Two major government
economists, Christina D. Romer and Ben Bernanke, have done influential
research on the Great Depression. Both implicate the State-run gold
standard of that era, which differed from the pre-1914 gold standard, as
a major culprit in the Great Depression. (See here and here.) Their work parallels that of other economists such as
Barry Eichengreen and Peter Temin on the negative role of the
interwar gold exchange standard. There is an emerging or existing consensus
among economists about the negative effects of the gold-exchange standard.
continues. The precise role of the gold-exchange standard in the Great
Depression remains a question mark. Richardson and Van Horn have evidence that New York banks "had large exposures to foreign deposits and German debt," that
led to problems when Creditanstalt collapsed. Bordo et al. contend that the gold standard did not fetter
central banks. Murray Rothbard, Benjamin Anderson, and Richard M. Ebeling all emphasize the FED’s inflationary
price-stabilization policies in the 1920s, which are connected to how the FED
operated under the gold-exchange standard.
Suppose that Romer
and Bernanke are correct about the role of the gold standard in worsening the
Great Depression. This shows absolutely nothing about gold (or any other
medium) as free market money. Romer and Bernanke do not bother to
distinguish a State-run gold standard from a free market gold standard, i.e.,
use of gold as free market money. They ignore gold used as non-State or
privately-generated money. They ignore any free market in money,
whether gold, credits, silver, cowrie, copper, or anything else.
In this way, Romer
and Bernanke provide us with a false choice: State-run gold standard or
State-run paper money. Which pair of handcuffs do you prefer?
By this omission, the
State-run gold standard becomes a straw man for any kind of gold money,
including free market gold. Knock down the gold standard, as they do, and
down goes free market gold money with it.
Romer says that
"going off the gold standard and increasing the domestic money supply
was a key factor in generating recovery and growth across a wide range of
countries in the 1930s." To her, the domestic money supply is the
central bank–based money supply. She gives us only two alternatives.
They are central bank money with a gold standard and central bank money
without a gold standard. The gold standard she speaks of is the state-run
gold standard, not a free market in gold, much less a free market in anything
that the market chooses to be money.
Romer banishes the
free market use of gold. It passes from view, consideration, and thought. She
abolishes it. Where did it go?
Roosevelt killed it, although
she does not put it this way. In her story, "Roosevelt temporarily
suspended the gold standard, before going back on gold at a lower value for
the dollar, paving the way for increases in the money supply." What
money supply? Central bank paper money. Nothing else.
Roosevelt restored the gold
standard for international payments, but domestically he killed it. She
entirely ignores the fact that gold could no longer be used privately as
money due to Roosevelt’s gold seizure! Free market convertibility
ended. She flushes free market gold as money down the memory hole. It no
longer serves as an alternative to the State’s money. Romer thinks only
in terms of State money, whether gold or paper, and nothing else.
generations of monetary economists and textbook writers, gold is a
dirty word. This is either blind or biased scholarship or both. Free market
money is nowhere on the map.
Bias in an
administration’s top economists is no accident. They have self-selected
into the existing system. They sit at the pinnacle of power in America. No wonder then that they acclaim the virtues of the State system of power. No
wonder then that they refuse to acknowledge the alternative of liberty in
economic matters. And since free market money is very likely to use gold as
an important component, no wonder that they denigrate gold.
In his excellent
Kinds of Gold Standard," Gary North carefully distinguishes the
State’s gold standard from the free market gold standard. A gold
standard, or more generally money, is either a product of voluntary exchange
(a good), or else it is a forced currency that is the State’s product
and forced into passing as a good.
The free market
origination and use of a good as money is a matter of choice among free
market participants. The good may be gold, silver, copper, or other metals,
or some other kind of thing. People in a free market decide on their own what
to use as a value standard and what to use as media of exchange or monies. Liberty and a free market include monetary freedom as an essential. The use of gold or
anything else as money is a matter of voluntary choices and exchanges.
