Although the idea of returning to a gold standard has
received considerable attention in recent years, the general focus has
been to return to some sort of government managed standard. For
instance, there has been a great deal of talk about reinstating a
variant of the Bretton Woods gold standard-which proved to be a terrible
failure. (For details, see Henry Hazlitt's latest book, From Bretton
Woods to World Inflation, reviewed by Bettina Bien Greaves in the June
1984 issue of The Freeman.)
The difficulty with any state-overseen approach to
revitalizing and protecting the monetary system is that it misses the
essential point about sound money. Sound money in the long run requires
separation of money from state.
A state-run monetary system is self-destructing; it
leads to its own eventual erosion as politicians gradually give in to
temptations to inflate. Over and over, history has shown the truth of
this proposition. Despite any heartfelt promises they may make, there is
no rational basis for expecting future politicians to behave
substantially better than their predecessors. Under any command-money
system, politicians solemnly promise to resist the seductive power of
inflation. But government control of money supersedes their resistance;
government controlled money is a powerful attractive nuisance which
corrupts even the noblest of intentions.
Therefore, if one wishes to discuss the best way to
bring back sound money, he must seriously consider money privatization.
As the idea of money privatization is not one generally
familiar to the lay reader, let us deal with the issue by answering some
common objections.
1. What does it really mean to privatize money?
Privatized money is minted, issued and backed by the private sector -
for instance, banks or mining companies - with government playing no
major role in the process. About all government does is what it does
with weights and measures: sets the basic conversion rate for the
dollar. In fact, a true gold-backed dollar is precisely a question of a
measured weight: a dollar would equal a specified weight of gold.
Privatized money takes the inflation machine away from
the government - by doing away with the machine entirely. It is well
known that inflation is economically destructive. But inflation is in
the final analysis a government caused problem arising from the
government's monopoly over money. If you take away the monopoly, you
take away the ability of politicians to print too much currency -
currency which they use to serve a long list of "justifiable" purposes
of wealth redistribution.
2. But wouldn't private money tend to be unstable,
subject to market whims? No. First, remember that the government
would still be responsible for seeing that a dollar- - any dollar,
issued by anyone - would represent a specific weight of gold. To say
that private money would be unstable if private parties issued it is
equivalent to saying that yardsticks would be unstable unless no one but
the government manufactured them. Clearly, that is nonsense. Private
companies manufacture perfectly accurate, reliable yardsticks; a yard is
the same whether the yardstick is made by the government or a hundred
private companies- because all use the same standard.
There is another relevant point here: a different way
of stating the elimination of the inflation of money is that it is
precisely a stabilization of money. Money privatization has an inherent
advantage over government money.
Economically, a free market is always more stable,
healthier, than a controlled market.
A free monetary system, one of privatized money,
separates money-valuation from government and thus helps separate
wealth-preservation from state authority and hence from state meddling.
This means that savings and investment can be undertaken with more
confidence. Businesses can better plan and are less afraid of what a
change of administrations or Federal Reserve governors might bring about
every few years. In short, people across the nation, whatever their
economic endeavors, are able to focus on market forces and not
government force as far as money values go.
(It is quite likely that under a private money system,
there would be no need whatsoever for a Federal Reserve. Money
measurement standards could be maintained by the Bureau of Weights and
Measures.)
3. Well, how would a system of private money work in
actual practice? The use of money itself never changes in basic
form. Money is simply a medium of exchange, used as a store of value.
However, because private money is out of the major turmoil of the
political winds, it works much better than government--monopolized, fiat
money-just as any private market tends to work better than a
government-run market.
Not only do issuers of private currencies use the
pre-set gold-weighted measure for their dollars, the market itself
rapidly assures that there is no fudging, no unrealistic money
expansion, involved. The private market sees that firms do not issue
more dollars than they can reasonably back with gold. Better-valued
currencies achieve greater acceptance and circulation, eventually
dominating the markets.
4. But if all dollars were convertible into a
specific weight of gold, why would the issue of competition among
currencies even arise? For the same reasons that some people prefer
to buy company A's yardsticks than company B's. People ask which dollar
is "better made," esthetically and structurally. Also the stockholders
of a money-issuing firm have a powerful interest in monitoring the
solvency and wisdom of the firm's policies.
Beyond this, users of money seldom all ask for their
gold at once. Thus, a company may issue dollars in excess of its actual
gold holdings, in anticipation of being able to meet conversion
demands-as long as the firm is prudently managed.
If the market feels the company is not well--managed,
or that the company is issuing more currency than it can reasonably be
expected to convert to gold, that currency quickly falls out of favor.
5. But this sounds a little uncertain. How would the
market be able to keep up on the many competing currencies - -and how
would money users gain protection from potentially imprudent
money-issuers? To answer the last part of the question first, above
and beyond the protection afforded by stockholders' monitoring of
company prudence, there is no reason why currencies cannot be insured.
