Two major government economists, Christina D. Romer and Ben Bernanke, have done influential research on the Great Depression. Both implicate the State-run gold standard of that era, which differed from the pre-1914 gold standard, as a major culprit in the Great Depression. (See here and here.) Their work parallels that of other economists such as Barry Eichengreen and Peter Temin on the negative role of the interwar gold exchange standard. There is an emerging or existing consensus among economists about the negative effects of the gold-exchange standard.
Still, research continues. The precise role of the gold-exchange standard in the Great Depression remains a question mark. Richardson and Van Horn have evidence that New York banks "had large exposures to foreign deposits and German debt," that led to problems when Creditanstalt collapsed. Bordo et al. contend that the gold standard did not fetter central banks. Murray Rothbard, Benjamin Anderson, and Richard M. Ebeling all emphasize the FED’s inflationary price-stabilization policies in the 1920s, which are connected to how the FED operated under the gold-exchange standard.
Suppose that Romer and Bernanke are correct about the role of the gold standard in worsening the Great Depression. This shows absolutely nothing about gold (or any other medium) as free market money. Romer and Bernanke do not bother to distinguish a State-run gold standard from a free market gold standard, i.e., use of gold as free market money. They ignore gold used as non-State or privately-generated money. They ignore any free market in money, whether gold, credits, silver, cowrie, copper, or anything else.
In this way, Romer and Bernanke provide us with a false choice: State-run gold standard or State-run paper money. Which pair of handcuffs do you prefer?
By this omission, the State-run gold standard becomes a straw man for any kind of gold money, including free market gold. Knock down the gold standard, as they do, and down goes free market gold money with it.
Romer says that "going off the gold standard and increasing the domestic money supply was a key factor in generating recovery and growth across a wide range of countries in the 1930s." To her, the domestic money supply is the central bank—based money supply. She gives us only two alternatives. They are central bank money with a gold standard and central bank money without a gold standard. The gold standard she speaks of is the state-run gold standard, not a free market in gold, much less a free market in anything that the market chooses to be money.
Romer banishes the free market use of gold. It passes from view, consideration, and thought. She abolishes it. Where did it go?
Roosevelt killed it, although she does not put it this way. In her story, "Roosevelt temporarily suspended the gold standard, before going back on gold at a lower value for the dollar, paving the way for increases in the money supply." What money supply? Central bank paper money. Nothing else.
Roosevelt restored the gold standard for international payments, but domestically he killed it. She entirely ignores the fact that gold could no longer be used privately as money due to Roosevelt’s gold seizure! Free market convertibility ended. She flushes free market gold as money down the memory hole. It no longer serves as an alternative to the State’s money. Romer thinks only in terms of State money, whether gold or paper, and nothing else.
To several generations of monetary economists and textbook writers, gold is a dirty word. This is either blind or biased scholarship or both. Free market money is nowhere on the map.
Bias in an administration’s top economists is no accident. They have self-selected into the existing system. They sit at the pinnacle of power in America. No wonder then that they acclaim the virtues of the State system of power. No wonder then that they refuse to acknowledge the alternative of liberty in economic matters. And since free market money is very likely to use gold as an important component, no wonder that they denigrate gold.
In his excellent article, "Two Kinds of Gold Standard," Gary North carefully distinguishes the State’s gold standard from the free market gold standard. A gold standard, or more generally money, is either a product of voluntary exchange (a good), or else it is a forced currency that is the State’s product and forced into passing as a good.
The free market origination and use of a good as money is a matter of choice among free market participants. The good may be gold, silver, copper, or other metals, or some other kind of thing. People in a free market decide on their own what to use as a value standard and what to use as media of exchange or monies. Liberty and a free market include monetary freedom as an essential. The use of gold or anything else as money is a matter of voluntary choices and exchanges.
