Gold's Dust vs. Dusty Gold

The best way for a nation to build confidence in its currency is not to bury lots of gold in the ground; it is, instead, to pursue responsible financial policies. If a country does so consistently enough, it’s likely to find its gold growing dusty from disuse.

~ Editorial, Wall Street Journal (July 8, 1969)

This statement is true, but it is unlikely that the editorial writer all those years ago understood why it is true.

When it comes to wise economic policy-making, let us get one thing straight: it doesn’t come like manna from heaven. It isn’t a free lunch. It comes only because there are political sanctions that reward government officials who devise and enforce policies that make consumers better off, and punish government officials who devise and enforce policies that make consumers worse off. These institutional sanctions must be consistent with the laws of economics — and there really are laws of economics. If the policies violate economic law, then the nation will get irresponsible financial policies, and lots of other kinds of irresponsible government policies.

The editorial writer implied that dusty gold is a silly thing to pursue. He also implied that a nation doesn’t need a supply of gold if it pursues wise financial policies. What he was really saying is that gold has nothing to do with wise financial policies. A gold standard is therefore irrelevant. It is an anachronism. It gathers dust, like gold itself.

I think otherwise. I think dusty gold is a great thing. I believe that gold bullion is good. I even believe that gold dust is good. But dust on a government’s supply of gold is even better, assuming that the public can legally obtain this gold on demand, as is the case with a gold coin standard. Permit me to explain why I believe this.

But first, let me mention a fact of political life: the Establishment hates gold.


Hostility to the traditional gold coin standard has been the mark of Establishment economists and editorialists ever since the U.S. government confiscated Americans’ gold in 1933. The Establishment hates gold. Its spokesmen ridicule gold. They want responsible fiscal and monetary policies, of course — all of them publicly assure of this fact, decade after decade — but the national debt just keeps getting bigger, and price inflation never ceases, also decade after decade. Somehow, fiscal and monetary responsibility just never seem to arrive.

Why do they hate gold? Because gold represents the public. More than this: gold is a powerful tool of control by the public. A gold coin standard places in the hands of consumers a means of controlling the national money supply. A gold coin standard transfers monetary policy-making from central bankers and government officials to the common man, who can walk into a bank and demand payment for paper or digital currency in gold coins. This is the ultimate form of democracy, and the Establishment hates it. The Establishment can and does control political affairs. They make democracy work for them. They are masters of political manipulation. But they cannot control long-run monetary policy in a society that has a gold coin standard. They hate gold because they hate the sovereignty of consumers.

We are also officially assured by Establishment-paid experts that fiscal and monetary responsibility has nothing to do with a gold coin standard, in the same way that international price stability, 1815—1914, had nothing to do with the presence of a gold coin standard. A gold coin standard would not provide fiscal responsibility, we are told. This is a universal affirmation, the shared confession of faith that unites all branches of the Church of Perpetual Re-election.

On this one thing, the economists are agreed, whether Keynesians, Friedmanites, or supply siders: gold should have no role to play in today’s monetary system. (A few supply siders do allow a role for bullion gold in central bank vaults — without full redeemability by the public — as a psychological confidence-builder in a pseudo-gold standard economy. They do not call for full gold coin redeemability by the public, or 100% reserve banking.)

The Wall Street Journal is no exception to this rule. It thinks that we can somehow get fiscal responsibility without a gold standard. Nevertheless, the editorial writer stumbled upon a very important point. The gathering of dust on a government’s stock of monetary gold is as good an indicator of fiscal responsibility as would be the addition of gold dust to the stock of monetary gold.


New money, including newly mined gold, confers no net benefit to society. New money does confer benefits on those people who get access to it early, but it does this at the expense of late-comers who get access to the new money late in the process. Those people who have early access to the new money gain a benefit: they can spend the newly mined (or newly printed) money at yesterday’s prices. Competing consumers who do not have immediate access to the new money are forced to restrict their purchases as supplies of available goods go down and/or prices of the goods increase. Thus, those people on fixed incomes cannot buy as much as they would have been able to buy had the new money not come into existence.

