Everybody knows we need sound money, but what exactly is sound money? A good way to answer this question is to consult the works of the two greatest economists of the twentieth century, Ludwig von Mises and Murray N. Rothbard. I am proud of the fact that Mises’s widow, the unforgettable Margit von Mises, warmly approved of the Mises Institute when I founded it in 1982, and proud that Murray was our Academic Vice-President and spoke at our conferences and events until his death in 1995.
Both of these great men made it crystal clear that they supported a monetary standard based on the precious metals, preferably gold.
First, let’s look at what Mises said. In his masterwork Human Action, he first pointed out that the use of gold and silver as money was not what he called ‘a praxeological fact.’ In other words, you couldn’t deduce just by thinking about it that these metals would be chosen as money:
“Men have chosen the precious metals gold and silver for the money service on account of their mineralogical, physical, and chemical features. The use of money in a market economy is a praxeologically necessary fact. That gold–and not something else–is used as money is merely a historical fact and as such cannot be conceived by catallactics [the study of economic exchange]. In monetary history, too, as in all other branches of history, one must resort to historical understanding. If one takes pleasure in calling the gold standard a ‘barbarous relic,’ one cannot object to the application of the same term to every historically determined institution. Then the fact that the British speak English–and not Danish, German, or French–is a barbarous relic too, and every Briton who opposes the substitution of Esperanto for English is no less dogmatic and orthodox than those who do not wax rapturous about the plans for a managed currency.”
But why a gold standard rather than a silver standard, or a bi-metallic standard, i.e., a standard with both metals used as money? Mises’s answer is that this came about in the late nineteenth century as a historical accident. The governments attempted to set up a fixed exchange rate between gold and silver, but this failed completely: “The demonetization of silver and the establishment of gold monometallism was the outcome of deliberate government interference with monetary matters. It is pointless to raise the question concerning what would have happened in the absence of these policies. But it must not be forgotten that it was not the intention of the governments to establish the gold standard. What the governments aimed at was the double standard. They wanted to substitute a rigid, government-decreed exchange ratio between gold and silver for the fluctuating market ratio between the independently coexistent gold and silver coins. The monetary doctrines underlying these endeavors misconstrued the market phenomena in that complete way in which only bureaucrats can misconstrue them. The attempts to create a double standard of both metals, gold and silver, failed lamentably. It was this failure that generated the gold standard. The emergence of the gold standard was the manifestation of a crushing defeat of the governments and their cherished doctrines.”
The reason these attempts failed is that silver had been overvalued and, as a result, driven out of the market. When this happened, the governments decided to stick with gold, which became a symbol of Western civilization:
“The gold standard was the world standard of the age of capitalism, increasing welfare, liberty, and democracy, both political and economic. In the eyes of the free traders, its main eminence was precisely the fact that it was an international standard as required by international trade and the transactions of the international money and capital market. It was the medium of exchange by means of which Western industrialism and Western capital had borne Western civilization into the remotest parts of the earth’s surface, everywhere destroying the fetters of age-old prejudices and superstitions, sowing the seeds of new life and new well-being, freeing minds and souls, and creating riches unheard of before. It accompanied the triumphal, unprecedented progress of Western liberalism, ready to unite all nations into a community of free nations peacefully cooperating with one another.
“It is easy to understand why people viewed the gold standard as the symbol of this greatest and most beneficial of all historical changes. All those intent upon sabotaging the evolution toward welfare, peace, freedom, and democracy loathed the gold standard, and not only on account of its economic significance. In their eyes the gold standard was the labarum, the symbol, of all those doctrines and policies they wanted to destroy. In the struggle against the gold standard much more was at stake than commodity prices and foreign exchange rates.”
Why do some people hate the gold standard? The main reason, Mises says, is that the nationalists want autarky, i.e., to shut their country out of the international capital market, so that they can inflate the supply of money:
“The nationalists are fighting the gold standard because they want to sever their countries from the world market and to establish national autarky as far as possible. 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.”
