of that reduction of the silver content in the [p. 159] silver coins made the market value of the coins about 5% less than their legal tender or face value. Then the coins were issued in sufficient quantities and they stayed in circulation. Thus, the coins were both acceptable and profferable as media of exchange. Note, however, that they were no longer full-bodied coins. The market value of their silver content was less than their legal tender value. They served as a medium of exchange at their face value because they were legal tender at their face value and were received as a payment for taxes at their face value, not because they were made of silver. The silver coins served well as a medium of exchange until the Civil War.

Shortly after the start of the Civil War the price of silver increased so that the market value of the silver in the coins was equal to and even higher than the legal tender value of the coins. Thus, the coins again became full-bodied coins, and again the people refused to offer them as a medium of exchange. They were acceptable but they were not profferable. People either hoarded them or exchanged them for the higher market value of their silver content.

In place of fractional coins the people used postage stamps and fractional paper notes as media of exchange. The postage stamps and the fractional paper notes did not drive the silver coins out of circulation. The coins were acceptable but people refused to offer them as a medium of exchange.

In 1874 large deposits of silver were discovered in Nevada. The result was a drop in the price of silver so that the market price of the silver content of the coins was less than the legal tender value of the coins. Again, large quantities of silver coins were minted and circulated as a medium of exchange. People were willing to offer them and people were willing to accept them. But they were not full-bodied coins.

For ninety years between 1874 and 1964, silver coins circulated as a medium of exchange in adequate amounts. During all those years, with the possible exception of very short periods, the market value of the [p. 160] silver content of the coins was much less than the legal tender or face value of the coins. There were times when the silver in the silver dollar coin was worth only 35 cents.

During all those years the silver coins served as a medium of exchange, they were profferable and acceptable not because they were silver coins, but because they were declared to be legal tender at a higher exchange value than the market value of their silver content.

In 1965 the market value of the silver content in the silver coins again increased so that it was above the legal tender value of the coins. The result again was the withholding of the coins as media of exchange. They were either exchanged for the higher market value of their silver content or they were kept as a store of value.

Do these experiences mean that silver coins are not desirable as a medium of exchange? No. It means that silver coins (and gold coins) are not appropriate items to serve as a medium of exchange when the government declares them to have a legal tender value that is higher or lower than the market value of their metal content.

If the government declares them to have a legal tender value that is lower than the market value of their silver content, they will not be offered as a medium of exchange. If the government declares them to have a legal tender value that is higher than the market value of their silver content there is no need for the coins to be made of sliver; they will serve as a medium of exchange just as well if they are made of nickel and/or copper, as they have since 1965.

In order to have full-bodied coins serve as a medium of exchange, the government need not and should not declare them to be legal tender. But if it does, it should declare them to be legal tender at the market value of their metal content at the time the coins are used as a payment. Then the people would always be willing to offer the coins as a medium of exchange and no unjust [p. 161] payments would be made legal. That is what some of the states did with foreign gold and silver coins before 1853.

For the people in a country that produces gold or silver, there is a way for them to have gold or silver coins serve as a medium of exchange. But it is doubtful that a country that does not produce gold or silver can be persuaded to exchange its goods and services for gold or silver to use as a national medium of exchange when bona fide credit certificates can serve the purpose.

How Well Do Full Bodied Gold Coins Serve as a Medium of Exchange?

The United States government minted the first gold coins in 1795 and continued to mint them intermittently until 1933. During all those years we had unlimited coinage of gold coins. That meant that the government would buy all the gold brought to the mint and pay for it at the set legal tender value for gold coins. It meant that the government would keep the market price of gold from going lower than the set legal tender value, thus assuring that the gold coins would remain full-bodied coins. These advantages, however, did not mean that the people would always use the coins as a medium of exchange.

When the market value of the gold content of the coins was higher than the legal tender value of the coins, people refused to offer them as a medium of exchange. This took place during most of the period between 1795 and 1834. During those years the government would receive the gold at the set price of $19.39 per fine ounce; but the market value varied between $19.39 and $20.60 per ounce.

In 1834, the government increased the price of gold to $20.69 per ounce. That price brought much gold to the mint because it was higher than any other market price. Then many coins were made and circulated as a medium of exchange.

