The Theory of Money and Credit - Ludwig von Mises [214]
It is to be expected that this freedom of the gold market will result in the inflow of a considerable quantity of gold from abroad. Private citizens will probably invest a part of their cash holdings in gold. In some foreign countries the sellers of this gold exported to the United States may hoard the dollar bills received and leave the balances with American banks untouched. But many or most of these sellers of gold will probably buy American products.
In this first period of the reform it is imperative that the American government and all institutions dependent upon it, including the Federal Reserve System, keep entirely out of the gold market. A free gold market could not come into existence if the administration were to try to manipulate the price by underselling. The new monetary regime must be protected against malicious acts by officials of the Treasury and the Federal Reserve System. There cannot be any doubt that officialdom will be eager to sabotage a reform whose main purpose is to curb the power of the bureaucracy in monetary matters.
The unconditional prohibition of the further issuance of any piece of paper to which legal-tender power is granted refers also to the issuance of the type of bills called silver certificates. The constitutional prerogative of Congress to decree that the United States is bound to buy definite quantities of a definite commodity, whether silver or potatoes or something else, at a definite price exceeding the market price and to store or to dump the quantities purchased must not be infringed. But such purchases are henceforth to be paid out of funds collected by taxing the people or by borrowing from the public.
It is probable that the price of gold established after some oscillations on the American market will be higher than $35 per ounce, the rate of the Gold Reserve Act of 1934. It may be somewhere between $36 and $38, perhaps even somewhat higher. Once the market price has attained some stability, the time will have come to decree this market rate as the new legal parity of the dollar and to secure its unconditional convertibility at this parity.
A new agency is to be established, the Conversion Agency. The United States government lends to it a certain amount, let us say one billion dollars, in gold bullion (computed at the new parity), free of interest and never to be recalled. The Conversion Agency has two functions only: First, to sell gold bullion at the parity price to the public against dollars without any restriction. After a short time, when the mint will have coined a sufficient quantity of new American gold coins, the Conversion Agency will be obliged to hand out such gold pieces against paper dollars and checks drawn upon a solvent American bank. Second, to buy, against dollar bills at the legal parity, any amount of gold offered to it. To enable the Conversion Agency to execute this second task it is to be entitled to issue dollar bills against a 100 percent reserve in gold.
The Treasury is bound to sell gold—bullion or new American coins—to the Conversion Agency at legal parity against any kind of American legal-tender bills issued before the start of the reform, against American token coins, or against checks drawn upon a member bank. To the extent that such sales reduce the government's gold holdings, the total amount of all varieties of legal-tender paper sheets, issued before the start of the reform, and of member-bank deposits subject to check is to be reduced. How this reduction is to be distributed among the various classes of these types of currency can be left, apart from the problem of the banknotes of small denominations, to be dealt with later,[3] to the discretion of the Treasury and the Federal Reserve Board.
It is essential for the reform suggested that the Federal Reserve System should be kept out of its way. Whatever one may think about the merits or demerits of the Federal Reserve legislation of 1913, the fact remains