WEBVTT NOTE The Case for a 100% Gold Dollar, Part 1 1 00:00:00.000 --> 00:00:04.000 The Case for a 100% Gold Dollar 2 00:00:04.000 --> 00:00:06.000 Preface 3 00:00:06.000 --> 00:00:13.000 When this essay was published nearly 30 years ago, America was in the midst of the Bretton Woods system, 4 00:00:13.000 --> 00:00:22.000 a Keynesian international monetary system that had been foisted upon the world by the United States and British governments in 1945. 5 00:00:22.000 --> 00:00:28.000 The Bretton Woods system was an international dollar standard masquerading as a gold standard, 6 00:00:28.000 --> 00:00:33.720 gold standard, in order to lend the well-deserved prestige of the world's oldest and most stable 7 00:00:33.720 --> 00:00:39.600 money, gold, to the increasingly inflated and depreciated dollar. 8 00:00:39.600 --> 00:00:45.320 But this post-World War II system was only a grotesque parody of a gold standard. 9 00:00:45.320 --> 00:00:51.920 In the pre-World War I classical gold standard, every currency unit, be it dollar, pound, 10 00:00:51.920 --> 00:00:59.000 Frank or Mark was defined as a certain unit of weight of gold, thus the dollar was defined 11 00:00:59.000 --> 00:01:04.500 as approximately one twentieth of an ounce of gold, while the pound sterling was defined 12 00:01:04.500 --> 00:01:10.120 as a little less than one fourth of a gold ounce, thus fixing the exchange rate between 13 00:01:10.120 --> 00:01:16.160 the two and between all other currencies at the ratio of their weights. 14 00:01:16.160 --> 00:01:21.160 The precise ratio of gold weights amounted to defining the pound sterling as equal to 15 00:01:21.160 --> 00:01:26.640 $4.86656. 16 00:01:26.640 --> 00:01:32.320 Since every national currency was defined as being a certain weight of gold, paper francs 17 00:01:32.320 --> 00:01:38.400 or dollars or bank deposits were redeemable by the issuer, whether government or bank, 18 00:01:38.400 --> 00:01:40.520 in that weight of gold. 19 00:01:40.520 --> 00:01:46.800 In particular, these government or bank monies were redeemable on demand in gold coin, so 20 00:01:46.800 --> 00:01:52.320 that the general public could use gold in everyday transactions, providing a severe 21 00:01:52.320 --> 00:01:56.520 check upon any temptation to over-issue. 22 00:01:56.520 --> 00:02:03.320 The pyramiding of paper or bank credit upon gold was therefore subject to severe limits. 23 00:02:03.320 --> 00:02:09.200 The ability by currency holders to redeem those liabilities in gold on demand, whether 24 00:02:09.200 --> 00:02:13.240 whether by citizens of that country or by foreigners. 25 00:02:13.240 --> 00:02:19.260 If in that system, France, for example, inflated the supply of French francs, either in paper 26 00:02:19.260 --> 00:02:25.800 or in bank credit, pyramiding more francs on top of gold, the increased money supply 27 00:02:25.800 --> 00:02:32.160 and incomes in francs would drive up prices of French goods, making them less competitive 28 00:02:32.160 --> 00:02:38.480 in terms of foreign goods, increasing French imports and pushing down French exports, with 29 00:02:38.480 --> 00:02:44.200 with gold flowing out of France to pay for these balance of payments deficits. 30 00:02:44.200 --> 00:02:49.880 But the outflow of gold abroad would put increasing pressure upon the already top-heavy French 31 00:02:49.880 --> 00:02:56.000 banking system, even more top-heavy now that the dwindling gold base of the inverted money 32 00:02:56.000 --> 00:03:01.720 pyramid was forced to support and back up a greater amount of paper francs. 33 00:03:01.720 --> 00:03:08.040 Inevitably, facing bankruptcy, the French banking system would have to contract suddenly, 34 00:03:08.040 --> 00:03:12.800 driving down French prices and reversing the gold outflow. 35 00:03:12.800 --> 00:03:18.420 In this way, while the classical gold standard did not prevent boom bust cycles caused by 36 00:03:18.420 --> 00:03:24.400 inflation of money and bank credit, it at least kept that inflation and those cycles 37 00:03:24.400 --> 00:03:27.040 in close check. 38 00:03:27.040 --> 00:03:32.160 The Bretton Woods system, an elaboration of the British-induced gold exchange standard 39 00:03:32.160 --> 00:03:35.460 of the 1920s, was very different. 40 00:03:35.460 --> 00:03:39.540 The dollar was defined at one-thirty-fifth of a gold ounce. 41 00:03:39.540 --> 00:03:45.460 The dollar, however, was only redeemable in large bars of gold bullion by foreign governments 42 00:03:45.460 --> 00:03:47.540 and central banks. 43 00:03:47.540 --> 00:03:50.940 Nowhere was there redeemability in gold coin. 44 00:03:50.940 --> 00:03:57.480 Indeed, no private individual or firm could redeem in either coin or bullion. 45 00:03:57.480 --> 00:04:03.860 In fact, American citizens were prohibited from owning or holding gold at all, at home 46 00:04:03.860 --> 00:04:10.740 or Abroad, beyond very small amounts permitted to coin collectors, dentists and for industrial 47 00:04:10.740 --> 00:04:12.100 purposes. 48 00:04:12.100 --> 00:04:17.580 None of the other countries' currencies after World War II were either defined or redeemable 49 00:04:17.580 --> 00:04:18.780 in gold. 50 00:04:18.780 --> 00:04:24.660 Instead, they were defined in terms of the dollar, dollars constituting the monetary 51 00:04:24.660 --> 00:04:30.540 reserves behind francs, pounds and marks, and these national money supplies were in 52 00:04:30.540 --> 00:04:34.580 in turn pyramided on top of dollars. 53 00:04:34.580 --> 00:04:42.420 The result of this system was a seeming bonanza during the 1940s and 1950s for American policymakers. 54 00:04:42.420 --> 00:04:47.780 The United States was able to issue more paper and credit dollars while experiencing only 55 00:04:47.780 --> 00:04:50.240 small price increases. 56 00:04:50.240 --> 00:04:55.620 For as the supply of dollars increased and the United States experienced the usual balance 57 00:05:25.620 --> 00:05:51.540 The Bretton Woods system was hailed by establishment macroeconomists and financial experts as sound, noble and destined to be eternal. 58 00:05:51.540 --> 00:05:59.180 The handful of genuine gold standard advocates were derided as gold bugs, cranks and neanderthals. 59 00:05:59.180 --> 00:06:03.200 Even the small gold group was split into two parts. 60 00:06:03.200 --> 00:06:08.500 The majority, the spar group, discussed in this essay, insisted that the Bretton Woods 61 00:06:08.500 --> 00:06:16.260 system was right in one crucial respect, that gold was indeed worth $35 an ounce, and that 62 00:06:16.260 --> 00:06:21.380 therefore the United States should return to gold at that rate. 63 00:06:21.380 --> 00:06:25.420 This led by the importance of sticking to fixed definitions. 64 00:06:25.420 --> 00:06:30.860 The spar group insisted on ignoring the fact that the monetary world had changed drastically 65 00:06:30.860 --> 00:06:38.580 since 1933, and that therefore the 1933 definition of the dollar being one-thirty-fifth of a 66 00:06:38.580 --> 00:06:44.660 gold ounce no longer applied to a nation that had not been on a genuine gold standard since 67 00:06:44.660 --> 00:06:46.020 that year. 68 00:06:46.020 --> 00:06:52.220 Actually, if they had been consistent in their devotion to a fixed definition, the Spar Group 69 00:06:52.220 --> 00:06:58.360 would have advocated a return to gold at $20 an ounce, the long-standing definition before 70 00:06:58.360 --> 00:07:04.820 Franklin D. Roosevelt began tampering with the gold price in 1933. 