The Case for a 100% Gold Dollar
Preface
When this essay was published nearly 30 years ago, America was in the midst of the Bretton Woods system,
a Keynesian international monetary system that had been foisted upon the world by the United States and British governments in 1945.
The Bretton Woods system was an international dollar standard masquerading as a gold standard,
gold standard, in order to lend the well-deserved prestige of the world's oldest and most stable
money, gold, to the increasingly inflated and depreciated dollar.
But this post-World War II system was only a grotesque parody of a gold standard.
In the pre-World War I classical gold standard, every currency unit, be it dollar, pound,
Frank or Mark was defined as a certain unit of weight of gold, thus the dollar was defined
as approximately one twentieth of an ounce of gold, while the pound sterling was defined
as a little less than one fourth of a gold ounce, thus fixing the exchange rate between
the two and between all other currencies at the ratio of their weights.
The precise ratio of gold weights amounted to defining the pound sterling as equal to
$4.86656.
Since every national currency was defined as being a certain weight of gold, paper francs
or dollars or bank deposits were redeemable by the issuer, whether government or bank,
in that weight of gold.
In particular, these government or bank monies were redeemable on demand in gold coin, so
that the general public could use gold in everyday transactions, providing a severe
check upon any temptation to over-issue.
The pyramiding of paper or bank credit upon gold was therefore subject to severe limits.
The ability by currency holders to redeem those liabilities in gold on demand, whether
whether by citizens of that country or by foreigners.
If in that system, France, for example, inflated the supply of French francs, either in paper
or in bank credit, pyramiding more francs on top of gold, the increased money supply
and incomes in francs would drive up prices of French goods, making them less competitive
in terms of foreign goods, increasing French imports and pushing down French exports, with
with gold flowing out of France to pay for these balance of payments deficits.
But the outflow of gold abroad would put increasing pressure upon the already top-heavy French
banking system, even more top-heavy now that the dwindling gold base of the inverted money
pyramid was forced to support and back up a greater amount of paper francs.
Inevitably, facing bankruptcy, the French banking system would have to contract suddenly,
driving down French prices and reversing the gold outflow.
In this way, while the classical gold standard did not prevent boom bust cycles caused by
inflation of money and bank credit, it at least kept that inflation and those cycles
in close check.
The Bretton Woods system, an elaboration of the British-induced gold exchange standard
of the 1920s, was very different.
The dollar was defined at one-thirty-fifth of a gold ounce.
The dollar, however, was only redeemable in large bars of gold bullion by foreign governments
and central banks.
Nowhere was there redeemability in gold coin.
Indeed, no private individual or firm could redeem in either coin or bullion.
In fact, American citizens were prohibited from owning or holding gold at all, at home
or Abroad, beyond very small amounts permitted to coin collectors, dentists and for industrial
purposes.
None of the other countries' currencies after World War II were either defined or redeemable
in gold.
Instead, they were defined in terms of the dollar, dollars constituting the monetary
reserves behind francs, pounds and marks, and these national money supplies were in
in turn pyramided on top of dollars.
The result of this system was a seeming bonanza during the 1940s and 1950s for American policymakers.
The United States was able to issue more paper and credit dollars while experiencing only
small price increases.
For as the supply of dollars increased and the United States experienced the usual balance
The Bretton Woods system was hailed by establishment macroeconomists and financial experts as sound, noble and destined to be eternal.
The handful of genuine gold standard advocates were derided as gold bugs, cranks and neanderthals.
Even the small gold group was split into two parts.
The majority, the spar group, discussed in this essay, insisted that the Bretton Woods
system was right in one crucial respect, that gold was indeed worth $35 an ounce, and that
therefore the United States should return to gold at that rate.
This led by the importance of sticking to fixed definitions.
The spar group insisted on ignoring the fact that the monetary world had changed drastically
since 1933, and that therefore the 1933 definition of the dollar being one-thirty-fifth of a
gold ounce no longer applied to a nation that had not been on a genuine gold standard since
that year.
Actually, if they had been consistent in their devotion to a fixed definition, the Spar Group
would have advocated a return to gold at $20 an ounce, the long-standing definition before
Franklin D. Roosevelt began tampering with the gold price in 1933.
