The Case For Gold: A Minority Report of the U.S. Gold Commission

More and more people are asking if a gold standard will end the financial crisis in which we find ourselves. The question is not so much if it will help or if we will resort to gold, but when. All great inflations end with the acceptance of real money—gold—and the rejection of political money—paper. The stage is now set; monetary order is of the utmost importance. Conditions are deteriorating, and the solutions proposed to date have only made things worse. Although the solution is readily available to us, powerful forces whose interests are served by continuation of the present system cling tenaciously to a monetary system that no longer has any foundation. The time at which there will be no other choice but to reject the current system entirely is fast approaching. Although that moment is unknown to us, the course that we continue to pursue will undoubtedly hurtle us into a monetary abyss that will mandate a major reform.

That moment may come very soon—it nearly arrived in the 1979 dollar crisis—but I hope it will not arrive for several years. That way a greater understanding among more people will prompt a wiser choice in establishing the new order. The minority views of the Gold Commission deal precisely with this task. In planning for a constructive monetary reform the errors of the past and the myths that have evolved around money must be fully understood and explained. In this report we have made an effort to analyze the American experience with gold and to refute the cliches used to condemn the use of gold as money. No one program is indispensable in outlining the transition from paper to gold. Every day conditions are different. Today we need a program different from the one necessary three years ago, and in three years the conditions again will change. We certainly do not have the same problem faced by the Germans in 1923, but in 1986 we may. Nevertheless, outlines of different methods of achieving a convertible currency can be made; we have done so in these views.

Briefly, we offer two methods, one through the legalization of competing currencies, the other a government-directed gold standard of the classical variety. Only future events and attitudes will determine the best method. We do know that current monetary policy cannot continue indefinitely, and we are obligated to prepare for better times. This report establishes the foundation on which a sound monetary system can be built.

The date the Gold Commission officially voted and rejected the gold standard—a foregone conclusion from the very beginning—the Wasnington Post headline read, “Commission Votes Against Revival of Gold Standard.” A reporter called to ask my reaction, assuming I would be greatly disappointed. But my response was the opposite. “I’m delighted,” I said, “the news is that the gold standard was considered and the (temporary) rejection deserves a top front page headline by the Washington Post.” The fact that for the first time in over 100 years a government body was seriously discussing the issue of gold as money is a major achievement. It may even be argued that this was the most significant discussion since the Constitutional Convention when the Founding Fathers condemned the Continental and tried to protect us from the ravages of another political currency. Even the 25 volumes published by the National Monetary Commission in 1912 largely avoided the issue of money and concentrated only on banking procedures. Yes, the news on the gold standard was noteworthy, but not quite for the reason suspected by the Washington Post.

Making a significant change in policy takes time and effort. Rejecting the paper standard will not occur overnight. The destruction of the dollar, once “as good as gold,” literally took 58 years (1913–1971). Paper did not defeat gold in one battle. Gold will achieve success in a shorter period. Already the initial steps have been taken. Legalization of gold ownership in 1974 (thanks to Philip Crane, Jesse Helms, and others) and of gold clause contracts in 1977 have certainly been positive developments. The gold coin as recommended by the Gold Commission is another major step in creating a climate for general acceptance of a gold standard. A U.S. gold coin minted by the U.S. Treasury for the first time in 50 years is a significant event and heralds a new era in U.S. monetary history.

The debate in the news media that accompanied the establishment of the Gold Commission made millions of Americans aware of the issue. This public attention will, in the long run, be quite beneficial and is absolutely necessary before gold is generally accepted as money once again.

This report makes the point that we need not return to a gold standard—which had many shortcomings—but we can learn from the mistakes of the past, improve upon past systems, and go forward to a modern gold standard. By contrast, all the effort and planning imaginable cannot make paper money work. There is no way paper can be “improved” as money. Whenever governments are granted power to purchase their own debt, they never fail to do so, eventually destroying the value of the currency. Political money always fails because free people eventually reject it. For short periods individual countries can tell their citizens to use paper, but only at the sacrifice of personal and economic liberty.

Governments can fool people for a while with paper money, but it’s inevitable that trust in the money—something absolutely required for it to serve as a medium of exchange and to allow economic calculation—will be lost. Governments have power to declare paper to be legal tender, but they do not have power to make that money trustworthy. As governments more and more insist on paper alone serving as money, less and less trust is placed in it. It’s hardly a surprise that the decade of the 1970s, a decade of paper money, has brought us the decade of the 1980s—a destroyed bond and mortgage market, persistent and devastatingly high interest rates, and a faltering economy.

