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The necessity of distinctions

Paul Marks, a frequent poster of comments, claims that the concept of a gold standard is misleading because “either gold is the money or it is not.” Sorry, the epigones of Murray Rothbard need to learn a lot more monetary history here. There are many kinds of arrangements under which “gold is the money” but who can get the money and under what circumstances is restricted. Consider these cases:

Medieval gold standard: Before the era of circulating notes. People often used “imaginary monies” corresponding to no current coin in circulation. If you got paid in gold, it would be with a grab-bag of available coins, perhaps by weight or perhaps by tale (face denomination) if the coins were not terribly worn and had a good reputation for uniformity.

Classical gold standard (1800s-1914): Half the world or more did not have central banks. Gold was minted into coins that circulated widely. People could redeem even small amounts for standard gold coins. Redemption even for large amounts was often made with gold coins and not with bullion.

Gold bullion standard: First proposed, I believe, by David Ricardo at a time when Britain was off the gold standard and gold coins had disappeared from circulation. The minimum unit of redemption would be a gold bar with a high value, restricting redemption in practice mainly to banks.

Currency board on gold: Yes, there were a few cases where currency boards held substantial reserves (one-third or more of the value of currency in circulation) in precious metals, and the rest in foreign securities.

Gold exchange standard: As practiced in the 1920s, countries on the gold exchange standard held large amounts of interest-bearing foreign assets denominated in major gold-convertible currencies where before World War I they would instead have held gold. The result looked a lot like the classical gold standard on the surface but had an element of foreign-currency risk for gold-exchange central banks that had been smaller under the classical gold standard.

Bretton Woods system: Central banking had taken over the world by this time. No gold coins circulated. Only one currency in the system, the U.S. dollar, was readily redeemable for gold, and then only by foreign governments, not by U.S. or foreign private individuals or banks. Exchange controls on most currencies in addition to restrictions on the use of gold.

Advanced free banking system on a gold standard: Gold coins are legal but nobody wants them for everyday use because they are cumbersome, and maybe nobody even mints them. The public is free to demand gold from banks but nobody does so for monetary purposes. Instead, gold remains in bank vaults and serves only as a medium of settlement among banks, except when demand to use gold in industry makes some withdrawal of gold from banks profitable.

100% gold standard: As George Selgin has pointed out, this is a system that seems never to have existed anywhere that banking has been competitive.

If you don’t distinguish among the characteristics of these arrangements, and that accordingly all but the first and maybe the last are systems in which “gold is not the money,” you can’t understand thoroughly how they work. Additionally, by implicitly lumping them with fiat money systems, in which gold is definitely not the money, you lose insight into why the various gold standards, whatever their flaws, have had lower inflation than fiat money systems.

  • Paul Marks

    Actually it is Kurt Schuler who needs to learn some monetary history – specifically the debate between the "Banking School" and the "Monetary School".

    The idea that a credit bubble (whatever fancy language is used for the credit bubble) is O.K. if it is for the "needs of trade" (the central idea of the Banking School) is just wrong – flat wrong. As Mises, Hayek (in his best years – perhaps not later) and others pointed out – the Currency School were "wrong about the solution" (Peel's Act of 1844) but "right about the problem" – the problem of the Credit Bubble (banker credit expansion), such artificial "prosperity" (the "boom") must lead to a bust – as the credit expansion shrinks back down towards the monetary base (the actual money).

    To bring things bang up to date…..

    Selling 43 ounces of gold for every once of gold one actually has is not a good idea – as when physical delivery is demanded (which it always, eventually, is) the cupboard is found to be bare – and the system crashes.

    "Competition" is not always automatically a good thing, competition between governments in war is not a good thing, competition between criminal gangs (to see which can steal and extort the most money and goods) is not a good thing, and competition between credit bubble bankers, to see which can create the biggest credit bubble and get the largest government aid (official or unofficial) is not a good thing either – especially when it involves corrupt court judgements (for example upholding contract breaking – such as "suspension of cash payments").

    From the point of view of reason neither legislation or court judgements determine what "fraud" is – if a contract is broken it does not matter (from the point of view of reason) whether government, and government courts, say it is O.K. to break contracts. What matters is that people have been given a false impression that X represents money – when it does not represent money, when the people who produce X do not actually have the money they imply they have.

