23: The Return to Sound Money
Public sentiment in economic matters generally recognizes that the present state of monetary affairs is unsatisfactory and that a change in policy is necessary to restore the soundness of money, but opinions on how this is to be achieved differ widely. Public discourse is vague, and often based on specious reasoning as to the proper course of action.
The destruction of monetary order was the result of deliberate action on the part of government, with the overt intention of averting the very phenomenon that has resulted from their actions.. yet, "without exception" all the plans for improving the currency systems seek a governmental solution, which generally involves granting them even more power over the economies they have destroyed in order to address the problems they have created.
"The inanity of all these plans is not accidental. It is the logical outcome of the social philosophy of their authors."
Commerce is a private act: it is the result of the private ownership of goods and the means of their production, and the ability of individuals to participate in voluntary exchange in which they may consider their own interests free of external compulsion - which includes the ability to withdraw from the market if the terms of exchange are unacceptable. And so long as these principles are maintained, there are natural checks and balances in the invisible hands of the marketplace to encourage such trade as is necessary to the betterment of participants. This is what is meant by "free market capitalism."
However, the preponderance of public opinion rejects free-market capitalism and the notion of an "uncontrolled" market, maintaining that only by means of force can a market interact in a manner that benefits the participants in exchange, and the welfare of individuals be ensured. Implicitly, that the participants in exchange are better served if they abandon their independent reasoning and yield to the power of a centralized system to better serve their interests than they, themselves, would be capable of doing.
The example is given of the "Fair Deal Party," which overtly maintains that the government should control all economic activity - prices, wage rates, and even interest - for the benefit of the market. However, when government has seized control of all the factors of production, it cannot be said that there is a "market" at all, merely forced production and rationed consumption in a totalitarian system by which the citizens have no rights at all over material goods, nor even over their own persons (as their labor is a factor of production that must yield to central control).
What presently exists is not a system of free enterprise reigned in at the fringes by government control, but a controlled economy in which individuals are "free" to act only as they are permitted to do so. It may be argued that it is a matter of the degree of control - but control itself is arbitrary. Force is applied indirectly an in a covert manner to extract from some and grant to others, but it is ever present and all-encompassing in the modern "mixed" economy.
One may act on the presumption that he is free, but will soon enough encounter restrictions. One may choose what to produce, but will be rewarded with subsidies or punished with tariffs if it does not happen to match the designs of government. One may price to offer or accept, but will be likewise punished or rewarded for the same reasons.
And the vagueness of the direction and arbitrary enforcement further complicates matters: it is known that excessive profits will result in a swift reaction, but what level of profit is "excessive" is not clearly communicated. Would-be participants in the economy must proceed with caution, often restricting themselves further than the law might intend (were its intentions clear), or withdrawing altogether from commercial activity.
As such, having a nominally "free" economy with vague government controls is far more damaging to the welfare of the people than a totalitarian government that exerts absolute control in an overt and clearly communicated manner.
In any nominally free economy, inflation is unavoidable: it is the margin of safety required by government to create additional money without creating additional goods, which is a necessary buffer for the miscalculations of the central plan.
As such the return to sound money requires more than merely tinkering with the currency, but the complete withdrawal of government's intrusion into the economic sphere. "There cannot be stable money within an environment dominated by ideologies hostile to the preservation of economic freedom."
The Integral Gold Standard
Sound money today means the same as it ever has: the gold standard. For money to maintain a stable value, it must be based on an objective standard of value that is not subject to arbitrary adjustment.
From a political perspective, this would require a complete return to overt taxation, which is essentially the confiscation of private property: rather than debasing money to obtain goods it has not produced, government must gather the goods it desires from those who possess them. The two actions are effectively the same, but the former does more widespread damage to the monetary system.
The public must also recognize the fallacy of the notion that government can improve the welfare of citizens simply by making money and credit more available, or to make some if its citizens richer without making others poorer. In effect, to recognize that the national economy is based upon goods - and the public welfare can only be improved by the production of the goods themselves. Wealth, and value at all, cannot be conjured merely by issuing token coins and bills that are not backed by something of tangible value.
Support for Keynesianism tends to wax and wane: citizens accept or reject to varying degrees the absurd notion that the supply of money has anything to do with their welfare, that "deficit spending" can improve the national economy, or that an increase in the amount of money in circulation reflects the productiveness of the nation.
