The Myth of Insufficient Gold

One of the standard arguments against a gold standard is this: “There’s not enough gold to facilitate all of the transactions in a free market economy.” This is an old criticism. It was a lot more popular before the desktop computer industry started cutting prices every year, while increasing product quality. These days, people expect falling prices in desktop computers.

What if they expected price cuts in all other industries?

If you have ever wondered what would happen if a relatively fixed supply of above-ground gold were the primary medium of exchange, this essay may help clarify things.

Most people have no conception of what you are about to read. They are not interested. They don’t know that their futures will depend heavily on the answers to these questions that will be adopted by the Federal Reserve System’s policy-makers. They think, “I can’t be bothered with monetary theory.” Therein lies your investment opportunity.

Cliché: “There Isn’t Enough Gold”

It would appear that the reasons commonly advanced as a proof that the quantity of the circulating medium should vary as production increases or decreases are entirely unfounded. It would appear also that the fall of prices proportionate to the increase in productivity, which necessarily follows when, the amount of money remaining the same, production increases, is not only entirely harmless, but in fact the only means of avoiding misdirections of production.

F. A. Hayek, Prices and Production (1931), p. 105

What Professor Hayek wrote in 1931 was not accepted then, and it is not accepted today. Note: it would take over $1,200 to match the purchasing power of $100 in 1931, according to the inflation calculator of the U.S. government’s Bureau of Labor Statistics.

If policy-makers had listened to him, we might be able to buy for $25 what it took $100 to buy in 1931. That is because economic growth has continued steadily since 1931.


Economic growth is one of the chief fetishes of modern life. Hardly anyone would challenge the contemporary commitment to the aggregate expansion of goods and services. This is true of socialists, interventionists, and free enterprise advocates; if it is a question of “more” as opposed to “less,” the demonstrated preference of the vast bulk of humanity is in favor of the former.

To keep the idea of growth from becoming the modern equivalent of the holy grail, the supporter of the free market is forced to add certain key qualifications to the general demand for expansion.

First, that all costs of the growth process be paid for by those who by virtue of their ownership of the means of production gain access to the fruits of production. This implies that society has the right to protect itself from unwanted “spill over” effects like pollution, i.e., that the so-called social costs be converted into private costs whenever possible.

Second, that economic growth be induced by the voluntary activities of men cooperating on a private market. The state-sponsored projects of “growthmanship,” especially growth induced through inflationary deficit budgets, are to be avoided.

Third, that growth not be viewed as a potentially unlimited process over time, as if resources were in unlimited supply.

In short, aggregate economic growth should be the product of the activities of individual men and firms acting in concert according to the impersonal dictates of a competitive market economy. It should be the goal of national governments only in the limited sense of policies that favor individual initiative and the smooth operation of the market, such as legal guarantees supporting voluntary contracts, the prohibition of violence, and so forth.


The “and so forth” is a constant source of intellectual as well as political conflict.

One of the more heated areas of contention among free market economists is the issue of monetary policy. The majority of those calling themselves free market economists believe that monetary policy should not be the autonomous creation of voluntary market agreements. Instead, they favor various governmental or quasi-governmental policies that would oversee the creation of money and credit on a national, centralized scale.

Monetary policy in this perspective is an “exogenous factor” in the marketplace — something that the market must respond to rather than an internally produced, “endogenous factor” that stems from the market itself. The money supply is therefore supposedly indirectly related to market processes; it is controlled by the central governments acting through the central bank, or else it is the automatic creation of a central bank on a fixed percentage increase per day and therefore not subject to “fine-tuning” operations of the political authorities.

A smaller number of free market advocates (myself among them) are convinced that such monopoly powers of money creation are going to be used. Power is never neutral; it is exercised according to the value standards of those who possess it. Money is power, for it enables the bearer to purchase the tools of power, whether guns or votes.

Governments have an almost insatiable lust for power, or at least for the right to exercise power. If they are granted the right to finance political expenditures through deficits in the visible tax schedules, they are empowered to redistribute wealth in the direction of the state through the invisible tax of inflation.