    I do not believe that Kurt Schuler or George Selgin would accept such Fascist conduct as the "legal" gold confiscation and contract voiding of the regime of Franklin Roosevelt in 1933 (no decent person, Free Banker or not, would accept such Fascist conduct) – therefore they do not (in reality) accept the principle of the Legal Positivists that "law" is simply the "will of the state". Nor would they accept such things as the bailouts of the modern period (either open or hidden) as lawful conduct – not in terms of reason (such conduct does not just violate economic law – it also violates natural law, basic right and wrong).

    Economics may be "value free" in the scientific sense that it just describes what certain principles lead to – but economists are also human beings, and as human beings have moral duties.

    For example, an economist (as an economist) may simply say "if you want to have a bust (and the economic chaos that goes with a bust) then lend out more "money" than really exists (as real savings) – engage in credit expansion".

    But an economist is also a human being – and as a human being it is their duty to say "and such a credit expansion (lending out "money" that does not really exist) is a bad thing to do" bad in its long term economic consequences and bad (corrupt) in moral terms also.

    In reality (whether in the present or the past) there is no "short cut" to real (as opposed to fake) prosperity. A population can not (in the long term) consume more than they produce, or borrow more than they save (really save). And calling credit expansion "real savings" is not just an error of economic logic, it is also immoral thing to do.

    This is true if the actual money is just government fiat (fiat – command, order) notes or coins, or actual commodity.

    Such as gold – where (I repeat) selling 43 ounces of gold (in a Central Bank backed scam to try and force down the gold price) for every ounce of gold one really has is neither sensible (for the day when physical delivery is demanded will come), nor is it moral – for one has (as with all this bubble scams) given the impression to people that one has what one does not have.

    I repeat – a population can not (in the long term) consume more than one produces, or borrow more than they save (really save). Credit expansion is not a short cut to prosperity – it leads, in the end, to crash and economic harm.

    This is a point of economics – but it is also a moral point.

    I would recommend that those who doubt this read Kipling's poem "The Gods of the Copybook Headings".

    There is no need for government laws (or court judgements) saying that 1+1 does not equal 78 (that one can not lend out more money than one actually has), or that throwing oneself in a volcano is a unhealthy thing to do.

    Indeed a society where such basic things are not understood (without any government laws or court judgements explaining them) is already doomed to harsh consequences – as the population (or key sections of it) have rejected reason.

    There will be punishment for such folly – and it will not be government that delivers the punishment, it will be the logical consequences of the conduct itself.

  • Paul Marks

    Sadly (as Richard Cantillon – the partner of John Law in "legal" crime) pointed out back in the 1700s… the terrible consequences of credit expansion do not always hit the specific individuals most responsible for it.

    On the contrary – such people tend to be wealthy and politically well connected, and often actually come out ahead (even after the boom-bust has run its course), the rest of society (the great majority of people) are harmed by their conduct, but they (personally) benefit from it. They are "out" before the crash (the crash of the credit expansion – the credit bubble) occurs.

    This is one of the major reasons why (in economic history) such conduct is seen – again and again.

    The other major (historical – and current) reason – is (as mentioned in my first comment) this desire for a "short cut" to prosperity, powerful people may (with the best of intentions) may really convince themselves (and others) that a population can (even in the long term) consume more than they produce and borrow more than they really save. The magic numbers (and "scientific" sounding jargon) of credit bubble finance convince them that this is so – even though it is not. This desire for a "philosopher's stone" that will turn lead into gold, and credit bubbles into real prosperity.

    However, I believe there is a third reason why credit expansion is now so fashionable – the deliberate (intentional) desire to destroy civil society (so called "capitalist" society).

    This desire is that of key group of people – the Marxists and those influenced by them.

    Historically Karl Marx himself (as Hunter Lewis points out in "Where Keynes Went Wrong") had nothing but contempt for credit expansion (credit bubble) policy (what was later called "Keynesianism"), but from the 1940s onwards many Marxists (starting with the Italian Marxist P. Straffa) became much more favourable to ideas of credit expansion (although "Lenin" may have had the same idea some decades before).

    Why so? I do not believe that people such as "Cloward and Piven" have really fallen for the fallacies of painless prosperity offered by credit expansion, on the contrary (I believe) they (and those they teach – such as the person sitting in the Oval Office) see credit expansion as a good way of helping undermine the economic (and the moral) basis of "capitalist" society.

    In short the Jamie Dimon types (the credit bubble bankers) have got into bed with dangerous people – very dangerous people indeed. They have supported the coming to power (in return for private promises of unlimited bailouts – mostly hidden) of the very people who will destroy them – and destroy everyone else.

    The bankers may think they control the radicals – but they will find that they do not.