The Spar Group consisted of two organizations, the Economist's National Committee on Monetary
Policy, headed by Professor Walter E. Spahr of New York University, and an allied layman's
activist group, headed by Philip McKenna, called the Gold Standard League. Spahr expelled
Henry Hazlitt from the former organization for the heresy of advocating return to gold
at a far higher price or lower weight.
The minority of gold standard advocates during the 1960s were almost all friends and followers
of the Great Austrian School Economist Ludwig von Mises. Mises himself, and such men as
Henry Hazlitt, de Gaulle's major economic adviser Jacques Roof, and Michelangelo Heilperin,
pointed out that as the dollar continued to inflate, it had become absurdly undervalued
at $35 an ounce. Gold was worth a great deal more in terms of dollars and other currencies,
The United States declared the Misesians should return to a genuine gold standard at a realistic,
much higher rate.
These Austrian economists were ridiculed by all other schools of economists and financial
writers for even mentioning that gold might even be worth the absurdly high price of $70
an ounce.
The Misesians predicted that the Bretton Woods system would collapse since relatively hard
Money Countries, recognizing the continuing depreciation of the dollar, would begin to
break the informal gentleman's rules of Bretton Woods, and insistently demand redemption in
gold that the United States did not possess.
The only other critics of Bretton Woods were the growing wing of establishment economists,
the Friedmanite monetarists.
While the monetarists also saw the monetary crises that would be entailed by fixed rates
In a world of varying degrees of currency inflation, they were even more scornful of gold than
their rivals, the Keynesians.
Both groups were committed to a fiat paper standard.
But whereas the Keynesians wanted a dollar standard cloaked in a fig leaf of gold, the
monetarists wanted to discard such camouflage, abandon any international money and simply
have national fiat paper monies freely fluctuating in relation to each other.
In short, the Friedmanites were bent on abandoning all the virtues of a world money and reverting
to international barter.
Keynesians and Friedmanites alike maintained that the gold bugs were dinosaurs.
Whereas Mises and his followers held that gold was giving backing to paper money, both
the Keynesian and Friedmanite wings of the establishment maintained precisely the opposite,
and it was sound and solid dollars that were giving value to gold.
Gold, both groups asserted, was now worthless as a monetary metal.
Cut dollars loose from their artificial connection to gold, they coerced in unison, and we will
see that gold will fall to its non-monetary value, then estimated at approximately $6
an ounce.
There can be no genuine laboratory experiments in human affairs, but we came as close as
as we ever will in 1968, and still more definitively in 1971.
Here were two firm and opposing sets of predictions.
The Misesians, who stated that if the dollar and gold were cut loose, the price of gold
in ever more inflated dollars would zoom upward, and the massed economic establishment, from
Friedman to Samuelson, and even including such ex-Misesians as Fritz Machlup, maintaining
Meaning that the price of gold would, if cut free, plummet from $35 to $6 an ounce.
The allegedly eternal system of Bretton Woods collapsed in 1968.
The gold price kept creeping above $35 an ounce in the free gold markets of London and
Zurich, while the Treasury, committed to maintaining the price of gold at $35, increasingly found
itself drained of gold to keep the gold price down.
Individual Europeans and other foreigners realized that because of this treasury commitment,
the dollar was, for them, in essence, redeemable in gold bullion at $35 an ounce.
Since they saw that dollars were really worth a lot less, and gold a lot more than that,
these foreigners kept accelerating that redemption.
Finally, in 1968, the United States and other countries agreed to scuttle much of Bretton Woods, and to establish a two-tier gold system.
The governments and their central banks would keep the $35 redeemability among themselves as before,
but they would seal themselves off hermetically from the pesky free gold market, allowing that price to rise or fall as it may.
In 1971, however, the rest of the Bretton Woods system collapsed.
Increasingly, such hard-money countries as West Germany, France and Switzerland, getting
ever more worried about the depreciating dollar, began to break the gentlemen's rules and
insist on redeeming their dollars in gold, as they had a right to do.
But as soon as a substantial number of European countries were no longer content to inflate
on top of depreciating dollars and demanded gold instead, the entire system inevitably
collapsed.
In effect, declaring national bankruptcy on August 15, 1971, President Nixon took the
United States off the last shred of a gold standard and put an end to Bretton Woods.
Gold and the dollar was thus cut loose in two stages.
From 1968 to 1971, governments and their central banks maintained the $35 rate among themselves,
while allowing a freely fluctuating private gold market.