Some critics go so far as to support the notion that government must be required to keep a balanced budget and should not enter into debt of any kind. While this seems a reasonable enough expectation, it is overly conservative and not strictly necessary. Government may incur debt, but it must be done overtly, and by the same terms as any other debtor: it must identify its notes as fiduciary media, and it must abide by its agreement to repay its debt by redemption of such media. If it does so, the monetary system remains sound, and the only risk is to those who have granted credit to the government (the same as if they had granted credit to any individual debtor).
Similar arguments are made of consumer credit: that the government should not intrude on private lending, even by means of seeking to control the rate at which loans are offered (including the forbearance against usury - which itself is n intrusion into credit based on vague and inconstant standards). Though it may be argued that it remains the rightful duty of government to protect both debtor and creditor by requiring each to hold to the promises exchanged as terms of credit.
Government must also refrain from interference in commercial exchange, specifically the attempt to influence the price or quantity of goods in trade. Specifically, government must refrain from interfering in labor markets, in recognition that seeking to establish "full employment" or fix a minimum wage is ultimately detrimental: a producer compelled to hire more workers than or needed, or to pay them a higher wage than they are entitled, is compelled to raise the price of his finished goods to cover such costs, to the detriment of the buyers.
It must also be recognized that the scarcity of material goods to satisfy every desire of humankind cannot be overcome by act of legislation. One cannot conjure by the stroke of the pen food, shelter, or any other material good. Each person must strive, by his own effort, to produce the goods he desires or requires, or to produce goods that may be offered in trade for others he desires. To suggest otherwise is ignorance of inescapable reality, or an attempt to conceal the truth from others.
Currency Reform in Ruritania
(EN: "Ruritania" was, in the author's time, a commonly used moniker for a hypothetical place - which is spoken of as if it were an actual location, the name itself being sufficient indication to the reader that it is a hypothetical example.)
Ruritania had been on the gold standard, and conducted business in gold coins. At some time in the past, their government created paper money, exchanged 1:1 for the coins, but at some point ceased to redeem them. When this became evident, the coins disappeared - hoarded by citizens or traded abroad.
Meanwhile, other nations behaved in essentially the same way, whether by an instantaneous act or a slower process of inflation and debasement, currencies no longer represented any commodity. During the transition, exchange rates fluctuated according to the amount of gold represented by the currencies in question.
During the same period, Ruritania attempted price and wage controls, which bankrupted multiple industries. To maintain production, the Ruritan government nationalized the industries, and maintained both low prices and high wages by means of government subsidies, which were provided by levying higher taxes on the industries that had not yet been nationalized (causing a cascade failure, which meant the nationalization of other industries). Ultimately, all industries became nationalized, and as there was no-one left to tax except private citizens (who were all dependent on the government for waves), they resorted to simply printing more money, accelerating the devaluation of the currency.
In international trade, the value of Ruritan currency plummeted. In order to prevent the Ruritan currency from falling in value against foreign currencies, it would be necessary for the government to monitor the debasement of foreign currency and ensure the domestic currency maintained the same pace. But the government of Ruritania, more concerned with domestic matters, found it necessary to float its currency to serve domestic needs.
Because domestic currency was effectively worthless, the Ruritanians exported goods abroad, to fetch currencies that retained some measure of actual value. Much of he output of Ruritania was sold to overseas markets at prices that were cheap by foreign standards, but high by domestic standards, such that the Ruritanian citizens could not afford to purchase many of the goods they manufactured domestically.
In order to reform their currency, the Ruritanian government would be required to desist from any further issue of Rutiran scrip ("scrip" being differentiated from money in that it is used domestically for exchange but is of no value outside the domestic market), then to continue to sell its goods on the foreign market to obtain gold or foreign currency (which could be redeemed for gold) to give exchange value to its own currency.
In effect, the worthless Ruritan scrip would gain the value of the gold that it represented, provided that it could be redeemed as such - once the currency is redeemable, it regains the status of money and is no longer scrip. As the sale of goods in foreign markets increases the reserves, and the redemption of Ruritan money reduces the amount in circulation, the unitary value of Ruritan money would increase.
It's suggested that such a process would be best attended by an independent agency to prevent political interests from interfering and resuming their usual business of debasement. In effect, the government would endow such an agency with a cash reserve (gold to back the currency) to be used for the redemption of money, and exert no other form of control upon it. The only way this agency would issue additional money is where it obtains (from the government or another source) the additional gold to back it.
It's also noted that no special legal privileges are necessary to grant the currency-issuing agency monopolistic control over the exchange of domestic money for gold - anyone who wishes to buy or sell gold is free to do so. This prevents monopolistic control of the exchange rate by the agency by virtue of exchange transactions.
