The important point here is a basic change that has occurred in the psychology of the market and of the public. In contrast to the naive and unquestioning faith of yesteryear, everyone now realizes at least the possibility of collapse of the FDIC. At some point in the possibly near future, perhaps in the next recession and the next spate of bad bank loans, it might dawn upon the public that 1.5 percent is not very safe either, and that no such level can guard against the irresistible holocaust of the bank run. At that point, ignoring the usual mendacious assurances and soothing-syrup of the Establishment, the commercial banks might be plunged into their ultimate crisis. The United States authorities would then be faced with two stark choices. One would be to allow the entire banking system to collapse, along with virtually all the deposits and depositors in that system. Since, given the mind-set of American politicians, and their evident philosophy of “too big to fail,” it is certain that they would be forced to embrace the second alternative: massive, hyper-inflationary printing of enough cash to pay off all the bank liabilities. The redeposit of such cash in the banking system would bring about an immediate runaway inflation and a massive flight from the dollar.
Such a future scenario, once seemingly unthinkable, is now definitely on the horizon. Perhaps realization of this plight will lead to increased interest, not only in gold, but also in a 100 percent banking system grounded upon a revalued gold stock.
In one sense, 100 percent banking is now easier to establish than it was in 1962. In my original essay, I called upon the banks to start issuing debentures of varying maturities, which could be purchased by the public and serve as productive channels for genuine savings which would neither be fraudulent nor inflationary. Instead of depositors each believing that they have a total, say, of $1 billion of deposits, while they are all laying claim to only $100 million of reserves, money would be saved and loaned to a bank for a definite term, the bank then relending these savings at an interest differential, and repaying the loan when it becomes due. This is what most people wrongly believe the commercial banks are doing now.
Since the 1960s, however, precisely this system has become widespread in the sale of certificates of deposit (CDs). Everyone is now familiar with purchasing CDs, and demand deposits can far more readily be shifted into CDs than they could have three decades ago. Furthermore, the rise of money market mutual funds (MMMF) in the late 1970s has created another readily available and widely used outlet for savings, outside the commercial banking system. These, too, are a means by which savings are being channeled into short-run credit to business, again without creating new money or generating a boom-bust cycle. Institutionally it would now be easier to shift from fractional to 100 percent reserve banking than ever before.
Unfortunately, now that conditions are riper for 100 percent gold than in several decades, there has been a defection in the ranks of many former Misesians. In a curious flight from gold characteristic of all too many economists in the twentieth century, bizarre schemes have proliferated and gained some currency: for everyone to issue his own “standard money”; for a separation of money as a unit of account from media of exchange; for a government-defined commodity index, and on and on.[4] It is particularly odd that economists who profess to be champions of a free-market economy, should go to such twists and turns to avoid facing the plain fact: that gold, that scarce and valuable market-produced metal, has always been, and will continue to be, by far the best money for human society.
Murray N. Rothbard
Las Vegas, Nevada
September, 1991
+++++++++
Case for the 100 Percent Gold Dollar
To advocate the complete, uninhibited gold standard runs the risk, in this day and age, of being classified with the dodo bird. When the Roosevelt administration took us off the gold standard in 1933, the bulk of the nation’s economists opposed the move and advocated its speedy restoration. Now gold is considered an absurd anachronism, a relic of a tribal fetish. Gold indeed still retains a certain respectability in international trade; as the pre-eminent international money gold as a medium of foreign trade can command support. But while foreign trade is important, I would rather choose the far more difficult domestic battleground, and argue for a genuine gold standard at home as well as abroad. Yet I shall not join the hardy band of current advocates of the gold standard, who call for a virtual restoration of the status quo ante 1933. Although that was a far better monetary system than what we have today, it was not, I hope to show, nearly good enough. By 1932 the gold standard had strayed so far from purity, so far from what it could and should have been, that its weakness contributed signally to its final breakdown in 1933.
Money and Freedom
Economics cannot by itself establish an ethical system, although it provides a great deal of data for anyone constructing such a system—and everyone, in a sense, does so in deciding upon policy. Economists therefore have a responsibility, when advocating policy, to apprise the reader or listener of their ethical position. I do not hesitate to say that my own policy goal is the establishment of the free market, of what used to be called laissez faire, as broadly and as purely as possible. For this, I have many reasons, both economic and non-economic, which I obviously cannot develop here. But I think it important to emphasize that one great desideratum in framing a monetary policy is to find one that is truly compatible with the free market in its widest and fullest sense. This is not only an ethical but also an economic tenet; for, at the very least, the economist who sees the free market working splendidly in all other fields should hesitate for a longtime before dismissing it in the sphere of money.
