By Ludwig von Mises


Why have a monetary system based on gold? Because, as conditions are today and for the time that can be foreseen today, the gold standard alone makes the determination of money's purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties, and prosperity for all) called "sound money."

The eminence and usefulness of the gold standard consists in the fact that it makes the supply of money depend on the profitability of mining gold, and thus checks large-scale inflationary ventures on the part of governments.

The gold standard did not fail. Governments deliberately sabotaged it, and still go on sabotaging it. But no government is powerful enough to destroy the gold standard so long as the market economy is not entirely suppressed by the establishment of socialism in every part of the world.

Governments believe that it is the gold standard's fault alone that their inflationary schemes not only fail to produce the expected benefits, but unavoidably bring about conditions that (also in the eyes of the rulers themselves and most of the people) are considered as much worse than the alleged or real evils they were designed to eliminate. Except for the gold standard, governments are told by pseudo-economists that they could make everybody perfectly prosperous. Let us test the three doctrines advanced for the support of this fable of government omnipotence.

1. The Fiction of Government Omnipotence

"The state is God," said Ferdinand Lassalle, the founder of the German socialist movement. As such, the state has the power to "create" unlimited quantities of money and thus to make everybody happy. Intrepid and clear-headed people branded such a policy of "creating" money as inflation. The official terminology calls it nowadays "deficit spending."

But whatever the name used in dealing with this phenomenon may be, its meaning is obvious. The government increases the quantity of money in circulation. Then a greater quantity of money "chases" (as a rather silly but popular way of talking about these problems says) a quantity of goods and services that has not been increased. The government's action did not add anything to the available amount of useful things and services. It merely made the prices paid for them soar.

If the government wishes to raise the income of some people, for example, government employees, it has to confiscate by taxation a part of some other people's incomes, and then distribute the amount collected to its employees or favored groups. Then the taxpayers are forced to restrict their spending, while the recipients of the higher salaries or benefits are increasing their spending to the same amount. There does not result a conspicuous change in the purchasing power of the monetary unit.

But if the government provides the money it wants for the payment of higher salaries by printing it or the granting of additional credits, the new money in the hands of these beneficiaries constitutes on the market an additional demand for the not-increased quantity of goods and services offered for sale. The unavoidable result is a general tendency of prices to rise.

Any attempts the governments and their propaganda offices make to conceal this concatenation of events are in vain. Deficit spending means increasing the quantity of money in circulation. That the official terminology avoids calling it inflation is of no avail whatever.
The government and its chiefs do not have the powers of the mythical Santa Claus. They cannot spend except by taking out of the pockets of some people for the benefit of others.

2. The "Cheap-Money" Fallacy

Interest is the difference in the valuation of present goods and future goods; it is the discount in the valuation of future goods as against that of present goods. Interest cannot be "abolished" as long as people prefer an apple available today to an apple available only in a year, in ten years, or in a hundred years.

The height of the originary rate of interest,[1] which is the main component of the market rate of interest as determined on the loan market, reflects the difference in the people's valuation of present and future satisfaction of needs. The disappearance of interest, that is, an interest rate of zero, would mean that people do not care a whit about satisfying any of their present wants and are exclusively intent upon satisfying their future wants, their wants of the later years, decades, and centuries to come. People would only save and invest and would not be consuming.

On the other hand, if people were to stop saving, that is, making any provision for the future, be it even the future of the tomorrow, and would not save at all and consume all capital goods accumulated by previous generations, the rate of interest would rise beyond any limits.
It is thus obvious that the height of the market rate of interest ultimately does not depend on the whims, fancies, and the pecuniary interests of the personnel operating the government apparatus of coercion and compulsion, the much-referred-to "public sector" of the economy. But the government has the power to push the Federal Reserve System, and the banks subject to it, into a policy of cheap money. Then the banks are expanding credit. Underbidding the rate of interest as established on the not-manipulated loan market, they offer additional credit created out of nothing.

Thus they are inescapably falsifying the businessmen's estimation of market conditions. Although the supply of capital goods (that can only be increased by additional saving) remained unchanged, the illusion of a richer supply of capital is conjured up. Business is induced to embark upon projects which a sober calculation, not misled by the cheap-money ventures, would have disclosed as mal-investments (over-investment in capital). The additional quantities of credit inundating the market make prices and wages soar. An artificial boom, a boom built entirely upon the illusions of ample and easy money, develops. But such a boom cannot last. Sooner or later it must become clear that, under the illusions created by the credit expansion, business has embarked upon projects for the execution of which the real savings are not rich enough. When this mal-investment becomes visible, the boom collapses.

