Blogs > Liberty and Power > Questions on Mises VII: A Gold Standard by Any Other Name

Dec 14, 2006 3:01 pm

Questions on Mises VII: A Gold Standard by Any Other Name

Roughly a year and a half ago, the Positive Liberty commentariat and I discussed what a possible return to commodity money might look like.

For reasons unknown, these comments have since disappeared: I have a top-level post referencing the discussion in another post, but this second post has no comments at all.

Now, whenever a commenter writes something to me, I tend strongly to remember it. And as much as a year and a half later, I may want to reference it. So whatever is going on is unacceptable. Can any more technically adept readers help me?

In any case, a commenter made the following arguments, which I am going to have to summarize from memory, as they are quite relevant to a discussion of Mises' Theory of Money and Credit.

We can't possibly go back to a gold standard. Here are the reasons why:

1. Serious difficulties would arise in industries requiring gold. These are not limited to jewelry, which would vanish, but also high-tech communications and electronics, which would likewise become too expensive for the average person's budget.

2. The U.S. government could never afford to buy enough gold to cover every U.S. dollar now in circulation. Doing so would entirely wreck the American economy, to say nothing of the rest of the world.

3. There is so much economic activity, and so much economic value, that using gold to mediate all of our exchanges would make for prohibitively small currency units. Even at current gold prices -- that is, before the multi-trillion dollar gold grab needed to return to a gold standard -- one U.S. dollar would be less than 1/500th of a troy ounce.

Was he right? Personally, I find 1) unconvincing. I find 2) serious enough now, that it seems plain to me a government cannot be the entity to return us to a commodity money. I am inclined to find 3) a technicality; flakes of gold can easily be encased in a larger substrate that would make them the mechanical equivalent of coins. (Or could they even be integrated into paper money?)

Consider the following as you answer the above challenges:

A) We might easily pick another commodity to serve as our commodity currency; gold is by no means the only choice.

B)"We" in the above sentence should almost certainly not be the government; if a true commodity currency were to re-emerge, it could well be through a process of market selection among bartered goods, as Mises sketches in TM&C Part 1 chapter 2 section 2:

Now all goods are not equally marketable. While there is only a limited and occasional demand for certain goods, that for others is more general and constant. Consequently, those who bring goods of the first kind to market in order to exchange them for goods that they need themselves have as a rule a smaller prospect of success than those who offer goods of the second kind. If, however, they exchange their relatively unmarketable goods for such as are more marketable, they will get a step nearer to their goal and may hope to reach it more surely and economically than if they had restricted themselves to direct exchange.

It was in this way that those goods that were originally the most marketable became common media of exchange; that is, goods into which all sellers of other goods first converted their wares and which it paid every would-be buyer of any other commodity to acquire first. And as soon as those commodities that were relatively most marketable had become common media of exchange, there was an increase in the difference between their marketability and that of all other commodities, and this in its turn further strengthened and broadened their position as media of exchange.

Thus the requirements of the market have gradually led to the selection of certain commodities as common media of exchange. The group of commodities from which these were drawn was originally large, and differed from country to country; but it has more and more contracted. Whenever a direct exchange seemed out of the question, each of the parties to a transaction would naturally endeavor to exchange his superfluous commodities, not merely for more marketable commodities in general, but for the most marketable commodities; and among these again he would naturally prefer whichever particular commodity was the most marketable of all. The greater the marketability of the goods first acquired in indirect exchange, the greater would be the prospect of being able to reach the ultimate objective without further maneuvering. Thus there would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money.

What this one commodity might be today is anyone's guess, although it is likely to still be a metallic element, and it might end up being gold after all. Metals are durable, divisible, uniform, portable, and impossible to counterfeit. Other suggestions are welcome, however.

C) This emergence of a new commodity currency could only take place if legal tender laws were abolished. I think this speaks for itself, and if not, the comments at Liberty and Power were quite decisive.

D) I can't really link any of this to allergic reactions suffered after drinking Goldschlager. But they did turn up in some of my research queries, so here you go.

Now then... Commodity currency: Possible? Impossible? Worth the trouble? I know that this post is asking some questions that are well beyond my (and probably most others') technical competence, so I promise that my next post will offer a dilemma that anyone can take a shot at -- albeit a dilemma that seems central to the modern understanding of economics all the same.

[Crossposted at Positive Liberty.]
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More Comments:

Jason Kuznicki - 12/15/2006

<em>Other arguments assume a 100% reserve banking. That is, any bank instrument deemed to be money must be "backed" by gold of equal value.

This would require a good bit of gold, and certainly would involve a reduction in the use of gold for industrial purposes. </em>

Ah yes, but many libertarians (with Rothbard at their head) would insist on exactly this. So the question remains important here.

Bill Woolsey - 12/15/2006

The problems described in the comment show approximately no grasp of a gold standard.

Some of the arguments seem to assume that gold must be used as money, rather than banknotes or tokens redeemable in gold. Once it is recongized that a gold standard doesn't mean gold coins only, then the actual instruments changing hands can be of a convenient size.

Other arguments assume a 100% reserve banking. That is, any bank instrument deemed to be money must be "backed" by gold of equal value.

This would require a good bit of gold, and certainly would involve a reduction in the use of gold for industrial purposes.

The usual approach of returning to a gold standard isn't for the government to buy up gold so much as to reduce the outstanding supply of money. Do that enough, and the remainder will be backed by gold in the desired percentage. Unforunately, the associated depression and deflation are very unpleasant.

Of course, by returning to the gold standard at a sufficiently high price, that can be avoided. In fact, the process could be made highly inflationary!

The trick, really, is to find the right price for gold.

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