Gary North's THE GOLD WARS Issue #13
Gold's
Dust vs Dusty Gold
Gary North
January 13, 2005
The best way
for a nation to build confidence in its currency is not to bury
lots of gold in the ground; it is, instead, to pursue responsible
financial policies. If a country does so consistently enough,
it's likely to find its gold growing dusty from disuse.
-Editorial, WALL
STREET JOURNAL (July 8, 1969)
This statement
is true, but it is unlikely that the editorial writer all those
years ago understood why it is true.
When it comes
to wise economic policy-making, let us get one thing straight:
it doesn't come like manna from heaven. It isn't a free lunch.
It comes only because there are political sanctions that reward
government officials who devise and enforce policies that make
consumers better off, and punish government officials who devise
and enforce policies that make consumers worse off. These institutional
sanctions must be consistent with the laws of economics -- and
there really are laws of economics. If the policies violate economics
law, then nation will get irresponsible financial policies, and
lots of other kinds of irresponsible government policies.
The editorial
writer implied that dusty gold is a silly thing to pursue. He
also implied that a nation doesn't need a supply of gold if it
pursues wise financial policies. What he was really saying is
that gold has nothing to do with wise financial policies. A gold
standard is therefore irrelevant. It is an anachronism. It gathers
dust, like gold itself.
I think otherwise.
I think dusty gold is a great thing. I believe that gold bullion
is good. I even believe that gold dust is good. But dust on a
government's supply of gold is even better, assuming that the
public can legally obtain this gold on demand, as is the case
with a gold coin standard. Permit me to explain why I believe
this.
But first,
let me mention a fact of political life: the Establishment hates
gold.
THE ESTABLISHMENT
VS. GOLD
Hostility to
the traditional gold coin standard has been the mark of Establishment
economists and editorialists ever since the U.S. government confiscated
Americans' gold in 1933. The Establishment hates gold. Its spokesmen
ridicule gold. They want responsible fiscal and monetary policies,
of course -- all of them publicly assure of this fact, decade
after decade -- but the national debt just keeps getting bigger,
and price inflation never ceases, also decade after decade. Somehow,
fiscal and monetary responsibility just never seem to arrive.
Why do they
hate gold? Because gold represents the public. More than this:
gold is a powerful tool of control by the public. A gold coin
standard places in the hands of consumers a means of controlling
the national money supply. A gold coin standard transfers monetary
policy-making from central bankers and government officials to
the common man, who can walk into a bank and demand payment for
paper or digital currency in gold coins. This is the ultimate
form of democracy, and the Establishment hates it. The Establishment
can and does control political affairs. They make democracy work
for them. They are masters of political manipulation. But they
cannot control long-run monetary policy in a society that has
a gold coin standard. They hate gold because they hate the sovereignty
of consumers.
We are also
officially assured by Establishment-paid experts that fiscal
and monetary responsibility has nothing to do with a gold coin
standard, in the same way that international price stability,
1815-1914, had nothing to do with the presence of a gold coin
standard. A gold coin standard would not provide fiscal responsibility,
we are told. This is a universal affirmation, the shared confession
of faith that unites all branches of the Church of Perpetual
Re-election.
On this one
thing, the economists are agreed, whether Keynesians, Friedmanites,
or supply siders: gold should have no role to play in today's
monetary system. (A few supply siders do allow a role for bullion
gold in central bank vaults -- without full redeemability by
the public -- as a psychological confidence-builder in a pseudo-gold
standard economy. They do not call for full gold coin redeemability
by the public, or 100% reserve banking.)
The WALL STREET
JOURNAL is no exception to this rule. It thinks that we can somehow
get fiscal responsibility without a gold standard. Nevertheless,
the editorial writer stumbled upon a very important point. The
gathering of dust on a government's stock of monetary gold is
as good an indicator of fiscal responsibility as would be the
addition of gold dust to the stock of monetary gold.
ENOUGH IS
ENOUGH
New money,
including newly mined gold, confers no net benefit to society.
New money does confer benefits on those people who get access
to it early, but it does this at the expense of late-comers who
get access to the new money late in the process. Those people
who have early access to the new money gain a benefit: they can
spend the newly mined (or newly printed) money at yesterday's
prices. Competing consumers who do not have immediate access
to the new money are forced to restrict their purchases as supplies
of available goods go down and/or prices of the goods increase.
Thus, those people on fixed incomes cannot buy as much as they
would have been able to buy had the new money not come into existence.