I realize that this is not a popular position to take, even in the most conservative economic circles. Thus, in almost its first sentence, the United States Chamber of Commerce’s pamphlet series on “The American Competitive Enterprise Economy” announced: “Money is what the government says it is.”[5] It is almost universally believed that money, at least, cannot be free; that it must be controlled, regulated, manipulated, and created by government. Aside from the more strictly economic criticisms that I will have of this view, we should keep in mind that money, in any market economy advanced beyond the stage of primitive barter, is the nerve center of the economic system. If, therefore, the state is able to gain unquestioned control over the unit of all accounts, the state will then be in a position to dominate the entire economic system, and the whole society. It will also be able to add quietly and effectively to its own wealth and to the wealth of its favorite groups, and without incurring the wrath that taxes often invoke. The state has understood this lesson since the kings of old began repeatedly to debase the coinage.
The Dollar: Independent Name or Unit of Weight?
“If you favor a free market, why in the world do you say that government should fix the price of gold?” And, “If you wish to tie the dollar to a commodity, why not a market basket of commodities instead of only gold?” These questions are often asked of the libertarian who favors a gold standard; but the very framing of the questions betrays a fundamental misconception of the nature of money and of the gold standard. For the crucial, implicit assumption of such questions—and of nearly all current thinking on the subject of money—is that “dollars” are an independent entity. If dollars are indeed properly things-in-themselves, to be bought, sold, and evaluated on the market, then it is surely true that “fixing the price of gold” in terms of dollars becomes simply an act of government intervention.
There is, of course, no question about the fact that, in the world of today, dollars are an independent entity, as are pounds of sterling, francs, marks, and escudos. If this were all, and if we simply accepted the fact of such independence and did not inquire beyond, then I would be happy to join Professors Milton Friedman, Leland Yeager, and others of the Chicago school, and call for cutting these independent national moneys loose from arbitrary exchange rates fixed by government and allowing a freely fluctuating market in foreign exchange. But the point is t
hat I do not think that these national moneys should be independent entities. Why they should not stems from the very nature and essence of money and of the market economy.
The market economy and the modern world’s system of division of labor operate as follows: a producer supplies a good or a service, selling it for money; he then uses the money to buy other goods or services that he needs. Let us then consider a hypothetical world of pure laissez faire, where the market functions freely and government has not infringed at all upon the monetary sphere. This system of selling goods for money would then be the only way by which an individual could acquire the money that he needed to obtain goods and services. The process would be: production → “purchase” of money → “sale” of money for goods.[6]
To those advocates of independent paper moneys who also champion the free market, I would address this simple question: “Why don’t you advocate the unlimited freedom of each individual to manufacture dollars?” If dollars are really and properly things-in-themselves, why not let everyone manufacture them as they manufacture wheat and baby food? It is obvious that there is indeed something peculiar about such money. For if everyone had the right to print paper dollars, everyone would print them in unlimited amounts, the costs being minuscule compared to the almost infinitely large denominations that could be printed upon the notes. Clearly, the entire monetary system would break down completely. If paper dollars are to be the “standard” money, then almost everyone would admit that government must step in and acquire compulsory monopoly of money creation so as to check its unlimited increase. There is something else wrong with everyone printing his own dollars: for then the chain from production of goods through “purchase” of money to “sale” of money for goods would be broken, and anyone could create money without having to be a producer first. He could consume without producing, and thus seize the output of the economy from the genuine producers.
Government’s compulsory monopoly of dollar-creation does not solve all these problems, however, and even makes new ones. For what is there to prevent government from creating money at its own desired pace, and thereby benefiting itself and its favored citizens? Once again, non-producers can create money without producing and obtain resources at the expense of the producers. Furthermore, the historical record of governments can give no one confidence that they will not do precisely that—even to the extent of hyperinflation and chaotic breakdown of the currency.
Why is it that historically, the relatively free market never had to worry about people wildly setting up money factories and printing unlimited quantities?[7] If “money” really means dollars and pounds and francs, then this would surely have been a problem. But the nub of the issue is this: On the pristine free market, money does not and cannot mean the names of paper tickets. Money means a certain commodity, previously useful for other purposes on the market, chosen over the years by that market as an especially useful and marketable commodity to serve as a medium for exchanges. No one prints dollars on the purely free market because there are, in fact, no dollars; there are only commodities, such as wheat, automobiles, and gold. In barter, commodities are exchanged for each other, and then, gradually, a particularly marketable commodity is increasingly used as a medium of exchange. Finally, it achieves general use as a medium and becomes a “money.” I need not go through the familiar but fascinating story of how gold and silver were selected by the market after it had discarded such commodity moneys as cows, fishhooks, and iron hoes.[8] And I need also not dwell on the unique qualities possessed by gold and silver that caused the market to select them—those qualities lovingly enunciated by all the older textbooks on money: high marketability, durability, portability, recognizability, and homogeneity. Like every other commodity, the “price” of gold in terms of the commodities it can buy varies in accordance with its supply and demand. Since the demand for gold and silver was high, and since their supply was low in relation to the demand, the value of each unit in terms of other goods was high—a most useful attribute of money. This scarcity, combined with great durability, meant that the annual fluctuations of supply were necessarily small—another useful feature of a money commodity.
