by Gary North: Good
News on Taxes
abundant evidence that a well designed, well managed, gold standard
is better adapted than a monetary standard managed at the discretion
of elite civil servants to maintain price stability and strong economic
growth. ~ Ralph Benko
Mr. Benko supports
the creation of a government-designed, government-run, and government-enforced
gold standard. I do not. This is because there is abundant evidence
that such a gold standard always turns into the central-bank fiat
money standard that Keynesian economists and monetarist economists
insist is the only possible way to maintain long-term economic growth.
Fiat money is dishonest money.
want dishonest money. So do politicians. So do central bankers.
So do commercial bankers. If you want to know what honest money
is, I have written a book on this. You
can download it for free.
While I have
no doubt that the jerry-rigged gold exchange standard that was cobbled
together by government bureaucrats and central bankers at the Genoa
conference of 1922 was better than Richard Nixon's fiat money monstrosity
that has plagued the world for 39 years and 11 months, it was a
pseudo-gold standard from the beginning. It was not a full gold-coin
standard under which anyone could exchange a nation's currency at
a fixed rate for gold coins of a fixed weight and fineness.
The full gold-coin
standard that prevailed in the second half of the nineteenth century
was itself a doomed experiment. It turned into the fiat money standard
(1914), which became the gold exchange standard (1922), which became
the Bretton Woods standard (1944), which became today's fiat money
standard (1971). Why? Because the full gold-coin standard relied
on government promises. "Yes, we guarantee that we will exchange
our currency for gold. You can trust us." It was not a 100% gold
standard. It was a 100% trust your national government standard.
In August 1914,
European governments that entered the war broke their monetary promises,
confiscated the gold that was on deposit in commercial banks, turned
this gold over to their respective central banks, which then inflated
to fund World War I. It was the biggest bank heist in history. There
was no resistance by the public.
The gold exchange
standard of 1922 was Europe's attempt to maintain the trappings
of the pre-war gold coin standard, but without full redeemability.
It was a central bankers' gold standard among themselves. It was
never intended to be a gold standard for the masses.
That was the
problem. It was a gold standard for the elite of elites: the central
bankers. It blocked out the secondary elite, namely, government
TRUST, DO VERIFY
was famous for his slogan governing nuclear disarmament: "Trust,
but verify." When dealing with central bankers, it should be, "Don't
trust, do verify." Central bankers are far less trustworthy than
Soviet bureaucrats were at their most duplicitous. They have outlasted
the Soviet bureaucrats. They got a free ride until Ron Paul's 32
years of warnings finally gained traction during the central bank-created
financial crisis of 2008.
Any time that
you see someone in an Establishment media outlet suggest that we
need a return to a gold standard, look carefully at the details
of his proposition. Does it involve the reintroduction of gold coins
by the national mint? If there is legally guaranteed rate of exchange
between the national currency and these gold coins, meaning full
redeemability? Can anyone go to his local bank and exchange money
in his bank account for gold coins? That would get us back to 1914.
Yet even that
gold standard would be fake. Why? Because no one is being charged
for a service: storing the gold coins. Any time you find a valuable
service being offered for free by any bank, you can be sure that
there is a ringer somewhere in the arrangement. The bank is luring
you into a deal by means of a promise that cannot be met under all
circumstances. In this case, it is free gold coin storage. Somewhere
in the bank's operations there is a liability against the gold coins
a liability superior to any depositor's claim.
In 1914 in
Europe, this liability was to the central banks. The central banks
in turn were under the authority of the governments. So, there were
two sets of superior claims. A mere citizen, let alone a resident
alien, did not have priority. The courts did not enforce his legal
claim to full redeemability of the national currency.
citizen today has no understanding of either the logic or the operations
of a gold coin standard. Neither does the average Ph.D. in economics.
Certain topics are not explored in detail by economics departments.
One is central banking. Another is the gold coin standard. Central
banking is never discussed in terms of the economic logic of cartels,
which are government-licensed operations against the public interest.
The only textbook-level analysis of fractional reserve banking that
does this is Murray Rothbard's The
Mystery of Banking (1983), which was not aimed at a college
market, and which has not been adopted by colleges.