Some people
benefit in the short run; others lose. There is no way that an
economist can say scientifically that society has benefited from
an increase in the money supply. He cannot add up losses and
gains inside people's minds. There is no such standard of measurement.
Murray Rothbard made this point a generation ago.
Thus, we see
that while an increase in the money supply, like an increase
in the supply of any good, lowers its price, the change does
not - unlike other goods -- confer a social benefit. The public
at large is not made richer. Whereas new consumer or capital
goods add to standards of living, new money only raises prices
-- i.e., dilutes its own purchasing power. The reason for this
puzzle is that money is only useful for its exchange-value. Other
goods have "real" utilities, so that an increase in
their supply satisfies more consumer wants. Money haws only utility
for prospective exchange; its utility lies in its exchange-value,
or "purchasing power." Our law -- that an increase
in money does not confer a social benefit -- stems from its unique
use as a medium of exchange.
[Murray N.
Rothbard, WHAT HAS GOVERNMENT DONE TO OUR MONEY? (1964), p. 13.
Available from the Mises Institute: http://www.mises.org.]
Rothbard's
point is vital: an increase of the total stock of money cannot
be said, a priori, to have increased a nation's aggregate social
wealth. This implication has a crucial policy implication: the
existing supply of money is sufficient to maximize the wealth
of nations. Enough is enough. "Stop the presses!"
An economist
who says that society has benefitted from an increase in the
money supply has an unstated presupposition: it is socially beneficial
to aid one group in the community (the miners, or those printing
the money) at the expense of another group (those on fixed incomes).
This is hardly neutral economic analysis. Let us assume a wild,
unlikely hypothesis: the supply of dollars will someday be tied,
both legally and in fact, to the stock of gold in the Federal
Reserve System' vault. Let us also assume that banks can issue
dollars only for gold deposited. For each ounce of gold deposited
in a bank, a paper receipt called a "dollar" is issued
by the bank to the person bringing in the gold for deposit. At
any time, the bearer of this IOU can redeem a paper "dollar"
for an ounce of gold. By definition, one dollar is now worth
an ounce of gold, and vice versa.
What would
take place if an additional supply of new gold is made by some
producer, or if the government (illegally) should spend an unbacked
paper dollar? Rothbard describes the results.
An increase
in the money supply, then, only dilutes the effectiveness of
each gold ounce; on the other hand, a fall in the supply of money
raises the poser of each gold ounce to do its work. [Rothbard
is speaking of the long-run effects in the aggregate.] We come
to the startling truth that it doesn't matter what the supply
of money is. Any supply will do as well as any other supply.
The free market will simply adjust by changing the purchasing-power,
or effectiveness of its gold unit. There is no need whatever
for any planned increase in the money supply, for the supply
to rise to offset any condition, or to follow any artificial
criteria. More money does not supply more capital, is not more
productive, does not permit "economic growth."
Once a society
has a given supply of money in its national economy, people no
longer need to worry about the efficiency of the monetary unit.
People will use money as an economic accounting device in the
most efficient manner possible, given the prevailing legal, institutional,
and religious structure. In fact, by adding to the existing money
supply in any appreciable fashion, banks bring into existence
the "boom-bust" phenomenon of inflation and depression.
The old cliche, "let well enough alone," is quite accurate
in the area of monetary policy.
This leads
to a startling conclusion: the existing money supply is sufficient
for all economic transactions. We don't need any more money.
(Well, actually, I do. But you don't.) We also don't need a Federal
Reserve System to manage the money supply. We don't need a government
rule that compels the Federal Reserve or the Treasury to increase
the money supply by 3% per annum or maybe 5% (Friedman's suggested
rule). Besides, who would enforce such a rule? It's a rule for
rulers enforced by rulers.
Then what do
we need? Freedom of contract and the enforcement of contracts.
Nothing else? Only laws that prohibit fraud. To issue a receipt
for which there is nothing in reserve to back up the receipt
is fraudulent.
WHY GOLD?
A productive
gold miner, by slightly diluting the purchasing power of the
gold-based monetary unit, achieves short-run benefits for himself.
He gets a little richer. Those people on fixed incomes now face
a slightly restricted supply of goods available for purchase
at the older, less inflated, price levels. Miners and mine owners
bought these goods with their newly mined gold. This is a fact
of life. But this is a minor redistribution -- miner redistribution
-- of wealth compared to the effects of a government monopoly
over money. The compulsion of government vastly magnifies the
redistribution effects of monetary inflation. It is cheaper to
print money than to mine gold.
