|
|
Gold
and Economic Freedom
by
Alan Greenspan
[written in 1966]
This
article originally appeared in a newsletter: The Objectivist published in
1966 and was reprinted in Ayn Rand’s
Capitalism: The Unknown Ideal.
An
almost hysterical antagonism toward the gold standard is one issue which
unites statists of all persuasions. They seem to sense – perhaps more
clearly and subtly than many consistent defenders of laissez-faire –
that gold and economic freedom are inseparable, that the gold standard is an
instrument of laissez-faire and that each implies and requires the other.
In
order to understand the source of their antagonism, it is necessary first to
understand the specific role of gold in a free society.
Money
is the common denominator of all economic transactions. It is that commodity
which serves as a medium of exchange, is universally acceptable to all
participants in an exchange economy as payment for their goods or services,
and can, therefore, be used as a standard of market value and as a store of
value, i.e., as a means of saving.
The
existence of such a commodity is a precondition of a division of labor
economy. If men did not have some commodity of objective value which was
generally acceptable as money, they would have to resort to primitive barter
or be forced to live on self-sufficient farms and forgo the inestimable
advantages of specialization. If men had no means to store value, i.e., to
save, neither long-range planning nor exchange would be possible.
What
medium of exchange will be acceptable to all participants in an economy is
not determined arbitrarily. First, the medium of exchange should be durable.
In a primitive society of meager wealth, wheat might be sufficiently durable
to serve as a medium, since all exchanges would occur only during and
immediately after the harvest, leaving no value-surplus to store. But where
store-of-value considerations are important, as they are in richer, more
civilized societies, the medium of exchange must be a durable commodity,
usually a metal. A metal is generally chosen because it is homogeneous and
divisible: every unit is the same as every other and it can be blended or
formed in any quantity. Precious jewels, for example, are neither homogeneous
nor divisible. More important, the commodity chosen as a medium must be a
luxury. Human desires for luxuries are unlimited and, therefore, luxury goods
are always in demand and will always be acceptable. Wheat is a luxury in
underfed civilizations, but not in a prosperous society. Cigarettes
ordinarily would not serve as money, but they did in post-World War II Europe
where they were considered a luxury. The term “luxury good”
implies scarcity and high unit value. Having a high unit value, such a good
is easily portable; for instance, an ounce of gold is worth a half-ton of pig
iron.
In the
early stages of a developing money economy, several media of exchange might
be used, since a wide variety of commodities would fulfill the foregoing
conditions. However, one of the commodities will gradually displace all
others, by being more widely acceptable. Preferences on what to hold as a
store of value, will shift to the most widely acceptable commodity, which, in
turn, will make it still more acceptable. The shift is progressive until that
commodity becomes the sole medium of exchange. The use of a single medium is
highly advantageous for the same reasons that a money economy is superior to
a barter economy: it makes exchanges possible on an incalculably wider scale.
Whether
the single medium is gold, silver, seashells, cattle, or tobacco is optional,
depending on the context and development of a given economy. In fact, all
have been employed, at various times, as media of exchange. Even in the
present century, two major commodities, gold and silver, have been used as
international media of exchange, with gold becoming the predominant one.
Gold, having both artistic and functional uses and being relatively scarce,
has significant advantages over all other media of exchange. Since the
beginning of World War I, it has been virtually the sole international
standard of exchange. If all goods and services were to be paid for in gold,
large payments would be difficult to execute and this would tend to limit the
extent of a society’s divisions of labor and specialization. Thus a
logical extension of the creation of a medium of exchange is the development
of a banking system and credit instruments (bank notes and deposits) which
act as a substitute for, but are convertible into, gold.
A free
banking system based on gold is able to extend credit and thus to create bank
notes (currency) and deposits, according to the production requirements of
the economy. Individual owners of gold are induced, by payments of interest,
to deposit their gold in a bank (against which they can draw checks). But
since it is rarely the case that all depositors want to withdraw all their
gold at the same time, the banker need keep only a fraction of his total
deposits in gold as reserves. This enables the banker to loan out more than
the amount of his gold deposits (which means that he holds claims to gold
rather than gold as security of his deposits). But the amount of loans which
he can afford to make is not arbitrary: he has to gauge it in relation to his
reserves and to the status of his investments.