Some people benefit in the short run; others lose. There is no way that an economist can say scientifically that society has benefited from an increase in the money supply. He cannot add up losses and gains inside people’s minds. There is no such standard of measurement. Murray Rothbard made this point a generation ago.

Thus, we see that while an increase in the money supply, like an increase in the supply of any good, lowers its price, the change does not — unlike other goods — confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices — i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange-value. Other goods have “real” utilities, so that an increase in their supply satisfies more consumer wants. Money has only utility for prospective exchange; its utility lies in its exchange-value, or “purchasing power.” Our law — that an increase in money does not confer a social benefit — stems from its unique use as a medium of exchange.

[Murray N. Rothbard, What Has Government Done to Our Money? (1964), p. 13.

Rothbard’s point is vital: an increase of the total stock of money cannot be said, a priori, to have increased a nation’s aggregate social wealth. This implication has a crucial policy implication: the existing supply of money is sufficient to maximize the wealth of nations. Enough is enough. “Stop the presses!”

An economist who says that society has benefited from an increase in the money supply has an unstated presupposition: it is socially beneficial to aid one group in the community (the miners, or those printing the money) at the expense of another group (those on fixed incomes). This is hardly neutral economic analysis.

Let us assume a wild, unlikely hypothesis: the supply of dollars will someday be tied, both legally and in fact, to the stock of gold in the Federal Reserve System vault. Let us also assume that banks can issue dollars only for gold deposited. For each ounce of gold deposited in a bank, a paper receipt called a “dollar” is issued by the bank to the person bringing in the gold for deposit. At any time, the bearer of this IOU can redeem a paper “dollar” for an ounce of gold. By definition, one dollar is now worth an ounce of gold, and vice versa.

What would take place if an additional supply of new gold is made by some producer, or if the government (illegally) should spend an unbacked paper dollar? Rothbard describes the results.

An increase in the money supply, then, only dilutes the effectiveness of each gold ounce; on the other hand, a fall in the supply of money raises the poser of each gold ounce to do its work. [Rothbard is speaking of the long-run effects in the aggregate.] We come to the startling truth that it doesn’t matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of its gold unit. There is no need whatever for any planned increase in the money supply, for the supply to rise to offset any condition, or to follow any artificial criteria. More money does not supply more capital, is not more productive, does not permit “economic growth.”

Once a society has a given supply of money in its national economy, people no longer need to worry about the efficiency of the monetary unit. People will use money as an economic accounting device in the most efficient manner possible, given the prevailing legal, institutional, and religious structure. In fact, by adding to the existing money supply in any appreciable fashion, banks bring into existence the “boom-bust” phenomenon of inflation and depression. The old cliché, “let well enough alone,” is quite accurate in the area of monetary policy.

This leads to a startling conclusion: the existing money supply is sufficient for all economic transactions. We don’t need any more money. (Well, actually, I do. But you don’t.) We also don’t need a Federal Reserve System to manage the money supply. We don’t need a government rule that compels the Federal Reserve or the Treasury to increase the money supply by 3% per annum or maybe 5% (Friedman’s suggested rule). Besides, who would enforce such a rule? It’s a rule for rulers enforced by rulers.

Then what do we need? Freedom of contract and the enforcement of contracts. Nothing else? Only laws that prohibit fraud. To issue a receipt for which there is nothing in reserve to back up the receipt is fraudulent.


A productive gold miner, by slightly diluting the purchasing power of the gold-based monetary unit, achieves short-run benefits for himself. He gets a little richer. Those people on fixed incomes now face a slightly restricted supply of goods available for purchase at the older, less inflated, price levels. Miners and mine owners bought these goods with their newly mined gold. This is a fact of life. But this is a minor redistribution — miner redistribution — of wealth compared to the effects of a government monopoly over money. The compulsion of government vastly magnifies the redistribution effects of monetary inflation. It is cheaper to print money than to mine gold.