71 00:07:04.820 --> 00:07:11.140 The Spar Group consisted of two organizations, the Economist's National Committee on Monetary 72 00:07:11.140 --> 00:07:17.740 Policy, headed by Professor Walter E. Spahr of New York University, and an allied layman's 73 00:07:17.740 --> 00:07:24.300 activist group, headed by Philip McKenna, called the Gold Standard League. Spahr expelled 74 00:07:24.300 --> 00:07:29.940 Henry Hazlitt from the former organization for the heresy of advocating return to gold 75 00:07:29.940 --> 00:07:34.060 at a far higher price or lower weight. 76 00:07:34.060 --> 00:07:39.820 The minority of gold standard advocates during the 1960s were almost all friends and followers 77 00:07:39.820 --> 00:07:46.220 of the Great Austrian School Economist Ludwig von Mises. Mises himself, and such men as 78 00:07:46.220 --> 00:07:53.420 Henry Hazlitt, de Gaulle's major economic adviser Jacques Roof, and Michelangelo Heilperin, 79 00:07:53.420 --> 00:07:59.060 pointed out that as the dollar continued to inflate, it had become absurdly undervalued 80 00:07:59.060 --> 00:08:06.540 at $35 an ounce. Gold was worth a great deal more in terms of dollars and other currencies, 81 00:08:06.540 --> 00:08:13.100 The United States declared the Misesians should return to a genuine gold standard at a realistic, 82 00:08:13.100 --> 00:08:15.180 much higher rate. 83 00:08:15.180 --> 00:08:20.340 These Austrian economists were ridiculed by all other schools of economists and financial 84 00:08:20.340 --> 00:08:26.700 writers for even mentioning that gold might even be worth the absurdly high price of $70 85 00:08:26.700 --> 00:08:28.100 an ounce. 86 00:08:28.100 --> 00:08:33.560 The Misesians predicted that the Bretton Woods system would collapse since relatively hard 87 00:08:33.560 --> 00:08:38.780 Money Countries, recognizing the continuing depreciation of the dollar, would begin to 88 00:08:38.780 --> 00:08:45.040 break the informal gentleman's rules of Bretton Woods, and insistently demand redemption in 89 00:08:45.040 --> 00:08:48.880 gold that the United States did not possess. 90 00:08:48.880 --> 00:08:54.040 The only other critics of Bretton Woods were the growing wing of establishment economists, 91 00:08:54.040 --> 00:08:56.480 the Friedmanite monetarists. 92 00:08:56.480 --> 00:09:02.020 While the monetarists also saw the monetary crises that would be entailed by fixed rates 93 00:09:02.020 --> 00:09:07.780 In a world of varying degrees of currency inflation, they were even more scornful of gold than 94 00:09:07.780 --> 00:09:10.340 their rivals, the Keynesians. 95 00:09:10.340 --> 00:09:14.060 Both groups were committed to a fiat paper standard. 96 00:09:14.060 --> 00:09:19.420 But whereas the Keynesians wanted a dollar standard cloaked in a fig leaf of gold, the 97 00:09:19.420 --> 00:09:25.540 monetarists wanted to discard such camouflage, abandon any international money and simply 98 00:09:25.540 --> 00:09:31.520 have national fiat paper monies freely fluctuating in relation to each other. 99 00:09:31.520 --> 00:09:37.080 In short, the Friedmanites were bent on abandoning all the virtues of a world money and reverting 100 00:09:37.080 --> 00:09:40.520 to international barter. 101 00:09:40.520 --> 00:09:45.360 Keynesians and Friedmanites alike maintained that the gold bugs were dinosaurs. 102 00:09:45.360 --> 00:09:50.820 Whereas Mises and his followers held that gold was giving backing to paper money, both 103 00:09:50.820 --> 00:09:56.900 the Keynesian and Friedmanite wings of the establishment maintained precisely the opposite, 104 00:09:56.900 --> 00:10:01.500 and it was sound and solid dollars that were giving value to gold. 105 00:10:01.500 --> 00:10:06.660 Gold, both groups asserted, was now worthless as a monetary metal. 106 00:10:06.660 --> 00:10:11.780 Cut dollars loose from their artificial connection to gold, they coerced in unison, and we will 107 00:10:11.780 --> 00:10:18.260 see that gold will fall to its non-monetary value, then estimated at approximately $6 108 00:10:18.260 --> 00:10:20.540 an ounce. 109 00:10:20.540 --> 00:10:26.600 There can be no genuine laboratory experiments in human affairs, but we came as close as 110 00:10:26.600 --> 00:10:33.440 as we ever will in 1968, and still more definitively in 1971. 111 00:10:33.440 --> 00:10:37.280 Here were two firm and opposing sets of predictions. 112 00:10:37.280 --> 00:10:42.560 The Misesians, who stated that if the dollar and gold were cut loose, the price of gold 113 00:10:42.560 --> 00:10:48.800 in ever more inflated dollars would zoom upward, and the massed economic establishment, from 114 00:10:48.800 --> 00:10:55.240 Friedman to Samuelson, and even including such ex-Misesians as Fritz Machlup, maintaining 115 00:10:55.240 --> 00:11:02.700 Meaning that the price of gold would, if cut free, plummet from $35 to $6 an ounce. 116 00:11:02.700 --> 00:11:08.720 The allegedly eternal system of Bretton Woods collapsed in 1968. 117 00:11:08.720 --> 00:11:14.440 The gold price kept creeping above $35 an ounce in the free gold markets of London and 118 00:11:14.440 --> 00:11:21.520 Zurich, while the Treasury, committed to maintaining the price of gold at $35, increasingly found 119 00:11:21.520 --> 00:11:26.640 itself drained of gold to keep the gold price down. 120 00:11:26.640 --> 00:11:31.920 Individual Europeans and other foreigners realized that because of this treasury commitment, 121 00:11:31.920 --> 00:11:38.700 the dollar was, for them, in essence, redeemable in gold bullion at $35 an ounce. 122 00:11:38.700 --> 00:11:44.400 Since they saw that dollars were really worth a lot less, and gold a lot more than that, 123 00:11:44.400 --> 00:11:47.640 these foreigners kept accelerating that redemption. 124 00:11:47.640 --> 00:11:57.640 Finally, in 1968, the United States and other countries agreed to scuttle much of Bretton Woods, and to establish a two-tier gold system. 125 00:11:57.640 --> 00:12:04.640 The governments and their central banks would keep the $35 redeemability among themselves as before, 126 00:12:04.640 --> 00:12:14.640 but they would seal themselves off hermetically from the pesky free gold market, allowing that price to rise or fall as it may. 127 00:12:14.640 --> 00:12:20.280 In 1971, however, the rest of the Bretton Woods system collapsed. 128 00:12:20.280 --> 00:12:25.980 Increasingly, such hard-money countries as West Germany, France and Switzerland, getting 129 00:12:25.980 --> 00:12:31.860 ever more worried about the depreciating dollar, began to break the gentlemen's rules and 130 00:12:31.860 --> 00:12:37.240 insist on redeeming their dollars in gold, as they had a right to do. 131 00:12:37.240 --> 00:12:42.380 But as soon as a substantial number of European countries were no longer content to inflate 132 00:12:42.380 --> 00:12:49.580 on top of depreciating dollars and demanded gold instead, the entire system inevitably 133 00:12:49.580 --> 00:12:50.580 collapsed. 134 00:12:50.580 --> 00:12:57.340 In effect, declaring national bankruptcy on August 15, 1971, President Nixon took the 135 00:12:57.340 --> 00:13:05.140 United States off the last shred of a gold standard and put an end to Bretton Woods. 136 00:13:05.140 --> 00:13:09.420 Gold and the dollar was thus cut loose in two stages. 137 00:13:09.420 --> 00:13:17.860 From 1968 to 1971, governments and their central banks maintained the $35 rate among themselves, 138 00:13:17.860 --> 00:13:22.220 while allowing a freely fluctuating private gold market. 139 00:13:22.220 --> 00:13:28.540 From 1971 on, even the fiction of $35 was abandoned. 140 00:13:28.540 --> 00:13:31.540 What then of the laboratory experiment? 141 00:13:31.540 --> 00:13:36.940 Flouting all the predictions of the economic establishment, there was no contest as between 142 00:13:36.940 --> 00:14:04.940 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. 143 00:14:04.940 --> 00:14:20.940 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. 