Only A Gold
Dollar Will End Deficits*
(February 17, 1997)
The United States government has had a budget deficit in almost every year since 1933.
Repeated pledges to end the deficits have come to nothing. The latest pledge, President
Clinton's plan to eliminate the deficit by the year 2002, is only one more such empty
promise. Seventy-five percent of the spending reductions he projects are to take place in
the last two years of his plan, which happen to be years that come after he will have
completed his second term and have left office.
In desperation, because of this dismal record of failure, opponents of budget deficits
have come to the conclusion that the only hope of success in eliminating them is the
enactment of a constitutional amendment that will mandate the achievement of a
The goal of a balanced budget is certainly an extremely worthy one. But the enactment
of a constitutional amendment is simply not the way to accomplish this objective. It is
not, because it will almost certainly contain major loopholes, as a condition of its being
enacted in the first place. If it is enacted without major loopholes, it is almost certain
very soon to be ignored, and thereby help to further undermine the authority of the
Constitution. What is even worse is what would have to be done to prevent such an
amendment from being ignored.
And that is, the amendment would have to provide the Supreme Court with some kind of
enforcement mechanism, so that after perhaps a few reminders to Congress that it was in
violation of the Constitution, the Court would be in a position to compel Congress
to comply. In other words, to make it enforceable, the amendment would have to provide for
the Supreme Court to be able to step in at some point and impose a balanced budget.
The Court would have to be given the authority to take control of the government's
revenues and expenditures and see to it that they were brought into balance.
What this would mean is the destruction of our whole constitutional system of division
of powers among three independent and equal branches of government, namely, the executive,
legislative, and judicial branches. The Supreme Court would have to be enabled to usurp
both the constitutional authority of Congress and important executive powers as well. It
would have to be transformed into a virtual judicial dictatorship. In other words, to be
effective, a constitutional amendment for balancing the budget would have to serve to
nullify most of the rest of the Constitution.
I don't think that any American wants to balance the budget by means of destroying the
American system of government. Thus, the balanced-budget amendment must be given up as
certain to prove highly ineffectual. If it were not to be ineffectual, it would constitute
a revolutionary danger.
Fortunately, there is a way to achieve balanced budgets, one which would almost
certainly be highly effective and, at the same time, would constitute absolutely no threat
to our constitutional system of government, but, quite the contrary, would greatly
The nature of this method is indicated by the very fact that deficits have been a
chronic problem in this country only since 1933. Before that time, the government's budget
in years of peace was in balance almost as often as since that time it has been in
deficit. Indeed, in that era, the budget deficits that were incurred in wartime were
followed by actual budget surpluses in the postwar years, in order to reduce the
size of the outstanding national debt.
What has been different in the years since 1933 compared with the years before 1933? Is
it simply a matter of choice on the part of the President and Congress? Or is it a matter
of the presence or absence of some external circumstance that powerfully affects their
choice concerning whether or not to balance the budget?
The answer is that it is a matter of the presence or absence of gold dollars.
Prior to 1933, our monetary system was based on gold dollars. Since 1933, it has been
based on irredeemable paper dollars. Few differences could be more profound.
Gold dollars are dollars that the government is simply physically incapable of making.
They are pieces of actual gold. In essence, they have to be laboriously dug out of the
ground. Irredeemable paper dollars in contrast, can be manufactured by the government,
virtually without cost and without limit.
When gold dollars prevail, the government is compelled to obtain all the money it
spends from the citizens. It has absolutely no money of its own. Its ability to spend is
thus absolutely limited by its ability to obtain money from the people.
True, the government could borrow for a time even under these circumstances. But
whatever it borrows comes from the people, and every dollar that it is obliged to repay
must also come from the people--together with interest. And this is the rub in borrowing
gold dollars. To the extent the government borrows and runs up debt, it has to obtain more
and more money from the people--the interest and the principal payments added to the funds
required for its regular operations. This has limits. To press the limits means to
confront the day when the government simply runs out of money. To go down the path
of borrowing at all, means that it becomes financially more and more difficult to run the
Under a system of gold dollars, the President and the Congress know all this very well.
They live in the same financial world as the citizens--a world of limited financial
means. They are compelled to act responsibly because there are serious negative
consequences for them of not acting responsibly, consequences which they easily recognize.
Thus, they avoid deficits for the same reason that every responsible private citizen
avoids deficits and for the same reason that they avoid any other kind of obviously
self-destructive behavior, such as jumping from high places or eating spoiled food. No
constitutional provision is required: perception of the facts of reality is enough.
But under a system of irredeemable paper money, such as we have had since 1933,
everything is turned upside down. Now the government has its own money--money that it
itself manufactures. It is no longer financially dependent on the people. If the tax
revenues obtained from the people are not enough, the government can supply the necessary
funds from its printing presses--or by the stroke of a pen or the use of a computer
keyboard. (With these last, it can have as many new dollars credited to its checking
account as it wishes.)
