Gold Standards: The Good, The Bad, and The Ugly

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There is great confusion about the gold standard, for the same reason
that there is great confusion about the free market: hardly anyone
understands it. This includes academic economists.

Let me get in my fiat monetary unit’s two cents’ worth:

the world doesn’t need now, has never needed, and has never had,
is a gold standard. What it needs is a monetary system that is
run solely through voluntary contracts. What the world needs is
economic freedom, out of which a monetary system will emerge,
probably using gold for large transactions.

There are proposals for various monetary systems that are in some
way tied to gold. There have been a lot of these proposals over
the centuries. They all have one thing in common: they are ignored
today by academic economists, commercial bankers, central bankers,
national governments, the general public, and CNBC. Well, perhaps
not ignored. More like ridiculed.

This freedom from any likelihood of being taken seriously by the
Powers That Be allows proponents of this or that version of a gold
standard to promote their systems in the name of higher values,
better economic theory, or personal self-interest. The sky is the
limit in terms of justifying a gold standard, since no one in authority
is going to pay any attention anyway. Why not go for the gold, theory-wise?
Why settle for some squishy theoretical compromise? Why wring our
hands in despair just because there is no agreement among gold standard
advocates, no theoretical basis for resolving these rival proposals,
no foundation for a political movement? When you’re John the Baptist,
crying in the wilderness, why be a trimmer for the sake of political

Therefore to all would-be trimmers who have naive dreams of building
a political Golden Alliance, and who are appalled by the bridge-burning
aspects of Austrian economic theory, I cite the cousin of the aforementioned
evangelist: “And as they departed, Jesus began to say unto the multitudes
concerning John, What went ye out into the wilderness to see? A
reed shaken with the wind? But what went ye out for to see? A man
clothed in soft raiment? behold, they that wear soft clothing are
in kings’ houses” (Matthew 11:7-8). Or work for the Federal Reserve.

Let us begin the lesson. There are three main varieties of gold
standards: (1) market-created; (2) state-created; (3) state-licensed
oligopoly-created. I call these the good, the bad, and the ugly.


We begin our analysis with the assumption of the right of individuals
to trade with each other. We make no assumptions regarding a special
position for one variety of contracts, namely, contracts defining
money. In our hypothetical system, all contracts are voluntary.
They are governed by the laws of equity, i.e., contracts that are
neither fraudulent or coercive.

Ludwig von Mises defined money as the most marketable commodity.
In his book, The
Theory of Money and Credit
(1912), he wrote:

all goods are not equally marketable. While there is only a limited
and occasional demand for certain goods, that for others is more
general and constant. Consequently, those who bring goods of the
first kind to market in order to exchange them for goods that
they need themselves have as a rule a smaller prospect of success
than those who offer goods of the second kind. If, however, they
exchange their relatively unmarketable goods for such as are more
marketable, they will get a step nearer to their goal and may
hope to reach it more surely and economically than if they had
restricted themselves to direct exchange.

was in this way that those goods that were originally the most
marketable became common media of exchange; that is, goods into
which all sellers of other goods first converted their wares and
which it paid every would-be buyer of any other commodity to acquire
first. And as soon as those commodities that were relatively most
marketable had become common media of exchange, there was an increase
in the difference between their marketability and that of all
other commodities, and this in its turn further strengthened and
broadened their position as media of exchange (p. 32). . . .

The advent of a commodity in market that functions as a widespread
means of exchange is not the result of a state’s designation of
such a commodity. It is the result of voluntary transactions over
time. The free market, not the civil government, creates money.

This analysis was important for one of Mises’ most important contributions
to monetary theory: the regression theorem. He asked: Why is money
valuable today? Answer: Because it was valuable yesterday, and people
expect it to be valuable tomorrow. Next: Why was it valuable yesterday?
Answer: Because it was valuable the day before yesterday.

This explanation raises the question of origins. How did money come
into existence? Because, Mises argued, it had been valuable in commodity
form for other purposes. These other purposes made the commodity
recognizably valuable. “The earliest value of money links up with
the commodity-value of the monetary material” (p. 110). From some
commodity’s widespread acceptance and familiarity arose its function
as money.

