Gary North

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 deposits.

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 deflation.

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 banking.

This is not a case against gold. It is a case against trusting government and bankers.

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