At one time the case for the gold standard was
practically self-evident - undisputed by most economists and appreciated
by both laymen and professionals. Today, however, the case for gold is
buried under decades of propaganda, misconceptions, and myths. It has
been only recently that the case for the gold standard has begun to
surface from under the Policy Makers' anti-gold debris. Consequently,
gold is once again gaining the attention and interest it so rightly
deserves.
Today's free-market advocates of the gold standard
differ from past advocates. For example, free-market advocates do not
exclude silver or other commodities from their concept of a gold
standard. Indeed, they do not even insist that gold must be money. The
case for the gold standard is actually the case for market-originated
commodity money, and the case against government-regulated flat money.
It is simply an extension of the case for free markets which respect the
rights of man, and the case against controlled markets which violate the
rights of man.
To be concerned with the gold standard is to be
concerned with a free economy, regulated by the values and choices of
men, rather than a controlled economy in which the values and choices of
men are regulated by government. This concern for man's freedom to
express values and exercise choices is derived from the deeper concern
for justice and for man's right to property. The man concerned with
justice does not aim to force others to use gold as money. Rather, he
insists that government has no right to prevent him and other men from
using gold as money if they choose. The man concerned with property
rights does not urge government to legislate pro-gold policies in order
to arbitrarily increase the value, popularity, or status of gold.
Rather, he insists that government stop inflating, since this
arbitrarily decreases the value of his money claims to property.
Antagonists of the gold standard claim that it is
impractical. But the gold standard is, in fact, the most practical
monetary system yet conceived by man. However, the gold standard's
primary virtue does not lie in its practicality: it lies in its
morality. Those concerned about such things as freedom, justice, the
preservation of property rights and purchasing power, would do well to
consider the moral case for the gold standard, for, once understood, it
is the individual's best defense against government confiscation of
property through inflation.
The fact that prevents government from indulging in
inflationary schemes under the gold standard can be best summed up in a
phrase: governments can't print gold. But to understand the implications
of this statement, and the virtues of having gold as money, it is first
necessary to understand what money is - and what money is not. What
Money Is ...
A man on a desert island has no need for money. He
produces the goods he needs to survive, and consumes all he produces.
Similarly, a primitive society has no need for money. The kinds of goods
produced are extremely limited, and if individuals desire to exchange
their goods with one another, they can do so through direct exchange,
i.e., barter. But under a division of labor economy where men specialize
in production and where there is a variety of goods produced, desired,
and traded, there is a very definite need for money. For how else could
Mr. Jones in Florida sell his oranges to men throughout the world and
then buy Mr. Smith's best-selling novel, unless there existed some
medium of exchange acceptable to all parties.
Money originates from men's desire for indirect
exchange. And more, since indirect exchange usually occurs between
strangers like Smith and Jones, money must be an object which is
mutually valued. Thus, money is that commodity which serves as a medium
of exchange by virtue of its high degree of marketability.
The task of discovering which commodity will be most
valued by and most acceptable to men as a medium of exchange can only be
accomplished through a market process; for it is only through the market
that men's values and choices are properly reflected. The verdict of the
market has reflected three general requirements for any lasting medium
of exchange: that money should be generally acceptable to most men; that
it should be practical to use; and that it should be relatively stable
in value. If these requirements are satisfied, the result is a money of
trust.
Trust is the lifeblood of money, and money is the
lifeblood of any economy based on the indirect exchange of goods and
services. A money of trust serves to facilitate exchange among men, and
in doing so, breeds a healthy and growing economy. But if men should
ever begin to mistrust money, the market will immediately reflect this
loss of confidence. Then money will begin to lose stability, lose its
acceptability, and will soon become impractical to use in exchange.
Mistrusted money is the antithesis of the lifeblood of
an economy. It's a kind of "bad blood" circulating between men
throughout the economy, breeding confusion and suspicion. The fact that
men's mistrust of money will result in monetary crises and collapse,
underscores the need for a money that never contradicts men's values, a
money that at all times properly reflects men's values, i.e., a money
based on, and constantly exposed to, individual choices - which means a
free-market-originated commodity money.
Why Leave to Market
When one considers the complex process that must take
place before men can discover which commodity money constantly reflects
their changing values and choices, one can understand why it is only
through a free market process that money can properly evolve as a medium
of trust. And one may also understand why no man, group of men, or
government, has the right to dictate what money or its value should be.
This decision must be a market decision if it is to be a lasting
decision.