A State-run gold
standard occurs when the State controls by force the monetary arrangements. States
have done this in all sorts of ways and with many degrees of control. Money
then becomes, wholly or in part, a product of the State, not solely of the
free market. Monetary freedom is suppressed.
alternatives need to be kept squarely in view if the concept of monetary
freedom is to withstand research that shows that the gold standard had
My main point is
this. Monetary freedom and its possible use of gold as money are not the same
as the gold standard courtesy of a State-run system. Defects in the latter
say nothing at all about the merits or demerits of the former.
If Romer and
Bernanke’s research is correct, the State’s operations of its
unfree gold standard helped to produce and exacerbate the Great Depression. But
rather than blame the State or the central bank for the money and credit
mismanagement that they produced, they blame the gold standard. They err in
divorcing the gold standard from the State’s operations and
manipulations. They err in falsely identifying gold with the gold standard. They
err in supporting as a remedy the State’s money monopoly. Generations
of economists have accepted this. They have redefined money as central bank
notes whose link and convertibility to gold is very greatly attenuated. This
system allows paper money to be manufactured at will by the State’s
economists. It allows the inflation we have experienced.
It should be obvious
that the public has little or no say in this system of money production. Such
money cannot be refused as payment, and there are barriers to introducing other
things as money. The markets do not determine what money is, how much there
is, how it is created, or who gets it. The State determines all of this. The
central banking system, freed from the constraints of gold and market
acceptability, is set up to benefit the State.
As such, the system
of State money is inherently unfair. All the questions that surround money
– what will be money, how much of it will there be, who gets it, what
is its value – are far, far too important in our lives to be left to the
hands of others to decide for us. With State-forced money, it is too easy for
us to be cheated. We are forced to accept a thing as payment for our services
that has been, or is being, or will be debased and devalued into losing
power to create money is its power to command goods and services and absorb
them from others without providing goods in return. The temptation to abuse
that power is enormous. All governments that have this power abuse it,
thereby cheating all those under their rule who are forced to accept
One obvious check and
balance on the State’s nefarious money creation is for each of us to
have the right to refuse to accept anything proffered as money that we
do not wish to accept. Monetary freedom includes such a right. Another
obvious check and balance is that anyone in society have the right to
produce that which may possibly pass as money. Only sound monies can
survive such a competitive process. The money schemes of those, including the
State, who would attempt to produce unsound monies will be winnowed out by
the voluntary choices of each of us, just as we winnow out other goods that
fail to provide us with desired values.
There is far more at
stake in monetary freedom. The State’s control over money gives our
rulers the leverage to control many other facets of a society’s life. It
gives them the resources to make wars and restructure society to its liking
and that of its allied interest groups. It gives them power to create booms
and then periods of unemployment.
Private control over
money is a step toward greater private control by the public as against the
State’s control over the public. Conversely, a large State invariably
controls money and controls an undifferentiated public that includes many who
prefer not to be controlled and affected by the State’s machinations. Those
who favor a large State favor State control over money. Those who are against
monetary freedom are against freedom generally. They do not want to let
people out from under the State’s control.
In this as in other
matters, I take a panarchic point of view. I separate cleanly arguments about
the economic or social merits of alternatives such as gold and paper money
from political recommendations. Economically and morally, I may argue against
central banking and point out its faults and what it is doing to the nation. Politically,
I do not argue for gold, a gold standard, a bimetallic standard, or any other
specific kind of monetary system to be imposed on an entire
territorially-defined nation. Politically, I do not argue that central
banking be replaced in the U.S. by a gold standard or by free money or by
anything. Rather, I argue that those of us who want to adopt alternative money
systems have the liberty to do that without penalty. I argue for monetary
freedom, and that includes the freedom of all those Americans who want to
continue to use the FED’s money to do so. I would not take that freedom
from them by ending the FED. If they do not feel that they are cheated or
that the system is unethical, they are welcome to live with it. By the same
token, if they have that freedom, then so should others of us have the
freedom to use banks and money of our own choice.
Such a side-by-side
use of alternative institutions and monies within one country is entirely
Michael S. Rozeff
other articles by Michael S. Rozeff
Michael S. Rozeff is a retired Professor of Finance living in East
Amherst, New York. He publishes regularly his ideas and analysis on www.LewRockwell.com .
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whole or in part is gladly granted, provided full credit is given.