In 1837, the government slightly reduced the price to [p. 162] $20.67 per ounce which was still higher than the ordinary market price. So the coins circulated as a medium of exchange until the Civil War.

During the Civil War, the market price of gold went above the government-set price. The result was that gold coins were not offered as a medium of exchange, except in California where gold was being produced.

Generally speaking, after the Civil War and until the early 1930s, enough gold was produced so that the market price did not go above the $20.67 per ounce paid by the United States mint. That price paid by the mint kept the market price from going below the $20.67 per ounce. So the gold coins remained full-bodied coins and stayed in circulation.

We should keep in mind, however, that if the government had not continued to buy gold for $20.67 per ounce the market price of gold might have fallen below that price when gold was discovered in Alaska.

History shows what it is necessary to do to keep full-bodied coins in circulation. Coins are not full bodied just because they are made of gold or silver. And coins do not serve as a medium of exchange just because they are full bodied or just because they are gold or silver.

About 1930 the market price of everything except gold began to fall. But the market price of gold did not decrease because the government controlled the price. The government would buy or sell gold at $20.67 per ounce. That meant that the owners of gold had a special advantage over the owners of other items. They had an asset (gold) the price of which the government would not allow to decline.

Because some people saw the advantage of owning gold and because some banks were not considered safe, some people began to redeem their gold certificates and Federal Reserve notes for gold.

Then government officials saw that they would not have enough gold with which to redeem all the currency that was redeemable for gold. So in 1933 President Roosevelt reversed the government policy pertaining to [p. 163] gold. That was the end of the use of gold in our domestic currency.

Let us remember that when the people tried to redeem their currency for gold coins in the early 1930s, they wanted the coins so that they could keep them as a store of value. And when coins are kept as a store of value they do not serve as a medium of exchange.

Does all this mean that full bodied gold coins would not serve well as a medium of exchange? No. It means that full-bodied gold coins will not serve well as a medium of exchange if the government places a fixed value on the coins that is higher or lower than the market value of the metal content of the coins.

Do Notes, Certificates, and Token Coins Serve Well as Media of Exchange, If They are Redeemable For a Fixed Amount of Gold or Silver and If They are Declared To Be Legal Tender at a Fixed Value?

Let us review what happened when the one-dollar silver certificate was used as one of the items of our currency. The government gave a written promise on the certificate to redeem each one-dollar silver certificate for one dollar in silver, i.e., for 371.25 grains of pure silver, and also declared that each one-dollar certificate was legal tender for a one-dollar payment for debts and taxes.

During the ninety years (1878 to 1968) the silver certificate served as a medium of exchange, it was not used as a medium of exchange because it was redeemable in silver. The fact that it was redeemable for 371.25 grains of silver was hardly considered because the government had also given the certificate a legal tender value of one dollar when it was used as a payment for debts and taxes. Thus, the silver certificate had two exchange values, the legal tender exchange value and the market exchange value of the 371.25 grains of silver for which it was the evidence of a claim. It was a certificate [p. 164] of legal tender for a one-dollar payment and it was a warehouse receipt for 371.25 grains of silver.

However, by 1967 the exchange value of 371.25 grains of silver went above the one-dollar legal tender exchange value of the certificate. (Advertisements in some newspapers were offering as much as $1.60 for each one-dollar certificate.) At that time the people refused to use it as legal tender or as a medium of exchange. People began to use it as the evidence of a claim for 371.25 grains of silver, and they continued such use until June 25, 1968, at which time the government stopped redeeming the certificates.

The certificates still are legal tender at their face value, but few remain in circulation because once they are redeemed, they are destroyed.

When in 1862 and 1863 United States notes were issued on which was written, “The United States of America will pay to the Bearer on Demand . . . (silver or gold) dollars,” the government did not and could not make such payments because, at that time, it did not have the gold or silver dollars with which to fulfill such a demand.

If the government had been able to pay such a demand, however, people would have redeemed the notes for gold or silver and then either hoarded the metal or sold it for the market price that was then higher than the legal tender value of the coins. The notes then would have been destroyed and would no longer have served as a medium of exchange.