These changes would effectively place the Ruritan currency on the gold standard - nothing mnore need be done. Once on the gold standard, the Ruritan currency would remain stable in both domestic and foreign markets, except for any fluctuation that would affect the value of gold itself.
On the other hand, it deprives the Ruritanian government the ability to spend any money except that which it collects from its citizens in the form of taxation. It cannot conjure additional money or debase the currency.
There is some argument that the Ruritanian currency would gain value abroad, and that foreign nationals would attempt to obtain currency as a means to redeem it and thus loot Ruritania of its gold. This remains true only if the exchange rate is independent of the gold value of foreign currency. If it maintained, the exchange of currency from one nation to another is essentially the same as the exchange of gold from the vaults of one country to another in equal amounts.
There is also the suggestion that a stable currency would make the government of Ruritania unable to balance the imports and exports of its people. But manipulating the value of currency does not change the demand for goods, merely the currency used in exchange. So long as the citizens of Ruritania produce goods to for their own consumption as well as for trade, they will receive the same value in exchange for what they create. In terms of currency, there may be an appearance of imbalances, but in terms of value given and received, these remain in perfect balance.
The United States' Return to a Sound Currency
It is commonly asserted that a return to the gold standard is impossible, though on closer examination, the crux of the argument that the return of the gold standard is merely incompatible with the practice of deficit spending. The intent of those who seek to reestablish a gold standard is to do away with the present system of waste, corruption, and arbitrary government. The intent of those who oppose the gold standard is to preserve it.
As in the hypothetical example, the first step to restoring sound currency is the immediate cessation of inflation: to issue no more currency unless there is value (in the form of gold) to back it. To place this restriction on government is no different, and no less sensible, than to place the restriction on any individual to refrain from writing checks in greater amount than he has on deposit to redeem them.
As a second step, all restrictions on trading and holding gold must be repealed, to reestablish the free market for gold. Anyone, domestic citizen or foreign national, should be able to buy or sell gold for American dollars, or to maintain the metal in his possession if he so desires.
It is expected that this latter measure will cause an influx of gold from abroad. As confidence in the dollar has wanted, private citizens may seek to buy gold from abroad. Meanwhile, given the output of American industry, foreigners will seek to obtain dollars (in exchange for their gold) to purchase American products - not to mention that their own currencies are in question, and they would seek to obtain a currency in which they could have greater confidence.
It is meanwhile imperative, until confidence is restored, fro the American government and even the Federal Reserve System, to keep entirely out of the gold market, except as necessary to provide dollars in exchange for gold in response to demand. In effect, these are the same individuals whose previous scheming has damaged the currency, and who are likely to seek an opportunity to continue with business "as usual."
The same must be applied to any form of currency - one cannot maintain a gold-standard currency while meanwhile issuing "silver certificates" or any other such currency and demanding their redemption against gold. This is merely a covert means to meddle in the gold standard and retain the ability to spend at a deficit.
To facilitate the transition, a new agency may be formed, called the "Conversion Agency," its sole responsibility and authority is the exchange of dollars for gold (which must be furnished by the federal government for the purpose of backing domestic currency), or vice versa. Nop additional dollars may be printed or minted except in exchange for gold, at parity.
It is suggested that the Federal Reserve System is saddle with an awkward problem: the huge amount of government debt (bonds) held by banks will eventually need to be redeemed with gold-backed currency. The author suggests no specific solution, except to not that "whatever solution may be adopted ... must not affect the purchasing power of the dollar." (EN: The obvious solution is for the federal government to tax citizens to raise the gold to redeem its bonds, but there may be other approaches the author wishes to concede without going into lengthy detail.)
It is also noted that what the United States needs, especially in the face of grave concern about the stability of its currency, is not the gold-exchange standard by the classical gold standard. Specifically, dollars must not merely represent gold that is allegedly maintained, but must prove their value by being redeemable, on the spot, for physical gold.
The author also suggests as a matter of restoring confidence, the issuance of new money - and particularly the restoration of gold coin: "Everybody must see gold coins changing hands, must be used to having gold coins in his pockets, to receiving gold coins when he cashes his paycheck, and to spending gold coins when he buys in a store." This may require the reserve to withdraw paper money in denominations of five, ten, and twenty dollars from circulation, to be replaced by gold coins.
