Inflation or Gold Standard

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D r . Hans

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INFLATIONORGOLDSTANDARD?

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As Old as Civilization

At the Democratic Party Convention , in July1896 , William Jennings Bryan made a famousspeech on the gold standard. "You shall not pressdown upon the brow of labor this crown of thorns, "he orated. "You shall not crucify mankind upon across of gold."

Is the gold standard really such a cross? Or is ita crown of public honesty and monetary stability?



Where gold coins were the accepted media of ex

change, circulating by weight rather than name,money substitutes were also payable in gold. Papernotes and clay tablets promising to pay cash ondemand were well known to the ancient world. The

ancient Chinese used gold coinssome

3,000 yearsago. The merchants of ancient Greece made payments in gold and silver coins over 2500 years ago.

During the Middle Ages, when economic relationsdisintegrated and great poverty lipread over theWestern world, the silver standard generally replacedthe gold standard . In Great Britain silver coinsformed the basis of the monetary system until themiddle of the eighteenth century. The U.S . had a



gold for use in industrial production, but also toemploy it in exchange.

Restoration of monetary freedom means return tothe gold standard. During and after the Civil Warwhen U .S. greenbacks were the only legal money in

the Union, there nevertheless was monetary freedomin California . Consequently, the people of the statepreferred gold over greenbacks and continued to usegold as their money . Business transactions wereconducted in gold, 'and money substitutes, such asbank notes and deposits, were payable in gold. Ifthe people are free to choose between paper moneyand gold currency they naturally turn to gold. Andthis choice then forces all issuers of paper money



national wealth and prosperity, they favored adouble standard in which both gold and silver werelegal money. But instead of letting both metalscirculate side by side at ratios that were freely determined in the money market in accordance with de

mand and supply, governments felt called upon toregulate their mutual exchange ratios. And this regulation, which was price-fixing of the metals in termsof each other, then gave birth to a single standard.In other words, the inevitable failure of the bimetallic standard due to the operation of Gresham'sLaw led to either the gold standard or silverstandard . The fixed ratio between the two determined the outcome.

The early history of American currency clearly



overvalued silver, so did the new ratio overvaluegold . Consequently, in time gold began to replacesilver as the standard money. True weight silvercoins and silver bullion disappeared from circulation , the banks substituted gold reserves for silver

specie , and a de facto gold standard emerged.

Substituting Goldfor Fiat or Silver

Several European nations, such as Germany,Austria-Hungary, and Russia, travelled yet anotherroad to the gold standard. Since Great Britain,the leader in world trade and finance, had a



destroy the gold standard . They have, in fact, beenso successful that the gold standard is now practically extinct. Governments have seized completecontrol over the monetary systems, and governmentpaper money has become the fiat standard money.I t

is true, governments still make limited gold payments to each other. But they neither publiclyredeem their paper notes in gold, nor tolerate themonetary use of gold by their citizens.

Three Variations

The decline of the gold standard in recent decades



familiarizes the people with paper money. Under

this standard the government is managing the bullion . Gold coins are no longer in circulation, havingbeen accumulated i n the vaults of central banks.The national currency is no longer redeemable in

gold coins , but only in large, expensive gold bars.This , in effect, prevents redemption by most citizensand limits it to a few specialists in internationaltrade and finance . During the 1920's several European countries -had standards of this type.

The gold standard system was undermined evenmore by the gold-exchange standard. Governmentsnow began holding their country's gold reserves notin actual gold, but . in foreign claims to gold. They



exchange standard a de facto dollar-exchangestandard .

During the 1960 's, the decade of the New Fron-

tier and Great Society, the U.S. dollar graduallyfell from this position of predominance. Several

monetary crisesand

runs fromthe

British pound,which triggered world-wide demands for dollar redemption , greatl y depleted the American stock ofgold and created precarious payment situations .Therefore , in March 1968, most governmentsjoined the U.S. Government in halting gold redemption of their currencies. Thus ended the goldexchange standard and began the fiat standard. The

gates were flung wide open for inflation .



serve . I t is a social institution t hat is controlled byinexorable economic law.

T he issuers of money substitu tes, whether privateor public , keep the ir currencies at par with go ldthro ugh unconditional redemption . Where there is

a ce ntral ba nk it buys anyamou

nt of go ld againstits currency or depo sits at the parity rate, and sellsindiscriminately and on demand any amount ofgold against its notes or deposits . I t thereby rendersno national service , nor "defends " or "protects" thenational currenc y. I t merely fulfills the contract itmade when it is sued the money subs titutes.