Money, given this fear of the political monopoly of the state, should ideally be the creation of market forces. Whatever scarce economic goods that men voluntarily use as a means of facilitating market exchanges — goods that are durable, divisible, transportable, and above all scarce — are sufficient to allow men to cooperate in economic production. Money came into existence this way; the state only sanctioned an already prevalent practice. Generally, the two goods that have functioned best as money have been gold and silver: they both possess great historic value, though not intrinsic value (since no commodity possesses intrinsic value).

Banking, of course, also provides for the creation of new money. But as Ludwig von Mises argued, truly competitive banking — free banking — keeps the creation of new credit at a minimum, since bankers do not really trust each other, and they will demand payment in gold or silver from banks that are suspected of insolvency.

Thus, the creation of new money on a free market would stem primarily from the discoveries of new ore deposits or new metallurgical techniques that would make available greater supplies of scarce money metals than would have been economically feasible before. It is quite possible to imagine a free market system operating in terms of nonpolitical money. The principle of voluntarism should not be excluded, a priori, from the realm of monetary policy.


There are several crucial issues involved in the theoretical dispute between those favoring centralized monetary control and free market voluntarists.

First, the question of constitutional sovereignty: which sphere, civil government or the market, is responsible for the administration of money?

Second, the question of economic efficiency: would the plurality of market institutions interfere with the creation of a rational monetary framework?

Third, and most important for this paper: is not a fundamental requirement for the growth of economic production the creation of a money supply sufficient to keep pace, proportionately, with aggregate productivity?

The constitutional question, historically, is easier to answer than the other two. The Constitution says very little about the governing of monetary affairs. The Congress is granted the authority to borrow money on the credit of the United States, a factor which has subsequently become an engine of inflation, given the legalized position of the central bank in its activity of money creation. The Congress also has the power “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures” (Article 11, Section 8). Furthermore, the states are prohibited to coin money, emit bills of credit, or “make any Thing but gold and silver Coin a Tender in Payment of Debts” (Article II, Section 9).


The interpretation of these passages has become increasingly statist since the 1860’s. Gerald T. Dunne describes his book, Monetary Decisions of the Supreme Court, in these terms: “This work traces a series of decisions of the Supreme Court which have raised the monetary power of the United States government from relative insignificance to almost unlimited authority.” He goes on to write: “. . . the Founding Fathers regarded political control of monetary institutions with an abhorrence born of bitter experience, and they seriously considered writing a sharp limitation on such governmental activity into the Constitution itself. Yet they did not, and by “speaking in silences” gave the government they founded the near absolute authority over currency and coinage that has always been considered the necessary consequence of national sovereignty.”

The most detailed study of the changing views of the Supreme Court is the 1,600-page book by Edwin Viera, Pieces of Eight. He is a Harvard-trained lawyer and a first-rate monetary theorist. He shows how the original dollar was based on a free market currency, the Spanish “piece of eight,” which was silver.

The great push toward centralization came, understandably, with the Civil War, the first truly modern total war, with its need of new taxes and new power. From that point on, there has been a continual war of the Federal government against the limitations imposed by a full gold coin standard of money. It is all too clearly an issue of sovereignty: the sovereignty of the political sphere against that of individuals operating in terms of voluntary economic transactions.


The second question is more difficult to answer. Would the plurality of monetary sovereignties within the over-all sovereignty of a competitive market necessarily be less efficient than a money system created by central political sovereignty? As a corollary, are the time, capital, and energy expended in gold and silver mining worse spent than if they had gone into the production of consumer goods?

In the short run and in certain localized areas, plural monetary sovereignties might not be competitive. A local bank could conceivably flood a local region with unbacked fiat currency. But these so-called wildcat banking operations, unless legally sanctioned by state fractional reserve licenses (deceptively called limitations), do not last very long. People discount the value of these fiat bills, or else make a run on the bank’s vaults. The bank is not shielded by political sovereignty against the demands of its creditors. In the long run it must stay competitive, earning its income from services rather than the creation of fiat money. With the development of modern communications that are almost instantaneous in nature, frauds of this kind become more difficult.