From 1971 on, even the fiction of $35 was abandoned.
What then of the laboratory experiment?
Flouting all the predictions of the economic establishment, there was no contest as between
and themselves and the Misesians. Not once did the price of gold on the free market fall below $35. Instead, it kept rising steadily, and after 1971 it vaulted upward, far beyond the once seemingly absurd high price of $70 an ounce. At one point, the price of gold reached $850 and is now lingering in the area of $350 an ounce.
While gold bugs like to mope about the alleged failure of gold to rise still further, it should be noted that even this depressed gold price is tenfold the alleged eternally fixed rate of $35 an ounce.
One side effect of the rising market price of gold was to ensure the total disappearance of the spar group.
Thirty-five dollar gold is now not even a legal fiction, it is dead and buried, and
it is safe to say that no one of any school of thought will want to resurrect it.
Here was a clear-cut case where the Misesian forecasts were proven gloriously and spectacularly
correct, while the Keynesian and Friedmanite predictions proved to be spectacularly wrong.
What, it might well be asked, was the reaction of the establishment, all allegedly devoted
to the view that science is prediction, and of Milton Friedman, who likes to denounce
Austrians for supposedly failing empirical tests.
Did he or they graciously acknowledge their error and hail Mises and his followers for
being right?
To ask that question is to answer it.
To paraphrase Mencken, that sort of thing will happen the Saturday before the Tuesday
before the resurrection morn.
After a dramatically unsuccessful and short-lived experiment in fixed exchange rates without
any international money, the world has subsisted in a monetarist paradise of national fiat
currencies since the spring of 1973.
The combination of almost two decades of exchange rate volatility, unprecedentedly high rates
of peacetime inflation and the loss of an international money have disillusioned the
economic establishment and induced nostalgia for the once acknowledged failure of Bretton
Woods.
One would think that the world would tire of careening back and forth between the various
disadvantages of fixed exchange rates with paper money and fluctuating rates with paper
for Money, and return to a classical, or still better, a 100% gold standard.
So far, however, there is no sign of a clamor for gold.
The only hope for gold on the monetary horizon, short of a runaway inflation in the United
States, is the search for a convertible currency in the ruined Soviet Union.
It may well dawn on the Russians that their now nearly worthless ruble could be rescued
by returning to a genuine gold standard, solidly backed by the large Russian stock of the monetary
metal. If so, Russia, in the monetary field, might well end up, ironically, pointing to
the West, the way to a genuine free market monetary system.
Two unquestioned articles of faith had been accepted by the entire economic establishment
in 1962. One was a permanent commitment to paper and scorn for any talk of a gold standard.
The other was the uncritical conviction that the American banking system, saved and bolstered
by the structure of deposit insurance imposed by the Federal Government during the New Deal,
was as firm as the rock of Gibraltar. Any hint that the American fractional reserve
of Banking System might be unsound or even in danger, was considered even more crackpot
and more neanderthal than a call for return to the gold standard. Once again, both the
Keynesian and the Friedmanite wings of the establishment were equally enthusiastic in
endorsing Federal Deposit Insurance and the FDIC, the Federal Deposit Insurance Corporation,
despite the supposedly fervent Friedmanite adherence to a market economy
free of controls, subsidies or guarantees.
Those of us who raised the alarm against the dangers of fractional reserve banking
were merely crying in the wilderness.
Here again, the landscape has changed drastically in the intervening decades.
At first, in the mid-1980s, the fractional reserve savings and loan banks
insured by private deposit insurance firms in Ohio and Maryland collapsed from massive
bank runs.
But then, at the end of the 1980s, the entire S&L system went under, necessitating a bailout
amounting to hundreds of billions of dollars.
The problem was not simply a few banks that had engaged in unsound loans, but runs upon
a large part of the S&L system.
The result was admitted bankruptcy and liquidation of the federally operated FSLIC, Federal Savings
and Loan Insurance Corporation. FSLIC was precisely to savings and loan banks what the
FDIC is to the commercial banking system. And if FSLIC deposit insurance can prove to
be a hopeless chimera, so too can the long-vaunted FDIC. Indeed, the financial press is filled
are filled with stories that the FDIC might well become bankrupt without a further infusion of taxpayer funds.
Whereas the safe level of FDIC reserves to the deposits it ensures is alleged to be 1.5%,
the ratio is now sinking to approximately 0.2% and this is held to be cause for concern.
