Deadly Assumption #6: Gold Is a Barbarous Relic
This assessment of gold's monetary role was made by the
British economist, John Maynard Keynes ("canes"). He was
referring to the gold standard. He was not referring to Rolex
watches or jewelry.
Because a gold standard was always a government promise to
pay gold on demand, there has been no gold standard. There has
only been a government-guaranteed gold-plated standard. In every
major war, banks have suspended gold redemption, meaning they
broke contract with their depositors. Then the central bank
stiffed the commercial banks by collecting all of "their" gold.
The central banks wind up with the people's gold. All
governments always allow this.
The barbarous relic died because of barbarous policies by
commercial bankers, central bankers, politicians, and judges.
The right of contract was abrogated retroactively.
Why? Because the gold standard restricted governments from
borrowing bank money and spending it on war or anti-depression
spending measures. Governments and bankers did not want the
restriction imposed on them by the legal right of depositors to
demand gold in exchange for deposits -- the promise that had
persuaded them to turn in their gold in exchange for bank
What we need is a true gold standard that is the product of
voluntary transactions. We need courts to enforce contracts. We
need the predictability that contracts and courts provide.
We do not have such a system today. People trust fractional
reserve banking. They trust it with their lives. The division
of labor keeps most of us alive, and it rests on fractional
reserve banking. If the banks ever ceased to function overnight,
most urban dwellers would die. We don't like to think about the
degree of our dependence on banking.
Will we ever get back to a gold standard? Probably not in
my day. But as fiat money erodes in purchasing power, gold will
become accepted as an inflation hedge.
Would gold do well in a deflationary environment? That
would depend on people's confidence in the banks. If they truly
distrust the banks, they would demand currency. There isn't
enough currency to meet the needs of trade. Prices would fall,
increasing the value of currency. I would rather have paper
money than gold in a deflationary environment.
But will we get a deflationary environment? We have not
seen this since 1933. That is a long time for one policy to
dominate: inflation. Yet it has dominated.
The case for gold is mainly the case for inflation. I have
read many deflationary cases for gold since 1974. Not one of
them made much sense, and all of them were wrong in forecasting
The average person does not recognize gold coins. Gold
therefore cannot function as money, except among central bankers.
But the free market case for the gold standard is the case
against central banking. It is the case for a system of currency
based on individual decisions. Men have been outside of a gold-
based monetary system for so long that it is difficult to imagine
a scenario in which it would become the currency of choice.
The gold standard was a relic for sure because it was a
government-guaranteed, government-enforced restriction on
government. The traditional gold standard worked in peacetime.
It never worked in wartime.
When a bank or a government agency promises to do something,
no matter what, it is lying. Thus, the traditional gold standard
was always fraudulent -- as fraudulent as fractional reserve
This is not a case against gold. It is a case against
trusting government and bankers.
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