Benko is a
disciple of Nobel Prize-winning economist Robert Mundell. Mundell
is an advocate of a pseudo-gold standard: central banks only. The
peons the likes of you and me are not supposed to
become a part of this Old Boy Network.
I have been
reading Mundell since the early 1970s. I recall speaking at a conference
sponsored by the Committee for Monetary Research and Education in
1973 or 1974, where Mundell had spoken before I did, i.e., had read
an academic paper to non-economists. In my speech, I described what
I was being paid to deliver my lecture: "All the beer I can drink,
plus an English-language translation of Dr. Mundell's lecture."
This got a laugh.
cited Mundell verbatim . . . or so it seemed. This is one of
Dr. Mundell's more coherent statements. This was from an interview
on Bloomberg television on May 25.
You've written about the role of gold in the world economy, Professor
Mundell. Do you think that we're going to see any kind of return
to the gold standard?
[T]here could be a kind of Bretton Woods type of gold standard
where the price of gold was fixed for central banks and they could
use gold as an asset to trade central banks.
advantage of that was that gold is nobody's liability and it can't
be printed. So it has a strength and confidence that people trust.
So if you had not just the United States but the United States
and the euro tied together to each other and to gold, gold might
be the intermediary and then with the other important currencies
like the yen and Chinese yuan and British pound all tied together
as a kind of new SDR that could be one way the world could move
forward on a better monetary system.
over Mundell's crucial sentence, which preceded what Benko cited:
"Nothing like the gold standard that existed before 1914. But there
could be a kind of Bretton Wood type of. . . ." This was deliberate
on Benko's part. In academia, when you drop someone's words, you
are expected to add three periods, called ellipses. They look like
this: ". . ." This lets the reader know that you have dropped something.
Benko did not
deem it important that his readers see the crucial admission that
Mundell made. Mundell has made this admission for 40 years: "Nothing
like the gold standard that existed before 1914." He got his Nobel
Prize because of this admission. Nobody who has advocated or has
even suggested the possibility of a return to the pre-1914 gold
coin standard has ever won a Nobel Prize.
eloquent about Mundell.
the world's most distinguished living economist. He is a Nobel
Economics Laureate. He was the primary source of the original
supply-side manifesto, "The Mundell-Laffer Hypothesis," which
led to the low-tax-rate, strong-dollar policy at the heart of
Reaganomics. He has acted as a privy counselor to the Chinese
government (which in appreciation has named a university for him).
Mundell's guidance, of course, is one of the reasons why mainland
China has had 30+ years of uninterrupted double-digit economic
growth. Mundell's work also laid the foundation for the common
European currency, the euro.
Buchanan is the most distinguished living Nobel laureate, if we
are talking about free market economists.
had nothing to do with the strong-dollar policy of the Reagan years.
Paul Volcker did, beginning in the fall of 1979, when he took over
as Federal Reserve Board Chairman, replacing the incomparably incompetent
G. William Miller, who had lasted only 18 months, the shortest term
on record. Volcker's policy of tighter money caused the 1980 recession,
which let Reagan win in November. He maintained that policy until
Friday, August 13, 1982, when the Mexican government threatened
to nationalize foreign banks. On Monday, August 16, the Federal
Reserve started to inflate. Mundell had nothing to do with any of
Chinese central bank has had the most inflationary monetary policy
of any major nation, inflating M2 at close to 20% per annum for
at least a decade. The currency is in no way tied to gold.
euro is a disaster.