144 00:14:20.940 --> 00:14:27.940 One side effect of the rising market price of gold was to ensure the total disappearance of the spar group. 145 00:14:27.940 --> 00:14:34.020 Thirty-five dollar gold is now not even a legal fiction, it is dead and buried, and 146 00:14:34.020 --> 00:14:40.340 it is safe to say that no one of any school of thought will want to resurrect it. 147 00:14:40.340 --> 00:14:47.060 Here was a clear-cut case where the Misesian forecasts were proven gloriously and spectacularly 148 00:14:47.060 --> 00:14:53.100 correct, while the Keynesian and Friedmanite predictions proved to be spectacularly wrong. 149 00:14:53.100 --> 00:14:59.180 What, it might well be asked, was the reaction of the establishment, all allegedly devoted 150 00:14:59.180 --> 00:15:04.680 to the view that science is prediction, and of Milton Friedman, who likes to denounce 151 00:15:04.680 --> 00:15:09.160 Austrians for supposedly failing empirical tests. 152 00:15:09.160 --> 00:15:14.860 Did he or they graciously acknowledge their error and hail Mises and his followers for 153 00:15:14.860 --> 00:15:16.620 being right? 154 00:15:16.620 --> 00:15:19.660 To ask that question is to answer it. 155 00:15:19.660 --> 00:15:23.740 To paraphrase Mencken, that sort of thing will happen the Saturday before the Tuesday 156 00:15:23.740 --> 00:15:27.360 before the resurrection morn. 157 00:15:27.360 --> 00:15:32.780 After a dramatically unsuccessful and short-lived experiment in fixed exchange rates without 158 00:15:32.780 --> 00:15:39.000 any international money, the world has subsisted in a monetarist paradise of national fiat 159 00:15:39.000 --> 00:15:43.220 currencies since the spring of 1973. 160 00:15:43.220 --> 00:15:49.500 The combination of almost two decades of exchange rate volatility, unprecedentedly high rates 161 00:15:49.500 --> 00:15:54.540 of peacetime inflation and the loss of an international money have disillusioned the 162 00:15:54.540 --> 00:16:00.260 economic establishment and induced nostalgia for the once acknowledged failure of Bretton 163 00:16:00.260 --> 00:16:01.960 Woods. 164 00:16:01.960 --> 00:16:06.600 One would think that the world would tire of careening back and forth between the various 165 00:16:06.600 --> 00:16:12.420 disadvantages of fixed exchange rates with paper money and fluctuating rates with paper 166 00:16:12.420 --> 00:16:19.820 for Money, and return to a classical, or still better, a 100% gold standard. 167 00:16:19.820 --> 00:16:23.540 So far, however, there is no sign of a clamor for gold. 168 00:16:23.540 --> 00:16:28.580 The only hope for gold on the monetary horizon, short of a runaway inflation in the United 169 00:16:28.580 --> 00:16:34.060 States, is the search for a convertible currency in the ruined Soviet Union. 170 00:16:34.060 --> 00:16:39.220 It may well dawn on the Russians that their now nearly worthless ruble could be rescued 171 00:16:39.220 --> 00:16:45.380 by returning to a genuine gold standard, solidly backed by the large Russian stock of the monetary 172 00:16:45.380 --> 00:16:52.100 metal. If so, Russia, in the monetary field, might well end up, ironically, pointing to 173 00:16:52.100 --> 00:16:57.700 the West, the way to a genuine free market monetary system. 174 00:16:57.700 --> 00:17:03.260 Two unquestioned articles of faith had been accepted by the entire economic establishment 175 00:17:03.260 --> 00:17:11.720 in 1962. One was a permanent commitment to paper and scorn for any talk of a gold standard. 176 00:17:11.720 --> 00:17:17.460 The other was the uncritical conviction that the American banking system, saved and bolstered 177 00:17:17.460 --> 00:17:23.020 by the structure of deposit insurance imposed by the Federal Government during the New Deal, 178 00:17:23.020 --> 00:17:28.740 was as firm as the rock of Gibraltar. Any hint that the American fractional reserve 179 00:17:28.740 --> 00:17:34.700 of Banking System might be unsound or even in danger, was considered even more crackpot 180 00:17:34.700 --> 00:17:40.740 and more neanderthal than a call for return to the gold standard. Once again, both the 181 00:17:40.740 --> 00:17:45.780 Keynesian and the Friedmanite wings of the establishment were equally enthusiastic in 182 00:17:45.780 --> 00:17:52.860 endorsing Federal Deposit Insurance and the FDIC, the Federal Deposit Insurance Corporation, 183 00:17:52.860 --> 00:17:57.660 despite the supposedly fervent Friedmanite adherence to a market economy 184 00:17:57.660 --> 00:18:01.460 free of controls, subsidies or guarantees. 185 00:18:01.460 --> 00:18:06.060 Those of us who raised the alarm against the dangers of fractional reserve banking 186 00:18:06.060 --> 00:18:09.060 were merely crying in the wilderness. 187 00:18:09.060 --> 00:18:14.160 Here again, the landscape has changed drastically in the intervening decades. 188 00:18:14.160 --> 00:18:19.260 At first, in the mid-1980s, the fractional reserve savings and loan banks 189 00:18:19.260 --> 00:18:25.460 insured by private deposit insurance firms in Ohio and Maryland collapsed from massive 190 00:18:25.460 --> 00:18:27.260 bank runs. 191 00:18:27.260 --> 00:18:34.260 But then, at the end of the 1980s, the entire S&L system went under, necessitating a bailout 192 00:18:34.260 --> 00:18:37.820 amounting to hundreds of billions of dollars. 193 00:18:37.820 --> 00:18:43.700 The problem was not simply a few banks that had engaged in unsound loans, but runs upon 194 00:18:43.700 --> 00:18:46.860 a large part of the S&L system. 195 00:18:46.860 --> 00:18:53.740 The result was admitted bankruptcy and liquidation of the federally operated FSLIC, Federal Savings 196 00:18:53.740 --> 00:19:01.060 and Loan Insurance Corporation. FSLIC was precisely to savings and loan banks what the 197 00:19:01.060 --> 00:19:08.060 FDIC is to the commercial banking system. And if FSLIC deposit insurance can prove to 198 00:19:08.060 --> 00:19:16.420 be a hopeless chimera, so too can the long-vaunted FDIC. Indeed, the financial press is filled 199 00:19:16.420 --> 00:19:23.420 are filled with stories that the FDIC might well become bankrupt without a further infusion of taxpayer funds. 200 00:19:23.420 --> 00:19:32.420 Whereas the safe level of FDIC reserves to the deposits it ensures is alleged to be 1.5%, 201 00:19:32.420 --> 00:19:40.420 the ratio is now sinking to approximately 0.2% and this is held to be cause for concern. 202 00:19:40.420 --> 00:19:47.420 The important point here is a basic change that has occurred in the psychology of the market and of the public. 203 00:19:47.420 --> 00:19:52.420 In contrast to the naive and unquestioning faith of yesteryear, 204 00:19:52.420 --> 00:19:58.420 everyone now realizes at least the possibility of collapse of the FDIC. 205 00:19:58.420 --> 00:20:05.420 At some point in the possibly near future, perhaps in the next recession and the next spate of bad bank loans, 206 00:20:05.420 --> 00:20:11.500 It might dawn upon the public that 1.5 percent is not very safe either, and that no such 207 00:20:11.500 --> 00:20:16.980 level can guard against the irresistible holocaust of the bank run. 208 00:20:16.980 --> 00:20:23.340 At that point, ignoring the usual mendacious assurances and soothing syrup of the establishment, 209 00:20:23.340 --> 00:20:27.660 the commercial banks might be plunged into their ultimate crisis. 210 00:20:27.660 --> 00:20:32.460 The United States authorities would then be faced with two stark choices. 211 00:20:32.460 --> 00:20:37.880 One would be to allow the entire banking system to collapse, along with virtually all the 212 00:20:37.880 --> 00:20:41.060 deposits and depositors in that system. 