When
banks loan money to finance productive and profitable endeavors, the loans
are paid off rapidly and bank credit continues to be generally available. But
when the business ventures financed by bank credit are less profitable and
slow to pay off, bankers soon find that their loans outstanding are excessive
relative to their gold reserves, and they begin to curtail new lending,
usually by charging higher interest rates. This tends to restrict the
financing of new ventures and requires the existing borrowers to improve
their profitability before they can obtain credit for further expansion.
Thus, under the gold standard, a free banking system stands as the protector
of an economy’s stability and balanced growth. When gold is accepted as
the medium of exchange by most or all nations, an unhampered free
international gold standard serves to foster a world-wide division of labor
and the broadest international trade. Even though the units of exchange (the
dollar, the pound, the franc, etc.) differ from country to country, when all
are defined in terms of gold the economies of the different countries act as
one-so long as there are no restraints on trade or on the movement of
capital. Credit, interest rates, and prices tend to follow similar patterns
in all countries. For example, if banks in one country extend credit too
liberally, interest rates in that country will tend to fall, inducing
depositors to shift their gold to higher-interest paying banks in other countries.
This will immediately cause a shortage of bank reserves in the “easy
money” country, inducing tighter credit standards and a return to
competitively higher interest rates again.
A
fully free banking system and fully consistent gold standard have not as yet
been achieved. But prior to World War I, the banking system in the United
States (and in most of the world) was based on gold and even though
governments intervened occasionally, banking was more free than controlled.
Periodically, as a result of overly rapid credit expansion, banks became
loaned up to the limit of their gold reserves, interest rates rose sharply,
new credit was cut off, and the economy went into a sharp, but short-lived
recession. (Compared with the depressions of 1920 and 1932, the pre-World War
I business declines were mild indeed.) It was limited gold reserves that
stopped the unbalanced expansions of business activity, before they could
develop into the post-World Was I type of disaster. The readjustment periods
were short and the economies quickly reestablished a sound basis to resume
expansion.
But
the process of cure was misdiagnosed as the disease: if shortage of bank
reserves was causing a business decline-argued economic interventionists-why
not find a way of supplying increased reserves to the banks so they never
need be short! If banks can continue to loan money indefinitely-it was
claimed-there need never be any slumps in business. And so the Federal
Reserve System was organized in 1913. It consisted of twelve regional Federal
Reserve banks nominally owned by private bankers, but in fact government
sponsored, controlled, and supported. Credit extended by these banks is in
practice (though not legally) backed by the taxing power of the federal
government. Technically, we remained on the gold standard; individuals were
still free to own gold, and gold continued to be used as bank reserves. But
now, in addition to gold, credit extended by the Federal Reserve banks
(“paper reserves”) could serve as legal tender to pay depositors.
When
business in the United States underwent a mild contraction in 1927, the
Federal Reserve created more paper reserves in the hope of forestalling any
possible bank reserve shortage. More disastrous, however, was the Federal
Reserve’s attempt to assist Great Britain who had been losing gold to
us because the Bank of England refused to allow interest rates to rise when
market forces dictated (it was politically unpalatable). The reasoning of the
authorities involved was as follows: if the Federal Reserve pumped excessive
paper reserves into American banks, interest rates in the United States would
fall to a level comparable with those in Great Britain; this would act to
stop Britain’s gold loss and avoid the political embarrassment of
having to raise interest rates. The “Fed” succeeded; it stopped
the gold loss, but it nearly destroyed the economies of the world, in the
process. The excess credit which the Fed pumped into the economy spilled over
into the stock market-triggering a fantastic speculative boom. Belatedly,
Federal Reserve officials attempted to sop up the excess reserves and finally
succeeded in braking the boom. But it was too late: by 1929 the speculative
imbalances had become so overwhelming that the attempt precipitated a sharp
retrenching and a consequent demoralizing of business confidence. As a
result, the American economy collapsed. Great Britain fared even worse, and
rather than absorb the full consequences of her previous folly, she abandoned
the gold standard completely in 1931, tearing asunder what remained of the
fabric of confidence and inducing a world-wide series of bank failures. The
world economies plunged into the Great Depression of the 1930’s.
