Professor Spahr and his associates wish to return to the gold standard (though not to 100 percent gold) at the current “price” of $35 an ounce, stressing the importance of fixity of the weight of the dollar. If these were before 1933 and we were still on a gold standard, even if a defective one, I would unhesitatingly agree. The principle of a fixed weight for the dollar, and above all the principle of the sanctity of contract, are essential to our entire system of private property, and therefore would have been well worth the difficulties of a severe deflation. Aside from that, we have built deflation into an absurd ogre, and have overlooked the healthy consequences of a deflationary purgation of the malinvestments of the boom, as well as the overdue aid that fixed income groups, hit by decades of inflationary erosion, would at last obtain from a considerable fall in prices. A sharp deflation would also help to break up the powerful aggregations of monopoly unionism, which are potentially so destructive of the market economy. At any rate, while the deflation would be nominally sharp, to the extent that people would wish to save much of their present cash holdings, they would increase voluntary savings by purchasing bank debentures in lieu of their deposits, thereby fostering “economic growth” and mitigating the rigors of the deflation.
On the other hand, there is no particular reason to be devoted to the $35 figure at the present time, since the existing “gold standard” and definition of the dollar are only applicable to foreign governments and central banks; as far as the people are concerned, we are now on a virtual fiat standard. Therefore, we may change the definition of the dollar as a preliminary step to return to a full gold standard, and we would not really be disturbing the principle of fixity. As in the case of any definition of weight, the initial definition is purely arbitrary, and we are so close now to a fiat standard that we may consider any dollar in a new standard as an initial definition.
Depending on how we define the money supply—and I would define it very broadly as all claims to dollars at fixed par value—a rise in the gold price sufficient to bring the gold stock to 100 percent of total dollars would require a ten- to twentyfold increase, This of course would bring an enormous windfall gain to the gold miners, but this does not concern us. I do not believe that we should refuse an offer of a mass entry into Heaven simply because the manufacturers of harps and angels’ wings would enjoy a windfall gain. But certainly a matter for genuine concern would be the enormous impetus such a change would give for several years to the mining of gold, as well as the disruption it would cause in the pattern of international trade.
Which course we take, or which particular blend of the two, is a matter for detailed study by economists. Obviously little or none of this needed study has been undertaken. I therefore do not propose here a detailed blueprint. I would like to see all of those who have become convinced of the need for a 100 percent gold standard join in such a study of the best path to take toward such a goal under present conditions. Broadly, the desired program may be summarized as follows:
1. Arrival of a 100 percent gold dollar, either by deflation of dollars to a gold stock valued at $35 per ounce, or by revaluation of the dollar at a “gold price” high enough to make the gold stock 100 percent of the present supply of dollars, or a blend of the two routes.
2. Getting the gold stock out of the hands of the government and into the hands of the banks and the people, with the concomitant liquidation of the Federal Reserve System, and a legal 100 percent requirement for all demand claims.
3. The transfer of all note-issue functions from the Treasury and the Federal Reserve to the private banks. All banks, in short, would be allowed to issue deposits or notes at the discretion of their clients.
4. Freeing silver bullion and its representative in silver certificates (which would now be issued by the banks) from any fixed value in gold. In short, silver ounces and their warehouse receipts would fluctuate, as do all other commodities, on the market in terms of gold or dollars, thus giving us “parallel” gold and silver moneys, with gold dollars presumably remaining the chief money as the unit of account.
5. The eventual elimination of the term “dollar,” using only terms of weight such as “gold gram” or “gold ounce.”[47] The ultimate goal would be the return to gold by every nation, at 100 percent of its particular currency, and the subsequent blending of all these national currencies into one unified world gold-gram unit. This was one of the considered goals at the abortive international monetary conferences of the late nineteenth century.[48] In such a world, there would be no exchange rates except between gold and silver, for the national currency names would be abandoned for simple weights of gold, and all the world’s money would at long last be freed from government intervention.