Mises says that some critics attack the gold standard because it doesn’t result in perfect “stability,” since the price of gold can fluctuate if new supplies of gold are discovered. Those who favor “stability” propose a standard based on a basket of commodities. I won’t go into the technical details of the various proposals for such a standard.
Mises responds with a challenge to the whole notion of monetary “stability.":
“The gold standard is certainly not a perfect or ideal standard. There is no such thing as perfection in human things. But nobody is in a position to tell us how something more satisfactory could be put in place of the gold standard. The purchasing power of gold is not stable. But the very notions of stability and unchangeability of purchasing power are absurd. In a living and changing world, there cannot be any such thing as stability of purchasing power. In the imaginary construction of an evenly rotating economy [i.e., in equilibrium] there is no room left for a medium of exchange. It is an essential feature of money that its purchasing power is changing. In fact, the adversaries of the gold standard do not want to make money’s purchasing power stable. They want rather to give to the governments the power to manipulate purchasing power without being hindered by an ‘external’ factor, namely, the money relation of the gold standard.”
Mises returns to why the enemies of gold attack it. They want to inflate the money supply, and the gold standard limits what they can do. “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.”
Mises concludes his discussion of the gold standard by reiterating its virtues. One can imagine a situation in which so much new gold is discovered that gold no longer acts as a check to inflation. But we cannot say anything about what would replace gold if that happened: “The struggle against gold, which is one of the main concerns of all contemporary governments, must not be looked upon as an isolated phenomenon. It is but one item in the gigantic process of destruction that is the mark of our time. People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty.
“It may happen one day that technology will discover a method of enlarging the supply of gold at such a low cost that gold will become useless for the monetary service. Then people will have to replace the gold standard by another standard. It is futile to bother today about the way in which this problem will be solved. We do not know anything about the conditions under which the decision will have to be made.”
Now let’s turn to Murray Rothbard. In his great book What Has Government Done to Our Money?, he repeats and extends the points that Mises has made. Mises himself had a high opinion of the book: As Dr. Patrick Newman has noted, in a letter to Leonard Read dated October 21, 1957, Mises says:
“Doctor Rothbard tries to provide in seventy-two typed pages a fundamental exposition of the nature and functioning of money within the frame of the market economy and of the causes and effects of present-day monetary troubles. He has succeeded...in giving to the general reader a correct interpretation of the intricate problems involved. There is little doubt that Dr. Rothbard’s draft can provide the discriminating layman with knowledge that no other available publication could furnish.”
Rothbard aimed at something substantially more radical than Mises. Of course, Mises wanted the gold standard, but there was some role left for the government. Murray wanted a completely free market in money, with no government involvement whatever:
“Let us first ask ourselves the question: Can money be organized under the freedom principle? Can we have a free market in money as well as in other goods and services? What would be the shape of such a market? And what are the effects of various governmental controls? If we favor the free market in other directions, if we wish to eliminate government invasion of person and property, we have no more important task than to explore the ways and means of a free market in money.”
People who favor a free market in money often propose that the market will settle what people accept as money. Free competition will settle what a free market will use as money. The great free market economist Friedrich Hayek is one example of someone who held this view. But Murray rejects it. You can’t bargain about the price of gold, because money is a unit of weight:
“All this might seem like laboring the obvious, except that a great deal of misery in the world would have been avoided if people had fully realized these simple truths. Nearly everyone, for example, thinks of money as abstract units for something or other, each cleaving uniquely to a certain country. Even when countries were on the ‘gold standard’, people thought in similar terms. American money was ‘dollars,’ French was ‘francs,’ German ‘marks,’ etc. All these were admittedly tied to gold, but all were considered sovereign and independent, and hence it was easy for countries to ‘go off the gold standard.’ Yet all of these names were simply names for units of weight of gold or silver. . . In a purely free market, gold would simply be exchanged directly as ‘grams,’ grains, or ounces, and such confusing names as dollars, francs, etc., would be superfluous.”
What Has Government Done to Our Money? is a treasure trove of insights about money. Let’s do everything we can to promote a genuine gold standard and to encourage people to read their great books!
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