The Re-Monetization of Gold

If gold is to be re-monetized, then this must mean that it has been de-monetized. But isn’t gold money?

No, gold is not money. It has not been money for Europeans since 1914, when the commercial banks stole it from depositors at the outbreak of World War I, and central banks then stole it from commercial banks before the war was over. Gold has not been money for Americans since 1933, when Roosevelt unilaterally by executive order stole it from the public.

Gold is high-powered money for central bankers, who settle their banks’ accounts in gold. But this is so far removed from the decisions of consumers that I can safely say that gold is not money.

The question is: Will it ever again become money?

This is the most important of all monetary questions.


Money is the most marketable economy. Gold is therefore not money. You have to buy gold from a specialized broker. There are so few gold brokers any more that they are all known to each other. Local coin stores don’t do much business in bullion gold coins such as the American eagle or Canadian maple leaf. The large wholesale firms like Mocatta don’t deal with the public. There are so few full-time bullion coin dealers that you could have a convention of them in a Motel 6 conference room. (When was the last time you were in a Motel 6 conference room?)

But . . . it costs $39 to rent a Motel 6 room. That tells us something. It’s not $6 a room any longer. Inflation has done its work.

Money is liquid. Liquidity means that you can exchange money for goods and services directly without the following costs:


There is a price spread between what you can sell a gold coin for (in money) and what you buy a gold coin for (in money). Gold coins therefore are not money.

I realize that old-time gold bugs go around saying “gold is the only true money” and similar slogans. These slogans reflect a lack of understanding of either gold or money. They are comforting slogans, no doubt, for someone who bought gold coins at twice the price that they command today, and held them for a quarter of a century at no interest while all other prices doubled or tripled. If he had instead made down payments on rental houses, he would be a whole lot richer. But the fact is, gold is not only not the only true money, it is not money at all. When you can walk into Wal-Mart and buy whatever you want with a gold coin or gold-denominated debit card, then gold will be money. Not until then.

To tell a gold bug this is to strike at his core beliefs. But his core beliefs are based on a lack of understanding of economics.

Money is the most marketable commodity. Gold is not the most marketable commodity. Given the lack of retail outlets where you can buy and sell gold, it is not even remotely money. Unless you are a central banker, gold is not money for you.


Gold is a valuable commodity. It was originally valuable for its physical properties: its glorious shine, its imperviousness to decay, its limited supply (high cost of mining), its malleability, its divisibility. In most religions, gold is used to represent deity or permanent truth. When something is “as good as gold,” it’s valuable.

Because of these properties, gold long ago became widely used in economic exchange. When the city-state of Lydia started issuing gold coins over five centuries before the birth of Jesus, gold became the most recognizable form of money in the classical world. Gold had been monetized long before this, as all historical records indicate, but the convenience of the coins amplified what had already been the case. This increased the demand for gold.

Gold was no longer money in Western Europe after the fall of Rome in the fifth century. In March of 2003, I visited the British museum. The museum has an exhibit of an early medieval grave-ship, where a Saxon seafaring king had been buried. The wood is gone, but metal implements remain. There was a small stash of gold coins. This is the Sutton Hoo exhibit. The burial’s date is estimated at 625. By that time, gold coins were rare in the West. In another museum exhibit of gold coins, you can see that from about 625 until the introduction of gold coins in Florence in 1252, there is only one gold coin.

Gold coins did circulate for the entire period in the Eastern Roman Empire (Byzantium), from 325 (Constantinople) to the fall of Byzantium to the Turks (1453). But there was little trade between the two halves of the old Roman Empire until late in the Middle Ages. The low division of labor in the West made barter far more common, and silver and bronze coins were the media of exchange.

It was the rise of the modern world, which was marked by an increasing division of labor, that brought gold coins back into circulation. Fractional reserve banking and gold coins developed side by side. Fractional reserve banking is why the boom-bust cycle has been with us, with credit money stimulating economic growth (an increase in the division of labor), and bank runs shrinking the money supply and contracting the economy (a decrease in the division of labor).

There has been a 500-year war in the West between gold coins and bank-issued credit money.


Bankers want to make money on money that their institutions create. They use the promise of redemption-on-demand in gold or silver as the lure by which they trick depositors into believing in something for nothing, i.e., the possibility of redemption on demand of money that has been loaned out at interest. The public believes this numerical impossibility, but then, one fine day, too many depositors present their IOU’s for gold or silver to the bank. A bank run begins, the lie is exposed, and the bank goes bankrupt (bank + rupture). The depositors lose their money. They get nothing for something, which is always the small-print inscription on the other side of something for nothing.