A State-run gold standard occurs when the State controls by force the monetary arrangements. States have done this in all sorts of ways and with many degrees of control. Money then becomes, wholly or in part, a product of the State, not solely of the free market. Monetary freedom is suppressed.
These two alternatives need to be kept squarely in view if the concept of monetary freedom is to withstand research that shows that the gold standard had economic problems.
My main point is this. Monetary freedom and its possible use of gold as money are not the same as the gold standard courtesy of a State-run system. Defects in the latter say nothing at all about the merits or demerits of the former.
If Romer and Bernanke’s research is correct, the State’s operations of its unfree gold standard helped to produce and exacerbate the Great Depression. But rather than blame the State or the central bank for the money and credit mismanagement that they produced, they blame the gold standard. They err in divorcing the gold standard from the State’s operations and manipulations. They err in falsely identifying gold with the gold standard. They err in supporting as a remedy the State’s money monopoly. Generations of economists have accepted this. They have redefined money as central bank notes whose link and convertibility to gold is very greatly attenuated. This system allows paper money to be manufactured at will by the State’s economists. It allows the inflation we have experienced.
It should be obvious that the public has little or no say in this system of money production. Such money cannot be refused as payment, and there are barriers to introducing other things as money. The markets do not determine what money is, how much there is, how it is created, or who gets it. The State determines all of this. The central banking system, freed from the constraints of gold and market acceptability, is set up to benefit the State.
As such, the system of State money is inherently unfair. All the questions that surround money — what will be money, how much of it will there be, who gets it, what is its value — are far, far too important in our lives to be left to the hands of others to decide for us. With State-forced money, it is too easy for us to be cheated. We are forced to accept a thing as payment for our services that has been, or is being, or will be debased and devalued into losing purchasing power.
The State’s power to create money is its power to command goods and services and absorb them from others without providing goods in return. The temptation to abuse that power is enormous. All governments that have this power abuse it, thereby cheating all those under their rule who are forced to accept depreciating money.
One obvious check and balance on the State’s nefarious money creation is for each of us to have the right to refuse to accept anything proffered as money that we do not wish to accept. Monetary freedom includes such a right. Another obvious check and balance is that anyone in society have the right to produce that which may possibly pass as money. Only sound monies can survive such a competitive process. The money schemes of those, including the State, who would attempt to produce unsound monies will be winnowed out by the voluntary choices of each of us, just as we winnow out other goods that fail to provide us with desired values.
There is far more at stake in monetary freedom. The State’s control over money gives our rulers the leverage to control many other facets of a society’s life. It gives them the resources to make wars and restructure society to its liking and that of its allied interest groups. It gives them power to create booms and then periods of unemployment.
Private control over money is a step toward greater private control by the public as against the State’s control over the public. Conversely, a large State invariably controls money and controls an undifferentiated public that includes many who prefer not to be controlled and affected by the State’s machinations. Those who favor a large State favor State control over money. Those who are against monetary freedom are against freedom generally. They do not want to let people out from under the State’s control.
In this as in other matters, I take a panarchic point of view. I separate cleanly arguments about the economic or social merits of alternatives such as gold and paper money from political recommendations. Economically and morally, I may argue against central banking and point out its faults and what it is doing to the nation. Politically, I do not argue for gold, a gold standard, a bimetallic standard, or any other specific kind of monetary system to be imposed on an entire territorially-defined nation. Politically, I do not argue that central banking be replaced in the U.S. by a gold standard or by free money or by anything. Rather, I argue that those of us who want to adopt alternative money systems have the liberty to do that without penalty. I argue for monetary freedom, and that includes the freedom of all those Americans who want to continue to use the FED’s money to do so. I would not take that freedom from them by ending the FED. If they do not feel that they are cheated or that the system is unethical, they are welcome to live with it. By the same token, if they have that freedom, then so should others of us have the freedom to use banks and money of our own choice.
Such a side-by-side use of alternative institutions and monies within one country is entirely feasible.
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.