The important point here is a basic change that has occurred in the psychology of the market and of the public.
In contrast to the naive and unquestioning faith of yesteryear,
everyone now realizes at least the possibility of collapse of the FDIC.
At some point in the possibly near future, perhaps in the next recession and the next spate of bad bank loans,
It might dawn upon the public that 1.5 percent is not very safe either, and that no such
level can guard against the irresistible holocaust of the bank run.
At that point, ignoring the usual mendacious assurances and soothing syrup of the establishment,
the commercial banks might be plunged into their ultimate crisis.
The United States authorities would then be faced with two stark choices.
One would be to allow the entire banking system to collapse, along with virtually all the
deposits and depositors in that system.
Since, given the mindset of American politicians and their evident philosophy of too big to
fail, it is certain that they would be forced to embrace the second alternative, massive
hyperinflationary printing of enough cash to pay off all the bank liabilities.
The redeposit of such cash in the banking system would bring about an immediate runaway inflation
and a massive flight from the dollar.
Such a future scenario, once seemingly unthinkable, is now definitely on the horizon.
Perhaps realization of this plight will lead to increased interest not only in gold, but
also in a 100% banking system grounded upon a revalued gold stock.
In one sense, 100% banking is now easier to establish than it was in 1962.
In my original essay, I called upon the banks to start issuing debentures of varying maturities,
which could be purchased by the public and serve as productive channels for genuine savings,
which would neither be fraudulent nor inflationary.
Instead of depositors each believing that they have a total, say, of $1 billion of deposits,
While they are all laying claim to only $100 million of reserves, money would be saved
and loaned to a bank for a definite term, the bank then re-lending these savings at
an interest differential and repaying the loan when it becomes due.
This is what most people wrongly believe the commercial banks are doing now.
Since the 1960s, however, precisely this system has become widespread in the sale of certificates
Deposits of Deposit, CDs. Everyone is now familiar with purchasing CDs, and demand deposits
can far more readily be shifted into CDs than they could have three decades ago. Furthermore,
the rise of Money Market Mutual Funds, MMMF, in the late 1970s has created another readily
available and widely used outlet for savings outside the commercial banking system. These
These too are a means by which savings are being channeled into short-run credit to business,
again without creating new money or generating a boom-bust cycle. Institutionally, it would
now be easier to shift from fractional to 100% reserve banking than ever before. Unfortunately,
now that conditions are riper for 100% gold than in several decades, there has been a
a defection in the ranks of many former Misesians. In a curious flight from gold characteristic
of all too many economists in the 20th century, bizarre schemes have proliferated and gained
some currency, for everyone to issue his own standard money, for a separation of money
as a unit of account from media of exchange, for a government-defined commodity index,
and on and on.
It is particularly odd that economists who profess to be champions of a free market economy
should go to such twists and turns to avoid facing the plain fact that gold, that scarce
and valuable market-produced metal, has always been and will continue to be by far the best
money for human society.
Murray N. Rothbard, Las Vegas, Nevada, September, 1991
The Case for a 100% Gold Dollar
To advocate the complete, uninhibited gold standard runs the risk in this day and age
of being classified with the dodo bird.
When the Roosevelt administration took us off the gold standard in 1933, the bulk of
The nation's economists opposed the move and advocated its speedy restoration.
Now gold is considered an absurd anachronism, a relic of a tribal fetish.
Gold indeed still retains a certain respectability in international trade as the pre-eminent
international money.
Gold as a medium of foreign trade can command support.
But while foreign trade is important, I would rather choose the far more difficult domestic
Battleground, and argue for a genuine gold standard at home as well as abroad. Yet I
shall not join the hardy band of current advocates of the gold standard, who call for a virtual
restoration of the status quo anti-1933. Although that was a far better monetary system than
what we have today, it was not, I hope to show, nearly good enough. By 1932 the gold
The gold standard had strayed so far from purity, so far from what it could and should
have been, that its weaknesses contributed signally to its final breakdown in 1933.
2. Money and Freedom
Economics cannot by itself establish an ethical system, although it provides a great deal
of data for anyone constructing such a system. And everyone, in a sense, does so in deciding
Depending Upon Policy.
Economists therefore have a responsibility, when advocating policy, to apprise the reader
or listener of their ethical position.
