Back to gold, back to prosperity

By Michael R. Allen
web posted June 1999

The gold standard. Hard money. Free banking. These terms are supposedly unquestionably refuted in modern economics. Besides a few crusty old Austrian-schoolers and Alan Greenspan on every other Thursday, not many economists consider gold-backed money a possibility in today's world.

The gold standard in America would mean that a dollar would be worth a certain amount of gold; the paper used in large exchanges would serve as ownership titles to gold soared in banks. There would be no Federal Reserve Bank, no unnatural inflation, no business cycle. One could confidently know that all his money was tied to real value and actually existed, unlike today as fractional reserve banking only holds a percentage of all Reserve Notes (dollars) in its demand deposits.

This system acknowledges that money is not merely a mean of exchange but also a hard commodity that represents real wealth. Gold emerged over time as man's preferred way of storing profits and trading for goods. Government only codified man's choice when nations began government-minted coins.

Basically, the period from 1815-1914 was a time in which this a system was employed. Then, as noted by Murray Rothbard in What Has Government Done To Our Money?, "each national currency (the dollar, pound, franc, etc.) was merely a name for a certain definite weight of gold." In that time, efforts to manipulate the gold-backed dollar resulted in a few recessions and depressions, but largely America was prosperous.

When the nation established a Federal Reserve Bank (the "Fed") in 1914 and the current system was christened, politicians, bankers, and economists cheered this new toll of prosperity. By throwing out a system where money was real wealth, the government was purportedly making money into a science where permanent prosperity could reign. Unfortunately, the potent pro-gold message of The Theory of Money and Credit - masterpiece of Austrian-school legend Ludwig von Mises - did not seem to reach the US.

Scarcely mentioned at the time was that the Fed's powers to create new credit and increase the money supply opened the doors to disaster. The Great Depression, caused by a high increase in capital credit and other money, did not even shatter faith in the Fed. In 1933, President Franklin Roosevelt confiscated privately-held gold to force everyone to use dollars. By 1971, no tie between gold and the dollar existed.

Besides allowing for a real base for a capitalist system, gold also restricts the expansion of government. It's no wonder politicians were so eager to ax the gold backing of money - with gold currency, the government could only take money through taxes. With fiat money, the government can benefit from credit expansion without taxing the people to rebellion.

Among supposedly free-market thinkers, Chicago-School monetarism is prevalent. With Milton Friedman as the fountainhead of that movement, adherents to this approach advocate freely-fluctuating fiat money, that is a currency backed by nothing but paper and controlled by a central government authority. That anyone would look to Friedman's monetary policy as a way to prevent inflation is amazing - but most conservative and many libertarian thinkers favor this approach. Monetarism was the prevalent approach not only of President Ronald Reagan in America but also of Prime Minister Margaret Thatcher of Britain.

Equally flawed is the stop-and-start policies implemented by Mr. Greenspan as Chairman of the Federal Reserve Bank. Greenspan is viewed by many as a laissez-faire capitalist, and some have even suggested his intellectual devotion to the gold standard. Yet he orchestrated the bailout of the failed Long-Term Capital Management and pressed for more US-backed International Monetary Fund loans to "solve" the Asian financial crisis. Greenspan often sounds like a pure capitalist on domestic issues, such as when he suggested the Department of Defense could be sunset.

However, Greenspan qualifies his support for pure laissez-faire capitalism. "The budget has to be balanced, the government has to be small, and the banking system must be perfectly sound" before a gold standard would work, says the Fed chief. Since those conditions cannot be met without a return to the gold standard, Greenspan escapes blame for not asking for a return to it. Conversely, by supporting a theoretical gold standard, he dodges blame for the dangers of the current system. He is, as Jeffery Tucker of the Mises Institute has dubbed him, "Mr. Moral Hazard."

Tragically, Greenspan is likely going to stand as the best Fed chairman ever. As the value of gold rises on the free market and the American dollar stays woefully devalued, restoring gold-backed money is a priority. Prosperity of the sort generated by the Fed lately is temporary. Prosperity under a gold standard lasts as long as people are free to hoard, purchase, and trade.

Michael R. Allen is the editor in chief of the peerless SpinTech magazine.


Current Issue

Archive Main | 1999

Musings - ESR's blog

E-mail ESR


1996-2013, Enter Stage Right and/or its creators. All rights reserved.