June 30, 2008

The gold standard, Ludwig von Mises wrote, “requires nothing else than that the government abstain from deliberately sabotaging it.” [p. 421] Much to the detriment of civilization, governments have undermined and debased the gold standard throughout much of history.  With the aid of a state-sympathetic class of intellectuals, most educated people now regard monetary gold as a quaint contrivance of a bygone age--to the extent they give the issue any thought at all.  Any suggestion that we adopt an authentic gold standard as a permanent solution to financial crises, dollar depreciation, and senseless wars is dismissed by the intelligentsia as hopelessly naive.  

Of course we need the Fed, they tell us.  Of course we need the power inherent in an instantly “accommodating” currency.   That’s why Wilson signed the Federal Reserve Act.  That’s why we were able to send so many conscripted youths to Churchill in World War parts I & II.  That’s why we were able to keep prices from falling and assist the overvalued British pound during the 1920s [pp. 48-49].  That’s why we ultimately outlawed real money in favor of political paper, so government could be unrestrained financially in dealing with any problem anywhere.  Funding government through taxation is never enough because the victims might retaliate.  What’s needed is what we have: the arcane subterfuge of a cloistered cartel.  What’s needed is a central bank quietly mulcting the masses while it feeds the world’s power-holders.  That way nobody revolts.  Not only don’t they revolt, not only don’t they pick up a $7 book that would explain what the hell’s going on, they take Friedman’s cue that leviathan and its bank will protect us against the horrors of depression.  The Fed is simply one of many government mechanisms for making freedom work.  Without it we’d be thrown back into the dark ages of the 19th century.  That it happens to engage “all the hidden forces of economic law on the side of destruction,” is not a problem for political insiders.  

War’s paymaster  

The Greek philosopher Heraclitus wrote, “You cannot step into the same river twice.”  But then, Heraclitus hadn’t met George W. Bush, who’s itching to step into another calamitous war.  

Foreign military adventures are costly in many ways, but the government’s printing press sees to it that Americans don’t get billed for the damages until well after the bombing gets underway.  And even then we don’t actually see a bill because the costs have worked their way into the things we buy.  The central bank/fiat money combination is an ingenious method of funding wars.  Americans find very little troubling about a bloodbath conducted thousands of miles from home that’s promoted as noble and given to them “free.”  Later, as the people grouse about higher prices, government can continue to pose as their savior by ordering its helicopter to make a quick pass over Main Street and stringing up a few choice speculators and corporate CEOs.  

The Fed is the perfect tool of tyranny, almost.  

“Almost,” because there’s a problem, one annoying protestor quietly calling attention to its egregious ways: government’s perennial enemy, gold.  Government has banned it, hoarded it, and publicly downplays its significance.  But the more money government prints, the more it cheats dollar holders, and the greater the demand for gold on world markets.  Prior to FDR’s confiscation order of 1933, twenty dollars (roughly) would buy an ounce of gold.  By mid-March of this year, an ounce of gold was selling for over a thousand dollars.  Gold dropped in price but has now started to climb again and is currently over $925.  Some analysts expect gold to match the Dow, and if the Fed sticks with stagflation rather than deflation or high inflation, the gold price could realistically reach $10,000.  In any case, we’re talking about a devastating government crime.  

And we’re the ones being devastated.  Want to wreck liberty or what little of it exists?  Become president, pick a fight, and inflate the currency to pay for it.  Gary North:  

Barbarism began in the twentieth century when World War I broke out in 1914. Within weeks, the commercial banks suspended redeemability in gold. The governments authorized this, and then had their central banks confiscate the confiscated gold from the commercial banks. The degree of barbarism that the war produced could not have been accomplished had a gold standard been in force. The public would have stripped the banks of the public’s gold. The governments would have had to come to terms with the enemy.                         

It was the abandonment of the gold standard that made modern barbarism affordable.  [Emphasis added]  

What did North say?  He said this:  

It was the abandonment of the gold standard that made modern barbarism affordable.  

Remember it, and remember why it’s true.  Gold doesn’t emerge from a printing press.  Gold cannot be mass produced to fund an “energetic presidency.”  That’s why governments have no use for it.  

In the case of World War I, the barbarism the gold standard could have prevented to a significant degree amounted to over 40 million casualties, including 19.7 million civilian and military deaths combined.  But that, of course, was only the beginning of the blood-soaked twentieth century -- a period in which state funding was and still is unrestrained by the “barbarous relic.”  

The combination of war and inflation is the surest way to advance statism, nor was the American Revolution and its inflation one of history’s sterling exceptions.  Read the excellent study by Leonard L. Richards, Shays’s Rebellion:  The American Revolution’s Final Battle.  Inflation led to rebellion, which led to widespread misrepresentation of the rebellion’s cause, which led to the Constitutional Convention to strengthen the central state.  (My review of Richards’ book is here.)  

Sound money safeguards  

It’s very difficult to inflate sound money because sound money, by its nature, is difficult to create.  It emerges in trade as a highly marketable commodity, but one that’s also relatively scarce.  Sound money starves the state but not the economy as long as prices are allowed to fluctuate.  Yet there was once some confusion about gold’s character.  As Mises wrote:  

When in the 'fifties of the nineteenth century gold production increased considerably in California and Australia, people attacked the gold standard as inflationary. . .  But later these criticisms subsided. The gold standard was no longer denounced as inflationary but on the contrary as deflationary.  [p. 416]  

It was considered insufficiently “elastic” (deflationary) even during the period 1896-1914, when gold discoveries in Alaska and South Africa spurred an annual inflation rate of two percent [see note 1]. But clearly, the objections to a gold standard were not so much based on its alleged inflationary or deflationary tendencies but on the fact that the market controlled its supply, rather than politicians and their pals in the fractional reserve banking racket.  Quoting Mises again:  

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.  [p. 414]  

But constitutions and bills of rights are the products of government and are subject to government’s shifting interpretations.  We should never let politicians or central bankers “interpret” anything for us, especially money.  An authentic gold standard would be entirely removed from state influence, and for that reason would afford much-needed protection against government assaults on our liberty.