I do not hesitate to say that my own policy goal is the establishment of the free market,
of what used to be called laissez-faire, as broadly and as purely as possible.
For this I have many reasons, both economic and non-economic, which I obviously cannot
develop here, but I think it important to emphasize that one great desideratum in framing
a monetary policy is to find one that is truly compatible with the free market in its widest
and fullest sense.
This is not only an ethical but also an economic tenet, for at the very least the economist
who sees the free market working splendidly in all other fields should hesitate for a
for a long time before dismissing it in the sphere of money.
I realize that this is not a popular position to take, even in the most conservative economic circles.
Thus, in almost its first sentence, the United States Chamber of Commerce's pamphlet series
on the American competitive enterprise economy announced,
money is what the government says it is.
It is almost universally believed that money, at least, cannot be free, that it must be controlled,
regulated, manipulated and created by government. Aside from the more strictly economic criticisms
that I will have of this view, we should keep in mind that money, in any market economy advanced
beyond the stage of primitive barter, is the nerve center of the economic system.
System.
If, therefore, the State is able to gain unquestioned control over the unit of all accounts, the
State will then be in a position to dominate the entire economic system and the whole society.
It will also be able to add quietly and effectively to its own wealth and to the wealth of its
favorite groups, and without incurring the wrath that taxes often invoke.
The state has understood this lesson since the kings of old began repeatedly to debase
the coinage.
3.
The Dollar, Independent Name or Unit of Weight
If you favor a free market, why in the world do you say that government should fix the
price of gold?
And if you wish to tie the dollar to a commodity, why not a market basket of commodities instead
of only gold?
These questions are often asked of the libertarian who favors a gold standard, but the very framing
of the questions betrays a fundamental misconception of the nature of money and of the gold standard.
For the crucial implicit assumption of such questions, and of nearly all current thinking
on the subject of money, is that dollars are an independent entity.
If dollars are indeed properly things in themselves to be bought, sold and evaluated on the market,
Market, then it is surely true that fixing the price of gold in terms of dollars becomes
simply an act of government intervention.
There is, of course, no question about the fact that, in the world of today, dollars
are an independent entity, as are pounds of sterling, francs, marks and escudos.
If this were all, and if we simply accepted the fact of such independence and did not
Inquire Beyond, then I would be happy to join Professors Milton Friedman, Leland Yeager
and others of the Chicago School, and call for cutting these independent national monies
loose from arbitrary exchange rates fixed by government, and allowing a freely fluctuating
market in foreign exchange. But the point is that I do not think that these national
monies should be independent entities. Why they should not stems from the very nature
Factor and Essence of Money and of the Market Economy
The market economy and the modern world system of division of labor operate as follows.
A producer supplies a good or a service, selling it for money.
He then uses the money to buy other goods or services that he needs.
Let us then consider a hypothetical world of pure laissez-faire, where the market functions
is freely and government has not infringed at all upon the monetary sphere.
This system of selling goods for money would then be the only way by which an individual
could acquire the money that he needed to obtain goods and services.
The process would be, production leads to purchase of money, leading to sale of money
for goods.
A person could also receive money from producers by inheritance or other gift, but here again
the ultimate giver must have been a producer. Furthermore, we may say that the recipient
produced some intangible service, for instance of being a son and heir, which provided the
reason for the giver's contribution. To those advocates of independent paper monies
As who also champion the free market, I would address this simple question.
Why don't you advocate the unlimited freedom of each individual to manufacture dollars?
If dollars are really and properly things in themselves, why not let everyone manufacture
them as they manufacture wheat and baby food?
It is obvious that there is indeed something peculiar about such money.
Therefore if everyone had the right to print paper dollars, everyone would print them in
unlimited amounts, the costs being minuscule compared to the almost infinitely large denominations
that could be printed upon the notes.
Clearly the entire monetary system would break down completely.
If paper dollars are to be the standard money, then almost everyone would admit that government
must step in and acquire compulsory monopoly of money creation so as to check its unlimited
increase.
There is something else wrong with everyone printing his own dollars.
For then the chain from production of goods through purchase of money to sale of money
for goods would be broken, and anyone could create money without having to be a producer
first.
He could consume without producing, and thus seize the output of the economy from the
of Genuine Producers.
Government's compulsory monopoly of dollar creation does not solve all these problems,
however, and even makes new ones.
