Here is what I propose: a Federal law is passed directing all States to find or construct a gold depository, and to print up paper notes that meet the best spec’s currently available to deter counterfeiting. Within a time window of, say, one month, all dollar bills in circulation are to be turned in, and will be replaced with State bills in exactly equal amounts. Those dollars, in turn, are used to buy gold. This would apply as well to bank balances.
Obviously, the price of gold will go up, and some speculators will make a lot of money. So be it. The money used to buy the gold is the new State bills. This will be mildly inflationary, since you are paying out what the gold is worth, plus the money you give to the depositor. This means you are paying out slightly more than what the gold is “worth” (if I thinking correctly: this is a complex system, and obviously I may have overlooked some important variable, but you have to start somewhere).
Now, money creation is what banks do now, anyway. They can loan out 9x what they have in actual reserves. This is where inflation comes from in the first place.
This is not a bank, though: it is a State agency that directs all the banks to turn in their actual assets for new State money. And once the transition is done, they have little to do but guard the building. No further action is needed.
The actual price paid for the gold doesn’t matter, because in my view what we need to do is make it “special” gold. Once it is bought, and physically placed somewhere secure, it is now, say TEXAS gold. Texas gold is special because its price never changes. It is always worth exactly as many notes as were issued against it.
What many economists seem to miss (and, again, I am here claiming to be smarter than people who have won the Nobel Prize, so take this with a grain of salt, but think it over carefully, and follow what I am saying and look to see where, if anywhere, I err in my logic) is that THERE IS NO VALUE TO ALTERATIONS IN THE QUANTITY OF MONEY. None.
None of us want money. We want what money will buy: houses, cars, trophy brides, golfing trips. Thus free markets in gold don’t help. Gold can be mined, and added to the supply, which dilutes it. There is no value in this. Self evidently, the market for gold will not go away; people still need to get married, and make good with the wife on her birthday. But in this scenario gold, per se, is no longer MONEY.
What needs to happen is that the quantity of money needs to be fixed. What will happen over time is that our collective purchasing power will continually increase, since it is no longer being siphoned off by the Federal government through the hidden tax of inflation, and no longer buying oceanfront properties for banking executives.
Now what does this do to banks? If the quantity of State bills is fixed, then you can’t make loans with money you don’t have. Thus, they will be required to lend real money. This will decrease greatly the quantity of money loaned. We can anticipate an economic crash when this happens, because what we see, today, isn’t real. It is smoke and mirrors. It is problem spreading like the ocean of oil in the Gulf, polluting everything.
THERE IS NO PAINLESS WAY TO FIX THIS PROBLEM. But big boys and girls take their medicine, no matter how bad it tastes, because they know–or the adults in the room know–that it is NECESSARY.
How, then, will banks make money? The old fashioned way: they earn it. They pay interest on deposits, and loan that money out at higher rates. They make fewer loans, but fewer go bad. We turn back into a nation of savers.
Pie in the sky? Maybe. But when we crash, a lot of crazy ideas will start looking good. We need to have a plan, and this is my suggestion.