The free market is astoundingly efficient in communicating knowledge. The activity of the stock market, for example, in response to new information about a government policy or a new discovery, indicates the speed of the transfer of knowledge, as prices are rapidly raised or lowered in terms of the discounted value that is expected to accrue because of the new conditions. The very flexibility of prices allows new information to be assimilated in an economically efficient manner. Why, then, are changes affecting the value of the various monetary units assumed to be less efficiently transmitted by the free market’s mechanism than by the political sovereign? Why is the enforced stability of fixed monetary ratios so very efficient and the enforced stability of fixed prices on any other market so embarrassingly inefficient? Why is the market incapable of arbitrating the value of gold and silver coins (domestic vs. domestic, domestic vs. foreign), when it is thought to be so efficient at arbitrating the value of gold and silver jewelry? Why is the market incapable of registering efficiently the value of gold in comparison to a currency supposedly fixed in relation to gold?


The answer should be obvious: it is because the market is so efficient at registering subtle shifts in values between scarce economic goods that the political sovereigns ban the establishment of plural monetary sovereignties. It is because any disparity economically between the value of fiat currency supposedly linked to gold and the market value of gold exposes the ludicrous nature of the hypothetical legal connection, which in fact is a legal fiction, that the political sovereignty assumes for itself a monopoly of money creation.

It is not the inefficiency of the market in registering the value of money but rather its incomparable efficiency that has led to its position of imposed isolation in monetary affairs. Legal fictions are far more difficult to impose on men if the absurdity of that fiction is exposed, hour by hour, by an autonomous free market mechanism.

Would there not be a chaos of competing coins, weights, and fineness of monies? Perhaps, for brief periods of time and in local, semi-isolated regions. But the market has been able to produce light bulbs that fit into sockets throughout America, and plugs that fit into wall sockets, and railroad tracks that match many companies’ engines and cars. To state, a priori, that the market is incapable of regulating coins equally well is, at best, a dangerous statement that is protected from critical examination only by the empirical fact of our contemporary political affairs.

Changes in the stock of gold and silver are generally slow. Changes in the “velocity of money” — the number of exchanges within a given time period — are also slow, unless the public expects some drastic change, like a devaluation of the monetary unit by the political authority. These changes can be predicted within calculable limits; in short, the economic impact of such changes can be discounted. They are relatively fixed in magnitude in comparison to the flexibility provided by a government printing press or a central bank’s brand new IBM computer. The limits imposed by the costs of mining provide a continuity to economic affairs compared to which the “rational planning” of central political authorities is laughable.

What the costs of mining produce for society is a restrained state. We expend time and capital and energy in order to dig metals out of the ground. Some of these metals can be used for ornament, or electronic circuits, or for exchange purposes; the market tells men what each use is worth to his fellows, and the seller can respond accordingly. The existence of a free coinage restrains the capabilities of political authorities to redistribute wealth, through fiat money creation, in the direction of the state. That such a restraint might be available for the few millions spent in mining gold and silver out of the ground represents the greatest potential economic and political bargain in the history of man. To paraphrase another patriot: “Millions for mining, but not one cent in tribute.”


By reducing the parameters of the money supply by limiting money to those scarce economic goods accepted voluntarily in exchange, prediction becomes a real possibility. Prices are the free market’s greatest achievement in reducing the irrationality of human affairs. They enable us to predict the future.

Profits reward the successful predictors, while losses greet the inefficient forecasters, thus reducing the extent of their influence. The subtle day-to-day shifts in the value of the various monies would, like the equally subtle day-to-day shifts in value of all other goods and services, be reflected in the various prices of monies, vis-à-vis each other.

Professional speculators (predictors) could act as arbitrators between monies. The price of buying pounds sterling or silver dollars with my gold dollar would be available on request, probably published daily in the newspaper. Since any price today reflects the supply and demand of the two goods to be exchanged, and since this in turn reflects the expectations of all participants of the value of the items in the future, discounted to the present, free pricing brings thousands and even millions of forecasters into the market.

Every price reflects the composite of all predictors’ expectations. What better means could men devise to unlock the secrets of the future? Yet monetary centralists would have us believe that in monetary affairs, the state’s experts are the best source of economic continuity, and that they are more efficient in setting the value of currencies as they relate to each other than the market could be.

