Mises Daily Articles
Is the Gold Standard History?
In the 19th century, notes Murray N. Rothbard, debates on monetary issues were highly public and intensely controversial. Do you favor the national bank? The gold standard? Bimetallism? What is your opinion of the free silver movement? What is most important: a highly liquid money stock that can prop up commodity prices, or a sound dollar that promotes thrift and discourages debt accumulation? Should the monetary system reward debtors or creditors?
These were issues debated in the nation’s newspapers, discussed in political meetings, and raged on the streets. Every educated man had an opinion. Part of the reason is that, frankly, people were much better educated in those days. It is astonishing to think of today, but average people had the mental equipment to enable them to understand these complicated issues, if not always to arrive at the right conclusions.
The federal government had long been involved in money precisely because this is one of the first areas a government likes to get its grubby hands on when it takes power. The US government was no exception, despite constitutional provisions that would appear to restrict its monetary power.
Matters are radically different today. It is very rare to ever see an article addressing the money question in the nation’s newspapers. Debates and discussions are left to the academic journals or the self-published tracts of money cranks—with the major exception of the Austrian economists, who continue to believe that the money issue is both academically important and politically crucial.
This is why, for twenty years, the Mises Institute has been sponsoring research and writing on the gold standard, and promoting an idea that most public intellectuals find absurdly anachronistic: that a gold standard is better than our current monetary system. What's more, we not only believe that the gold standard had a better record historically. We believe that we ought to institute a gold standard right now.
Even many libertarians find themselves mystified by our focus. Who cares about these arcane issues of monetary policy? What does it have to do with the fate of human liberty? Could we pick a policy agenda that is more unlikely to come about? Are we just gluttons for political failure? Why not trim our ambitions to political reality?
It is true that not a soul in Washington apart from our heroic Congressman from Texas, Ron Paul, says a word about the gold standard. Even Alan Greenspan, who once wrote that freedom is inseparable from the gold standard, dreads being asked about the subject. To him, it is entirely theoretical with no practical import. In any case, he doesn’t want people looking too closely at the kinds of things he does at the Fed, any more than the Wizard of Oz wanted anyone to pull back the curtain.
Most economists have no interest in the issue. What's more, the most influential economist of the last century, John Maynard Keynes, hated the gold standard with astonishing intensity, and he considered it his great accomplishment in life to have assisted in its destruction. Even to this day, his influence is immense, with most economists accepting the broad framework that he laid out in his work, and sharing his conviction that the worst thing that could befall any society is for the government to lose its power to manage economic life.
There are many objections to the conventional view of the gold standard, but let me just respond to the point about realism. There are a lot of policies which seem unrealistic to promote. We can admit that there is little prospect that the post office will be privatized anytime soon, but that fact doesn't diminish our responsibility to push the idea. Nothing could be more obvious than that private enterprise would do a better job of delivering letters than the government. But if no one says it—if people are not willing to state what is true, again and again—all hope for change is lost. And sometimes, just stating what is true is enough to bring about change when conditions are ripe for it.
In the debate on the post office, we have the added advantage of being able to point to a superior and very well developed sector of private package and letter delivery. The reason it is thriving is due to loopholes in the law, which these companies exploit. If the letter statutes were repealed, I have no doubt that first-class letters would be deliverable by private enterprise within days. That is precisely why the post office is so anxious to hold onto its legal privileges.
In any case, as with the gold standard, it might be said that advocating privatization is politically unrealistic, and therefore a waste of time. What's more, we might say that by continuing to harp on the issue, we only marginalize ourselves, proving that we are on the fringe. Again, I submit that there is no better way to assure that an issue will always be off the table than to stop talking about it.
This applies to the gold standard too. The case for radical monetary reform is as obvious as the need to sell the post office. Every year or 18 months, the world goes through some sort of monetary convulsion. In the last ten years, we've seen it in Mexico, all through Asia, and now Latin America. To one degree or another, there are few problems of international economics that are not traceable to the grave limitations of a world fiat money system.
