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

VII. The Next 10 Years

The transition to gold, as we have outlined it in chapter six, should be accomplished in no more than three years, with any resulting recession lasting about a year. The following 10 years should be ones of prosperity, high real economic growth, and low levels of unemployment. Inflation and the business cycle would be things of the past, as a genuine free banking system would eliminate the possibility of national inflations and contractions. Interest rates would fall to the “normal” interest rates that prevailed for centuries before our national and international experiment with paper money.

Confidence in the monetary unit—the gold dollar—would elicit enormous savings and investments. Prices could be expected to fall gently, resulting in large real wage increases for all workers. In short, the next 10 years with gold would be similar to the prosperity, full employment, and rapid economic growth this nation experienced in the last third of the 19th century. If anyone would like to know what the next 10 years with a gold standard and monetary freedom would be like, he can get a pretty good idea from studying the American economy in the last portion of the last century.

In their Monetary History of the United States, Friedman and Schwartz write:

Both the earlier [1879–1897] and the later [1897–1914] periods were characterized by rapid economic growth. The two final decades of the nineteenth century saw a growth of population of over 2 percent per year, rapid extension of the railway network, essential completion of continental settlement, and an extraordinary increase both in the acreage of land in farms and the output of farm products. The number of farms rose by nearly 50 percent, and the total value of farm lands and buildings by over 60 percent—despite the price decline. Yet at the same time, manufacturing industries were growing even more rapidly, and the Census of 1890 was the first in which the net value added by manufacturing exceeded the value of agricultural output. A feverish boom in western land swept the country during the eighties. “The highest decadal rate [of growth of real reproducible tangible wealth per head from 1805 to 1950] for periods of about ten years was apparently reached in the eighties with approximately 3.8 percent.” ...[G]enerally declining [at 1 percent per year] or generally rising [at 2 percent per year] prices had little impact on the rate of growth, but the period of great monetary uncertainty in the early nineties produced sharp deviations from the longer-term trend.1

It was the return of the United States to the gold standard in 1879 that stimulated this real economic growth, and it was the “monetary uncertainty in the early nineties” that slowed and almost stopped that growth. Today it is once again “monetary uncertainty” that has brought us to our present crisis.

The pre-1914 gold standard was invented by no one. More important, it was also managed by no one. Modern economists too often look upon the classical gold standard and attribute its success to the Bank of England’s ability to follow the “rules of the game.” But in fact the system worked to the extent the authorities let it work. Of course, there had to exist an environment where governments kept their promises to define and redeem their currencies in a specific weight of gold, and would allow gold to be traded freely. But to call their success in doing this managing gold is to play with language. Gold can manage itself if governments do not hinder it.

The best of all worlds would be to have Bank and State separated the way Church and State are. That is what we propose. For a gold standard still coupled with government monopoly on note issue would only be as sound as the promise of the government to redeem their notes.

In the classical gold standard before 1914, promises made by governments were kept. Everyone expected that they would be. And not only the promises of governments to their citizens, but to other governments. Those governments who broke faith with other governments were treated as pariahs. Treaties were taken seriously.

If it is too much to expect that governments will always be honest, at least we can improve matters whereby governments are condemned and punished for breaking promises. If the government debases its paper money, there ought to be alternatives that people can use for exchange.

The contrast is stark between a regime of money regulated by the marketplace and our system manipulated by politicians. John Maynard Keynes rhapsodized on the world before 1914 in The Economic Consequences of the Peace:

What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages. The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.2

The next 10 years with gold hold great promise. But to realize that promise, Congress must act quickly to clear the legal underbrush and obstacles out of the way of free men. Their failure to do so will result in a totally unnecessary and totally avoidable tragedy.

10 Years without Gold

Since 1971, America’s monetary unit has been both undefined and undefinable. The meaning of the term “dollar” has changed from yearto-year, month-to-month, even day-to-day. The economic consequences of this irrationality are clear; there is no need to review them again. The question we must attempt to answer in this concluding section is, quite simply, what will happen if the American people are forced to endure another decade without gold and monetary freedom? What is likely to occur should Congress fail to act on the recommendations we have made in chapters five and six?

Without a gold standard, and continuing roughly with the present system, we can expect more of the same—except worse. For every year, as inflationary expectations become more and more imbedded, we can expect the central “core” rates of both inflation and unemployment to rise. We should never forget that Richard Nixon imposed pricewage controls in 1971 because the government was panicking at a 4.5 percent per annum rate of inflation. In 1982, we would consider returning to this rate tantamount to reaching the state of nirvana. The prime interest rate in July 1971 was 6 percent. Each year we get accustomed to more and more inflation, so that now any inflation rate below 10 percent (“double digit”) is considered a virtual end to inflation. Should Congress not adopt the recommendations outlined above, we can expect core inflation rates to rise over the next decade, and at an accelerated rate—so that 10 years from now we can expect cheering in the media when the inflation rate falls below 50 percent. As inflation deepens and accelerates, inflationary expectations will intensify, and prices will begin to spurt ahead faster than the money supply.

