Gold's Dust


Gary North is a member of the Economists’ National Committee on Monetary Policy.

The best way for a nation to build confidence in its currency is not to bury lots of gold in the ground; it is, instead, to pursue responsible financial policies. If a country does so consistently enough, it’s likely to find its gold growing dusty from disuse.

Editorial, The Wall Street Journal, 1969

When I read the above sentences for the first time, something clicked in my mind. That the con­clusions drawn by the editorialist concerning the importance of gold for monetary purposes are opposed to my conclusions is neither here nor there. What is important is that within an editorial hostile to gold, the writer has hit upon one of the basic truths of the in­ternational gold standard. The gathering of dust on a govern­ment’s stock of monetary gold is as good an indication of fiscal re­sponsibility as would be the addi­tion of gold dust to the stock.

In order to place things in their proper perspective, we must con­sider the function of money in general and the size of a nation’s gold stock in particular. Money, it should be understood, is useful only as a means of exchange. The reason some particular economic good functions as money is be­cause it is the most highly market­able good available; it outrivals other items in the four properties of any monetary good: durability, transportability, divisibility, and scarcity. For that reason it is in demand; people are willing to part with other scarce goods and serv­ices in order to purchase money. Murray Rothbard has commented on this unique function of money:

Thus, we see that while an increase in the money supply, like an increase in the supply of any good, lowers its price, the change does not—unlike other goods—confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices—i.e., dilutes its own purchasing power. The rea­son for this puzzle is that money is only useful for its exchange-value. Other goods have "real" utilities, so that an increase in their supply satis­fies more consumer wants. Money has only utility for prospective exchange; its utility lies in its exchange-value, or "purchasing power." Our law—that an increase in money does not confer a social benefit—stems from its unique use as a medium of ex­change.’

No Measure for Social Benefit

I would prefer to modify Dr. Rothbard’s statement somewhat. If economic analysis is accepted as a tool for better understanding, then we must be careful not to derive ethical judgments from the application of a supposedly neu­tral tool of analysis. This, I be­lieve, is in line with the epistemo­logical foundations laid down by men like Ludwig von Mises and Lionel Robbins. What we can say, therefore, is that an addition to an existing stock of money cannot be said to confer a social benefit in the aggregate. Given Professor Mises’ analysis of inflation (which Dr. Rothbard generally accepts, as I do), we know that those who have first access to the new money do, indeed, gain a benefit: they can spend the newly mined (or newly printed) money at yester­day’s prices. Their competitors who do not have immediate access to the new money are forced to restrict their purchases as supplies of available goods go down and/or prices of the goods increase. Thus, those on a fixed income cannot buy as much as they would have been able to buy had the new money not come into existence. Some peo­ple benefit in the short run; others suffer loss. Economic analysis as such gives us no clue as to the over-all social benefit; in the ag­gregate, social benefits may have increased, stayed the same, or fall­en. But Dr. Rothbard’s general point is vital: the increase of the total stock of money cannot be said, a priori, to have increased a nation’s aggregate social benefit. The only way such a statement could be made would be in terms of a value-laden set of presuppo­sitions which deems it socially beneficial to aid one group in the community (the miners, or those printing the money) at the ex­pense of another group (those on fixed incomes). Economics as such could never tell us this, which should encourage us to re-examine the presuppositions lying behind the highly inflationary recommen­dations of many of those enam­ored of the "new economics."

If it is true that there is no way of supporting, through the use of economic analysis, the idea that an increase in the money supply in some way increases aggregate social benefits, then certain con­clusions will follow. For the sake of argument, let us assume that the supply of paper dollars is tied, both legally and in fact, to the stock of gold in the Federal gov­ernment’s vaults. Let us assume that for each ounce of gold brought to the government, a paper receipt called a "dollar" is issued to the one bringing in the gold for deposit. At any time the bearer of this IOU can redeem the paper "dollar" for an ounce of gold. By definition, a dollar is now worth an ounce of gold, and vice versa. What will take place either if an addition of new gold is made by some producer, or if the government (illegally) should print up a paper dollar? Rothbard describes the results:

