Why a Thick Layer of Dust on Top of a Nation's Gold Reserves Is a Good Thing. Selling the Gold to Private Buyers Is Even Better.
Reality Check (June 6, 2002)
GOLD'S DUST VS. DUSTY GOLD
The best way for a nation to build confidence
in its currency is not to bury lots of gold in the ground;
it is, instead, to pursue responsible financial policies.
If a country does so consistently enough, it's likely to
find its gold growing dusty from disuse. -- Editorial, WALL
STREET JOURNAL (July 8, 1969)
This statement is true, but it is unlikely that the
editorial writer all those years ago understood why it is
When it comes to wise economic policy-making, let us
get one thing straight: it doesn't come like manna from
heaven. It isn't a free lunch. It comes only because
there are political sanctions that reward government
officials who devise and enforce policies that make
consumers better off, and punish government officials who
devise and enforce policies that make consumers worse off.
These institutional sanctions must be consistent with the
laws of economics -- and there really are laws of
economics. If the policies violate economics law, then
nation will get irresponsible financial policies, and lots
of other kinds of irresponsible government policies.
The editorial writer implied that dusty gold is a
silly thing to pursue. He also implied that a nation
doesn't need a supply of gold if it pursues wise financial
policies. What he was really saying is that gold has
nothing to do with wise financial policies. A gold
standard is therefore irrelevant. It is an anachronism.
It gathers dust, like gold itself.
I think otherwise. I think dusty gold is a great
thing. I believe that gold bullion is good. I even
believe that gold dust is good. But dust on a government's
supply of gold is even better, assuming that the public can
legally obtain this gold on demand, as is the case with a
gold coin standard. Permit me to explain why I believe
But first, let me mention a fact of political life:
the Establishment hates gold.
THE ESTABLISHMENT VS. GOLD
Hostility to the traditional gold coin standard has
been the mark of Establishment economists and editorialists
ever since the U.S. government confiscated Americans' gold
in 1933. The Establishment hates gold. Its spokesmen
ridicule gold. They want responsible fiscal and monetary
policies, of course -- all of them publicly assure of this
fact, decade after decade -- but the national debt just
keeps getting bigger, and price inflation never ceases,
also decade after decade. Somehow, fiscal and monetary
responsibility just never seem to arrive.
Why do they hate gold? Because gold represents the
public. More than this: gold is a powerful tool of control
by the public. A gold coin standard places in the hands of
consumers a means of controlling the national money supply.
A gold coin standard transfers monetary policy-making from
central bankers and government officials to the common man,
who can walk into a bank and demand payment for paper or
digital currency in gold coins. This is the ultimate form
of democracy, and the Establishment hates it. The
Establishment can and does control political affairs. They
make democracy work for them. They are masters of
political manipulation. But they cannot control long-run
monetary policy in a society that has a gold coin standard.
They hate gold because they hate the sovereignty of
We are also officially assured by Establishment-paid
experts that fiscal and monetary responsibility has nothing
to do with a gold coin standard, in the same way that
international price stability, 1815-1914, had nothing to do
with the presence of a gold coin standard. A gold coin
standard would not provide fiscal responsibility, we are
told. This is a universal affirmation, the shared
confession of faith that unites all branches of the Church
of Perpetual Re-election.
On this one thing, the economists are agreed, whether
Keynesians, Friedmanites, or supply siders: gold should
have no role to play in today's monetary system. (A few
supply siders do allow a role for bullion gold in central
bank vaults -- without full redeemability by the public --
as a psychological confidence-builder in a pseudo-gold
standard economy. They do not call for full gold coin
redeemability by the public, or 100% reserve banking.)
The WALL STREET JOURNAL is no exception to this rule.
It thinks that we can somehow get fiscal responsibility
without a gold standard. Nevertheless, the editorial
writer stumbled upon a very important point. The gathering
of dust on a government's stock of monetary gold is as good
an indicator of fiscal responsibility as would be the
addition of gold dust to the stock of monetary gold.
ENOUGH IS ENOUGH
New money, including newly mined gold, confers no net
benefit to society. New money does confer benefits on
those people who get access to it early, but it does this
at the expense of late-comers who get access to the new
money late in the process. Those people who have early
access to the new money gain a benefit: they can spend the
newly mined (or newly printed) money at yesterday's prices.
