Mises on the Gold Standard

Mises in Human Action

...Interventionist governments and pressure groups are fighting the gold standard because they consider it the most serious obstacle to their endeavors to manipulate prices and wage rates. But the most fanatical attacks against gold are made by those intent upon credit expansion. With them credit expansion is the panacea for all economic ills. It could lower or even entirely abolish interest rates, raise wages and prices for the benefit of all except the parasitic capitalists and the exploiting employers, free the state from the necessity of balancing its budget--in short, make all decent people prosperous and happy. Only the gold standard, that devilish contrivance of the wicked and stupid "orthodox" economists, prevents mankind from attaining everlasting prosperity....


The significance of the fact that the gold standard makes the increase in the supply of gold depend upon the profitability of producing gold is, of course, that it limits the government's power to resort to inflation. The gold standard makes the determination of money's purchasing power independent of the changing ambitions and doctrines of political parties and pressure groups. This is not a defect of the gold standard; it is its main excellence. Every method of manipulating purchasing power is by necessity arbitrary. All methods recommended for the discovery of an allegedly objective and "scientific" yardstick for monetary manipulation are based on the illusion that changes in purchasing power can be "measured." The gold standard removes the determination of cash-induced changes in purchasing power from the political arena. Its general acceptance requires the acknowledgment of the truth that one cannot make all people richer by printing money. The abhorrence of the gold standard is inspired by the superstition that omnipotent governments can create wealth out of little scraps of paper.

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Credit money is fine when

Credit money is fine when free from the coercion of a government - meaning if I try to buy shoes from you, and promise to pay you back later (I hand you an i.o.u), it's up to you to decide how to proceed. It's a risk, but maybe you know me well, and decide you can trust me. That could turn out to be an astute decision on your part. With those new shiny shoes I can now ace that interview, become a more productive member of society, and honor the i.o.u. Credit money, in this case, was probably a good thing.

If I try to buy shoes from you, but instead offer you the i.o.u of someone you don't know, it's a tougher decision. You may trust me, but perhaps I'm a little gullible, and an easy mark for grifters. If it turns out that the money I gave in exchange for the i.o.u. was invested in Mad Dog or Night Train, it won't be returning much in the way of dividends. I still get my shiny shoes, but you get nothing. Credit money, in this case, wasn't stellar, so there's a run on the bank of Bill Cholenski, and my reputation for judgement of economic efficiency is ruined. My career as a banker, though poor, was too short-lived to ruin many people.

If, however, it turns out that the money I gave in exchange for the i.o.u. was invested in rehabilitating a promising business man who was just down on his luck, my investment could reap huge rewards. The business man recovers (and employs many people through his new, successful ventures), I get my shiny shoes (and hence job), and you get paid. Society benefits enormously, and my reputation for spotting good investments increases. More people come to me for loans, I separate the winos from the promising down-trodden. More people know they can trust the promisory notes I circulate. More people are working because I've directed capital to efficient uses. I'm rewarded for my skill, and people prosper.

If I try to buy shoes from you, but instead offer you the i.o.u of a government, calculation is impossible (or rather, uninformed). I can't know from where that i.o.u. came. I can rely on the "reputation" of the government, but a government (at least the ones I'm familiar with) can't choose as wisely as a successful banker. Currency markets can induce it to be less corrupt than others, but that's hardly a recommendation.

More than that, the fiat money of a government could not stand up to the competition of privately-issued money. That's why laws REQUIRE you to accept it.

Okay, I have to add on to

Okay, I have to add on to Bill's comment: "Gold is a fact". The value of gold is not a fact, it is determined by market supply and demand like everything else. If gold were the medium of exchange (either gold coins or gold-backed currency) then you and everyone else might be rudely surprised one day if price levels rose dramatically. Or, for that matter, if they fell dramatically; either one would cause business activity to fall due to increased currency risk.

Now, you might argue that gold-based monetary systems are less prone to fluctuations in the price level than fiat or credit money; I might even agree with you. But if you think that gold is somehow immune to the forces that affect the value of money (*any* money) simply because it is "real" (cold, hard, yellow, and tangible) then you are dangerously mistaken. The value of anything used as a medium of exchange does not depend on its physical properties, as reassuring as they may be. It depends on the supply and demand curves of many factors: goods and services, labor, capital, present wealth, and future wealth.

In short: don't get all excited about the gold standard just because gold is solid and shiny. Tangibility and attractiveness are properties which are neither necessary nor desirable for a medium of exchange. What you want in a medium of exchange is scarcity, wide acceptance, and price stability. Gold might fit the bill... but not because it is "a fact".

Gold is much to important to

Gold is much to important to leave in the hands of
government.

Fiat money is a promise that

Fiat money is a promise that eventually turns into a lie.

Gold is a fact.

There's reason to believe

There's reason to believe that credit money is every bit as good as commodity money, if not better. The monopoly power the Fed enjoys as the sole issuer of credit money in the U.S. is dangerous, of course, but if we had free banking then competition would allow credit money to provide all the benefits of commodity money without the overhead of the cost of mining.

In a sense, we do have competition in credit money: the various national central banks compete with each other to make their currency the most attractive. While private free banking would be better, the international currency market is large and liquid enough to ensure that most central bankers will manage their currencies responsibly, i.e. offer the property that people most want in a currency, namely price stability.