We live in
an imperfect universe. We are not perfect creatures, possessing
omniscience, omnipotence, and perfect moral natures. We therefore
find ourselves in a world in which some people will choose actions
which will benefit them in the short run, but which may harm
others in the long run. Our judicial task is to minimize these
effects. We should pursue a world of minor imperfections rather
than accept a world with major imperfections. But we would be
wise not to demand political perfection. Messianic societies
never attain perfection. They attain only tyranny.
To compare
a gold standard with perfection -- zero monetary expansion --
misses the point. Perfection is not an available option. Instead,
we should compare the effects of a gold coin standard, where
no one can issue receipts for gold unless he owns gold, with
the effects of a monetary system in which the government forces
people to accept its money in payment for all debts, goods, and
services. Compared to the cost of creating a blip on a computer,
the costs of mining are huge. The rate of monetary inflation
will be vastly lower under a pure gold coin standard with 100%
reserve banking than under a credit money standard run by central
bankers through the fractionally reserved commercial banks.
Professor Mises
defended the gold standard as a great foundation of our liberties
precisely because gold is so expensive to mine. Mining expenses
reduce the rate of monetary inflation. The gold standard is not
a perfect arrangement, he said, but its effects are far less
deleterious than the power of a monopolistic State or a State-licensed
banking system to create credit money. The economic effects of
gold are far more predictable, because they are more regular.
Geology acts as a greater barrier to monetary inflation than
can any man-made institutional arrangement. [Ludwig von Mises,
THE THEORY OF MONEY AND CREDIT (New Haven, Connecticut: Yale
University Press, [1912] 1951), pp. 209-11, 238-40.] The booms
will be smaller, the busts will be less devastating, and the
redistribution involved in all inflation (or deflation, for that
matter) can be more easily planned for.
On all this,
see my on-line book, MISES ON MONEY.
http://www.lewrockwell.com/north/mom.html
Nature is niggardly.
This is a blessing for us in the area of monetary policy, assuming
that we limit ourselves to a monetary system legally tied to
specie metals. We would not need gold if, and only if, we could
be guaranteed that the government or banks would not tamper with
the supply of money in order to gain their own short-run benefits.
For as long as that temptation exists, gold (or silver, or platinum)
will alone serve as a protection against policies of mass inflation.
HOW WOULD
THE SYSTEM WORK?
The collective
entity known as the nation, as well as another collective, the
State, will always have a desire to increase its percentage of
the world's economic goods. In international terms, this means
that there will always be an incentive for a nation to mine all
the gold that it can. While it is true that economics cannot
tell us that an increase in the world's gold supply will result
in an increase in aggregate social utility, economic reasoning
does inform us that the nation which gains access to newly mined
gold at the beginning will able to buy at yesterday's prices.
World prices will rise in the future as a direct result, but
he who gets there "fustest with the mostest" does gain
an advantage. What applies to an individual citizen miner applies
equally to national entities.
So much for
technicalities. What about the so-called "gold stock"?
In a free market society that permits all of its residents to
own gold and gold coins, there will be a whole host of gold coins,
there will be a whole host of gold stocks. (By "stock,"
I mean gold hoard, not a share in some company.) Men will own
stocks of gold, institutions like banks will have stocks of gold,
and all levels of civil government -- city, county, national
-- will possess gold stocks. All of these institutions, including
the family, could issue paper IOU slips for gold, although the
slips put out by known institutions would no doubt circulate
with greater ease (if what is known about them is favorable).
The "national stock of gold" in such a situation would
refer to the combined individual stocks.
Within this
hypothetical world, let us assume that the United States Government
wishes to purchase a fleet of German automobiles for its embassy
in Germany. The American people are therefore taxed to make the
funds available. Our government now pays the German central bank
(or similar middleman) paper dollars in order to purchase German
marks. Because, in our hypothetical world, all national currencies
are 100 per cent gold-backed, this would be an easy arrangement.
Gold would be equally valuable everywhere (excluding shipping
costs and, of course, the newly mined gold which keeps upsetting
our analysis), so the particular paper denominations are not
too important. Result: the German firm gets its marks, the American
embassy gets its cars, and the middleman has a stock of paper
American dollars.
These bills
are available for the purchase of American goods or American
gold directly by the middleman, but he, being a specialist working
the area of currency exchange, is more likely to make those dollars
available (at a fee) for others who want them. They, in turn,
can buy American goods, services, or gold. This should be clear
enough.