    "Why are you upset Paul? Surely one should welcome the prospect of bankers finally get some personal punishment?"

    Hell also contains punishment – but it is wrong to wish Hell on anyone, and it is certainly wrong to welcome Hell on Earth.

    The sort of fate that the Marxists have in mind for Jamie Dimon and co is not (repeat – not) justice. And they have the same fate in mind for everyone (the entire population).

    The bankers have (as so often in history) been "clever fools" (motivated by almost insane levels of short sighted greed – the desire for more profit than they could gain by honest means, by lending out money that actually exists), but they do not deserve what is coming (and their incentives were utterly distorted by government interventions – repeated government interventions).

    And neither does the general population deserve what is coming.

    • Kurt Schuler

      To the extent I can make sense of what you write, you favor a monetary theory of credit, whereas I favor a credit theory of money. My post "Start from money, or credit?" limns the differences.

      • VangelV

        Paul may be a bit too angry for your taste (or mine for that matter) but his analysis seems to be closer to the truth than yours. If gold mattered as little as you and George seem to think why is it that central banks are obsessed with it and are in a battle to manipulate its price? Why are governments so eager to confiscate it and choose not to allow market participants to use it as money without penalty? Why do they need legal tender laws to prop up their currencies?

        From what I can tell by quickly reading his material Paul is predicting turmoil in the financial system that is created by all of this artificial meddling in the markets and by the central banks' creation of purchasing power out of thin air. This is a conclusion that Austrian theory leads to because Austrian theory makes clear that the type of manipulation that you and George seem to tolerate and encourage is unsustainable.

        Now I am just a lowly engineer who has not had the time to look into the minutiae of monetary theory as many of you have. But that may be an advantage because had I taken that route I may have missed that the foundation on which you have built all those wonderful logical structures is based on premises that cannot be defended. If you want to understand why Rothbard is getting far more attention than either Keynes or Friedman among those who are not interested in political and economic rent-seeking or academic navel gazing look no further; flawed as he might be at times, Rothbard is fare more consistent. After all, it does not take a scholar to see that someone who calls himself a 'free banker' should not indirect or direct support for the central banking system that we have in place today. True free banking leads to a world without central banks and some time of commodity standard that would limit credit creation.

        And just for the record, I found your post, Start from money, or credit?, very unconvincing and agreed with Peter Sundra's critique.

        • VangelV

          Sorry about the spelling and grammatical errors. Typing too fast and cutting and pasting to change the meaning of sentences can be dangerous for those that care about using the language properly but are short of time.

          • Kurt Schuler

            Briefly: (1) It may be true in what you read that Rothbard is getting more attention than Keynes and Friedman, but it is not true more generally. (2) I think it's likely that a free banking system today would be commodity based but am not as certain as you seem to be. There are other possible paths, as we can glimpse from Bitcoin. (3) I don't find your reaction to my earlier post surprising, since people influenced by Rothbard on money find Thornton and Schumpeter less congenial to their viewpoint, and vice versa.

  • Bill Stepp

    Rothbard's writings on gold struck me as a bit of a priori history. He was a great critic of that sort of approach except when he himself used it. Exhibit B was his copyright stamp, which he dredged up in Power and Market. If someone can find one, please let us know.

    • Michael Miller

      Here you go, Bill:

      People place copyright notices (which include the word "Copyright" or the c-in-a-circle) on works frequently, but the meaning of that practice has nothing to do with what Rothbard imagined. The copyright laws provide (roughly) that if a copyright notice is placed on a work, a defendant in a copyright infringement suit cannot plead "innocent infringement."

      Rothbard was trying to base copyrights on contract. He said that when Mr. Brown places “copyright Mr. Brown” on a mousetrap, any buyer — merely by buying — thereby agrees not "to sell it or an identical copy to someone else." Of course, that is no basis at all on which to suppose such an agreement (unless such a mark had independently acquired the meaning "any buyer of this product agrees not to sell it or an identical copy to someone else"). Rothbard went further and said that this supposed contract could be enforced against anyone who happened to see the mousetrap, even if they did not buy it. All this, in the desire to say that it's all based on consent.

      Many of Rothbard's followers go even further and think that all rights and obligations must be based on each individual's consent, that no law may be applied to anyone who has not consented to it, and that the laws should be provided by "the free market." The laws, and our fundamental rights and obligations, cannot be based upon consent — though, of course, they should be fashioned so to allow for a large realm of action in which many subsidiary rights and obligations develop based upon consent.

