(Original Caption) New York, N.Y.: Gold bars are weighed on a giant scale in the gold vault of the Federal Reserve Bank.
Bettmann Archive
There’s a weapon the Trump Administration should unleash to begin a huge, much-needed overhaul of the Federal Reserve. The Treasury should issue government bonds linked to gold. These securities would provide a simple, everyday metric as to whether Washington is undermining the dollar’s integrity or maintaining its value.
Noted economist Judy Shelton, in her seminal book Good as Gold: How to Unleash the Power of Sound Money, provides a model on how this would work. Washington would sell a zero-coupon bond with a maturity of, say, five years. The profoundly positive kicker: At maturity, the investor would make a choice—get the principal back in dollars or in gold. For example, you buy a five-year gold bond for a $1 million. At maturity, the bond would permit you to get cash or a specific amount of gold, in this case, around 280 ounces.
If Washington and the Federal Reserve misbehave, as they have in the recent past, you might collect gold worth $1.5 million. Washington would set aside a certain amount of its 261 million ounces of gold to cover its potential liabilities. The beauty is that every day people could see if Washington was messing around with the dollar’s value.
A weak dollar would mean that Uncle Sam would lose gold. Instinctively, most people wouldn’t like that, knowing this portends trouble. The price of these gold bonds would be a great barometer of the financial health of Washington.
Gold keeps its intrinsic value better than anything else on earth—and has for thousands of years. It is to stable value what the North Star is to navigation. It’s a fixture. When the price of gold fluctuates, it’s a reflection of changes in the value of the dollar, not in the yellow metal.
These days, investors hunger for protection against inflation. That’s why they’ve bought some $2.6 trillion in Treasury Inflation-Protected Securities, TIPS, even though the nominal interest rate is low compared to regular Treasury bonds.
Gold bonds would also become a weapon against the very destructive philosophy that guides Federal Reserve policy: the belief that prosperity causes inflation. The Fed fears that a vibrant economy will send prices higher. It doesn’t distinguish between expenses going up from natural disasters, pandemic lockdowns or government policy, such as sales taxes and regulations, and classic inflation that comes when you reduce the value of the dollar.
Judy Shelton rightly makes the point that we need to rule out the central bank’s manipulating the cost of capital to stimulate or restrict economic activity. This socialist-style thinking needs to be attacked.
Money measures value the way a clock measures time, a ruler measures length and a scale measures weight. We all know that markets work best with fixed weights and measures.
The Fed should focus only on maintaining the value of the dollar. It shouldn’t keep trying to manipulate economic activity. It shouldn’t manipulate interest rates. It’s an absurdity that a three-month treasury bill yields 4.3%. A market rate would likely be half that.
Gold bonds would help highlight how misbegotten the Fed’s true mission has become. They would be the beachhead for big-time reform.