213 00:20:41.060 --> 00:20:46.960 Since, given the mindset of American politicians and their evident philosophy of too big to 214 00:20:46.960 --> 00:20:53.100 fail, it is certain that they would be forced to embrace the second alternative, massive 215 00:20:53.100 --> 00:20:59.060 hyperinflationary printing of enough cash to pay off all the bank liabilities. 216 00:20:59.060 --> 00:21:05.100 The redeposit of such cash in the banking system would bring about an immediate runaway inflation 217 00:21:05.100 --> 00:21:08.580 and a massive flight from the dollar. 218 00:21:08.580 --> 00:21:14.900 Such a future scenario, once seemingly unthinkable, is now definitely on the horizon. 219 00:21:14.900 --> 00:21:20.440 Perhaps realization of this plight will lead to increased interest not only in gold, but 220 00:21:20.440 --> 00:21:27.380 also in a 100% banking system grounded upon a revalued gold stock. 221 00:21:27.380 --> 00:21:34.200 In one sense, 100% banking is now easier to establish than it was in 1962. 222 00:21:34.200 --> 00:21:40.500 In my original essay, I called upon the banks to start issuing debentures of varying maturities, 223 00:21:40.500 --> 00:21:45.840 which could be purchased by the public and serve as productive channels for genuine savings, 224 00:21:45.840 --> 00:21:49.740 which would neither be fraudulent nor inflationary. 225 00:21:49.740 --> 00:21:55.820 Instead of depositors each believing that they have a total, say, of $1 billion of deposits, 226 00:21:55.820 --> 00:22:02.460 While they are all laying claim to only $100 million of reserves, money would be saved 227 00:22:02.460 --> 00:22:08.340 and loaned to a bank for a definite term, the bank then re-lending these savings at 228 00:22:08.340 --> 00:22:13.420 an interest differential and repaying the loan when it becomes due. 229 00:22:13.420 --> 00:22:19.140 This is what most people wrongly believe the commercial banks are doing now. 230 00:22:19.140 --> 00:22:25.800 Since the 1960s, however, precisely this system has become widespread in the sale of certificates 231 00:22:25.800 --> 00:22:33.060 Deposits of Deposit, CDs. Everyone is now familiar with purchasing CDs, and demand deposits 232 00:22:33.060 --> 00:22:40.120 can far more readily be shifted into CDs than they could have three decades ago. Furthermore, 233 00:22:40.120 --> 00:22:47.600 the rise of Money Market Mutual Funds, MMMF, in the late 1970s has created another readily 234 00:22:47.600 --> 00:22:54.200 available and widely used outlet for savings outside the commercial banking system. These 235 00:22:54.200 --> 00:22:59.840 These too are a means by which savings are being channeled into short-run credit to business, 236 00:22:59.840 --> 00:23:06.800 again without creating new money or generating a boom-bust cycle. Institutionally, it would 237 00:23:06.800 --> 00:23:14.840 now be easier to shift from fractional to 100% reserve banking than ever before. Unfortunately, 238 00:23:14.840 --> 00:23:20.480 now that conditions are riper for 100% gold than in several decades, there has been a 239 00:23:20.480 --> 00:23:27.180 a defection in the ranks of many former Misesians. In a curious flight from gold characteristic 240 00:23:27.180 --> 00:23:33.180 of all too many economists in the 20th century, bizarre schemes have proliferated and gained 241 00:23:33.180 --> 00:23:39.520 some currency, for everyone to issue his own standard money, for a separation of money 242 00:23:39.520 --> 00:23:46.360 as a unit of account from media of exchange, for a government-defined commodity index, 243 00:23:46.360 --> 00:23:48.400 and on and on. 244 00:23:48.400 --> 00:23:53.980 It is particularly odd that economists who profess to be champions of a free market economy 245 00:23:53.980 --> 00:24:00.840 should go to such twists and turns to avoid facing the plain fact that gold, that scarce 246 00:24:00.840 --> 00:24:07.960 and valuable market-produced metal, has always been and will continue to be by far the best 247 00:24:07.960 --> 00:24:11.680 money for human society. 248 00:24:11.680 --> 00:24:20.520 Murray N. Rothbard, Las Vegas, Nevada, September, 1991 249 00:24:20.520 --> 00:24:24.920 The Case for a 100% Gold Dollar 250 00:24:24.920 --> 00:24:30.320 To advocate the complete, uninhibited gold standard runs the risk in this day and age 251 00:24:30.320 --> 00:24:33.640 of being classified with the dodo bird. 252 00:24:33.640 --> 00:24:38.960 When the Roosevelt administration took us off the gold standard in 1933, the bulk of 253 00:24:38.960 --> 00:24:44.720 The nation's economists opposed the move and advocated its speedy restoration. 254 00:24:44.720 --> 00:24:51.000 Now gold is considered an absurd anachronism, a relic of a tribal fetish. 255 00:24:51.000 --> 00:24:56.600 Gold indeed still retains a certain respectability in international trade as the pre-eminent 256 00:24:56.600 --> 00:24:58.600 international money. 257 00:24:58.600 --> 00:25:02.520 Gold as a medium of foreign trade can command support. 258 00:25:02.520 --> 00:25:07.840 But while foreign trade is important, I would rather choose the far more difficult domestic 259 00:25:07.840 --> 00:25:14.680 Battleground, and argue for a genuine gold standard at home as well as abroad. Yet I 260 00:25:14.680 --> 00:25:20.160 shall not join the hardy band of current advocates of the gold standard, who call for a virtual 261 00:25:20.160 --> 00:25:27.720 restoration of the status quo anti-1933. Although that was a far better monetary system than 262 00:25:27.720 --> 00:25:34.880 what we have today, it was not, I hope to show, nearly good enough. By 1932 the gold 263 00:25:34.880 --> 00:25:39.840 The gold standard had strayed so far from purity, so far from what it could and should 264 00:25:39.840 --> 00:25:47.680 have been, that its weaknesses contributed signally to its final breakdown in 1933. 265 00:25:47.680 --> 00:25:53.200 2. Money and Freedom 266 00:25:53.200 --> 00:25:58.120 Economics cannot by itself establish an ethical system, although it provides a great deal 267 00:25:58.120 --> 00:26:04.440 of data for anyone constructing such a system. And everyone, in a sense, does so in deciding 268 00:26:04.440 --> 00:26:07.160 Depending Upon Policy. 269 00:26:07.160 --> 00:26:12.160 Economists therefore have a responsibility, when advocating policy, to apprise the reader 270 00:26:12.160 --> 00:26:15.240 or listener of their ethical position. 271 00:26:15.240 --> 00:26:21.480 I do not hesitate to say that my own policy goal is the establishment of the free market, 272 00:26:21.480 --> 00:26:27.760 of what used to be called laissez-faire, as broadly and as purely as possible. 273 00:26:27.760 --> 00:26:33.200 For this I have many reasons, both economic and non-economic, which I obviously cannot 274 00:26:33.200 --> 00:26:39.640 develop here, but I think it important to emphasize that one great desideratum in framing 275 00:26:39.640 --> 00:26:45.980 a monetary policy is to find one that is truly compatible with the free market in its widest 276 00:26:45.980 --> 00:26:48.200 and fullest sense. 277 00:26:48.200 --> 00:26:54.280 This is not only an ethical but also an economic tenet, for at the very least the economist 278 00:26:54.280 --> 00:26:59.560 who sees the free market working splendidly in all other fields should hesitate for a 279 00:26:59.560 --> 00:27:03.560 for a long time before dismissing it in the sphere of money. 280 00:27:03.560 --> 00:27:10.560 I realize that this is not a popular position to take, even in the most conservative economic circles. 