Unde r the gold-coin standard in flationary p oliciesare not rendered impossible , but rather ma de diffi



different names and had different weights. But thishardly mattered as long as they consisted of goldand could be exchanged freely . After all, an ounceof gold is an ounce of gold whether minted ineagles or sovereigns.

The gold standard united the world as international payments ceased to be a problem . I t

facilitated internat ional trade and finance, andthereby promoted world-wide division of labor.Countries specialized in those internationally tradedcommodities in which they enjoyed the greatest advantage. But above all, the gold standard encouraged exportation of capital from the industrialcountries to the backward areas. Without the fears



When a central bank operating without the re

straints of the gold standard creates new reservesfor banks, which in turn extend cred it to business,the entrepreneurs begin to. expand production . But

this expansion is based merely on banknotes anddeposits. It lacks the real supply of capital goods,and therefore must finally collapse. When theprices of production factors begin to soar and business becomes unprofitable, when the central bankfinally halts its inflation out of fear of runawayprices, the boom must come to a sudden end. I t isfollowed by a recession which is a time of readjustment and correction.

Professo.r William Graham Sumner, the great



Ardent opposition to the gold standard is voiced

bythe nationalists

in all countries. Favoring nationalautarky in all matters they resent their monetarydependence on gold. The fiat standard is theirsystem.

The

American representative resents the goldstandard for two particular reasons. I t puts goldinto the center of the system to which all nationalcurrencies including the U.S . dollar must adjust.Without the standard that makes national currenciesjust money substitutes, the U .S. dollar would takethe place of gold in the currency systems of mostcountries. At least, this is what our nationalists believe. American preponderance in the world capital



dom - and succumbs to laws and regulations. Its

implacable enem y is govern me nt in search oj reve-nu e .

The economic prob lem of government differsradically from that of it s subjects. Indi viduals pro

du ce good s a nd services in order to earn their livelihood . Go.vernment exprop riates ind ividual incomeand wealth in order to cover its expenses . Whileindividual s mu st produce more in order to earnmor e, government s must find new method s of expropri ation. Th e tax levies must be ra ised, or newtaxes imp osed . But t axation is often unpopul ar, a ndmay precipitate the down fall of governments . Thi sis why inflation, which is th e c reation oj n ew money



come from the pockets of creditors to those of

debtors. I t reduces the standards of living of peoplewith fixed incomes , in particular, the aged andhandicapped . And it diminishes the value of savingsbonds and savings accounts, mortgages and lifeinsurance policies, pensions and o.ther savings. I t

causes the economic instabilities of the trade cycle.And , above all, the losses which inflation inflicts onmillions of people breed a political and economicradicalism that tends to destroy our private propertyorder .

In March 1933, the Roosevelt Administration expropriated the monetary gold owned by Americansand thus forcibly abolished the gold-coin standard .



The quantity of money has grown phenomenally

and its value deteriorated drastically.From

March1933 to January 1969 the quantity of currency heldby the public rose from $5.5 billion to $42.7 billion,demand deposits from $13.5 billion to $146.7 billion,time deposits from $21.8 billion to $265 .6 billion .During this period the purchasing power of the U.S.dollar fell to 37c of the 1933 dollar .

These are government statistics. Private researchorganizations which undertook to measure the de

cline of the dollar 's purchasing power in their particular fields arrived at much greater rates of depreciation. In construction, for instance, the American Appraisal Co ., Associated General Contractors ,and the Engineering News-Record found that the



by the classical economists . They looked upon the

costs of a metallic currency as a waste, which thegold-exchange standard was said to reduce. Theyblithely assumed that no government o f a civilizednation would exploit the gold exchange standard forinflationary objectives. David Ricardo put it thisway: "In a free country, with an enlightened legislature, the power of issuing paper money, under therequisite checks of convertibility at the will of theholder, might be safely lodged in the hands of commissioners appointed for that speoial purpose, andthey might be made totally independent of the control of ministers."

Several modern economists still echo this partic



disastrous to everybody concerned, including those

who tried to profit by them."

The False GoldStandard

The gold -coin standard cannot be manipulated bygovernment and, therefore, presents an insurmountab le obstacle to all attempts at credit expansion and

regulation throug h monetary policy. When it wasgradually replaced by the gold-bullion standard andfinally by the gold-exchange standard, governmentsassumed the power to manipulate their national curre ncy systems .



pay, the nationalist concludes, the fault must lie with

the system. Let's abolish it rather than admit failureto "those international bankers."It is indeed difficult to admit that the accumulated

payments deficits of more than $35 billion resultedfrom our own inflation predilection. For many yearsthe U.S. Government has been generating the inter-national payments defioits with reckless deficit spend-ing and money creation .

