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Feature
A Road to Prosperity
The case for a modernized gold standard.
Gold, a fundamental, metallic element of the earth’s constitution, exhibits unique properties that enabled it, during two millennia of market testing, to emerge as a universally accepted store of value and medium of exchange, not least because it could sustain purchasing power over the long run against a standard assortment of goods and services. Rarely considered in monetary debates, these natural properties of gold caused it to prevail as a stable monetary standard, the most marketable means by which trading peoples worldwide could make trustworthy direct and indirect exchanges for all other articles of wealth.
The preference of tribal cultures, as well as ancient and modern civilizations, to use gold as money was no mere accident of history. Nor has this natural, historical, and global preference for gold as a store of value and standard of measure been easily purged by academic theory and government fiat.
Gold, by its intrinsic nature, is durable, homogenous, fungible, imperishable, indestructible, and malleable. It has a relatively low melting point, facilitating coined money. It is portable and can be readily transported from place to place. Gold money can be safely stored at very low cost, and then exchanged for monetary certificates, bank deposits, and notes—convertible bills of exchange that efficiently extended the gold standard worldwide.
Like paper money, gold is almost infinitely divisible into smaller denominations. But paper money has a marginal production cost near zero. Producing gold money, like other articles of wealth, requires real labor and capital.
This investment of real labor
and capital gives gold an objectively grounded value on which to
base proportional exchanges—a value that can be compared to that
invested in producing a unit of any product or service. Prices for
goods and services always vary with subjective preferences. But the
real costs of production persist as an underlying market-price
regulator. Despite subjective preferences, a mutual exchange of
real money—a gold monetary unit—for a good or service is a
transparent, proportional, equitable exchange, grounded by real
costs of production, namely labor, capital, and natural
resources.
In contrast, almost no marginal labor or capital is required to produce an additional unit of paper money. Thus, legal tender paper money is subject only to quantitative control and the discretion of political authorities. Historical evidence shows that inconvertible paper money is overproduced, tending always toward depreciation and inflation, interrupted by bouts of austerity and deflation. Over the long run, government-forced and spurious paper money has not maintained equitable exchanges between labor and capital. Market exchanges based on depreciating paper money and floating paper currencies issued through the banking system always lead to speculative privilege of insiders, generally the financial class.
Because of its imperishability and density of value per weight unit, gold can be held and stored (saved) permanently at incidental carrying costs. Precious metal monetary tokens (gold and silver) survived millennia of experiments with inferior alternatives such as shells, grains, cattle, tobacco, base metals, and many others. These alternatives are either consumable, perishable, bulky, or of insufficient value for large-scale commercial exchange over long distances. For example, perishables like wheat or cattle are not storable for long periods at very low cost; nor are they portable cheaply over long distances to exchange for other goods; nor are they useful and efficient to settle short- and long-term debts promptly.
Through a process of long-term economic evolution in tribal, interregional, and national trading markets, gold’s natural properties were discovered and utilized in almost all cultures. Gold thus became universally marketable and acceptable as the optimum long-term store of value, uniform standard of commercial measure, and durable medium of exchange. Universal marketability and acceptability is a hallmark of global money. Silver, with its much lower value per unit of weight, was the suboptimal monetary metal of modern civilization, exhibiting many but not all of the properties required for large-scale international exchange.
Merchants, bankers, farmers, and laborers may not have consciously considered these facts, but over the long run, they behaved as if they did. Thus gold became an unimpeachable, universally accepted currency, to be held as reserves and passed on as a reliable store of future purchasing power. People, even hostile nations, freely accepted gold, a non-national currency, from one another in exchange for other goods, even as they rejected the sovereign risk of holding national currencies as their exclusive reserves. All who cherished the value of their saved labor—pensioners, working people, those on fixed incomes—came to rely on the gold monetary standard as a stable, long-term proxy for goods and services to be purchased later, perhaps much later.
Today’s global stock of aboveground gold in all its forms is approximately 5 to 6 billion ounces, perhaps more—close to one ounce per capita of the world population. Because of gold’s lasting value from time immemorial, and the human incentive to conserve all scarce resources, these 5 to 6 billion ounces represent most of the gold ever produced. Yet the aboveground gold stock today may be enclosed in a cube of approximately 70 feet on each side. Gold may be easily converted to substantial amounts of monetary coin to underwrite convertible paper money and bank deposits for convenient exchange in the market.
