Gold StandardNovember 18, 1981 (a radio commentary)
Recent Plumbline commentary has included some common academic objections to a gold standard of value. I would like to respond to those objections.
One type of objection labors to show that, because of variations in mining production, a static supply of gold cannot be maintained. From this insight the conclusion is drawn that the use of gold as money will not lead to stable prices.
Such analysis, however, applies only to the artificial relationships which exist when artificial money is used. When real money is used, prices find a natural equilibrium and stability. For example, an ounce of gold and a well-tailored suit of clothes have had relative parity of value for hundreds of years, even though the supply of gold money, and the supply of clothes, have changed. This relative parity is maintained because people see that the values of the human labor required to produce the one or to produce the other are approximately equal. When a suit sells for significantly more than one ounce of gold, more people learn to be tailors. When an ounce of gold buys significantly more than one suit of clothes, more people work in the gold mines. This is only one of many examples of the way in which the parity of the value of gold is maintained through the free decisions of millions of people. When artificial money is used, this natural balance does not exist, because no labor is required to "create" such money. Therefore, a controlling monetary authority is established in an effort to replace natural economic law. When real money is used, the controlling decisions or a monetary authority are unnecessary, and, frequently, a nuisance.
Another type of objection calls attention to the booms and busts which have occurred while gold money was in use. These are seen as evidence that gold money does not bring stability.
Such reasoning, however, does not understand that artificial money, usually in the form of bank notes and credit, was used to cause those artificial boom periods, and the periods of bust which always follow. The stabilizing effect of real money is not fully realized when artificial credit money is "created" and given equivalent value as legal tender. Whether we choose to return to the use of privately issued money, or real money issued by the government, we must insist on the return to a true standard of value, so that nothing is legal tender unless it transfers ownership of standard units of real wealth. Pretending that a promise to pay real money is itself real money, leads to legal and economic confusion. How many of understand the money we are using? Our deceitful games have made it difficult for us to understand our own economic activities. Should it surprise us that our situations are not improving?
Another objection tries to ridicule those who put wealth into vaults and piggy banks.
We should remember, however, that one of the most important functions of good money is the storing of value for future use. Planning for emergencies or for retirement requires that we produce something valuable now which we will use or consume in the future. Though it sounds simplistic, we must remember that the only way to store value is to put something valuable into storage. If at times some people decide that it is prudent to store and protect some of the wealth which they have produced or earned, rather than to lend or invest it, they need something valuable to store. Do we want to deny people the right to make such decisions regarding the wealth for which they are responsible? Are people not free to control the fruits of their own labor? Many retired people today have no real wealth as savings. They have only the hope that younger people will work to replace the wealth which retired people parted with during their productive years, while receiving nothing but promises of undefined units of credit. Certificates, bonds, bills, notes, and other credits of dollars represent hopes and promises rather than stored wealth. History shows conclusively that economic systems based on debts and credits provide less security and stability than those based on the exchange and storage of real wealth. The longest periods of peace and prosperity have been times when gold and silver were used as money. Artificial paper monies have produced some of the most violent and chaotic periods of history, and the destruction of the wealth of millions. Incidentally, if central bankers really believe that it is bad for the country if people store real wealth in vaults, their own actions have been most unpatriotic.
Another objection focuses on the alleged problems of determining the correct "price" of gold.
However, if gold is the standard of value, then gold itself does not have a "price". Rather, the price of all other goods is measured in units of gold. An ounce of gold is an ounce of gold. A gram of gold is a gram of gold. Period. The "price" of the standard of value is not subject to determination, any more than the length of the standard foot is measured in feet, or the standard pound is weighed on a pound scale. What will continue to be difficult for people is the determination of the value of the many forms of paper money, as measured in gold. But that difficulty does not discredit a gold standard of value. Instead, it emphasizes the problems of our present system, which has no defined standard of value, and in which money is an abstract idea of which records are kept on paper. We cannot avoid unpleasant consequences of our past and present foolishness. To pretend that we can is only to continue the foolishness and bring us closer to disaster. A foundation of sand does not change into rock while people are searching for a magic wand.
Another objection claims that the use of gold as money will benefit the Russians and the South Africans, and hurt the rest of us.
Now, do we really think that the Russians care whether they can exchange their gold for goods directly, or whether they must first convert to paper money in order to purchase goods? Does it make us feel better to know that they have converted their gold to paper money before buying goods? To consider the question is to answer it. The simple fact is that those who have gold can always obtain other goods. This objection is only another effort to confuse our thinking and to raise unnecessary fears which will scare us into preserving the status quo, so that the "creators" of artificial money may continue to plunder the wealth of other people.
In our present system, money does not exist in the material world. It is an abstract idea of which records are kept on paper and in computers.
We cannot hold our present money in our hands. It is only an idea. We can only hold monetary records in our hands, just as we can hold records of temperature in our hands. We cannot hold temperature itself in our hands. We can hold records of the speed of wind in our hands. We can't hold the speed of wind itself in our hands. We can hold records of abstract money in our hands, but not abstract money itself.
Anyone who puts confidence in dollars of our present money is placing confidence in something which exists only in people's minds, and depends for its existence upon sustained and consistent mental activity. Because our money exists only in people's minds, it is entirely controlled by those whose thinking is recognized by law as authoritative, and whose thinking is therefore recognized by law as the "creation" of money.
Our monetary authorities want us to believe that the abstract concepts which are "created" by acts of their human wills, and distributed by them to those who find favor, have a value as good as that of the materials which are created by acts of the divine will, and obtained through the exercise of productive skills distributed by divine providence. Our monetary authorities want us to trust them. When we doubt, they and their prophets reassure us that they are the ones most worthy of our trust.
The choice of real money or artificial money is fundamentally an issue of control. Artificial money gives the "creators" of such money the control of the supply of money and credit, and control over the economic lives of those who use it.
Artificial money is nothing other than the approval and good favor of the monetary authority. Artificial money leads to endless debates, opinion polls, and referendums, which attempt to influence the monetary authority in its distribution of favors. Artificial money is an excellent tool for establishing planned and controlled societies.
Are we enjoying what the planners are doing for us? How many more times will we try yet another of their new policies, while accepting their most recent explanation of what has gone wrong? The time has come for us to return to the simple and historically proven practice of using real money.
Real money puts the control of wealth in the hands of those who work to earn or produce it. It is a means for workers and producers to control their own economic lives. Real money is a characteristic of free societies.
If we want our lives to be planned and controlled by other people, we should promote artificial money.
If we prefer, instead, with God's help, to plan and control our own lives, we should promote real money.
History has shown that the best form of real money known to man is gold.