281 00:27:10.560 --> 00:27:16.560 Thus, in almost its first sentence, the United States Chamber of Commerce's pamphlet series 282 00:27:16.560 --> 00:27:20.560 on the American competitive enterprise economy announced, 283 00:27:20.560 --> 00:27:23.560 money is what the government says it is. 284 00:27:23.560 --> 00:27:30.280 It is almost universally believed that money, at least, cannot be free, that it must be controlled, 285 00:27:30.280 --> 00:27:37.640 regulated, manipulated and created by government. Aside from the more strictly economic criticisms 286 00:27:37.640 --> 00:27:43.560 that I will have of this view, we should keep in mind that money, in any market economy advanced 287 00:27:43.560 --> 00:27:48.520 beyond the stage of primitive barter, is the nerve center of the economic system. 288 00:27:48.520 --> 00:27:49.520 System. 289 00:27:49.520 --> 00:27:56.320 If, therefore, the State is able to gain unquestioned control over the unit of all accounts, the 290 00:27:56.320 --> 00:28:02.800 State will then be in a position to dominate the entire economic system and the whole society. 291 00:28:02.800 --> 00:28:08.520 It will also be able to add quietly and effectively to its own wealth and to the wealth of its 292 00:28:08.520 --> 00:28:14.160 favorite groups, and without incurring the wrath that taxes often invoke. 293 00:28:14.160 --> 00:28:19.520 The state has understood this lesson since the kings of old began repeatedly to debase 294 00:28:19.520 --> 00:28:21.520 the coinage. 295 00:28:21.520 --> 00:28:23.080 3. 296 00:28:23.080 --> 00:28:28.280 The Dollar, Independent Name or Unit of Weight 297 00:28:28.280 --> 00:28:32.500 If you favor a free market, why in the world do you say that government should fix the 298 00:28:32.500 --> 00:28:34.580 price of gold? 299 00:28:34.580 --> 00:28:40.200 And if you wish to tie the dollar to a commodity, why not a market basket of commodities instead 300 00:28:40.200 --> 00:28:42.760 of only gold? 301 00:28:42.760 --> 00:28:48.480 These questions are often asked of the libertarian who favors a gold standard, but the very framing 302 00:28:48.480 --> 00:28:55.320 of the questions betrays a fundamental misconception of the nature of money and of the gold standard. 303 00:28:55.320 --> 00:29:00.520 For the crucial implicit assumption of such questions, and of nearly all current thinking 304 00:29:00.520 --> 00:29:06.180 on the subject of money, is that dollars are an independent entity. 305 00:29:06.180 --> 00:29:12.720 If dollars are indeed properly things in themselves to be bought, sold and evaluated on the market, 306 00:29:12.720 --> 00:29:18.280 Market, then it is surely true that fixing the price of gold in terms of dollars becomes 307 00:29:18.280 --> 00:29:21.320 simply an act of government intervention. 308 00:29:21.320 --> 00:29:25.920 There is, of course, no question about the fact that, in the world of today, dollars 309 00:29:25.920 --> 00:29:32.900 are an independent entity, as are pounds of sterling, francs, marks and escudos. 310 00:29:32.900 --> 00:29:37.680 If this were all, and if we simply accepted the fact of such independence and did not 311 00:29:37.680 --> 00:29:43.160 Inquire Beyond, then I would be happy to join Professors Milton Friedman, Leland Yeager 312 00:29:43.160 --> 00:29:48.400 and others of the Chicago School, and call for cutting these independent national monies 313 00:29:48.400 --> 00:29:54.520 loose from arbitrary exchange rates fixed by government, and allowing a freely fluctuating 314 00:29:54.520 --> 00:30:00.560 market in foreign exchange. But the point is that I do not think that these national 315 00:30:00.560 --> 00:30:06.240 monies should be independent entities. Why they should not stems from the very nature 316 00:30:06.240 --> 00:30:10.560 Factor and Essence of Money and of the Market Economy 317 00:30:10.560 --> 00:30:16.600 The market economy and the modern world system of division of labor operate as follows. 318 00:30:16.600 --> 00:30:21.040 A producer supplies a good or a service, selling it for money. 319 00:30:21.040 --> 00:30:26.080 He then uses the money to buy other goods or services that he needs. 320 00:30:26.080 --> 00:30:31.460 Let us then consider a hypothetical world of pure laissez-faire, where the market functions 321 00:30:31.460 --> 00:30:37.300 is freely and government has not infringed at all upon the monetary sphere. 322 00:30:37.300 --> 00:30:42.500 This system of selling goods for money would then be the only way by which an individual 323 00:30:42.500 --> 00:30:47.520 could acquire the money that he needed to obtain goods and services. 324 00:30:47.520 --> 00:30:54.060 The process would be, production leads to purchase of money, leading to sale of money 325 00:30:54.060 --> 00:30:55.900 for goods. 326 00:30:55.900 --> 00:31:01.960 A person could also receive money from producers by inheritance or other gift, but here again 327 00:31:01.960 --> 00:31:07.920 the ultimate giver must have been a producer. Furthermore, we may say that the recipient 328 00:31:07.920 --> 00:31:13.920 produced some intangible service, for instance of being a son and heir, which provided the 329 00:31:13.920 --> 00:31:20.320 reason for the giver's contribution. To those advocates of independent paper monies 330 00:31:20.320 --> 00:31:25.680 As who also champion the free market, I would address this simple question. 331 00:31:25.680 --> 00:31:31.800 Why don't you advocate the unlimited freedom of each individual to manufacture dollars? 332 00:31:31.800 --> 00:31:37.460 If dollars are really and properly things in themselves, why not let everyone manufacture 333 00:31:37.460 --> 00:31:41.100 them as they manufacture wheat and baby food? 334 00:31:41.100 --> 00:31:46.000 It is obvious that there is indeed something peculiar about such money. 335 00:31:46.000 --> 00:31:50.320 Therefore if everyone had the right to print paper dollars, everyone would print them in 336 00:31:50.320 --> 00:31:56.960 unlimited amounts, the costs being minuscule compared to the almost infinitely large denominations 337 00:31:56.960 --> 00:32:00.040 that could be printed upon the notes. 338 00:32:00.040 --> 00:32:04.680 Clearly the entire monetary system would break down completely. 339 00:32:04.680 --> 00:32:09.920 If paper dollars are to be the standard money, then almost everyone would admit that government 340 00:32:09.920 --> 00:32:16.880 must step in and acquire compulsory monopoly of money creation so as to check its unlimited 341 00:32:16.880 --> 00:32:18.120 increase. 342 00:32:18.120 --> 00:32:22.000 There is something else wrong with everyone printing his own dollars. 343 00:32:22.000 --> 00:32:27.360 For then the chain from production of goods through purchase of money to sale of money 344 00:32:27.360 --> 00:32:33.320 for goods would be broken, and anyone could create money without having to be a producer 345 00:32:33.320 --> 00:32:34.360 first. 346 00:32:34.360 --> 00:32:39.800 He could consume without producing, and thus seize the output of the economy from the 347 00:32:39.800 --> 00:32:43.080 of Genuine Producers. 348 00:32:43.080 --> 00:32:47.880 Government's compulsory monopoly of dollar creation does not solve all these problems, 349 00:32:47.880 --> 00:32:50.580 however, and even makes new ones. 350 00:32:50.580 --> 00:32:56.120 For what is there to prevent government from creating money at its own desired pace and 351 00:32:56.120 --> 00:33:00.260 thereby benefiting itself and its favored citizens? 352 00:33:00.260 --> 00:33:06.320 Once again, non-producers can create money without producing, and obtain resources at 353 00:33:06.320 --> 00:33:08.600 the expense of the producers. 354 00:33:08.600 --> 00:33:21.600 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. 355 00:33:21.600 --> 00:33:32.600 Why is it that historically the relatively free market never had to worry about people wildly setting up money factories and printing unlimited quantities? 