Moreover, the empirical data demonstrate that the stock of aboveground gold has grown for centuries in direct proportion to the growth of population and output per capita. The average, annual, long-run growth of the stock of gold in the modern world is approximately 1.5 percent. This remarkable fact accounts for the unique, long-run stability of its purchasing power. New output of gold money, joined to its rate of turnover, is sufficient for both economic growth and long-run stability of the general price level, as modest but regular output of gold does not affect the relative value of the large existing stock.
This hidden but crucial commercial equation of the social order was a fundamental reason why the true gold standard, i.e., gold-based money, became the foundation of the monetary institutions of modern civilization. Gold-based money not only stabilized the long-term price level, but its network effects also integrated and compounded the rapid growth of the advanced, competitive trading nations of the Western world during the Industrial Revolution. For the purpose of global trade, exchange and investment currencies convertible to the universally acceptable gold monetary standard had engirdled the earth by the beginning of the 20th century.
As the technology and productivity of the payments mechanism evolved, banknotes and checking account deposits (among other credit and transfer systems), came into modern circulation as substitutes for physical, monetary tokens. But these banknotes and checks derived and sustained their value from the fact that everyone knew they were credit instruments convertible to gold. Still, actual gold transfers were used to settle residual balance-of-payments deficits among nations, a necessary and efficient international adjustment mechanism by which to rebalance domestic and international trade and exchange.
Despite legal tender inconvertible paper money and the disabilities presently imposed on gold by the political authorities, gold retains the same inherent properties that make it the least imperfect monetary standard. Indeed, all inconvertible paper money systems, based on contemporary fractional reserve banking, use the vestigial forms but not the substance of their original convertible currency systems.
In sum, gold is natural currency, not least because it provides in a single, indestructible substance the primary functions of money—i.e. a standard unit of account, a stable medium of exchange, a stable store of value, and a stable deferred means of payment. By reason of these facts, the market guided the authorities over time to bestow on gold coin the status of an official monetary standard. Gold money was, moreover, endowed by nature with profound but simple national and international networking effects, the digital standard by which free prices could be communicated worldwide. Thus, the gold standard exhibited natural economies of global information scale, a necessary virtue in the present electronic age. The adoption of the gold standard by the major trading nations in the 19th century led to a radical reduction in the settlement costs of international trade and transactions, a crucial confidence and reliability factor stimulating an unparalleled boom in trade that was constantly and promptly rebalanced by residual deficit settlements in gold.
About the Author
Lewis E. Lehrman is a senior partner at L. E. Lehrman & Co. and chairman of the Lehrman Institute.
Letter to the Editor View all comments (40) | Leave a comment
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aware| 9.14.12 @ 6:27AM
We will have a return to gold, but not by choice or orderly. After the epic collapse that is just around the corner first will come chaos. Then eventually the survivors will return to real money.
After the Fed announcement anybody not buying metals will get what they richly deserve for trusting the professional criminal class. And anybody that doesn't understand that lunatics run this world deserves all they are going to get.
Just look around you at the Americanus Boobus and convince me that the herd isn't ripe for slaughter.
Jack in Wi| 9.14.12 @ 7:52AM
A great essay by a great man. He is right and has been for decades. Thanks for publishing it.
TLP| 9.14.12 @ 9:50AM
THERE IS A CONTEST that can be found on Paul Kengor's Article.
Everyone is Welcome, and I hear that there will be Prizes.
Those who missed the last one?
Here's your Chance.
Warrior| 9.14.12 @ 12:10PM
The herd has been slaughtered and just hasn't realized they are dead. Zombies if you will.
You are forgetting one of the lefts role models FDR who confiscated gold. I only bring that up because like all good liberals, they will point out that there is precedent and the greedy rich people need to be fair.
Aristocat| 9.16.12 @ 4:53AM
If we went on the gold standard, wouldn't China and others turn in their dollars for gold and quickly deplete the US gold holdings?
Sean| 9.14.12 @ 7:11AM
Paper money leads to risky investments as you have to invest in something that provides high returns in order to maintain the value of your depreciating currency.
Cobalt| 9.14.12 @ 8:30AM
Great article Mr. Lehrman.
F.D.R.'s Executive Order 6102 might interest some people.
