Two Kinds of Gold Standards

The British economist, John Maynard Keynes, is famous for one aphorism, “In the long run, we are all dead,” which he applied to the operations of the price system, and one phrase: “barbarous relic,” which he applied to the gold standard. He believed that the free market needed to be policed by bureaucrats to be made efficient. He also believed that the gold standard’s restriction of State power is a great evil.

Keynes’ hostility to the traditional gold standard is shared by all inflationists and statists. It places temporary limits on the government’s ability to create fiat money and thereby spend without taxing directly. I say “temporary,” because the traditional gold standard is a promise made by a government. It is made to be broken later, during an emergency that is declared by the government. It is ultimately paper gold. It is a misuse of the people’s trust.

The gold standard made possible much of the civilization of the ancient world, until gold was abandoned in the third-century by the government of Rome. Then classical civilization disappeared in the West. But in the Eastern Roman Empire (Byzantium), a reliable gold coinage lasted for over a thousand years.

Even in the Alexandrian and Roman empires, the government needed gold to pay its troops. When the costs of maintaining Rome’s war machine and its bread and circuses at home grew too great for direct taxation to fund them, the government began to debase its coins. This debasement paralleled the decay of the Roman Empire.

Is the traditional gold standard really a relic? Yes. It becomes a relic in every empire, as surely as there was gold at the beginning of that empire. No nation honors the requirements of a State-run gold standard: the free convertibility of the State’s money into gold.


The first view is that of the free market. The gold standard is seen as the product of voluntary exchange. The State’s enforcement of the laws of contract leads to the development of a commodity money. The commodity usually is gold or silver. Whatever commodity is portable, widely recognized, divisible, and has a high value in terms of weight and volume can function as money. But gold and silver are the common winners in the competition for money. Money is therefore initially not the product of State action. It is the product of voluntary exchange. This is the view of Austrian School economists: Mises, Rothbard, Hayek. See my eBook, “Mises on Money.”

The other view of gold argues that money is the product of State declaration, i.e., fiat announcement. Money is anything that the State says it is. This has been the view of all governments from the beginning of coinage in the sixth century B.C. The State’s gold standard can be extended as a result of military conquest. The victorious nation steals the gold hoard of the defeated nation. While the empire is expanding, the gold standard is possible. When the empire shrinks, gold is abandoned. The costs of empire lead to the debasement of the currency.

Keynes’ statement on gold came in the early 1920’s, which was when the British Empire had begun to fade. World War I had nearly bankrupted the British government. World War II would end the British empire.

Lenin’s famous quote on gold was that gold would someday be used for public urinals. But that would be later. Under Communism, torture was common to get men to surrender their gold to the state.

Barbarism began in the twentieth century when World War I broke out in 1914. Within weeks, the commercial banks suspended redeemability in gold. The governments authorized this, and then had their central banks confiscate the confiscated gold from the commercial banks. The degree of barbarism that the war produced could not have been accomplished had a gold standard been in force. The public would have stripped the banks of the public’s gold. The governments would have had to come to terms with the enemy.

It was the abandonment of the gold standard that made modern barbarism affordable.


Gold initially becomes the favored money metal because of the decisions of individuals. The division of labor is not the product of State sovereignty over money. It is the product of the rule of law.

Under contract law, if a gold coin’s producer debases his coins, he can be sued in court by his victims or by his competitors. Debasement is fraud: a violation of contract. The State need only enforce contracts in order for a gold standard to be extended by market participants.

Government officials then see that gold coins circulate. They intervene, mandating that all coins be stamped with the State’s seal. The State comes in the name of its own sovereignty to bask in the light of a free market institution: the gold standard. It is like a species of bird that lays its eggs in another species’ nests. It has to fool the other birds. So does the State have to fool the public. “Money is an attribute of the state’s sovereignty!” Not initially, it isn’t.

The State then offers to store coins for free and issues receipts: IOU’s. A free service! How wonderful! Something for nothing! But the offer is bogus. The State’s goal is to get the public to start using IOU’s for gold coins rather than actual coins. The State can then more easily confiscate these coins: nothing for something!

There is no long-run limit on the State when the State controls the coinage. The traditional gold standard is a paper standard, revocable at will by politicians.