But the most implacable enemies of the gold

standard are the inflationists . To them federalspending and easy money are the panacea for allsocial and economic ills. They are the chronicspenders who find it so difficult to live on taxrevenue only . Year after year they prompt the



It is true , the gold stand ard does not afford

supplementary revenue to go vernments.But

thestated objecti ves, such as economic expansion andfull emplo yment , social welfare and justice , not onlydo not require inflation , but even presuppose itsabsence. Economic growth depends on theaccumu-

lation of capital through savings and profits. Fullemployment results from the proper adjustments oflabor costs to labor productivity. And social welfare and justice depend on sound money - infla -tion

merely compounds economic and social evils. Thisis why age s of inflation are also marked by socialand political unrest , by strife and conflict, riots andrevolutions.

The



people who exchange their goods and services for

gold, their common medium of exchange. The actualuse of gold coins affords a measure of protectionfrom inflationary policies, which all kinds of govern-ment are so prone to practice. But, contrary to theshalIow charges by many foes, no gold standardadvocate expects it to protect man from his ownfolIies . I t is merely a manifestation of civil liberty,a phenomenon of the market economy, but nopanacea for political, social and econo.mic evils.

I t would be extremely naive to believe that agovernment bent on spending and inflating wouldtolerate the gold standard, or that interventionistsand socialists would wil1ingly forego their power



I t is undoubtedly true that the fiat standard is

more workable for economic planners and moneyman agers. But this is the very reason why we preferthe gold standard. Its excellence is its unmanage-abilit y by government. And we also deny that thefiat standard which is charaoterized by rapid self-destruction and has failed wherever it was tried ,compares favorably on purely scientific grounds withthe gold st andard which is as old as man 's civiliza-tion. Out of the a shes .of fiat money the goldstandard always springs anew because it is no tech-nical cre ation of a few expert advisors, but a socialinstitution that flows from economic freedom andeconomic law.

The the



eager governments did not fix their prices and set

into operation Gresham 's Law .

Return to the GoldStandard

How can a re birth of the gold standard beachieved under present conditions? And how wouldit work?

No reasonable economist would want to revolutionize economic life through a radical monetaryreform . He does not want to make gold the onlymoney , forbidding government issue of any kindand suppressing banknotes and demand deposits

reform



trialized countries, such as England and France,

prospered with the gold standard, others adopted itthrough quick substitution. Their approach was thatof latecomers who for good reasons imitated thesuccessful leader . I t is obvious that in an age offiat money this avenue to the gold standard is closedfor lack of leader. And it is rather unrealistic toexpect the U.S. Government to provide this leadership. I t would have 10 renounce its inflationary waysand, at heavy expense, substitute gold coins for

Federal Reserve notes while it owes more than $35billion in gold to foreign creditors.

Most Western nations arrived at We gold standardvia the bimetallic standard. Similarly, a double



I f the government now decrees that both Federal

Reserve money and gold are legal money we are ona double standard. I f the government establishes alegal parity of the dollar to gold at any ratio otherthan 100 to 1 it brings into operat ion Gresham'sLaw. That is, artificially overvalued money tends todrive artificially undervalued money out of circulation. Let us say the government sets a ratio of 105to 1, or even 11010 1. I t obviously overvalues thegold and thereby creates the gold standard. Gold

gradually replaces government money in the people'scashholdings .

This road to the gold standard is rather circuitous.Nevertheless, as it makes few demands on govern



This prop osal for reform is most comprehensive

and complete , asit

envision s creation of a classicalgold-coin standard by a single law. Of course, itassumes a state of eco.nomic and political enlightenment that surpasses by far the present state ofeconomic and political thought.

Restor ation of the gold standard ma y be a longand arduous task . As it was lost in a gr adual erosionof monetary freedom we m ay have to retrieve itslowly and painstakingly on the ro ad back to free

dom , which gives it birth and meaning through inexorable economic law. This is why we seek noreform l aw, no restoration law, no convers ion orparity , no government cooperation, merely freedom.

The road is short and direct. And yet , depending



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H ans Sennholz i s Profe ssor of Economics andCh airman of th e Economics Department at GroveCit y College, Pa. He took his Master 's at MarburgUniver sity and hi s Ph .D. in Politic al Science atCologne U niversity i n Ge rmany, a nd also earned aPh .D . in Econom ics a t New York Uni versity. Prof.Sennholz h as publi shed more than 200 articles invarious journals, a nd ha s authored or co-authoredmany books . He is a Tru stee of lSI , Member of

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