Throughout history, almost every conceivable commodity
has been used as a medium of exchange. Through the years of economic
development and through trial and error, those commodities least suited
to serve as money were eliminated, while those commodities best suited
survived as forms of money. After centuries of exchange between men, the
commodity that emerged as the most valued, the most practical, the most
trusted money among men, was gold.
What gives rise to men's trust in gold? First, men
value gold as money because men value gold as a commodity. Gold at any
time can be converted to its commodity role if its monetary role should
ever be questioned. Second, since gold is relatively scarce and precious
to men, it has stability of value. Therefore, it can be trusted to serve
as a relatively stable medium of exchange. And since most individuals
desire to save part of what they produce in some monetary form, gold's
stability of value provides them with a reliable monetary method of
accumulating and storing wealth.
What else gives rise to men's trust in gold? Gold is
easily marketable, which means it is acceptable to men in exchanges of
all kinds. Gold is also trusted because it is practical: it's durable,
so it won't perish or rot; it's small in bulk, so it is easily
transportable. It's a metal, which means it can be used in different
forms, such as bars or coins; and, since gold does not evaporate, it
will lose neither quantity nor quality if or when men should decide to
melt their coins into bullion or melt their bullion for use in
production.
There is one more thing that gives rise to men's trust
in gold: the knowledge that gold cannot be counterfeited; the conviction
that the money supply cannot be artificially and arbitrarily increased
by those who would aim to confiscate wealth rather than produce it; the
knowledge that money (the claim to production and effort) will itself
represent production and effort. In short, men's trust in gold carries
the conviction that the monetary system freely adopted by men is based,
not on whim and decree, but on integrity and productivity.
These are some of the reasons why men have trusted gold
as a medium of exchange through history-and why today's Policy Makers
damn its existence. ... And What Money Is Not
Money is not paper. Paper notes evolve from the desire
for a convenient substitute for commodity money. The paper notes that
circulate as money today were once money substitutes (receipts for
gold), defined by and convertible into a specific amount of gold. Paper
notes did not and cannot become a money of trust without first
representing a commodity of trust.
Consider the reaction of free men - men who,
understanding and respecting the meaning of property rights, are
suddenly and for the first time offered in place of gold,
non-convertible paper notes. These notes would be meaningless to such
men. No man who had just come from harvesting a field of wheat would
even consider trading his wheat for scrap paper.
There are only two ways in which men will accept paper
notes without commodity convertibility: if they are forced to do so, or
if they are conned into doing so. Americans are now legally forced to
accept government's non-convertible paper notes -but only because they
have been conned into believing that commodity money is "old-fashioned"
and "impractical" and that paper notes are indicative of a "modern and
sophisticated economy."
Nothing could be further from the truth.
Non-convertible paper "money" is fiat money that derives its value, not
from its value as a commodity, not from its value as a useful medium of
exchange according to the requirements of a medium of exchange, but from
the decree of government. Fiat money is a throwback to the days of kings
and the mentality of dictators. It is not a money evolved from the
values and choices of free men in free markets, but a money created
through the coercion of government.
Is commodity money old-fashioned and impractical, as
today's Policy Makers contend it is? Consider the following facts: Over
the last several decades, the exchange ratios (the prices) of various
commodities have not varied much in value relative to each other. For
example, the value of eggs to milk or milk to bread would be at
approximately the same ratios today as they were years ago.
Why Prices Rise
But if it is true that the exchange ratios of
commodities are relatively the same today as they were in the past, why
then have prices (the exchange ratios of dollars to goods) soared over
the years? The reason is that the value of the paper money, with which
government f orces everyone to deal, has fallen yearly relative to all
commodities. Clearly, if a commodity (theoretically, almost any
commodity) had been used as a medium of exchange over the past decades
instead of government's fiat money, prices would have remained
relatively stable. It is important to realize that it is not commodities
that are rising in value, but flat money that is falling in value.
Since 1933, when the U.S. severed the dollar-commodity
relationship by abandoning what was left of the gold standard, the value
of the dollar has depreciated by over two-thirds in relation to other
commodities. This could never occur under a commodity standard - only
under a government imposed fiat standard. Had the U.S. returned to a
dollar based on and convertible into gold instead of severing the
dollar-gold relationship, the supply of dollars over the years would
have been limited to, or checked by, the supply of gold. Therefore, the
value of the dollar today would have been equal to the value of gold in
relation to other commodities. Instead, the U.S. decided to print
dollars whenever "needed" and to pretend that the dollar was "as good as
gold" by legally fixing its value. The pretense couldn't last, and today
the dollar is worth approximately 25 per cent of its value in terms of
gold in 1933.
