Gary North

Dec. 27, 2010

This was posted on one of my site's discussion forums on the night before Christmas:

Gold based economies more volatile than central bank fiat based money economies??

Roubini: On a return to the Gold standard

"When you had a traditional gold standard, boom and bust with severe swings in economic activity were the norm--really big ones. It was only once we moved to fiat money that central banks were able to smooth the business cycle, and make it less volatile, as we did during the financial economic crisis." - Nov 2010

Where do they get these ideas? Or rather where did I get the idea the boom and busts would be smaller in a gold based society? I know I have heard this multiple times.

But they did have bank panics in the 1800s. So maybe they are right?

My bet is that the booms and busts will occur in a gold based economy but they will not be so big and wild or last as long as in a fiat money based economy.

The person who posted this is well meaning. He senses that Roubini is wrong, but he is not sure exactly why. He is typical of the overwhelming minority of those who think that a gold standard would be a good idea. He means well, but, as they say, he doesn't get it.

What is "it"? The logic of the free market.

So, let us begin. First and foremost, a government-guaranteed gold standard is a rotten idea. It is just a little better than a fiat-money standard. But advocates of "the gold standard" almost always mean "a government-guaranteed gold standard." Therein lies the problem. Governments lie. They cheat. They steal.

Over and over, I have returned to this theme: a government-guaranteed gold standard is a fool's gold standard. I have had great trouble in getting this idea across.

There are two kinds of gold standards: government-guaranteed and privately administered. The first is a counterfeit of the second. The politicians set up the rubes to be skinned. I have written about this here:

I hope you will click the link, print out the 2003 article, and read it twice.

The idea of the gold standard pre-dates Austrian School economics by a century. Ludwig von Mises created the Austrian School by applying the general principles of economics developed by Menger and Bohm-Bawerk to monetary theory: The Theory of Money and Credit (1912). Here, we find the first integrated defense of a free market gold standard.

A short presentation is Murray Rothbard's mini-book, What Has Government Done to Our Money? (1964).

Something close to a free market gold standard existed in California in 1849-54. That is about the only place it has ever existed.

Here are the characteristic features of a free market gold standard:

1. Private property
2. The right of contract
3. The enforcement of contracts by the government
4. No government licensing of banks
5. Open entry in coin production
6. No government mint
7. No government currency or coins
8. Therefore, no legal tender laws

The legal framework begins with private property. The monetary system develops out of this. If the monetary system does not begin with private property and the right of contract, then it is just one more government substitute for liberty. It will fail to bring liberty or maintain it.

Here was what Mises advocated: free banking, no bank regulations beyond the general enforcement of contracts, and no central bank supported by the government.

Out of this legal framework will develop a free market gold coin standard, a free market silver coin standard, and maybe other standards. The various currencies would fluctuate in price, just as all other commodities fluctuate in price. These would be parallel currencies, not price-controlled currencies. There would be no government-enforced price controls that set the price of silver in terms of the price of gold.

The government would specify the form of acceptable currency for the payment of taxes -- nothing else. It would not issue coins or currency of its own. It would not enter the money business. Whenever governments enter the money business, the public should expect monkey business.

This system of economic liberty is the great enemy of civil governments. Therefore, they all create alternative monetary systems. One of these is the government-guaranteed gold standard. A government-guaranteed gold standard is not worth the paper it's written on. It's a deception. It is always violated at some point.

Conservatives who have never read Mises or Rothbard on money nevertheless regard themselves as free market economists, because they favor a government-guaranteed gold standard. Such a standard has not existed anywhere since 1933, and did not exist anywhere else, 1914-1933.

So, when anti-gold economists attack the gold standard, they are attacking the phony gold standard -- the imitation standard -- created by major European governments in the 19th century. Those governments did the following:

1. Limited private property
2. Did not allow the right of contract
3. Did not enforce all voluntary contracts
4. Licensed banks
5. Forbade entry in coin production
6. Ran government mints
7. Established government currency and coins
8. Passed legal tender laws

The critics think they have been successful when they point out that this pseudo-gold standard had major problems. Of course it had major problems. It was an anti-free market gold standard.

The Keynesian critics' preferred solution is fiat money: unlimited deception, corruption, and currency destruction by the national government.

The defenders of the phony gold standard have self-doubts. This is good. The system they defend was corrupt from day one.

Now, if I can just persuade the self-doubters of the legitimacy and wisdom of the free market. . . .