Since the United States went completely off gold in August 1971 and established the Friedmanite fluctuating fiat system in March 1973, the United States and the world have suffered the most intense and most sustained bout of peacetime inflation in the history of the world. It should be clear by now that this is scarcely a coincidence. Before the dollar was cut loose from gold, Keynesians and Friedmanites, each in their own way devoted to fiat paper money, confidently predicted that when fiat money was established, the market price of gold would fall promptly to its nonmonetary level, then estimated at about $8 an ounce. In their scorn of gold, both groups maintained that it was the mighty dollar that was propping up the price of gold, and not vice versa. Since 1971, the market price of gold has never been below the old fixed price of $35 an ounce, and has almost always been enormously higher. When, during the 1950s and 1960s, economists such as Jacques Rueff were calling for a gold standard at a price of $70 an ounce, the price was considered absurdly high. It is now even more absurdly low. The far higher gold price is an indication of the calamitous deterioration of the dollar since “modern” economists had their way and all gold backing was removed.
It is now all too clear that the world has become fed up with the unprecedented inflation, in the United States and throughout the world, that has been sparked by the fluctuating fiat currency era inaugurated in 1973. We are also weary of the extreme volatility and unpredictability of currency exchange rates. This volatility is the consequence of the national fiat money system, which fragmented the world's money and added artificial political instability to the natural uncertainty in the free-market price system. The Friedmanite dream of fluctuating fiat money lies in ashes, and there is an understandable yearning to return to an international money with fixed exchange rates.
Unfortunately, the classical gold standard lies forgotten, and the ultimate goal of most American and world leaders is the old Keynesian vision of a one-world fiat paper standard, a new currency unit issued by a World Reserve Bank (WRB). Whether the new currency be termed “the bancor” (offered by Keynes), the “unita” (proposed by World War II United States Treasury official Harry Dexter White), or the “phoenix” (suggested by The Economist) is unimportant. The vital point is that such an international paper currency, while indeed free of balance of payments crises since the WRB could issue as much bancors as it wished and supply them to its country of choice, would provide for an open channel for unlimited world-wide inflation, unchecked by either balance-of-payments crises or by declines in exchange rates. The WRB would then be the all-powerful determinant of the world's money supply and its national distribution. The WRB could and would subject the world to what it believes will be a wisely-controlled inflation. Unfortunately, there would then be nothing standing in the way of the unimaginably catastrophic economic holocaust of world-wide runaway inflation, nothing, that is, except the dubious capacity of the WRB to fine-tune the world economy.
While a world-wide paper unit and Central Bank remain the ultimate goal of world's Keynesian-oriented leaders, the more realistic and proximate goal is a return to a glorified Bretton Woods scheme, except this time without the check of any backing in gold. Already the world's major Central Banks are attempting to “coordinate” monetary and economic policies, harmonize rates of inflation, and fix exchange rates. The militant drive for a European paper currency issued by a European Central Bank seems on the verge of success. This goal is being sold to the gullible public by the fallacious claim that a free-trade European Economic Community (EEC) necessarily requires an overarching European bureaucracy, a uniformity of taxation throughout the EEC, and, in particular, a European Central Bank and paper unit. Once that is achieved, closer coordination with the Federal Reserve and other major Central Banks will follow immediately. And then, could a World Central Bank be far behind? Short of that ultimate goal, however, we may soon be plunged into yet another Bretton Woods, with all the attendant crises of the balance of payments and Gresham's Law that follow from fixed exchange rates in a world of fiat moneys.
As we face the future, the prognosis for the dollar and for the international monetary system is grim indeed. Until and unless we return to the classical gold standard at a realistic gold price, the international money system is fated to shift back and forth between fixed and fluctuating exchange rates with each system posing unsolved problems, working badly, and finally disintegrating. And fueling this disintegration will be the continued inflation of the supply of dollars and hence of American prices which show no sign of abating. The prospect for the future is accelerating and eventually runaway inflation at home, accompanied by monetary breakdown and economic warfare abroad. This prognosis can only be changed by a drastic alteration of the American and world monetary system: by the return to a free market commodity money such as gold, and by removing government totally from the monetary scene.
