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Sound Money 2 : The Virtues and Shortcomings of the Gold Standard

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The gold standard’s superiority may be observed in the fact that it makes the determination of the buying power of the monetary unit independent of government and political party policy. It stops rulers from abusing the representative assembly’ financial and budgetary powers. Parliamentary financial control works only if the government is unable to cover unlawful spending by raising the amount of fiat money in circulation. In this sense, the gold standard appears to be a necessary component of the body of constitutional guarantees that enable representative government to work.

When gold output expanded dramatically in California and Australia in the 1950s, the gold standard was criticised as being inflationary. Michel Chevalier advocated for the abandoning of the gold standard in his book Probable Depreciation of Gold at the time, while Béranger addressed the matter in one of his poems. However, these complaints faded with time. The gold standard was no longer considered inflationary, but rather deflationary. Even the most ardent proponents of inflation seek to mask their actual motivations by claiming that they are only trying to counteract the contractionary pressures that an apparently inadequate quantity of gold causes.

Inflation has long been advocated as a way to relieve the burdens of impoverished deserving debtors at the expense of affluent harsh creditors. The usual debtors under capitalism, on the other hand, are well-to-do owners of real estate, businesses, and common stock, as well as persons who have borrowed from banks, savings banks, insurance companies, and bondholders. People of moderate means who possess bonds and savings accounts or have taken out insurance policies are the usual debtors. If the average person supports anti-creditor legislation, it is because he ignores the fact that he is a creditor himself. The notion that wealthy are victims of easy money policies is a relic of the past.

The issuance of fiat money appears to be magical to the inexperienced mind. A magic word spoken by the government generates something out of nothing that may be exchanged for whatever item a man desires. When compared to the Treasury Department of the government, the art of sorcerers, witches, and conjurors pales in comparison! Professors teach us that the government “can print all the money it wants.” Taxes for revenue are “obsolete,” according to the head of the Federal Reserve Bank of New York.  What a beautiful thing! And how vengeful and misanthropic are those adamant adherents of antiquated economic dogma who demand that governments balance their budgets by paying all expenses with tax revenue.

These believers fail to see that inflation is conditioned by public ignorance, and that inflation ceases to function as soon as the public becomes aware of its consequences on the buying power of the monetary unit. People are unconcerned about monetary issues in normal times, that is, when the government does not meddle with the monetary standard. They take it for granted that the buying power of the monetary unit is “stable.” They are interested in fluctuations in the money values of various goods. They are fully aware that the exchange rates between various commodities fluctuate.

They are, however, unaware that the exchange rate between money and all commodities and services is also changing. When the unavoidable effects of inflation manifest and prices rise, they mistakenly believe that goods are becoming more expensive while failing to see that money is becoming less expensive. Only a few people recognise what is going on early in an inflation, conduct their businesses in accordance with this knowledge, and purposefully seek inflation advantages. The vast majority of people are too dull to comprehend a right assessment of the circumstance. They continue about their business as usual in non-inflationary times. They accuse individuals who are faster to recognise the true reasons of the market commotion of being “profiteers,” and they blame them for their own misfortune. The public’s ignorance is the unavoidable foundation of inflationary policies. Inflation works as long as the housewife believes to herself, “I desperately need a new frying pan.” But today’s prices are too high; I’ll wait till they fall again.” It comes to an abrupt halt when individuals realise that inflation will continue, that it causes price increases, and that prices will thus continue to grow indefinitely. “I don’t need a new frying pan today,” the homemaker thinks at the key point. In a year or two, I may require one. But I’m going to get it now because it’ll be a lot more expensive afterwards.” Then the inflation’s tragic conclusion is approaching. “I don’t need another table; I’ll never need one,” the housewife believes at the end of the process. But it’s better to purchase a table than to hold these bits of paper the government refers to as money for another minute.” 

The index-number approach is a very rudimentary and imprecise way of “measuring” changes in the buying power of a monetary unit. Because there are no stable relationships between magnitudes in the sphere of social affairs, no measurement is feasible, therefore economics can never become quantitative.