Token coins which are redeemable in gold or silver will be used by people just as they used silver certificates.

How Can The Government Issue Notes, Certificates, or Warehouse Receipts So That They Will Be Redeemable In Gold or Silver at a Declared Legal Tender Value and Continue To Serve as Media of Exchange?

It is not necessary for government officials to declare [p. 165] such items to be legal tender, but if they do, they should declare them to be legal tender for payments equal to the amount of the market value of the metal for which they are the evidence of a claim at the time they are used as payments. Then the redeemable notes, certificates, or warehouse receipts will continue to serve as media of exchange because their legal tender value and the market value of the metal for which they are the evidence of a claim will always be equal.

Why Do We Have Laws Against the Counterfeiting of Coins and Other Currency?

Placing counterfeit currency into circulation is an inflation of the currency in circulation. The result is an unjust increase in the price of all goods and services, and a lowering of the exchange value of every dollar's worth of currency that was earned and issued in good faith.

Or we can say that when a person buys anything with counterfeit currency, that person steals from all the owners of the bona fide currency in circulation.

Does Article I, Section 10, of the United States Constitution Which States, "No State Shall . . . Coin Money: Emit Bills Of Credit . . .," Make It Unconstitutional For a State to Issue Tax Credit Certificates?

At the time the Constitution was written, the people were experienced with the use of bills of credit and bills of exchange. A bill of credit was a promise to pay. It was a note. A bill of exchange was an order to pay. The United States Constitution only prevents the states from issuing bills with a promise to pay.

When a state issues a tax credit certificate, it is not coining money (making coins), nor is it issuing a bill with a promise to pay. It is issuing a document (a certificate), which it promises to receive for any payment [p. 166] due it. It also will redeem that certificate when it is presented as payment for the taxes levied at the time it was issued. So there is no promise to pay made by the state. We, therefore, conclude that the United States Constitution does not prevent a state from issuing tax credit certificates.

Does Article VIII, Section 9, of the Wisconsin Constitution Which States, "No Scrip, Certificate, or Other Evidence of State Debt, Whatsoever, Shall Be Issued, Except for Such Debts as are Authorized By the Sixth and Seventh Sections of This Article," Prevent the State From Issuing Tax Credit Certificates?

A bona fide tax credit certificate is not a scrip giving evidence of a debt, it is not a certificate giving evidence of a debt, nor is it any kind of evidence of a state debt. In fact, it is issued by a state in order to make it unnecessary to issue bonds, which are evidence of debts. Thus we conclude that the Wisconsin Constitution does not prevent the legislature from authorizing the issuing of bona fide tax credit certificates.

Did Abraham Lincoln and the U.S. Congress In 1862 and 1863 Issue the U.S. Notes In Order To Supply the People With a Medium of Exchange?

The U.S. Congress issued $450,000,000 worth of the U.S. notes to supply the government with media of exchange to avoid the taxation or the borrowing needed to pay for the war.

The government paid out these U.S. notes for its needed expenses and in turn received these notes for the payment of all obligations due it (except for interest on the federal debt and custom duties), so the people used the U.S. notes along with privately issued bank notes as their media of exchange. [p. 167]

However, beginning about July 1, 1863, the U.S. government began borrowing bank credit from the newly chartered private national banks and continued borrowing to pay for the balance of the cost of the war. At the end of the year 1865, the U .S. government debt was $2,678,000,000. In 1860, the year before the war began, the debt was only $65,000,000.

What Is the Federal Reserve System?

The Federal Reserve System is not a real banking system for the American people. The Federal Reserve banks, which are a part of the Federal Reserve System, serve as banks only for their member banks and for the United States government. We must distinguish between the Federal Reserve System and the Federal Reserve banks.

We must keep in mind that the commercial banking system serving the people in the United States is called a fractional reserve banking system. It is not called the Federal Reserve Banking system, although many of the commercial banks are members of the Federal Reserve System.

The Federal Reserve System is an organizational apparatus established by Congress in 1913 to control our fractional reserve banking system. Because the commercial banks are allowed to operate on the fractional reserve banking system for demand deposits, they can cause an inflation or a deflation of bank credit. The Board of Governors, using the Federal Reserve banks and the Federal Open Market Committee as tools, is supposed to control the operations of the fractional reserve banking system for the benefit of the public. They are supposed to prevent an inflation or deflation of the money supply.