  • Bill Stepp

    Thanks Michael for the link. Who knew about the stamp? I wonder if it existed when Rothbard wrote P&M.
    Rothbard got patents right and copyright wrong. In a libertarian society neither would exist, nor would laws be based on statutes. I don't recall reading any libertarian arguing that laws, rights and obligations generally must be based on each individual's consent. In a free society all laws would develop spontaneously as a result of voluntary exchange on the market, and would not be imposed by the criminal entity known as the State. A statue is, in the immortal words of Mr. Spooner, an absurdity, a crime, and a usurpation. That goes in spades for the first copy"right" statue, the Statute of Anne (1709), a royal monopoly if ever there were one.

    • Michael Miller

      Bill, could you say what you mean by laws developing "spontaneously" and how that happens as a result of voluntary exchange on the market? As I intimated, through contracts ("voluntary exchange on the market") people can create some of the rules that define their subsidiary rights and obligations with respect to others. Of course, those rules develop by human action and design, not spontaneously. But doesn't "voluntary exchange on the market" itself presuppose the laws that define people's fundamental rights and obligations with respect to each other? That is, what rights each has, what each brings to the market, to exchange or not, must be determined independently of any exchange or market. People must have rights independent of the market or any exchange, or no one would have anything to exchange. The functioning of the market depends upon the laws of property. The market can't create the laws of property. Similarly, the functioning of the market depends upon the laws of contracts. The functioning of the market doesn't depend so much upon the laws of torts, but it also doesn't create it. In free markets, each buys what goods he/she wants, and each is able to enjoy the goods he/she buys, even if others buy and enjoy different goods. Each can't buy and enjoy his/her own laws. Laws aren't the sort of thing that each can buy and enjoy on his own.

  • Paul Marks

    Kurt S.

    Money must be a store-of-value not just a medium-of-exchange.

    Whether the money is a freely chosen commodity (such as gold or silver – whose value is based on the free choices of buyers and sellers) or government "fiat" (command-order) money (whose, DARK, value is based upon legal tender laws and tax demands) what commercial banks produce is NOT money. Commercial banks do not have a magic gold (or silver) production machine – and, normally, they are not allowed to produce fiat notes and coins either (even when they are – this is within limits laid down by the state and it does NOT cover their credit expansion).

    If commercial banks could just produce fiat notes and coins (without limit) and send people to prison who refused to use them (legal tender laws) and demand that taxes be paid with these notes and coins (tax demands) – then these commercial banks would have become the government. This is not how commercial banks really operate.

    The credit expansion of commercial banks is presented as money, the creators of the credit expansion may even convince THEMSELES that they have extra money. But it is NOT money.

    All the credit expansion (the expansion of credit beyond the actual money) actually is, is a CREDIT BUBBLE.

    And credit bubbles eventually burst – hence the booms-and-busts of the 19th century.

  • Bill Stepp

    See also David Friedman, The Machinery of Freedom.

    Contrary to statists (and what I gather is taught in law schools), laws develop not in some overarching top-down manner prior to trucking and bartering, but in conjunction with these acts.

    If two people had a dispute over a commercial act, it was resolved by a "judge" (if that's what he was called). The "ruling" would then be followed by other truckers/barterers and become part of the emerging common law.

    I haven't read this one, but the summary gets at the point.

  • Paul Marks

    It is not really Murray Rothbard – the key arguments were explained almost a century before he was born (by the Currency School in Britain [of which both Mises and Hayek were maintained were "right about the problem – but wrong about the solution" the failed solution being Peel's 1844 Banking Act) and by Martin Van Buren and the other New York "Barnburners" in the United States).

    Whether it is a "National Bank" OR private "pet" banks (the sort that President Jackson favoured on a State level – and which such people as Senator "Bullion" Benton detested).

    The words "based on" are the key.

    Pyramid-schemes-R-us is not a good policy. And a pyramid scheme is not "fractional reserve banking" as a normal human being would understand that term (to people one tenth or nine tenths is a normal "fraction", ninety tenths or 900 tenths is NOT a normal "fraction").

    Money should be either a commodity or not a commodity – not "based on" a commodity (an open door to logical, if not legal, fraud).

    And banks should act as honest money lenders – lending out physical money (with the consent of investors – who are NOT "depositors" and must not be given the false impression that they are "depositing" money like farmers depositing grain at a grain silo). No "crediting to the account", or treating loans as assets – and all the other parts of the complex (and interactive) mess.

    To note about Milton Friedman (in many ways a great man, but…..).