We live in an imperfect universe. We are not perfect creatures, possessing omniscience, omnipotence, and perfect moral natures. We therefore find ourselves in a world in which some people will choose actions which will benefit them in the short run, but which may harm others in the long run. Our judicial task is to minimize these effects. We should pursue a world of minor imperfections rather than accept a world with major imperfections. But we would be wise not to demand political perfection. Messianic societies never attain perfection. They attain only tyranny.

To compare a gold standard with perfection — zero monetary expansion — misses the point. Perfection is not an available option. Instead, we should compare the effects of a gold coin standard, where no one can issue receipts for gold unless he owns gold, with the effects of a monetary system in which the government forces people to accept its money in payment for all debts, goods, and services. Compared to the cost of creating a blip on a computer, the costs of mining are huge. The rate of monetary inflation will be vastly lower under a pure gold coin standard with 100% reserve banking than under a credit money standard run by central bankers through the fractionally reserved commercial banks.

Professor Mises defended the gold standard as a great foundation of our liberties precisely because gold is so expensive to mine. Mining expenses reduce the rate of monetary inflation. The gold standard is not a perfect arrangement, he said, but its effects are far less deleterious than the power of a monopolistic State or a State-licensed banking system to create credit money. The economic effects of gold are far more predictable, because they are more regular. Geology acts as a greater barrier to monetary inflation than can any man-made institutional arrangement. [Ludwig von Mises, The Theory of Money and Credit (New Haven, Connecticut: Yale University Press, [1912] 1951), pp. 209—11, 238—40.] The booms will be smaller, the busts will be less devastating, and the redistribution involved in all inflation (or deflation, for that matter) can be more easily planned for.

On all this, see my on-line book, Mises On Money.

Nature is niggardly. This is a blessing for us in the area of monetary policy, assuming that we limit ourselves to a monetary system legally tied to specie metals. We would not need gold if, and only if, we could be guaranteed that the government or banks would not tamper with the supply of money in order to gain their own short-run benefits. For as long as that temptation exists, gold (or silver, or platinum) will alone serve as a protection against policies of mass inflation.


The collective entity known as the nation, as well as another collective, the State, will always have a desire to increase its percentage of the world’s economic goods. In international terms, this means that there will always be an incentive for a nation to mine all the gold that it can. While it is true that economics cannot tell us that an increase in the world’s gold supply will result in an increase in aggregate social utility, economic reasoning does inform us that the nation which gains access to newly mined gold at the beginning will able to buy at yesterday’s prices. World prices will rise in the future as a direct result, but he who gets there “fustest with the mostest” does gain an advantage. What applies to an individual citizen miner applies equally to national entities.

So much for technicalities. What about the so-called “gold stock”? In a free market society that permits all of its residents to own gold and gold coins, there will be a whole host of gold coins, there will be a whole host of gold stocks. (By “stock,” I mean gold hoard, not a share in some company.) Men will own stocks of gold, institutions like banks will have stocks of gold, and all levels of civil government — city, county, national — will possess gold stocks. All of these institutions, including the family, could issue paper IOU slips for gold, although the slips put out by known institutions would no doubt circulate with greater ease (if what is known about them is favorable). The “national stock of gold” in such a situation would refer to the combined individual stocks.

Within this hypothetical world, let us assume that the United States Government wishes to purchase a fleet of German automobiles for its embassy in Germany. The American people are therefore taxed to make the funds available. Our government now pays the German central bank (or similar middleman) paper dollars in order to purchase German marks. Because, in our hypothetical world, all national currencies are 100 percent gold-backed, this would be an easy arrangement. Gold would be equally valuable everywhere (excluding shipping costs and, of course, the newly mined gold which keeps upsetting our analysis), so the particular paper denominations are not too important. Result: the German firm gets its marks, the American embassy gets its cars, and the middleman has a stock of paper American dollars.

These bills are available for the purchase of American goods or American gold directly by the middleman, but he, being a specialist working the area of currency exchange, is more likely to make those dollars available (at a fee) for others who want them. They, in turn, can buy American goods, services, or gold. This should be clear enough.