The Federal Reserve System is made up of the following:

1. The Board of Governors. (The Federal Reserve Board) [p. 168]
2. The Federal Open Market Committee.
3. The Federal Advisory Council.
4. The twelve Federal Reserve banks with their branches.
5. The member banks (the owners-stockholders-of the Federal Reserve banks).

The Board of Governors and the Federal Open Market Committee decide all major policies for the Federal Reserve banks.

Neither The Federal Reserve System nor its Board of Governors is a corporation. The board is a committee of men appointed by the president of the United States and approved by the United States Senate.

The Board of Governors is not the Federal Reserve banks. The Board of Governors is an independent agency of the government created by Congress.

It is the twelve Federal Reserve banks that are private corporations. All local banks with the word "national" in their title are members of the Federal Reserve System and they are the stockholders of the Federal Reserve banks. Some, but not all, state banks also are members of the Federal Reserve System.

The Federal Reserve banks serve as banks only to their member banks (the local banks) and to the United States government. Their main function is to act as instruments, which the Board of Governors and the Federal Open Market Committee use to control the money supply. They also issue Federal Reserve notes in exchange for interest-bearing government bonds given to them as collateral.

The Federal Open Market Committee is made up of the Board of Governors and the presidents of the Federal Reserve banks. For details on the F.O.M.C. see chapter XII.

The Federal Advisory Council is a committee made up of one commercial banker from each of the twelve Federal Reserve districts. Its function is purely advisory.

The officials of the Board of Governors frequently [p. 169] receive blame for the evils of the fractional reserve banking system for demand deposits. If blame is to go to them, it should be for not offering a plan to enable individuals and governmental bodies to obtain all the bona fide currency they need without borrowing it. Then they would really be serving the public interest because then the commercial banks could operate their demand deposit accounts on a 100% reserve banking system.

Can the People Themselves, Without any Action By Government Officials, Avoid the Use of Federal Reserve Notes?

If the people will accept only coins or checks, instead of Federal Reserve notes when receiving a payment or when receiving change, Federal Reserve notes will have no takers. Therefore, they will not circulate as currency.

It is not necessary for the people to use Federal Reserve notes, because Congress has authorized the Treasury Department to mint as many coins as are needed. All the people have to do is ask for the coins at their bank.

It is only a slight inconvenience to carry up to $50 in coins. Larger payments can be made with checks, including American Express Travelers Cheques.

Can the People Themselves, Without any Action by Government Officials, Stop the Operations of the Federal Reserve Banks?

The people can give all their banking business to banks that are not members of the Federal Reserve System and use coins instead of Federal Reserve notes. Then the Federal Reserve banks will have only a limited demand for their services. That limited service can be provided by some of the regular banks and the United States Treasury Department in the same manner as was done before the Federal Reserve banks existed. This action [p. 170] will not mean that the local member banks will be put out of business. It will be a strong encouragement for them to become state non-member banks.

The Federal Reserve banks are owned by the member banks. When all the member banks withdraw from the Federal Reserve System, the Federal Reserve banks will have no owners and their surplus funds will be given to the United States Treasury.

At the present time more non-member banks are doing business in the United States than member banks, although the member banks have more assets and liabilities than the non-member banks.

Would We Have a Trustworthy "Money System" If We No Longer Used the Federal Reserve Banks and the Federal Reserve Notes?

Assuming that we did nothing else, we would have the same "money problems" (bank failures, inflations, deflations, booms and busts, unemployment, and ever increasing interest-bearing debts) that existed before the Federal Reserve System was established and that still exist. These are the problems the Federal Reserve System was supposed to prevent. We know that it did not. We also know that interest-bearing debts increased almost beyond comprehension.

To have a trustworthy "money system" we must gradually replace the fractional reserve banking system with a 100% reserve banking system for demand deposits in commercial banks. (See chapter XI for details.)

How Can a Bank Make Any Loans If It Is Required To Operate On a 100% Reserve Requirement System?

