The Mises Institute monthly, free with membership
Volume 16, Number 12
Gold and Government
by Llewellyn H. Rockwell, Jr.
Speaking before a Congressional committee, Alan Greenspan stepped back from his
discussion of the newest international
currency crisis to reflect on the gold standard of the last century. He noted that bad judgments
and distortions in price had a
way of working themselves out very quickly. Interest rates would rise and fall to reflect shifts in
capital flows and thus
minimize the losses associated with economic change. Imbalances corrected themselves.
What happened to the gold standard? As Greenspan put it, "following World War I such
tight restraints on economies were
seen as too inflexible to meet the economic policy goals of the twentieth century." What those
policy goals were,
Greenspan did not spell out. Let's fill in the blanks.
The end of the gold standard dates from the founding of the Federal Reserve itself. It was
created in 1913 to permit the
banking industry to coordinate its credit expansions to prevent the kind of contagion we've seen
occurring domestically. The Fed was a bankers' tool above all else.
How does government fit in? In financing Woodrow Wilson's attack on "The Hun," the Fed
proved to be a useful money-creation machine that allowed the government to spend without
taxing. Risk-free debt instruments could pile up without
end because they are guaranteed by the power of the central bank to create money. This proved
indispensable as the funding
device for the unlimited growth of the welfare-warfare state.
After the war, economic crises became worse, as the Fed spread its false interest rate signal
throughout the entire economy.
With each new crisis, presidents used their power to make the dollar's link to gold weaker and
weaker. The weaker the link
became, the more the Fed was free to work with the government to expand without limit.
The ideological forces of socialism and social democracy grew in tandem, as did the
regulatory state. The result was a
revolutionary change in the regime. The American people could once go about their lives nearly
oblivious to the existence
of the federal government. Now they would be controlled by it in all aspects of their lives.
But the policy goals that followed the breakdown of the gold standard have left enormous
destruction in their wake.
Inflation devastated the middle class and transformed the structure of the family. The welfare
state corrupted the morals of
the lower class. Cheap credit got American business hooked on debt finance. The ability to fund
wars turned the U.S. into a
The philosophy of government that Greenspan alludes to is the theory of the egalitarian,
redistributionist state, in which no
property is outside the grasp of the leviathan and no aspect of our economic lives outside its
control. Fiat money is the
financial foundation of all aspects of the social democratic welfare disaster.
One of many things government could not do under a gold standard was engage in
willy-nilly bailouts of bankrupt foreign
governments. Every government in the world would have to obtain its financing through the
private sector, with its bonds
subject to a market-based risk premium.
Greenspan is often given credit for running a sound money program at the Fed. And given
his favorable comments about
the gold standard, one might expect he might go along with a different attitude toward
government. Trouble is, he's on
record favoring these dreadful international and domestic bailouts (even as he warns about their
People say it is unrealistic to seek the restoration of gold as the foundation of the American
monetary system, since that
would require a complete rethinking of the nature of government. In fact, that seems to be
happening all over the Western
world, as the political system is increasingly seen as inherently corrupt, wasteful, intrusive, and
The government didn't create the gold standard. The free market chose gold as the
foundation for the monetary system
because of its inherent qualities. Gold created a firewall between the government and the people's
economy. That's why
governments, working in cooperation with central banks and special interests, destroyed the gold
standard. It's also why
restoring it is not just a much-needed program for monetary reform. It is a program for restoring
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