Libertarian Land Philosophy:
Man's Eternal Dilemma
Oscar B. Johannsen, Ph.D.
BOOK VI: THE STATE AND MONEY
Chapter 2 - The Gold Standard
A nation is on the gold standard when its monetary unit is composed
of gold of a specified weight and fineness. In the United States, the
monetary unit is the dollar, which is 13.714+ grains of pure gold
(1/35th of an ounce).[1]
Strictly speaking, that is all that a gold standard comprises. It is
the definition of the fundamental monetary unit as being a certain
weight and fineness of gold. Unfortunately. other functions have been
ascribed to it which has caused it to fall into disrepute.
Most governments set up an agency, as a Bureau of Weights and
Measures, or Bureau of Standards, which is responsible for the
definition of many of the units which men use. Fundamental physical
units as distance, electrical energy, and weights arc defined by law.
The yard was defined by law as being the distance between two scratch
marks on a piece of metal in Washington D.C.
Such definitions are the result of custom or agreement by those most
intimately interested in them. Through usage, people established a
certain distance as a yard. To avoid confusion as to its exact
dimensions, scientists specified the distance which was then enacted
into law- Thus, a yard is not 35½ or 36½ inches. It is that
specified distance on the piece of metal in Washington, which is
termed 36 inches.
The enactment of a law is not necessary, but it does no particular
harm in the case of physical units. States are rarely interested in
arbitrarily changing such units. Many important units are not
incorporated into law. Through their associations, businessmen and
others will determine definitions of the particular units which are
useful to them, and these units are ordinarily accepted by all without
question.
Once a people have developed a monetary unit, eventually the State
will enact a law specifying it as the standard. For example, the unit
might have been a pound of silver of a certain fineness. This might
have been called the silver standard. When the unit is defined as
being a certain quantity of fine gold, the gold standard is said to
have been established. And that is all there is to the gold standard.
Unfortunately, States usually go beyond this point. They specify not
only the monetary unit but they mint the coins and ingots. This is
analogous to a State not only specifying the yard, but making the
yardsticks.
Also, unfortunately, most economists believe that the gold standard
not only embodies the definition of the unit, but the coining of it by
the State, and explicitly or implicitly other functions, particularly
the following.
It is that any banknote or demand deposit of the State's central
bank, or non-interest bearing circulating note of the State itself,
must be redeemed in gold without question upon presentation.
The purpose for assuming that this is a function of the gold standard
is a laudatory one. It is to bind the hands of the State so it will
not indulge in its propensity to inflate the quantity of money-aids.
But, the sad truth is that whenever any State wishes to inflate the
exchange media it will do so, as long as it has control over it. Any
rule, law or custom standing in its way will be brushed aside.
By making this "function" an essential clement of the gold
standard, economists have attained nothing really constructive.
Rather, it has been destructive for it has led people to believe that
the gold standard periodically breaks down. That is what the Americans
believed happened in 1933 when the United States was said to have gone
off the gold standard domestically. If one recognizes that the gold
standard is merely the defining of the monetary unit, it is obvious
that it did not break down. How does a definition break down.
What occurred was that the United States refused to honor its
obligation to redeem its own non-interest bearing circulating notes,
as United States Notes, or permit the Federal Reserve Banks to redeem
their Federal Reserve notes and demand deposits in gold, domestically.
Since the Federal Reserve Banks are really an arm of the State, their
demand deposits and Federal Reserves notes are actually the IOUs of
the Federal State. As a matter of fact, by law Federal Reserve notes
are obligations of the United States.
Thus, the "breakdown of the gold standard" actually was a
breakdown by the United States for it did not live up to its
responsibility to redeem its circulating IOUs. It was a unilateral act
of bankruptcy by the government, with no consultation with its
creditors -- those who held its money-aids. This action was no
different from that of a debtor who unilaterally refused to pay his
debts. However, in such a case, the creditors would call upon the
State's authorities either to force the debtor to live up to his
obligations or else seize whatever property he had and divide it up
among the creditors. But to whom can one appeal when a State
repudiates its debts?
Because the redemption of these money-aids was presumed to be a
function of the gold standard, instead of the Federal State having
been attacked for welshing on its debts, the money of the nation was
impugned. The people believed there was something deficient with the
exchange media in use and the federal authorities had to step in to
correct the situation.
