Article by Gary North.

Excerpts:

Politicians want to spend lots of money, but they do not want to get blamed for collecting taxes necessary to fund all of the projects that they plan to fund. So, they can go to the central bank, and if the central bank wants to, it buys the debt of the government. The government can increase the amount of its debt, because it has the cooperation of the central bank.

When the central bank increases its holdings of government debt, this increases the nation’s monetary base. When the monetary base increases, commercial banks make more loans. But when they increase loans, they increase the money supply. They expand those loans with fiat money. When fiat money gets into the economy, this tends to raise prices.

As prices rise, individuals decide that the price of gold will also rise. If the price of gold rises, it pays someone to own gold. So, people begin to buy gold. Gold-using producers start buying. The banks find that digital money is flowing in from the buyers of gold, and the gold is flowing out. This creates a crisis, because they have expanded the money supply based on the expansion of Federal Reserve credit, not based on the expansion of deposits by owners of gold coins.

So, when the common man goes down to his bank and turns in an IOU for gold, and he takes his gold coins home, this is a bank run. It is the same when the common man turns over his IOUs to gold to someone who sells gold to the general public. The IOUs’ buyer also presents the IOU to gold to the commercial banks. This is a run on the banks.

This means that the holders of gold coins can exercise a veto over the central bank’s decision to expand its ownership of government debt. This indirectly transfers a veto to the common man over the size of the government’s deficit. If the government cannot sell its debt to the central bank, it has to sell its debt to private investors. This tends to raise the interest rate, because the government has to offer a higher interest rate in order to persuade investors to buy its debt.

The essence of a gold coin standard is the veto. Where should the veto be lodged? Defenders of the gold coin standard say that it should be lodged with those people who use gold coins, or who use IOUs to gold coins in their economic decisions. The defender of the gold coin standard says that the individuals who use gold coins or own IOUs to gold coins are the most reliable people to exercise a veto over the commercial banks, and therefore over the central bank, and therefore over the national government.

[. . .]

I believe in decentralized political authority. I believe that governments are more responsive to voters at the local level than they are at the state or national level. But I also believe that the transfer of economic authority in the form of private property, especially the ownership of gold or silver coins, is more important for the preservation of liberty than the transfer of political sovereignty back to local units of civil government.

People are more careful about spending their money than they are about voting. They spend their money constantly. They vote only occasionally. They spend their money on aspects of their lives that they are closely familiar with. They are barely familiar with local politicians.

So, with respect to that crucial resource, knowledge, it is more important to decentralize ownership than it is to decentralize political power. They both should be decentralized, but if local voters do not have authority over the monetary system, by means of a gold coin standard, their right to vote locally will be compromised politically. The major decisions will still be made by the central government.

[. . .]

If we were to abolish the Federal Reserve System, and if the government would then transfer to American voters of all of the gold presently said to be in the vaults of the Federal Reserve Bank of New York and Fort Knox, we would see the restoration of liberty. I can think of no other pair of laws that would transfer more authority to the voters and the abolition of the Federal Reserve system than the transfer of the gold in the form of tenth-ounce coins back to the voters. This is why this essay is hypothetical.

Who are the opponents of such a procedure? First, the Congress of the United States. Second, all the bureaucrats who work for the Federal government. Third, all of the decision-makers of the Federal Reserve System. Fourth, the vast majority of all commercial bankers. Fifth, the entire academic economics profession. This is why we are unlikely to see this pair of laws passed in our generation.

The Powers That Be fear the transfer of authority over money to the general population, because that would transfer enormous power politically into the hands of the people. It would let them veto the spending policies of the Federal government. The fear of that veto is great inside the Washington Beltway.