What we find in the price-fixing of currencies is exactly what we find in the price-fixing of all other commodities: Periods of inflexible, politically imposed “stability” interspersed with great economic discontinuities. The old price shifts to some wholly new, wholly unpredictable, politically imposed price, for which few men have been able to take precautions. It is a rigid stability broken by radical shifts to some new rigidity. It has nothing to do with the fluid continuity of flexible market pricing. Discontinuous “stability” is the plaque of politically imposed prices, as devaluations come in response to some disastrous political necessity, often internationally centered, involving the prestige of many national governments. It brings the rule of law into disrepute, both domestically and internationally. Sooner or later domestic inflation comes into conflict with the requirements of international solvency.

For those who prefer tidal waves to the splashing of the surf, for those who prefer earthquakes to slowly shifting earth movements, the rationale of the political monopoly of money may appear sane. It is strange that anyone else believes in it. Instead of the localized discontinuities associated with private counterfeiting, the state’s planners substitute complete, centralized discontinuities, the predictable market losses of fraud (which can be insured against for a fee) are regarded as intolerable, yet periodic national monetary catastrophes like inflation, depression, and devaluation are accepted as the “inevitable” costs of creative capitalism. It is a peculiar ideology.


The third problem seems to baffle many well-meaning free market supporters. How can a privately established monetary system linked to gold and silver expand rapidly enough to facilitate business in a modern economy? How can new gold and silver enter the market rapidly enough to “keep pace,” proportionately, with an expanding number of free market transactions?

The answer seems too obvious: the expansion of a specie-founded currency system cannot possibly grow as fast as business has grown in the last century. Since the answer is so obvious, something must be wrong with the question. There is something wrong; it has to do with the invariable underlying assumption of the question: today’s prices are downwardly inflexible.

It is a fact that many prices are inflexible in a downward direction, or at least very, very “sticky.” For example, wages in industries covered by minimum wage legislation are as downwardly inflexible as the legislatures that have set them. Furthermore, wages in industries covered by the labor union provisions of the Wagner Act of 1935 are downwardly inflexible, for such unions are legally permitted to exclude competing laborers who would work for lower wages. Products that come under laws establishing “fair trade” prices, or products undergirded by price floors established by law, are not responsive to economic conditions requiring a downward revision of prices. The common feature of the majority of downwardly inflexible prices is the intervention of the political sovereignty.

The logic of economic expansion should be clear enough: if it takes place within a relatively fixed monetary structure, either the velocity of money will increase (and there are limits here) or else prices in the aggregate will have to fall. If prices are not permitted to fall, then many factors of production will be found to be uneconomic and therefore unemployable. The evidence in favor of this law of economics is found every time a depression comes around (and they come around just as regularly as the government-sponsored monetary expansions that invariably precede them). Few people interpret the evidence intelligently.

Labor union leaders do not like unemployed members. They do not care very much about unemployed nonmembers, since these men are unemployed in order to permit the higher wages of those within the union. Business owners and managers do not like to see unemployed capital, but they want high rates of return on their capital investments even if it should mean bankruptcy for competitors. So, when falling prices appear necessary for a marginal firm to stay competitive, but when it is not efficient enough to compete in terms of the new lower prices for its products, the appeal goes out to the state for “protection.” Protection is needed from nasty customers who are going to spend their hard-earned cash or credit elsewhere.

Each group resists lower returns on its investment — labor or financial — even in the face of the biggest risk of all: total unemployment. And if the state intervenes to protect these vested interests, it is forced to take steps to insure the continued operation of the firms.

It does so through the means of an expansion of the money supply. It steps in to set up price and wage floors; for example, the work of the NRA (National Recovery Administration) in the early years of the Roosevelt administration. Then the inflation of the money supply raises aggregate prices (or at least keeps them from falling), lowers the real income from the fixed money returns, and therefore “saves” business and labor. This was the “genius” of the Keynesian recovery, only it took the psychological inducement of total war to allow the governments to inflate the currencies sufficiently to reduce real wages sufficiently to keep all employed, while simultaneously creating an atmosphere favoring the imposition of price and wage controls in order to “repress” the visible signs of the inflation, i.e., even higher money prices. So prices no longer allocated efficiently; ration stamps, priority slips, and other “hunting licenses” took the place of an integrated market pricing system. So did the black market.


