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It's been way too many decades since I was taught about the conversion from gold, but it seems to have been a well fought and supported argument. If a historian could summarize, it might help remind us of the pressures for change as it was defined then.

Otherwise, spot on, Steve.


"...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...."

"...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 [p. 476] 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...."

It confounds logic to worry about a possible future low cost of gold production while at the same time ignoring the minimal current costs associated with the production of unbacked paper currency.

If you were to carefully examine why you believe that an ever increasing supply of money, of whatever type, is needed to support a growing economy, you would find that it is a fallacy.

Regards, Don


I don't think advocating a gold standard is a requirement for libertarianism. Milton Friedman didn't advocate a gold standard. That said, no sense in being pigoenhold into a label.


Another well done illustration from you. I continually recommend this blog as a primer for many current topics. I'm glad that you
touched on the indisputable fact of how nations act in their own self interest, often without much thought about the consequences.

It's interesting that you think of yourself as a hybrid.......Im assuming that is your political orientation at least in the economic dimension.

Other than those that subscribe to rigid dogma, I suggest the majority of Americans are political hybrids to some degree because we think about and look at things from more than just one dimension. However, at any point one dimension may exert a stronger influence over the others.

I agree with the overall point of Steve's post. However, I think it's not quite right in the details to say that the money supply should grow at the same rate as goods and services for a number of reasons. For example, changes in money velocity, people's predisposition to investment versus consumption, demographic trends, etc. all may require that the money supply grow more or less quickly than goods and services for an optimal balance.

Hi Don:
I've studied both sides of this question for years; I knew I'd have to write this article sooner or later.

Deflation is the result when the economy grows faster than the money supply, and deflation is effectively a step towards a barter economy. Here's a thought experiment: Let's assume the Fed has (miraculously) discovered a way to control the quantity of base money such that the demand for fiat money remained constant -- and they proceeded to do just that for decade after decade. Which economy would be the more likely result: (a) a thriving, high-employment economy in which abundant goods and services cost fractions of dollars, and wages are pennies per hour; or (b) a stagnant, depressed, high-unemployment economy, with all the misery that accompanies a lengthy depression?

[Frankly, I think the economy would start moving towards (b) for a few years... and then we'd experience an overthrow of the government.]

A good exercise for me, for the past decade, has been to think through Milton Friedman's equation (an identity), which he had made into his license plate: MV=PQ (Money supply times Velocity equals Price level times Quantity of transactions). One key implication: when M, V, and P are held constant, Q cannot grow. Throw in the fact of life that deflation stifles entrepreneurs' desire to borrow (and therefore to innovate), and we arrive at the conclusion that unfettered real growth requires an accompanying growth in the money supply.

Bob McTeer examined the implications a few years ago in this paper I thought was a very good one:

For what it's worth, the mechanics of our current fiat money system became much clearer to me after I took the time to understand the details about how it works, explained in this paper by Warren Mosler:

The Fed cannot control the money supply, it can only influence the demand for money. If we were better able to measure inflation and predict inflation, the Fed would be better at choosing the target rate for nudging the demand in the desired direction.


If you're going to use the Equation of Exchange as a logical basis for a conclusion, you should at least read a short criticism of its validity and usefulness, as quoted below :


13. The Fallacy of the Equation of Exchange

" The basis on which we have been explaining the purchasing power of money and the changes in and consequences of mone­tary phenomena has been an analysis of individual action. The behavior of aggregates, such as the aggregate demand for money and aggregate supply, has been constructed out of their indi­vidual components. In this way, monetary theory has been inte­grated into general economics. Monetary theory in American eco­nomics, however (apart from the Keynesian system, which we dis­cuss elsewhere), has been presented in entirely different terms—in the quasi-mathematical, holistic equation of exchange, derived especially from Irving Fisher. The prevalence of this fallacious approach makes a detailed critique worthwhile...."

"... There are other valid criticisms that could be made of Fisher: his use of index numbers, which even at best could only measure a change in a variable, but never define its actual position; his use of an index of T defined in terms of P and of P defined in terms of T; his denial that money is a commodity; the use of mathematical equations in a field where there can be no constants and therefore no quantitative predictions. In particular, even if the equation of exchange were valid in all other respects, it could at best only describe statically the conditions of an average period. It could never describe the path from one static condition to another. Even Fisher admitted this by conceding that a change in M would always affect V, so that the influence of M on P could not be isolated. He contended that after this “transition” period, V would revert to a constant and the effect on P would be propor­tional. Yet there is no reasoning to support this assertion. At any rate, enough has been shown to warrant expunging the equation of exchange from the economic literature."