Competing consumers who do not have immediate access to the
new money are forced to restrict their purchases as
supplies of available goods go down and/or prices of the
goods increase. Thus, those people on fixed incomes cannot
buy as much as they would have been able to buy had the new
money not come into existence.
Some people benefit in the short run; others lose.
There is no way that an economist can say scientifically
that society has benefited from an increase in the money
supply. He cannot add up losses and gains inside people's
minds. There is no such standard of measurement. Murray
Rothbard made this point a generation ago.
Thus, we see that while an increase
in the money supply, like an increase in the
supply of any good, lowers its price, the change
does not - unlike other goods -- confer a social
benefit. The public at large is not made richer.
Whereas new consumer or capital goods add to
standards of living, new money only raises prices
-- i.e., dilutes its own purchasing power. The
reason for this puzzle is that money is only
useful for its exchange-value. Other goods have
"real" utilities, so that an increase in their
supply satisfies more consumer wants. Money haws
only utility for prospective exchange; its
utility lies in its exchange-value, or
"purchasing power." Our law -- that an increase
in money does not confer a social benefit --
stems from its unique use as a medium of
[Murray N. Rothbard, WHAT HAS GOVERNMENT DONE TO
OUR MONEY? (1964), p. 13. Available from the
Mises Institute, Auburn, Alabama.]
Rothbard's point is vital: an increase of the total
stock of money cannot be said, a priori, to have increased
a nation's aggregate social wealth. This implication has a
crucial policy implication: the existing supply of money is
sufficient to maximize the wealth of nations. Enough is
enough. "Stop the presses!"
An economist who says that society has benefitted from
an increase in the money supply has an unstated
presupposition: it is socially beneficial to aid one group
in the community (the miners, or those printing the money)
at the expense of another group (those on fixed incomes).
This is hardly neutral economic analysis.
Let us assume a wild, unlikely hypothesis: the supply
of dollars will someday be tied, both legally and in fact,
to the stock of gold in the Federal Reserve System' vault.
Let us also assume that banks can issue dollars only for
gold deposited. For each ounce of gold deposited in a
bank, a paper receipt called a "dollar" is issued by the
bank to the person bringing in the gold for deposit. At
any time, the bearer of this IOU can redeem a paper
"dollar" for an ounce of gold. By definition, one dollar
is now worth an ounce of gold, and vice versa.
What would take place if an additional supply of new
gold is made by some producer, or if the government
(illegally) should spend an unbacked paper dollar?
Rothbard describes the results.
An increase in the money supply,
then, only dilutes the effectiveness of each gold
ounce; on the other hand, a fall in the supply of
money raises the poser of each gold ounce to do
its work. [Rothbard is speaking of the long-run
effects in the aggregate.] We come to the
startling truth that it doesn't matter what the
supply of money is. Any supply will do as well
as any other supply. The free market will simply
adjust by changing the purchasing-power, or
effectiveness of its gold unit. There is no need
whatever for any planned increase in the money
supply, for the supply to rise to offset any
condition, or to follow any artificial criteria.
More money does not supply more capital, is not
more productive, does not permit "economic
Once a society has a given supply of money in its
national economy, people no longer need to worry about the
efficiency of the monetary unit. People will use money as
an economic accounting device in the most efficient manner
possible, given the prevailing legal, institutional, and
religious structure. In fact, by adding to the existing
money supply in any appreciable fashion, banks bring into
existence the "boom-bust" phenomenon of inflation and
depression. The old cliche, "let well enough alone," is
quite accurate in the area of monetary policy.
This leads to a startling conclusion: the existing
money supply is sufficient for all economic transactions.
We don't need any more money. (Well, actually, I do. But
you don't.) We also don't need a Federal Reserve System to
manage the money supply. We don't need a government rule
that compels the Federal Reserve or the Treasury to
increase the money supply by 3% per annum or maybe 5%
(Friedman's suggested rule). Besides, who would enforce
such a rule? It's a rule for rulers enforced by rulers.
Then what do we need? Freedom of contract and the
enforcement of contracts. Nothing else? Only laws that
prohibit fraud. To issue a receipt for which there is
nothing in reserve to back up the receipt is fraudulent.
A productive gold miner, by slightly diluting the
purchasing power of the gold-based monetary unit, achieves
short-run benefits for himself. He gets a little richer.