This includes the problem of the business cycle itself. In this recession, unlike any I can remember, the Austrian theory of the trade cycle has received a fantastic amount of public commentary and attention. The core idea of this theory is that Fed-created credit is responsible for the boom and bust, and it has been embraced by top economists at some of the largest and most prestigious investment houses.
The Mises Institute has done a fine job in getting the word out about the true cause of the business cycle, but the real reason it is getting such attention is that is provides such a compelling explanation of the 1990s bubble and the later crisis. Neither do most of these economists doubt that financial bubbles would not be a problem under the gold standard, even if they believe the gold standard introduces problems of its own.
Far from being an arcane and anachronistic issue, then, we can see that the gold standard and the issues it raises get right to the heart of the current debate concerning the future of the world economy and its reform. What the critics who denounce gold are really saying is that the government and its friends don't like the idea of the gold standard, so therefore they are not going to favor one.
Why do the government and its partisans dislike the gold standard? It removes the discretionary power of the Fed by placing severe limits on the ability of the central bank to inflate the money supply. Without that discretionary power, the government has far fewer tools of central planning at its disposal. Government can regulate, which is a function of the police power. It can tax, which involves taking people's property. And it can spend, which means redistributing other people's property. But its activities in the financial area are radically curbed.
Think of your local and state governments. They tax and spend. They manipulate and intervene. As with all governments from the beginning of the time, they generally retard social progress and muck things up as much as possible. What they do not do, however, is run huge deficits, accumulate trillions in debt, reduce the value of money, bail out foreign governments, provide endless credits to failing enterprises, administer hugely expensive and destructive social insurance schemes, or bring about immense swings in business activity.
State and local governments are awful and they must be relentlessly checked, but they are not anything like the threat of the federal government. Neither are they as arrogant and convinced of their own infallibility and indispensability. They lack the aura of invincibility that the central government enjoys.
Why is this? You might say it is because the federal government already does these things, but no government has ever been troubled by the prospect of providing redundant services. You might say that state-level constitutions restrict their activities, but our experience with the federal government demonstrates that constitutions can’t restrain a government by themselves. The main reason, I believe, is that the state and local government do not issue their own currencies controlled by central banks.
It is the central bank, and only the central bank, that works as the government's money machine, and this makes all the difference. Now, it is not impossible that a central bank can exist alongside a gold standard, a lender of last resort that avoids the temptation to destroy that which restrains it. In the same way, it is possible for someone with an insatiable appetite to sit at a banquet table of delicious food and not eat.
Let's just say that the existence of a central bank introduces an occasion of sin for the government. That is why under the best gold standard, there would be no central bank, gold coins would circulate as freely as their substitutes, and rules against fraud and theft would prohibit banks from pyramiding credit on top of demand deposits. So long as we are constructing the perfect system, all coinage would be private. Banks would be treated as businesses, no special privileges, no promises of bailout, no subsidized insurance, and no connection to government at any level.
This is the free-market system of monetary management, which means turning over the institution of money entirely to the market economy. As with any institution in a free society, it is not imposed from above, dictated by a group of experts, but is the de facto result that comes about in a society that consistently respects private-property rights and encourages enterprise.
Money is not something chosen by social managers but the consequence of economic development, as society moves from barter to indirect exchange. One commodity that is widely in demand comes to operate as a medium of exchange, a commodity for which any good or service can be traded with the expectation that this commodity will be demanded by others in future exchanges. Precious metals, gold in particular, have traditionally served as the money of choice.
As Rothbard explained, the institutions we call banks serve a dual function in a free-market system. First, they provide safe keeping for one's money, and offer money substitutes that they certify really do represent money in the vault. And second, they provide credit services, both to savers who would like to see money risked in the loan market and to borrowers who need cash for purposes of consumption or investment. The banks work as brokers between these parties to effect mutually beneficial exchanges.
If any market-chosen commodity can perform the function of money, why are we Austro-libertarians focused on gold? It is often said that we have an obsession with gold and a fixation on the subject of money. To some degree, however, this alleged obsession is shared by popular culture and by financial markets, as a continuing testimony to the power of the idea of gold as a guarantor of value.
