The Theory of Money and Credit - Ludwig von Mises [215]
The Federal Reserve System is saddled with an awkward problem, namely, the huge amount of government bonds held by the member banks. Whatever solution may be adopted for this question, it must not affect the purchasing power of the dollar Government finance and the nation's medium of exchange have in the future to be two entirely separate things.
The banknotes issued by the Federal Reserve System as well as the silver certificates may remain in circulation. Unconditional convertibility and the strict prohibition of any further increase of their amount will have radically changed their catallactic character It is this alone that counts.
However, a very important change concerning the denomination of these notes is indispensable. What the United States needs is not the gold-exchange standard but the classical old gold standard, decried by the inflationists as orthodox. Gold must be in the cash holdings of everybody. Everybody must see gold coins changing hands, must be used to having gold coins in his pockets, to receiving gold coins when he cashes his paycheck, and to spending gold coins when he buys in a store.
This state of affairs can be easily achieved by withdrawing all bills of the denominations of five, ten, and perhaps also twenty dollars from circulation. There will be under the suggested new monetary regime two classes of legal-tender paper bills: the old stock and the new stock. The old stock consists of all those paper sheets that at the start of the reform were in circulation as legal-tender paper, without regard to their appellation and legal quality other than legal-tender power. It is strictly forbidden to increase this stock by the further issuance of any additional notes of this class. On the other hand, it will decrease to the extent that the Treasury and the Federal Reserve Board decree that the reduction in the total amount of legal-tender notes of this old stock plus bank deposits subject to check, existing at the start of the reform, has to be effected by the final withdrawal and destruction of definite quantities of such old-stock legal-tender notes. Moreover, the Treasury is bound to withdraw from circulation, against the new gold coins, and to destroy, within a period of one year after the promulgation of the new legal gold parity of the dollar, all notes of five, ten, and perhaps also twenty dollars.
It does not require any special mention that the new-stock legal-tender notes to be issued by the Conversion Agency must be issued only in denominations of one dollar or fifty dollars and upward.
Old British banking doctrine banned small banknotes (in their opinion, notes smaller than £5) because it wanted to protect the poorer strata of the population, supposed to be less familiar with the conditions of the banking business and therefore more liable to be cheated by wicked bankers. Today the main concern is to protect the nation against a repetition of the inflationary practices of governments. The gold-exchange standard, whatever argument may be advanced in its favor, is vitiated by an incurable defect. It offers to governments an easy opportunity to embark upon inflation unbeknown to the nation. With the exception of a few specialists, nobody becomes aware in time of the fact that a radical change in monetary matters has occurred. Laymen, that is 9,999 out of 10,000 citizens, do not realize that it is not commodities that are becoming dearer but their tender that is becoming cheaper.
What is needed is to alarm the masses in time. The workingman in cashing his paycheck should learn that some foul trick has been played upon him. The President, Congress, and the Supreme Court have clearly proved their inability or unwillingness to protect the common man, the voter, from being victimized by inflationary machinations. The function of securing a sound currency must pass into