If the nature of money is understood and one observes how the destruction of money occurred during the past 50 years, and especially during the past 10, it’s easy to see why interest rates are high. Most people today see the economic problems we face as the result of high interest rates and a “shortage of money,” yet the high interest rates are merely symptoms of an untrustworthy currency. When one deals with currency that has no predictable value and in the long run is steadily depreciating, a “shortage” will always occur. The shortage, however, is in purchasing power and trust, and not in nominal dollars. Ironically, the more dollars created to satisfy this “shortage,” the greater is the loss of purchasing power and trust.

This report was written to demonstrate as clearly as possible the choices available to us: political (paper) money or commodity (real) money. It is imperative that we make it clear to the American people the alternatives they have, and that they make the correct choice. Making the wrong choice will jeopardize our political freedom and destroy the possibility of restoring a truly productive economy. Making the correct choice—limited government, free market, private property, and sound money—ensures liberty and prosperity.

I’m firmly convinced that major economic and political decisions will be forced upon us in the 1980s. The current system is “running out of steam” and is slowing to a stop. New ideas as well as a “new” money are required to keep society’s train from rushing downward from our magnificent peak of economic prosperity and political freedom.

I hope this report will help prevent needless suffering and show the way to an honest money system in which the people are in charge, not politicians and the bankers.

Washington, D.C.
Ron Paul

July 1, 1982
Member of Congress

We live in an age of inflation. Punctuated by brief moments of austerity and declining prices, the world of work hurtles without compass toward a rendezvous with catastrophe.

Usually defined as too much money chasing too few goods, inflation is really the depreciation of money, a process of monetary destruction. But a stable monetary standard is essential in a market economy—it is the indispensable standard of commercial value. Stable money is, in fact, bound up with civilization itself. The depreciation of the commercial standard of civilization—money, as with the depreciation of moral and legal standards of value, brings chaos and disorder. For a generation we have seen the debasement of these standards not only in commerce, but also in our public life, our schools, our families, our art, and our science. It is no exaggeration to say that the survival of Western civilization in general, and America in particular, is at stake in the struggle over standards of value.

Monetary Revolution

When stable political institutions are overturned, the result is revolution. Inflation and deflation are revolutions in the world of commercial affairs. And history shows that a price revolution often precedes a political revolution. Lenin in Russia, Hitler in Germany, and Mao in China—to name just three examples—came to power after great inflations.

Today, we have a permanent financial crisis at home and throughout the world because men and women no longer trust the American dollar. No longer a just and honest measure of the value of work, the dollar has ceased to be the stable standard of economic worth the world over. Since 1971, when President Nixon cut the dollar’s final link to the gold standard, our currency has been nothing but a printed piece of green paper, or an impulse on a computer tape, manipulated by a government—created monopoly bank called the Federal Reserve System. What the Post Office has done to the currency of communications—the mail the Fed monopoly has done to the currency of commerce—the dollar.

Working people understandably refuse to hold the depreciating dollar for long periods. They spend it quickly for a house, a car, an antique, a rare coin—anything real. At best they lend their dollars for short periods to the highest bidder, usually the U.S. government or money market funds, which do not build factories or hire unemployed workers.

Why have producers and consumers alike lost faith in our commercial standard of value? It is because the U.S. government, the Federal Reserve, and the dependent private banks have created more dollars than Americans want to hold. These paper and credit dollars were often printed to pay for the colossal budget deficits, created by specialinterest government in Washington. And often the manipulation of credit by the Fed was an indirect effort to manipulate voters by manipulating the banking system and the economy. Even during short periods of dollar scarcity, such as 1981–1982, the Fed has denied credit to the economy in order to correct for previous periods of excess. Fed manipulation causes inflation and deflation.

What the Fed and the politicians have forgotten is the sacred link between the value of the dollar and the value of work. The manipulation of the quantity of money does not create prosperity.

Money does not make wealth. Only hard work creates wealth.

Real Money for Real Work

A craftsman labors many hours to create a product. If he exchanges the product for Federal Reserve notes, he receives for his work a paper dollar that costs almost nothing to produce. But if he exchanges the valuable product of his hands for gold coins, he takes for his work the real product of labor offered by miners and coin makers. All producers desire to trade proportional product values of honest work—both in quality and quantity. Producers and consumers use money to make the exchange—and to save.

