22.
The Gold Standard
A number of different
goods have been used as money across the globe and human history--sea shells,
cows, cigarettes, beer, cabbage, tobacco, beads, etc.--but the most commonly
used money has been the precious metals of gold and silver. Such goods arose as a money not by
democratic election or government fiat but by the free interaction of consumers
in the market.
Money serves as a
medium of exchange facilitating trade, a measure of value and as a store of
value. The qualities that made
gold and silver the first choice in money over the numerous others are inherent
in the precious metals and is comparable to using cotton for shirts and
ceramics for coffee cups. Just as
cotton has the qualities which make it a good material for shirts--light
weight, breathability, washability, etc.--and ceramic has the qualities which
make it a good material for coffee mugs--insulation, non-leaking, etc., gold is
a good material for money.
Gold has four
qualities in the right combination to be money. These qualities are:
durability--a 100 year old coin is still recognizable and functional as
a coin; widespread acceptance--people the world over value gold; high value per
unit--1 ounce of gold is worth about $350 today; and divisibility--cutting an
ounce of gold in half results in 2 fully gold 1/2 ounces. Other goods which have been used as
money do not have the same mix of qualities as fully appropriate as does
gold. Thus, gold as money is all
quite rational, logical and reasonable in contrast to J. M. Keynes's famous
edict that "gold is a barbarous relic."
Ironically, it is the
current chairman of the Federal Reserve System, Alan Greenspan, who enunciated
the correct view on the animosity toward gold in Capitalism the Unknown
Ideal:
An almost hysterical antagonism toward the gold
standard is one issue which unites statists of all persuasions.
They seem to sense--perhaps more
clearly and subtly than many consistent defenders of laissez-faire--that gold
and economic freedom are inseparable, that the gold standard is an instrument
of laissez-faire and that each implies and requires the other. p. 96
One of the claims
against a gold standard money--currency units denominated in a weight of gold
with gold coins circulating and paper currency fully redeemable upon demand--is
that it is silly to mine gold from the earth only to rebury much of it in bank
vaults and incur significant costs in the process--unfortunately, Milton
Friedman is in this camp. These
critics claim that it would be much less expensive to just establish a pure
paper money standard. While this
claim is true as stated, it does not recognize the costs that are
generated. A gold standard puts a
check on the creation of money since all paper and credit must be redeemable in
actual gold bullion or coin. The
problem with a paper money standard is that there is no way to stop the
creation of ever greater quantities of money once the authority to do so is
granted.
As an analogy, it
could be claimed that it is silly to go to all of the trouble and expense of
making locks out of hard metal when paper locks would be cheaper! But of course the reason for metal
locks is that thieves will not be deterred by the paper locks and refrain from
theft. Nor will those in authority
of money creation refrain from the theft inherent in additional paper money
creation. Contrary to the notion
that unlike a paper money supply, gold cannot be readily created in mass
quantities and therefore is undesirable, this in fact is one of the major
virtues of gold!
In a choice between
the integrity of politicians and the stability of gold, George Bernard Shaw is
reported to have advised:
"With all due respect to those gentlemen, I advise the voter to
vote for gold."
Yet another
ridiculous claim against gold is that the price of gold is too volatile--having
run up from $70 in the early 1970's to $850 in 1980 and now selling in 1995 at
$350. But this line of analysis
exactly reverses the true cause and effect. Gold in terms of paper dollars soared in the late 1970's due
to the growing distrust in the paper money when inflation hit
double-digits. With the
disinflation of the 1980's fears subsided and the price of gold declined. Gold is seen as the safe haven, the
hedge against inflation. The
actual volatility was in the confidence of the paper dollar; the price of gold
in terms of those dollars was an effect.
An additional
commonly cited claim against gold as money is that our economy would be at the
mercy of the world's major gold producers--Russia and South Africa. What this argument conveniently
overlooks is that the annual production of these two countries is tiny compared
to the existing stock of gold.
Additionally, it is costly to mine gold and will be done only if the
price is high enough to warrant the costs. But increasing production of gold reduces the price, thereby
undermining the intended outcome of a country hell-bent on overproduction. However, for the sake of argument,
let's assume both countries do engage in mass production to whatever degree
possible and "flood" the world with gold. Is this something to be upset about? After all, gold is a valuable commodity
in industry and for consumers--would this be such a tragedy? I'll worry about this in the same way I
lose sleep worrying that Russia may massively produce oil or wheat thereby
reducing my cost of driving and eating!
One last claim
against gold is that there just is not enough gold to reestablish the U.S.
dollar's redeemability. It is true
that the number of paper and credit dollars created has been so vast that there
is not enough gold to redeem dollars at the original rate of $20 to the
ounce. But, we can recognize
reality and reestablish the dollar at an appropriate rate of approximately
$2000 to the ounce. Murray N.
Rothbard has proposed just such a program in The Mystery of Banking:
-
That the dollar be defined as 1/1696 gold ounce.
-
That the Fed take the gold out of Fort Knox
and the other Treasury depositories, and that the gold then be used (a) to redeem
outright all Federal Reserve Notes, and (b) to be given to the commercial
banks, liquidating in return all their deposit accounts at the Fed...I propose
that the most convenient definition is one that will enable us, at one and the
same time as returning to a gold standard, to denationalize gold and to abolish
the Federal Reserve System.
-
Greenspan, Alan
"Gold and Economic Freedom" in Capitalism the Unknown Ideal edited by Ayn Rand ,
(New York: New American Library, 1967)
pp. 96 - 101.
-
Hazlitt, Henry
The Failure of the New Economics ,
(New Rochelle, New York: Arlington House, 1959)
pp. 153 - 155.
-
Katz, Howard
The Paper Aristocracy ,
(New York: Books in Focus, 1976)
pp. 5 - 18.
-
Paul, Ron
The Case for Gold ,
(Washington, D. C.: The Cato Institute, 1982)
-
Rockwell, Llewellyn, editor
The Gold Standard ,
(Lexington, Massachusetts: D. C. Heath and Company, 1985)
-
Rothbard, Murray N.
The Mystery of Banking ,
(New York: Richardson and Snyder, 1983)
pp. 263 - 269.
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