Commodities on the market exchange by their unit weights, and gold and silver were no exceptions. When someone sold copper to buy gold and then to buy butter, he sold pounds of copper for ounces or grams of gold to buy pounds of butter. On the free market, therefore, the monetary unit—the unit of the nation’s accounts—naturally emerges as the unit of weight of the money commodity, for example, the silver ounce, or the gold gram.
In this monetary system emerging on the free market, no one can create money out of thin air to acquire resources from the producers. Money can only be obtained by purchasing it with one’s goods or services. The only exception to this rule is gold miners, who can produce new money. But they must invest resources in finding, mining, and transporting an especially scarce commodity. Furthermore, gold miners are productively adding to the world’s stock of gold for non-monetary uses as well.
Let us indeed assume that gold has been selected as the general medium of exchange by the market, and that the unit of account is the gold gram. What will be the consequences of complete monetary freedom for each individual? What of the freedom of the individual to print his own money, which we have seen to be so disastrous in our age of fiat paper? First, let us remember that the gold gram is the monetary unit, and that such debasing names as “dollar,” “franc,” and “mark” do not exist and have never existed. Suppose that I decided to abandon the slow, difficult process of producing services for money, or of mining money, and instead decided to print my own? What would I print? I might manufacture a paper ticket, and print upon it “10 Rothbards.” I could then proclaim the ticket as “money,” and enter a store to purchase groceries with my embossed Rothbards. In the purely free market which I advocate, I or anyone else would have a perfect right to do this. And what would be the inevitable consequence? Obviously, that no one would pay attention to the Rothbards, which would be properly treated as an arrogant joke. The same would be true of any “Joneses” “Browns,” or paper tickets printed by anyone else. And it should be clear that the problem is not simply that few people have ever heard of me. If General Motors tried to pay its workers in paper tickets entitled “50 GMs,” the tickets would gain as little response. None of these tickets would be money, and none would be considered as anything but valueless, except perhaps a few collectors of curios. And this is why total freedom for everyone to print money would be absolutely harmless in a purely free market: no one would accept these presumptuous tickets.
Why not freely fluctuating exchange rates? Fine, let us have freely fluctuating exchange rates on our completely free market; let the Rothbards and Browns and GMs fluctuate at whatever rate they will exchange for gold or for each other. The trouble is that they would never reach this exalted state because they would never gain acceptance in exchange as moneys at all, and therefore the problem of exchange rates would never arise.
On a really free market, then, there would be freely fluctuating exchange rates, but only between genuine commodity moneys, since the paper-name moneys could never gain enough acceptance to enter the field. Specifically, since gold and silver have historically been the leading commodity moneys, gold and silver would probably both be moneys, and would exchange at freely fluctuating rates. Different groups and communities of people would pick one or the other money as their unit of accounting.[9]
Names, therefore, whatever they may be, “Rothbard,” “Jones,” or even “dollar,” could not have arisen as money on the free market. How, then did such names as “dollar” and “peso” originate and emerge in their own right as independent moneys? The answer is that these names invariably originated as names for units of weight of a money commodity, either gold or silver. In short, they began not as pure names, but as names of units of weight of particular money commodities. In the British pound sterling we have a particularly striking example of a w
eight derivative, for the British pound was originally just that: a pound of silver money.[10] “Dollar” began as the generally applied name of an ounce weight of silver coined in the sixteenth century by a Bohemian, Count Schlick, who lived in Joachimsthal, and the name of his highly reputed coins became “Joachimsthalers,” or simply “thalers” or “dollars.” And even after a lengthy process of debasement, alteration, and manipulation of these weights until they more and more became separated names, they still remained names of units of weight of specie until, in the United States, we went off the gold standard in 1933. In short, it is incorrect to say that, before 1933, the price of gold was fixed in terms of dollars.
Instead, what happened was that the dollar was defined as a unit of weight, approximately 1/20 of an ounce of gold. It is not that the dollar was set equal to a certain weight of gold; it was that weight, just as any unit of weight, as, for example, one pound of copper is 16 ounces of copper, and is not simply and arbitrarily “set equal” to 16 ounces by some individual or agency.[11] The monetary unit was, therefore, always a unit of weight of a money commodity, and the names that we know now as independent moneys were names of these units of weight.[12]
What Has Government Done to Our Money? Page 11