Once you bring insurance companies into the picture, they immediately
and necessarily seek to protect their investment by themselves
monitoring the money-firms' health and wisdom.
Further, rating services can play a role. There are
already companies which rate various monetary instruments, such as
Moody's or Standard and Poors (in bond markets, for instance). Rating
agencies are common in the United States in many fields - such as
Consumer Reports, which rates an incredibly wide variety of private
consumer goods, and Underwriters Labs, which rates electrical products.
There are no major difficulties for the private market
to keep tabs on the solvency of private currencies. With modern
computers, the equivalent task is done minute-by-minute on millions of
shares of stocks or on competing international government-run
currencies. No major innovations are needed in order to keep tabs on
private U.S. currencies.
6. But wouldn't privatizing money be a massive,
almost impossibly complicated task? Not really, for the private
market does most of the work. While it is better to move directly from a
fiat system to private money, even if we move from a government gold
standard - assuming for the sake of argument that we get one -
-implementing a private monetary system is no more difficult than it was
for private companies to take over the parcel post market, which they
now largely run.
Money privatization requires no elaborate groundwork
and virtually no government oversight or expenditures. All that is
needed is a simple piece of legislation ending the government monopoly
on money. The idea is to open the U.S. currency system to competition -
without necessarily wiping out the government-backed dollar right away.
When parcel post was opened to private competition, it
was not necessary to wring our national hands over which specific
companies would accept the challenge of parcel post delivery. This was
not something one could rationally foresee. The markets decided.
Companies that wanted to compete with the Postal Service did it. Over
time, the more efficient private parcel post companies - such as United
Parcel, Federal Express, and Purolator - -came to dominate the market.
But people still could use the Postal Service if they wished.
In short, no bureaucrat can or should try to foretell
who or what private individuals or firms will dominate the production of
private currencies. The market will be the best arbiter. The gradualism
of this type of transition is orderly and painless for the
nation-except, of course, for those politicians used to paying for their
free lunches with fiat money!
7. But how could the U.S. government pay for its
services without controlling the currency? Taxation and currencies
are not necessarily tied to one another; this merely indicates how
closely most people have come to associate a fiat system with
taxation-probably because they subconsciously realize, or have heard,
that fiat money inflation is "back door" taxation.
Under private money, inflation is for all intents and
purposes abolished-but that in no way affects taxation for essential
government services, such as national defense.
Instead of confiscating taxes denominated in U.S.
Federal Reserve notes alone, the government takes money denominated in
weights of gold. At tax time, you do exactly what you do now: write a
check to Uncle Sam (but very likely drawn on a private-money account).
If Uncle Sam has a question about the check, or if the check bounces,
well, laws against bad checks already exist.
Nor are wage withholdings a problem. Withholdings are
merely a percentage of earnings. The percentage and withholding payments
are unaffected by whether the wealth of earnings is measured in
government or private dollars, because, again, all dollars are by law
claims for a specific weight of gold.
8. What about the international effects on the U.S.
dollar? Wouldn't money privatization severely shock the markets, and
perhaps weaken the dollar? We must remember two things: This program
would be gradually phased in and would necessarily result in a type of
gold standard.
As the program would not, could not, be instituted
overnight, there would be ample time for international markets to adjust
to the situation.
Gradual, prudent institution of a system does not
psychologically lend itself to panic-but rather to calm. It's not when
governments move toward sounder money that markets are shocked, it's
when they move away from sounder money-such as Nixon's closing of the
(limited) gold window in 1971. It is not less government command of
money that is feared, but more.
Because the move to private money would be perceived as
a move to untamperable money, the rest of the world would quickly
perceive the birth of modern dollars of unprecedented strength. The
world would understand that dealing with private, gold-backed money
would be no more difficult than dealing with more than one type of stock
or bond, with more than one parcel post company, with more than one
maker of yardsticks.
Returning to a gold standard is the American way. As
Bernard H. Siegan wrote, "The evidence is most convincing that the
delegates to the Constitutional Convention of 1787 intended to devise a
currency based on gold and silver. Their problem was draftsmanship; they
did not write this purpose carefully enough into the Constitution to
prevent the Supreme Court from applying an entirely different
interpretation." (Wall Street Journal, June 18, 1984.)
Beyond the practical considera-tions of private money,
there is the moral question: Is it right for government to hold total
control over the medium of exchange? The answer should be clear: It is
no more morally proper for government to tyrannize the making of money
than it is for government to tyrannize the economy as a whole. Such
control is pure violation of individual rights, a substitution of
command for consent in a nation's medium of exchange.
Is it not time for us to live up to the intended
rationality and heritage of the Founders? Returning to a gold standard
is the American way. Returning to private money is the ultimate form of
a gold standard for a free people.
At the time of the original publication, Mr. Ross was
an Oregon commentator and writer especially conceded with new
developments in human freedom.
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
January 1985, Vol. 35, No. 1.
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