1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/4355/our-money-madness/

Our Money Madness

November 21, 2005 by

Here is my latest speech on money old and new, and the absurd notion of monetary central planning. We flatter ourselves in this technological age driven by financial innovation and mind-boggling efficiencies, that we know more than any previous generation. But there is lost knowledge, among which is the knowledge of what sound money feels and looks like, what it does, who makes it and why, and how it holds its value. As for central banking, if Wal-Mart’s slogan is “Always Low Prices,” the slogan of the Fed and the government should be “Always Higher Prices.” FULL ARTICLE


jeff November 21, 2005 at 12:32 pm

The comment box had been inadvertantly closed on this. It is open now

J D November 21, 2005 at 12:36 pm

“The question is why. Why is it that Congress, the Fed, and the presidency all agree that deflation is something to be avoided at all costs?”

The answer is: They have the same puppeteers pulling their strings.

“. . . . As Rothbard further showed, the downturn was a correction of a previous inflation, a macroeconomic version of the dot-com bust, and one that was made ever worse by governmental attempts to fix the problem. As for the Fed, it did not pursue a policy of benign neglect but rather desperately attempted to inflate the money supply and was unable to do so.

The real blame for the Great Depression lies with precisely the policy that Bernanke favors, that is, a steady and relentless increase in the money supply to keep the economy humming while not sparking price increases that are politically objectionable. . . . .”

A contradiction??

“It has been war that has been the driving force in monetary depreciation throughout history.”

Amen, Amen!

Mr. Rockwell has nailed it.

He, however, omitted any reference to the amendment which allows the taxing of labor – the mechanism whereby those who profit from war force almost everyone else to pay for it.

Even austrian economists seldom mention that taxing labor ultimately requires an expanding money supply.

Paul Edwards November 21, 2005 at 1:15 pm

Great article.

Bernanke’s ironic “I assure this committee that, if I am confirmed, I will be strictly independent of all political influences …” contrasts to the context in which the Fed exists as clarified by ex-Fed chairman Arthur Burns’s hilarious “the Fed chairman must do as the president wants, or the Fed would lose its independence.”

Paul Edwards November 21, 2005 at 1:25 pm

Hi J.D.

The austrians don’t mention that taxing labor ultimately requires an expanding money supply, because, they don’t hold that it does. Or at least, not to my knowledge. This isn’t to say they advocate income tax, i’d say they don’t. But although the two crimes are used by the same perpetrators for the same purposes, they are two independent activities.

David White November 21, 2005 at 1:29 pm

Lew writes: “…let us remember that all forms of freedom seem impossible in the midst of despotic control.”

Finding as I do a lot of defeatism on this site (e.g., “I’m afraid that Jim Bradley is correct – the stateless society is a fantasy”), I don’t think that more vitally important words could be spoken at this pivotal moment in history — i.e., at a time when an “Empire of Debt” (http://www.lewrockwell.com/french/french35.html) is reaching the limits of its nearly century-long plunder of the American people. For as these limits are reached, the return to sound money stands to “tie the hands of the state” to the point of vanquishing it.

No, this historic transformation won’t be painless; on the contrary, since the American people’s gullibility is exceeded only by their politicians’ cowardice, the pain will be all the worse for having been postponed for so long. But since the modern nation-state cannot survive without phony money, and since phony money can only suspend economic reality for so long, sound money will eventually become THE reality, and those who don’t like it (i.e., statists of all stripes) will nonetheless have to learn to live with it…while the rest of humanity revels in its new-found freedom.

John Christopher November 21, 2005 at 1:56 pm

Another great article. That would be great to have the references or links pointing to the transition plans by Joseph Salerno, Murray Rothbard, George Reisman and Ron Paul, since they were named in the article. Here I am asking for the most practical, concrete and comprehensive documents on the topic for each writer. Difficult to sell the vision without a sound transition plan.

Roger M November 21, 2005 at 3:34 pm

Great article! I currently work in the field of long term care for the elderly. The biggest problem is that it’s impossible to save enough to live on and pay medical bills for 20 years of retirement. So elderly people depend on relatives and Medicaid. But if we had persistent deflation of between 1% and 3% per year, it would be fairly easy to do so.

Paul Marks November 21, 2005 at 5:20 pm

A good article.