Postwar inflationary pressures have prevented us from falling into reality. Citizens will not face the possibility that the depression of the 1930’s is being repressed through the expansion of the money supply, an expansion which is now threatening to become exponential. No, we seem to prefer the blight of inflation to the necessity of an orderly, generally predictable downward drift of aggregate prices.

Most people resist change. That, in spite of the hopes and footnoted articles by liberal sociologists who enjoy the security of tenure.

Those people who do welcome change have in mind familiar change, potentially controllable change, change that does not rush in with destruction. Stability, law, order: these are the catchwords even in our own culture, a culture that has thrived on change so extensive that nothing in the history of man can compare with it. It should not be surprising that the siren’s slogan of “a stable price level” should have lured so many into the rocks of economic inflexibility and monetary inflation.

Yet a stable price level requires, logically, stable conditions: static tastes, static technology, static resources, static population. In short, stable prices demand the end of history. The same people who demand stable prices, whether socialist, interventionist, or monetarist, simultaneously call for increased economic production. What they want is the fulfillment of that vision restricted to the drunken of the Old Testament: “… tomorrow shall be as this day, and much more abundant” (Isaiah 56:12). The fantasy is still fantasy; tomorrow will not be as today, and neither will tomorrow’s price structure.

Fantasy in economic affairs can lead to present euphoria and ultimate miscalculation. Prices change. Tastes change. Productivity changes. To interfere with those changes is to reduce the efficiency of the market; only if your goal is to reduce market efficiency would the imposition of controls be rational. To argue that upward prices, downward prices, or stable prices should be the proper arrangement for any industry over time is to argue nonsense. An official price can be imposed for a time, of course, but the result is the misallocation of scarce resources, a misallocation that is mitigated only by the creation of a black market.


There is one sense in which the concept of stable prices has validity. Prices on a free market ought to change in a stable, generally predictable, continuous manner. Price (or quality) changes should be continual (since economic conditions change) and hopefully continuous (as distinguished from discontinuous, radical) in nature. Only if some exogenous catastrophe strikes the society should the market display radical shifts in pricing. Monetary policy, ideally, should contribute no discontinuities of its own — no disastrous, aggregate unpredictabilities. This is the only social stability worth preserving in life: the stability of reasonably predictable change.

The free market, by decentralizing the decision-making process, by rewarding the successful predictors and eliminating (or at least restricting the economic power of) the inefficient forecasters, and by providing a whole complex of markets, including specialized markets of valuable information of many kinds, is perhaps the greatest engine of economic continuity ever developed by men. That continuity is its genius. It is a continuity based, ultimately, on its flexibility in pricing its scarce economic resources. To destroy that flexibility is to invite disaster.

The myth of the stable price level has captured the minds of the inflationists, who seek to impose price and wage controls in order to reduce the visibility of the effects of monetary expansion. On the other hand, stable prices have appeared as economic nirvana to conservatives who have thought it important to oppose price inflation. They have mistaken a tactical slogan — stable prices — for the strategic goal. They have lost sight of the true requirement of a free market, namely, flexible prices. They have joined forces with Keynesians and neo-Keynesians; they all want to enforce stability on the “bad” increasing prices (labor costs if you’re a conservative, consumer prices if you’re a liberal), and they want few restraints on the “good” upward prices (welfare benefits if you’re a liberal, the Dow Jones average if you’re a conservative). Everyone is willing to call in the assistance of the state’s authorities in order to guarantee these effects. The authorities respond.

What we see is the “ratchet effect.” A wage or price once attained for any length of time sufficient to convince the beneficiaries that such a return is “normal” cannot, by agreed definition, be lowered again. The price cannot slip back. It must be defended. It must be supported. It becomes an ethical imperative. Then it becomes the object of a political campaign. At that point the market is threatened.


The defense of the free market must be in terms of its capacity to expand the range of choices open to freemen. It is an ethical defense. Economic growth that does not expand the range of men’s choices is a false hope. The goal is not simply the expansion of the aggregate number of goods and services. It is no doubt true that the free market is the best means of expanding output and increasing efficiency, but it is change that is constant in human life, not expansion or linear development. There are limits on secular expansion.