I appreciate the Austrian argument for the gold standard and agree with the philosophy behind it. But I think that the qualities the Austrians desire in a monetary system can be obtained without using gold. Proving it would require more space than I have in this margin. :)

Mises' absolutely right

Mises' absolutely right here- the breakdown of the bretton woods system in 1973 was one of the worst things to happen the global economy, as well as the US economy. Growth rates basically broke in half in 1973 and haven't come close to their previous levels since. A few additional reasons to prefer it:

1. One of the empirical assumptions behind Ricardo's theory of Comparative Advantage is that capital would be reltively immobile. Obviously, taking currency off the gold standard makes it way more mobile and as a result mobile capital will always flow toward the absolute advantage because that's the most rational investment.

2. Allowing currency speculation effectively imprisons the governments of small countries. On a large scale, it provides investors with power to basically control government policy. While it may be rational for Thailand to enact some reasonable environmental standards and labor standards, it's completely irrational for them to do so when investors can speculate against their currency. Any change that seems to go mildly against the flow of massive profits will result in a sale the Baht which can start a free fall and wreck the country severely, effectively giving speculators "democratic" control over the policies of the Thai government.

3. Volatility: whereas 30 years ago about 90% of foreign exchange transactions were related to the real economy (trade and long term investment), currently well over 90% of a vastly greater sum consists of short-term flows, about 80% less than a week in duration, often much shorter, speculating against currencies or exchange rate fluctuations. Markets have become increasingly volatile and less and less predictable and financial crises are occurring with increasing regularity. The short term capital flows are also unproductive for the economies they are invested into- factories aren't being built, infrastructure is not being funded- people are just getting in and getting out.

B-Psycho-
going back to the Gold Standard may not be ideal, but the "Tobin tax" (suggested by Nobel laureate economist James Tobin) is a serious solution to many of these problems. It'd be a fraction-of-a-cent tax on a international financial transactions that would reduce the profit incentive for currency speculators, as well as providing money for international relief (or whatever you'd want the proceeds to go to.)

In case you were wondering- yes it does put a gun to people's heads, so sorry about that. A "gun" which will never go off is preferable, however, to the slaughter carried out unintentionally by currency speculators.

-Matt

I generally agree with the

I generally agree with the point behind the gold standard. Yet at the same time I wonder: once it has been left behind, is it even possible to return to it?

Tried wrapping my head around it before, but I doubt I'll ever get monetary policy enough to say more than that.

Bill, point taken, and sorry

Bill, point taken, and sorry if I misread you.

Regarding gold being harder to create than promises and lies (aka credit): very true, which is simultaneously the strength and weakness of gold as money. The demand for money relative to everything else does change over time; if gold is used as money, then mine operators will increase or decrease their output accordingly, but such changes are slow to implement and thus will maintain stable price levels in the long-term but will allow short-term fluctuations. Plus, producing more money will have a cost, consuming labor and capital that could otherwise be spent producing other things.

Credit money has zero cost to create, which makes the resources that would have been used to mine gold available to do other stuff. Credit money can be created instantaneously, and can also be destroyed (which can't really happen with gold); this makes credit money better able to meet short-term fluctuations in demand. There are two problems, though: banks have incentives to cause inflation, and the Fed is the sole source of credit money in the US. I believe that competitive free banking would solve both of these problems.

Of course, so would the gold standard. The government couldn't use the money supply to (inefficiently) try to control the economy, and gold would probably not be inflationary. Gold would be preferable to a monetary monopoly. However, I think gold would be inferior to a robust credit-based free banking system, and possibly even inferior to the system of multiple national central banks that we actually have today.

Couldn't be stated any

Couldn't be stated any better. What a powerhouse of intellect. Gold is the most beautiful and crafty of all investments and makes an interesting hobby, not to mention it keeps your wealth out of the hands of the scumbags called government.

gold is almost as arbitrary

gold is almost as arbitrary as money, when you think about it. It doesn't really matter though- for practical purposes the differences are real enough.

I'm heavily invested in "gold" at the moment (something I should've done 2 years ago) because I expect the dollar to keep dropping. I'm in the ETF though, which I'm not happy about because it basically just tracks the price, and as a result, the price is artificially low. If the ETF becomes "audited" (wherein each purchaser of the fund is guaranteed a proportional amount of gold) I guarantee the price'll up 10 points. Does anyone know of a way to invest in "real" gold without actually having to own real gold? I.E. a fund/commodity future/whatever that's actually audited?

In short: don’t get all excited about the gold standard just because gold is solid and shiny. Tangibility and attractiveness are properties which are neither necessary nor desirable for a medium of exchange.

who's doing that? There's a happy medium here- Gold's exchange value is a result of supply and demand factors, but gold is also valuable in and of itself (of course that value is a result of supply and demand too, but that's not really the point.) The fact that it's been used for so long, and it doesn't rely on the word of a government to back it up makes it behave a bit differently than money.

Everyone- I should also take this time to point out a very common misunderstanding: currencies are not just a fancier version of the barter system as many people (perhaps Libertarians especially) claim. This idea is generally attributed to Jean Baptiste Say, who supposed that people made goods for money which they then used to buy more goods. What he called "thieves" actually turns out to be capitalists, who use money to buy goods in order to accumulate more money. The focus is accumulation- not consumption and as a result, a major Austrian and Neoclassical assumption is invalid. In alot of cases it is like the barter system, but a peculiar feature of capitalism is that you also have non-bartering "thieves", the kind which Ayn Rand masturbated to every night.

-Matt

The value of gold is not a

The value of gold is not a fact...

Eddie, I agree with EVERYTHING you said in THAT posting - and it was very well said.

Don't confuse me with someone who thinks that gold is magic. It's not. My words were brief, and so admittedly open to wide interpretation. The VALUE of gold is not a fact. The misunderstanding of "value" is my top pet-peeve. I just mean to say that gold is real, and much harder to create than a lie.