    Milton Friedman was a great admirer of the policies of Benjamin Strong of the New York Federal Reserve in the 1920s – the individual more responsible than any other for the credit bubble of the late 1920s. Even decades afterwards Milton Friedman was still praising Benjamin Strong.

    This shows a profound lack of understanding of monetary policy.

    Just as Milton Friedman's defence of the (private and commercial) "United States Bank" (its directors went to prison for "technical" violations of the law, the treatment of the bank was very unfair…. may have been influenced by anti Semitism….. and …….) shows a shocking view of banking. Even Benjamin Anderson (the arch defender of bankers in an American context in the this period) is very clear (in his "Economics and the Public Welfare") that this bank was a corrupt farce.

    If the late Milton Friedman sincerely could not see anything fundamentally wrong with even how this bank operated……

  • ebsim

    Weather gold is money or not doesn't matter. If a fiat system can exist as long it has then sand is currency the issue comes to policy and quantity behind whatever the medium is. Of course Rothbard loved commodities and some of his followers say only gold is money but that would require absolute knowledge which the Austrian school of economics declares is hard to come by. Gold bugs of the free market tradition sometimes puzzle me with such statements.

    • VangelV

      "If a fiat system can exist as long it has…"

      That is the point. History shows that fiat systems cannot exist for very long as unbacked paper currencies keep tumbling towards their intrinsic value as paper. The purchasing power of the USD has tumbled by around 90% since Nixon closed the gold window. How much does it have to lose for you to judge the experiment a failure?

      • ebsim

        Long relative to a gold standard. The issue is what is intrinsic in gold standard as supposed to a shell standard. The issue is the choice in currency. The failure is not in reserves or type of medium but rather the planning that goes along. The gold standard's health has been as poor in the long-term as the fiat system. Economies are far too complicated for a certain money supply to be determined. Also I don't think that the second best solution to free banking is the gold standard. At the current rate it is almost impossible to go back and would be wrong to go back.

        Choice in banking is the solution. Determining that gold is more of a "money" than paper is not accurate. The lack of knowledge is tremendous in this world.I just don't get how free market supporters can support gold standard as if gold is money. It's not like they would support gov't healthcare because it is the "right" type of care. What happened to choice and allocation. Its like it disappears once one enters monetary policy.

        By the way I am not opposed to second best solutions but I do oppose the gold standard as one.

        • VangelV

          "The issue is what is intrinsic in gold standard as supposed to a shell standard."

          This is easy. Gold is an element. It has one stable isotope, Au-197, which is rare compared to the base metals and has properties that make it ideal as a monetary media. A gold standard would be quite stable because the supply is not very elastic and therefore it cannot be created out of thin air. And since annual production is small in compared to the total even a great discovery will be unable to create much inflation. The big finds in Australia, the Klondike, and California proved this as new mine output was unable to create much in the way of price inflation. That is not true for a fiat money standard, where the supply of money can credit can be inflated very rapidly to serve political goals.

          Let us note that George is not arguing for fiat money. His main thing is about fractional reserve lending in a free banking system. Most market participants would not choose a fiat currency as the basis of such a system.

          "The gold standard's health has been as poor in the long-term as the fiat system."

          This is not true. The gold standard did not fail. It was simply ended by politicians who needed to find a way to have a nice big war. Even Nixon closed the gold window so that he could continue the welfare/warfare state policies of his predecessors.

          "Economies are far too complicated for a certain money supply to be determined."

          Nobody is calling for anything to be determined by central planning types. Just let the free market work.

          "Also I don't think that the second best solution to free banking is the gold standard."

          I think that you are very confused. You can have free banking, which means to regulator, with a gold standard. The gold standard was not imposed by politicians. The only thing that the politicians did was state the weight in gold of their monetary unit and that is not very important in the general scheme because one weight could easily be as good as another as long as private coinage would be allowed to fill market needs. I believe that George had a book about this but I may be thinking of someone else.

          "At the current rate it is almost impossible to go back and would be wrong to go back."

          Go back to what? What we have is an unstable system that is based on fiat money that can be brought into existence out of thin air. That is clearly not what one would call 'right' because it robs savers and workers of purchasing power and transfers wealth to the financial system. All the advocates of gold are calling for is the end to the legal tender laws so that people who WANTED to use other monetary media could do so efficiently.

          "Choice in banking is the solution."

          How about choice in money? If people chose to use copper backed bills as money why would I want to stop them?

          "Determining that gold is more of a "money" than paper is not accurate."