356 00:33:32.600 --> 00:33:41.600 The American Wildcat Bank did not print money itself, but rather bank notes, supposedly redeemable in money. 357 00:33:41.600 --> 00:33:47.600 If money really means dollars and pounds and francs, then this would surely have been a problem. 358 00:33:47.600 --> 00:33:56.600 But the nub of the issue is this. On the pristine free market, money does not and cannot mean the names of paper tickets. 359 00:33:56.600 --> 00:34:04.040 Money means a certain commodity, previously useful for other purposes on the market, chosen 360 00:34:04.040 --> 00:34:09.600 over the years by that market as an especially useful and marketable commodity to serve as 361 00:34:09.600 --> 00:34:12.360 a medium for exchanges. 362 00:34:12.360 --> 00:34:18.960 No one prints dollars on the purely free market because there are in fact no dollars. 363 00:34:18.960 --> 00:34:24.440 There are only commodities, such as wheat, automobiles and gold. 364 00:34:24.440 --> 00:34:30.440 In barter, commodities are exchanged for each other, and then, gradually, a particularly 365 00:34:30.440 --> 00:34:35.320 marketable commodity is increasingly used as a medium of exchange. 366 00:34:35.320 --> 00:34:41.040 Finally, it achieves general use as a medium and becomes a money. 367 00:34:41.040 --> 00:34:46.640 I need not go through the familiar but fascinating story of how gold and silver were selected 368 00:34:46.640 --> 00:34:52.440 by the market after it had discarded such commodity monies as cows, fish hooks and 369 00:34:52.440 --> 00:34:54.320 and Iron Hose. 370 00:34:54.320 --> 00:35:00.240 And I need also not dwell on the unique qualities possessed by gold and silver that caused the 371 00:35:00.240 --> 00:35:07.280 market to select them, those qualities lovingly enunciated by all the older textbooks on money, 372 00:35:07.280 --> 00:35:14.160 high marketability, durability, portability, recognizability and homogeneity. 373 00:35:14.160 --> 00:35:20.120 Like every other commodity, the price of gold in terms of the commodities it can buy varies 374 00:35:20.120 --> 00:35:26.520 is in accordance with its supply and demand. Since the demand for gold and silver was high, 375 00:35:26.520 --> 00:35:32.280 and since their supply was low in relation to the demand, the value of each unit in terms 376 00:35:32.280 --> 00:35:39.440 of other goods was high, a most useful attribute of money. This scarcity, combined with great 377 00:35:39.440 --> 00:35:45.460 durability, meant that the annual fluctuations of supply were necessarily small, another 378 00:35:45.460 --> 00:35:51.680 Another Useful Feature of a Money Commodity Commodities on the market exchanged by their 379 00:35:51.680 --> 00:35:55.760 unit weights, and gold and silver were no exceptions. 380 00:35:55.760 --> 00:36:02.420 When someone sold copper to buy gold and then to buy butter, he sold pounds of copper, for 381 00:36:02.420 --> 00:36:07.380 ounces or grams of gold, to buy pounds of butter. 382 00:36:07.380 --> 00:36:13.040 On the free market, therefore, the monetary unit, the unit of the nation's accounts, naturally 383 00:36:13.040 --> 00:36:19.120 Money emerges as the unit of weight of the money commodity, for example, the silver ounce 384 00:36:19.120 --> 00:36:21.720 or the gold gram. 385 00:36:21.720 --> 00:36:27.480 In this monetary system emerging on the free market, no one can create money out of thin 386 00:36:27.480 --> 00:36:31.160 air to acquire resources from the producers. 387 00:36:31.160 --> 00:36:36.460 Money can only be obtained by purchasing it with one's goods or services. 388 00:36:36.460 --> 00:36:42.000 The only exception to this rule is gold miners, who can produce new money. 389 00:36:42.000 --> 00:36:47.760 But they must invest resources in finding, mining and transporting an especially scarce 390 00:36:47.760 --> 00:36:48.760 commodity. 391 00:36:48.760 --> 00:36:54.880 Furthermore, gold miners are productively adding to the world stock of gold for non-monetary 392 00:36:54.880 --> 00:36:57.580 uses as well. 393 00:36:57.580 --> 00:37:03.860 Let us indeed assume that gold has been selected as the general medium of exchange by the market, 394 00:37:03.860 --> 00:37:07.240 and that the unit of account is the gold gram. 395 00:37:07.240 --> 00:37:12.520 What will be the consequences of complete monetary freedom for each individual? 396 00:37:12.520 --> 00:37:16.680 What of the freedom of the individual to print his own money, which we have seen to be so 397 00:37:16.680 --> 00:37:19.800 disastrous in our age of fiat paper? 398 00:37:19.800 --> 00:37:26.080 First, let us remember that the gold gram is the monetary unit, and that such debasing 399 00:37:26.080 --> 00:37:32.480 names as dollar, franc and mark do not exist and have never existed. 400 00:37:32.480 --> 00:37:37.380 Suppose that I decide to abandon the slow, difficult process of producing services for 401 00:37:37.380 --> 00:37:44.380 money or of mining money, and instead decided to print my own. What would I print? I might 402 00:37:44.380 --> 00:37:50.280 manufacture a paper ticket and print upon it ten Rothbards. I could then proclaim the 403 00:37:50.280 --> 00:37:56.360 ticket as money and enter a store to purchase groceries with my embossed Rothbards. In the 404 00:37:56.360 --> 00:38:01.180 The purely free market which I advocate, I or anyone else would have a perfect right 405 00:38:01.180 --> 00:38:02.640 to do this. 406 00:38:02.640 --> 00:38:05.920 And what would be the inevitable consequence? 407 00:38:05.920 --> 00:38:10.000 Obviously that no one would pay any attention to the Rothbard's, which would be properly 408 00:38:10.000 --> 00:38:12.600 treated as an arrogant joke. 409 00:38:12.600 --> 00:38:18.640 The same would be true of any Jones's, Brown's or paper tickets printed by anyone else. 410 00:38:18.640 --> 00:38:23.000 And it should be clear that the problem is not simply that few people have ever heard 411 00:38:23.000 --> 00:38:24.080 of me. 412 00:38:24.080 --> 00:38:30.400 If General Motors tried to pay its workers in paper tickets entitled 50 GMs, the tickets 413 00:38:30.400 --> 00:38:33.160 would gain as little response. 414 00:38:33.160 --> 00:38:38.240 None of these tickets would be money, and none would be considered as anything but valueless, 415 00:38:38.240 --> 00:38:41.480 except perhaps a few collectors of curios. 416 00:38:41.480 --> 00:38:46.560 And this is why total freedom for everyone to print money would be absolutely harmless 417 00:38:46.560 --> 00:38:48.760 in a purely free market. 418 00:38:48.760 --> 00:38:52.920 No one would accept these presumptuous tickets. 419 00:38:52.920 --> 00:38:55.920 Why not freely fluctuating exchange rates? 420 00:38:55.920 --> 00:39:02.000 Fine, let us have freely fluctuating exchange rates on our completely free market. 421 00:39:02.000 --> 00:39:07.240 Let the Rothbards and Browns and GMs fluctuate at whatever rate they will exchange for gold 422 00:39:07.240 --> 00:39:09.040 or for each other. 423 00:39:09.040 --> 00:39:13.680 The trouble is that they would never reach this exalted state, because they would never 424 00:39:13.680 --> 00:39:20.240 gain acceptance in exchange as monies at all, and therefore the problem of exchange rates 425 00:39:20.240 --> 00:39:22.740 would never arise. 426 00:39:22.740 --> 00:39:27.940 On a really free market, then, there would be freely fluctuating exchange rates, but 427 00:39:27.940 --> 00:39:34.460 only between genuine commodity monies, since the paper name monies could never gain enough 428 00:39:34.460 --> 00:39:36.900 acceptance to enter the field. 429 00:39:36.900 --> 00:39:43.180 Specifically, since gold and silver have historically been the leading commodity monies, gold and 430 00:39:43.180 --> 00:39:49.860 silver would probably both be monies, and would exchange at freely fluctuating rates. 