Regards, Don

The gold standard was not a part of mercantilism; in fact, the gold standard was an opponent and target of mercantilists. From the Dark Ages, mercantilism sought protected domestic markets in two ways. First, protective tariffs. Second, subsidized cost of credit, meaning usury statutes or control of domestic interest rates. When John Maynard Keynes became the apologist for mercantilism in 1936, he endorsed usury statutes and controlled domestic interest rates, while attacking the gold standard as provocative of international conflict.

Please understand that a "gold standard" by which the value of currency is measured by a quantity of gold does not mean necessarily that currency can be issued only in direct proportion to quantity of gold held. The market can make its judgment of the currency's value, as the quantity of currency rises in proportion to the growth in production of goods and services.

By that means, a "gold standard" achieves the central objective of monetary policy: a stable value of the currency unit. With that objective achieved, the central bank could even implement a gold exchange mechanism and no one would wish to hold gold instead of the trustworthy currency.

By contrast with our experience with controlling domestic interest rates since 1971, which has produced severe inflation interspersed with bouts of severe deflation (1981-82 and 1996-2002), the intrinsic value of gold remains very stable due to the very large inventory accumulated over the centuries (which is neither consumed nor wasting, due to its physical nature). This is the only available path towards your condition # 2, and it can be achieved very promptly and forthrightly.

The economy grows exponentially. The supply of gold can only increase on a linear scale, since gold does not compound.

If we tried to denominate an exponentially growing economy with, at best, a linearly growing supply of gold, the result would be exponential deflation.

This is true even if the Russians and South Africans sent us all the gold they could produce.

I think it's fair to say that this topic is probably well above the heads of most people, probably including most of the readers of this blog (myself included). A simple equation is something I can understand - but whether that equation is valid or not is something else entirely. If you (Steve, or whoever) could really boil the issue down to some simple graphs and/or logic, the rest of us would be really greatful.

That said, there is an existing, though probably limited, option for people who don't like the Fed:


How about this, from a while back:

Also, in spite of what it says at your link about private transactions, we must pay our taxes in US dollars, nothing else.

Steve - thanks, I had forgotten about that one. Tim Shell's comment is also straightforward. Do the Mises guys have a retort?

While there are a few panic-room-building libertarians out there, I haven't seen the gold standard as a hallmark of most of the folks I know who call themselves libertarian. Policy tactics shouldn't be considered a prerequisite for joining the team.

Our party needs to rally more people around the essential concepts of libertarianism in order to grow and lead the world to a better place.

When people confront me about it, I put it this way: Democrats trust individuals to make their own decisions about their personal lives, but think that government needs to save people from economic disaster. Republicans trust people to make the right economic decisions for themselves, but think government needs to save them from going to hell.

Libertarians simply trust people on both fronts.

If we never get out of the weeds of libertarian=gold standard or libertarian=abolish the IRS, we'll never get more than 4% of the vote!

Mises' preferred definition of inflation (an increase in the supply of money) has been overwhelmingly supplanted, just as he said: "What many people today call inflation or deflation is no longer the great increase of decrease in the supply of money, but its inexorable consequences, the general tendency twoard a rise or a fall in commodity prices and wages."

We can't even measure the money supply accurately, much less control it. That's a big reason why the Fed, and other central banks, have moved to "inflation targeting." Under today's definition of inflation/deflation, an increase in the money supply matched by an equivalent increase in real goods and services results in no increase or decrease in the purchasing power of money; i.e., no inflation, even though the money supply increased.

"... an equivalent increase in real goods and services....."


Are we talking about supply here? Because it would appear that an increase in money supply accompanied with a decrease in the supply of goods and services would
generate inflation.

So, really what the Fed needs to do is find out improved means of measuring and forecasting the supply of goods and services as well as predicting demand.

That's a tall order!

Bob, Steve, Tim,

We have a means of measuring growth in supply of goods and services relative to growth in money supply. Or, said another way, we can determine the level of demand for money relative to the supply of money, thus permitting the two to be balanced so as to avoid change in value of the monetary unit.