Money is useful only for exchange, and this is especially true of paper money (gold, at least, can be made into wedding rings, earrings, nose rings, and so forth). If there is no good reason to mistrust the American government — we are speaking hypothetically here — the paper bills will probably be used by professional importers and exporters to facilitate the exchange of goods. The paper will circulate, and no one bothers with the gold. Gold just sits there in the vaults, gathering dust. As long as the governments of the world refuse to print more paper bills than they have gold to redeem them, their gold stays put.

It would be wrong to say that gold has no economic function, however. It does, and the fact that we must forfeit storage space and payment for security systems testifies to that valuable function. It keeps governments from tampering with their domestic monetary systems.

Obviously, we do not live in the hypothetical world which I have sketched. What we see today is a short-circuited international gold standard. National governments have monopolized the control of gold for exchange purposes; they can now print more IOU slips than they have gold. Domestic populations cannot redeem their slips. The governments create more and more slips, the banks create more and more credit, and we are deluged in money of decreasing purchasing power. The rules of the game have been shifted to favor the expansion of centralized power. The laws of economics, however, are still in effect.


One can easily imagine a situation in which a nation has a tiny gold reserve in its national treasury. If its people produce, say, bananas, and they limit their purchases of foreign goods by what they receive in foreign exchange for exported bananas, the national treasury needs to transfer no gold. The nation’s currency unit has purchasing power (exported bananas) apart from any gold reserves.

If, for some reason, it wants to increase its national stock of gold (perhaps the government plans to fight a war, and it wants a reserve of gold to buy goods in the future, since gold stores more conveniently than bananas), the government can get the gold. All it needs to do is take the foreign money gained through the sale of bananas and use it to buy gold instead of other economic goods. This will involve taxation, of course, but that is what all wars involve. If you spend less than you receive, you are saving the residual. A government can save gold. That’s really what a gold reserve is: a savings account.

This is a highly simplified example. I use it to convey a basic economic fact: if you produce a good (other than gold), and you use it to export in order to gain foreign currency, than you do not need a gold reserve. You have chosen to hoard foreign currency instead of gold. That applies to citizens and governments equally well.

What, then, is the role of gold in international trade? Free market economist Patrick Boarman (the translator of Wilhelm Roepke’s Economics of the Free Society) explained the mechanism of international exchange in The Wall Street Journal (May 10, 1965).

The function of international reserves is NOT to consummate international transactions. These are, on the contrary, financed by ordinary commercial credit supplied either by exporters, or in some cases by international institutions. Of such commercial credit there is in individual countries normally no shortage, or internal credit policy can be adjusted to make up for any un-toward tightness of funds. In contrast, international reserves are required to finance only the inevitable net differences between the value of a country’s total imports and its total exports; their purpose is not to finance trade itself, but net trade imbalances.

The international gold standard, like the free market’s rate of interest, served as an equilibrating device. I think it will again someday. What it is supposed to equilibrate is not gross world trade but net trade imbalances. Boarman’s words throw considerable light on the perpetual discussion concerning the increase of “world monetary liquidity.”

A country will experience a net movement of its reserves, in or out, only where its exports of goods and services and imports of capital are insufficient to offset its imports of goods and services and exports of capital. Equilibrium in the balance of payments is attained not by increasing the quantity of a mythical “world money” but by establishing conditions in which autonomous movements of capital will offset the net results, positive and negative, of the balance of trade.

Some trade imbalances are temporarily inevitable. Natural or social disasters take place, and these may reduce a nation’s productivity for a period of time. The nation’s “savings” — its gold stock — can then be used to purchase goods and services from abroad. Specifically, it will purchase with gold all those goods and services needed above those available in trade for current exports. If a nation plans to fight a long war, or if it expects domestic rioting, then, of course, it should have a larger gold stock than a nation which expects peaceful conditions. If a nation plans to print up millions and even billions of IOU slips in order to purchase foreign goods, it had better have a large gold stock to redeem the slips. But that is merely another kind of trade imbalance, and is covered by Boarman’s exposition.


