All Commentary
Wednesday, January 1, 1975

A Standard for Freedom

Mr. Stevens is a free-lance writer who special­izes in the field of economics and monetary policy.

At one time the case for the gold standard was practically self-evi­dent — undisputed by most econo­mists and appreciated by both lay­men and professionals. Today, however, the case for gold is bur­ied under decades of propaganda, misconceptions, and myths. It has been only recently that the case for the gold standard has begun to surface from under the Policy Makers’ anti-gold debris. Conse­quently, gold is once again gain­ing the attention and interest it so rightly deserves.

Today’s free-market advocates of the gold standard differ from past advocates. For example, free-market advocates do not exclude silver or other commodities from their concept of a gold standard. Indeed, they do not even insist that gold must be money. The case for the gold standard is actually the case for market-originated commodity money, and the case against government-regulated fiat money. It is simply an extension of the case for free markets which respect the rights of man, and the case against controlled markets which violate the rights of man.

To be concerned with the gold standard is to be concerned with a free economy, regulated by the values and choices of men, rather than a controlled economy in which the values and choices of men are regulated by government. This concern for man’s freedom to express values and exercise choices is derived from the deeper concern for justice and for man’s right to property. The man con­cerned with justice does not aim to force others to use gold as money. Rather, he insists that gov­ernment has no right to prevent him and other men from using gold as money if they choose. The man concerned with property rights does not urge government to legislate pro-gold policies in order to arbitrarily increase the value, popularity, or status of gold. Rather, he insists that gov­ernment stop inflating, since this arbitrarily decreases the value of his money claims to property.

Antagonists of the gold stand­ard claim that it is impractical. But the gold standard is, in fact, the most practical monetary sys­tem yet conceived by man. How­ever, the gold standard’s primary virtue does not lie in its practi­cality: it lies in its morality. Those concerned about such things as freedom, justice, the preserva­tion of property rights and pur­chasing power, would do well to consider the moral case for the gold standard, for, once under­stood, it is the individual’s best defense against government con­fiscation of property through in­flation.

The fact that prevents govern­ment from indulging in inflation­ary schemes under the gold stand­ard can be best summed up in a phrase: governments can’t print gold. But to understand the impli­cations of this statement, and the virtues of having gold as money, it is first necessary to understand what money is — and what money is not.

What Money Is . . .

A man on a desert island has no need for money. He produces the goods he needs to survive, and consumes all he produces. Simi­larly, a primitive society has no need for money. The kinds of goods produced are extremely lim­ited, and if individuals desire to exchange their goods with one another, they can do so through direct exchange, i.e., barter. But under a division of labor economy where men specialize in produc­tion and where there is a variety of goods produced, desired, and traded, there is a very definite need for money. For how else could Mr. Jones in Florida sell his oranges to men throughout the world and then buy Mr. Smith’s best-selling novel, unless there ex­isted some medium of exchange acceptable to all parties.

Money originates from men’s desire for indirect exchange. And more, since indirect exchange usu­ally occurs between strangers like Smith and Jones, money must be an object which is mutually val­ued. Thus, money is that commod­ity which serves as a medium of exchange by virtue of its high degree of marketability.

The task of discovering which commodity will be most valued by and most acceptable to men as a medium of exchange can only be accomplished through a market process; for it is only through the market that men’s values and choices are properly reflected. The verdict of the market has re­flected three general requirements for any lasting medium of ex­change: that money should be gen­erally acceptable to most men; that it should be practical to use; and that it should be relatively stable in value. If these require­ments are satisfied, the result is a money of trust.

Trust is the lifeblood of money, and money is the lifeblood of any economy based on the indirect ex­change of goods and services. A money of trust serves to facili­tate exchange among men, and in doing so, breeds a healthy and growing economy. But if men should ever begin to mistrust money, the market will immedi­ately reflect this loss of confidence. Then money will begin to lose stability, lose its acceptability, and will soon become impractical to use in exchange.

Mistrusted money is the anti­thesis of the lifeblood of an econ­omy. It’s a kind of “bad blood” circulating between men through­out the economy, breeding con­fusion and suspicion. The fact that men’s mistrust of money will result in monetary crises and col­lapse, underscores the need for a money that never contradicts men’s values, a money that at all times properly reflects men’s val­ues, i.e., a money based on, and constantly exposed to, individual choices — which means a free­-market-originated commodity money.

Why Leave to Market

When one considers the com­plex process that must take place before men can discover which commodity money constantly re­flects their changing values and choices, one can understand why it is only through a free market process that money can properly evolve as a medium of trust. And one may also understand why no man, group of men, or govern­ment, has the right to dictate what money or its value should be. This decision must be a market decision if it is to be a lasting decision.

