The Gold Problem

Why Gold

Dr. Mises is Visiting Professor of Economics at New York University and part-time ad­viser, consultant, and staff member of The Foundation for Economic Education.

Because, as conditions are today and for the time that can be fore­seen today, the gold standard alone makes the determination of mon­ey’s purchasing power independent of the ambitions and machinations of dictators, political parties, and pressure groups. The gold stand­ard alone is what the nineteenth-century liberals, the champions of representative government, civil liberties, and prosperity for all, called sound money.

The eminence and usefulness of the gold standard consists in the fact that it makes the supply of money depend on the profitability.

Further discussion of the gold problem may be found in his book, The Theory of Money and Credit (Yale University Press, 1953) also available from The Foundation of mining gold, and thus checks large-scale inflationary ventures on the part of governments. The gold standard did not fail. The governments sabotaged it and still go on sabotaging it. But no gov­ernment is powerful enough to de­stroy the gold standard as long as the market economy is not entirely suppressed by the establishment of socialism in every part of the world.

Governments believe that it is the gold standard’s fault alone that their inflationary schemes not only fail to produce the expected benefits but unavoidably bring about conditions that also in the eyes of the rulers themselves and of all of the people are considered as much worse than the alleged or real evils they were designed to eliminate. But for the gold stand­ard, they are told by hosts of pseudo-economists, they could make everybody perfectly prosper­ous.

Let us test the three doctrines advanced for the support of this fable of government omnipotence.

The Santa Claus Power of the State

The state is God, said Ferdi­nand Lassalle, the founder of the German socialist movement. As such the state has the power to “create” unlimited quantities of money and thus to make everybody happy. Irreverent people branded such a policy of “creating” money as inflation. The official terminol­ogy calls it nowadays “deficit spending.”

But whatever the name used in dealing with this phenomenon may be, its meaning is obvious. The government increases the quantity of money in circulation. Then a greater quantity of money “chases,” as a rather silly but pop­ular way of talking about these problems says, a quantity of goods and services that has not in­creased. The government’s action did not add anything to the avail­able amount of useful things and services. It merely makes the prices paid for them soar.

If the government wants to raise the income of some people—e.g., government employees—it has to confiscate by taxation a part of some other people’s in­comes and to distribute the amount collected among its em­ployees. Then the taxpayers are forced to restrict their spending, while the recipients of the higher salaries are increasing their spending to the same amount. There does not result a conspicu­ous change in the purchasing pow­er of the monetary unit.

But if the government provides the money it wants for the pay­ment of higher salaries by print­ing it, the new money in the hands of the beneficiaries of the higher salaries constitutes on the market an additional demand for the not increased quantity of goods and services offered for sale. The un­avoidable result is a general tend­ency of prices to rise.

Any attempts the governments and their propaganda offices make to conceal this concatenation of events are vain. Deficit spending means increasing the quantity of money in circulation. That the of­ficial terminology avoids calling it inflation, is of no avail whatever.

The government and its chiefs do not have the powers of the mythical Santa Claus. They can­not spend but by taking out of the pockets of some people.

The “Cheap Money” Fallacy

Interest is the difference in the valuation of present goods and fu­ture goods. It is the discount in the valuation of future goods as against that of present goods. It cannot be “abolished” as long as people prefer an apple available today to an apple available only in a year, in ten years, or in a hun­dred years. The height of the orig­inary rate of interest, which is the main component of the market rate of interest as determined on the loan market, reflects the dif­ference in people’s valuation of present and future satisfaction of needs. The disappearance of in­terest, that is an interest rate of zero, would mean that people do not care a whit about satisfying any of their present wants and are exclusively intent upon satisfying their future wants, their wants of the later years, decades, and cen­turies to come. People would only save and invest and never con­sume. On the other hand, if peo­ple were to stop making any pro­vision for the future, be it even the future of the tomorrow, would not save at all and consume all capital goods accumulated by pre­vious generations, the rate of in­terest would rise beyond any limits.

It is thus obvious that the height of the market rate of in­terest ultimately does not depend on the whims, fancies, and the pecuniary interests of the person­nel operating the government ap­paratus of coercion and compul­sion, the much referred to “public sector” of the economy. But the government has the power to push the Federal Reserve System and the banks subject to it into a pol­icy of cheap money. Then the banks are expanding credit. Un­derbidding the rate of interest as established on the not-manipulated loan market, they offer additional credit created out of nothing. Thus they are intentionally falsifying the businessmen’s estimation of market conditions. Although the supply of capital goods (that can only be increased by additional saving) remained unchanged, the illusion of a richer supply of capi­tal is conjured up. Business is in­duced to embark upon projects which a sober calculation, not mis­led by the cheap-money ventures, would have disclosed as malinvest­ments. The additional quantities of credit inundating the market make prices and wages soar. An artificial boom, a boom built en­tirely upon the illusions of easy money, develops. But such a boom cannot last. Sooner or later it must become clear that, under the illu­sions created by the credit expan­sion, business has embarked upon projects for the execution of which it is not rich enough. When this malinvestment becomes visible, the boom collapses. The depression that follows is the process of liq­uidating the errors committed in the ecstasies of the artificlal boom, is the return to calm reasoning and a reasonable conduct of af­fairs within the limits of the available supply of capital goods. It is a painful process, but it is a process of recovery.