A nation that relies on the free market to balance supply and demand, imports and exports, production and consumption, will not need a large gold stock to encourage trade. Gold’s function is to act as a restraint on government’s spending more than the government takes in. If a government takes in revenues from its citizenry, and then exports the paper bills or fully backed credit to pay for some foreign good, then there is no necessity for the government to deplete its semi-permanent gold reserves. The gold will sit idle — idle in the sense of physical movement, but not idle in the sense of being economically irrelevant.

The fact that a nation’s gold does not move is no more (and no less) significant than the fact that the guards who are protecting this gold can sit quietly on the job if the storage system is really efficient. Gold in a nation’s treasury guards its citizens from that old messianic dream of getting something for nothing. This is also the function of the guards who protect the gold. The guard who is not very important in a “thief-proof” building is also a kind of “equilibrating device.” He is there just in case the overall system should experience a temporary failure.

A nation that permits the free market to function is, by analogy, also “thief-proof.” Everyone who consumes is required by the system to offer something in exchange. During economic emergencies, the gold is used, like the guard is used during vault emergencies. Theoretically, the free market economy could do without a large national gold reserve, in the same sense that a perfectly designed vault could do without guards. The nation that requires huge gold reserves is like a vault that needs extra guards: something is probably breaking down somewhere — or breaking in.


What I have been trying to explain is that a full gold coin standard, within the framework of a free market economy, would permit the large mass of citizens to possess gold. This means that the “national reserves of gold,” that is, the State’s gold hoard, would not have to be very large.

If we were to re-establish full domestic convertibility of paper money for gold coins (as it was before 1933), while removing the “legal tender” provision of the Federal Reserve Notes, the American economy would still function. It would function far better in the long run. Consumers would be able to reassert their sovereignty over politicians and government-licensed bankers.

This, of course, is not the world we live in. Because America is not a free society in the sense that I have pictured here, we must make certain compromises with our theoretical model. The statement in The Wall Street Journal‘s editorial would be completely true only in an economy using a full gold coin standard: “The best way for a nation to build confidence in its currency is not to bury lots of gold in the ground.” Quite true; gold would be used for purposes of exchange, although one might save for a “rainy day” by burying gold. But if governments refused to inflate their currencies, few people would need to bury their gold, and neither would the government.

If a government wants to build confidence, it should “pursue responsible financial policies,” that is, it should not spend more than it takes in. The editorial’s conclusion is accurate: “If a country does so consistently enough, it’s likely to find its gold growing dusty from disuse.”

In order to remove the necessity of a large gold hoard, all we need to do is follow policies that will “establish Justice, insure domestic Tranquility, provide for the common defense [with few, if any, entangling alliances], promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.”

To the extent that a nation departs from those goals, it will need a large gold hoard, for it costs a great deal to finance injustice, domestic violence, and general illfare. With the latter policies in effect, we find that the gold simply pours out of the Treasury, as “net trade imbalances” between the State and everyone else begin to mount. A moving ingot gathers no dust.

This leads us to “North’s Corollary to the Gold Standard” (tentative):

“The fiscal responsibility of a nation’s economic policies can be measured directly in terms of the thickness of the layer of dust on its gold reserves: the thicker the layer, the more responsible the policies.”

This article is a revision of an article that I published in The Freeman in 1969. My analysis has not changed since 1969, but the price level in the United States is 4.9 times higher. See the inflation calculator of the Bureau of Labor Statistics.

The government’s gross national debt (on-budget debt, not accrual debt, which is vastly larger) at the end of 1969 was $366 billion. At the end of this year, it will be approximately $5.9 trillion.

The Establishment still ridicules gold. The public still doesn’t understand gold. And academic economists tell us that central banking is the wave of the future: the best conceivable world.

The more things change (debt, prices), the more they stay the same (economic opinions).

November 14, 2003

Gary North [send him mail] 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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