Commercial banks can also issue IOU’s for depositors’ gold. The banks make the same offer: redeemable on demand. The tip-off that there is fraud in the arrangement is when storage fees are not charged for the service. There are no free lunches. You must ask: How can the institution afford to offer a free service? Who pays now? Who will pay later? Someone must pay for storage.

There is a limit on the ability of a bank to issue credit, but only when the government enforces gold contracts. The government can and will change the gold contract law during an emergency.

I suggest this relationship: a government-guaranteed gold standard is to money what government-guaranteed health inspection is to prostitution. Both guarantees are subsidies to the providers. Both guarantees create the illusion of decreased risk. Finally, the operations of both systems are best described by the same verb.

When money fails, legitimacy is lost, too. Gold’s price is a test of political legitimacy: the value of a national currency. A rising gold price is a vote of reduced confidence in the State’s money. This is why governments since World War I have done everything they could to remove gold coins from circulation. Politicians want no public referendum on the legitimacy of the State. They allow political voting. Political voting can be controlled. Gold coins cannot be controlled. So, they are abolished by law.

This is why governments sell off gold. It de-legitimizes gold and legitimizes government currency. But this can go only for as long as central banks sell their confiscated gold.


Most of the problems are obvious. Coins are bulky. They must be carried with you, which increases the risk of robbery and loss. There are problems with making small change.

The solution is an IOU redeemable in gold. The IOU must be signed over by the existing owner to a new owner. The IOU, if trusted, results in wide acceptance. It is “as good as gold.” It may even be better than gold: less risky.

But then comes default on the IOU contract. If the agency that stores the gold and issues the IOU is protected by the government, as banks are, or if the issuer is an arm of the government, then the risk of default in wartime is high.

We see an extension of trust: by the public to the banks, by the banks to the central bank; by the central banks to the State. The transfer of trust moves from economics to political sovereignty. But a system based on political sovereignty is not trustworthy. It has the ability to cheat, and no agency can bring charges. No agency of appeal exists.

During World War II, the Bank for International Settlements (Basle) was created so that agents of the various central banks of warring nations could clear their accounts. It was a neutral third-party agency that enforced the rules. This made a gold exchange standard possible among central bankers. What they did not allow to the masses whose gold had been stolen by the commercial banks they demanded from each other: settlement in gold. This allowed the national war machines to continue their bloody efforts.


In the republican phase of government, the State monetizes gold. It places its stamp of approval on gold coins. It asserts sovereignty over money in the name of preserving the value of money by guaranteeing the fineness and weight of the coins.

Then, in the empire phase, debasement begins. The State de-monetizes gold. It substitutes base metals and calls the new coins equally valuable. The free market assesses the truth of this claim, exchange by exchange.

The result of the de-monetization of gold is the de-capitalization of the State. The de-monetized IOU’s become IOU nothings. The State finds it more difficult to get the masses to accept its money.

In the twentieth century, the State persuaded the masses to accept its IOU nothings. The result has been a vast expansion of state power and state debt, coupled with a vast depreciation of money’s purchasing power. This will not be reversed until the debt system overwhelms the monetary system (deflation), or the state’s official money is abandoned by the public (inflation).


The State’s gold standard is a preliminary to eventual confiscation or debasement. The State’s promise of redemption on demand should not be trusted.

A gold coin standard by profit-seeking storage organizations can be trusted with less risk, but not if the storage is offered for free. There are no free lunches. Someone will eventually pay for free services. When it comes to fractional reserve banking, that someone is always the late-coming depositors.

This is why any call by conservatives for the State to adopt a gold standard is futile. No one will listen. Even if voters understood the case for a limited State, they would not be able to limit the State by a State-run gold standard. A State-run monetary system, with the exception only of Byzantium, becomes a debased standard.

This is why the free market is the only reliable source for the re-establishment of a gold standard. Honest money begins with these steps: (1) the revocation of legal tender laws that require people to accept the State’s money; (2) the enforcement of contracts; (3) laws against fraud, which fractional reserve banking is. The free market can do the rest.

For a free copy of my book, “Honest Money,” click here.

August 26, 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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