This means that the state does not create money. “It has been demonstrated,
in striking fashion, that the State alone could not make a commodity
into a common medium of exchange, that is, into money, but this
could be done only by the common action of all individuals engaged
in business” (p. 76).

When the state attempts to set prices between monetary units, the
artificially overvalued money is selected by the public for common
transactions, and the artificially undervalued money is shipped
abroad or is used on the black market. This is Gresham’s famous
law in action: bad money drives out good, which is the mark of statist
intervention into monetary affairs. “The result has always come
to pass against the will of the State, not in accordance with it”
(p. 77).

So, in the Austrian School tradition, money is a product of the
market. Coins or ingots of a fixed fineness and weight of some money
metal are used by market participants to facilitate exchange. Receipts
for these metals also are widely used as money substitutes. Mises
always called these receipts money substitutes. He did not call
them money.

Mises did not trust the state in monetary matters, so he called
for free banking: some fractional reserves, in which more receipts
to metals are issued by banks than are held in reserve. He trusted
bankers and depositors to monitor the issue of money. Anything other
than free banking, he argued, places too much trust in government.
As he wrote in Human
(Regnery, 1966),

even if the 100 percent reserve plan were to be adopted on the
basis of the unadulterated gold standard, it would not entirely
remove the drawbacks inherent in every kind of government interference
with banking. What is needed to prevent any further credit expansion
is to place the banking business under the general rules of commercial
and civil laws compelling every individual and firm to fulfill
all obligations in full compliance with the terms of the contract.
If banks are preserved as privileged establishments subject to
special legislative provisions, the tool remains that governments
can use for fiscal purposes. Then every restriction imposed upon
the issuance of fiduciary media depends upon the government’s
and the parliament’s good intentions. They may limit the issuance
for periods which are called normal. The restriction will be withdrawn
whenever a government deems that an emergency justifies resorting
to extraordinary measures. If an administration and the party
backing it want to increase expenditure without jeopardizing their
popularity through the imposition of higher taxes, they will always
be ready to call their impasse an emergency. Recourse to the printing
press and to the obsequiousness of bank managers willing to oblige
the authorities regulating their conduct of affairs is the foremost
means of governments eager to spend money for purposes for which
the taxpayers are not ready to pay higher taxes (p. 444).

In contrast, Rothbard held to a system of 100% reserves, which he
defended by an appeal to law: a prohibition against issuing receipts
for which there was insufficient metal. He presented this view in
his important essay, “The
Case for a 100 Per Cent Gold Dollar
“: “In my view, issuing promises
to pay on demand in excess of the amount of goods on hand is simply
fraud, and should be so considered by the legal system. For this
means that a bank issues ‘fake’ warehouse receipts — warehouse
receipts, for example, for ounces of gold that do not actually exist
in the vaults. This is legalized counterfeiting. . . . In short,
I believe that fractional reserve banking is disastrous both for
the morality and for the fundamental bases and institutions of the
market economy” (In Search of a Monetary Constitution, edited
by Leland B. Yeager [Harvard University Press, 1962], p. 114).

Both Mises and Rothbard explained the origin of money as the institutional
result of a free market. Both opposed the state as an agency of
money creation. Both mistrusted the state in the area of money.
Both explained money in terms of a comprehensive theory of human
action, i.e., market exchange. In this sense, the Austrians are
unique. Only the Austrian School offers a fully developed theory
of money in terms of a wider theory of the free market. They alone
want government out of the money business.

Both men argued that the laws governing contract must be enforced.
When a depositor turns over a gold coin to a bank or any third party,
he in effect hires the use of a piggy bank. This piggy bank must
be paid for. In short, TANSTAAFPB: There ain’t no such thing as
a free piggy bank. Mises’ theory of piggy banks allows for a market-enforced,
market-monitored degree of fractional reserving to pay for the piggy
bank system. Rothbard’s theory does not. The gold depositor must
pay for the privilege. (For an example of how a commercial gold
deposit system works, using Rothbard’s approach, visit

The Austrians in the Mises-Rothbard tradition have never called
for a gold standard except as a market-created standard of monetary
exchange. It is a market standard in gold, not a gold standard.
Gold will probably win in international exchange, they both believed,
but silver or other metals may operate side by side gold domestically,
which Mises and Rothbard described as parallel standards. The gold
standard is, in this view, the market standard.