6. Free (but presumably not gratuitous) private coinage of gold and silver.
I must here differ with Professor Mises’ and Henry Hazlitt’s suggestion for return to the gold standard by first establishing a “free market” in gold by cutting the dollar completely loose from gold, and then seeing, after several years, what gold price the market would establish.[49] In the first place, this would cut the last tenuous link that the dollar still has to gold and yield us a totally fiat money. Second, the market would hardly be a “free” one, since almost all the nation’s gold would be sequestered in government hands. I think it important to move in the reverse direction. The Federal government, after all, seized the people’s gold in 1933 under the guise of a temporary emergency. It is important, for moral and economic reasons, to permit the people to reclaim their gold as rapidly as possible. And since the gold is still held as hostage for our dollars, I believe that the official link and official convertibility between dollars and gold should be re-established as soon as Congress can be so persuaded. And finally, since the dollar is merely a weight of gold, properly speaking, it is not at all appropriate to establish a “market” between dollars and gold, any more than there should be a “market” between one-dollar bills and five-dollar bills.
There is no gainsaying the fact that this suggested program will strike most people as impossibly “radical” and “unrealistic”; any suggestion for changing the status quo, no matter how slight, can always be considered by someone as too radical, so that the only thoroughgoing escape from the charge of impracticality is never to advocate any change whatever in existing conditions. But to take this approach is to abandon human reason, and to drift in animal- or plant-like manner with the tide of events. As Professor Philbrook pointed out in a brilliant article some years ago, we must frame our policy convictions on what we believe the best course to be and then try to convince others of this goal, and not include within our policy conclusions estimates of what other people may find acceptable.[50] For someone must propagate the truth in society, as opposed to what is politically expedient. If scholars and intellectuals fail to do so if they fail to expound their convictions of what they believe the correct course to be, they are abandoning truth, and therefore abandoning their very raison d’être, All hope of social progress would then be gone, for no new ideas would ever be advanced nor effort expended to convince others of their validity.
Notes
[1] The precise ratio of gold weights amounted to defining the pound sterling as equal to $4.86656.
[2] Actually, if they had been consistent in their devotion to a fixed definition, the Spahr group should have advocated a return to gold at $20 an ounce, the long-standing definition before Franklin B. Roosevelt began tampering with the gold price in 1933. The “Spahr group” consisted of two organizations: The Economists’ National Committee on Monetary Policy, headed by Professor Walter E. Spahr of New York University; and an allied laymen’s activist group, headed by Philip McKenna, called The Gold Standard League. Spahr expelled Henry Hazlitt from the former organization for the heresy of advocating return to gold at a far higher price (or lower weight).
[3] At one point, the price of gold reached $850, and is now lingering in the area of $350 an ounce. While gold bugs like to mope about the
alleged failure of gold to rise still further, it should be noted that even this “depressed” gold price is tenfold the alleged eternally fixed rate of $35 an ounce. One side effect of the rising market price of gold was to ensure the total disappearance of the Spahr group. Thirty-five dollar gold is now not even a legal fiction; it is dead and buried, and it is safe to say that no one, of any school of thought, will want to resurrect it.
[4] For a critique of some of these schemes, see Murray N. Rothbard, “Aurophobia, Or: Free Banking On What Standard?”, Review of Austrian Economics 6, no. 1(1992); and Rothbard, “The Case for a Genuine Gold Dollar,” in Llewellyn H. Rockwell, Jr., ed. The Gold Standard: An Austrian Perspective (Lexington, Mass.: Lexington Books, 1985), pp. 1-17.
[5] Economic Research Department, Chamber of Commerce of the United States, The Mystery of Money (Washington, DC.: Chamber of Commerce, 1953), p. 1.
[6] A person could also receive money from producers by inheritance or other gift, but here again the ultimate giver must have been a producer. Furthermore, we may say that the recipient “produced” some intangible service—for instance, of being a son and heir—which provided the reason for the giver’s contribution.
[7] The American “wildcat bank” did not print money itself, but rather bank notes supposedly redeemable in money.
[8] On the process of emergence of money on the market, see the classic exposition of Carl Menger in his Principles of Economics, translated and edited by James Dingwall and Bert F. Hoselitz (Glencoe, Ill.: Free Press, 1950), pp. 257-85.