Michael Doveberg November 21, 2005 at 6:30 pm

Hello everybody!
In general I accept the idea of return to the gold-like standard. However, gold’s role in the modern world has shrunk to the jewelry and corrosion-protection in electronics. No one can eat gold and nobody will. Gold is not in use in dentistry nowadays too.

So what can be done with this? A basket of commodities. Say, let’s agree on introduction of universal currency unit – UCU. It should probably consist of three parts:
* Metallic (33%)
** Energy-related part (34%)
*** Food-related part (33%)

Each part can be defined in shares of real commodities, for example

Metallic (gold – 1oz, silver -50 oz, aluminum – 1000 oz, copper – 200 oz and iron – 1000 oz), in proportions relating to the real-world use of them.

** Energy-related part (uranium, oil, natural gas)

*** Food-related part (fertilizers, sugar, wheat).

For international trade any fiat currency should be expressed in UCU then.
That means that market value of UCU is fixed for considerable time period (say 5 years and it’s Content can be revised periodically).

That kind of currency will be much more stable and reliable as world currency. UCU should exist in two forms : electronic and real. For each real UCU central bank creates it’s electronic counterpart.
In that case we won’t lose existing electronic payment system, but ultimate payment will mean a delivery of hard asset to the destination point.

Alan Gifford November 21, 2005 at 6:59 pm

Micheal, while something like that might be more stable, I don’t think the added stability would outweigh the fact that you can’t really put your hands on 2/3 of the value of that money. You can’t take your share of uranium or whatever the other components are, and keep their value with you. You have to trust that someone is going to, in the end, be able to actually give you that uranium, or fertilizer, or wheat, in exchange for that money… and you just can’t do that. Just goes back to the government deciding to stop redeemimg gold for dollars in the 30′s.

Also, all the different metals you listed don’t have fixed proportions of use in the “real world”. It seems far too complicated and requires too much planning to make it work. Gold is very stable; plenty stable to get the job done, and is SO much simpler in more than one way than what you’ve proposed.

Mark Sunwall November 21, 2005 at 8:19 pm

Ay me lairdship! Thar’s saying it! The brilliance of R.L.Stevenson should be set along side of Menger, Jevons, and Walras as a subjective revolutionist of the 19th century, albeit in the field of what Mises called “literary psychology.” As with Homer’s epics there is more in Treasure Island than a rough and tumble adventure story. It was perhaps the first work of popular fiction to incorporate alterating narrations by characters who are embedded in the plot. The characters are set adrif on more than a physical sea but under conditions of uncertainty and conflicting plans, and forced to deal with issues of ethics and hierarchy on the basis of their own native sense of morality. It encapsulates a bit of Crusoe commentary (Ben Gunn) regarding want satisfaction and time preference, within a far better narative concerning competition and rule-enforcement in a social context. And that is even before we get to that chest of non-fiat stuff that Lew has reminded us of in his article.

Recomended for all ages! I have three or four copies circulating among my kids.

averros November 21, 2005 at 9:13 pm

> But today in China or Russian, anyone who favors
> a return of travel and moving restrictions is
> considered dangerous and deranged

I’m afraid this is a wishful thinking. In Russia, the popular and long-serving mayor of Moscow (Yuri Luzhkov, also notorious for having a billionaire wife who looks and speaks exactly like Soviet-era beyond-rude store clerk) keeps his constituents appraised partially by the maintaining unconstitutional (but nonetheless enforced) registration and restrictions on travel (“propiska”). People there are xenophobic and think that not allowing the “blacks” (i.e. natives of southern regions) in is a very good idea.

Frank Z November 21, 2005 at 10:25 pm

A very good article. A natural limitatition to government is honest money. They like to legislate around their limitations.
One point! Lew said:
“Children know what treasure is, even if central bankers do not.”

Cantral bankers know quite well what treasure is, which is why they stole, hoard and own the vast majority of it today.

Paul Edwards November 21, 2005 at 11:30 pm

Michael: I have to agree with Alan, your idea requires “too much planning”. On top of that, it overlooks the fundamental nature of money. Study Mises’s money regression theorem and consider this question: is it conceivable that a basket of commodities could ever emerge as a medium of exchange in the market. It is not. Only one commodity must prevail and that is the most marketable and useful as a medium of exchange. The market chose gold almost the entire world over, before it was used in electronic components and there is no reason to assume it would reject it as money today.