431 00:39:49.860 --> 00:39:57.100 groups and communities of people would pick one or the other money as their unit of accounting. 432 00:39:57.100 --> 00:40:03.140 Names therefore, whatever they may be, Rothbard, Jones or even Dollar, could not have arisen 433 00:40:03.140 --> 00:40:05.900 as money on the free market. 434 00:40:05.900 --> 00:40:11.740 How then did such names as Dollar and Peso originate and emerge in their own right as 435 00:40:11.740 --> 00:40:14.100 independent monies? 436 00:40:14.100 --> 00:40:21.540 The answer is that these names invariably originated as names for units of weight of a money commodity, 437 00:40:21.540 --> 00:40:24.260 either gold or silver. 438 00:40:24.260 --> 00:40:30.520 In short, they began not as pure names, but as names of units of weight of particular 439 00:40:30.520 --> 00:40:32.780 money commodities. 440 00:40:32.780 --> 00:40:38.660 In the British pound sterling, we have a particularly striking example of a weight derivative, for 441 00:40:38.660 --> 00:40:44.900 The British pound was originally just that, a pound of silver money. 442 00:40:44.900 --> 00:40:49.940 Dollar began as the generally applied name of an ounce-weight of silver coined in the 443 00:40:49.940 --> 00:40:56.420 16th century by a Bohemian, Count Schlieck, who lived in Joachimstal, and the name of 444 00:40:56.420 --> 00:41:04.500 his highly reputed coins became Joachimstalers, or simply tollers, or dollars. 445 00:41:04.500 --> 00:41:10.620 And even after a lengthy process of debasement, alteration and manipulation of these weights, 446 00:41:10.620 --> 00:41:16.300 until they more and more became separated names, they still remained names of units 447 00:41:16.300 --> 00:41:24.220 of weight of specie, until, in the United States, we went off the gold standard in 1933. 448 00:41:24.220 --> 00:41:30.960 In short, it is incorrect to say that before 1933 the price of gold was fixed in terms 449 00:41:30.960 --> 00:41:33.000 of Money. 450 00:41:33.000 --> 00:41:38.680 Instead what happened was that the dollar was defined as a unit of weight approximately 451 00:41:38.680 --> 00:41:41.680 one twentieth of an ounce of gold. 452 00:41:41.680 --> 00:41:46.120 It is not that the dollar was set equal to a certain weight of gold. 453 00:41:46.120 --> 00:41:48.080 It was that weight. 454 00:41:48.080 --> 00:41:55.360 Just as any unit of weight, as for example one pound of copper is sixteen ounces of copper 455 00:41:55.360 --> 00:42:03.800 and is not simply and arbitrarily set equal to 16 ounces by some individual or agency. 456 00:42:03.800 --> 00:42:09.940 The monetary unit was not just a pure unit of weight, such as the ounce or the gram. 457 00:42:09.940 --> 00:42:15.000 It was the unit of weight of a certain money commodity, such as gold. 458 00:42:15.000 --> 00:42:20.360 The dollar was one twentieth of an ounce of gold, not of just any ounce. 459 00:42:20.360 --> 00:42:25.880 And here we find a crucial flaw in the idea of a composite commodity money, which has 460 00:42:25.880 --> 00:42:27.840 been overlooked. 461 00:42:27.840 --> 00:42:33.820 Just as we cannot call the monetary unit an ounce or gram or pound of several different 462 00:42:33.820 --> 00:42:40.760 or composite commodities, so the dollar cannot properly be the name of many different weights 463 00:42:40.760 --> 00:42:43.320 of many different commodities. 464 00:42:43.320 --> 00:42:49.560 The money commodity selected by the market was a single particular commodity, gold or 465 00:42:49.560 --> 00:42:54.160 of Gold and Silver, and therefore the unit of that money had to be of that commodity 466 00:42:54.160 --> 00:42:59.160 alone and not of some arbitrary composite. 467 00:42:59.160 --> 00:43:05.160 The monetary unit was therefore always a unit of weight of a money commodity, and the names 468 00:43:05.160 --> 00:43:11.200 that we know now as independent monies were names of these units of weight. 469 00:43:11.200 --> 00:43:17.440 Economists, of course, admit that our modern national monies emerged originally from gold 470 00:43:17.440 --> 00:43:22.960 Gold and Silver, but they are inclined to dismiss this process as a historical accident 471 00:43:22.960 --> 00:43:26.720 from which we have now been happily emancipated. 472 00:43:26.720 --> 00:43:33.200 But Ludwig von Mises has shown in his regression theorem that logically money can only originate 473 00:43:33.200 --> 00:43:39.720 in a non-monetary commodity, chosen gradually by the market to be an ever more general medium 474 00:43:39.720 --> 00:43:41.760 of exchange. 475 00:43:41.760 --> 00:43:47.480 Money cannot originate as a new fiat name, either by government edict or by some form 476 00:43:47.480 --> 00:43:49.560 of social compact. 477 00:43:49.560 --> 00:43:55.660 The basic reason is that the demand for money on any day, X, which along with the supply 478 00:43:55.660 --> 00:44:01.720 of money determines the purchasing power of the money unit on that day, itself depends 479 00:44:01.720 --> 00:44:08.060 on the very existence of a purchasing power on the previous day, X minus one. 480 00:44:08.060 --> 00:44:14.580 For while every other commodity on the market is useful in its own right, money, or a monetary 481 00:44:14.580 --> 00:44:21.140 commodity considered in its strictly monetary use, is only useful to exchange for other 482 00:44:21.140 --> 00:44:22.860 goods and services. 483 00:44:22.860 --> 00:44:29.900 Hence, alone among goods, money depends for its use and demand on having a pre-existing 484 00:44:29.900 --> 00:44:32.020 purchasing power. 485 00:44:32.020 --> 00:44:38.620 If this is true for any day when money exists, we can push the logical regression backward 486 00:44:38.620 --> 00:44:43.900 to see that ultimately the money commodity must have had a use in the day's previous 487 00:44:43.900 --> 00:44:48.180 two money, that is, in the world of barter. 488 00:44:48.180 --> 00:44:51.340 I want to make it clear what I am not saying. 489 00:44:51.340 --> 00:44:57.580 I am not saying that fiat money once established on the ruins of gold cannot then continue 490 00:44:57.580 --> 00:45:00.020 indefinitely on its own. 491 00:45:00.020 --> 00:45:05.540 Unfortunately, such ultrametallists as J. Lawrence Laughlin were wrong. 492 00:45:05.540 --> 00:45:15.060 Indeed, if fiat money could not continue indefinitely, I would not have to come here to plead for its abolition. 493 00:45:15.060 --> 00:45:22.660 4. The Decline from Weight to Name, Monopolizing the Mint 494 00:45:22.660 --> 00:45:28.980 The debacle of 1931 to 1933, when the world abandoned the gold standard, 495 00:45:28.980 --> 00:45:36.340 was not a sudden shift from gold weight to paper name, it was but the last step in a lengthy, 496 00:45:36.340 --> 00:45:43.620 complex process. It is important, not just for historical reasons, but for framing public policy 497 00:45:43.620 --> 00:45:50.740 today to analyze the logical steps in this transformation. Each stage of this process was 498 00:45:50.740 --> 00:45:57.540 caused by another act of government intervention. On the market, commodities take different forms 499 00:45:57.540 --> 00:46:03.220 for Different Uses, and so on a free market, wood, gold or silver. 500 00:46:03.220 --> 00:46:09.900 The basic form of processed gold is gold bullion, and ingots or bars of bullion would be used 501 00:46:09.900 --> 00:46:13.000 for very large transactions. 502 00:46:13.000 --> 00:46:19.340 For smaller everyday transactions, the gold would be divided into smaller pieces, coins, 503 00:46:19.340 --> 00:46:24.900 hardened by the slight infusion into an alloy to prevent abrasion, accounted for in the 504 00:46:24.900 --> 00:46:26.900 final weight. 