An increase in the money supply, then, only dilutes the effectiveness of each gold ounce; on the other hand, a fall in the supply of money raises the power of each gold ounce to do its work. [Rothbard is speaking of the long-run effects in the aggregate.] We come to the startling truth that it doesn’t matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing-power, or effectiveness of its gold unit. There is no need what­ever for any planned increase in the money supply, for the supply to rise to offset any condition, or to follow any artificial criteria. More money does not supply more capital, is not more productive, does not permit "economic growth."2

Once we have a given supply of money in our national gold sys­tem (or wampum system), we no longer need to worry about the ef­ficiency of the monetary unit. Men will use money as an eco­nomic accounting device in the most efficient manner possible, given the prevailing legal, insti­tutional, and religious structure. In fact, by adding to the existing money supply in any appreciable fashion, we bring into existence the "boom-bust" phenomenon of inflation and depression.3 The old cliché, "Let well enough alone," is quite accurate in the area of mon­etary policy.

Why Gold?

We live in an imperfect uni­verse. We are not perfect crea­tures, possessing omniscience, om­nipotence, and perfect moral na­tures. We therefore find ourselves in a world in which some people will choose actions which will benefit them in the short run, but which may harm others in the long run. The gold miner, by diluting the purchasing power of the mone­tary unit, achieves short-run bene­fits. Those on fixed incomes are faced with a restricted supply of goods available for purchase at the older, less inflated, price levels. This is a fact of life.

Nevertheless, Professor Mises has defended gold as the great foundation of our liberties pre­cisely because it is so difficult to mine. It is not a perfect mechan­ism, but its effects are far less deleterious than the power of a monopolistic state or licensed banking system to create money by fiat. The effects of gold are far more predictable, because they are more regular; geology acts as a greater barrier to inflation than can any man-made institutional arrangement.`’ The booms will be smaller, the busts will be less devastating, and the redistribution involved in all inflation (or defla­tion, for that matter) can be more easily planned for.

Nature is niggardly; that is a blessing for us in the area of mon­etary policy, assuming we limit ourselves to a monetary system tied to specie metals. We would not need gold if, and only if, we could be guaranteed that the government or banks would not tamper with the supply of money in order to gain their own short-run benefits. So long as that temp­tation exists, gold (or silver, or platinum) will alone serve as a protection against policies of mass inflation.

The Stock of Gold

The collective entity known as the nation, as well as another col­lective, the State, will always have a desire to increase its percentage of the world’s economic goods. In international terms, this means that there will always be an in­centive for a nation to mine all the gold that it can. While it is true that economics cannot tell us that an increase in the world’s gold supply will result in an in­crease in aggregate social utility, economic reasoning does inform us that the nation which gains access to newly mined gold at the beginning will be able to buy at yesterday’s prices. World prices will rise in the future as a direct result, but he who gets there "fustest with the mostest" does gain an advantage. Thus, so long as there is a demand for South African gold, we can expect to see South Africa selling her gold if the value of the goods she can purchase is greater than the value of the gold to her. What applies to an individual citizen miner ap­plies equally to national entities.

So much for technicalities. What about the so-called "gold stock"? In a free market society which permits all of its citizens to own gold and gold coins, there will be a whole host of gold stocks. (By "stock," I mean gold hoard, not a share in some company.) Men will own stocks, institutions like banks will have stocks, and all levels of civil government—city, county, national—will possess gold stocks. All of these institu­tions, including the family mem­ber, could issue paper IOU slips for gold, although the slips put out by known institutions would no doubt circulate with greater ease (if what is known about them is favorable). I suppose that the "na­tional stock of gold" in such a situation would refer to the com­bined individual stocks.

Within this hypothetical world, let us assume that the national government wishes to purchase a fleet of German automobiles for its embassy in Germany. The American people are therefore taxed to make the funds available. Our government now pays the German central bank (or similar middleman) paper dollars in order to purchase German marks. Since, in our hypothetical world, all na­tional currencies are 100 per cent gold-backed, this will be an easy arrangement. Gold would be equally valuable everywhere (ex­cluding shipping costs and, of course, the newly mined gold which keeps upsetting our analy­sis), so the particular paper de­nominations are not too impor­tant. Result: the German firm gets its marks, the American embassy gets its cars, and the middleman has a stock of paper American dollars. These bills are available for the purchase of American goods or American gold directly by the middleman, but he, being a specialist working in the area of currency exchange, is more likely to make those dollars available (at a fee) for others who want them. They, in turn, can buy American goods, services, or gold. This should be clear enough.