The first step needs to be to put the US dollar back to a gold basis as it was before 1913. It can’t be put back to the same par, but what is important is dollar redeemability in gold. Rothbard lays out the approach, it’s pretty straight forward.

People must be able to hold their commodity money in their hands and their vaults and literally use it in its physical form in exchange. In this way, they can keep their banks honest with bank runs once again. Or we could go the extra mile and treat FR banking as the fraud that it is which would put an end to the need for bank runs and would eliminate the source of any significant monetary instability.

Doug Wiltfong November 22, 2005 at 4:46 am

Fiat money and the monetary centralized planning federal reserve banking system is legalized plunder.

It just has more complicated smoke and mirrors for people to look at than other kinds of legalized plunder. It’s just another way that people use government to rip other people off in that country legally.

The beginning part of that article makes an excellent point. What is treasure?

I loved the Alan Greenspan and Arthur Burns quotes.

Alan Greenspan: “The cause of freedom is bound up with the cause of the gold standard.”

Arthur Burns: “The Fed chairman must do as the president wants or the Fed would lose its independence.”

Lew: “It would require that the government recognize the error of its own ways, agree to limit its power and influence, abolish the Fed, and return the control over economic structures back to the people. And you wonder why the movement for a gold standard struggles!”

Curt Howland November 22, 2005 at 8:13 am

Mr. Doveberg, I have an alternative for your consideration.

Repeal the laws that require someone to accept any particular currency (legal tender), and repeal the laws that prohibit the private minting/printing of money.

At the same time, a general effort of education and prosecution for “counterfeiting” and fraud would help people understand what was going on.

Then see what happens. Let people decide. Or, think about what is happening right now:

Before I go into a restaurant, I look at their door and make sure that I have a charge card that matches the ones on their list. I don’t have to care if I’m in Japan, China, Canada, Europe or anywhere else, the charge card company takes care of the conversion.

In a purely commodity money situation, it doesn’t matter if the restaurant is going to bill me in stones-weight of corn, or thimbles of heavy water, or board-feet of oak. It doesn’t matter if my account is denominated in ounces of gold, quarts of gasoline or square-feet of Florida swampland. Anything and everything that can be traded is possible.

As others have mentioned in fewer words than I, to restrict people to particular commodities is inefficient, even if the only added costs are the costs to administer the restriction.

Roger M November 22, 2005 at 8:56 am

Does anyone know if banks exist that keep reserves in gold instead of paper at the Fed? Has anyone, or could someone, start a bank where when you deposited your paper money, the bank converted it to gold at the current price. The principal would fluctuate with the value of gold and you would get a modest interest on the deposit. Any loans the bank made would be tied to the price of gold at the time of the loan. The principal would rise or fall with the value of gold. As a result, the interest rate could be lower because the price of gold would take care of inflation.

Hudson Luce November 22, 2005 at 10:13 am

Money is power. No government will ever voluntarily lessen its power. Adoption of a gold standard would make it impossible to create money by fiat, which vastly lessens the power of government.

The only way the governed can influence this is by losing faith in the government, so that government becomes irrelevant through the lack of consent of the governed.

At this time, most people are quite comfortable, well fed, and entertained to as great a degree as could be desired. It is unlikely that any great change will occur with a citizenry whose attention span is that of a five year old child, and of course the governing class is aware of this and capitalizes on it.

Michael Doveberg November 22, 2005 at 10:15 am

Hello, everybody

Let’s get back to reality, guys. The gold standard is dead – R.I.P. Nobody wants it’s return anymore (except goldbugs) since e-money is much more convenient. Just accept that Gold bullion is simple insurance against dollar collapse. That’s it – end of story. If you believe in dollar collapse, that’s OK. But until world trade based on USD it’s not going to happen.

My point was about changing the base of international trade, not personal savings. I am a realistic goldbug, buy the way.

My point was about changing the base of international trade, not personal savings. I am a realistic gold bug, buy the way.