Inasmuch as the gold standard has had foisted on it other functions
besides the definition of the monetary unit, it should hardly be
surprising to learn that what are termed variations of the gold
standard arose. One is the gold bullion standard. Under it, although
the fundamental unit may be defined so as to permit it to be minted
into a convenient coin, yet no coins are struck. Instead ingots are
minted. Anyone desiring them can obtain them, but their size is such
that few people have the means to purchase them. This, the essential
characteristic of money, while not lost, is inhibited. Money is a
medium of exchange. To be should such, it must actually be used by the
people. To put obstacles in the way, as the gold bullion standard
does, is to hamper its use as a medium of exchange.
It would be a matter of indifference if a gold bullion standard
existed or not if anyone could mint coins in terms of the fundamental
unit. However, States guard their monopoly too zealously to permit
this. That private individuals most certainly would coin money in
convenient sizes was adequately demonstrated a few years ago. In
Switzerland, as has already been stated, private entrepreneurs minted
gold sovereigns which were exact duplicates of the coins England
formerly issued. They did it to meet a demand by people who feared
depreciating money-aids.
The gold bullion standard is neither an extension nor a more
sophisticated form of the gold standard, as it as sometimes claimed.
Its evolution is the result of the State arrogating to itself the
monopoly on the issuance of money. Eliminate the monopoly. Then, even
it officially the gold bullion standard is in existence. Actually it
would have reverted to the gold standard, or the gold coin standard,
as it is sometimes called. The necessary coins would come into
circulation through their being minted by banks and other private
concerns.
That the gold bullion standard acts as a device to remove money from
circulation is indicated by anomalous situation in the United States.
From early 1933 until December 31, 1934, it was illegal for Americans
to own gold bullion. However, it was always legal to own gold dust.
Attempts were made by private entrepreneurs to establish a market in
gold dust. This did not materialize, however, as people had no desire
for money in that form. it was argued by some that the country was
domestically on the gold standard (as conceived by most economists)
because it was possible to exchange gold dust for the money-aids in
circulation even though the redemption of such exchange media into
ingots was prohibited. One might as well argue that the country is
still on the generally accepted concept of the gold standard as it is
possible to exchange money-aids for gold jewelry.
After 1934, the United States was said to be on an "international
gold bullion standard" as any of its money-aids which were owned
by foreign States, or their central banks, could be redeemed in gold
ingots. However, the U.S. Treasury looked with great disfavor on any
nation which exercised that prerogative too freely. Of .course, at any
time it could simply abolish this privilege.[2]
It might not be amiss to point out that if this writer's concept of
what constitutes the gold standard is accepted as correct, the United
States is still on the gold standard. The dollar is still defined in
terms of gold. It is not suspect. It is the money-aids which are. It
is these which the people wish to convert into dollars, i.e., gold.
Recapitulation
The gold standard is the definition of the monetary in terms of a
certain weight and fineness of gold.
In addition to the above, economic literature ordinarily includes the
following as aspects of the gold standard.
1. Free unlimited coinage of gold into coins and ingots by the
government with or without charges for the cost of minting.
2. Redemption of all exchange media issued by the government or its
central bank into gold upon demand. Actually, minting money is a
function of private enterprise and the government should have no more
to do with it than it has with the production of yardsticks.
An individual should pay his debts -- so should a State. If either
does not, it is an act of bankruptcy. State should no more attempt to
pay off its debts by altering the standard of money, than it should to
make things appear shorter by altering the standard of length. The
sooner the gold standard is recognized for what it is -- merely the
definition of the monetary unit and nothing else - the sooner there is
a likelihood that the people will begin to recognize that the gold
standard does not break down, but rather the debts of a government
'break down'.
NOTES
- As mentioned in a previous footnote, the dollar has been
re-defined twice since this was written. In 1971, an announcement
was made that it would be redefined to be 1/38th of an ounce of
fine gold. On. February 12, 1973 (14 months later) another
announcement was made that it would be re-defined to be 1/42.22th
of an ounce of fine gold.
- On August l5, 1971, the President of the United States ordered
the Secretary of the Treasury to "suspend temporarily the
convertibility of the dollar into gold or other reserve assets".
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