It will be at that point that a fateful decision will be made—the same that was made by Rudolf Havenstein and the German Reichsbank in the early 1920s: whether to stop or greatly slow down the inflation, or whether to yield to public outcries of a “shortage of money” and a “liquidity crunch” (as business called it in the mini-recession of 1966).

In the latter case, the central bank will promise business or the public that it will issue enough money supply to “catch up” with prices.3 When that fateful event occurs, as it did in Germany in the early 1920s, prices and money could spiral upward to infinity and it could cost $10 billion to buy a loaf of bread. America could experience the veritable holocaust of runaway inflation, a cataclysm which would make the Depression of the 1930s—let alone an ordinary recession—seem like a tea party.

That this horror can happen here can be seen in the reaction to the first peacetime double-digit inflation (1973-1974) by the former Chairman of the Council of Economic Advisers, Walter Heller. Writing in the Federal Reserve Bank of Philadelphia Review in 1974, Heller pointed out that in the past year, prices had risen faster than the money supply, and that therefore [sic] an increase in the money supply could not be a cause of the inflation. On the contrary, opined Dr. Heller, it was the duty of the Federal Reserve to increase the money supply fast enough so that the real money stock (M corrected for price changes) would return to pre-1973 highs. In short, while using modern jargon, Heller said exactly the same thing as Rudolf Havenstein had said a half century earlier: that the authorities must increase the money supply fast enough to catch up with the prices. That way lies disaster, and who of us is to say that the United States, at some point in the next 10 years without gold, will not take the very same course?

Heller’s claim that the money supply growth did not cause the price inflation is an example of many current economists’ befuddlement over money. In a similar way we saw the coining of a new word in the 1974- 75 recession: “stagflation,” to describe the event of rising prices in a business slump. This appeared mysterious to the conventional economists, yet was predicted by the hard-money, free-market economists. Depreciating a currency through monetary inflation always brings escalating prices with recessions in the latter stages of a currency destruction. In the early stages of a currency destruction, recession may well slow the increase in prices, but that is only because not too many people have caught on to the monetary policies of the government. As the inflation progresses, more and more people catch on.

There now is consternation among orthodox economists over persistently high interest rates in the midst of a severe recession—a very bad monetary and financial signal. Conventional economists remain baffled over the modest price inflation currently associated with record high “real” interest rates, exclaiming they are “higher than they should be.” This confusion comes from ignoring the fact that computer calculations of the money supply cannot project interest rates accurately. It fails to address the subject of trust in and the quality of money. Interest rates are set in the market, taking into consideration money’s quality, anticipated future government monetary policy, and trust in the officials, in addition to immediate short-term changes in the supply and demand for money and credit.

Precise price correlation (to money supply increases), stagflation, and high interest rates are all understood and anticipated by the advocates of sound money who emphasize the importance of the quality of money as well as its quantity.

In short, if we continue to stay on the course of fiat money, facing America at the end of the road is the stark horror—the holocaust—of runaway inflation. Such an inflation would wipe out savings, pensions, thrift instruments of all kinds; it would eliminate economic calculation; and it would destroy the middle and poorer classes. In America, hyperinflation will not be the relatively “moderate,” steady 100 percent per year or so that Israel or that many countries in Latin America have experienced. For in these small countries, particularly in Latin America, the currency becomes only hand-to-hand cash; all investments move to the U.S. and the dollar. The United States would not be so fortunate.

America, in sum, must choose, and the choice is a vital one. In three years, perhaps sooner if necessary, another Gold Commission should be established to make more recommendations to the Congress. At that time, the choice will be perfectly clear to all, even to those now opposed to gold. Either we must move to the gold, standard and monetary freedom, with long-run stability of prices and business, rapid economic growth and prosperity, and the maintenance of a sound currency for every American; or we will continue with irredeemable paper, with accelerating core rates of inflation and unemployment, the punishment of thrift, and eventually the horror of runaway inflation and the total destruction of the dollar. The failure of irredeemable money nostrums is becoming increasingly evident to everyone-even to the economists and politicians. Congress must have the courage to move forward to a modern gold standard.

• 1Milton Friedman and Anna J. Schwartz, Monetary History (Princeton: Princeton University Press, 1963), pp. 92-93.
• 2John Maynard Keynes, The Economic Consequences of the Peace (New York: St. Martin’s Press, 1919), pp. 10-12.
• 3See Fritz K. Ringer, ed. German Inflation of 1923 (New York: Offshore University Press, 1969), p. 96.