Paper notes that are not representative of and
convertible into a commodity are not money and have never satisfied the
requirements of money for long. They are notes of circulating debt which
men are forced to accept, so that governments can continuously pursue
their policies of inflation.
The Nature of Inflation
Inflation is the fraudulent increase in the supply of
money substitutes and credit. It is a policy which allows government to
artificially create and spend more money than it is able to collect in
taxes or borrow from its citizens. Government is the cause of inflation
-the effect is higher prices.
Consider each dollar as a claim to some tangible good.
If the claims are increased ' the value of each claim goes down because
there are more dollars seeking goods. This bids prices up.
But inflation is not simply rising prices. In fact,
inflation may exist even when prices remain the same or decrease. How is
this possible? If the production of goods and services increases more
than the artificial increase in paper claims, prices will drop -but not
by as much as they would have, had there been no artificial increase in
paper claims. Thus, in real terms, the value of paper claims is
effectively reduced even though in relative terms the value of these
claims may increase.
Historically, and in relatively free market economies,
there are only two ways in which a general across-the-board increase in
prices can occur: through a dramatic increase in commodity money (such
as new gold discoveries) or through a fraudulent increase of money
substitutes by banks and governments. The former type of general price
increase rarely occurs and is perfectly natural. The latter is both
unnatural and immoral.
In the case of new gold production, those who have
produced the new commodity money will have earned the right to exchange
their product for the products of others. All other non-money producers
may have to pay higher prices for goods, as the supply of gold
increases, but the higher prices are compensated for by having more
money to spend. Who receives the "new" money will depend on individual
productivity - and this is as it should be, for it is the justice of the
market that the acquisition and distribution of wealth is based upon
productivity rather than decree.
But, given a fiat standard where government sanctions
and sponsors an artificial increase in paper money or credit, the
increase in purchasing power for some men can only be obtained at the
expense of other men. Given a flat standard, income distribution is the
result of chance, caprice, or government favors and loans. When
government doles out its fiat money, these notes dilute the value of all
other outstanding money claims. Those who receive the fiat money first,
benefit from spending their money before prices rise. But as the fiat
money is spent, prices are higher for all other consumers. Thus, the
difference between a real increase in the money supply (i.e., commodity
money) and an artificial increase (i.e., in paper claims) is the
difference between production and theft.
Clearly, inflation is a moral issue. However prices
respond, it is immoral that some man, agency, or government is legally
permitted to obtain wealth at the involuntary expense of other men. The
major challenge in the sphere of monetary relations today is how to
abolish the coercive power of government to control the supply and
regulate the value of money, and how to return this function to the
market where it properly belongs.
The Fiat Standard at Work
Under a flat standard, government gains control of the
banking system and thus, indirectly, of the nation's money supply. It
can artificially and arbitrarily create money and furnish credit.
Government paper notes are not based on or convertible into gold, or any
other tangible commodity; man's production and labor are not the sole
claim to other men's production and labor: the supply and value of money
are determined by government.
Under the American version of the fiat standard, the
banking system and the nation's money supply are controlled and
regulated for the most part by a twelve-man Board of Governors which is
empowered to make policy decisions for the majority of the nation's
banks. Thus, America's banking system is not a free and private banking
system - it is a quasi-governmental banking system, known as the Federal
Reserve System.
It should be clear that the Federal Reserve System's
power to create claims against individuals' property is immoral. But
neither the Federal Reserve System nor the fiat standard is ever
defended on moral grounds; they are defended on practical grounds. Once
inspected, however, these grounds turn out to be about as solid as
quicksand. The primary justification given for a fiat standard is that
credit can be extended far more rapidly and extensively. This, it is
claimed, is the fiat standard's major virtue. It is, in fact, a major
vice.
The greatest economic threat under a fiat standard is
that the Federal Reserve System will supply heavy doses of money and
credit to the loan market in an attempt to reduce interest rates and
"stimulate" the economy. This attempt, while temporarily stimulating
economic activity, leads to mal-investment, as businessmen falsely
anticipate greater profits. A "boom" results, but since the "boom" is
artificially created, the prosperity is temporary and, for the most
part, illusory. Government has not furnished more goods; it has not
increased the nation's prosperity; it has simply increased the money
supply which leads men to believe they are richer. The fact is, however,
they only have more paper claims to goods. This cannot enrich anyone; it
can only lead to future inflation, i.e., a reduction of the value of
real claims to wealth.
