The gold standard

Throughout history, money has taken many forms. But the precious metals, gold and silver, have always been favoured as money because of their physical, chemical, and aesthetic characteristics. The precious metals are beautiful; they are relatively rare; they are readily minted into uniform and identifiable forms, such as coins and bullion bars; and for all of these reasons, they are universally desired as stores of value, and universally accepted in exchange for all other goods and services. These reasons are both necessary and sufficient to establish the precious metals as the historical money par excellence.

Gold, and the gold standard, have had a symbolic significance, in addition to their practical use in facilitating trade: they have always represented real value, integrity, responsibility, productivity — and an ever-increasing standard of living.

The gold standard was the world standard during the nineteenth century, an era of rapidly increasing wealth and liberty throughout the world. Gold was the standard for international trade and the international money and capital markets. Gold was the medium of exchange which spread capitalism, industrialism, and an ever-increasing standard of living into the remotest parts of the world, destroying ancient prejudices and superstitions, sowing the seeds of new life and well-being, freeing minds, creating incentives, and generating unprecedented wealth. Gold offered the prospect of uniting all peoples into a world community cooperating peacefully with one another. Thus, the gold standard was both the means and the symbol of this greatest and most beneficial of all historical developments.

The gold standard is a market generated phenomenon. It evolves and functions spontaneously and independently of governments. Its preservation and operation does not depend upon the existence of implementing laws or government interference. It requires only that governments abstain from deliberately sabotaging it. And it results in the optimal cooperation of all productive people in the world marketplace.

It is important to understand how the gold standard operates. This is best illustrated with a diagram — which I cannot share with you over the telephone. But it is very simple; I will describe it, and then summarise the key points in a few words which you can jot down for future reference.

Let us start with an economy that is in equilibrium. Suddenly, there is an increase in the supply of gold: gold is discovered in California, in the Yukon, in South Africa, or wherever. An increased supply of gold means an increased supply of money, but not an increase in the goods and services which are exchanged for money; therefore, an increased supply of money, other things being equal, will result in increased prices throughout the economy. However, if domestic prices are increasing, then cheaper goods and services will be purchased and imported from abroad, and so imports from foreigners will increase. Further, if domestic prices are increasing, then foreigners will buy fewer domestically produced goods and services, and so exports to foreigners will decrease. Therefore, the effect of more gold in circulation will be to increase imports and to decrease exports. But this imbalance of trade must be paid for. How? By exporting gold. And when gold is exported, then the domestic money supply decreases and domestic prices decrease; and thus the stimulus which upset the original equilibrium — namely, more gold — is self-correcting.

If you have paper and pencil handy, you might want to jot down these seven steps.

1. Gold supply up.
2. Prices of goods and services up.
3. Imports of goods and services up.
4. Exports of goods and services down.
5. Gold exports up.
6. Gold supply down.
7. Prices down.

Again, because gold is universally desired as a medium of exchange and store of value, the stimulus which upset the equilibrium — more gold — is self-correcting. This negative feedback, or economic servomechanism, functions in a totally free market to keep production, prices, trade, and consumption in optimal balance.

The gold standard makes the determination of the monetary unit’s purchasing power independent of the policies of governments, political parties, and pressure groups; it removes the determination of the purchasing power of money from the political arena.

The main objection raised against the gold standard is that the prime factor in the determination of prices is something which no government can control — the profitability of gold production — which is itself in dynamic equilibrium with the profitability of producing all other goods and services. Therefore, an “automatic” market-generated factor restrains a national government’s ability to inflate the supply of money and manipulate the purchasing power of money.

The enemies of the gold standard spurn, as its alleged vice, the very thing that is its main virtue: namely, its incompatibility with a policy of inflation and unlimited credit expansion. It is a fundamental economic truth that no one can be made richer by printing more paper money. The official abhorrence of the gold standard is due to the myth that omnipotent governments can create wealth out of little scraps of paper.