Paul Edwards November 22, 2005 at 10:55 am

“Nobody wants it’s return anymore (except goldbugs)”

You mean unrealistic goldbugs don’t you? Michael, seriously, i’m unsure of who you mean by nobody. If you’re talking about the establishment: the bankers and big business in collusion with big government then yes nobody in that camp wants the return of gold. Inflation suits them fine. If it mattered to me what those types wanted, i wouldn’t be reading and posting on mises.org.

There is nothing about a 100% gold standard that prevents us from using paper and electronic representations for it. All a real gold standard means is that for every ounce of gold you spend, electronically, or via check or bill, or coin, it is backed by a real gold ounce in your possession. Clearing systems will reduce the volume of physical gold transferred from bank to bank. There is nothing about gold money that will put us in the dark ages technologically. It will just give us real honest money back.

billwald November 22, 2005 at 11:28 am

Mr Doveberg is correct. Talk is cheap. The “gold” people refuse to estimate the dollar cost of gold in current dollars if we went to a gold standard and the amount of money that would be in circulation. I estimate gold would be at least $10,000/oz and the average worker would not have any. People would be murdered for the gold in their teeth. We would revert to pre-WW1 conditions with half the population living in poverty, 10% or less middle class and 1% with the gold.

David J. Heinrich November 22, 2005 at 11:45 am

Bill Wald,

Actually, various Austrians have estimated the gold-price in dollars if we went to a gold standard, including Rothbard, Thornton, Reiseman, and others. It is true that gold would be valued very highly — much more than it is today — but your paranoia scenarios are nothing but ridiculous FUD. People most likely would have the gold in their teeth removed and use something more economical for filling, except for flamboyant celebrities.

Since gold is highly malleable, and there are other less valuable metals that would likely serve as parallel money in a free market on money (e.g., silver, copper), it is absurd to worry about the per-ounce price of gold. Furthermore, as its price rose, more of it would be dug up, which would be societally beneficial (reducing transaction costs, etc; see Block and Barnett on the optimum quantity of money in a truly free market).

Ohhh Henry November 22, 2005 at 11:49 am

I just heard a caller to a talk-radio station in Ottawa this morning, speaking off the top of his head when he was prompted by the host, state that the worst possible thing a Conservative Party government could if it is elected is to put the Canadian dollar on a gold standard and “destroy all exports”.

I guess he was thinking that all unionized, subsidized, protected and government workers would get paid with gold-backed dollars at the same rate and in the same numbers as right now …

Roger M November 22, 2005 at 11:50 am

Some people seem to be confusing a gold standard with using gold as money. No one advocates a return to gold as the money we carry around in our pockets. A simple way to return to a gold standard would be to have the Fed target the price of gold. Greenspan used to do that when he first started as chairman. He said a few times that he wanted to keep gold at about $350. But for some reason he abandoned it, probably under pressure to inflate.

Marco de Innocentis November 22, 2005 at 12:18 pm


A simple way to return to a gold standard would be to have the Fed target the price of gold.

That’s not a gold standard. A gold standard is when you can take your dollars to any bank and exchange them, right there and then, for a fixed amount of gold.

Paul Edwards November 22, 2005 at 12:40 pm


I’m one of them. And i am advocating gold as the money we carry around in our pockets, as well as gold certificates, gold credit cards, gold checking accounts, etc. I’d like to one day see prices in terms of weights or mass.

Regarding Greenspan, he has very recently stated that the gold standard, although fine, is unnecessary because the Fed maintains a gold standard for practical purposes. Since this is very incorrect, as he knows and as do many of us, you can get a feel for the impossibility of using a state apparatus such as the Fed for giving us honest money. The fed must divest itself from the control of our money and allow us back to a real gold standard with real gold as our money.

Alan Gifford November 22, 2005 at 3:30 pm

David Heinrich makes an essential point: the added demand for gold as money will drive up its price, and as its price goes up, so does the profitability of mining more of it. Many people would probably also sell a lot of jewelry that didn’t have extreme sentimental value to be melted down and minted into coin.

And although even the very small 1/10 ounce coins could be worth $500 or $1000 or more, there is no problem with using a lower fineness, like 14K (or less) coins instead of the 22K coins like the Gold Eagle and Kruggerrand. This would allow for durable coins while keeping their value modest enough for daily use.