505 00:46:26.900 --> 00:46:32.620 It should be understood that all forms of gold would really be money, since gold exchanges 506 00:46:32.620 --> 00:46:33.620 by weight. 507 00:46:33.620 --> 00:46:38.660 A gold ornament is itself money as well as ornament. 508 00:46:38.660 --> 00:46:44.960 It could be used in exchange, but it is simply not in a convenient shape for exchanges and 509 00:46:44.960 --> 00:46:50.680 would probably be melted back into bullion before being used as money. 510 00:46:50.680 --> 00:46:55.780 Even sacks of gold dust might be used for exchange in mining towns. 511 00:46:55.780 --> 00:47:01.300 Of course, it costs resources to shift gold from one form to another, and therefore on 512 00:47:01.300 --> 00:47:07.080 the market, coins would tend to be at a premium over the equivalent weight in bullion, since 513 00:47:07.080 --> 00:47:13.100 it generally costs more to produce a coin out of bullion than to melt coins back into 514 00:47:13.100 --> 00:47:15.420 bullion. 515 00:47:15.420 --> 00:47:20.300 The first and most crucial act of government intervention in the market's money was its 516 00:47:20.300 --> 00:47:26.100 Its assumption of the compulsory monopoly of minting, the process of transforming bullion 517 00:47:26.100 --> 00:47:33.300 into coin, the pretext for socialization of minting, one which has curiously been accepted 518 00:47:33.300 --> 00:47:39.060 by almost every economist, is that private minters would defraud the public on the weight 519 00:47:39.060 --> 00:47:41.860 and fineness of the coins. 520 00:47:41.860 --> 00:47:47.140 This argument rings peculiarly hollow when we consider the long record of governmental 521 00:47:47.140 --> 00:47:51.140 and the gold debasement of the coinage and of the monetary standard. 522 00:47:51.140 --> 00:48:02.140 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. 523 00:48:02.140 --> 00:48:11.140 Yet nobody advocates nationalization of the machine tool industry or the electronics industry in order to safeguard these standards. 524 00:48:11.140 --> 00:48:16.580 and No One Wants to Abolish All Contracts Because Some People Might Commit Fraud in 525 00:48:16.580 --> 00:48:18.500 Making Them. 526 00:48:18.500 --> 00:48:25.100 Surely the proper remedy for any fraud is the general law in defense of property rights. 527 00:48:25.100 --> 00:48:29.820 The standard argument against private coinage is that the minting business operates by a 528 00:48:29.820 --> 00:48:37.060 mysterious law of its own, Gresham's Law, where bad money drives out good, in contrast 529 00:48:37.060 --> 00:48:42.700 to other areas of competition where the good product drives out the bad. 530 00:48:42.700 --> 00:48:48.540 But Mises has brilliantly shown that this formulation of Gresham's Law is a misinterpretation 531 00:48:48.540 --> 00:48:54.740 and that the law is a subdivision of the usual effects of price control by government. 532 00:48:54.740 --> 00:48:59.740 In this case, the government's artificial fixing of an exchange rate between two or 533 00:48:59.740 --> 00:49:06.920 more monies creates a shortage of the artificially undervalued money and a surplus of the overvalued 534 00:49:06.920 --> 00:49:13.360 Money. Gresham's law is therefore a law of government intervention rather than one of 535 00:49:13.360 --> 00:49:19.380 the free market. The state's nationalization of the minting business entered the free market 536 00:49:19.380 --> 00:49:25.320 and the monetary system in many ways. One neglected point is that government minting 537 00:49:25.320 --> 00:49:31.600 is subject to the same flaws, inefficiency and tyranny over the consumer as every other 538 00:49:31.600 --> 00:49:34.100 Under Government Operation. 539 00:49:34.100 --> 00:49:39.720 Since coins are a convenient monetary shape for daily transactions, the state's decree 540 00:49:39.720 --> 00:49:47.920 that only X, Y and Z denominations shall be coined imposes a loss of utility on consumers 541 00:49:47.920 --> 00:49:52.620 and substitutes uniformity for the diversity of the market. 542 00:49:52.620 --> 00:49:59.140 It also begins the long disastrous slide from an emphasis on weight to an emphasis on name 543 00:49:59.140 --> 00:50:01.180 or tally. 544 00:50:01.180 --> 00:50:07.060 In short, under private coinage there would be a number of denominations in strict accordance 545 00:50:07.060 --> 00:50:10.300 with the variety of consumer wants. 546 00:50:10.300 --> 00:50:15.660 The private stamp would probably guarantee fineness rather than weight, and the coins 547 00:50:15.660 --> 00:50:18.340 would circulate by weight. 548 00:50:18.340 --> 00:50:24.900 But if the government decrees just a few denominations, then weight begins to be disregarded and the 549 00:50:24.900 --> 00:50:29.300 name of the coin to be considered more and more. 550 00:50:29.300 --> 00:50:34.740 For example, the problem persisted in Europe for centuries of what to do with old worn 551 00:50:34.740 --> 00:50:42.060 coins. If a 30 gram coin was worn down to 25 grams, the simplest thing would be for 552 00:50:42.060 --> 00:50:49.440 the old coin to circulate not at the old and now misleading 30 grams, but at the new, correct 553 00:50:49.440 --> 00:50:57.340 25 grams. The fact that the State itself had stamped 30 grams on the new coin, however, 554 00:50:57.340 --> 00:51:02.580 is somehow considered an insuperable barrier to such a simple solution. 555 00:51:02.580 --> 00:51:07.620 And furthermore, much monetary debasement took place through the state's decree that 556 00:51:07.620 --> 00:51:14.680 new and old coins be treated alike, with Gresham's law causing new coins to be hoarded and only 557 00:51:14.680 --> 00:51:17.580 old ones to circulate. 558 00:51:17.580 --> 00:51:23.940 The royal stamp on coins also gradually shifted emphasis from weight to tally by wrapping 559 00:51:23.940 --> 00:51:28.500 Foreign coinage and the trappings of the mystique of state sovereignty. 560 00:51:28.500 --> 00:51:34.120 For many centuries it was considered no disgrace for foreign gold and silver coins to circulate 561 00:51:34.120 --> 00:51:36.180 in any area. 562 00:51:36.180 --> 00:51:39.180 Monetary nationalism was yet in its infancy. 563 00:51:39.180 --> 00:51:43.620 The United States used foreign coins almost exclusively through the first quarter of the 564 00:51:43.620 --> 00:51:49.260 nineteenth century, but gradually foreign coins were outlawed and the name of the national 565 00:51:49.260 --> 00:51:54.260 The Federal State's unit became enormously more significant. 566 00:51:54.260 --> 00:52:01.260 Debasement through the centuries greatly spurred a loss of confidence in money as a unit of weight. 567 00:52:01.260 --> 00:52:07.260 There is only one point to any standard of weight that it be eternally fixed. 568 00:52:07.260 --> 00:52:12.260 The international meter must always be the international meter. 569 00:52:12.260 --> 00:52:17.260 But using their minting monopoly, the state rulers juggled standards of monetary weight 570 00:52:17.260 --> 00:52:19.260 to Their Own Economic Advantage. 571 00:52:19.260 --> 00:52:27.260 It was as if the State were a huge warehouse that had accepted many pounds of copper or other commodity from its clients, 572 00:52:27.260 --> 00:52:37.260 and then, when the clients came to redeem, the warehouseman suddenly announced that henceforth a pound would equal twelve ounces instead of sixteen, 573 00:52:37.260 --> 00:52:43.260 and paid out only three-fourths of the copper, pocketing the other fourth for his own use. 574 00:52:43.260 --> 00:52:51.260 It is perhaps superfluous to point out that any private agency doing such a thing would be promptly branded as criminal.