Illusion of Prosperity
Thus, increases of money and credit provide only an
illusion of prosperity, for with increased money and credit come
increased costs for producer goods and increased wage costs. Higher
wages then lead to over-consumption, as consumers, too, are enticed by
the illusion of prosperity. But over-consumption results in higher
prices which reduce the consumer's standard of living. Since the "boom"
was inflation-inspired, producers and consumers are not better off -they
are worse off. Mal-investment and over-consumption are mistakes - errors
in judgment - caused by government's attempt to con its citizens into
believing that profit opportunities are better than they really are.
When the credit expansion that stimulated the "boom"
ends, the mistakes that were made cannot be perpetuated. These mistakes
must be liquidated: consumers buy less and begin paying off their
unrealistic accumulation of debts.
Producers liquidate inventories. Interest rates rise,
and unemployment increases as the economy struggles to readjust. The
severity of the readjustment depends on the degree and length of
government's prior credit expansion and the policies implemented to cope
with the adverse effects. Given continual injections of money and credit
in the inane attempt to continue the "boom" and prevent a necessary
recession, hyperinflation will result. Hyperinflation must lead to
monetary chaos as well as economic disaster, i.e., to depression. A
major depression is not a necessary result of the fiat standard, but
inflation and the "boom-bust cycle" are.
The whole purpose of fiat money is to allow government
to spend more money than it can raise in direct taxes from its citizens.
As a result, the American flat standard has worked more often as a means
of redistributing wealth than a means of stimulating the economy.
Government, instead of furnishing money to the loan market in the
attempt to continuously reduce interest rates, has created money to
finance the "welfare" state. When government's fiat money enters the
economy in the form of checks for expenditures, rather than through the
loan market, the sequence of events and the effects are a little
different.
Men usually hold their money as savings, but as prices
continue to rise over the years of government deficit spending, men
realize that the pieces of paper they hold are continuously and
progressively depreciating in value - that inflation is becoming a way
of life. Once men begin to lose confidence in government's fiat money,
it's only a matter of time before the years of simple inflation burst
into hyperinflation and monetary collapse.
Thus, whether government tries to stimulate the economy
or to finance programs that it cannot afford, the, fiat standard is
self-defeating and counter-productive. The consequences of America's
flat standard have been mild by historical standards: the Great
Depression of the '30's, an endless series of booms and busts since
then, and a depreciation of the dollar by about 75 percent. So much for
the "practicality" of the fiat standard!
The Meaning of the Gold Standard
In a free society, no man, group of men, or government
has the "right" to infringe upon the rights of others. This means that
within a free society, the initiation of force is banned. All goals must
be attained through persuasion and voluntary cooperation, and no goal
may be achieved at the expense of any man -not for the "good" of another
man, not for the "good" of the state, and not for the "good" of society.
A system of voluntary exchange is a system of laissez-faire capitalism.
Under capitalism, man's rights are supreme. They are defended by
government-not violated by government.
A gold standard is an integral part of a free society;
a fiat standard is an integral part of a controlled society. A gold
standard cannot exist without the consent of individuals; a fiat
standard cannot exist without the initiated force of government. A gold
standard is based on voluntary exchange, the recognition of men's
values, and respect for private property; a fiat standard is based on
compulsory "exchange," the denial of men's values, and the insidious
confiscation of private property.
Wealth is production, and gold is the equivalent of
wealth produced. Because neither wealth nor gold can be created out of
nothing, neither wealth nor gold are possible without men of
intelligence, men of ability, and men of productivity. Fiat is force and
is the equivalent of wealth confiscated. Both fiat and force are the
tools of the envious and the cowardly.
Where a gold standard is welcomed by the best of men,
the flat-standard is welcomed by the worst of men. Where the gold
standard demands the earned, the fiat standard grants the unearned.
Where a gold standard evolves from individual choice, a fiat standard
evolves from government edict. Where a gold standard necessitates only
that men be left free to act, to choose, and to trade, a fiat standard
invites government to control, to regulate, and to dictate men's
choices, actions, and the terms of trade.
Gold limits the government's power to spend more money
than it receives in taxes, and in doing so, gold limits the government's
arbitrary power over the economy; gold checks artificial money and
credit expansion; it prevents artificial "booms" which lead to very real
"busts"; gold protects individuals from economically unsound government
programs; and it protects citizens from the inflationary confiscation of
private property. Not only is the gold standard the most practical
monetary system yet discovered, it is a standard consistent with freedom
- yet it is the gold standard that today's Policy Makers either ignore
or denounce.
At the time of the original publication, Mr. Stevens
was a free-lance writer who specializes in the field of economics and
monetary policy.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
January, 1975, Vol. 25, No. 1.
Yourname@libertyhaven.com