Commercial banks have two departments that serve its depositors:

1. The department for demand deposit accounts.
2. The department for time and savings accounts. [p. 171]

When a depositor places his funds in a time or savings account, he expects the bank to loan out those funds. He should not expect the bank to return his funds on demand.

The bank has rules and regulations to which the depositor agrees when he makes a deposit in a savings account. The following are the rules and regulations regarding withdrawals in a passbook issued by the savings department of a large bank in Milwaukee, Wisconsin.

NOTICE OF WITHDRAWAL. The bank reserves the right to require a thirty-day prior notice in writing of depositor's intention to withdraw any sum exceeding One Hundred Dollars, a sixty day prior notice in writing of the depositor's intention to withdraw any sum in excess of One Hundred Dollars up to Five Hundred Dollars, and a ninety day prior notice in writing of depositors intention to withdraw any sum in excess of Five Hundred Dollars.

The banks pay interest on time and savings deposits, so they in turn have a right to loan out those funds in order to earn the interest and make a profit. So it should not be expected and it is not necessary for the bank to have any reserves for time and savings accounts, especially when a bank has rules such as those above for withdrawals. Mutual savings banks are not required to keep any reserves for depositors' savings accounts.

Therefore, when we speak of a 100% reserve system, we are not referring to the time and savings deposit accounts, we are only referring to the demand deposit accounts. The depositor of demand deposits does not loan his funds to the bank. In many cases those are the funds the bank loaned to the depositor. In those cases the depositor is paying interest on those funds. He has a right to expect the bank to keep those funds on hand until he demands them by his check. He does not expect the bank to loan those same funds to someone else. [p. 172]

We should consider it normal for the banks to be able to payout their demand deposits in full, on demand. But they will be able to do that only when they operate on a 100% reserve system.

Why Should Certificates In Lieu of Coins Be Issued, Instead of United States Notes, To Replace Federal Reserve Notes and Demand Deposits of Bank Credit?

A note is the written evidence of a promise to pay with something of value. A bona fide note will specify the item to be paid. Honesty requires that we state the item to be paid and the intention to keep that promise. If the government issues a note without a promise to pay or with a promise to pay without stating the item to be paid, such a promise is meaningless and should not be issued by government officials.

The coins we are now using are not the evidence of promises to pay. They are the evidence of the law passed by Congress that states, “All coins and currencies . . . shall be legal tender . . .” Therefore, certificates in lieu of coins would serve as coins do in giving the evidence of that law.

It would be more appropriate to use such certificates to replace Federal Reserve notes and demand deposits of bank credit, than it would be to use United States notes which are supposed to be the evidence of promises to pay, but which are not.

An important lesson can be learned from our experience with silver certificates. From 1886 to 1967, most of our one-dollar bills were silver certificates. They had their exchange value and were used as currency because they were declared to be legal tender at their face value, not because they were redeemable for 371.25 grains of silver.

For nearly all those years, the 371.25 grains of silver was worth between 35 cents and 90 cents and the legal [p. 173] tender value was worth $1. Those silver certificates, like the coins were evidence of legal tender.

It was only when the price of the 371.25 grains of silver went above one dollar that the people did not use the certificate as the evidence of legal tender. They redeemed it for the silver.

The president, the members of Congress, and the Board of Governors of the Federal Reserve System, all of whom are responsible for our money system, would have served the public interest if, at the time the 371.25 grains of silver became worth one dollar, they replaced the silver certificates with certificates in lieu of coins. Instead, they allowed the Federal Reserve banks to replace them with Federal Reserve notes that are based on government debts.

What Items Would Serve as International Currency?

There are two types of items that will serve internationally as media of exchange:

1. Items with exchange value in themselves; commodities.
2. Certificates or other documents giving evidence that the bearer has a just claim for items with exchange value; bills of exchange, certificates of credit, and warehouse receipts.

To make the above items more acceptable internationally, they may be warranted by internationally recognized organizations or corporations.

The items that will serve internationally as media of exchange are the same items that will serve nationally as media of exchange. If the above items were used internationally as media of exchange and if government officials in all countries did not interfere with the free exchanging of goods and currencies, balance of payments deficits or surpluses would never occur. The buying [p. 174] and selling would be like bartering and in bartering; no one can sell any more or any less than he can buy.