I would think that in addition silver would become rather popular for small purchases, though I think gold would remain the favorite unit of account. And in any event, there is no problem with storing ones gold in a warehouse, and using a gold card just like a credit card to make purchases of small items in units like grams, grains, or milligrams.

Adam November 22, 2005 at 4:55 pm

Rothbard’s proposals are laid out in the link to “What Has Government Done With Our Money?” towards the bottom of the article and which in the current edition is included the proposal “The Case for a 100 Percent Gold Dollar”. I’m sure it’s somewhere on the site for free if current inflationary practice has reduced the value of your fiat money.

David White November 22, 2005 at 5:32 pm

Couple this — http://www.lewrockwell.com/orig/garris3.html — with this — http://www.cipe.org/publications/fs/ert/e32/e32_02.htm — and it’s a whole new (libertarian) world.

Juan Garofalo November 22, 2005 at 6:37 pm

Mr. Doveberg

It looks like you don’d understand the nature of money.

Money is a comodity, wich, because of possesing special characteristics ends up being used as the universal medium for exchange.

The key-word here is *a* commodity. Money can’t be a mix of commodities.

Money is a unit. It makes no sense to define a unit as a mix of other units. There must always be a fundamental unit underlaying the system. No ‘financial creativity’ can change this fact.

Also ‘stability’ here is a myth/fallacy. Extending your reasoning, in order to get ‘total stability’, we should use a mix of ALL comodities. At this point we would have a totally stable currency wich would have completly wiped out the price system :)

Vince Daliessio November 22, 2005 at 11:53 pm

Not to quibble, but Lew’s article reminded me of the silver half-dollar I had been given as a child. When there was still some tie between the dollar and gold, we could also use silver, copper, and other metals, because their values tended to move together. These days, all of our coins are made of either zinc plated with copper, or else copper and nickel alloy.

To the folks arguing for something other than a true gold standard – help us get rid of the criminal Federal Reserve, then create your own bank and money system, and give it a try!

P.M.Lawrence November 23, 2005 at 6:07 am

I thought I should post the contents of an email on this I just sent to Lew Rockwell.

The first small detail is that you probably meant “climactic moment” and not “climatic moment” (it was tropical, of course).

The next is that gold is not a stable material for money in all times and places. This doesn’t undercut the thrust of your argument, but it doesn’t hurt to avoid overstating the case. Bullion has already been through a phase like junk bonds, with its value compared to other commodities more or less stable now – but the first introducers of bullion got a windfall gain just like the printers of paper money. The difference is, that game is up now so that a country – once on a bullion standard – is insulated from these drains of value. But it has happened more than once before, for instance with the arrival of New World silver centuries ago. People in sieges who trusted in gold soon found that it lost all its transaction value since there was no new supply (this is a rare case where price controls do have some use, as they don’t cut back supply which has already been cut off – the only effect is on stocks). But going onto a gold or silver standard, starting from here, can produce problems – there would be a one off windfall gain to holders of gold supplies and a continuing one to gold producers. This is why Denmark had great difficulties going onto gold in the early 19th century, for instance.

The remaining point is that high prices do help some sectors; it used to be that farmers liked them, before they became net debtors and also started needing lots of inputs from the rest of the economy. Today, it is the middlemen groups who get the newly released money who benefit -they can pass on the downside to others further downstream, and they end up ahead of the game if they think of using their gains to acquire more enduring assets than purely financial ones (if they don’t, they go broke too when the music stops). Inflation mediates wealth transfers to more than just the issuers of new money.

All of this has historical precedent.

Curt Howland November 23, 2005 at 11:26 am

Since it seems no one has mentioned them yet, there are already several explicitly metal-backed “currencies” being worked electronically right now, two off the top of my head are e-gold and Pecunix.

billwald November 23, 2005 at 11:44 am

“Money is a unit.”

Exactly! Money is a conversion factor: the ratio for converting the value of food into the value of rent or whatever.

I suggest that we use “work-hour” instead of dollar or whatever. One w-h would be the value equivalent of one person digging an hour with a shovel. This is a universal standard.

billwald November 23, 2005 at 11:47 am

Would anyone like to argue that inflation is theoretically or pragmatically impossible under a 100% barter economy? If not, then the existance of money can’t be the cause of inflation?