Paper Promises Easily Broken

Money, it will be recalled, is useful only for exchange, and this is especially true of paper money (gold, at least, can be made into wedding rings, earrings, nose rings, and so forth). If there is no reason to mistrust the Ameri­can government, the paper bills will probably be used by profes­sional importers and exporters to facilitate the exchange of goods. The paper will circulate, and no one bothers with the gold. It just sits around in the vaults, gather­ing dust. So long as the govern­ments of the world refuse to print more paper bills than they have gold to redeem them, their gold stays put. It would be wrong to say that gold has no economic function, however. It does, and the fact that we must forfeit storage space and payment for security systems testifies to that valuable function. It keeps governments from tampering with their domes­tic monetary systems. An ingot of prevention is worth a pound of cure (apologies to Harold Wilson).

Obviously, we do not live in the hypothetical world which I have sketched. What we see today is a short-circuited international gold standard. National governments have monopolized the control of gold for exchange purposes; they can now print more IOU slips than they have gold. Domestic populations cannot redeem their slips, and since March of 1968, very few international agencies have access to governmental gold stocks (or so we are told). The governments create more and more slips, the banks create more and more credit, and we are deluged in money of decreasing purchas­ing power. The rules of the game have been shifted to favor the ex­pansion of centralized power. The laws of economics, however, are still in effect.

Trading Without Gold

One can easily imagine a situa­tion in which a nation has a tiny gold reserve in its national treas­ury. If it produces, say, bananas, and it limits its purchases of for­eign goods by what it receives in foreign exchange for exported bananas, it needs to transfer no gold. It has purchasing power (ex­ported bananas) apart from any gold reserves. If, for some reason, it wants to increase its national stock of gold (perhaps the gov­ernment plans to fight a war, and it wants a reserve of gold to buy goods in the future, since gold stores more conveniently than bananas), the government can get the gold, or it could before March, 1968. All it needs to do is take the foreign money gained through the sale of bananas and use it to buy gold instead of other economic goods. This will involve taxation, of course, but that is what all wars involve. If you spend less than you receive, you are saving the residual; a government can save gold. That’s really what a gold reserve is—a savings account.

This is a highly simplified ex­ample. It is used to convey a basic economic fact: if you produce a good (other than gold), and you use it to export in order to gain foreign currency, then you do not need a gold reserve. You have merely chosen to hoard foreign currency instead of gold. That ap­plies to citizens and governments equally well.

What, then, is the role of gold in international trade? Dr. Pat­rick Boarman clearly explained the mechanism of international exchange in The Wall Street Jour­nal of May 10, 1965:

The function of international re­serves is NOT to consummate inter­national transactions. These are, on the contrary, financed by ordinary commercial credit supplied either by exporters or importers, or in some cases by international institutions. Of such commercial credit there is in individual countries normally no shortage, or internal credit policy can be adjusted to make up for any un­toward tightness of funds. In con­trast, international reserves are re­quired to finance only the inevitable net differences between the value of a country’s total imports and its total exports; their purpose is not to fi­nance trade itself, but net trade im­balances.

The international gold standard, like the free market’s rate of in­terest, is an equilibrating device. What it is supposed to equilibrate is not gross world trade but net trade imbalances. Boarman’s words throw considerable light on the perpetual discussion concerning the increase of "world monetary liquidity":

A country will experience a net movement of its reserves, in or out, only where its exports of goods and services and imports of capital are insufficient to offset its imports of goods and services and exports of capital. Equilibrium in the balance of payments is attained not by in­creasing the quantity of a mythical "world money" but by establishing conditions in which autonomous movements of capital will offset the net results, positive and negative, of the balance of trade.

Some trade imbalances are tem­porarily inevitable. Natural or so­cial disasters take place, and these may reduce a nation’s productivity for a period of time. The nation’s "savings"—its gold stock—can then be used to purchase goods and services from abroad. Specif­ically, it will purchase with gold all those goods and services needed above those available in trade for current exports. If a nation plans to fight a long war, or if it expects domestic rioting, then, of course, it should have a larger gold stock than a nation which expects peaceful conditions. If a nation plans to print up millions and even billions of IOU slips in order to purchase foreign goods, it had better have a large gold stock to redeem the slips. But that is merely another kind of trade im­balance, and is covered by Boar-man’s exposition.