Still, it is reasonable to expect that the growth in the number of goods and services in a free market will exceed the number of new gold and silver discoveries. If so, then it is equally reasonable to expect to see prices in the aggregate in a slow decline. In fact, by calling for increased production, we are calling for lower prices, if the market is to clear itself of all goods and services offered for sale. Falling prices are no less desirable in the aggregate than increasing aggregate productivity. They are economic complements.

Businessmen are frequently heard to say that their employees are incapable of understanding that money wages are not the important thing, but real income is. Yet these same employers seem incapable of comprehending that profits are not dependent upon an increasing aggregate price level.

It does not matter for aggregate profits whether the price level is falling, rising, or stable. What does matter is the entrepreneur’s ability to forecast future economic conditions, including the direction of prices relevant to his business.

Every price today includes a component based on the forecast of buyer and seller concerning the state of conditions in the future. If a man on a fixed income wants to buy a product, and he expects the price to rise tomorrow, he logically should buy today; if he expects the price to fall, he should wait. Thus, the key to economic success is the accuracy of one’s discounting, for every price reflects in part the future price, discounted to the present. The aggregate level of prices is irrelevant; what is relevant is one’s ability to forecast particular prices.

It is quite likely that a falling price level (due to increased production of non-monetary goods and services) would require more monetary units of a smaller denomination. But this is not the same as an increase of the aggregate money supply. It is not monetary inflation. Four quarters can be added to the money supply without inflation, just as long as a paper one-dollar bill is destroyed. The effects are not the same as a simple addition of the four quarters to the money supply.

The first example conveys no increase of purchasing power to anyone; the second does. In the first example, no one on a fixed income has to face an increased price level or an empty space on a store’s shelf due to someone else’s purchase. The second example forces a redistribution of wealth, from the man who did not have access to the four new quarters into the possession of the man who did. The first example does not set up a boom-bust cycle; the second does.

Prices in the aggregate can fall to zero only if scarcity is entirely eliminated from the world, i.e., if all demand can be met for all goods and services at zero price. That is not our world. Thus, we can safely assume that prices will not fall to zero. We can also assume that there are limits on production. The same set of facts assures both results: scarcity guarantees a limit on falling prices and a limit on aggregate production. But there is nothing incompatible between economic growth and falling prices. Far from being incompatible, they are complementary. There should be no need to call for an expansion of the money supply “at a rate proportional to increasing productivity.”

It is a good thing that such an expansion is not necessary, since it would be impossible to measure such proportional rates. It would require whole armies of government-paid statisticians to construct an infinite number of price indexes. If this were possible, then socialism would be as efficient as the free market. Infinite knowledge is not given to men, not even to government statistical boards. Even Arthur Ross, the Department of Labor’s commissioner of labor statistics, and a man who thinks the index number is a usable device, has to admit that it is an inexact science at best. Government statistical indexes are used, in the last analysis, to expand the government’s control of economic affairs. That is why the government needs so many statistics.

The quest for the neutral monetary system, the commodity dollar, price index money, and all other variations on this theme has been as fruitless a quest as socialists, Keynesians, social credit advocates, and government statisticians have ever embarked on. It presupposes a sovereign political state with a monopoly of money creation. It presupposes an omniscience on the part of the state and its functionaries that is utopian. It has awarded to the state, by default, the right to control the central mechanism of all modern market transactions, the money supply. It has led to the nightmare of inflation that has plagued the modern world, just as this same sovereignty plagued Rome in its declining years.

In the case of ancient Rome, it was a reasonable claim, given the theological presupposition of the ancient world (excluding the Hebrews and the Christians) that the state is divine, either in and of itself or as a function of the divinity of the ruler. Rulers were theoretically omniscient in those days. Even with their supposed omniscience, their monetary systems were subject to ruinous collapse.

Odd that men today would expect a better showing from an officially secular state that recognizes no divinity over it or under it. Then again, perhaps a state like this assumes the function of the older, theocratic state. It recognizes no sovereignty apart from itself. And like the ancient kingdoms, the sign of sovereignty is exhibited in the monopoly over money.

October 3, 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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