28th Amendment – Section 3 Explained

This is as much nuts and bolts as I think we dare put in a constitutional amendment.

Section 3 essentially directs the Secretary of the Treasury:  a) to tally up the gold in the possession of the federal government and the federal reserve system; b) to keep one-tenth of it for the federal government as its own; c) to distribute one-tenth of it to the states, pro rata, to keep as their own; and for the remainder d) retain an amount sufficient to redeem all outstanding federal reserve notes in gold; and e) distribute the balance to banking institutions so as to enable their existing demand deposits to be redeemed in gold.

The dollar amounts of outstanding federal reserve notes and demand deposits will be known with certainty, as will the quantity of gold available and in the possession of the government.  From there it is a simple matter of arithmetic to define the “dollar” in gold terms so that there will be enough gold to satisfy every dollar claim against it.  This is what section 7 of the amendment requires the Secretary of the Treasury to do.

Let me use round numbers just to illustrate the process.  For example, let’s say the outstanding federal reserve notes stand at $1 trillion and demand deposits at $6 trillion.  The Secretary determines that the government has 8800 tons of gold.  The federal government keeps 400 tons and distributes 400 tons to the states, pro rata.  For the remainder, the Secretary just divides the amount of gold on hand into the dollar amount he needs to cover FRN’s and demand deposits and defines the dollar accordingly.

On the numbers given you would have 8000 tons of gold which is 256,000,000 ounces.  This would be divided into $7 trillion and the dollar definition would be roughly $27,300 to an ounce of gold.

Obviously, if the amount of gold on hand were greater, or the number of “dollars” required were smaller, or both, the definition would be adjusted accordingly.

Now if the number in fact came out that high there would clearly be ramifications.  Some of them would be obvious, such as that people who are holding gold would effectively have very high amounts of dollars relative to anyone who was not holding gold.

I have no gold, by the way.  In case anyone was wondering.

Other ramifications would be less obvious.  One can surmise, for example, that people would find a lot more gold since it was so dearly priced in dollar terms.  As the amount of the gold supply increases, should the dollar definition be changed and the amount lowered?  Section 7 provides that this could only be done by constitutional amendment.  But at that point, such an amendment would directly reduce the number of dollars relative to gold holdings.  Presumably gold hoarders would oppose.  In any case, a super-majority and a major effort would be required to change the dollar-gold ratio, because that power will have been taken away from Congress by section 8.  Perhaps it would never happen.  Perhaps it doesn’t need to, and we just ride out a period of admittedly extreme distortion while nearly everyone goes panhandling for gold.

Perhaps – and I broach this subject very gingerly – that predictable practice could be discouraged somehow, such as by a temporary law forfeiting any new found gold to the federal government.  One goal of passing this amendment is to provide a quiescent interregnum, if you will, where it makes sense for people to keep doing what they have been doing.  Keep working at your job, keep living in your house, keep farming, keep delivering, keep shopping at the grocery store.  The objective is that after the initial shock all these things will resume at whatever level individual people are comfortable with and capable of.  If everyone left their jobs to panhandle for gold this wouldn’t happen.

The main thing is this:  however many “dollars” you had in the bank and in your wallet before the amendment was effective, you would have the same number of dollars afterward.  You would have no debt.  Anything you owned before – house, car, whatever – you would still own.

The federal government would retain 10% of the country’s money for its own purposes.  The states would collectively retain another 10%.  Where it goes from there I don’t know.  What I do know is that both state and federal governments would have a substantial reserve – about $700 billion for the feds – from which to keep  operating, money-wise.

It is essential to avoid two other problems:  first, the experience of Great Britain, which attempted to restore a gold standard after the first world war.  They made the pound too dear, which resulted in an abrupt shrinkage of the money supply, and that was a disaster.  And second, if the amount of dollars held in demand deposits and cash is $7 trillion, then you need to define the dollar so that you will have $7 trillion, so that people will at least know how many dollars they will have in what is otherwise a roiling sea of uncertainty. That, and nullifying people’s savings and cash – what most people think of as their “money” – would be, um, ill-advised.

It may be hard to get this at first, but it’s important to realize that the “dollar” can be defined in gold terms at will, at whatever level accomplishes what needs to be accomplished, but thereafter should be treated as pretty much sacrosanct, because a change is always going to benefit some and hurt others.

At one time, in pre-central bank days the dollar-gold ratio was $20 per ounce by law.  If I’m right, and the only way to fairly ease our way out of this mess is to redefine the dollar to $27,300 an ounce, that should tell you just how distorted our monetary system has become.  This amendment does not create the monetary distortion; it merely recognizes the distortion that has already taken place.  The difference is that as things stand now the distortion is a largely hidden mechanism to the benefit of the political and financial classes; this amendment brings the distortion out into the open where everyone can see it, and then begin to deal with things on a level playing field.

I am more than amenable to any suggestions or comments.

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6 Comments

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6 responses to “28th Amendment – Section 3 Explained

  1. jimmayjvf

    Atticus – I really appreciate the time you put in trying to fix a broken system.