Neither man called on the civil government to establish a gold standard,
or any other monetary standard. They did not argue that a gold standard
created by the government would function for long as a restraint
on the coercive power of civil government. They argued the opposite.
A government-guaranteed gold standard is a guarantee of future default
by the government and its agents.

Rothbard in 1962 called for the American government’s imposition
of a fully redeemable gold coin standard on the government as a
way for the public to reclaim its confiscated gold. “It is important,
for moral and economic reasons, to permit the people to reclaim
their gold as rapidly as possible” (p. 135). He wanted a fixed price
between dollars and gold, not in order to “preserve the value” of
the dollar or to “keep government in check,” but to enable people
to strip the federal government of every last ounce of gold. He
never called for the government to be a buyer of gold at a fixed
price, issuing receipts for gold to the public in exchange for gold
deposited with the government by the public. He wanted a government-guaranteed
gold standard with a one-way flow of gold: out. If this should be
perceived as a call for the reimposition of a traditional gold standard,
make the best of it.


An intellectual defense of the traditional gold standard is always
offered in the name of establishing limited civil government. The
gold standard is seen as a means of holding the state in check.
If the public is allowed to demand payment in gold from the state,
at a fixed exchange rate between the currency unit and one ounce
of gold, then the state cannot print up too many currency units.
If it does, people will trade in their fiat money for gold. To keep
from losing its gold reserves, the monetary authorities will have
to stop creating new money.

We have already read Mises’ criticism of such a state-operated,
state-created, state-defended gold standard. “They may limit the
issuance for periods which are called normal. The restriction will
be withdrawn whenever a government deems that an emergency justifies
resorting to extraordinary measures.”

The crucial question is: Whose gold is in the state’s vaults? The
state initially says that the deposited gold belongs to the public.
The state is only storing the public’s gold, free of charge, as
a public service. (Anyone who believes that the state offers free
services as a public service really ought to stop smoking whatever
that abused substance is.)

The traditional gold standard is the state’s way to get its collective
hands on the public’s gold. It needs this gold to pay for goods
in an emergency, when taxes no longer produce sufficient revenues.
The obvious situation is at the outbreak of a war. With few or no
exceptions, governments cease redeeming gold for their currency
units within weeks of the outbreak of war. This is called the suspension
of payments. Then, with stolen gold in reserve, the state prints
money with abandon. It first made its fully redeemable money familiar
to users of its currency. Then it revokes the right of redemption
that had served as the lure in the first place. Convertibility into
gold on demand was the promise that led the public into accepting
pieces of paper in lieu of gold. Then the public learns its lesson
the hard way: the government keeps the gold, and the public suffers
a depreciation of its paper money.

At some point, most governments pass a legal tender law as a substitute
for the unilaterally revoked gold standard. The public henceforth
is compelled by law to accept the government’s paper money in exchange
for goods and services, and also for debt repayment, especially
by the government, which has issued, and will issue more, government
bonds. Later, the state may impose price and wage controls to put
a stop to Gresham’s law, i.e., to penalize those people who get
caught trading the state’s money as something less than the official
price of gold, silver, or whatever black market money is prevalent
— possibly the abused substance that the traditional gold standard’s
advocates were smoking when they recommended that people have faith
in the public-spirited intentions of state bureaucrats.

The traditional gold standard is best explained as a convenient
means of starting a war at a below-market price. Governments do
not trust each other. They know that, during war time, international
trade will become more expensive as denominated in a nation’s now-fiat
currency unit. A gold reserve is the government’s thrift plan for
a rainy day. The government persuades the public to sell it gold
in exchange for pieces of paper that promise to pay gold on demand.
Then the state revokes the contract. Its officials never planned
to do anything else.

A traditional gold standard is best understood as the state’s very
own piggy bank. The state persuades the public to put its gold coins
into the piggy bank, which is labeled “full faith and credit of
the government.” Then, when a war comes along, the government breaks
the piggy bank and spends the money in foreign markets where its
fiat currency unit is not trusted. This is the ultimate example
of Gresham’s law.