[9] The exchange rate between gold and silver will inevitably be at or near their purchasing-power parities, in terms of the social array of goods available, and this rate would tend to be uniform throughout the world. For a brilliant exposition of the nature of the geographic purchasing power of money, and the theory of purchasing-power parity, see Ludwig von Mises, The Theory of Money and Credit, 2d ed. (New Haven: Yale University Press, 1953), pp. 170-86. Also see Chi-Yuen Wu, An Outline of International Price Theories (London: Routledge, 1939), pp. 233-34.
Since I am advocating a totally free market in money, what I am strictly proposing is not so much the gold standard as parallel gold and silver standards. By this, of course I do not mean bimetallism, with its arbitrarily fixed exchange rate between gold and silver, but freely fluctuating exchange rates between the two moneys. For an illuminating account of how parallel standards worked historically and how they were interfered with, see Luigi Einaudi, “The Theory of Imaginary Money from Charlemagne to the French Revolution,” in Frederic C. Lane and Jelle C. Riemersma, eds., Enterprise and Secular Change (Homewood, Ill.: Irwin, 1953), pp. 229-61.
Professor Robert Sabatino Lopez writes, of the return of Europe to gold coinage in the mid-thirteenth century, after half a millennium: “Florence, like most medieval states, made bimetallism and trimetallism a base of its monetary policy... it committed the government to the Sysiphean labor of readjusting the relations between different coins as the ratio between the different metals changes, or as one or another coin was debased... Genoa, on the contrary, in conformity with the principle of restricting state intervention as much as possible [italics mine], did not try to enforce a fixed relation between coins of different metals. Basically, the gold coinage of Genoa was not meant to integrate the silver and bullion coinages but to form an independent system” (“Back to Gold, 1251,” Economic History Review [April 1956]: 224).
On the merits of parallel standards and their superiority to bimetallism, see William Brough, Open Mints and Free Banking (New York: Putnam, 1898), and Brough, The Natural Law of Money (New York: Putnam, 1894). Brough called this system “Free Metallism.” On the recent example of pure parallel standards in Saudi Arabia, down to the 1950s, see Arthur N. Young, “Saudi Arabian Currency and Finance,” Middle East Journal (Summer 1953): 361-80.
[10] The fact that there was never an actual pound-weight coin of silver is irrelevant and does not imply that the pound was some form of “imaginary” unit of account. The pound was a pound of silver bullion, or an accumulation of a pound weight of silver coins. Cf. Einaudi, “Theory of Imaginary Money,” pp. 229-30. The fundamental misconception here is to place too much emphasis on coins and not enough on bullion, an overemphasis, as we shall see presently connected intimately with government intervention and with the long slide downward of the monetary unit from weight of gold and silver to pure name.
[11] The monetary unit was not just a pure unit of weight, such as the ounce or the gram; it was a unit of weight of a certain money commodity, such as gold. The dollar was 1/20 of an ounce of gold, not of just any ounce. And hero we find a crucial flaw in the idea of a composite-commodity money which has been overlooked: Just as we cannot call the monetary unit an “ounce” or “gram” or “pound” of several different, or composite, commodities, so the dollar cannot properly be the name of many different weights of many different commodities. The money commodity selected by the market was a single particular commodity, gold or silver, and therefore the unit of that money had to be of that commodity alone, and not of some arbitrary composite.
[12] This is why, in the older books, a discussion of money and monetary standards often take place as part of a general discussion of weights and measures. Thus in Barnard’s work on international unification of weights and measures, the problem of international unification of monetary units was discussed in an appendix, along with other appendixes on measures of capacity and metric system. Frederick A. P. Barnard, The Metric System of Weights and Measures, rev. ed. (New York: Columbia College, 1872).