For what is there to prevent government from creating money at its own desired pace and
thereby benefiting itself and its favored citizens?
Once again, non-producers can create money without producing, and obtain resources at
the expense of the producers.
Furthermore, the historical record of governments can give no one confidence that they will not do precisely that, even to the extent of hyperinflation and chaotic breakdown of the currency.
Why is it that historically the relatively free market never had to worry about people wildly setting up money factories and printing unlimited quantities?
The American Wildcat Bank did not print money itself, but rather bank notes, supposedly redeemable in money.
If money really means dollars and pounds and francs, then this would surely have been a problem.
But the nub of the issue is this. On the pristine free market, money does not and cannot mean the names of paper tickets.
Money means a certain commodity, previously useful for other purposes on the market, chosen
over the years by that market as an especially useful and marketable commodity to serve as
a medium for exchanges.
No one prints dollars on the purely free market because there are in fact no dollars.
There are only commodities, such as wheat, automobiles and gold.
In barter, commodities are exchanged for each other, and then, gradually, a particularly
marketable commodity is increasingly used as a medium of exchange.
Finally, it achieves general use as a medium and becomes a money.
I need not go through the familiar but fascinating story of how gold and silver were selected
by the market after it had discarded such commodity monies as cows, fish hooks and
and Iron Hose.
And I need also not dwell on the unique qualities possessed by gold and silver that caused the
market to select them, those qualities lovingly enunciated by all the older textbooks on money,
high marketability, durability, portability, recognizability and homogeneity.
Like every other commodity, the price of gold in terms of the commodities it can buy varies
is in accordance with its supply and demand. Since the demand for gold and silver was high,
and since their supply was low in relation to the demand, the value of each unit in terms
of other goods was high, a most useful attribute of money. This scarcity, combined with great
durability, meant that the annual fluctuations of supply were necessarily small, another
Another Useful Feature of a Money Commodity Commodities on the market exchanged by their
unit weights, and gold and silver were no exceptions.
When someone sold copper to buy gold and then to buy butter, he sold pounds of copper, for
ounces or grams of gold, to buy pounds of butter.
On the free market, therefore, the monetary unit, the unit of the nation's accounts, naturally
Money emerges as the unit of weight of the money commodity, for example, the silver ounce
or the gold gram.
In this monetary system emerging on the free market, no one can create money out of thin
air to acquire resources from the producers.
Money can only be obtained by purchasing it with one's goods or services.
The only exception to this rule is gold miners, who can produce new money.
But they must invest resources in finding, mining and transporting an especially scarce
commodity.
Furthermore, gold miners are productively adding to the world stock of gold for non-monetary
uses as well.
Let us indeed assume that gold has been selected as the general medium of exchange by the market,
and that the unit of account is the gold gram.
What will be the consequences of complete monetary freedom for each individual?
What of the freedom of the individual to print his own money, which we have seen to be so
disastrous in our age of fiat paper?
First, let us remember that the gold gram is the monetary unit, and that such debasing
names as dollar, franc and mark do not exist and have never existed.
Suppose that I decide to abandon the slow, difficult process of producing services for
money or of mining money, and instead decided to print my own. What would I print? I might
manufacture a paper ticket and print upon it ten Rothbards. I could then proclaim the
ticket as money and enter a store to purchase groceries with my embossed Rothbards. In the
The purely free market which I advocate, I or anyone else would have a perfect right
to do this.
And what would be the inevitable consequence?
Obviously that no one would pay any attention to the Rothbard's, which would be properly
treated as an arrogant joke.
The same would be true of any Jones's, Brown's or paper tickets printed by anyone else.
And it should be clear that the problem is not simply that few people have ever heard
of me.
If General Motors tried to pay its workers in paper tickets entitled 50 GMs, the tickets
would gain as little response.
None of these tickets would be money, and none would be considered as anything but valueless,
except perhaps a few collectors of curios.
And this is why total freedom for everyone to print money would be absolutely harmless
in a purely free market.
No one would accept these presumptuous tickets.
Why not freely fluctuating exchange rates?
Fine, let us have freely fluctuating exchange rates on our completely free market.
Let the Rothbards and Browns and GMs fluctuate at whatever rate they will exchange for gold
or for each other.
The trouble is that they would never reach this exalted state, because they would never
gain acceptance in exchange as monies at all, and therefore the problem of exchange rates
would never arise.
