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Part Four: Monetary Reconstruction > Chapter 23. The Return to Sound Money

2. The Integral Gold Standard

Sound money still means today what it meant in the nineteenth century: the gold standard.

The eminence of the gold standard consists in the fact that it makes the determination of the monetary unit's purchasing power independent of the measures of governments. It wrests from the hands of the "economic tsars" their most redoubtable instrument. It makes it impossible for them to inflate. This is why the gold standard is furiously attacked by all those who expect that they will be benefited by bounties from the seemingly inexhaustible government purse.

What is needed first of all is to force the rulers to spend only what, by virtue of duly promulgated laws, they have collected as taxes. Whether governments should borrow from the public at all and, if so, to what extent are questions that are irrelevant to the treatment of monetary problems. The main thing is that the government should no longer be in a position to increase the quantity of money in circulation and the amount of checkbook money not fully—that is, 100 percent—covered by deposits paid in by the public. No backdoor must be left open where inflation can slip in. No emergency can justify a return to inflation. Inflation can provide neither the weapons a nation needs to defend its independence nor the capital goods required for any project. It does not cure unsatisfactory conditions. It merely helps the rulers whose policies brought about the catastrophe to exculpate themselves.

One of the goals of the reform suggested is to explode and to kill forever the superstitious belief that governments and banks have the power to make the nation or individual citizens richer, out of nothing and without making anybody poorer. The shortsighted observer sees only the things the government has accomplished by spending the newly created money. He does not see the things the nonperformance of which provided the means for the government's success. He fails to realize that inflation does not create additional goods but merely shifts wealth and income from some groups of people to others. He neglects, moreover, to take notice of the secondary effects of inflation: malinvestment and decumulation of capital.

Notwithstanding the passionate propaganda of the inflationists of all shades, the number of people who comprehend the necessity of entirely stopping inflation for the benefit of the public treasury is increasing. Keynesianism is losing face even at the universities. A few years ago governments proudly boasted of the "unorthodox" methods of deficit spending, pump-priming, and raising the "national income." They have not discarded these methods but they no longer brag about them. They even occasionally admit that it would not be such a bad thing to have balanced budgets and mon etary stability. The political chances for a return to sound money are still slim, but they are certainly better than they have been in any other period since 1914.

Yet most of the supporters of sound money do not want to go beyond the elimination of inflation for fiscal purposes. They want to prevent any kind of government borrowing from banks issuing banknotes or crediting the borrower on an account subject to check. But they do not want to prevent in the same way credit expansion for the sake of lending to business. The reform they have in mind is by and large bringing back the state of affairs prevailing before the inflations of World War I. Their idea of sound money is that of the nineteenth-century economists with all the errors of the British Banking School that disfigured it. They still cling to the schemes whose application brought about the collapse of the European banking systems and currencies and discredited the market economy by generating the almost regular recurrence of periods of economic depression.

There is no need to add anything to the treatment of these problems as provided in part three of this volume and also in my book Human Action. If one wants to avoid the recurrence of economic crises, one must avoid the expansion of credit that creates the boom and inevitably leads into the slump.

Even if for the sake of argument we neglect to refer to these issues, one must realize that conditions are no longer such as the nineteenth-century champions of bank-credit expansion had in mind.

These statesmen and authors regarded the government's financial needs as the main and practically the only threat to the privileged bank's or banks' solvency. Ample historical experience had proved that the government could and did force the banks to lend to them. Suspension of the banknotes' convertibility and legal-tender provisions had transformed the "hard" currencies of many countries into questionable paper money. The logical conclusion to be drawn from these facts would have been to do away with privileged banks altogether and to subject all banks to the rule of common law and the commercial codes that oblige everybody to perform contracts in full faithfulness to the pledged word. Free banking would have spared the world many crises and catastrophes. But the tragic error of nineteenth-century bank doctrine was the belief that lowering the rate of interest below the height it would have on an unhampered market is a blessing for a nation and that credit expansion is the right means for the attainment of this end. Thus arose the characteristic duplicity of the bank policy. The central bank or banks must not lend to the government but should be free, within certain limits, to expand credit to business. The idea was that in this way one could make the central banking function independent of the government.

Such an arrangement presupposes that government and business are two distinct realms of the conduct of affairs. The government levies taxes but it does not interfere with the way the various enterprises operate. If the government meddles with central-bank affairs, its objective is to borrow for the treasury and not to induce the banks to lend more to business. In making bank loans to the government illegal, the bank's management is enabled to gauge its credit transactions in accordance with the needs of business only.

Whatever the merits or demerits of this point of view may have been in older days,1 it is obvious that it is no longer of any consequence. The main inflationary motive of our day is the so-called full-employment policy, not the treasury's incapacity to fill its empty vaults from sources other than bank loans. Monetary policy is regarded—wrongly, of course—as an instrument for keeping wage rates above the height they would have reached on an unhampered labor market. Credit expansion is subservient to the unions. If a hundred or seventy years ago the government of a Western nation had ventured to extort a loan from the central bank, the public would unanimously have sided with the bank and thwarted the plot. But for many years there has been little opposition to credit expansion for the sake of "creating jobs," that is, for providing business with the money needed for the payment of the wage rates which the unions, strongly aided by the government, force business to grant. Nobody took notice of warning voices when England in 1931 and the United States in 1933 entered upon the policy for which Lord Keynes, a few years later in his General Theory, tried to concoct a justification, and when in 1936 Blum, in imposing upon the French employers the so-called Matignon agreements, ordered the Bank of France to lend freely the sums business needed for complying with the dictates of the unions.

Inflation and credit expansion are the means to obfuscate the fact that there prevails a nature-given scarcity of the material things on which the satisfaction of human wants depends. The main concern of capitalist private enterprise is to remove this scarcity as much as possible and to provide a continuously improving standard of living for an increasing population. The historian cannot help noting that laissez-faire and rugged individualism have to an unprecedented extent succeeded in their endeavors to supply the common man more and more amply with food, shelter, and many other amenities. But however remarkable these improvements may be, there will always be a strict limit to the amount that can be consumed without reducing the capital available for the continuation and, even more, the expansion of production.

In older ages social reformers believed that all that was needed to improve the material conditions of the poorer strata of society was to confiscate the surplus of the rich and to distribute it among those having less. The falsehood of this formula, despite the fact that it is still the ideological principle guiding present-day taxation, is no longer contested by any reasonable man. One may neglect stressing the point that such a distribution can add only a negligible amount to the income of the immense majority. The main thing is that the total amount produced in a nation or in the whole world over a definite period of time is not a magnitude independent of the mode of society's economic organization. The threat of being deprived by confiscation of a considerable or even the greater part of the yield of one's own activities slackens the individual's pursuit of wealth and thus results in a diminution of the national product. The Marxian socialists once indulged in reveries concerning a fabulous increase in riches to be expected from the socialist mode of production. The truth is that every infringement of property rights and every restriction of free enterprise impairs the productivity of labor. One of the foremost concerns of all parties hostile to economic freedom is to withhold this knowledge from the voters. The various brands of socialism and interventionism could not retain their popularity if people were to discover that the measures whose adoption is hailed as social progress curtail production and tend to bring about capital decumulation. To conceal these facts from the public is one of the services inflation renders to the so-called progressive policies. Inflation is the true opium of the people and it is administered to them by anticapitalist governments and parties.

  • 1. About the fundamental error of this point of view, see pp. 339-366 above.