Benko is a
well-meaning advocate of a fake gold standard. No one in the financial
world pays any attention to him, any more than the world's economists
have ever paid any attention to Mundell's call for a pseudo-gold
The point of
a gold standard is to limit central banks. It restricts their ability
to inflate. It limits their authority over monetary policy. Central
bankers do not want limitations on their authority. They are forced
to accept some degree of government authority for brief periods
during financial crises crises that central bank policies
have created but they will never voluntarily surrender to
the masses their authority over monetary manipulation, meaning central
economics profession, except for the Austrian School, believes in
central banking and fractional reserve commercial banking. This
means that economists favor a cartel. In universities, they assign
a textbook with a chapter on cartels which argues that cartels are
profit-seeking, government-licensed, oligopolies that act against
the public interest. But textbooks never extend this analysis to
central banks and commercial banks. I have said this before, but
it bears repeating. Fractional reserve banking and central banking
get a free ride from academic economists. They also get a free ride
from financial journalists.
call for their favorite pseudo-market, government-administered limitation
on this or that aspect of banking. But they do not call for 100%
reserve banking, as Rothbard did. They do not call for free banking,
as Ludwig von Mises did.
Why not? Because
they do not trust the free market to maintain a money supply limited
only by mining expenses and voluntary contracts. They give lip service
to free market competition, but not at the center of every economy,
the money supply. Here, they want final government authority and
central bank administrative authority. They believe in people with
badges and guns as reliable central planners.
The gold coin
standard removes final economic authority from people with badges
and guns and turns it over to the masses.
IS THE HAMMER
In this life,
there are nails and hammers. The battle over final economic authority
is the battle over the monetary system, for money is the central
institution in a division-of-labor economy. Thus, the battle is
over who holds the hammer.
politicians refuse to turn final authority over to the masses. The
elite wishes to retain power over scarce resources. This can be
accomplished only through their power over the money supply.
Gold is the
ultimate hammer, because it has long been the favored money commodity.
It cannot be easily counterfeited. It is expensive to mine. It is
easily divisible. It has high value in relation to weight and volume.
It is widely recognized. So, it has historic value not intrinsic
value, which no asset has, but historic value. It has easily predictable
allow little people to hold the hammer. Through the market process,
individuals exercise their choices. They determine market value
through a system of auctions. The free market is a gigantic auction.
keep the auction honest. No one can legally print money to gain
influence in the auction. No one can easily counterfeit his way
into great wealth, outbidding others.
want to direct the auction. So do politicians. So do commercial
bankers. All three elite groups have an incentive to keep gold coins
out of the auction process. Gold coins keep the auction honest,
and elites maintain their power through dishonesty above
all, dishonest money. They fear honest money.
Gold is described
by ignorant journalists as the money of plutocrats. Fiat money Greenbackers
like Ellen Brown agree. (On Ellen Brown's fiat money utopianism,
here.) This reverses the truth. Fiat money is the money of the
elites, the plutocrats of all ages. The gold coin standard is the
economy of the masses.
are mini-hammers. These coins, along with legal IOUs to coins, transfer
enormous authority to the masses. The little guy with gold coins
or IOUs to gold coins has a veto over the easy money, big-spending,
power-centralizing schemes of the government's central planners
and their profit-seeking allies, the counterfeiters: fractional
There is chatter
on the fringes of the Establishment about the reintroduction of
a gold standard. The gold standard they promote is not the pre-World
War I gold coin standard. That standard drastically reduced government
power over money, but it was always a compromise with government
power. The governments of Europe revoked that standard when the
war began. They played around with a government-run, central bank-run
version in 1922: the gold exchange standard. The final revocations
of the gold coin standard took place in 1931, when England went
off the gold coin standard, and 1933, when the United States did.
There are gold
coins and counterfeit gold coins. Similarly, there are gold standards
and counterfeit gold standards. When dealing with gold coins or
theories of a gold standard, I suggest that you adopt a slogan from
1950s advertising: "Accept no substitutes!"
is the real thing: a free market standard without any government
involvement no mint, no central bank, no legal tender laws,
no printing presses, no warehouse receipts, no "free" storage. Just
this: laws against fraud and laws enforcing contracts. That system
will produce a gold coin standard for large transactions and a silver
coin standard for smaller ones. The users can decide what they want
to use as money. The ruling elites will no longer be allowed to
counterfeit, confiscate, or manipulate money.
When an economist
who defends this system wins the Nobel Prize on the basis of his
defense, we will know that our deliverance draweth nigh. If the
prize is awarded in gold coins, we have entered the Golden Age.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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