On a really free market, then, there would be freely fluctuating exchange rates, but
only between genuine commodity monies, since the paper name monies could never gain enough
acceptance to enter the field.
Specifically, since gold and silver have historically been the leading commodity monies, gold and
silver would probably both be monies, and would exchange at freely fluctuating rates.
groups and communities of people would pick one or the other money as their unit of accounting.
Names therefore, whatever they may be, Rothbard, Jones or even Dollar, could not have arisen
as money on the free market.
How then did such names as Dollar and Peso originate and emerge in their own right as
independent monies?
The answer is that these names invariably originated as names for units of weight of a money commodity,
either gold or silver.
In short, they began not as pure names, but as names of units of weight of particular
money commodities.
In the British pound sterling, we have a particularly striking example of a weight derivative, for
The British pound was originally just that, a pound of silver money.
Dollar began as the generally applied name of an ounce-weight of silver coined in the
16th century by a Bohemian, Count Schlieck, who lived in Joachimstal, and the name of
his highly reputed coins became Joachimstalers, or simply tollers, or dollars.
And even after a lengthy process of debasement, alteration and manipulation of these weights,
until they more and more became separated names, they still remained names of units
of weight of specie, until, in the United States, we went off the gold standard in 1933.
In short, it is incorrect to say that before 1933 the price of gold was fixed in terms
of Money.
Instead what happened was that the dollar was defined as a unit of weight approximately
one twentieth of an ounce of gold.
It is not that the dollar was set equal to a certain weight of gold.
It was that weight.
Just as any unit of weight, as for example one pound of copper is sixteen ounces of copper
and is not simply and arbitrarily set equal to 16 ounces by some individual or agency.
The monetary unit was not just a pure unit of weight, such as the ounce or the gram.
It was the unit of weight of a certain money commodity, such as gold.
The dollar was one twentieth of an ounce of gold, not of just any ounce.
And here we find a crucial flaw in the idea of a composite commodity money, which has
been overlooked.
Just as we cannot call the monetary unit an ounce or gram or pound of several different
or composite commodities, so the dollar cannot properly be the name of many different weights
of many different commodities.
The money commodity selected by the market was a single particular commodity, gold or
of Gold and Silver, and therefore the unit of that money had to be of that commodity
alone and not of some arbitrary composite.
The monetary unit was therefore always a unit of weight of a money commodity, and the names
that we know now as independent monies were names of these units of weight.
Economists, of course, admit that our modern national monies emerged originally from gold
Gold and Silver, but they are inclined to dismiss this process as a historical accident
from which we have now been happily emancipated.
But Ludwig von Mises has shown in his regression theorem that logically money can only originate
in a non-monetary commodity, chosen gradually by the market to be an ever more general medium
of exchange.
Money cannot originate as a new fiat name, either by government edict or by some form
of social compact.
The basic reason is that the demand for money on any day, X, which along with the supply
of money determines the purchasing power of the money unit on that day, itself depends
on the very existence of a purchasing power on the previous day, X minus one.
For while every other commodity on the market is useful in its own right, money, or a monetary
commodity considered in its strictly monetary use, is only useful to exchange for other
goods and services.
Hence, alone among goods, money depends for its use and demand on having a pre-existing
purchasing power.
If this is true for any day when money exists, we can push the logical regression backward
to see that ultimately the money commodity must have had a use in the day's previous
two money, that is, in the world of barter.
I want to make it clear what I am not saying.
I am not saying that fiat money once established on the ruins of gold cannot then continue
indefinitely on its own.
Unfortunately, such ultrametallists as J. Lawrence Laughlin were wrong.
Indeed, if fiat money could not continue indefinitely, I would not have to come here to plead for its abolition.
4. The Decline from Weight to Name, Monopolizing the Mint
The debacle of 1931 to 1933, when the world abandoned the gold standard,
was not a sudden shift from gold weight to paper name, it was but the last step in a lengthy,
complex process. It is important, not just for historical reasons, but for framing public policy
today to analyze the logical steps in this transformation. Each stage of this process was
caused by another act of government intervention. On the market, commodities take different forms
for Different Uses, and so on a free market, wood, gold or silver.
The basic form of processed gold is gold bullion, and ingots or bars of bullion would be used
for very large transactions.