Credit expansion is not a nos­trum to make people happy. The boom it engenders must inevitably lead to a debacle.

If it were possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world. The economically backward nations would not have to complain about the insufficiency of their capital equipment. All they would have to do for the improvement of their conditions would be to expand credit more and more. No “for­eign aid” schemes would have emerged. In granting foreign aid to the backward nations, the American government implicitly acknowledges that credit expan­sion is no substitute for capital accumulation through saving.

The Failure of Minimum Wage Legislation and of Labor Unionism

The height of wage rates is de­termined by the consumers’ ap­praisal of the value the worker’s labor adds to the value of the ar­ticle available for sale. As the im­mense majority of the consumers are themselves earners of wages and salaries, this means that the determination of the compensa­tion for work and services ren­dered is made by the same kind of people who are receiving these wages and salaries. The fat earn­ings of the movie star and the boxing champion are provided by the welders, street sweepers, and charwomen who attend the per­formances and matches.

An entrepreneur who would try to pay a hired man less than the amount this man’s work adds to the value of the product would be priced out of the labor market by the competition of other entrepre­neurs eager to earn money. On the other hand, no entrepreneur can pay more to his helpers than the amount the consumers are pre­pared to refund to him in buying the product. If he were to pay higher wages, he would suffer loss­es and would be ejected from the ranks of the businessmen.

Governments decreeing mini­mum wage laws above the level of the market wage rates restrict the number of hands that can find jobs. They are producing unem­ployment of a part of the labor force. The same is true for what is euphemistically called “collec­tive bargaining.” The only differ­ence between the two methods concerns the apparatus enforcing the minimum wage. The government enforces its orders in re­sorting to policemen and prison guards. The unions “picket.” They and their members and officials have acquired the power and the right to commit wrongs to person and property, to deprive individ­uals of the means of earning a livelihood, and to commit many other acts which no one can do with impunity.’ Nobody is today in a position to disobey an order issued by a union. To the em­ployers no other choice is left than either to surrender to the dictates of the unions or to go out of business.

But governments and unions are impotent against economic law. Violence can prevent the em­ployers from hiring help at po­tential market rates, but it can­not force them to employ all those who are anxious to get jobs. The result of the governments’ and the unions’ meddling with the height of wage rates cannot be anything else than an incessant increase in the number of unemployed.

To prevent this outcome the gov­ernment-manipulated banking sys­tems of all Western nations are resorting to inflation. Increasing the quantity of money in circu­lation and thereby lowering the purchasing power of the monetary unit, they are cutting down the oversized payrolls to a height con­sonant with the state of the mar­ket. This is today called Keynesian full-employment policy. It is in fact a method to perpetuate by continued inflation the futile at­tempts of governments and labor unions to meddle with the condi­tions of the labor market. As soon as the progress of inflation has adjusted wage rates so far as to avoid a spread of unemployment, government and unions resume with renewed zeal their ventures to raise wage rates above the level at which every job-seeker can find a job.

The experience of this age of the New Deal, the Fair Deal, the New Frontier, and the Great So­ciety confirms the fundamental thesis of British nineteenth-cen­tury liberalism: there is but one means to improve the material conditions of all of the wage earn­ers, viz., to increase the per-head quota of capital invested. This re­sult can only be brought about by additional saving and capital accumulation, never by govern­ment decrees, labor union violence and intimidation, and inflation. The foes of the gold standard are wrong also in this regard.

U. S. Gold Holdings Shrinking

In many parts of the earth an increasing number of people realize that the U. S. and most of the other nations are firmly com­mitted to a policy of progressing inflation. They have learned enough from the experience of the last decades to conclude that on ac­count of these inflationary policies the ounce of gold will one day be­come more expensive in terms both of the currency of the U. S. and of their own country. They are alarmed and would like to avoid being victimized by this out­come.

Americans are forbidden to own gold coins and gold ingots. Their attempts to protect their financial assets consist in the methods that the Germans in the most spectacu­lar inflation that history knows called “Flucht in die Sachwerte.” They are investing in common stock and real estate and prefer to have debts payable in legal tender money to having claims payable in it.

Even in the countries in which people are free to buy gold there are up to now no conspicuous pur­chases of gold on the part of financially potent individuals and institutions. Up to the moment at which French agencies began to buy gold, the buyers of gold were mostly people with modest in­comes anxious to keep a few gold coins as a reserve for rainy days. It was the purchases on the part of such people that via the London gold market reduced the gold hold­ings of the United States.

There is only one method avail­able to prevent a farther reduc­tion of the American gold reserve: radical abandonment of deficit spending as well as of any kind of “easy money” policy.

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Multiplying the Error

If it be admitted that a man, possessing absolute power, may misuse that power by wronging his adversaries, why should a majority not be liable to the same reproach? Men are not apt to change their characters by agglomeration; nor does their patience in the presence of obstacles increase with the con­sciousness of their strength. And for these reasons 1 can never willingly invest any number of my fellow creatures with that unlimited authority which I should refuse to any one of them.

Alexis De Tocqueville, Democracy in America

Foot Notes

1 Cf. Roscoe Pound, Legal Immunities of Labor Unions, Washington, D. C., 1957, p. 21