The traditional gold standard rests on two main official theories,
both of which are invoked from time to time in order to keep the
public from seeing the real reason, i.e., the piggy bank.

1. State sovereignty. This one is rarely invoked by economists,
but is the ancient favorite of political theorists. The state is
said to possess sovereignty, an innate attribute that enables it,
and it alone, to determine the value of money. Sovereignty is sometimes
perceived as all-encompassing (Rousseau), or perhaps only narrowly
defined (Locke), but it always is said to apply to money. Economics
is subordinate to state sovereignty, beginning with money. Economic
sovereignty may or may not end with money, but it always begins

2. Mercantilism’s macroeconomics. The free market economy
of voluntary exchanges is the microeconomy. Money is necessarily
a part of this microeconomy, yet it is said to be above it. Money
is said to operate in terms of a different set of standards, laws,
and conventions from the world of goods and services. The free market
may have generated money originally, but market-generated money
is supposedly inefficient. The free market economy cannot prosper
unless state-issued and state-regulated money is substituted for
market-generated money. People can safely trust the nation’s monetary
system only if the state possesses a monopoly over the monetary
unit. Without public trust in the state’s monopoly over money, the
free market could not develop much beyond the economy of, say, Gambia.

World War I ended the traditional international gold standard: the
largest smashed piggy bank in history. The common people lost their
gold. But central bankers and government officials wanted to keep
the system going for themselves. So, a new piggy bank system was
invented: the gold-exchange standard. It was launched at the Genoa
Conference of 1922, and it was revised at the Bretton Woods meeting
of 1944. Britain opened the piggy bank to the public in 1925, but
broke the piggy bank again in 1931, when the public started demanding
their gold. Roosevelt smashed the Americans’ piggy bank in 1933.
For governments, the piggy bank’s flow of gold is one way only:
in. When it reverses, the government smashes the bank. Always. That
is what the piggy bank is for in a traditional gold standard.

The Genoa agreement made a deal for European central banks. “Deposit
your gold with the British and American governments, and they will
pay you interest. You can use their government bonds as reserves
for your own currencies as if they were as good as gold.” America
offered the world the same deal in 1944 at Bretton Woods. In flowed
the gold. Out flowed the interest-bearing IOUs. But then the flow
of gold reversed in 1958. Gold flowed out. It flowed out throughout
the 1960’s. So, on August 15, 1971, Nixon smashed the gold exchange
piggy bank. The central banks could no longer receive gold for their
dollars at a fixed rate. Immediately, the Nixon government began
the inflation process that was adopted by Ford and Carter, which
drove up the price of gold to $850/oz in early 1980 from $35/oz
in August, 1971.

There are still a handful of traditional gold standard advocates,
but rarely have they had any training in economics. None of them
has any influence with any government. The reason why is clear:
once governments get the public’s gold and then break the piggy
bank, and once the United States got the world’s gold and broke
the piggy bank, the piggy bank game was over. Governments were never
interested in limited government. They were interested in a traditional
gold standard only as a way to fill up the governments’ piggy banks
with the public’s gold. The traditional gold standard has outlived
its usefulness to governments.


Commercial bankers invented the piggy bank system. Beginning five
centuries ago, they issued IOU’s for gold to depositors who would
deposit their gold. They agreed to pay interest on this gold. They
agreed to let depositors exchange paper money or other banks’ checks
for gold. This one-upped the government. The government offered
free storage for gold. The banks offered free storage, plus money
for letting them store the gold. What a deal! I mean, it’s free

As W. C. Fields once said, there was an Ethiopian in the fuel supply.
If banks paid money to people who deposited gold with them, then
someone had to pay the banks even more money. Bankers figured out
how this could be done: keep the gold in reserve, and issue additional
IOU’s, sometimes called checks, to interest-paying borrowers. Soon,
there were more IOU’s to gold than there was gold in reserve. The
assumption was that most people will not demand payment.