For smaller everyday transactions, the gold would be divided into smaller pieces, coins,
hardened by the slight infusion into an alloy to prevent abrasion, accounted for in the
final weight.
It should be understood that all forms of gold would really be money, since gold exchanges
by weight.
A gold ornament is itself money as well as ornament.
It could be used in exchange, but it is simply not in a convenient shape for exchanges and
would probably be melted back into bullion before being used as money.
Even sacks of gold dust might be used for exchange in mining towns.
Of course, it costs resources to shift gold from one form to another, and therefore on
the market, coins would tend to be at a premium over the equivalent weight in bullion, since
it generally costs more to produce a coin out of bullion than to melt coins back into
bullion.
The first and most crucial act of government intervention in the market's money was its
Its assumption of the compulsory monopoly of minting, the process of transforming bullion
into coin, the pretext for socialization of minting, one which has curiously been accepted
by almost every economist, is that private minters would defraud the public on the weight
and fineness of the coins.
This argument rings peculiarly hollow when we consider the long record of governmental
and the gold debasement of the coinage and of the monetary standard.
But apart from this, we certainly know that private enterprise has been able to supply an almost infinite number of goods requiring high precision standards.
Yet nobody advocates nationalization of the machine tool industry or the electronics industry in order to safeguard these standards.
and No One Wants to Abolish All Contracts Because Some People Might Commit Fraud in
Making Them.
Surely the proper remedy for any fraud is the general law in defense of property rights.
The standard argument against private coinage is that the minting business operates by a
mysterious law of its own, Gresham's Law, where bad money drives out good, in contrast
to other areas of competition where the good product drives out the bad.
But Mises has brilliantly shown that this formulation of Gresham's Law is a misinterpretation
and that the law is a subdivision of the usual effects of price control by government.
In this case, the government's artificial fixing of an exchange rate between two or
more monies creates a shortage of the artificially undervalued money and a surplus of the overvalued
Money. Gresham's law is therefore a law of government intervention rather than one of
the free market. The state's nationalization of the minting business entered the free market
and the monetary system in many ways. One neglected point is that government minting
is subject to the same flaws, inefficiency and tyranny over the consumer as every other
Under Government Operation.
Since coins are a convenient monetary shape for daily transactions, the state's decree
that only X, Y and Z denominations shall be coined imposes a loss of utility on consumers
and substitutes uniformity for the diversity of the market.
It also begins the long disastrous slide from an emphasis on weight to an emphasis on name
or tally.
In short, under private coinage there would be a number of denominations in strict accordance
with the variety of consumer wants.
The private stamp would probably guarantee fineness rather than weight, and the coins
would circulate by weight.
But if the government decrees just a few denominations, then weight begins to be disregarded and the
name of the coin to be considered more and more.
For example, the problem persisted in Europe for centuries of what to do with old worn
coins. If a 30 gram coin was worn down to 25 grams, the simplest thing would be for
the old coin to circulate not at the old and now misleading 30 grams, but at the new, correct
25 grams. The fact that the State itself had stamped 30 grams on the new coin, however,
is somehow considered an insuperable barrier to such a simple solution.
And furthermore, much monetary debasement took place through the state's decree that
new and old coins be treated alike, with Gresham's law causing new coins to be hoarded and only
old ones to circulate.
The royal stamp on coins also gradually shifted emphasis from weight to tally by wrapping
Foreign coinage and the trappings of the mystique of state sovereignty.
For many centuries it was considered no disgrace for foreign gold and silver coins to circulate
in any area.
Monetary nationalism was yet in its infancy.
The United States used foreign coins almost exclusively through the first quarter of the
nineteenth century, but gradually foreign coins were outlawed and the name of the national
The Federal State's unit became enormously more significant.
Debasement through the centuries greatly spurred a loss of confidence in money as a unit of weight.
There is only one point to any standard of weight that it be eternally fixed.
The international meter must always be the international meter.
But using their minting monopoly, the state rulers juggled standards of monetary weight
to Their Own Economic Advantage.
It was as if the State were a huge warehouse that had accepted many pounds of copper or other commodity from its clients,
and then, when the clients came to redeem, the warehouseman suddenly announced that henceforth a pound would equal twelve ounces instead of sixteen,
and paid out only three-fourths of the copper, pocketing the other fourth for his own use.
It is perhaps superfluous to point out that any private agency doing such a thing would be promptly branded as criminal.