Whenever a writer wants to convey the idea that something sets the highest standard, he refers to it as the gold standard. I was amused the other day to read in the London Daily Telegraph an article on grade inflation in British schools, in which the writer counterpoised the grading gold standard of the past. The metaphor seems quite apt.
As for financial markets, events this year have again underscored the underlying obsession, if you want to call it that, that the world's financial markets have with gold. It is not a coincidence that gold-mining stocks were the best performing during the bust period of this business cycle. And earlier this summer, we saw spot prices of gold begin to move very rapidly in response to the growing perception that the financial sector was far from bottoming out. Try as it might, the establishment just can’t seem to crush the perception that gold is more reliable that government’s paper money.
Indeed, gold continues to be seen as a standard of soundness, as the commodity to flee to in times of emergency, as the last store of value that can be counted on. Neither are these emergencies unknown in the modern world. In Latin America this summer, we witnessed governments prohibiting withdrawals from banks during financial crises, just as we saw in the early days of the Great Depression in the United States. Gold continues to be perceived as a safe haven from the wiles of political opportunism and violence.
J. Bradford DeLong, former assistant US Treasury Secretary, wrote the following just the other day: "Eighty years ago, John Maynard Keynes argued that governments needed to take responsibility for maintaining full employment and price stability that the pre-World War I gold standard had not been the golden age people thought it was, and that its successes were the result of a lucky combination of circumstances unlikely to be repeated. Keynes was an optimist in believing that governments could learn to manage the business cycle." DeLong continues to point out that the record of post-gold currencies has been a disaster as compared with their promise.
In this respect, fiat currency has much in common with socialism. They both failed to live up to their promises, and, indeed, failed miserably by every standard. But they both long outlived their failures, simply because political elites had too much invested in them to change the system and the intellectual class worked overtime to shore up support for the failed system. Eventually, of course, full-blown socialism collapsed, just as I believe that fiat currency systems will.
Murray Rothbard has written: "It might be thought that the mix of government and money is too far gone, too pervasive in the economic system, too inextricably bound up in the economy, to be eliminated without economic destruction… In truth, taking back our money would be relatively simple and straightforward, much less difficult than the daunting task of denationalizing and decommunizing the Communist countries of Eastern Europe and the former Soviet Union."
And for all the reasons that gold eventually emerged as the money of choice thousands of years ago, it continues to have the properties that make it the best money of choice today. It is portable, divisible, fungible, durable, and has a high ratio of value per unit of weight. It is as compatible with today's economy, driven by information technology and lightning quick financial transactions, as it was compatible with the 19th century economy of heavy industry and agriculture. It is not technical limitations that prevent the dollar from being redefined as a unit weight of gold, but political ones.
The monetary benefits of a gold standard are clear enough, and they include life without inflation, an end to the business cycle, rational economic calculation in accounting and international trade, an encouragement to savings, and a dethroning of the government-connected financial elite.
But it is also political considerations that draw people to support the gold standard. Gold limits the power of the state and puts power back in the hands of the people.
Once you begin to understand the role of the monetary regime in the building of the modern statist enterprise—in providing the means of funding for the entire welfare-warfare state, in generating financial instability, in destroying savings and undermining living standards—you realize that there is far too little interest in the subject in the mainstream press. You begin to realize that the 19th century focus on the money issue was entirely appropriate.
Once having read Mises or Rothbard or any number of great monetary theorists, you begin to realize that understanding the monetary regime is the key that unlocks the mysteries of political control in our time. The Fed was created not to scientifically manage the economy—as the journals claimed at the time—but because it met the institutional needs of both the government and the banking industry. The government sought a means of finance that didn't depend on taxation, and the banking industry sought what Rothbard called a cartelization device. That is to say, the banking industry was seeking some way to prevent competitive pressures between banks from limiting their ability to expand credit.
Well, the central bank fit the bill. A central bank managing a currency that is not tied to anything real fits the bill even better. If a little power to inflate is good for the government and its connected banking and financial interests, a lot of power to inflate is even better. For this reason, it was very likely that the gold standard could not have survived the creation of a central bank, and, for the same reason, the creation of a new gold standard will have to do away with the central bank that would always threaten bring it down.