Executive Order 6102
" Executive Order 6102 is an Executive Order signed on April 5, 1933, by U.S. President Franklin D. Roosevelt "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continential United States." The order criminalized the possession of monetary gold by any individual, partnership, association or corporation."
http://en.wikipedia.org/wiki/Executive_Order_6102
JD| 9.14.12 @ 11:47AM
Indeed, this dictate, early in the Great Depression, has been harming our economy ever since.
Freedomist | 9.14.12 @ 3:38PM
I can see where Obama (and other presidents) got the strategy of bypassing Congress with Executive Orders. I wonder what other EOs created a criminal law? No one person should have that kind of power. Shameful.
OP4| 9.14.12 @ 8:43AM
Before paper money, gold was a limiting factor in the size of government. The irresistible temptation (that the Fed succumbed to today) to print more cash wasn't an option. The King could not, in the long run, spend more than he collected in taxes.
Von Mises Jr| 9.14.12 @ 9:00AM
As Mr. Lehrman points out, the colonies and the Revolutionary government issued a myriad of currencies that resulted in inflation and collapse. The colonies used paper money to attract commerce and investment just as the Chinese peg their currency to incentivize their exports and minimize their imports. An international gold standard would facilitate division of labor and fair trade worldwide.
If you don't think that we have a problem of epic proportions, just ponder why the U.S. Government is buying up oil and mineral rich land, farm and aquifers, and preventing private concerns from using these resources. It is because they know the money is worth bupkiss, and the wealth will be in these productive lands and commodities.
c. j. acworth| 9.14.12 @ 9:35AM
I'll have to re-read this article again to make sure I understand it, but here is how things were explained to me once: About 100 years ago you could go into a general store with a $50 gold piece and buy the best suit in the place, or a Colt revolver. You could do the same with $50 in greenbacks. Nowadays, you can still get a fine suit or a Colt revolver with a $50 gold piece. The $50 in greenbacks will only get you a couple of ties or a box of ammo.
Kingofthenet| 9.14.12 @ 12:15PM
$20 Gold Piece, there is no $50 Gold Piece. Here is a better one for you thou, instead of that $20 Double Eagle holding it's value, say instead you bought stock with it, say a few shares of Coca-Cola today you could but the ENTIRE STORE.
C. Vernon Crisler | 9.14.12 @ 4:00PM
True, gold is not an investment good but a form of protection. You won't get rich buying gold, but, depending on when you buy it, you can preserve the value of your capital.
Ol' Will| 9.14.12 @ 10:04PM
Kingofthenet,
1. In a gold standard economy you can still invest in Coca-Cola. And when you cash out, no percentage of your gain is eaten away by inflation.
2. You could have also invested in WesTec or the Saturday Evening Post or some DotCom hottie or the best buggy whip factory in the country. In that case you wouldn't even be able to buy one Coca-Cola much less a clothing store. The point is that you cannot compare holding gold or a gold standard currency with what is essentially a speculative venture such as trading stocks (or even buying and holding) or trading commodities.
3. In a real gold standard economy, if you loan someone long-term, say a mortgage, your principle is returned to you intact and your interest is real income - not negative because of inflation.
You can debunk anyone's economic theory by playing the woulda/coulda/shoulda game.
Show a little intellectual rigor, please.
JP| 9.14.12 @ 2:26PM
A 1900 $50 Gold piece today is worth about $2000. Now, that's inflation.
Kingofthenet| 9.14.12 @ 2:39PM
$20 dollar, there is NO such thing as a $50 gold piece back in the day, that is a modern invention.
JP| 9.14.12 @ 2:53PM
You missed the point. Gold in 1900 sold for roughly $20/ounce. A $20 Gold piece in 1900 cost $20. Today, the same Gold piece would sell for $1500. Do the math.
2Anglico| 9.14.12 @ 9:58AM
I think it was Voltaire who said "Paper money eventually returns to its intrinsic value, zero".
Louis Jenkins| 9.14.12 @ 10:00AM
In the coming meltdown will people trade in gold? You can't eat it, you can only hope that people will trade for it. Beans, bandaids, and bullets are the best monetary assurance that a man may have. At least in the beginning. Maybe later gold will assume its righful position. Sure is a nice shiney Buffalo nickle though.