Granted that the purchasing power of gold is not perfectly stable. But the very notion of stability of purchasing power is absurd. In a continually changing world, there can be no such thing as stability of purchasing power. But the adversaries of the gold standard do not want the purchasing power of money to be stable; rather, they want governments to be able to manipulate the purchasing power of money without being constrained by the monetary discipline of the gold standard.

During the gold rushes of the nineteenth century, the rapidly increasing supply of gold provoked attacks upon the gold standard as being inflationary. Somewhat later, when the supplies of goods and services increased faster than gold production, this provoked other attacks upon the gold standard as being deflationary. The foes of the gold standard were demanding an intensification of the prevailing upward trend of prices and wages: they wanted to lower the monetary unit’s purchasing power at an ever-accelerating rate.

Such a policy of inflationism is always popular: it appears to increase wages. But its popularity is due to a misunderstanding of its effects. What people are really asking for is a rise in the prices of the goods and services they are selling, while the prices of the goods and services they are buying remain unchanged. In the long run, of course, this is impossible.

In the words of the great Austrian economist, Ludwig von Mises: “For the naive mind there is something miraculous in the issuance of government fiat paper money. A magic word spoken by the government creates out of nothing a thing which can be exchanged against any merchandise a person could desire. How pale is the art of sorcerers, witches, and conjurors when compared with that of the government’s treasury department! Professors tell us that the government can raise all the money it needs by printing it; allegedly, inflation can solve all problems.”

Inflation may appear to be benign as long as the housewife thinks: “I need a new frying pan today. But prices are too high today; I shall wait until prices are lower.” The critical stage begins when the housewife thinks: “I don’t need a new frying pan; I may need it in a year to two; but I’ll buy it today because it will be much more expensive later.” Now the catastrophic end of the inflation is near. In its last stage the housewife thinks “I don’t need any more frying pans; I’ll never need any more frying pans. But it’s wiser to buy something tangible with these scraps of paper that the government calls money, than to hang on to them until they become worthless.”

Inflation ceases to work as soon as the populace becomes aware of its effects upon the monetary unit’s purchasing power. In the early stages of an inflation, only a very few people discern what is going on, manage their business affairs in accordance with this insight, and deliberately aim at reaping inflation gains. The vast majority of people are too dull to grasp what is really happening. Filled with indignation, they attack as “profiteers” those few who are astute enough to understand and take advantage of the real causes of the inflation. Public ignorance is the indispensable basis of the inflationary policy.

But is it rational to base a monetary system upon the intentional deception of the great majority of the citizens? Obviously not. Such a policy is self-defeating. Eventually, the masses come to understand the schemes of their rulers; and then the clever plans of the inflationists collapse. Inflationism is not a reasonable alternative to a sound money policy: it is difficult, if not impossible, to stop an inflationary spiral before the masses have seen through their rulers’ schemes.

Those who are intent upon maintaining political power and political favouritism have always wanted to sabotage the evolution toward increased prosperity, peace, and liberty. They loathed the gold standard, not only because of its economic value, but also because it was symbolic of all those doctrines and policies they wanted to destroy. Nationalists and isolationists fight the gold standard because they want to sever their countries from the world market- place and establish national autarky. Interventionist governments and pressure groups fight the gold standard because they consider it the most serious obstacle to their desires to manipulate prices and wages. But the most fanatical attacks against gold are made by those who believe that unlimited expansion of bank credit is the panacea for all economic ills. They believe that unlimited expansion of bank credit could lower or even entirely abolish interest rates, raise wages and prices for the benefit of everyone, free the State from the necessity of balancing its budget — in short, make all decent people prosperous and happy. They believe that only the gold standard, that devilish contrivance of the wicked and stupid classical economists, prevents mankind from attaining everlasting prosperity.