The bankers hate gold as money. Gold as money acts as a restraint on their profits, which are derived from creating money “out of thin air” and lending it at interest. Gold as money acts as a barrier to the expansion of credit money. The public initially does not trust the bankers or their money apart from the right of redemption on demand. Depositors initially insist on IOU’s for gold coins. So, the bankers partially submit to gold, but only grudgingly.

To keep from facing their day of judgment — redemption day, when the public presents its IOU’s and demands payment — fractional reserve bankers call on the government. They persuade the government to create a bankers’ monopoly, called a central bank, which stands ready to intervene and lend newly created fiat money to any commercial bank inside the favored cartel that gets into trouble with its depositors. By reducing the risk of local bank failures, the central bank extends the public’s acceptance of a system of unbacked IOU’s, called “an elastic currency” when members of the banking cartel create it, and called “counterfeiting” when non-members of the cartel create it.

Then why do central bankers use gold to settle their own interbank accounts? Because central bankers don’t trust each other — the same reason why the public prior to 1914 used gold coins and IOU’s to gold coins. The central bankers don’t want to get paid off in depreciating money. At the same time, they do want to retain the option of paying off the public in depreciating money.

It’s not that they want depreciating money. They want economic growth, lots of borrowers, and lots of opportunities to lend newly created money at interest. The problem is, they are never able to maintain the economic boom, which was fostered by credit money, without more injections of credit money. The same holds true for additional profits from lending. If a bank has additional money to lend and a booming economy filled with would-be borrowers, that’s great for the bankers. But the result has always been either a deflationary depression when the credit system collapses, or else price inflation, which overcomes the collapse at the expense of reliable money. The result in both cases is lost profits.

Bankers want the fruits of a gold coin standard: predictably stable or slowly falling prices, a growing economy, international trade, and a currency worth something when they retire. But they don’t want the roots of a gold coin standard: lending limited by deposits, a legal link between the time period of the loan and the time period when the depositor cannot redeem his deposit, and profits arising solely from matching lenders (depositors) with borrowers. Bankers sacrifice the roots for the profitable pursuit of the fruits. The results: boom-bust business cycles, bankruptcies, depreciating currencies, shattered dreams of retirement, and political revolutions.

In the twentieth century, fractional reserve bankers won the war of economic ideas: Keynesianism, monetarism, and supply-side economics. They also won the political wars. They succeeded in getting all governments to de-monetize gold, thereby creating unbreakable banking cartels (but not unbreakable currencies). The result was the decline in purchasing power of the dollar by 94%, 1913—2000. Verify this here:

Verify this with the Inflation Calculator, posted on the U.S. government’s Bureau of Labor Statistics Web site.

$1,000 in 1913 = $17,300 in 2000. 1 divided by 17 = .06, or 6%.100% minus 6% = 94%.

In other nations, the depreciation was even worse: World War I and its post-war inflations, plus World War II and its post-war inflations, when added to the Communist revolutions, destroyed entire currency systems, sometimes more than once.


Official statistics indicate that most of the world’s gold is stored in the vaults of central banks. The bulk of the rest of it is in women’s dowries in India, or on ring fingers of Westerners, or in jewelry of affluent women. But, as I have argued previously, central banks have in fact been transferring their gold to private owners by way of the “bullion banks,” which have borrowed gold at 1% per annum, sold it to the public, and invested the money at high interest rates.

If my thesis is correct, then gold has been de-monetized almost completely. It is no longer serving as an ultimate restriction on central bank policies. The central bankers are now trading paper gold — promises to pay gold — that have been issued by private bullion banks, which cannot afford to buy the gold back to re-pay the central banks. The bullion bankers have done to the central bankers what the fractional reserve bankers did to their depositors, and the central bankers did to the commercial banks. They have gotten their hands on gold in exchange for written promises to repay this gold — promises that cannot possibly be fulfilled — and have made oodles of money by lending the money derived from the sale of the gold.

This means two things: this gold has been repatriated to the private markets (yea!), and gold in general is now almost fully de-monetized (boo!). Men have put bracelets and necklaces on their daughters (India) and wives (the West), but consumers do not have gold coins in their individual repositories, especially their pockets.

This means that what had been the highest-value use for gold for 2,600 years — gold as money — has disappeared except among central bankers, and even then increasingly merely IOU’s to gold issued by bullion banks. There has been a huge, historically unprecedented reduction in demand for gold since 1914. This should be obvious to anyone. Demand for gold today is for industrial and ornamental uses, not monetary uses. Yet I am just about the only person within the camp of the gold bugs who is willing to admit this in print.


Nothing is permanent except death, taxes, and the lies of politicians, but in the West, the de-monetization of gold appears to be as permanent as the West. The West has bet its future on fractional reserve banking. This is additional evidence that the West is doomed. It has placed the extension of the division of labor into the hands of the bankers’ cartel.