What Type of Unemployment Is Caused By a Shortage of the Media of Exchange in Circulation?

Every productively employed person is producing a product or performing a service for a customer. If the quality and price of the product or service are satisfactory to enough customers and if those customers have sufficient media of exchange, the product or service will be sold and the person will continue to be employed.

Some years ago, when testifying before a Congressional committee that was inquiring about the methods to be used to create jobs, a businessman told the committee,

In a private enterprise economy, it is business activity (the production and distribution of wanted goods and services) undertaken in the expectation of profits which creates jobs. If the profits are realized, the jobs continue and perhaps grow in number. If the profits are not realized, the jobs and the companies which offer them eventually disappear. There will be virtually no unused capacity in either manpower or material resources when the possibility can be seen for employing them at a profit.

Employers do not manufacture jobs. They, together with their employees, manufacture products and perform services. The employer and the employee are both working for the customer. The customers, in the end, pay the wages of the employees and the profits of the employer.

To enable the customers to buy the goods and services produced, the amount of media of exchange in circulation must be no less than the amount needed to maintain a stable general price level. [p. 175]

A stable general price level would be maintained if bona fide certificates of credit issued by the possessors of the goods or services being offered for sale, and/or bona fide tax credit or tax payment certificates issued by governmental bodies, were used as media of exchange. Coins can be issued by governmental bodies as tax credit certificates.

Because those items can be issued without incurring any interest-bearing debts, they can be issued in the quantity needed. Because they are redeemable in goods or services or as payments for taxes, no one can honestly issue them in too great a quantity. So no deflation or inflation of the media of exchange need occur. Thus, the right amount of the media of exchange can be placed in circulation and a stable general price level will be achieved.

In the past as well as at the present time the single most destabilizing factor of the general price level was and is the fact that all of the items (except our coins) that we use as media of exchange come into circulation only as a result of a governmental body, a private corporation, or an individual incurring interest-bearing debts. The items which serve as media of exchange should be brought into circulation, not in relation to the amount of interest-bearing debts incurred, but in relation to the amount of goods and services being offered for sale.

When people, including government officials, speak of creating more jobs, they should identify the products to be made, the services to be rendered, the debts to be incurred, the wages to be paid, and the profits for the employers. If the wage rates, the interest rates, and the profits are higher than the customers are willing and able to pay, the products and the services will not be bought and no employment will be available.

We must keep in mind that there is more than one reason for people to be unemployed. The reason for one person' s unemployment may be different from another's.

When there is general unemployment, i.e., unemployment [p. 176] not limited to specific groups, and the general price level for all goods and services is low or declining, we can conclude that the cause of that general unemployment is due to a shortage of the items that serve as media of exchange. This was the condition that existed in the United States in the 1930's. All our natural resources, tools, energy, knowledge, and willingness to work were to no avail.

When there is limited unemployment, i.e., certain specific groups of people ate unemployed, and the general price level of all goods and services is stable or increasing, we can conclude that this type of unemployment is not due to a shortage of the media of exchange in circulation. This is the condition we had in 1976. So what is the reason for this type of unemployment?

To determine the reason, we must learn why certain groups of people are unemployed. Who are the individuals or groups of individuals that are unemployed? If we do a little studying, I think we shall find that the unemployed are:

1. Those who build houses.
2. Those who build automobiles.
3. Those who make any product or render any service at a price that is higher than many people are willing or able to pay.
4. Those who have not yet acquired the knowledge, the skill, or the willingness to earn the government set legal minimum wage.
5. Those who are prevented from working by government laws, such as those declaring that a person is too old or too young to be employed.
6. Those who are being paid enough when they do not work so that they do not have a desire to work.
7. Those who are for various reasons temporarily unemployed, about 3% or 4%.

These are perhaps the main classifications of those who are unemployed in the United States at the present [p. 177] time. To put these people to work requires a different solution for each group.

Because we know that the general price level of all goods and services is increasing at the present time, we know that the people in these seven groups are not unemployed because of a shortage of media of exchange in circulation. So if the amount of the media of exchange in circulation were abnormally increased, an abnormal increase of the general price level of all the goods and services being offered for sale would occur. That is not the solution.