Those people on fixed incomes now face a slightly
restricted supply of goods available for purchase at the
older, less inflated, price levels. Miners and mine owners
bought these goods with their newly mined gold. This is a
fact of life. But this is a minor redistribution -- miner
redistribution -- of wealth compared to the effects of a
government monopoly over money. The compulsion of
government vastly magnifies the redistribution effects of
monetary inflation. It is cheaper to print money than to
We live in an imperfect universe. We are not perfect
creatures, possessing omniscience, omnipotence, and perfect
moral natures. We therefore find ourselves in a world in
which some people will choose actions which will benefit
them in the short run, but which may harm others in the
long run. Our judicial task is to minimize these effects.
We should pursue a world of minor imperfections rather than
accept a world with major imperfections. But we would be
wise not to demand political perfection. Messianic
societies never attain perfection. They attain only
To compare a gold standard with perfection -- zero
monetary expansion -- misses the point. Perfection is not
an available option. Instead, we should compare the
effects of a gold coin standard, where no one can issue
receipts for gold unless he owns gold, with the effects of
a monetary system in which the government forces people to
accept its money in payment for all debts, goods, and
services. Compared to the cost of creating a blip on a
computer, the costs of mining are huge. The rate of
monetary inflation will be vastly lower under a pure gold
coin standard with 100% reserve banking than under a credit
money standard run by central bankers through the
fractionally reserved commercial banks.
Professor Mises defended the gold standard as a great
foundation of our liberties precisely because gold is so
expensive to mine. Mining expenses reduce the rate of
monetary inflation. The gold standard is not a perfect
arrangement, he said, but its effects are far less
deleterious than the power of a monopolistic State or a
State-licensed banking system to create credit money. The
economic effects of gold are far more predictable, because
they are more regular. Geology acts as a greater barrier
to monetary inflation than can any man-made institutional
arrangement. [Ludwig von Mises, THE THEORY OF MONEY AND
CREDIT (New Haven, Connecticut: Yale University Press,
 1951), pp. 209-11, 238-40.] The booms will be
smaller, the busts will be less devastating, and the
redistribution involved in all inflation (or deflation, for
that matter) can be more easily planned for.
On all this, see my on-line book, MISES ON MONEY. http://www.lewrockwell.com/north/mom.html
Nature is niggardly. This is a blessing for us in the
area of monetary policy, assuming that we limit ourselves
to a monetary system legally tied to specie metals. We
would not need gold if, and only if, we could be guaranteed
that the government or banks would not tamper with the
supply of money in order to gain their own short-run
benefits. For as long as that temptation exists, gold (or
silver, or platinum) will alone serve as a protection
against policies of mass inflation.
HOW WOULD THE SYSTEM WORK?
The collective entity known as the nation, as well as
another collective, the State, will always have a desire to
increase its percentage of the world's economic goods. In
international terms, this means that there will always be
an incentive for a nation to mine all the gold that it can.
While it is true that economics cannot tell us that an
increase in the world's gold supply will result in an
increase in aggregate social utility, economic reasoning
does inform us that the nation which gains access to newly
mined gold at the beginning will able to buy at yesterday's
prices. World prices will rise in the future as a direct
result, but he who gets there "fustest with the mostest"
does gain an advantage. What applies to an individual
citizen miner applies equally to national entities.
So much for technicalities. What about the so-called
"gold stock"? In a free market society that permits all of
its residents to own gold and gold coins, there will be a
whole host of gold coins, there will be a whole host of
gold stocks. (By "stock," I mean gold hoard, not a share
in some company.) Men will own stocks of gold,
institutions like banks will have stocks of gold, and all
levels of civil government -- city, county, national --
will possess gold stocks. All of these institutions,
including the family, could issue paper IOU slips for gold,
although the slips put out by known institutions would no
doubt circulate with greater ease (if what is known about
them is favorable). The "national stock of gold" in such a
situation would refer to the combined individual stocks.
Within this hypothetical world, let us assume that the
United States Government wishes to purchase a fleet of
German automobiles for its embassy in Germany. The
American people are therefore taxed to make the funds
available. Our government now pays the German central bank
(or similar middleman) paper dollars in order to purchase
German marks. Because, in our hypothetical world, all
national currencies are 100 per cent gold-backed, this
would be an easy arrangement. Gold would be equally
valuable everywhere (excluding shipping costs and, of
course, the newly mined gold which keeps upsetting our
analysis), so the particular paper denominations are not
too important. Result: the German firm gets its marks, the
American embassy gets its cars, and the middleman has a
stock of paper American dollars.