But then, as always happens, bankers got greedy. They issued too
many receipts, and depositors began to take the bankers at their
word. They demanded payment. This always happened when a war broke
out. So, the banks suspended payment. The banking lobby then called
upon the government to legalize retroactively this broken contract,
which governments always did. After all, governments need buyers
of government debt, and bankers are the primary buyers. The government
doesn’t want them to go bankrupt (bank, rupture) when a war breaks
out. So, the state allowed banks to stiff their depositors. The
banks’ smashing of the piggy banks was legalized. That’s what piggy
banks are for, aren’t they? To provide piggy bank owners with all
of the money inside.

This looked like such a good deal that the biggest banks wanted
to build an even larger piggy bank for use by commercial bankers.
Beginning in 1694, with the creation of the privately owned Bank
of England, central bankers figured out how to make the piggy bank
system work on a much larger scale. They wanted a new deal. Not
possessing sovereignty, they cut a deal with the government: “Grant
us a monopoly over money creation, and we’ll guarantee a market
for government debt.” This transferred sovereignty to the central
bank, which is now said to be “beyond politics” so that it can “protect
the integrity of the currency.”

Virtually all economists believe this today, including the authors
of every college-level introductory economics textbook and money
and banking textbook. They explain the existence of this government-granted
central bank monopoly over money and monetary policy as part of
the self-sacrificing, public-spirited banking community’s gift to
the general public: the gift of stable money. They offered this
rare gift in exchange for having been granted sovereignty over money
by the government. Unlike political philosophers, economists offer
graphs and equations in support of this theory of transferred sovereignty.
The only known exception was Murray Rothbard, whose money and banking
textbook, The
Mystery of Banking
, identified the entire fractional reserve
banking process as fraudulent, inflationary, and the source of all
modern economic depressions. As far as I know, this book has never
been assigned by any college professor in money and banking. I speak
as someone who once owned the rights to publish the book.

A central bank, like commercial banks, issues money out of nothing
every time it buys a government’s debt certificate. Then it gets
paid interest on these government bonds. The money issued by the
central bank immediately gets spent into circulation by the government.

In a monetary crisis, the central bank comes to the rescue of selected
commercial banks, namely, those banks that belong to the central
bank’s system. The system requires these participating commercial
banks to make interest-free deposits with the central bank, which
the central bank then lends to the government and pockets the interest.

The quid pro quo for both the government (its guaranteed market
for its debt) and the commercial banks (their loans during periods
of public panic over commercial banks’ solvency) is the central
bank’s control over the monetary base. By buying or selling assets,
the central bank controls the size of the monetary base used by
commercial banks to buy investment assets.

For a time, central banks issue receipts for gold to commercial
banks and other central banks. These contracts are always broken.


The piggy bank system is inescapable. People don’t carry all of
their gold coins with them when they go out for a walk. Here are
the relevant questions regarding piggy banks:

  1. Who owns the piggy bank? When?

  2. Who owns the gold inside it? When?

  3. What
    are the laws governing gold redemption? When?
  4. What incentives do local courts have in enforcing these laws
    locally? When?

  5. What
    incentives do national politicians have in retroactively authorizing
    the violation of the gold redemption contracts? When?

Each of the three types of gold standard should be analyzed in terms
of these questions.

What we find is that piggy banks owned locally by commercial enterprises
— gold storage companies — face law enforcement by local
courts. Local judges are unlikely to conspire secretly with all
other judges in the nation to exempt retroactively storage companies
from fulfilling their contractual obligations.

In contrast, national politicians are only too happy to make such
exemptions when emergencies arise. What is a government emergency?
A political opportunity to extract additional wealth from the public
without facing additional risks at the next election.

Mises and Rothbard defended piggy banks owned by local entrepreneurs
who were subject to the law of contracts. Out of this system came
a free market monetary standard that included gold and money substitutes
— receipts for gold. But this was never a textbook version
of a gold standard. It was a market standard that involved gold.
The textbook gold standard was always a piggy bank operation with
fractional reserves: commercial bankers, politicians, and central
bankers. The piggy banks got smashed by the authorities and their
agents every time.

So, when I hear the words “gold standard,” I reach for my gun.

21, 2002

North is the author of Mises
on Money
. Visit
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