          These are just empty words. The market makes determinations about what is right and what is not right, not you or I. Let the market work and we will see what survives as money. It certainly won't be the USD in my opinion because it is not a store of value.

          "The lack of knowledge is tremendous in this world."

          As you keep showing us.

          "I just don't get how free market supporters can support gold standard as if gold is money."

          They are not supporting a gold standard. They simply want to be able to choose what they use as money. If that is too subtle for you think some more until you get it.

          "It's not like they would support gov't healthcare because it is the "right" type of care. What happened to choice and allocation. Its like it disappears once one enters monetary policy."

          Like I wrote above, you are very confused. You might try reading and thinking a bit more carefully.

          • ebsim

            You are obviously misunderstanding everything I said.

            I don't advocate for a fiat system, I like free banking. In free banking there is freedom of choice in currency and banking systems. Thus my argument is not elasticity of specific type because one can bring up many metals to talk about or many commodities to note, rather I am talking about the rash assumptions you make that gold is great and nothing else is better. I don't care for gold, if it is truly the best it can only be proven if its performance in a free banking system is strong. Its easy to make assertions that the reason it failed over years was due to greedy kings and presidents who devalued their currencies so that they can pay for swords and shields. These statements can't be truly empirical unless one knows that the gold standard was used with widely without legislation. The assumption of a free market in monetary policy is that your choice of currency is yours and my choice of currency is mine. When I said the lack of knowledge in the world is a lot I didn't mean it as a strike against you as you seem to take everything personally but rather emphasizing that like Hayek famous notes "economics teaches men how little they know about what they imagine they can design". And you imagine that you can design a monetary system of a gold standard and assume that it will work better without proof of it working a free market, partly because a free market in banking hasn't existed for long periods (namely Scotland and Canada for a few decades). You are making assumptions that the money needs to have a certain elasticity but that's an arbitrary continuum. You say let the market work yet are defiant that gold is money. Money comes from the markets need for a convenient way to barter, the ability for markets to work is important not chemistry.

          • VangelV

            "…rather I am talking about the rash assumptions you make that gold is great and nothing else is better."

            I am not saying that the market has to choose gold or silver. I am simply pointing out that it always has chosen them as the basis of the monetary system.

            "These statements can't be truly empirical unless one knows that the gold standard was used with widely without legislation."

            It was used widely without legislation. Nobody forced people on the frontier to use gold or silver as money but they did anyways. In the US you had the widespread use of Spanish silver dollars that had nothing to do with issuance by the government. "Thalers" were used throughout Europe for several hundred years without any government legislation of any kind.

            "When I said the lack of knowledge in the world is a lot I didn't mean it as a strike against you as you seem to take everything personally but rather emphasizing that like Hayek famous notes "economics teaches men how little they know about what they imagine they can design"."

            I don't take anything 'personally' because I cannot control what people think of me and don't really care when it comes down to it. My focus is on defending the right ideas and from what I see there are too many muddled thinkers who defend ideas that cannot be defended properly. And because muddled thinking means muddled writing it is hard to figure out what people are saying at times unless one is willing to devote far more time to reading their comments than seems wise.

            This is actually my big problem with George. He is a very smart guy but often dances around and makes circuitous arguments that make him far more difficult to understand. It would be far better if he were a more clear writer but I suspect that clear writing is frowned in the economics profession because most economists would be exposed as charlatans if people truly understood what they were really saying.

  • ebsim

    Whether gold is money or not doesn't matter. If a fiat system can exist as long it has then sand is currency the issue comes to policy and quantity behind whatever the medium is. Of course Rothbard loved commodities and some of his followers say only gold is money but that would require absolute knowledge which the Austrian school of economics declares is hard to come by. Gold bugs of the free market tradition sometimes puzzle me with such statements.

    • Paul Marks

      ebsim – if people choose sea shells, or bits of paper as money that is up them.

      The problem comes if a false impression is given – for example that bits of paper represent gold (or silver, or sea shells) when they do NOT.

      Of course most modern "money" is not even bits of paper – it is bank CREDIT (figures on computer screens).

      It is NOT that the banks just do not have gold – they do not even have the Dollar bills (the fiat notes and coins) they do not even have that. The banking credit bubble (in its various and complex forms) is vast.

      Government fiat notes and coins at least have DARK (force and fear based) value – based upon legal tender laws and tax demands. Gold, silver (and other commodities) have the value freely judged to them by buyers and sellers.

      What does the credit bubble have? In what way is it a store-of-value (and money must be a store-of-value not just a medium-of-exchange).