The depression that follows is the process of liquidating the errors committed in the excesses of the artificial boom; it is the return to calm reasoning and a reasonable conduct of affairs within the limits of the available supply of capital goods. It is a painful process, but it is a process of restoration of business health.

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.

If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world. The economically backward nations would not have to complain about the insufficiency of their capital equipment. All they would have to do for the improvement of their conditions would be to expand money and credit more and more. No "foreign aid" schemes would have emerged. But in granting foreign aid to the backward nations, the American government implicitly acknowledges that credit expansion is no real substitute for genuine capital accumulation through saving.

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Liberals are people that will believe anything twice.

3. The Failure of Minimum Wage Legislation and of Union Coercion

The height of wage rates is determined by the consumers' appraisal of the value the worker's labor adds to the value of the article available for sale. As the immense majority of the consumers are themselves earners of wages and salaries, this means that the determination of the compensation for work and services rendered is made by the same kind of people who are receiving these wages and salaries. The fat earnings of the movie star and the boxing champion are provided by the welders, street sweepers, and charwomen who attend the performances and matches.

An entrepreneur who would try to pay a hired man less than the amount this man's work adds to the value of the product would be priced out of the labor market by the competition of other entrepreneurs eager to earn money. On the other hand, no entrepreneur can pay more to his helpers than the amount the consumers are prepared to refund to him in buying the product. If he were to pay higher wages, he would suffer losses and would be ejected from the ranks of the businessmen.

Governments decreeing minimum wage laws above the level of the market rates restrict the number of hands that can find jobs. Such governments are producing unemployment of a part of the labor force. The same is true for what is euphemistically called "collective bargaining."

The only difference between the two methods concerns the apparatus enforcing the minimum wage. The government enforces its orders in resorting to policemen and prison guards. The unions "picket." They and their members and officials have acquired the power and the right to commit wrongs to person and property, to deprive individuals of the means of earning a livelihood, and to commit many other acts which no one can do with impunity.[2] Nobody is today in a position to disobey an order issued by a union. To the employers no other choice is left than either to surrender to the dictates of the unions or to go out of business.

But governments and unions are impotent against economic law. Violence can prevent the employers from hiring help at potential market rates, but it cannot force them to employ all those who are anxious to get jobs. The result of the governments' and the unions' meddling with the height of wage rates cannot be anything else than an incessant increase in the number of unemployed.

It is precisely to prevent this outcome that the government-manipulated banking systems of all Western nations are resorting to inflation. Increasing the quantity of money in circulation and thereby lowering the purchasing power of the monetary unit, they are cutting down the oversized payrolls to a height consonant with the state of the market. This is today called Keynesian full-employment policy. It is in fact a method to perpetuate by continued inflation the futile attempts of governments and labor unions to meddle with the conditions of the labor market. As soon as the progress of inflation has adjusted wage rates so far as to avoid a spread of unemployment, government and unions resume with renewed zeal their ventures to raise wage rates above the level at which every job-seeker can find a job.

The experience of this age of the New Deal, the Fair Deal, the New Frontier, and the Great Society confirms the fundamental thesis of the true British lovers of political liberty in the nineteenth century, namely, that there is but one means to improve the material conditions of all of the wage earners, viz., to increase the per-head quota of real capital invested. This result can only be brought about by additional saving and capital accumulation, never by government decrees, labor-union violence and intimidation, and inflation. The foes of the gold standard are wrong also in this regard.

4. The Inescapable Consequence, namely, the United States Government Gold Holdings Will Shrink

In many parts of the earth an increasing number of people realize that the United States and most of the other nations are firmly committed to a policy of progressing inflation. They have learned enough from the experience of the recent decades to conclude that on account of these inflationary policies an ounce of gold will one day become more expensive in terms both of the currency of the United States and of their own country. They are alarmed and would like to avoid being victimized by this outcome.
Americans were once forbidden to own gold coins and gold ingots (from 1933 to 1976). Their attempts to protect their financial assets consisted in the methods that the Germans in the most spectacular inflation that history knows called "Flucht in die Sachwerte" (flight into real values). They are investing in common stocks and real estate, and prefer to have debts payable in legal tender money rather than holding claims payable in it.

Even in the countries in which people are free to buy gold there are not yet (1965) conspicuous purchases of gold on the part of financially potent individuals and institutions. Up to the moment at which French agencies began to buy gold, the buyers of gold were mostly people with modest incomes anxious to keep a few gold coins as a reserve for rainy days. It was the purchases via the London gold market on the part of such people that reduced the gold holdings of the United States.

There is only one method available to prevent a further reduction of the American gold reserve, namely, radical abandonment of deficit spending as well as of any kind of "easy-money" policy.