And thus John Maynard Keynes, the ideological father of deficit spending, proclaimed in the British House of Lords, on May 23, 1944, that gold was “a barbarous relic.” And whoever today suggests that the world should return to the gold standard is dismissed as a lunatic.

Credit expansion based on fiat money can produce a temporary boom, but at the cost of making economic calculation impossible. The basis of the boom is funny-money, not an increase in capital goods. The inevitable failure of all political attempts at credit expansion based on fiat money results in recurrent economic crises — the boom-bust cycles which have occurred throughout history.

And now these political prophets without vision are trying to con us once again — with electronic money which is nothing more than blips on computer screens. A stable and automatically balanced economy must be based upon a monetary system that involves a universally accepted medium of exchange AND store of value. Historically, only the precious metals — predominantly gold — have met these criteria. Neither fiat money nor electronic money is a store of value; and so the eventual results of electronic money will be the same as those of fiat money: hyperinflation, a massive loss of confidence, an unprecedented level of economic chaos, and deep depression and destruction of the world’s capital base. It is inevitable.

Indeed, all government interference with market phenomena must fail to achieve the ends sought. We call this the “one-eighty degree phenomenon.” A discussion of this crucially important subject is beyond the scope of today’s presentation, but it is covered in the offshore seminars. When an interventionist government tries to remedy the negative effects of its previous actions by intervening further and further, it eventually converts its country’s economic system into socialism. It then abolishes the domestic market altogether, and with it money, even though it may maintain some of the terms and trappings of the market economy. But in any event, it is not the gold standard that frustrates the intentions of the political authorities; it is their own contradictions.

We must understand that the gold standard has never failed. Governments have tried to abolish it in order to pave the way for inflation — to expand credit without limits in order to lower interest rates and to improve the balance of trade. It is obvious that the gold standard cannot function properly if the buying, selling, and possession of gold is illegal, and legions of judges, gendarmes, and informers are busily enforcing the law. The whole grim apparatus of oppression and coercion — policemen, custom guards, penal courts, prisons, in some countries even executioners — had to be used to destroy the gold standard. Solemn pledges were broken, retroactive laws were promulgated, provisions of constitutions and bills of rights were openly defied. And legions of servile writers praised what governments had done and hailed the dawn of the fiat-money millennium.

The most remarkable thing about this allegedly new monetary policy, however, is its complete failure. It substituted fiat money in the domestic markets for sound money, and favoured the interests of some individuals and groups of individuals at the expense of others. It also contributed to the disintegration of the international division of labour. But it did not succeed in eliminating gold from its position as the international world standard. Gold has achieved its eminence, and it will retain its eminence, because millions of participants in the world marketplace voluntarily prefer it to all other forms of money. If you glance at the financial pages of any newspaper you discover that gold is still the world’s money, and not the colourful products of the various government printing presses.

No government is powerful enough to abolish the gold standard. Gold is the money of international trade and the economic community of mankind. It cannot be affected by the actions of governments whose sovereignty is limited to definite countries. It does not matter that governments confiscate gold coins and bullion, or that they seize and punish those holding gold as felons. He who buys or sells on a foreign market calculates the advantages and disadvantages of such transactions in terms of gold. If a government wants to sever its domestic price structure from that of the world market, it must resort to other measures, such as prohibitive import and export duties and embargoes. Nationalisation of foreign trade, whether effected openly or indirectly by foreign exchange control, does not eliminate gold: The world’s medium of exchange is still gold.

The policy of all contemporary governments to denigrate gold is not an isolated phenomenon. It is an integral part of the almost universal process of destruction which is the hallmark of our era: the denigration of values, integrity, responsibility, productivity, and prosperity. Governments want to substitute economic isolationism for free trade, plunder for production, poverty for prosperity, political power and control for individual liberty, and war for peace. They are trying to fake Reality, and in the long run, Reality cannot be faked.

The gold standard will always remain inviolate as both the means and the symbol of integrity, prosperity, and peace on Earth.