      The banker credit bubble (although vast and complex) is, at bottom, nothing but magic pixie dust from the fairy castle in the air.

      • ebsim

        But all gold standards in US history were influenced by government action. Even if there was no Federal Reserve there still was the treasury which had as much power to determine the relation of a dollar to an ounce of gold. I see gold standard in a free banking world the only effective way to implement it. In a the current fashion it could be run a muck similarly to fiat currency. If one assumes a govt will be smart with gold standards then one can also assume they will be smart with paper, however that is hardly the case.

        • VangelV

          "But all gold standards in US history were influenced by government action."

          You mean to tell me that the Spanish milled dollar was used because of the US government's action? Please explain how that worked because you obviously have a different view of monetary history than I do.

          • ebsim

            I didn't say that the government started the idea of gold from the beginning, what I mean is that governments as long as they have the power to control the exchange internationally and/or domestically gold standard would be no good. Like Paul commented it could have been ruined when people were conned out of their gold with fake standards but you fail to bring that up.

          • VangelV

            "I didn't say that the government started the idea of gold from the beginning, what I mean is that governments as long as they have the power to control the exchange internationally and/or domestically gold standard would be no good. Like Paul commented it could have been ruined when people were conned out of their gold with fake standards but you fail to bring that up."

            Governments did not control the exchange rates. All they did was say what the weight of its monetary unit was. History shows us that there is no need for a government monetary unit because privately minted coins are more than capable of meeting the need of the markets. The Thaler pushed aside many government issued coins.

  • Paul Marks

    I left out the Moonbeams – the magic pixie dust is transported from the invisible fairy castle in the air, via Moonbeams.

    It is a vitally important point – I apologise for my error.

    I am sure that Pyramid Scheme Banking (it is not really "fractional reserve" as ninety tenths or 900 tenths are not normal fractions) is now vindicated.

  • Paul Marks

    ebsim – as you may well know, the West of the United States used to be dominated by private mints, which (in return for a tiny proportion of the raw gold and silver) produced coins from the gold and silver privately mined in the West of the United States.

    It was not really economic policy that led to Congress banning these private mints in the 1850s – it was a POWER GRAB against private money.

    As for private notes….

    I have no problem with a bank (or you personally) producing notes that really represent gold or silver (or whatever commodity you actually have).

    But I do not like being CONNED.

    Traditionally bankers (and other such) came out with arguments such as "well gold coins would damage your clothing – or you might be robbed in the street", but it was a snowstorm.

    In reality their notes did not really represent the commodity – because they DID NOT HAVE THE COMMODITY (at least not the amount they gave-the-impression they had).

    It was a con – that is why the word "standard" was used.

    Because the words "con" or "deception" do not sound nice.

    Of course the con was on a much more limited scale than today – they did have SOME gold (just not as much as they gave-the-impression they did).

    By the way if it is NOT a con – go right ahead.

    "Here is a nice looking piece of paper – use it as money if you want to".

    "Does it represent gold or some other commodity?"

    "No it does NOT".

    I am fine with someone trying that.

    Go right ahead.

    • ebsim

      So lets go to free banking. What I am arguing is the philosophical question of what is money. While gold has a history some other commenters keep telling me that the market has already decided. I am not arguing so much the performance of gold, I am arguing why some people support free markets and then act like they know what the market thinks of the perfect money is, kinda like what central planners do.

      I will concur that the history of the gold standard is not fully understood and hardly the a gold standard as people like to think.

      In the end free banking seems to solve a lot of these issues and maybe more supporters of gold and precious metals will go towards free banking.

  • Paul Marks

    Bill Stepp.

    Remember that we are not dealing with "Law Merchant" or some other form of "polycentric law".

    The government (and the Bar Association dominated cartels) select the judges.

    To adapt the old Italian saying about the people……

    "He who trusts the judges builds his house upon sand".

    To put this in a specific American context.

    Nothing good is going to come out of judges educated in "sociological jurisprudence" (and that started a century ago) and "Critical Theory".

    And that is the ….. (errr stuff) that modern judges are educated in.

  • Paul Marks

    ebsim – whether a businessman calls himself a Free Banker or not does not alter the fact that money has to be a store-of-value (not just a medium-of-exchange).

    A banker credit bubble ("credit expansion") is not a store-of-value, it is not money. To confuse money and credit is a basic mistake (whether for a "Free Banker" or anyone else).

    Let me take an example from George Selgin – cows (rather than money – although in some times and place cattle have been used as money).