These bills are available for the purchase of American
goods or American gold directly by the middleman, but he,
being a specialist working the area of currency exchange,
is more likely to make those dollars available (at a fee)
for others who want them. They, in turn, can buy American
goods, services, or gold. This should be clear enough.
PAPER PROMISES ARE EASILY BROKEN
Money is useful only for exchange, and this is
especially true of paper money (gold, at least, can be made
into wedding rings, earrings, nose rings, and so forth).
If there is no good reason to mistrust the American
government -- we are speaking hypothetically here -- the
paper bills will probably be used by professional importers
and exporters to facilitate the exchange of goods. The
paper will circulate, and no one bothers with the gold.
Gold just sits there in the vaults, gathering dust. As
long as the governments of the world refuse to print more
paper bills than they have gold to redeem them, their gold
It would be wrong to say that gold has no economic
function, however. It does, and the fact that we must
forfeit storage space and payment for security systems
testifies to that valuable function. It keeps governments
from tampering with their domestic monetary systems.
Obviously, we do not live in the hypothetical world
which I have sketched. What we see today is a short-
circuited international gold standard. National
governments have monopolized the control of gold for
exchange purposes; they can now print more IOU slips than
they have gold. Domestic populations cannot redeem their
slips. The governments create more and more slips, the
banks create more and more credit, and we are deluged in
money of decreasing purchasing power. The rules of the
game have been shifted to favor the expansion of
centralized power. The laws of economics, however, are
still in effect.
TRADING WITHOUT GOLD
One can easily imagine a situation in which a nation
has a tiny gold reserve in its national treasury. If its
people produce, say, bananas, and they limits their
purchases of foreign goods by what they receives in foreign
exchange for exported bananas, the national treasury needs
to transfer no gold. The nation's currency unit has
purchasing power (exported bananas) apart from any gold
If, for some reason, it wants to increase its national
stock of gold (perhaps the government plans to fight a war,
and it wants a reserve of gold to buy goods in the future,
since gold stores more conveniently than bananas), the
government can get the gold. All it needs to do is take
the foreign money gained through the sale of bananas and
use it to buy gold instead of other economic goods. This
will involve taxation, of course, but that is what all wars
involve. If you spend less than you receive, you are
saving the residual. A government can save gold. That's
really what a gold reserve is: a savings account.
This is a highly simplified example. I use it to
convey a basic economic fact: if you produce a good (other
than gold), and you use it to export in order to gain
foreign currency, than you do not need a gold reserve. You
have chosen to hoard foreign currency instead of gold.
That applies to citizens and governments equally well.
What, then, is the role of gold in international
trade? Free market economist Patrick Boarman (the
translator of Wilhelm Roepke's ECONOMICS OF THE FREE
SOCIETY) explained the mechanism of international exchange
in THE WALL STREET JOURNAL (May 10, 1965).
The function of international
reserves is NOT to consummate international
transactions. These are, on the contrary,
financed by ordinary commercial credit supplied
either by exporters, or in some cases by
international institutions. Of such commercial
credit there is in individual countries normally
no shortage, or internal credit policy can be
adjusted to make up for any un-toward tightness
of funds. In contrast, international reserves
are required to finance only the inevitable net
differences between the value of a country's
total imports and its total exports; their
purpose is not to finance trade itself, but net
The international gold standard, like the free
market's rate of interest, served as an equilibrating
device. I think it will again someday. What it is
supposed to equilibrate is not gross world trade but net
trade imbalances. Boarman's words throw considerable light
on the perpetual discussion concerning the increase of
"world monetary liquidity."
A country will experience a net
movement of its reserves, in or out, only where
its exports of goods and services and imports of
capital are insufficient to offset its imports of
goods and services and exports of capital.
Equilibrium in the balance of payments is
attained not by increasing the quantity of a
mythical "world money" but by establishing
conditions in which autonomous movements of
capital will offset the net results, positive and
negative, of the balance of trade.
Some trade imbalances are temporarily inevitable.
Natural or social disasters take place, and these may
reduce a nation's productivity for a period of time. The
nation's "savings" -- its gold stock -- can then be used to
purchase goods and services from abroad. Specifically, it
will purchase with gold all those goods and services needed
above those available in trade for current exports. If a
nation plans to fight a long war, or if it expects domestic
rioting, then, of course, it should have a larger gold
stock than a nation which expects peaceful conditions. If
a nation plans to print up millions and even billions of
IOU slips in order to purchase foreign goods, it had better
have a large gold stock to redeem the slips. But that is
merely another kind of trade imbalance, and is covered by
A nation that relies on the free market to balance
supply and demand, imports and exports, production and
consumption, will not need a large gold stock to encourage
trade. Gold's function is to act as a restraint on
government's spending more than the government takes in.