Throughout history, almost every conceivable commodity has been used as a medium of ex­change. Through the years of eco­nomic development and through trial and error, those commodi­ties least suited to serve as money were eliminated, while those com­modities best suited survived as forms of money. After centuries of exchange between men, the commodity that emerged as the most valued, the most practical, the most trusted money among men, was gold.

What gives rise to men’s trust in gold? First, men value gold as money because men value gold as a commodity. Gold at any time can be converted to its commodity role if its monetary role should ever be questioned. Second, since gold is relatively scarce and precious to men, it has stability of value. Therefore, it can be trusted to serve as a relatively stable medium of exchange. And since most in­dividuals desire to save part of what they produce in some mon­etary form, gold’s stability of value provides them with a relia­ble monetary method of accumu­lating and storing wealth.

What else gives rise to men’s trust in gold? Gold is easily mar­ketable, which means it is accept­able to men in exchanges of all kinds. Gold is also trusted because it is practical: it’s durable, so it won’t perish or rot; it’s small in bulk, so it is easily transportable. It’s a metal, which means it can be used in different forms, such as bars or coins; and, since gold does not evaporate, it will lose neither quantity nor quality if or when men should decide to melt their coins into bullion or melt their bullion for use in production.

There is one more thing that gives rise to men’s trust in gold: the knowledge that gold cannot be counterfeited; the conviction that the money supply cannot be arti­ficially and arbitrarily increased by those who would aim to con­fiscate wealth rather than produce it; the knowledge that money (the claim to production and effort) will itself represent production and effort. In short, men’s trust in gold carries the conviction that the monetary system freely adopted by men is based, not on whim and decree, but on integrity and productivity.

These are some of the reasons why men have trusted gold as a medium of exchange through his­tory — and why today’s Policy Makers damn its existence.

.. . And What Money Is Not

Money is not paper. Paper notes evolve from the desire for a con­venient substitute for commodity money. The paper notes that cir­culate as money today were once money substitutes (receipts for gold), defined by and convertible into a specific amount of gold. Paper notes did not and cannot become a money of trust without first representing a commodity of trust.

Consider the reaction of free men — men who, understanding and respecting the meaning of property rights, are suddenly and for the first time offered in place of gold, non-convertible paper notes. These notes would be mean­ingless to such men. No man who had just come from harvesting a field of wheat would even consider trading his wheat for scrap paper.

There are only two ways in which men will accept paper notes without commodity convertibility : if they are forced to do so, or if they are conned into doing so. Americans are now legally forced to accept government’s non-con­vertible paper notes — but only because they have been conned into believing that commodity money is “old-fashioned” and “im­practical” and that paper notes are indicative of a “modern and sophisticated economy.”

Nothing could be further from the truth. Non-convertible paper “money” is fiat money that derives its value, not from its value as a commodity, not from its value as a useful medium of exchange ac­cording to the requirements of a medium of exchange, but from the decree of government. Fiat money is a throwback to the days of kings and the mentality of dic­tators. It is not a money evolved from the values and choices of free men in free markets, but a money created through the coer­cion of government.

Is commodity money old-fash­ioned and impractical, as today’s Policy Makers contend it is? Con­sider the following facts: Over the last several decades, the ex­change ratios (the prices) of vari­ous commodities have not varied much in value relative to each other. For example, the value of eggs to milk or milk to bread would be at approximately the same ratios today as they were years ago.

Why Prices Rise

But if it is true that the ex­change ratios of commodities are relatively the same today as they were in the past, why then have prices (the exchange ratios of dollars to goods) soared over the years? The reason is that the val­ue of the paper money, with which government forces everyone to deal, has fallen yearly relative to all commodities. Clearly, if a com­modity (theoretically, almost any commodity) had been used as a medium of exchange over the past decades instead of government’s fiat money, prices would have re­mained relatively stable. It is im­portant to realize that it is not commodities that are rising in value, but fiat money that is fall­ing in value.

Since 1933, when the U.S. sev­ered the dollar-commodity rela­tionship by abandoning what was left of the gold standard, the value of the dollar has depreciated by over two-thirds in relation to other commodities. This could nev­er occur under a commodity stand­ard — only under a government imposed fiat standard. Had the U.S. returned to a dollar based on and convertible into gold instead of severing the dollar-gold rela­tionship, the supply of dollars over the years would have been limited to, or checked by, the sup­ply of gold. Therefore, the value of the dollar today would have been equal to the value of gold in relation to other commodities. Instead, the U.S. decided to print dollars whenever “needed” and to pretend that the dollar was “as good as gold” by legally fixing its value. The pretense couldn’t last, and today the dollar is worth ap­proximately 25 per cent of its val­ue in terms of gold in 1933.

Paper notes that are not repre­sentative of and convertible into a commodity are not money and have never satisfied the require­ments of money for long. They are notes of circulating debt which men are forced to accept, so that governments can continuously pur­sue their policies of inflation.

The Nature of Inflation

Inflation is the fraudulent in­crease in the supply of money sub­stitutes and credit. It is a policy which allows government to arti­ficially create and spend more money than it is able to collect in taxes or borrow from its citizens. Government is the cause of infla­tion — the effect is higher prices.

Consider each dollar as a claim to some tangible good. If the claims are increased, the value of each claim goes down because there are more dollars seeking goods. This bids prices up.

But inflation is not simply ris­ing prices. In fact, inflation may exist even when prices remain the same or decrease. How is this pos­sible? If the production of goods and services increases more than the artificial increase in paper claims, prices will drop — but not by as much as they would have, had there been no artificial in­crease in paper claims. Thus, in real terms, the value of paper claims is effectively reduced even though in relative terms the value of these claims may increase.

Historically, and in relatively free market economies, there are only two ways in which a general across-the-board increase in prices can occur: through a dramatic in­crease in commodity money (such as new gold discoveries) or through a fraudulent increase of money substitutes by banks and governments. The former type of general price increase rarely oc­curs and is perfectly natural. The latter is both unnatural and im­moral.

In the case of new gold produc­tion, those who have produced the new commodity money will have earned the right to exchange their product for the products of others. All other non-money producers may have to pay higher prices for goods, as the supply of gold in­creases, but the higher prices are compensated for by having more money to spend. Who receives the “new” money will depend on indi­vidual productivity — and this is as it should be, for it is the jus­tice of the market that the acqui­sition and distribution of wealth is based upon productivity rather than decree.

But, given a fiat standard where government sanctions and spon­sors an artificial increase in paper money or credit, the increase in purchasing power for some men can only be obtained at the ex­pense of other men. Given a fiat standard, income distribution is the result of chance, caprice, or government favors and loans. When government doles out its fiat money, these notes dilute the value of all other outstanding money claims. Those who receive the fiat money first, benefit from spending their money before prices rise. But as the fiat money is spent, prices are higher for all other consumers. Thus, the difference between a real increase in the money supply (i.e., commodity money) and an artificial increase (i.e., in paper claims) is the dif­ference between production and theft.

Clearly, inflation is a moral is­sue. However prices respond, it is immoral that some man, agency, or government is legally permit­ted to obtain wealth at the invol­untary expense of other men. The major challenge in the sphere of monetary relations today is how to abolish the coercive power of government to control the supply and regulate the value of money, and how to return this function to the market where it properly belongs.

The Fiat Standard at Work

Under a fiat standard, govern­ment gains control of the banking system and thus, indirectly, of the nation’s money supply. It can arti­ficially and arbitrarily create mon­ey and furnish credit. Government paper notes are not based on or convertible into gold, or any other tangible commodity; man’s pro­duction and labor are not the sole claim to other men’s production and labor : the supply and value of money are determined by govern­ment.

Under the American version of the fiat standard, the banking sys­tem and the nation’s money sup­ply are controlled and regulated for the most part by a twelve-man Board of Governors which is em­powered to make policy decisions for the majority of the nation’s banks. Thus, America’s banking system is not a free and private banking system — it is a quasi-governmental banking system, known as the Federal Reserve System.

It should be clear that the Fed­eral Reserve System’s power to create claims against individuals’ property is immoral. But neither the Federal Reserve System nor the fiat standard is ever defended on moral grounds; they are de­fended on practical grounds. Once inspected, however, these grounds turn out to be about as solid as quicksand. The primary justifica­tion given for a fiat standard is that credit can be extended far more rapidly and extensively. This, it is claimed, is the fiat standard’s major virtue. It is, in fact, a major vice.

The greatest economic threat under a fiat standard is that the Federal Reserve System will sup­ply heavy doses of money and credit to the loan market in an attempt to reduce interest rates and “stimulate” the economy. This attempt, while temporarily stimu­lating economic activity, leads to malinvestment, as businessmen falsely anticipate greater profits. A “boom” results, but since the “boom” is artificially created, the prosperity is temporary and, for the most part, illusory. Govern­ment has not furnished more goods; it has not increased the nation’s prosperity; it has simply increased the money supply —which leads men to believe they are richer. The fact is, however, they only have more paper claims to goods. This cannot enrich any­one; it can only lead to future in­flation, i.e., a reduction of the value of real claims to wealth.

Illusion of Prosperity

Thus, increases of money and credit provide only an illusion of prosperity, for with increased money and credit come increased costs for producer goods and in­creased wage costs. Higher wages then lead to over-consumption, as consumers, too, are enticed by the illusion of prosperity. But over­consumption results in higher prices which reduce the consum­er’s standard of living. Since the “boom” was inflation-inspired, producers and consumers are not better off — they are worse off. Mal-investment and over-consump­tion are mistakes — errors in judg­ment — caused by government’s at­tempt to con its citizens into be­lieving that profit opportunities are better than they really are.

When the credit expansion that stimulated the “boom” ends, the mistakes that were made cannot be perpetuated. These mistakes must be liquidated: consumers buy less and begin paying off their un­realistic accumulation of debts. Producers liquidate inventories. Interest rates rise, and unemploy­ment increases as the economy struggles to readjust. The severity of the readjustment depends on the degree and length of govern­ment’s prior credit expansion and the policies implemented to cope with the adverse effects. Given continual injections of money and credit in the inane attempt to con­tinue the “boom” and prevent a necessary recession, hyperinfla­tion will result. Hyperinflation must lead to monetary chaos as well as economic disaster, i.e., to depression. A major depression is not a necessary result of the fiat standard, but inflation and the “boom-bust cycle” are.

The whole purpose of fiat mon­ey is to allow government to spend more money than it can raise in direct taxes from its citizens. As a result, the American fiat stand­ard has worked more often as a means of redistributing wealth than a means of stimulating the economy. Government, instead of furnishing money to the loan mar­ket in the attempt to continuously reduce interest rates, has created money to finance the “welfare” state. When government’s fiat money enters the economy in the form of checks for expenditures, rather than through the loan mar­ket, the sequence of events and the effects are a little different.

Men usually hold their money as savings, but as prices continue to rise over the years of govern­ment deficit spending, men realize that the pieces of paper they hold are continuously and progressively depreciating in value — that in­flation is becoming a way of life. Once men begin to lose confidence in government’s fiat money, it’s only a matter of time before the years of simple inflation burst in­to hyperinflation and monetary collapse.

Thus, whether government tries to stimulate the economy or to finance programs that it cannot afford, the fiat standard is self-de­feating and counter-productive. The consequences of America’s fiat standard have been mild by historical standards: the Great Depression of the ’30′s, an end­less series of booms and busts since then, and a depreciation of the dollar by about 75 percent. So much for the “practicality” of the fiat standard!

The Meaning of the Gold Standard

In a free society, no man, group of men, or government has the “right” to infringe upon the rights of others. This means that within a free society, the initia­tion of force is banned. All goals must be attained through persua­sion and voluntary cooperation, and no goal may be achieved at the expense of any man — not for the “good” of another man, not for the “good” of the state, and not for the “good” of society. A system of voluntary exchange is a system of laissez-faire capitalism. Under capitalism, man’s rights are supreme. They are defended by government — not violated by government.

A gold standard is an integral part of a free society; a fiat stand­ard is an integral part of a con­trolled society. A gold standard cannot exist without the consent of individuals; a fiat standard cannot exist without the initiated force of government. A gold stand­ard is based on voluntary exchange, the recognition of men’s values, and respect for private property; a fiat standard is based on compulsory “exchange,” the de­nial of men’s values, and the insidi­ous confiscation of private prop­erty.

Wealth is production, and gold is the equivalent of wealth pro­duced. Because neither wealth nor gold can be created out of nothing, neither wealth nor gold are pos­sible without men of intelligence, men of ability, and men of produc­tivity. Fiat is force and is the equivalent of wealth confiscated. Both fiat and force are the tools of the envious and the cowardly.

Where a gold standard is welcomed by the best of men, the fiat stand­ard is welcomed by the worst of men. Where the gold standard de­mands the earned, the fiat stand­ard grants the unearned. Where a gold standard evolves from indi­vidual choice, a fiat standard evolves from government edict. Where a gold standard necessi­tates only that men be left free to act, to choose, and to trade, a fiat standard invites government to control, to regulate, and to dic­tate men’s choices, actions, and the terms of trade.

Gold limits the government’s power to spend more money than it receives in taxes, and in doing so, gold limits the government’s arbitrary power over the economy; gold checks artificial money and credit expansion; it prevents arti­ficial “booms” which lead to very real “busts”; gold protects individuals from economically un­sound government programs; and it protects citizens from the in­flationary confiscation of private property. Not only is the gold standard the most practical mone­tary system yet discovered, it is a standard consistent with freedom — yet it is the gold standard that today’s Policy Makers either ig­nore or denounce.