If excess liquidity is present in the economy, the value of the monetary unit falls and is immediately reflected in a rise in the spot price of gold. In that case, liquidity can be drained from the economy by Fed open market operations selling Treasury securities in the open market.

If liquidity is insufficient to accommodate growth in goods and services, the currency unit's value will rise, which will be reflected immediately in a falling gold price. In that case, liquidity should be added by the Fed buying Treasury securities in the open market (with newly created dollars).

In short, liquidity can be managed to maintain dollar value stability relative to gold. This does not mean no more currency can be issued than you have gold to exchange for it. The mechanism relies upon the market to keep the value of the currency at the acceptable value relative to gold.

If you haven't done so, reading the writings of Jude Wanniski at www.wanniski.com is very helpful. You might look specifically for his essay written in the mid-90s called "Gold Polaris."

This is not a matter of libertarian ideology. The analysis derives from classical economic theory.

Two major criticisms:

First: While you seem to have convinced yourself that a growing money supply is necessary for optimal economic conditions, I think you ignore the practical implications of exactly how the Fed goes about expanding the money supply. When new money is effectively created, it is not distributed proportionally or equally to the populace. This "new" money usually winds up in the hands of bureaucrats or politically well-connected businesses first, before the general price level has risen; other individuals, on the opposite end of this oft cited money 'velocity,' that is, the people who get the money last, are as worse off as the politically well-connected are better off, since the prices have since been bid up and the general price level is higher. Thus, the expansion of the money supply, even if it keeps the economy as healthy as you think it does, still redistributes income. You cannot see this in the traditional analysis of how creditors or debtors benefit/lose out from inflation/deflation, but it is a valid critique that to my knowledge has not been addressed.

Second: Libertarians do not support the Gold Standard, per se. I know there are a lot of people who call themselves libertarians who are big advocates of a gold standard, but if you look at the philosophy of libertarianism in and of itself, the only conclusion that you can come to is that the market ought to, in the end, decide what money should be used. To my surprise, I recently learned that Panama actually has had no central bank for some time now, and is also not on a government-mandated gold standard, and therefore, the market in Panama decides what currencies, of all the currencies in the world, it will use. Panama has very low to no inflation, and does not suffer from the periodic economic crises that plague the rest of Latin America. I think this is the real libertarian position and is a perfectly tenable one. The gold standard, after all, was a government creation. And what the government giveth the government taketh away.

Allan Juranek

I have now thought out a third criticism:

You say, “The point: Let's fix it instead of vaporizing it.”

But the problem is that the Federal Reserve is NOT broken. It is doing today exactly what it was set up to do. The Fed is fundamentally a cartel. It is a cartel of big banks, and cartels are set up to benefit their members. It gets even better because in most cartels there are incentives to “cheat” or break the cartel. This is not possible in the case of the Federal Reserve; to “cheat” would be to break the law, and thus this cartel has the power of the gun behind it. The Federal Reserve, along with various other semi-public, semi-private institutions like FDIC, are set up to keep all banks in the United States inflating at the same pace (that is, the pace set my the Fed), within the framework of our fractional reserve system, so that banks cannot compete by inflating less (that is, offering a hypothetically more stable currency) or more, holding more/less reserves, having to avoid bank runs etc. In other words, these economic incentives will continue to exist regardless of whether we do audits or measure inflation better; a ‘new era’ of transparency will only change the diction/tactics of those in the media/academia that continue to cover up this crime against our money supply. The only real solution is to break the Fed’s monopoly over the money supply and have a free market in money.

PS: I actually replied ‘yes’ when you asked, “Well, Congress, the presidency, and the Supreme Court have all made mistakes—but is that sufficient reason to revert back to the Articles of Confederation?”

PPS: The deflation criticism of the gold standard, in terms of deflation being a tax on borrowers can be remedied by indexing loans to deflation; in other words, we can still think of a “real” and “nominal” interest rate, it’s just that the “nominal” rate, i.e., the rate paid, would be lower than the “real” or original rate, compensating for the rate of deflation.

To all the haters:
I don't understand the obsession with the gold standard. Free money and markets in monetary policy I understand and support; but tying our currency to gold is exactly as Steve said: backing one (fiat) currency with one (natural) currency. What's the upside?

Unfortunately for a large number of reasonable libertarians, the Lew Rockwells have a loud voice...

