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There is 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.
Economists 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 civil servants.
DON’T TRUST, DO VERIFY
Ronald Reagan 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.
The average 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.
MUNDELL’S PSEUDO-GOLD STANDARD
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.
Benko 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.
Pimm Fox: 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?
Mundell: [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.
The great 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.
Benko skipped 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.
Benko waxed eloquent about Mundell.
Mundell is 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.
First, James Buchanan is the most distinguished living Nobel laureate, if we are talking about free market economists.
Second, Mundell 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 this.
Third, the 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.
Fourth, the 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 standard.
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 planning.
The entire 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.
Economists 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.
GOLD 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.
Bankers and 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 value.
Gold coins 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.
Gold coins 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.
Central bankers 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, click 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.
Gold coins 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 reserve banks.
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!”
Here 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.
July 23, 2011
Copyright © 2011 Gary North