Why Congress Should Restore the Monetary Veto

American democracy prides itself on being “of the people, by the people, and for the people.” But the people lack control over a key part of their daily lives: the money supply. Its expansion and contraction affect the value of every paycheck, every dollar of savings, and the price of virtually everything that can be purchased. Americans once had the ability to redeem their dollars for gold at a fixed rate. Congress should restore that power. Doing so would give every American a direct check on monetary expansion and force Washington to reckon with the consequences of fiscal excess.

The idea is actually simpler than it sounds. If Americans believed Washington was undermining the value of their money, they could exchange dollars for a legally fixed quantity of gold. As those redemptions drew down the nation’s gold reserves, monetary authorities would face pressure to contract rather than continue expanding the money supply. In effect, every dollar holder would possess a monetary veto.

For 55 years, America has relied upon a small group of experts to manage our money supply without the external discipline imposed by gold convertibility. The impact on fiscal policy has been disastrous and stands in stark contrast to much of the historical record before 1971. For much of the 182 years after the first federal budget in 1789, the nation treated balanced budgets—and, during prosperous peacetime years, surpluses—as the fiscal norm. Even accounting for spending spikes during crises like the Civil War, America’s average budget deficit remained modest. Our democracy survived existential threats with reasonable fiscal discipline.

The developed world remained fiscally disciplined even after the enormous strain of WWII, crawling out from under mammoth wartime debts within a few decades. By 1971, the 23 countries in the OECD had an average debt-to-GDP ratio of just 35%. This discipline was encouraged in part by the design of Bretton Woods, which created a self-correcting feedback loop. The system of fixed exchange rates subjected countries, including America, to external discipline. Foreign monetary authorities could redeem dollars for gold if they lost confidence in American monetary policy. France famously exercised that power in the 1960s after Charles de Gaulle rebuked the U.S. for glutting the globe with dollars. The French government redeemed hundreds of millions of dollars of its foreign exchange reserves for gold, drawing down America’s stock.

Yet foreign governments were not the first to possess such power. A century ago, ordinary Americans could redeem dollars for gold at $20.67 per ounce. Prior to 1933, the Federal Reserve was required to maintain gold reserves equal to at least 40% of the value of the currency it issued. Gold redemption therefore placed direct pressure on the monetary system and constrained its expansion. Washington, in other words, could not expand money without facing potential consequences from the people holding it. Americans did not need to understand the arcane financial terminology that bedevils monetary policy today. They could simply convert their dollars into gold.

That right disappeared in 1933 under President Franklin Roosevelt and was solidified into law the following year. Foreign monetary authorities could still redeem dollars at the new rate of $35 per ounce under the postwar monetary system. That lasted until 1971, when President Richard Nixon ended dollar-gold convertibility, beginning the collapse of Bretton Woods. The end of gold convertibility did not by itself cause the modern era of chronic deficits. But it removed one external constraint governments faced when financing them. The OECD countries’ debt-to-GDP ratio has risen dramatically since the end of Bretton Woods.

Congress should use its authority clearly granted in Article 1, Section 8 of the Constitution to establish a statutory right of dollar-gold redemption and determine the conversion rate, appropriate gold backing, eligibility for redemption and responsibilities of the Treasury and Federal Reserve. Those are difficult questions of design, but they are precisely the questions Congress should begin examining.

Congress could start with hearings on convertibility and require the Treasury and Federal Reserve to report on possible redemption mechanisms, reserve requirements, conversion rates and transition periods. The objective would be to give millions of Americans an exit right. If citizens lose confidence in the stewardship of their currency, they could exchange it for an asset Washington cannot create at will.

Such a system would carry real costs. Gold redemption could contract the money supply and leave the Federal Reserve with little freedom to respond during financial crises. Indeed, the constraint of gold redemptions can certainly intensify economic contractions. But the alternative of monetary discretion carries the greater cost: fiscal profligacy and ultimately insolvency. Americans should not be expected to entrust something as fundamental as the value of their money exclusively to a small circle of experts. They deserve a direct check—and Congress should give it back to them.