In order that the people in these seven categories have productive employment, it is necessary that those in groups 1, 2, and 3 reduce the price of the product or service they are selling to a price more customers are willing and able to pay.

To give employment to the people in groups 4 and 5, government officials should repeal those state and federal laws that prevent an employer from hiring workers on terms that are mutually agreeable to the employer and the employee.

At the present time it is illegal for an employer to give employment to people in groups 4 and 5 on terms permitting the employer to stay in business.

People are human beings. They are free agents. They are responsible for their own acts. They are neither wards nor servants of government officials. They are not commodities to be bought or sold. But the goods produced and the services rendered by people are items of commerce. They are items with an exchange value. And in the free enterprise economic system the price or exchange value of goods and services and the conditions under which the goods and services are to be exchanged should be determined by mutual agreement between the buyer and seller and not by government officials.

To give employment to the people in group 6, government officials should repeal state and federal laws that require people to be paid about as much to do nothing as they might earn if they worked. [p. 178]

Those in group 7 are making adjustments in their employment and will in time take care of themselves. Many of them are just changing jobs.

If we should ever have general unemployment with a drop in the general price level of all goods and services, we can conclude that unemployment of such magnitude is probably due to a shortage of the media of exchange in circulation.

One solution for that kind of unemployment is to increase the amount of media of exchange in circulation to an amount that will bring the general price level up to what it was before the unemployment began. The other solution is to reduce all prices and wages to conform to the decreased amount of media of exchange in circulation.

Can Our Money System Be Used to Cause General Unemployment?

When a person obtains employment, he is selling or exchanging his services for a certain number of dollars, worth of the money supply for each unit of time he works or for each unit of the product he makes. The price of each unit of his time or each unit of his product is, to a great extent, determined by the total money supply in circulation.

If the money supply is increased, there will be a greater effective demand for his time or his product. He may be able to obtain more dollars' worth of the money supply for each unit of his time or product.

On the other hand, if the money supply in circulation is decreased, his share of it will be decreased. To be fully employed, he must work the same number of hours or produce the same number of units of his product for his reduced share of the money supply. There is not enough dollars' worth of the money supply available for him to sell the same number of units of his time or his products at the previous price.

If he does not reduce the price of his product or his services to adapt to the reduced money supply in circulation, [p. 179] he will be unemployed or only partly employed. In order to sell his goods or services, the price must be adjusted to match the increase and the decrease of the money supply. If he does not increase the price of his goods or services when the money supply is increased, he will not have enough goods or services to meet the demand. If he does not decrease the price of his goods or services when the money supply is decreased, he will not be able to sell the same amount of goods or services he formerly sold.

These are the basic principles underlying the causes of general employment or general unemployment. There would be no general unemployment if the prices of goods and services were reduced at the same time and at the same rate that the money supply was reduced.

Prices for goods and services can usually be increased when the money supply is increased, but because of long-term contracts it is difficult to lower the prices for goods and services when the money supply is decreased.

Once we are aware of the fact that the real cause of general unemployment is due to an imbalance between the money supply and the general price level of goods and services, we will know how to correct it: We must either increase the money supply or decrease the prices of the goods and services being offered for sale. At the present time, the people who produce our goods and services do not control the money supply, so they cannot increase it without incurring interest-bearing debts. They can only reduce their prices and wages.

If they decrease their prices and wages to match the decreased money supply, and the money supply is again decreased, they will again have to decrease their prices and wages or be unemployed. This reveals that when the producers and distributors of goods and services do not control the money supply, they do not fully control their own prices, wages, and employment. Those who control the money supply dictate their prices, wages and employment.

One congressman on a television program in March [p. 180] 1975 reported that the actions taken by the Federal Reserve Board during the months of January and February 1975 caused a 24 billion dollar reduction in the money supply. That caused a reduction in the demand for goods and services, which in turn caused a reduction of employment.

Such occurrences would not take place if the people who produce and exchange goods and services had full control of the items they use as media of exchange. They could issue and use certificates of credit as their media of exchange and thus be free from the control of a governmentally appointed board with power over their prices, wages, and employment. [p. 181]

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