But the paper dollar, with which Americans are paid today, is not real money. Almost no real work is required of the government to produce the mass-printed paper dollar bill. So with its marginal cost of production almost zero, our paper money has no real underlying value. Nor is the paper dollar linked to anything of real value. Yet it is legal tender. That is, the U.S. government requires Americans to accept paper money without intrinsic value in payment of all debts, public and private. In exchange for real work and real values, Americans by law must accept paper money—unless the contract specifies otherwise.

Today, we live in a crisis of inflation and deflation caused by government manipulation of paper money and bank credit. The unhinged federal government deficits are the visible manifestations of government finance run amok.

The Dangers Confronting President Reagan

Four financial forces now conspire to destroy the President’s economic program: rising federal spending; the permanent federal deficit; the Treasury demand for credit to finance the deficit; and the unpredictable creation and destruction of excess money and credit by the U.S. central bank, the Federal Reserve System. Together, these forces cause extreme price volatility, high interest rates, and economic stagnation.

Total government credit demand is running at $150-200 billion a year, and rising. But personal savings are only about $100 billion. Net national savings equal approximately $200 billion. The impact of the government demand for credit has dazed the Fed and the market. The government absorbs almost all the savings, and business languishes. The Federal Reserve wanders around Wall Street amidst the chaos of the capital markets, which are virtually shut down for all but the U.S. Treasury and the highest quality utility and telephone credits, themselves government wards. Moreover, with the defense buildup, even the rate of growth of federal spending may not slow down. And it is government borrowing at present levels, joined to Fed manipulation, which has immobilized the money and capital markets.

Previous administrations sowed chaos. President Reagan may reap the whirlwind.

Indifference to Deficits

The present crisis is not unique.

Financial disorder greeted Margaret Thatcher in 1979 when she was elected Prime Minister of England. In 1958, economic chaos and war destroyed the Fourth Republic in France. But President Charles DeGaulle and his financial advisor, Jacques Rueff, understood the causes of the French financial collapse. The causes were budget deficits (financed indirectly by the Bank of France), a manipulated currency, and an overregulated economy. In creating the Fifth Republic, Rueff and de Gaulle reformed the currency, balanced the budget, and began the deregulation of the economy. The result for France was a decade of economic growth and political stability.

Here in the United States, two past decades of Keynesian policies have failed under Lyndon Johnson, Richard Nixon, and Jimmy Carter, while Thatcher’s current monetarist policies are coming to naught in England because they depend too much on central bank manipulation of the money supply. Well-intentioned monetarist policies, officially adopted by the Reagan administration and the Federal Reserve, are doing no better in the United States.

Neither monetarists nor Keynesians understand the mechanism by which inflation and deflation is transmitted—how the federal deficit and credit demands influence interest rates and tend to cause inflationary and deflationary Fed monetary policy. Both supply-siders and monetarists are unsure of the links between federal spending, budget deficits, rising interest rates, growth in the money supply, inflation and economic stagnation. But as the monetarists, Keynesians, and supply-siders war among themselves, they now agree, ironically, on one thing: Budget deficits don’t matter. And they are all tragically wrong. The indifference of academic economists to budget deficits is an economic heresy which ravages the world. And the wages of sin are upon us—the highest real rates of interest in the last 20 centuries.

Meanwhile, because of the Reagan administration’s uncertain policy towards deficits and the Fed, and the effect of deficits on capital formation and economic growth, we now endure the major financial crisis of postwar American history.

Rising Treasury credit demands, on and off budget; historically high interest rates; and a political decision by the Fed to create excess credit again could cause a complete collapse of the U.S. capital markets.

Once the wonder of the Western world, American long-term capital markets have already ceased to exist as our forefathers knew them.

There Are Solutions

But we need not accept the destruction of our money and our economy. The remedies are available and they are historic American remedies. We could establish the gold standard, balance the budget without raising taxes, and reform the procedures of the Federal Reserve. That is what this report is about.

It is about financial disorder in America. We try to show, in outline form, where we have been, where we are now, and where we must head. We lay out a financial policy for the rebirth of the American economy, a lasting policy which we deeply believe will lead to full employment and growth in a free economic order.

Even without such a sound financial policy, we are repeatedly told by critics that we shall still survive as a country. True, it is the lot of working people and businessmen to survive, especially in America. But to what end? Permanently high unemployment, inflation, and interest rates? Increasing bankruptcies? Wage and price controls? Is this the stuff of the American dream?

We can achieve financial order, but only with real leadership and real money.

New York, New York

July 1, 1982

Lewis E. Lehrman