The Guards

A nation which relies on its free market mechanism to balance supply and demand, imports and exports, production and consump­tion, will not need a large gold stock to encourage trade. Gold’s function is to act as a restraint on governments’ spending more than they take in. If a government takes in revenues from the citi­zenry, and exports the paper bills or fully backed credit to pay for some foreign good, then there should be no necessity to deplete its semi-permanent gold reserves. They will sit idle—idle in the sense of physical movement, but not idle in the sense of being eco­nomically irrelevant.

The fact that the gold does not move is no more (and no less) significant than the fact that the guards who are protecting the gold can sit quietly on the job if the storage system is really effi­cient. Gold guards us from that old messianic dream of getting something for nothing; that is also the function of the guards who protect the gold. The guard who is not very important in a "thief-proof" building is also a kind of "equilibrating device": he is there in case the over-all system should experience a tem­porary failure.

A nation which permits the market to function freely is, by analogy, also "thief-proof": every­one consuming is required to offer something in exchange. During emergencies the gold is used, like the guard. Theoretically, the free market economy could do without a large national gold reserve, in the same sense that a perfectly de­signed vault could do without most of the guards. The nation that requires huge gold reserves is like a vault that needs extra guards; something is probably breaking down somewhere.


I have come, as a recent popu­lar song puts it, "the long way around." What I have been trying to explain is that a full gold coin standard, within the framework of a free market economy, would permit the large mass of citizens to possess gold. This might mean that the "national reserves of gold"—that is, the State’s gold hoard—might not have to be very large. If we were to re-establish full domestic convertibility of paper money for gold coins (as it was before 1934), while removing the "legal tender" provision of the Federal Reserve Notes, the economy would still function. It would probably function far better in the long run.

That, of course, is not the world we live in. Since it is not a free society in the sense that I have pictured, we must make certain compromises with our theoretical model. The statement in The Wall Street Journal’s editorial would be completely true only in an economy using a full gold coin standard: "The best way for a nation to build confidence in its currency is not to bury lots of gold in the ground." Quite true; gold would be used for purposes of exchange, although one might save for a "rainy day" by burying gold. But if governments refused to inflate their currencies, few people would need to bury their gold, and neither would the government. If a government wants to build con­fidence, indeed it should "pursue responsible financial policies," that is, it should not spend more than it takes in. The conclusion is ac­curate: "If a country does so con­sistently enough, it’s likely to find its gold growing dusty from disuse."

In order to remove the necessity of a large gold hoard, all we need to do is follow policies that will "establish Justice, insure domestic Tranquility, provide for the com­mon defense [with few, if any, entangling alliances], promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity." To the extent that a nation departs from those goals, it will need a large gold hoard, for it costs a great deal to finance injustice, domestic vio­lence, and general illfare. With the latter policies in effect, we find that the gold simply pours out of the Treasury, as "net trade im­balances" between the State and everyone else begin to mount. A moving ingot gathers no dust.

Which leads us to "North’s Corollary to the Gold Standard" (tentative): "The fiscal responsi­bility of a nation’s economic poli­cies can be measured directly in terms of the thickness of the layer of dust on its gold reserves: the thicker the layer, the more respon­sible the policies."



1 Murray N. Rothbard, What Has Government Done to Our Money? (Pine Tree Press, 1964), p. 13.

2 Ibid., p. 13.

3 Cf. Gary North, "Repressed Depression," THE FREEMAN (April, 1969).

4 Ludwig von Mises, The Theory of Money and Credit (Yale University Press, 1951), pp. 209-11, 238-40.



Nobody’s Business

The essential difference between the pre-war and the post-war gold standard was that the former had to work, because, if it did not do so, the banker went bankrupt. After the outbreak of war in 1914 the Government—not the banker—was responsible, and what is the Government’s business is often nobody’s business.

GEORGE WINDER, A Short History of Money 


October 1969

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December 2014

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