Hi Allan;
"When new money is effectively created, it is not distributed proportionally or equally to the populace."

Nor should it be. The way the Fed creates new base money is by purchasing Treasury securities from the public in the open market. Only the sellers of T-securities receive that money, and it's a fair-and-square transaction.

"The Fed is fundamentally a cartel. It is a cartel of big banks, and cartels are set up to benefit their members."

For a debunking of the Fed conspiracy theory:

"Conspiracy theorists have long viewed the Federal Reserve Act as a means of giving control of the banking system to the money trusts, when in reality the intent and effect was to wrestle control away from them. History clearly demonstrates that in the decades prior to the Federal Reserve Act the decisions of a few large New York banks had, at times, enormous repercussions for banks throughout the country and the economy in general. Following the return to central banking, at least some measure of control was removed from them and placed with the Federal Reserve."
(see http://tinyurl.com/2u4yrs)

Also: The conspiracy theory usually asserts that the secret cartel of sinister, greedy bankers is getting rich off dumb old you and me. Here's the real situation:

The income of the Federal Reserve System is derived primarily from the interest on U.S. government securities that it has acquired through open market operations... After it pays its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. About 95% of net earnings have been paid into the Treasury since inception in 1914.
(see http://tinyurl.com/yot39q)

Lastly, there's an infinitely quicker way to guarantee that your financial assets are protected from inflation (i.e., infinitely quicker than trying to sell the nation on the gold standard: exchange your money and bonds for Treasury Inflation Protected Securities. (see http://tinyurl.com/33qbys)


"Lastly, there's an infinitely quicker way to guarantee that your financial assets are protected from inflation (i.e., infinitely quicker than trying to sell the nation on the gold standard: exchange your money and bonds for Treasury Inflation Protected Securities."

Is it not clear that, without any conspiracy theories involved, the government has every incentive to understate measured inflation so as to restrain the growth of all of its future liabilities that are supposedly indexed to inflation? Do you trust the government to not respond to those incentives? Does the word skeptical mean something different to you than it does to me?

Regards, Don

Okay, let's examine that idea to put all your capital into inflation-protected TIPS, and assume the government acts with integrity towards TIPS owners even as it acts with treachery towards those owners of dollars. What are the economic consequences of that scenario?

No capital for private investment, except the capital of the poor saps who undertake private ventures even with currency that is untrustworthy. That is an entirely irresponsible approach to public policy. This is what we are discussing here, isn't it? Public policy - not just how personally to avoid the consequences of bad public policy.

If we are spending the intellectual energy to design the best public policy, shouldn't we match that energy with the willpower to seek its adoption in practice? To do otherwise, it seems to me, falls short of the efforts of those who came before us.

What does currency with value measured relative to gold do for us? It eliminates the wrenching damage and gross inefficiencies experienced in all dollar-reliant economies since 1971. The oil gluts and shortages, the extreme economic dislocations and waves of bankruptcies (including, e.g., the savings & loan failures) have been the products of the dismal record of the Fed in attempting to manage domestic interest rates instead of targeting a stable dollar value.

The dollar gained about 50% in value in 1996-1999 and has lost that much (on a spot basis) since 2003. This means more years of inflation, high interest rates and stagnation, as we have experienced in the past. Right now is not so bad in economic growth terms because Republicans have kept tax rates down. If economic stagnation gives political power back to Democrats and they raise tax rates, the U. S. and the world will return to 1970 economic conditions.

Woops... That's "1970s" economic conditions, not "1970."

Not everyone is as afraid of the Fed's ability to control inflation as some who advocate the gold standard; therefore, nowhere near everyone would move all their capital to TIPS. The point is, they are a much quicker way for those few to immunize their financial assets, including paper money, from inflation -- as opposed to waiting for a return to the gold standard to come to their rescue.

The option is there; that doesn't mean everyone would do it.

Am I crazy or is it a simple experiment to see what inflation was when a gold standard was in place?

Based on my admittedly brief research, it looks like it has been similar regardless of the money system.

Also, wouldn't the loosening of fractional banking requirements in the 90s have far more effect on money supply than fed policy?