Footnotes
II. Money in a Free Society
1On the origin of money, cf. Carl Menger, Principles of Economics (Glencoe, Ill.: Free Press, 1950), pp. 257–71; Ludwig von Mises, The Theory of Money and Credit, 3rd ed. (New Haven, Conn.: Yale University Press, 1951), pp. 97–123.
2Money does not “measure” prices or values; it is the common denominator for their expression. In short, prices are expressed in money; they are not measured by it.
3Even those goods nominally exchanging in terms of volume (bale, bushel, etc.) tacitly assume a standard weight per unit volume.
4One of the cardinal virtues of gold as money is its homogeneity—unlike many other commodities, it has no differences in quality. An ounce of pure gold equals any other ounce of pure gold the world over.
5Actually, the pound sterling exchanged for $4.87, but we are using $5 for greater convenience of calculation.
6Iron hoes have been used extensively as money, both in Asia and Africa.
7See Herbert Spencer, Social Statics (New York: D. Appleton 1890), p. 438.
8To meet the problem of wear-and-tear, private coiners might either set a time limit on their stamped guarantees of weight, or agree to recoin anew, either at the original or at the lower weight. We may note that in the free economy there will not be the compulsory standardization of coins that prevails when government monopolies direct the coinage.
9For historical examples of private coinage, see B.W. Barnard, “The use of Private Tokens for Money in the United States,” Quarterly Journal of Economics (1916–17): 617–26; Charles A. Conant, The Principles of Money and Banking (New York: Harper Bros., 1905), vol. I, 127–32; Lysander Spooner, A Letter to Grover Cleveland (Boston: B.R. Tucker, 1886), p. 79; and J. Laurence Laughlin, A New Exposition of Money, Credit and Prices (Chicago: University of Chicago Press, 1931), vol. I, pp. 47–51. On coinage, also see Mises, Theory of Money and Credit, pp. 65–67; and Edwin Cannan, Money, 8th ed. (London: Staples Press, 1935), pp. 33ff.
10Gold mining is, of course, no more profitable than any other business; in the long-run, its rate of return will be equal to the net rate of return in any other industry.
11At what point does a man's cash balance become a faintly disreputable “hoard,” or the prudent man a miser? It is impossible to fix any definite criterion: generally, the charge of “hoarding” means that A is keeping more cash than B thinks is appropriate for A.
12How the government would go about this is unimportant at this point. Basically, it would involve governmentally-managed changes in the money supply.
13For historical examples of parallel standards, see W. Stanley Jevons, Money and the Mechanism of Exchange (London: Kegan Paul, 1905), pp. 88–96, and Robert S. Lopez, “Back to Gold, 1252,” Economic History Review (December 1956): 224. Gold coinage was introduced into modern Europe almost simultaneously in Genoa and Florence. Florence instituted bimetallism, while “Genoa, on the contrary, in conformity to the principle of restricting state intervention as much as possible, did not try to enforce a fixed relation between coins of different metals,” ibid. On the theory of parallel standards, see
Mises, Theory of Money and Credit, pp. 179f. For a proposal that the United States go onto a parallel standard, by an official of the U.S. Assay Office, see I.W. Sylvester, Bullion Certificates as Currency (New York, 1882).
14A third form of money-substitute will be token coins for very small change. These are, in effect, equivalent to bank notes, but “printed” on base metal rather than on paper.
15See Amasa Walker, The Science of Wealth, 3rd ed. (Boston: Little, Brown, 1867), pp. 139–41; and pp. 126–232 for an excellent discussion of the problems of a fractional-reserve money.