Ryan| 9.14.12 @ 11:22AM
In a collapse, you would be right; but it's not an argument to not return to a better monetary standard.
Kingofthenet| 9.14.12 @ 12:45PM
My Plan is to buy guns and STEAL all the other stuff I need at gun point. ..Joke
Ol' Will| 9.14.12 @ 10:07PM
Kingofthenet,
Now that's what I call intellectual rigor!
Al Adab| 9.14.12 @ 11:09AM
With our current paper dollar declining in value daily, a standardized system makes sense. With gold at its current price the time would be right to return to a metal based dollar.
Both gold and silver coins (Krugerands, Silver eagles, etc.) are used in the marketplace these days for exchange. Both businesses and private sellers of goods and services routinely exchange them as transactions. Would not most people sell off a used car for example in exchange for two or three Krugerands?
Who Knows?| 9.14.12 @ 11:57AM
Never forget the Golden Rule.
Who owns the gold, rules.
These potential last days of a free America, the “gold” continues to be held by the lawyers.
Just think!
We all want law and order, and the rule makers supreme, putatively chosen by the people, the law makers in DC and other capitals, have gone and set off the nuclear “bomb”. That is, they’ve forgotten the real purpose of lawyers, and long ago engaged in rule making for their own sakes.
Got to have billable hours!
Lewis Lehrman has penned another righteously true proof of why we need to return to the gold standard. James Dines, the first gold bug of note I read back in the late 70’s when gold went nuts, also wrote a book---lot of good it did.
Dirksen quipped about how a billion here, a billion there, pretty soon you’re talking about real money. Revised, it’s a trillion here, etc.
I remember finding out a Japanese Yen was worth about a US penny, and marveling at how weird it would be to price things in the US in the copper coin---a car for $10,000 going for 1,000,000 pennies!
And, here we are, in 2012.
Coke was 10 cents when I was a kid in the 50’s. No, a penny was worth one tenth of a coke.
Kingofthenet| 9.14.12 @ 12:11PM
Well one problem is there isn't enough Gold in the entire world to match the paper money in circulation. Another reason is the same one why Nixon closed the 'Gold Window' in the 1970's EVERY Sovereign Creditor will DEMAND to be paid in gold, can you imagine China asking for ALL the gold in Ft.Knox?
axbucxdu| 9.14.12 @ 2:10PM
That's the point: There's too much paper money already in circulation resulting from an absolute lack of monetary discipline. I hate to say it, but I don't agree with Lehrman's proposal here either. Fiat gold standards can be worse than what we have now. Proper monetary discipline can only be imposed by harnessing private interest and competition, not by passing a government, or in Lehrman's case, international decrees.
Look up Free Banking, the "obstacles" you cite can be addressed by competition, and not by having sufficient specie for the redemption of notes. There's a third alternative that needs to be explored.
JP| 9.14.12 @ 2:24PM
Good point. Governments of all type hate the Gold Standard. Gold keeps government powers in check. The historic expansion of government in the 1960s caused the Gold panic of 1970. Our money supply is mostly of function of our printing presses. For every dollar worth of bonds the Fed buys it must print an equal amount of money to cover the liability. Fed Chairman Bernecke plans on buying $60 billion of bonds a month indefinitely.
aware| 9.14.12 @ 4:23PM
Find whoever told you that, King, and beat the crap out of him. Even if there was only 1 ounce of gold in the world it would still be adequate to PEG currency.
You miss the entire point of a gold standard. Gold can't be "created" by the criminal class at will. And more importantly, gold is not issued as DEBT.
JP| 9.14.12 @ 2:21PM
What should be stressed again and again, is the fact that while the US remained on the Gold Standard it had almost no inflation. Despite the chaotic growth of the industrial revolution, the Civil War, and the growth of this nation, the price of commodities from 1813 to 1913 was almost exactly the same. Yes, there were several downturns caused by the normal boom/bust business cycle; however, inflation was almost 0% during that period.
Since 1913 and the formation of the Fed, our currency has depreciated almost 95%. Only unheard of advances in technology and business productivity allowed our nation to advance at a time when the purchasing power of the dollar plunged. Since 1999 alone, the dollar has fallen in value 22%.