Ludwig von Mises (1881–1973) was dean of the Austrian School. Comment on the blog.
This article originally appeared in The Freeman, June, 1965. Minor editing was done for its inclusion in Planning for Freedom, pp. 179–187.

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Liberals are people that will believe anything twice.

This is an 1965 article: The only problem with gold is not having enough of it. The premis of the article is that wages are artificially inflated by unions etc., not that Unions are the only road up for workers. Without unions, this country would be a country of 5.00 an hour workers and 10.00 an hour supervisors and Millionaire business owners. The current housing situation, prefaced by greedy real estate agents and speculators, has eliminated from buying a house all first time buyers that make less than 80-100K a year, so basically the American dream has turned into a nightmare for the proletariot. Yeah, the problem with gold is still the lack of it.

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Life is good, the water is sweet. The ground keeps moving beneath my feet.

How can anyone take this shit seriously when everything is laid out in simplistic terms as those are? Where are the formulas, charts, or models? He wrote this thirty years after he was even briefly relevant. After The Theory of Money and Credit, he became a nobody in the field of economics and a hero to libertarians who needed someone to explain monetary policy to them. You will not live to see the day when we tie our currency to a commodity. You wouldn't have been able to tell 9/11 from 1907.

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I'm more tongue and cheek than a lesbo orgy.

We don't use the old fashioned gold standard anymore.

I'm too lazy to read that, sorry if that article already mentioned that.

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i n h a l e , h o l d , e x h a l e.

Plato ...

Know what would really be cool? ... If you would take Mises on point by point and refute the article. I'd really be interested if you would. Mises writes in very simplistic terms, so it shouldn't be to difficult to tear his theories to shreds.

There are economists who rely on charts and models ... and then there are those who rely on history and common sense. Keyenes used charts and models ... and the OVERALL national debt is what?

Not disputing you ... or putting you ideas down. I'm just curious, that's all.

Vi

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Liberals are people that will believe anything twice.

Vi, I really hate to disagree with you because I think you're one of the brightest guys on here. I have a lot of respect for you and it's very apparent that you're well read. I happen to believe that we share a lot of the same beliefs, so I hope you don't take offense to anything I ever post, including this: All economists, including Mises, rely on charts and models - economic forecasting. This is not an economics piece; rather, it's a political piece. You will find his descriptions in introductory or survey economics courses in high school. You want me to refutiate Mises? How do you propose we should respond to painful market fluctuations or downturns quickly? There are no absolutes, no right or wrongs. Keynes, like Mises, isn't relevant either except for political ideological ends. Monetary rules today and it will continue to rule tomorrow. Fiscal policies are only relevant to the extent they set priorities. You will not see me praise Bush the way you have. Unlike you, I'm not in support of the man at the top who is resorting to Keynesian polices (short-run - cut T, raise G = deficit spending to stimulate economic growth). So if you're upset over the national debt don't blame Keynes, he never spent one dime. Why not blame the guy you support who has seen it double under him? Keynesian policies do work to a limited extent, but not too well. Government is slow, riddled with bureaucracy idleness, and changes due to political wind. I support an active central bank who is able to tweak interest rates through ffr in order to have an immediate impact. The only substantial charges of The Fed resorting to political play was made by liberals against Greenspan regarding GWB (I don't buy it though). By substantial, I mean those that don't include rhetoric like "illuminati", "new world order" or "jewish bankers."

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I'm more tongue and cheek than a lesbo orgy.

Thanks, Plato ...

No offense taken at all ... and thanks for the kind words too. My respects to you as well.

I admit, I'm a LOT more into the politics of economics than the mathematics. The math stuff bores me to death ... with the charts and graphs and such. I love reading the works of the economists of the Austrian school of thought. Their ideas just seem to me to be more conducive to liberty. From what I've read, regarding the gold standard, the separation of gold from currency, in essence, is socialized money and puts government in charge of the citizen's money. It allowed government to inflate at will in order to build a welfare state. And, according to what I've read, every totalitarian state has removed precious metal as the benchmark for the same reasons.

On Bush ...

I've said many times that I support him on very limited terms. His spending spree isn't one of the areas I support. *lol*

Vi

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Liberals are people that will believe anything twice.

Vi, the mathematics bores us all. I'm only twenty-one, and I've come from a background where I haven't had to provide much for myself. So you should be well assured that your opinions and beliefs carry quite a bit more weight than mine do. I've had to care for no one, including myself. I've been able to hold my egalitarian beliefs while not being responsible to anyone. With all that said, I believe I will always hold equality of opportunity ideals very close. Friedman, Rothbard, Hayek, and Mises have never been able to provide as much comfort to me as Galbraith has. to you.

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I'm more tongue and cheek than a lesbo orgy.

And I thought the gold standard was about growing!