With a
logic reminiscent of a generation earlier, statists argued that the gold standard
was largely to blame for the credit debacle which led to the Great
Depression. If the gold standard had not existed, they argued,
Britain’s abandonment of gold payments in 1931 would not have caused
the failure of banks all over the world. (The irony was that since 1913, we
had been, not on a gold standard, but on what may be termed “a mixed
gold standard”; yet it is gold that took the blame.) But the opposition
to the gold standard in any form-from a growing number of welfare-state advocates-was
prompted by a much subtler insight: the realization that the gold standard is
incompatible with chronic deficit spending (the hallmark of the welfare
state). Stripped of its academic jargon, the welfare state is nothing more
than a mechanism by which governments confiscate the wealth of the productive
members of a society to support a wide variety of welfare schemes. A
substantial part of the confiscation is effected by taxation. But the welfare
statists were quick to recognize that if they wished to retain political
power, the amount of taxation had to be limited and they had to resort to
programs of massive deficit spending, i.e., they had to borrow money, by
issuing government bonds, to finance welfare expenditures on a large scale.
Under
a gold standard, the amount of credit that an economy can support is
determined by the economy’s tangible assets, since every credit
instrument is ultimately a claim on some tangible asset. But government bonds
are not backed by tangible wealth, only by the government’s promise to
pay out of future tax revenues, and cannot easily be absorbed by the
financial markets. A large volume of new government bonds can be sold to the
public only at progressively higher interest rates. Thus, government deficit
spending under a gold standard is severely limited. The abandonment of the
gold standard made it possible for the welfare statists to use the banking
system as a means to an unlimited expansion of credit. They have created
paper reserves in the form of government bonds which-through a complex series
of steps-the banks accept in place of tangible assets and treat as if they
were an actual deposit, i.e., as the equivalent of what was formerly a
deposit of gold. The holder of a government bond or of a bank deposit created
by paper reserves believes that he has a valid claim on a real asset. But the
fact is that there are now more claims outstanding than real assets. The law
of supply and demand is not to be conned. As the supply of money (of claims)
increases relative to the supply of tangible assets in the economy, prices
must eventually rise. Thus the earnings saved by the productive members of
the society lose value in terms of goods. When the economy’s books are
finally balanced, one finds that this loss in value represents the goods
purchased by the government for welfare or other purposes with the money
proceeds of the government bonds financed by bank credit expansion.
In the
absence of the gold standard, there is no way to protect savings from
confiscation through inflation. There is no safe
store of value. If there were, the government would have to make its holding
illegal, as was done in the case of gold. If everyone decided, for example,
to convert all his bank deposits to silver or copper or any other good, and
thereafter declined to accept checks as payment for goods, bank deposits
would lose their purchasing power and government-created bank credit would be
worthless as a claim on goods. The
financial policy of the welfare state requires that there be no way for the
owners of wealth to protect themselves.
This
is the shabby secret of the welfare statists’ tirades against gold.
Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this
insidious process. It stands as a protector of property
rights. If one grasps this, one has no difficulty in understanding the
statists’ antagonism toward the gold standard.
Trace Mayer
RuntoGold.com
Trace Mayer,
J.D., holds a degree in Accounting from Brigham Young University, a law
degree from California Western School of Law and studies the Austrian school
of economics. He works as an entrepreneur, investor, journalist and monetary
scientist. He is a strong advocate of the freedom of speech, a member of the
Society of Professional Journalists and the San Diego County Bar Association.
He has appeared on ABC, NBC, BNN, many radio shows and presented at many
investment conferences throughout the world.
|
|
