The law can do all these things. But it would have to be the most fundamental and unarguable kind of law: in the US, for example, it would mean a constitutional amendment. But in any case, these things can be done only by the most undisputed authority, whether king or pope or constitution.
1. Universal debt jubilee: This remains the centerpiece of the proposal. Don’t let the word “jubilee” fool you. It’s not all partying and celebration. The vast majority of people will probably gain, or at least gain as much as they lose if a jubilee occurs. But there are some people who would not gain while at the same time losing a great deal, and so many things that people are used to relying upon would disappear: pensions, social security, bonds, t-bills, the entire derivative architecture, however many trillions or even quadrillions it “nominally” is.
The only exceptions to the debt cancellation are bank deposits and government currency, what most people think of as being “money” proper. Conveniently, the “dollar” (or any other nominal unit of account in any other country with a central bank) amounts of both can be determined with near absolute certainty.
Now. Why does a debt jubilee need to be done this way?
Briefly, though, we have to exempt the currency and bank deposits because otherwise they would be cancelled too, and there would then be no existing money, since money that actually circulates is pretty much always debt, paper or (in more modern times) electronic.
You see, it is misleading when people derisively refer to “paper” money or even “debt” money. Neither of those is the problem in and of itself. The problem is that the debt or paper or computer digit – that is, no matter what form it takes – is irredeemable. That can never be the case, not even for the government.
Which brings us to the second component of saving the world:
2. Money will henceforth be redeemable in gold. As I indicated before, in order to accomplish this the dollar price of gold will have to be extremely high. Let’s just call it $30,000 per ounce for now. The reason for this is that there is only so much gold the country has available for this purpose – something like 8000 tons or 256 million ounces – and that would have to cover all the outstanding currency and bank deposits, which amount to something like $7 trillion.
That figure ($30,000/oz), that is, will permit all currency and bank deposits to be backed by – that is redeemable in – gold.
But this is where my thinking on the matter has changed considerably. Rather than a gold “standard” that is inflexible and fixed by law, I think it would be better for the present and the foreseeable future to have the central bank empowered to change the dollar value of gold at will, subject to one restriction: the central bank can redefine the dollar in gold quantity terms, but can never exceed the initial dollar price. In other words, the $30,000 figure will constitute a cap on the dollar price of gold. From there it could be reduced, then increased again, practically ad infinitum, all the way down to very low dollar amounts, but could never exceed $30,000.
The government and the populace have become accustomed to the government having the power to control the money supply. Currently this is done indirectly through setting interest rates for borrowing, setting reserve requirements for banks, and (primarily) buying government securities through “open market” operations. The idea is to dispense with all that and just change the money supply directly by changing the value of gold in dollar terms. Lowering the dollar price of gold will have the effect of reducing the money supply by reducing the number of dollars; increasing the dollar price of gold – though never beyond the cap – will have the effect of increasing the money supply. Because this would be done openly and publicly, and because it is a simple direct ratio, everyone will know just what has been done. There will be no “lag” between the implementation of monetary “policy” and its effects on the money supply. There will be less opportunity for profiting through manipulation based on changing monetary policy all by itself.
Now, thinking this through a little. Which is important.
The first thing is that with gold initially at a capped price of $30,000 per ounce, the profit to be had by mining or otherwise producing gold would be irresistible. The entire money stock of the country would be $7 trillion, in a situation where we are used to describing annual GDP alone as more than double that figure, and where estimates of the current available liquid money supply are somewhere in the vicinity of $50+ trillion.
Put another way, the jubilee will annihilate in one fell swoop something over 80% of the liquid money supply.
With the liquid money supply so greatly reduced, and with no way to expand the money supply other than by producing more gold, wages and prices will collapse in dollar terms. A complete readjustment will occur to the downside: a loaf of bread, for example, will probably go back to being pennies. Dollars will become very “dear” – but you’ll be able to get 30,000 of them for a single ounce of gold. If free market thinking means anything, there will be a mad scramble into the gold producing business. Indeed, the very point is that since the effect of the jubilee will be to have annihilated so much of the money supply by annihilating so much of the debt that constitutes it, this will be a Good Thing, as the need for liquidity will be acute.
But note two things: first, subject to the $30,000/oz cap, the central bank will still control the money supply, because even as more gold is produced they are free to reduce the dollar price of it. No doubt this would be undesirable when what is most urgently required is an increase in the dollar denominated money supply that producing more gold can provide at a constant dollar value, but the option is there and remains on the table even as more gold – and thus more “dollars” are produced.
Second – and this should be entirely beneficial in a “real economy” way – while it would become highly profitable to produce gold, it would at the same time become, by definition, unprofitable to buy it or hold it, since the dollar price will have been not only set, but capped. In other words, you could never make money in dollar terms by buying gold at the capped price, because it can only go down from there; and if you were holding gold, you could stay even but never make a profit in dollar terms, since the dollar price could only go down, never up.
Indeed, there would only be one thing to do with gold at that point – sell it to the government in exchange for the highest number of dollars it will ever bring, which the government can freely issue to you so long as it receives gold to back the notes it thereby hands out. Other trading in gold would effectively disappear, except in final payment situations where it would simply be functioning as a proxy for dollars anyway. At least, until the central bank had acted at some point to reduce the dollar value of gold and had the potential to increase it again.
Now a point or two overall about this second step.
What I have outlined here is a break from every school of economic thought, whether Keynesian or Austrian or Chartalist or whatever, but it is most closely based upon the Chartalists’ understanding of the nature of money and the government’s necessary role in any rational and functioning monetary system, a role that is apparently rejected by most Austrians but then again utterly perverted by Keynesians.
The difference between me and the Chartalists is that they think the government can and should ultimately dispense with redeemability, and I think this is a grave error. The government, in my view, can’t get the idea that they are not bound by the laws of nature and elementary logic, and this is the evil that monetary irredeemability fosters. Formal, de jure irredeemability means not just a broken promise, but an illusory one. A deception. A promise to pay which is not only never kept, but is never even intended to be kept.
No one can be granted such a power. It is Tolkein’s One Ring.
In and of itself irredeemability is bad enough, but the idea also replicates throughout government and then society itself like a virulent pestilence, and before you know it even courts of law do not believe they are bound by any such thing as law, that indeed there are no such things as law or even “facts”, other than what someone wills them to be, and that someone is always the more powerful player, the one who possesses the ring and believes in it.
Contending with this viewpoint is the central problem of lawyering. Arguably, it is the central social problem we face. Indeed, arguably it is the central problem of our own souls.
But let’s not go there. Some things just have to be left to fend for themselves.
Now, there are a few incidental things, not as essential as the first two (the jubilee and dollar to gold redeemability), but designed to ease the transition to what will be a completely different economic reality.