    I’m afraid the gold of which you speak is probably in Santiago, Tel Aviv, Geneva….wherever they’re going when TSHTF.

    Please read http://csper.wordpress.com/2011/01/08/in-conclusion/

    We are in the ‘marginalized minority’ which is an understatement. By definition, minority could be up to as much as 49.999% of a demographic. We are more in the .00000005% range. In other words, the majority don’t give a shit about fixing anything. As long as their lives continue to go mostly undisturbed, they will believe that the US is the greatest nation ever created and we are well within our divine right to continue to stand astride the globe as Colossus and enforcer.

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    • I have no illusions about any of this. You’re probably right, but then again it’s usually some determined core group that changes things. Things will change regardless; the only question is how much human suffering it inflicts. I have children and that question bothers me so I try, but there are less selfish reasons, too. So many who also see the problems coming also seem to relish the results, anxious to see the overlords and the banksters and the profligate masses get what’s coming to them. But as the Clint Eastwood character says in “The Unforgiven”: We all got it coming.

      The world needs more love – real love – and less blaming and punishing. Perhaps that will always be the case.

      Thanks for the comment.

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  2. Frenchfrog

    I agree with both comments, the mass does not give a hoe about things as long as their little lives are not disturbed. But I really appreciate your work although I live in Europe and hope/wish more people will take the same initiative to try to fix things. The world needs to change in a good way, we are all a human family, enough of this competition nonsense, enough suffering, we are destroying the divine nature of mankind.

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  3. Jimbo

    Jim Sinclair may have used a similar model to find a fair price for gold in the 70s/80s bull market. But his reference point was the net external debt rather than the number of dollars and bank deposits (http://gold.approximity.com/gold_price_models_sinclair.html). I find Sinclair’s a more realistic model because gold is the ultimate extinguisher of debt and international debt is the ultimate debt (in as much as things get pretty nasty if it’s not extinguished to the creditor’s satisfaction). It’s not so important what currency gets used within a nation’s borders, but when settling international trade it’s only polite to use a currency which is largely independent of culture and government.

    That’s not to say that if gold were reinstated as the dollar’s backing that all the gold should be sent abroad to clear the national current account deficit. But I do find it objectionable to suppose that a good use for the gold would be to clear the debts of anyone with a mortgage, loan, credit card or any other obligation to a bank. If gold were remonetised based on the value of notes and coins then I expect its price would rise substantially (but not to as much as $27000), so anyone with a $1400 debt would suddenly have to provide significantly less than 1 oz (as I write, gold is about $1430) worth of goods and services to the economy in order to repay the debt, whilst the depositor on the other side of the equation would see a commensurate decrease in the buying power of their savings. Is this not a sufficient amount of messing with the system? I see no reason for the debtor’s debt to be wiped out and the saver’s deposit to fall from being worth 1 oz to about 1/20 oz. If revaluing based on the number of notes and coins takes gold to about $4200 (I don’ know the real figure but I guess it might be somewhere around there) then the depositor would still lose 66% but any debt which currently needs to be marked down as low as 33c on the dollar would (all things being equal and after the initial shock has passed) become fully valued at 100c on the dollar and the banking system would be solvent again.

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    • A saver saved “dollars” and wouldn’t lose any of them under what I have proposed. Granted, their dollars would buy a lot less gold, but they wouldn’t necessarily buy much less of anything else.

      Actually I’ve been anxiously waiting for someone to ask a question like this.

      You have to think it through. Where would we be post-jubilee? There would be roughly, say, $7 trillion dollars in existence but no claims against them or anyone or anything else. Now, lending might start right back up again but I suspect with all debts having just been canceled by law people will be a little circumspect about lending, so let’s leave that out of the equation for just a moment. Assume, in other words, that having just been burned no one will lend anything.

      Then the $7 trillion is all there is and all there’s going to be unless people start finding more gold, which I suspect they will. But in any case, you won’t be able to increase dollars at will, like the central bank can do now.

      This is an entirely different monetary world. People might be very reluctant to part with dollars if they have them because for the first time in a century it will not be easy for the government and banks to just make more of them out of nothing. The price of goods and services in dollar terms might be surprisingly low at first, even if the price of gold is fantastically high, because people will be cautious about spending.

      But then again we’re just spit-balling here, because there really is no precedent in modern times.

      One big problem I see is that there will be way too much reward attached to mining or holding gold. One can anticipate, therefore, that a lot more gold would be produced, at least at first, since it will be so lucrative. But since more gold will also mean more dollars there would be price inflation in other goods and services even as we are on a gold standard!

      But we must try to understand this much: as problems go this one is benign. The alternatives – millions of homeless kids just to mention one – are so much worse.

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      • Jimbo

        You’re defining savings as dollars and replacing it with gold. However, savings in banks are acually debt denominated in dollars. So it is not the case that “you won’t be able to increase dollars at will, like the central bank can do now” because they can increase dollar-denominated debt, which you call dollars, by lending to the government. Debt is measured in dollars but it is not dollars. If you make just the dollars redeemable in gold then the debt will take care of itself.

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