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Wednesday, November 1, 1995

Gold and Liberty

Free Markets Are Capable of Serving Our Monetary Needs


About five years ago, a young banker sat next to me on the commuter train I take home from work. Noticing that I was reading about central bank policies, he engaged me in conversation on that topic. He enthused about the Fed and the “great job” it was then doing fighting inflation. “You know,” I said to him, “fighting inflation is the last thing the Fed, or any central bank, for that matter, is about.” Just as I was getting started, the train arrived at my station. While he seemed open to my line of reasoning, I’ll never know if my words made any impact.

The discussion I was barely able to initiate on that train is ably executed from start to finish by Richard Salsman in Gold and Liberty. He identifies gold as the only money consistent with the free market. Central banking, on the other hand, supported by the belief that free markets are incapable of adequately serving our monetary needs, is exposed by Salsman as “nothing but central planning applied to money and banking.” He uses history to illustrate that central banks were established to put more resources in the hands of spendthrift governments. This, and not preventing inflation and business cycles, is the one activity at which they have ever had any modicum of success. Salsman lays low the old canard that the classical gold standard worked only because of the tender ministrations of the Bank of England, showing rather how its sterilization policies actually broke the rules necessary for the gold standard’s survival.

Gold money is more to Salsman than the key to combatting inflation, however. He sees it as indispensable to any truly free society. He quotes Henry Hazlitt to the effect that, “the gold standard is not an isolated gadget, but an integral part of the system of free enterprise and limited government, of good faith and law, of promise-keeping and the sanctity of contract.” This is a far cry from the “unpredictability, politicization, inflating, and cheating,” that Salsman correctly characterizes as the hallmarks of central banking.

Salsman sees free banking as another element of the integrated system of which gold is a part. In his eagerness to defend that arrangement, he sometimes overstates his case. To deny, as he does early in the book, the existence of any credit expansion or panics under a free banking regime is to ignore the nature of fractional reserves as well as the relevant history. While fractional reserves may well do less harm under free banking than central, they cannot be as stable as a system based on 100 percent reserves. A comparison of these alternatives would have been enlightening.

Despite this and some objectivist swipes at religion, Gold and Liberty makes a solid case that the road to liberty is paved with gold. It shows central banking, on the other hand, to be not only a gross infringement on our liberty in its own right, but to open the door to many other forms of mischief. I certainly hope my young banker friend gets to read it.


  • 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.