Despite its shortcomings, the index-number technique plays a vital part in the process of making people inflation-conscious during an inflationary cycle. Once the use of index numbers becomes widespread, the government is compelled to limit the rate of inflation and persuade the public that the inflationary policy is only a temporary measure to deal with a temporary situation that will be resolved soon. While government economists continue to tout inflation’s advantages as a long-term monetary management strategy, governments are forced to take caution in its implementation.

It is legitimate to label a policy of purposeful inflation dishonest since the desired outcomes can only be achieved if the government succeeds in fooling the majority of the population about the strategy’s implications. Many proponents of interventionist programmes will have no qualms about such deception; in their minds, nothing the government does can ever be wrong. However, their high moral indifference is unable to counter an objection to the economist’s anti-inflation argument. The essential issue, in the economist’s opinion, is not that inflation is ethically terrible, but that it can only work when used with extreme caution, and even then only for a limited time.As a result, resorting to inflation cannot be seriously regarded as a viable alternative to a permanent standard like the gold standard. 

The pro-inflationist propaganda stresses today the purported reality that the gold standard failed and will never be tried again: governments are no longer ready to follow the rules of the gold-standard game and suffer all of the costs associated with maintaining the gold standard. 

To begin with, it is critical to recognise that the gold standard did not fail. It was eliminated by governments to make room for inflation. To bring down the gold standard, the whole infrastructure of tyranny and compulsion — police, customs guards, criminal tribunals, jails, and, in certain nations, even executioners — had to be put into operation. Solemn vows were breached, retroactive legislation were passed, and constitutional and bill of rights provisions were openly ignored. And a slew of servile authors lauded the governments’ actions and heralded the century of fiat money. 

However, the most surprising aspect of this ostensibly new monetary strategy is its total failure.

True, it replaced sound money with fiat money in domestic markets, favouring the material interests of certain persons and groups at the detriment of others. It also had a significant role in the collapse of the international division of labour. It did not, however, succeed in dethroning gold as the international or global standard. If you look at the financial section of any newspaper, you’ll see right away that gold is still the world’s money, not the various products of various government printing agencies. The more steady the price of an ounce of gold, the more valuable these bits of paper become. Today, anyone who even suggests that countries may revert to a local gold standard is branded a crazy. This terrorism might go for a long time. The status of gold as the world’s standard, on the other hand, is unassailable. The policy of “moving off the gold standard” did not remove a country’s monetary authority from the need to consider the price of gold when determining the monetary unit. 

What all opponents of the gold standard decry as its fundamental sin is the same thing that supporters of the gold standard praise as its greatest virtue: its incompatibility with a credit-expansion programme.

The expansionist fallacy lies at the heart of all anti-gold authors’ and politicians’ arguments. 

Interest, or the discount of future goods against current goods, is an originary category of human valuation, present in every sort of human behaviour and irrespective of any social structures, according to the expansionist view. The expansionists fail to see that there have never been and will never be human beings who place the same value on an apple accessible in a year or a hundred years as they do on an apple available today.

Our central bank is compelled to retain its discount rate at a level that reflects international money market circumstances and foreign central bank discount rates. Otherwise, “speculators” would withdraw cash from our nation for short-term investment in other countries, causing our central bank’s gold holdings to fall below the permissible ratio. There would be no need for our central bank to adapt the height of the money rate to the circumstances of the international money market, which is ruled by the world-encompassing gold monopoly, if it were not required to redeem its banknotes in gold.

The most incredible aspect of this argument is that it was made in debtor nations, where the operation of the international money and capital markets meant an infusion of foreign funds and, as a result, the appearance of a trend toward lower interest rates. In the 1870s and 1880s, it was quite popular in Germany and much more so in Austria, but it was barely discussed in England or the Netherlands, whose banks and bankers gave generously to Germany and Austria. It was only after World War I, when Great Britain’s status as the world’s financial hub had been lost, that it was advanced in England.

Of course, the reasoning is flawed in the first place. The transnational intertwinement of the lending sector does not cause the inevitable failure of each endeavour at credit expansion. It is the result of the fact that non-existing capital goods cannot be replaced with fiat money and bank circulation credit. Credit growth might initially result in a boom. However, such a boom would inevitably end in a fall, a depression. The repeated attempts of governments and banks under their supervision to extend credit in order to make business profitable through low interest rates are precisely what cause economic crises to reoccur.

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