PAPER PROMISES
ARE EASILY BROKEN
Money is useful
only for exchange, and this is especially true of paper money
(gold, at least, can be made into wedding rings, earrings, nose
rings, and so forth). If there is no good reason to mistrust
the American government -- we are speaking hypothetically here
-- the paper bills will probably be used by professional importers
and exporters to facilitate the exchange of goods. The paper
will circulate, and no one bothers with the gold. Gold just sits
there in the vaults, gathering dust. As long as the governments
of the world refuse to print more paper bills than they have
gold to redeem them, their gold stays put.
It would be
wrong to say that gold has no economic function, however. It
does, and the fact that we must forfeit storage space and payment
for security systems testifies to that valuable function. It
keeps governments from tampering with their domestic monetary
systems.
Obviously,
we do not live in the hypothetical world which I have sketched.
What we see today is a short- circuited international gold standard.
National governments have monopolized the control of gold for
exchange purposes; they can now print more IOU slips than they
have gold. Domestic populations cannot redeem their slips. The
governments create more and more slips, the banks create more
and more credit, and we are deluged in money of decreasing purchasing
power. The rules of the game have been shifted to favor the expansion
of centralized power. The laws of economics, however, are still
in effect.
TRADING
WITHOUT GOLD
One can easily
imagine a situation in which a nation has a tiny gold reserve
in its national treasury. If its people produce, say, bananas,
and they limit their purchases of foreign goods by what
they receives in foreign exchange for exported bananas, the national
treasury needs to transfer no gold. The nation's currency unit
has purchasing power (exported bananas) apart from any gold reserves.
If, for some
reason, it wants to increase its national stock of gold (perhaps
the government plans to fight a war, and it wants a reserve of
gold to buy goods in the future, since gold stores more conveniently
than bananas), the government can get the gold. All it needs
to do is take the foreign money gained through the sale of bananas
and use it to buy gold instead of other economic goods. This
will involve taxation, of course, but that is what all wars involve.
If you spend less than you receive, you are saving the residual.
A government can save gold. That's really what a gold reserve
is: a savings account.
This is a highly
simplified example. I use it to convey a basic economic fact:
if you produce a good (other than gold), and you use it to export
in order to gain foreign currency, than you do not need a gold
reserve. You have chosen to hoard foreign currency instead of
gold. That applies to citizens and governments equally well.
What, then,
is the role of gold in international trade? Free market economist
Patrick Boarman (the translator of Wilhelm Roepke's ECONOMICS
OF THE FREE SOCIETY) explained the mechanism of international
exchange in THE WALL STREET JOURNAL (May 10, 1965).
The function
of international reserves is NOT to consummate international
transactions. These are, on the contrary, financed by ordinary
commercial credit supplied either by exporters, or in some cases
by international institutions. Of such commercial credit there
is in individual countries normally no shortage, or internal
credit policy can be adjusted to make up for any un-toward tightness
of funds. In contrast, international reserves are required to
finance only the inevitable net differences between the value
of a country's total imports and its total exports; their purpose
is not to finance trade itself, but net trade imbalances.
The international
gold standard, like the free market's rate of interest, served
as an equilibrating device. I think it will again someday. What
it is supposed to equilibrate is not gross world trade but net
trade imbalances. Boarman's words throw considerable light on
the perpetual discussion concerning the increase of "world
monetary liquidity."
A country will
experience a net movement of its reserves, in or out, only where
its exports of goods and services and imports of capital are
insufficient to offset its imports of goods and services and
exports of capital. Equilibrium in the balance of payments is
attained not by increasing the quantity of a mythical "world
money" but by establishing conditions in which autonomous
movements of capital will offset the net results, positive and
negative, of the balance of trade.
Some trade
imbalances are temporarily inevitable. Natural or social disasters
take place, and these may reduce a nation's productivity for
a period of time. The nation's "savings" -- its gold
stock -- can then be used to purchase goods and services from
abroad. Specifically, it will purchase with gold all those goods
and services needed above those available in trade for current
exports. If a nation plans to fight a long war, or if it expects
domestic rioting, then, of course, it should have a larger gold
stock than a nation which expects peaceful conditions. If a nation
plans to print up millions and even billions of IOU slips in
order to purchase foreign goods, it had better have a large gold
stock to redeem the slips. But that is merely another kind of
trade imbalance, and is covered by Boarman's exposition.