Faculty members in Western universities are agreed on few things, but one universally shared assumption is that gold should not be money. In business schools and economics departments, in political science department and history departments, the professors are agreed: gold is a relic, and probably a barbarous relic.

But then there is Asia.

In Asia, the people are still barbarians. This means that they don’t trust their governments because they know the truth: governments cheat, lie, and steal. Government corruption is a way of life in heartland Asia. This is a tremendous advantage that Asians enjoy. The less educated the Asian, the more likely he is to distrust the government. He is partially immunized against trusting promises to pay that are issued by governments. This is why Chinese peasants still want silver coins and Indian peasant wives still have gold jewelry. All over the Asian mainland, paper money has universally depreciated. The division of labor has been thwarted.

In the Asian tiger nations, whose economies have been closely tied to the capitalist West, fractional reserve banking is accepted, and fiat currencies are trusted. These nations have experienced a loss of trust in gold, which is the other side of the debased coin of fractional reserve banking. The war is on in Asia.

China’s currency is government-controlled and highly inflationary. What is saving China from mass price inflation is the rapid spread of the division of labor through freeing the economy. Capitalism’s extension of the division of labor is paralleling the Bank of China’s extension of credit money. So far, capitalism has won the race. But the race is not a sprint; it’s a marathon. At some point, there will be a massive recession in China as a result of the monetary inflation that has been going on for two decades. The boom will turn into a bust. Then the Chinese may remember the truth that their great-grandparents knew: you cannot safely trust government money. Those Chinese who did trust government’s money in 1948 were destroyed economically by Chiang’s mass inflation and then wiped out politically and economically by Mao’s tyranny.


Gold is an inflation hedge. There has been inflation since 1980. But gold has not risen in price since 1980 for many reasons: the gold bubble of 1979, the continuing de-monetization of gold by central banks, the steady sell-off of gold by central banks, the central banks’ gold leasing programs (disguised sales), and dollar supremacy internationally. The third factor, dollar supremacy, is looking shaky.

Gold is not a deflation hedge whenever it is not monetized, and it has not been monetized for generations. But, in the midst of deflation, there is a possibility of the re-monetization of gold. I regard this as a distant possibility. During a breakdown in the payments system — cascading cross defaults, as Greenspan calls it — there is an outside possibility that gold will become used again in the monetary system. But for this change to take place, a massive breakdown is necessary, in order to overcome a century of anti-gold economic theories. There is no case for gold being made by Ph.D.-holding economists, politicians, pastors, and TV commentators. A return to gold as money in the West will take a cataclysm, which will impose enormously high costs on the public for not using gold as money, thereby pressuring consumers to adopt gold as money. In a cataclysm, the cost of moving from fiat money to gold would be accompanied by a horrendous reduction in the social division of labor — life-threatening, in my view. A collapse of the derivatives market could produce such a cataclysm. To say that it cannot happen is foolish, but very few people can afford to do much to prepare for such an event. I have. Maybe you have. But we are a minority. We are all dependent on the division of labor to sustain our lives, let alone our lifestyles.

In Asia, the costs of returning to gold as money are much lower. The division of labor is lower. There is less trust in government. Old ideas die hard. There is also increasing wealth, which will further the purchase of gold. But I think this will be gold as ornament and investment, not gold as money.

That’s why I do not expect to see gold as money in my lifetime. But I still recommend gold as an investment. This is because, when it comes to monetary inflation, the mamby-pamby policies of the post-war West are only a cautious prelude to the future. To overcome any deflation of the money supply in today’s debt-induced, credit-induced world economy, central bankers will stop acting like wussies. They will start inflating in earnest, for only through inflation can the fractional reserve process continue. It is inflate or die. They will inflate. Then the West’s currencies will die. But bankers will inflate now in order to postpone the death of money. They believe that “something will turn up” other than prices.

For gold to become money in the West will take an economic cataclysm. I am too old to be enthusiastic about going through such a cataclysm. So, I remain content with the de-monetization of gold. The consumer is economically sovereign, and he has not shown any interest in gold as money. Long live the consumer, especially in his capacity as a producer!

But as for gold as an inflation hedge . . . that’s a horse of a different color. Gold as a commodity will outperform digits as money.

In this sense, I remain a pessimist. The world needs gold as money, but the transition costs are astronomical. “Everybody wants to go to heaven, but nobody wants to die.”

Nevertheless, I would rather be a rich pessimist with gold than a poor optimist with digits.

How about you?

August 13, 2003

Gary North is the author of Mises on Money. Visit For a free subscription to Gary North’s newsletter on gold, click here.

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