[13] Ludwig von Mises developed the very important regression theorem in his Theory of Money and Credit, pp. 97-123, and defended it against the criticisms of Benjamin M. Anderson and Howard S. Ellis in his Human Action (New Haven: Yale University Press, 1949), pp. 405-08. Also see Joseph A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 1090. For a reply to Professor J. C. Gilbert’s contention that the establishment of the Rentenmark disproved the regression theorem, see Murray N. Rothbard “Toward a Reconstruction of Utility and Welfare Economics,” in Mary Sennholz, ed., On Freedom and Free Enterprise (Princeton: Van Nostrand, 1956), p. 236n.
The latest criticism of the regression theorem is that of Professor Patinkin, who accuses Mises of inconsistency in basing this theorem on deriving the marginal utility of money from the marginal utility of the goods that it will purchase, rather than from the marginal utility of cash holdings the latter approach being used by Mises in the remainder of his work. Actually, the regression theorem in Mises’ system is not inconsistent, but operates on a different plane, for it shows that the very marginal utility of money to hold—as elsewhere analyzed by Mises—is itself based upon the prior fact that money has a purchasing power in goods. Don Patinkin, Money, Interest, and Prices (Evanston, Ill.: Row, Peterson 1956), pp. 71-72, 414.
[14] Presumably, on the free market private citizens will also safeguard their coins by testing their weight and purity—as they do their monetary bullion—or will mint coins with those private minters who have established reputations for probity and efficiency. Even in the heyday of the gold standard there were few writers willing to go beyond the bounds of social habit to concede the feasibility of private minting. A notable exception was Herbert Spencer, Social Statics (New York: Appleton, 1890), pp. 488-89. The French economist Paul Leroy-Beaulieu also favored free private coinage. See Charles A. Conant, The Principles of Money and Banking (New York: Harper, 1905), vol.1, pp. 127-28. Also see Leonard K. Read, Government—An Ideal Concept (Irvington-on-Hudson, NY: Foundation for Economic Education, 1954), pp. 82ff. Recently Professor Milton Friedman, though completely out of sympathy with the gold standard has, remarkably, taken a similar stand in A Program for Monetary Stability (New York: Fordham University Press, 1960), p. 5.
For historical examples of successful private coinage, see B. W. Barnard, “The Use of Private Tokens for Money in the United States,” Quarterly Journal of Econ
omics (1916-47): 617-26; Conant, vol. 1, pp. 127-32; Lysander Spooner, A Letter to Grover Cleveland (Boston: Tucker, 1886), p. 69; and J. Laurence Laughlin, A New Exposition of Money, Credit and Prices (Chicago: University of Chicago Press, 1931), vol. 1, pp. 47-51.
[15] Thus, see W. Stanley Jevons’ criticism of Spencer in his Money and the Mechanism of Exchange, 15th ed. (London: Kegan Paul, 1905), pp. 63-66.
[16] See Mises, Human Action, pp. 432n, 447, 754. Mises was partly anticipated at the turn of the century by William Brough: “The more efficient money will always drive from the circulation the less efficient if the individuals who handle money are left free to act in their own interest. It is only when bad money is endorsed by the State with the property of legal tender that it can drive good money from circulation” (Open Mints and Free Banking, pp. 35-36)
[17] The minting monopoly also permitted the state to charge a monopoly price (“seigniorage”) for its minting service, which imposed a special burden on conversion from bullion to coin. In later years the state granted the subsidy of costless coinage, over-stimulating the transformation of bullion to coin. Modern adherents of the gold standard unfortunately endorse the subsidy of gratuitous coinage. Where coinage is private and marketable, the firms will of course charge a fee covering approximately the true costs of minting (such a fee is known as “brassage”).
[18] Besides the minting monopoly, the other critical device for government control of money has been legal-tender laws, superfluous at best, mischievous and a means of arbitrary exchange-rate fixing at worst. As William Brough stated: There is no more case for a special law to compel the receiving of money than there is for one to compel the receiving of wheat or of cotton. The common law is as adequate for the enforcement of contracts in the one case as in the other” (The Natural Law of Money, p. 135). The same position was taken by T. H. Farrer, Studies in Currency, 1898 (London: Macmillan, 1898), pp. 42ff.
What Has Government Done to Our Money? Page 14