Francisco Torres November 23, 2005 at 12:39 pm

billwald wrote:
” One w-h would be the value equivalent of one person digging an hour with a shovel.”

What person? Why would digging a hole for an hour have “value”? Value according to whom? You? Me?

The universality of gold and silver stems from the simple fact that people find such things desirable. Digging holes in the earth may be desirable for people looking for water or a cadaver, but not everyone else. This is why your standard unit for measuring value is flawed.

When you mentioned that “pre-WWI” scenario, you quickly (and in my mind, conveniently) forget that people can also exchange goods using silver and copper and not only gold. Silver is more plentiful – in fact, many Americans in the 19th Century exchanged goods using Mexican silver pesos!

Francisco Torres November 23, 2005 at 12:43 pm

billwald asks:
“Would anyone like to argue that inflation is theoretically or pragmatically impossible under a 100% barter economy?”

It is possible. If people started to barter stones for goods, pretty much quickly you would require a LOT of stones to purchase a pound of corn.

“If not, then the existance of money can’t be the cause of inflation[...]”

This is a non sequitur.

David White November 23, 2005 at 2:24 pm


Electronic, metal-backed currencies were in fact previously mentioned, via my post that cited this article on money privatization: — http://www.cipe.org/publications/fs/ert/e32/e32_02.htm.

Coupled with the other article I cited — http://www.lewrockwell.com/orig/garris3.html — it is clear (to me, at least) that a revolution is at hand and that the state will be powerless to stop it.

Paul Edwards November 23, 2005 at 6:45 pm


I read the article you cited and i have some comments: (http://www.cipe.org/publications/fs/ert/e32/e32_02.htm )

“…Electronic digital payments technology will enable property rights claims on real assets, such as stock and bond funds, or gold, to be utilized as the medium of exchange for virtually all transactions. In sum, when businesses or individuals wish to purchase a good or service, they will provide—directly or indirectly— an electronic instruction to their bank or other financial intermediary. The instruction will state that an amount equal to the nominal value of the purchase should be transferred immediately to the account of the seller of the good or service.”

Does this strike you as barter: multiple classes of securities and commodities used as “medium of exchange”. Or will prices in dollars still be appraised prior to the transaction to facilitate determining the exchange price?

“Accordingly, there will be no loss of interest earned, nor will there be any need for a traditional wholesale interbank clearing system. The buyer and seller will have transferred wealth instantaneously, without risk of nonpayment. By avoiding the use of government-produced fiat money, with all of its uncertainty and instability, some of the problems of inflation and payments insecurity will disappear.”

No clearing system? An instantaneous transfer of wealth? I don’t see how this is realistic. I don’t understand how real wealth and commodities can change possession instantly. There were a few years when the US had a real gold standard, and a well oiled private clearing system was a pivotal element to it.

I think this gang may not have a firm grip on the concept of money.

Angelo Mike November 23, 2005 at 9:04 pm

Great article! It’s nice to see how truly optimistic about human nature libertarians are really shine through, as opposed to those who believe that violence wielded on a huge scale is necessary to organize society.

David White November 24, 2005 at 8:44 am
billwald November 25, 2005 at 10:19 am

“There is nothing about a 100% gold standard that prevents us from using paper and electronic representations for it. All a real gold standard means is that for every ounce of gold you spend, electronically, or via check or bill, or coin, it is backed by a real gold ounce in your possession.”

Private companies would be prevented from issuing credit cards? Credit cards were invented while we were still on a gold standard.

Also, the working people must be taxed because our owners and rulers will not tax themselves. Thus has always been and always will be.

It has been worried that the poor people would learn they can vote themselves money but our poor people are not smart enough to co-operate which is one reason they are poor. Didn’t take long for Congress to vote themselves a raise. They know how to co-operate when it is important.

Vince Daliessio November 25, 2005 at 11:31 am

P.M. Lawrence;

One development that would tend to minimize the effects of changes in value of a gold standard is the nearly instantaneous transmission of commodity prices over electronic media. Because producers, holders, buyers, and sellers are all able to exchange price information instantaneously, dislocations in supply / demand vs. price would tend to be small and short-lived.