The power to create money is the most ominous power ever bestowed on any human being. This power is rightly criminalized when it is exercised by private individuals, and even today, everyone knows why counterfeiting is wrong and knavish. Far fewer are aware of the role of the federal government, the Fed, and the fiat dollar in making possible the largest counterfeiting operation in human history, which is called the world dollar standard. Fewer still understand the connection between this officially sanctioned criminality and the business cycle, the rise and collapse of the stock market, and the continued erosion of the value of the dollar.
In fact, I would venture to guess that a sizeable percentage of even educated adults would be astounded to discover that the Federal Reserve does more than manage the nation's money accounts, that, in fact, its main activity consists in actually creating money that distorts production and creates inflation and the business cycle. In fact, I would go further to suggest that many educated adults believe that gold continues to serve as the ultimate backing of our monetary system, and would be astonished to discover that our money is backed by nothing but more of itself.
We have our work cut out for us, to be sure, mainly at the educational level. We must continue to state the obvious at every opportunity, that the fiat system is exactly what it is, a system of paper money backed by nothing of real value. We must continue to point out that because of this, our economic system is not depression proof, but rather highly vulnerable to complete meltdown. We must continue to draw attention to the only long-term solution: a complete separation of money and state based on the commodity that the market has always chosen as money, namely, gold.
Apart from making the intellectual case, the biggest obstacle we currently face is that most all theoretically viable plans for radical monetary reform depend heavily on those who are currently in charge of mismanaging our money being the ones to manage a transition. In many ways, this is akin to expecting the politburo to have instituted a free-market economy in Russia before the great counterrevolution. Can we really expect that Alan Greenspan is going to wake up one day and decide to do the right thing? It is possible, but I seriously doubt it.
I recognize that that this problem is a real one, but it is no different from the rest of the practical problems of instituting freedom. When we call for spending cuts, we are implicitly calling on Congress to do something that is against its self interest. When we call for deregulating financial markets, we are expecting the SEC to do the very thing it is least likely to do from a bureaucratic-pressure group perspective. And when we call for sound money, we are similarly expecting those who currently benefit from the present system to have a change of heart and mind, and to act against their own interests.
This takes us back to our original question: is the gold standard history? Is it so preposterously unrealistic to advocate it that we might as well move to on other things? It won't surprise you that my answer is no. If there is one thing that a long-term view of politics teaches, it is that only the long-term really matters.
Back in 1997-98 you were considered a crabby kook, behind the times, to warn that the bull market in tech stocks could not last. But economic law intervened, and fashions changed. Back in those days, too, had you suggested that the business cycle had not been repealed, you would have been dismissed out of hand. But economic law intervened.
In the same way, there will come a time when the current money and banking system, living off credit created by a fiat money system, will be stretched beyond the limit. When it happens, attitudes will turn on a dime. No advocate of the gold standard looks forward to the crisis nor to the human suffering that will come with it. We do, however, look forward to the reassertion of economic law in the field of money and banking. When it becomes incredibly obvious that something drastic must replace the current system, new attention will be paid to the voices that have long cast aspersions on the current system and called for a restoration of sound money.
Must a crisis lead to monetary reforms that we will like? Not necessarily, and, for that matter, a crisis is not a necessary precursor to radical reform. As Mises himself used to emphasize, political history has no predetermined course. Everything depends on the ideas that people hold about fundamental issues of human freedom and the place of government. Under the right conditions, I have no doubt that a gold standard can be completely restored, no matter how unfavorable the current environment appears towards its restoration.
What is essential for us today is to continue the research, the writing, the advocacy for sound money, for a dollar that is as good as gold, for a monetary system that is separate from the state. It is a beautiful vision indeed, one in which the people and not the government and its connected interest groups maintain control of their money and its safe keeping.
What has been true for hundreds of years remains true today. The clearest path to the restoration of economic health is the free market undergirded by a sound monetary system. The clearest path toward economic destruction is for us to stop working toward what is right and true.
This speech was delivered at the first Burton S. Blumert Gold Conference in San Mateo, California, September 14, 2002.