(EN: This seems a bit silly by modern standards, when a $20 coin would contain only a fraction of a gram of gold, but at the author's time, the silver dollar was made of actual silver, and given that gold traded at about $35 per ounce, a twenty-dollar gold coin would be of reasonable weight. It seems less silly and more depressing when you consider the degree to which the American dollar has been devalued over time.)
The author notes that the intention of British banking, in deciding not to issue paper money in amounts of less than five pounds, was intended to protect the poorer members of the population from being defrauded by counterfeit bills. It seems necessary in the American system to do the same, and for the same reason - though in this case, the counterfeit is perpetrated by the government itself, by creating large amounts of "small change" that is not backed by any metal in reserve.
An additional benefit to gold coin is that it makes plain to the masses what is typically hidden from them by paper money and token coinage: that it is not the price of goods becoming higher, but the value of money becoming lower. When the value of money is based on the preciousness of the metal it contains, no arbitrary act of legislature can devalue it - they must seize the actual coin.
The fraud perpetrated on the American people, whose gullibility in such matters is astounding, has given common rise to the notion that one should be glad of receiving a greater sum of money over time, even while the purchasing power of that money is being steadily diminshed. And more so, it is commonly accepted that one should thank a protectionist government for granting money, and damn free enterprise for the rising prices of goods.
Were the value of money fixed, and funds for government spending raised by overt taxation rather than covert devaluation, it is almost certain that the American people would be more attentive to matters of civics, and exercise a more active role in their own government.
Controversy Regarding the New Gold Parity
Those who advocate a return to the gold standard are divided on the matter of the conversion rate. The "restorers" seek a return to the gold standard at the exchange rate that existed previous to its abandonment, whereas the "Stabilizers" seek a return to the standard based on its present value (in 1934, this was $35 per ounce).
The restorers are motivated by their interest in outstanding credit balances. Prior to 1933, credit was issued in dollars, each of which represented 25.8 grains of 90% fine gold. They maintain it would be unfair to creditors be repaid in dollars that contain a smaller weight of gold, and unfair to debtors to increase the dollar-value of their debts to reflect an equal weight in gold.
However, it stands to note that the balance of debts incurred prior to 1933 is small, and the same claim could not be made of anyone what issued credit since. Those who issued credit during the period in which currency was depreciated cannot reasonably assert a claim to be repaid in greater value - they were well aware, at the time the debt was issued, that it was denominated in an unstable and risky currency.
And it is noted that in any instance of inflation, there will be "winners" and "losers" where credit is issued: the creditor agrees to loan and the debtor to borrow based on their estimation of the effects of inflation on the value of future currency. Should inflation be less than their estimate, the creditor benefits by being repaid more (in terms of purchasing power) than was loan; and should it be greater, the debtor benefits by repaying less. This is an inherent risk in credit, and well-known to both parties. One cannot claim to be cheated because of the inaccuracy of one's own estimation.
As such, it's suggested that the damage done to currency be accepted: one cannot amend or repair the injustice of past inflation by inflicting upon the future a proportionate deflation. Such an act is not to mend old wounds, but opens new ones. Moreover, the principle of sound money requires stability - and finds deflation to be no more beneficial than inflation.
The author refers to history, where the currency reform after the Napoleonic Wars and the resulting depreciation to currency led the British to restore the value of a pound (the currency itself being named for the weight of metal it represented - thus it seemed absurd to restore a "pound" note in a manner that made it worth nine or ten ounces).
"Calamitous economic hardships" resulted from the resulting attempt to achieve balance, visited acutely on debtors who were compelled to repay loans in a currency that was more dear than that which they had borrowed. It was this era that found the poor burdened to support the fortunes of the wealthy, and granted theorists such as Marx and Engles a great deal more attention and credibility than such specious positions would be granted in a healthy and functional market.
Concluding Remarks
The present unsatisfactory state of monetary affairs is an outcome of the ideology to which people and their governments are presently committed: people lament over inflation, but enthusiastically support policies that exacerbate the issue, and stubbornly oppose any attempt to restrict or abort deficit spending.
Reform of the monetary system requires the renunciation of such ideologies: the gold standard cannot be reestablished in an environment in which waster and corruptions are the "foremost characteristics of the conduct of public affairs." Critics of the gold standard continue to denounce it as unsustainable, while meanwhile promulgating an even less sustainable practice of constant debasement and devaluation.
As such, the choice before us is among two alternatives: a sound monetary standard that enables the economy to thrive without the sabotage of politicians, or one in which government interferes with the markets, production, and labor, causing an ongoing cascade failure that can result only in totalitarian control. The choice of the first alternative requires a decision in favor of the gold standard.