Steve, my point is that TIPS do not TIPS certainly do not immunize the general economy from the damaging effects of inflation. So the inflation problem remains real and ought to be attacked with every energy available so as to eliminate it. TIPS do harm (much like the WIN buttons of the Ford administration) in fooling some into thinking inflation is not really a problem. The minor point is that TIPS do no more than fool those who invest in them that the government will indeed perform this promise.

Patrick, take a closer look and you'll find prices were stable from the late 1700's through the 1920s, except for the effects of the inflation/deflation cycle caused by abandoning the gold standard during the Civil War. Crude oil was stable in price and plentiful from its discovery until the dollar was cut from gold in 1971.

Interesting article, thank you. However I think your dismissal of gold doesn't matter in this discussion. If the "Stone of the Wise" is being found (which means that people can make gold...) or there are serious geostrategic objections to gold, the market will choose another metal to replace gold (silver, ...)

Indeed: the market will choose a metal. If the one crucial thing happens, and that is the abolition of the FED (or ECB). As Rothbard says in this text, a solid alternative for state money will never appear, as long as the FED exists. I don't have religious feelings for this man, but he is right in claiming that Germans kept on using their worthless marks under the Hitler-dictatorship...


I wouldn't trust the free market to fix my car, fly me in a plane, deliver fresh produce to my local grocery store or build skyscrapers, so why should I trust it to come up with a fair medium of exchange? No siree, I'm going to let the Fed handle all that and go check the latest on Paris Hilton...


The damage done by not having a gold standard is far greater than inflation.

Without the power to print up money and loan it out, all investment power would come from the people who are the most thrifty, most efficient, and whom have greatest ability to save. The Fed co-opting this process rewards a culture of debt, credit, and consumption rather than of thrift, savings, and investment. It leads to people being massively in debt for things like cars and houses rather than moderately in debt for things like factories and infrastructure. Having the power to print up money makes the ease of credit and their credit priorities completely different than what would be normal in a productive society.

Hi Steve,

I am no expert on this, but my intuition tells me that the free market could play a role in improving our monetary system. As I understand it, Ron Paul does not push for a reversion to the gold standard, but rather, that people should have the option to trade in asset-backed currency instead of fiat dollar if they choose. Currently there are capital gains taxes that hinder alternate currencies thereby giving the Fed a "money monopoly". Am I wrong about this, and what are your thoughts regarding competing currencies? Thanks!

I enjoy listening to economics discussing statistics while divorcing themselves from the meaning behind the raw, mathematical formulas. Could someone refer me to a mathematician that builds these economic models? I think Statistics has always been a vodoo branch of math used to sell snake oil, politicians and AD campaigns. I firmly believe that Economicists trying to sell the math of economics divorced from the psychology of economics need to learn A LOT more about statistics.

Here is the psychology that must be addressed in my opinion (as a Math guy): Paper currency requires that the masses “believe” that what they are spending is worth something. When enough of the “masses” realize that what is in their pocket is paper and what is in their savings account is monetized debt: they will demand change.

Truck drivers and soccer moms don’t care about your formulas: they want to believe that their currency has intrinsic value.

When the masses are spending a currency that has been inflated to the value of pesos they won’t care how well you defend the debt backed currency system or any other form of paper system--they‘ll want a currency that they can buy a loaf of bread with. Paper currency is the biggest lie of the modern Era and adjusting values in formulas will never overcome the fact that paper isn’t worth anything.

Ironically, Ron Paul criticizes American imperialism. However, wouldn't "the fact that the gold standard makes the increase in the supply of gold depend upon the profitability of producing gold" lead us back to imperialism as world powers compete to colonize lands that have more gold? This may be a dumb question, so please answer it and clarify.

Correct me if I'm wrong, but the Arabs and the Chinese have to get along with us because we buy their good with our paper money, and they reinvest that paper money back into our economy in the faith and hope that they can get even more of our paper money, which will make them wealthier. So our America's success also serves Chinese and Arab interests. So our paper money protects us, Dr. Paul. America first indeed!

Why is paper currency a "lie" and gold-backed currency not? What makes gold valuable besides "belief"?
We do print "In God We Trust" on our paper money.

Wait, the Fed's board of directors is not accountable to the public nor is it voted in. Its appointed by the president who is advised by the banking cartel themselves.

Secondly, why does everybody miss the big point. You cannot have growth in any system forever. We need a new way to think about money and what it does. Its a unit of work. But when the entire world have been overtaken by this meme, there is no more room to grow.

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