Government borrowing takes on a very different character. A substantial part of
government borrowing even ceases to be actual borrowing. It is money creation that
is called borrowing--i.e., the Treasury sells securities in one part of the market and the
Federal Reserve System (a government agency) buys government securities in another part of
the market, paying for them with irredeemable paper dollars that it creates virtually out
of thin air. Even the borrowing from the citizens that goes on undergoes a radical change
in its significance. Because it can manufacture its own money, the government need no
longer be concerned that it will lack the means of paying its debts. If need be, it can
simply manufacture the necessary additional funds.
But the most profound change that results is the total reversal of the financial
relationship between the citizens and the government. When the government has the power to
manufacture money, not only is it no longer financially dependent on the citizens, but the
citizens become financially dependent on it. The government becomes a source of money to
them. Its financial role is switched from that of a dependent, who must obtain its funds
from the people, to that of a financial provider, from whom the people obtain funds. It is
because of this, perhaps more than anything else, that the people of the United States
have come to look to the government as a source of wondrous free benefits.
To make fully real the implications of the government's financial position under
today's system of irredeemable paper money, the reader should imagine that he himself had
a license to create money--accompanied by a printing press in his basement or garage that
could turn out $100 bills, say. In such circumstances, would anyone feel a need to balance
his personal budget? Suppose he spent a few thousand, or a few hundred thousand, dollars
more than he earned in a year? Did he have to borrow that money? If he did borrow it,
would he have any difficulty in repaying it? Why should he ever stop spending more than he
earns? If once in a while he feels bad about his behavior and now and then resolves to
change his ways, can he really be expected to change? How will his friends and relatives,
and the merchants he deals with, perceive him? Won't they view him as a wonderful sort of
Santa Claus and won't they be constantly pressuring him to spend? After all, he can obtain
the money so easily and effortlessly.
Essentially these have been the financial circumstances of the United States government
since 1933. The government will not abandon its policy of deficits until these
circumstances are changed. This means, it will not abandon its policy of deficits, until
it loses the power to manufacture money, which in turn means, until the United States
dollar is once again gold.
Reinstituting a gold dollar will certainly not be quick or easy. But there is one step
that could be enacted that would also be immediately and directly helpful in ending budget
deficits. This is for a simple majority in both houses of Congress to pass a law
prohibiting the Federal Reserve System from increasing its holdings of U.S. Treasury
securities beyond their level existing at some definite date, such as the date of the
law's enactment. Thereafter, apart from replacing expiring government securities with
equivalent new government securities, the Federal Reserve's open market operations would
take place exclusively in the gold and silver bullion markets.
One major effect of this would be that the increase in the supply of Federal Reserve
notes and deposits would then occur in conjunction with the System's acquisition of new
and additional precious metal reserves. This would substantially raise the price of gold
and greatly increase its monetary role, both of which are necessary preliminary steps
toward the reinstitution of a gold dollar. At the same time, the Federal Reserve System
would cease to serve as a money machine for the United States Treasury. As a result,
further additions to the national debt beyond modest proportions would have an immediate
and significant depressing effect on the market for government securities. This would
operate to limit such additions, i.e., to limit, if not end, deficits.
Such a law would be far more effective in eliminating deficits than would a
constitutional amendment explicitly forbidding them, and would certainly be far less
difficult to enact. Naturally, for the time being, it could allow for exceptions to the
prohibition on the Federal Reserve's purchase of additional government securities, such as
the outbreak of a war declared by Congress, or the purchase of Treasury securities issued
in exchange for the assets of banks that had failed or were in danger of failing. (This
last provision would serve to prevent a deflation of the existing money supply, which
might otherwise be possible.)1
Enacting such a measure, and going beyond it, to a new gold dollar, to balanced
budgets, and to a government that is once again the dependent servant of the people rather
than their increasingly powerful master, will be a difficult struggle. Along the way, all
of the enormous errors and misconceptions surrounding the gold standard will have to be
addressed and overcome, such as the claims that it is deflationary, causes depressions and
unemployment, and inhibits economic progress. But this can certainly be done if the
friends of sound money, limited government, and the sovereignty of the individual citizen
take the trouble to learn sound economic theory.2
1. Allowing for these exceptions is not to advocate either
wartime inflation or government subsidies to banks. Both of these powers presently exist
and will go on existing for some time. In the interest of obtaining important movement in
the direction of gold and consequent major limitation of the powers of government, my
proposal would simply leave these particular powers alone for the time being. It thus
represents what I have described elsewhere as an "appropriate compromise."
See George Reisman, Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson
Books, 1996), p. 974. Moreover, the situation of fractional reserve checking deposits and
their potential for deflation is one that has been created by generations of government
intervention in money and banking. Avoiding such deflation in conjunction with movement
toward gold is consistent with the process of the government's making an orderly retreat
from this intervention. On this subject, see ibid., pp. 959-963.
2. I deal with the errors and misconceptions concerning the gold
standard in ibid., pp. 951-963. For an example, use the link immediately below.