If a government takes in revenues from its citizenry, and
then exports the paper bills or fully baked credit to pay
for some foreign good, then there is no necessity for the
government to deplete its semi-permanent gold reserves.
The gold will sit idle -- idle in the sense of physical
movement, but not idle in the sense of being economically
The fact that a nation's gold does not move is no more
(and no less) significant than the fact that the guards who
are protecting this gold can sit quietly on the job if the
storage system is really efficient. Gold in a nation's
treasury guards its citizens from that old messianic dream
of getting something for nothing. This is also the
function of the guards who protect the gold. The guard who
is not very important in a "thief-proof" building is also a
kind of "equilibrating device." He is there just in case
the over-all system should experience a temporary failure.
A nation that permits the free market to function is,
by analogy, also "thief-proof" Everyone who consumes is
required by the system to offer something in exchange.
During economic emergencies, the gold is used, like the
guard is used during vault emergencies. Theoretically, the
free market economy could do without a large national gold
reserve, in the same sense that a perfectly designed vault
could do without guards. The nation that requires huge
gold reserves is like a vault that needs extra guards:
something is probably breaking down somewhere -- or
What I have been trying to explain is that a full
gold coin standard, within the framework of a free market
economy, would permit the large mass of citizens to possess
gold. This means that the "national reserves of gold,"
that is, the State's gold hoard, would not have to be very
If we were to re-establish full domestic
convertibility of paper money for gold coins (as it was
before 1933), while removing the "legal tender" provision
of the Federal Reserve Notes, the American economy would
still function. It would function far better in the long
run. Consumers would be able to reassert their sovereignty
over politicians and government-licensed bankers.
This, of course, is not the world we live in. Because
America is not a free society in the sense that I have
pictured here, we must make certain compromises with our
theoretical model. The statement in THE WALL STREET
JOURNAL's editorial would be completely true only in an
economy using a full gold coin standard: "The best way for
a nation to build confidence in its currency is not to bury
lots of gold in the ground." Quite true; gold would be
used for purposes of exchange, although one might save for
a "rainy day" by burying gold. But if governments refused
to inflate their currencies, few people would need to bury
their gold, and neither would the government.
If a government wants to build confidence, it should
"pursue responsible financial policies," that is, it should
not spend more than it takes in. The editorial's
conclusion is accurate: "If a country does so consistently
enough, it's likely to find its gold growing dusty from
In order to remove the necessity of a large gold
hoard, all we need to do is follow policies that will
"establish Justice, insure domestic Tranquility, provide
for the common defense [with few, if an, entangling
alliances], promote the general Welfare, and secure the
Blessings of Liberty to ourselves and our Posterity."
To the extent that a nation departs from those goals,
it will need a large gold hoard, for it costs a great deal
to finance injustice, domestic violence, and general
illfare. With the latter policies in effect, we find that
the gold simply pours out of the Treasury, as "net trade
imbalances" between the State and everyone else begin to
mount. A moving ingot gathers no dust.
This leads us to "North's Corollary to the Gold
"The fiscal responsibility of a
nation's economic policies can be measured
directly in terms of the thickness of the layer
of dust on its gold reserves: the thicker the
layer, the more responsible the
Note: this article is a revision of an article that I
published in THE FREEMAN in 1969. My analysis has not
changed since 1969, but the price level in the United
States is 4.9 times higher. See the inflation calculator
on the home page of the Bureau of Labor Statistics.http://www.bls.gov
The government's gross national debt (on-budget debt,
not accrual debt, which is vastly larger) at the end of
1969 was $366 billion. At the end of this year, it will be
approximately $5.8 trillion.http://www.treas.gov/education/fact-sheets/taxes/fed-debt.html
The Establishment still ridicules gold. The public
still doesn't understand gold. And academic economists
tell us that central banking is the wave of the future: the
best conceivable world.
The more things change (debt, prices), the more they
stay the same (economic opinions).
In my next report, I will describe the institutional
arrangement by which the world's economy could function on
a pure coin standard: 100% reserves. In fact, a company
actually exists that has begun to offer just such an
alternative to the existing system.