THE GUARDS
A nation that
relies on the free market to balance supply and demand, imports
and exports, production and consumption, will not need a large
gold stock to encourage trade. Gold's function is to act as a
restraint on government's spending more than the government takes
in. If a government takes in revenues from its citizenry, and
then exports the paper bills or fully baked credit to pay for
some foreign good, then there is no necessity for the government
to deplete its semi-permanent gold reserves. The gold will sit
idle -- idle in the sense of physical movement, but not idle
in the sense of being economically irrelevant.
The fact that
a nation's gold does not move is no more (and no less) significant
than the fact that the guards who are protecting this gold can
sit quietly on the job if the storage system is really efficient.
Gold in a nation's treasury guards its citizens from that old
messianic dream of getting something for nothing. This is also
the function of the guards who protect the gold. The guard who
is not very important in a "thief-proof" building is
also a kind of "equilibrating device." He is there
just in case the over-all system should experience a temporary
failure.
A nation that
permits the free market to function is, by analogy, also "thief-proof"
Everyone who consumes is required by the system to offer something
in exchange. During economic emergencies, the gold is used, like
the guard is used during vault emergencies. Theoretically, the
free market economy could do without a large national gold reserve,
in the same sense that a perfectly designed vault could do without
guards. The nation that requires huge gold reserves is like a
vault that needs extra guards: something is probably breaking
down somewhere -- or breaking in.
CONCLUSION
What I have
been trying to explain is that a full gold coin standard, within
the framework of a free market economy, would permit the large
mass of citizens to possess gold. This means that the "national
reserves of gold," that is, the State's gold hoard, would
not have to be very large.
If we were
to re-establish full domestic convertibility of paper money for
gold coins (as it was before 1933), while removing the "legal
tender" provision of the Federal Reserve Notes, the American
economy would still function. It would function far better in
the long run. Consumers would be able to reassert their sovereignty
over politicians and government-licensed bankers.
This, of course,
is not the world we live in. Because America is not a free society
in the sense that I have pictured here, we must make certain
compromises with our theoretical model. The statement in THE
WALL STREET JOURNAL's editorial would be completely true only
in an economy using a full gold coin standard: "The best
way for a nation to build confidence in its currency is not to
bury lots of gold in the ground." Quite true; gold would
be used for purposes of exchange, although one might save for
a "rainy day" by burying gold. But if governments refused
to inflate their currencies, few people would need to bury their
gold, and neither would the government.
If a government
wants to build confidence, it should "pursue responsible
financial policies," that is, it should not spend more than
it takes in. The editorial's conclusion is accurate: "If
a country does so consistently enough, it's likely to find its
gold growing dusty from disuse."
In order to
remove the necessity of a large gold hoard, all we need to do
is follow policies that will "establish Justice, insure
domestic Tranquility, provide for the common defense [with few,
if an, entangling alliances], promote the general Welfare, and
secure the Blessings of Liberty to ourselves and our Posterity."
To the extent
that a nation departs from those goals, it will need a large
gold hoard, for it costs a great deal to finance injustice, domestic
violence, and general illfare. With the latter policies in effect,
we find that the gold simply pours out of the Treasury, as "net
trade imbalances" between the State and everyone else begin
to mount. A moving ingot gathers no dust.
This leads
us to "North's Corollary to the Gold Standard" (tentative):
"The fiscal
responsibility of a nation's economic policies can be measured
directly in terms of the thickness of the layer of dust on its
gold reserves: the thicker the layer, the more responsible the
policies."
-------------------------------
This article
is a revision of an article that I published in "The Freeman"
1969. My economic analysis has not changed since 1969, but the
price level in the United States is over five times times higher.
See the "Inflation Calculator" on the home page of
the Bureau of Labor Statistics.
http://www.bls.gov
The government's
gross national debt, meaning the on- budget debt, not accrual
debt, which is vastly larger, at the end of 1969 was a little
under $366 billion. (Note: when you click this link, you arrive
at the U.S. Treasury Department's debt-history page. Look at
the "latest" figures. They are estimates. They are
wildly low.)
http://snipurl.com/awm7
For the latest
figure, click here:
http://brillig.com/debt_clock
The Establishment
still ridicules gold. The public still doesn't understand gold.
And academic economists tell us that central banking is the wave
of the future: the best conceivable world.
The more things
change (debt, prices), the more they stay the same (economic
opinions).
January 12,
2005
Gary North
For a free
subscription to Gary North's newsletter on gold, send an e-mail
to: goldwars@kbot.com.
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