Vince Daliessio November 25, 2005 at 11:48 am

One thing we tend to lose sight of is that prior to 1913, dollar bills were for all intents and purposes warehouse receipts for gold and silver physically in the possession of the US government. Coins were made of gold, silver, and copper, and had actual commodity value of roughly the same order of magnitude as their face value. After the founding of the federal reserve, dollar bills ceased to have any real value as warehouse receipts, but became simply promissory notes, a much different,less secure type of money substitute, but real commodity money still existed in silver and copper coins (gold coins of course having subsequently been outlawed by FDR). In the mid-late ’60′s, the real value of silver far exceeded the face value of silver coins, causing the US mint to start making them out of copper and zinc, and silver coins disappeared from circulation into piggy banks and melting pots. More recently, with the government testily reminding us of the illegality of the (mid-70′s – early 80′s )widespread practice of melting pennies for the copper content, in 1983 pennies were converted from a pure copper commodity money to a debased copper-plated zinc slug.

P.M.Lawrence November 25, 2005 at 9:08 pm

Vince Daliessio, while those things would speed up any transition, they would not affect the enduring consequences. That is, anyone who had better access to stocks of gold at the beginning (governments, surprise!) would simply be able to trabsfer their holdings to a different asset base faster. Speeding up their diversification would not mean better transfer of wealth to the general public, only that stocks, shares, land, etc. would be acquired from them faster.

Paul Edwards November 26, 2005 at 3:22 am


I’m mostly not following you. A 100% gold standard implies a free and unhampered market in money. That is, there would be no possibility of “Private companies” being “prevented from issuing credit cards” by the state. The consumer would let the banks know soon enough if they liked credit cards or not. This would be the only form of prevention, if we want to use such terminology in free exchanges.

Vince Daliessio November 26, 2005 at 11:44 am

PM, I’m not following you here. If a true, market gold (or silver, or other money) were in place, the first beneficiary would be the gold miner, the second the person who converted the raw gold into a secure, reliable, portable form suitable for use as money, and the third the wage earner whose labor would be paid for in a stable, hard money. There would be absolutely no advantage for governments in this scheme except in the case where they use force to extract taxes or obtain monopoly minting rights. Contrast that now with the first three beneficiaries of the current system of imaginary money: the big banks, the government, and lenders. The wage earner isn’t even in the picture, because any advantage he gets from a “stable” fiat currency (an oxymoron) is simply inflated or taxed away along with the majority of his capital.

P.M.Lawrence November 27, 2005 at 9:14 pm

Vince Daliessio, the issue is that you are looking at the steady state, not the transition and its enduring effects. It’s also not just a question of flows but of stocks (most economics works more conveniently with time derivatives and abstracts out the effects of stocks).

Lets walk it through. Right now, most holdings of gold are in governmental or quasi-governmental physical possession. So, going onto gold gives them a one off windfall gain, with the amount varying according to whatever official release prices they use during the transition.

During the transition, people at the end of the chain will be giving up goods and services – including revenue yielding assets – to acquire the gold. Wise governments would end up with a lot of these themselves, but most likely they would wind up in the hands of middlemen just the same way as happened when governments started in with paper money issues.

There has to be some price incentive to make people take the gold, so there must always be some such wealth transfer to drive the transition (i.e. the gold can’t be priced too high). Result: people at the end of the chain get gypped.

Now that’s just the transition. Unfortunately, although most of the effects wash out over time, the permanent wealth transfers – the acquisition of existing investments rather than any new investment – stays in place and has an enduring effect. This is much the same regardless of the speed of the transition, facilitated by technology or not.

That’s simplistic, since it’s an “other things being equal” sort of thing. But, just as Microsoft has little incentive to eliminate bugs before releasing products, there is little incentive for governments and compradores (middlemen) to work to eliminate these effects of going onto gold.

Furthermore, the Danish experience of the early 19th century shows that governments may not be well placed to do anything to offset the issue anyway (Denmark had many lean trading years because it had to acquire stocks of gold to go on the gold standard).

Allen S. Rout November 27, 2005 at 10:24 pm

It’d be nice if quotes from officials were annotated with references; I would often like to read the context of particularly strong quotes. The “Thus spake Bernanke to those worried about deflation:” bit; what speech was that, and where can I download it?

jeffrey November 27, 2005 at 10:30 pm

A google quote search yields this.

Comments on this entry are closed.

Previous post:

Next post: