All Commentary
Sunday, December 1, 1996

Economics of a Pure Gold Standard

A Standout from Mainstream Treatments of Alternative Monetary Systems

Early in his marriage, Ludwig von Mises told his wife that despite writing prolifically about money he was never likely to earn a great deal of it. Mark Skousen makes the case in Austrian Economics for Investors (subtitled Ludwig von Mises Goes to Wall Street) that the ideas of Mises and his confreres do indeed have money-making potential. Showing the importance of subjective elements in forecasting, the impact of government policies on economic growth, the behavior of different types of industries over the course of the business cycle, and the role of gold as an inflation hedge are but a few ways Skousen sees Austrian insights as helping the reader put his capital to work.

While Austrian Economics for Investors touches upon the topic of gold, the role as money of the metal Keynes once dismissed as a barbarous relic is discussed thoroughly in Skousen’s Economics of a Pure Gold Standard, just re-issued by the Foundation for Economic Education. It goes one better than showing the reader how 100 percent gold reserve banking might work, by showing how it actually did work in seventeenth-century Amsterdam, Hamburg, and Venice. From there, it provides some unfamiliar details to the familiar story of how practices once considered criminal came to be venerable standards. Specifically, the author explains how money’s fungibility (i.e., particular pieces of money not being specifically identifiable) led British courts to construe bank deposits as loans, culminating in the 1833 decision of Pitts v. Glegg, which conferred legal status and has not since been challenged to fractional reserve banking.

A thorough rendering of the views of hard money advocates, from the Founding Fathers through the Jacksonians, the British currency school, and Murray Rothbard, serves as prologue to a survey of the issues involved in a pure specie standard, including what the unit of account should be, whether to allow for private provision of coinage, and the role of banks under such a system. Free banking as an alternative to a pure gold standard is discussed here as well. Skousen also covers several perennial critiques of a 100 percent specie system including its purported costliness and violation of the sanctity of private contracts. In so doing, he shows the ease with which hard money proponents turn each of these arguments to the gold standard’s advantage.

In the first case, they show how the cost of labor and capital expended to mine additional gold is dwarfed by the inflation, business cycles, bank failures, and hidden tax burden incurred under any regime with less than 100 percent reserves. In the second, their arguments hinge on the prohibition of fraud being a defense of private contracts rather than their violation. To the extent that depositors are informed about the banks’ use of their money, this case is less than airtight. A stronger argument, conspicuous by its absence, is that any money creation which reduces the reserve ratio is really an act of counterfeiting.

While the economics of the gold standard is clearly this book’s long suit, it stands out from mainstream treatments of these issues by dealing forthrightly with some of the ethical and philosophical issues of alternative monetary systems. Yet, the book ends with the sobering realization that the insights of the 100 percent gold standard advocates are necessary but not sufficient for breathing life into such a system. Or, as the author puts it, the 100 percent specie standard, advantageous as it may be portrayed, can be instituted only through drastic reforms and economic disruptions. It may have theoretical beauty, but it lacks pedestrian attributes. Lovers of liberty can only hope that Skousen is as wrong about the prospects of returning to sound money as he believed Mises to be about the money-making implications of Austrian economics.

  • Mark Skousen is a Presidential Fellow at Chapman University, editor of Forecasts & Strategies, and author of over 25 books. He is the former president of FEE and now produces FreedomFest, billed as the world's largest gathering of free minds. Based on his work “The Structure of Production” (NYU Press, 1990), the federal government now publishes a broader, more accurate measure of the economy, Gross Output (GO), every quarter along with GDP.

  • Robert Batemarco teaches economics on an adjunct basis at Fordham University and Manhattan College. He was formerly book review editor of The Freeman. He is a member of the FEE Faculty Network.