16Perhaps a libertarian system would consider “general warrant deposits” (which allow the warehouse to return any homogeneous good to the depositor) as “specific warrant deposits,” which, like bills of lading, pawn tickets, dock warrants, etc., establish ownership to certain specific earmarked objects. For, in the case of a general deposit warrant, the warehouse is tempted to treat the goods as its own property, instead of being the property of its customers. This is precisely what the banks have been doing. See Jevons, Money and the Medium of Exchange, pp. 207–12.
17Fraud is implicit theft, since it means that a contract has not been completed after the value has been received. In short, if A sells B a box labeled “corn flakes” and it turns out to be straw upon opening, A's fraud is really theft of B's property. Similarly, the issue of warehouse receipts for nonexistent goods, identical with genuine receipts, is fraud upon those who possess claims to nonexistent property.
III. Government Meddling With Money
1Direct seizure of goods is therefore not now as extensive as monetary expropriation. Instances of the former still occurring are “due process” seizure of land under eminent domain, quartering of troops in an occupied country, and especially compulsory confiscation of labor service (e.g., military conscription, compulsory jury duty, and forcing business to keep tax records and collect withholding taxes).
2It has become fashionable to scoff at the concern displayed by “conservatives” for the “widows and orphans” hurt by inflation. And yet this is precisely one of the chief problems that must be faced. Is it really “progressive” to rob widows and orphans and to use the proceeds to subsidize farmers and armament workers?
3This error will be greatest in those firms with the oldest equipment, and in the most heavily capitalized industries. An undue number of firms, therefore, will pour into these industries during an inflation. For further discussion of this accounting-cost error, see W.T. Baxter, “The Accountant's Contribution to the Trade Cycle,” Economica (May 1955): 99–112.
4In these days of rapt attention to “cost-of-living indexes” (e.g., escalator-wage contracts) there is strong incentive to increase prices in such a way that the change will not be revealed in the index.
5On the German example, see Costantino Bresciani-Turroni, The Economics of Inflation (London: George Allen and Unwin, 1937).
6For a further discussion, see Murray N. Rothbard, America's Great Depression (Princeton, N.J.: D. Van Nostrand, 1963), Part I.
7On debasement, see Elgin Groseclose, Money and Man (New York: Frederick Ungar, 1961), pp. 57–76.
8Many debasements, in fact, occurred covertly, with governments claiming that they were merely bringing the official gold-silver ratio into closer alignment with the market.
9Lord Farrer, Studies in Currency 1898 (London: Macmillan, 1898), p. 43.
The ordinary law of contract does all that is necessary without any law giving special functions to particular forms of currency. We have adopted a gold sovereign as our unit.... If I promise to pay 100 sovereigns, it needs no special currency law of legal tender to say that I am bound to pay 100 sovereigns, and that, if required to pay the 100 sovereigns, I cannot discharge my obligation by paying anything else.
On the legal tender laws, see also Ludwig von Mises, Human Action (New Haven, Conn.: Yale University Press, 1949), pp. 432n. and 444.
10The use of foreign coins was prevalent in the Middle Ages and in the United States down to the middle of the nineteenth century.
11See Horace White, Money and Banking, 4th ed. (Boston: Ginn, 1911), pp. 322–27.
12In the United States, the banks were forced by law to join the Federal Reserve System, and to keep their accounts with the Federal Reserve Banks. (Those “state banks” that are not members of the Federal Reserve System keep their reserves with member banks.)
13The establishment of the Federal Reserve in this way increased threefold the expansive power of the banking system of the United States. The Federal Reserve System also reduced the average legal reserve requirements of all banks from approximately 21 percent in 1913 to 10 percent by 1917, thus further doubling the inflationary potential—a combined potential inflation of six-fold. See Chester A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle (New York: Macmillan, 1937), pp. 23ff.
14See Melchior Palyi, “The Meaning of the Gold Standard,” Journal of Business (July 1941): 299–304.
15Frank W. Taussig, Principles of Economics, 2nd ed. (New York: Macmillan, 1916), vol. I, p. 312. Also see J.K. Upton, Money in Politics, 2nd ed. (Boston: Lothrop Publishing, 1895), pp. 69 ff.
16For an incisive analysis of the steps by which the American government confiscated the people's gold and went off the gold standard in 1933, see Garet Garrett, The People's Pottage (Caldwell, Idaho: Caxton Printers, 1953), pp. 15–41.
17In the last few years, the dollar has been overvalued in relation to other currencies, and hence the dollar drains from the U.S.
18For an excellent discussion of foreign exchange and exchange controls, see George Winder, The Free Convertibility of Sterling (London: Batch-worth Press, 1955).
IV. The Monetary Breakdown of the West
1For a recent study of the classical gold standard, and a history of the early phases of its breakdown in the twentieth century, see Melchior Palyi, The Twilight of Gold, 1914–1936 (Chicago: Henry Regnery, 1972).
2On the crucial British error and its consequence in leading to the 1929 depression, see Lionel Robbins, The Great Depression (New York: Macmillan, 1934).
3Cordell Hull, Memoirs (New York, 1948), vol. I, p. 81. Also see Richard N. Gardner, Sterling-Dollar Conspiracy (Oxford: Clarendon Press, 1956), p. 141.
4On the two-tier gold market, see Jacques Rueff, The Monetary Sin of the West (New York: Macmillan, 1972).
INDEX
A | B | C | D | E
F | G | H | I | J
K | L | M | N | P
R | S | T | U | W
A
American revolution, 56
B
Bancor, 105
Bank of England, 68, 70, 76
Banks and Banking,
central, 67, 68–74, 82, 99
free, 45–46, 65, 67
holidays, 71
notes, 40–41, 65
88 percent reserve, 42–43
runs on, 42, 45, 48, 66, 72
wildcat, 46, 67
world central, 105–06 See also Money Warehouse
Barnard, B.W., 25n
Barter, 12–13, 51
Baxter, W.T., 54n
Bimetallism, 36–38, 60–63
Brassage, 58
Bresciani-Turroni, Costantino, 56n
Bretton Woods, 95–98
Business cycle, 57, 88
C
Calculation, 17, 54
Cannan, Edwin, 25n
Cash balances, 33
Civil war, 67, 77, 78
Coinage
and fraud, 22–23
as business, 21
government, 22–23, 57–59, 60, 64–65
private, 22–23, 25, 49, 66
Coincidence of wants, 13
Conant, Charles A., 25n
Continentals, 56, 77
Count Schlick, 19
Counterfeiting, 23, 43, 52–53
Credit, 44, 47–48, 64
expansion of, 71, 73–75, 96
Crusoe economics, 8, 11–12
D
&
nbsp; Debasement, 62, 65
Debt, 48, 64
Deflation, 74, 91
Demand deposits; see Certificates of deposit
Dinar, 59
Dirty floats, 89, 103
Dollar
definition of, 86
depreciation, 58, 99, 101–04, 107
origin of, 19
shortage, 81, 96
E
Eurodollars, 98, 100, 102
European Economic Community (EEC), 106
Exchange,
direct; see Barter
foreign, 80–82, 93–95
function of, 11, 17
indirect, 13
medium of; see Money
rates, 19–20, 38, 78, 80, 86, 89, 104–06
ratios, 17, 27
values in, 12, 29
voluntary, 11
F
Farrer, Lord, 63
Federal Reserve Deposit Insurance Corporation (FDIC), 71
Federal Reserve System, 7, 68
origins and history of, 68, 72n
policies of, 69–72
pronouncements of, 72, 75
Foreign Aid, 81, 96
Fractional reserve; see Banking
Friedman, Milton (Chicago School), 94, 100, 103, 104
G
Gardner, Richard N., 93n
What Has Government Done to Our Money? Page 9
