The Mystery of Banking

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top of that gold, we may note that the Fed’s total of gold certifi-
cates on December 31, 1981 was $11.15 billion. On this figure,
the Fed has pyramided liabilities (Federal Reserve notes plus
demand deposits at the Fed) of $162.74 billion, a pyramiding of
14.6:1 on top of gold. On top of 
that
, however, the banking sys-
tem had created a money supply totaling $444.8 billion of M-1
for that date, a pyramiding of 2.73:1 on top of the monetary base,
or, an ultimate pyramiding of 38.9:1 on top of the Fed’s stock of
gold. 
3. H
OW TO
R
ETURN TO
S
OUND
M
ONEY
Given this dismal monetary and banking situation, given a
39:1 pyramiding of checkable deposits and currency on top of
gold, given a Fed unchecked and out of control, given a world of
fiat moneys, how can we possibly return to a sound noninflation-
ary market money? The objectives, after the discussion in this
work, should be clear: (a) to return to a gold standard, a com-
modity standard unhampered by government intervention; (b) to
abolish the Federal Reserve System and return to a system of free
and competitive banking; (c) to separate the government from
money; and (d) 
either
to enforce 100 percent reserve banking on
the commercial banks, or at least to arrive at a system where any
bank, at the slightest hint of nonpayment of its demand liabilities,
is forced quickly into bankruptcy and liquidation. While the out-
lawing of fractional reserve as fraud would be preferable if it
could be enforced, the problems of enforcement, especially where
banks can continually innovate in forms of credit, make free
banking an attractive alternative. But how to achieve this system,
and as rapidly as humanly possible? 
First, a gold standard must be a true gold standard; that is, the
dollar must be redeemable on demand not only in gold bullion,
but also in full-bodied gold coin, the metal in which the dollar is
defined. There must be no provision for 
emergency
suspensions of
redeemability, for in that case everyone will know that the gold
standard is phony, and that the Federal government and its central
Conclusion
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bank remain in charge. The currency will then still be a fiat paper
currency with a gold veneer. 
But the crucial question remains: For there to be a gold stan-
dard the dollar must be defined as a unit of weight of gold, and
what
definition shall be chosen? Or, to put it in the more popu-
lar but erroneous form, at what 
price
should gold be fixed in
terms of dollars? The old definition of the dollar as 1/35 gold
ounce is outdated and irrelevant to the current world; it has been
violated too many times by government to be taken seriously
now. Ludwig von Mises proposed, in the final edition of his 
The-
ory of Money and Credit
, that the current 
market price
be taken
as the definition of gold weight. But this suggestion violates the
spirit of his own analysis, which demonstrates that gold and the
dollar are not truly separate commodities with a 
price
in terms of
the other, but rather simple definitions of unit of weight. But 
any
initial
definition is arbitrary, and we should therefore return to
gold at the most conveniently defined weight. 
After
a definition is
chosen, however, it should be eternally fixed, and continue per-
manently in the same way as the defined unit of the meter, the
gram, or the pound. 
Since we must adopt