Freedomist | 9.14.12 @ 3:00PM
First, I'm a free-market, pro-sound money proponent. That said, I find most gold standard proposals problematic. In a sense, we already have a "gold standard", the gold market. Today, it's about $1770/oz. Last year, it was about $1600/oz. In the future, the price of gold could go up or down, depending on the supply and demand for gold and the dollar. Any attempt to fix the price of gold requires intervention in the market, a policy that's antithetical to free markets. Currently, US gold reserves are worth (at current prices) about 5% of the US dollar money supply. If fixing the price of gold requires the intervention of purchasing dollars with gold, the US Treasury would have no gold to buy dollars after gold reserves are depleted. In essence, the US dollar has been corrupted, perhaps irreversibly corrupted. Any attempt to de-corrupt the dollar faces the challenges I described. A more rational monetary policy would be to encourage and expand other currencies in trade, including existing foreign fiat and commodity-based currencies, and new (non-dollar) commodity-based currencies. The value of the dollar would continue to be regulated as it is now: by maintaining, increasing or decreasing the US dollar money supply, also known as "quantitative easing" and "quantitative tightening". Given the political pressures on the US dollar money supply, "quantitative tightening" may never happen.
Al Adab| 9.14.12 @ 3:34PM
Alternatively, what about an oil based currency? At $100 per barrel the reserves or holdings of various nations could be used to back the currency. Nations could buy or sell just as they did gold in the day. Why not demand payment of international debt in the form of oil a strategic, valuable, and desired commodity?
Freedomist | 9.14.12 @ 7:21PM
Oil is a possibility. One problem: not all oil is of equall quality. Same's true for many commodities. Variations in a commodity's quality can be overcome by contractually agreed specifications for the commodity's quality associated with the currency.
jdondet| 9.14.12 @ 4:14PM
I learned somethings with this article. I am ashamed to say I studied history in college and this is the first time that I have heard of a conference in Genoa in 1922 about a limited gold standard.
My professors never brought it up and the text books never mentioned it. I just assumed, that the 1896 election settled the debate about gold, until FDR and his gold confiscation in 1932. I see, that I was wrong.
However, unlike the farmers in the 'Free Silver' movement in that 1896 election. I have cheap money to pay my debts, damn I hate to pay those bills with real money. I believe most of us are in that boat. Something has to be done to convert those debts to real money that will be now used to pay them, vice the cheap money now used.
Ol' Will| 9.14.12 @ 10:13PM
So if the US returns to a gold-backed currency. What will the currency be backed with? It's my understanding that the gov't has no gold in reserve. It's all been depleted - shipped elsewhere.
I know "Nixon closed the gold window" but what's happened to the gold he was preserving since then?
Carroll | 9.15.12 @ 3:31AM
that may have helped mislead his leftist fans into thinking Turner one of their political cult, the album nevertheless strangely obsesses over sin, redemption, and the life after. And, oh yeah, it's also about William the Conqueror, navigating the labyrinth of drunks on Winchester's Jewry Street, and the pastoral past.
Mickle | 9.15.12 @ 3:34AM
Has Noam Chomsky crawled out of his hole to scapegoat this all on Capitalism yet?
Vet4Progress| 9.15.12 @ 3:40AM
"Moreover, the empirical data demonstrate that the stock of aboveground gold has grown for centuries in direct proportion to the growth of population and output per capita."
This is a breathtakingly astonishing statement. It is an expression of "Magical" thinking in its purest form. To suggest that their is an inherent relationship between the supply of gold and population growth and output is a non-sequiter of monstrous proportions. The supply of gold is what it is! It is a fixed physical fact. It bears no relationship whatsoever to the activities of man be they procreative or any other form of creativity. If the author is capable of this level of magical thinking it is not a stretch to conclude that his entire argument is infected with a similar level of fallacy.
Alej| 9.15.12 @ 10:36AM
He wrote "aboveground." That which is mined, not the number of Au molecules in the planet's makeup. Mining costs are inflating heavily right now. More money into the system may mean paying mining costs in cheaper rands or rupees, which has historically paralleled population growth.
Mosiah| 10.23.12 @ 12:08PM
If the pen is mightier than sword then, then those that dominate the world's media could put a stop to the so-called terrorist/freedom-fighter, by calling them what they really are. COWARDS!! in any language of the world. If their cause is just then they should be proud enough to wear a uniform that represents them and present their case before the world in open court and expect redress for the wrongs against them.