    Let us say there are ten cows and by an incredibly complex set of interactions between banks one hundred cows appear in the bank ledgers (either as ink in leather bound ledger books – or as electronic figures on a computer screen).

    How many cows are there?

    George Selgin seems to think (I say "seems" because I am not sure – due to the academic language this gentleman uses) there are now 100 cows.

    I maintain that there are still (regardless of what the ledger books say) ten cows.

    I also maintain that a business that maintains there are now 100 cows is fundamentally unsound.

    By the way I am NOT saying there should be a law against this – any more than there should be a law against sincerely believing that 1+1=29 or that throwing oneself into an active volcano is good for one's health.

    Against such basic errors passing new laws is useless.

    • ebsim

      What you are critical of then is fractional reserve banking and see gold as one medium that can deter that. And if you do oppose fractional reserve banking I assume you believe that it can be decreased through market forces?

      • Paul Marks

        I am critical of credit bubble (Pyramid Scheme) banking. I do not think it is helpful to call it Fractional Reserve Banking – as, to most people, 100 tenths or 1000 tenths is not a normal fraction.

        As for gold – it does not make much difference (either way). Credit Bubble people can pyramid on top of gold, or they can pyramid on top of government fiat notes.

        Also we live in a world where the Financial Times newspaper can describe a flood of gold out of Britain (to Switzerland to be melted down, round the clock on a three shift system, for customers around the world) as a wonderful "export boom" – as if the gold was actually produced in this country (it is not).

        In reality this is a massive gold drain (due to buyers demanding physical gold for the paper gold that was foolishly sold to them a couple of months ago as part of a Central Bank backed scam to reduce the gold price – some 43 paper ounces were sold for every real ounce of gold they have got, so this will not end well) – they treat a gold drain as a wonderful "export boom".

        Neither a "gold standard" or any other monetary system (including a government fiat money system) can function when the international order (commercial as well as governmental) is in the hands of lunatics.

  • Kurt Schuler

    You seem unfamiliar with commercial credit, in which a product, for instance a spark plug, can give rise to a chain of credit transactions. There may be five stages of production with credit extended at each stage by a firm more remote from the ultimate buyer to a firm closer to the ultimate buyer. Then when the ultimate buyer buys, as when a customer buys a spark plug at an auto parts store, the credit is paid and the chain ceases. (In practice, the relationships among firms are usually continuing, so by the time one credit chain has been paid, another is arising.) This is not a case of claiming that there are five spark plugs rather than one, or, as in your example, 100 cows rather than 10. It is a consequence of the chain of production not being vertically integrated. Sometimes banks rather than nonfinancial firms provide the credit, but that does not change the essentials of the situation.

  • Paul Marks

    A store that thinks it has 100 spark plugs, when it really has 10 spark plugs – needs to change the way it does its books and checks its stock.

    • Kurt Schuler

      It is apparent that you lack a good understanding of credit, so I will cease commenting in this thread.

  • Paul Marks

    On the contrary – I am just not making the mistake of confusing credit with money.

    A banker would do well to, each day, make a visit to the vaults – to see how much money the bank actually has (whether its own – or the investments of so called "depositors").

    Perhaps in this way the banker would avoid the mistake of confusing the bank ledgers (whether leather bound or electronic) with physical reality.

  • Martin Brock

    "Classical gold standard (1800s-1914): Half the world or more did not have central banks. Gold was minted into coins that circulated widely."

    An account of this era seems incomplete without mentioning silver and copper. The system in the U.S. was more a silver standard toward the beginning, the dollar being a Spanish silver coin that the U.S. adopted as a standard only because pre-revolutionary colonists had adopted it. The effective transition to an exclusive gold standard occurred somewhere along the way, culminating in 1873, and interests in the increasingly centralized U.S. government undoubtedly influenced this transition toward a more powerfully exclusive money monopoly.

    Also, in the 19th century, the value of a copper cent was more like the value of a dollar today, and the U.S. Treasury thus coined half cents as well. Common consumers rarely used gold coins, or even much silver, in common exchange, and I suppose a bank redeeming notes for specie could redeem them for copper cents, so for common people, the monetary system might has well have been a copper standard. A silver dollar then was more like a hundred dollars now, and average daily wages were less than a dollar. According to one source I find online just now, the average farm wage in N.C. in 1830 was $6 per month.

    • Kurt Schuler

      My post specifically compares gold standards only. Your point about the existence of other monetary metals in wide use is important, though.