Michael Suede

Michael Suede is an Austrian economist and author who holds a business degree from the University of Wisconsin. Michael is a veteran of the US Navy and an advocate of voluntarism.

Against the Gold Standard

10 minute read

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Against The Gold Standard

By Michael Suede

Posted June 21, 2011

After reflecting upon the recent articles I have written where I have defended the new peer-to-peer currency called Bitcoin from attacks by gold standard advocates, I feel it is time stop taking a defensive role and make a few offensive jabs at the much vaunted gold standard.

In my articles I have spent a lot of time comparing the economics of how gold operates as a currency to how Bitcoin operates as a currency.  In the course of comparing the currencies, I was struck by a problem with the gold standard that was so obvious, yet so damning, I felt it deserved its own article.  I hope to hear a response from some well versed gold standard advocates on this issue.

The problem is not a new one, but it is a problem that I have never in all my years heard a satisfactory answer to.   The problem is quite simple, so here it is:

When gold is represented by something, what prevents arbitrary replication of that “thing”?

The law?  Who is the law?  Aren’t laws arbitrary creations by some governing body?  If that body has the authority to make arbitrary replication of money products illegal, then it stands to reason it also must have the power to make counterfeiting legal.

Throughout history, hasn’t that been the historic fault of the gold standard?  Hasn’t history been abundantly clear that as soon as paper receipts for gold are used as money, those paper receipts inevitably become monopolized by State actors, leading to their eventual arbitrary replication at the hands of the criminal class?

Don’t the bankers who issue the receipts have a massive incentive to cheat the system and issue more receipts than they actually have in gold reserves?  Doesn’t the State have a massive incentive to allow such legalized counterfeiting?  Has not history made it clear that those who have the power to issue money always and inevitably come to dominate the rest of society?

Baron Nathan Mayer Rothschild once said,

“I care not what puppet is placed on the throne of England to rule the Empire, …The man that controls Britain’s money supply controls the British Empire. And I control the money supply.”

Rothschild wasn’t talking about minting gold coins for use in barter; he was talking about paper receipts.  The incentive to issue more paper than specie is more massive than any other kind of fraud imaginable.  If one had the ability to manufacture paper that people treat in the same way they treat a gold coin, the urge to inflate would be more powerful than even an angel could bear.

I’m reminded of a statement Milton Friedman once made concerning greed as he was addressing Phil Donahue on his talk show.  Friedman said, “You know I think you are taking a lot of things for granted, just tell me where in the world you will find these angels who are going to organize society for us? I don’t even trust you to do that.”

I would argue that there is NO solution to this problem.  Changing the structure of government, eliminating the State, enforcement of fraud laws, and other such measures ultimately can not prevent a private bank from engaging in this kind of fraud.  Indeed, history has shown us that bankers routinely buy the law and were instrumental in creating the modern State.

Rothbard wrote extensively on the mischief caused by private banks engaged in the counterfeiting of their own notes prior to the inception of the Fed.  The Fed is simply a coordinator and cartelizing agent that allows for the even inflation of the money supply and acts to prevent bank runs, but its existence is not necessary for banks to engage in the counterfeiting of their own notes.  It was through this process that the bankers came to acquire enough power to take control of government in the first place.  It was through the power of the printing press that the Fed came to be enshrined in law.

I seem to recall, deep within the recesses of my mind, Hoppe making similar arguments at one point in time.

Dr. Hans-Hermann Hoppe writes:

And they [the power elite] realized that their ultimate dream of unlimited counterfeiting power would come true, if only they succeeded in creating a US dominated world central bank issuing a world paper currency such as the bancor or the phoenix; and so they helped set up and finance a multitude of organizations such as the Council on Foreign Relations, the Trilateral Commission, the Bilderberg Group, etc., that promote this goal. As well, leading industrialists recognized the tremendous profits to be made from state-granted monopolies, from state-subsidies, and from exclusive cost-plus contracts in freeing or shielding them from competition, and so they, too, have allied themselves to and “infiltrated” the state.

There are “accidents” in history, and there are carefully planned actions that bring about consequences which are unintended and unanticipated. But history is not just a sequence of accidents and surprises. Most of it is designed and intended. Not by common folks, of course, but by the power elites in control of the state apparatus. If one wants to prevent history from running its present, foreseeable course to unprecedented economic disaster, then, it is indeed imperative to arouse public indignation by exposing, relentlessly, the evil motives and machinations of these power elites, not just of those working within the state apparatus, but in particular also of those staying outside, behind the scenes and pulling the strings.

The ability to acquire enormous power through the fraud of counterfeiting is plainly evident.  Thus, the importance of ensuring that such fraud can not take place is paramount in selecting a currency system.  Bankers are very good at playing the role of benevolent benefactors.  Today, over half of our society calls out to the banker gods begging for more table scraps and handouts.  Bankers make society love them for their printing presses. It is impossible to get rid of counterfeiting if bankers can use the power of the printing press to make the public believe they are the beneficiaries of the fraud.  They only need to convince half of the population that they are benefiting from the fraud, then turn that half against the other to ensure their fraud continues unhindered.

Former Chairman of the Federal Reserve, Alan Greenspan once said,

“Well, first of all, the Federal Reserve is an independent agency, and that means, basically, that there is no other agency of government which can overrule actions that we take. So long as that is in place and there is no evidence that the administration or the Congress or anybody else is requesting that we do things other than what we think is the appropriate thing, then what the relationships are don’t, frankly, matter.”

Low interest rates, cheap loans, cheap credit, social welfare programs, public-private contracts that insulate corporations from competitive forces, etc.. etc.. etc.. – all act to fool the public into believing that their great benefactors are only looking out for their best interests.  And all of those things arise from the power of the printing press.   From this we can say that the urge to inflate is not limited to the bankers who control the printing presses, but also expands out to the public who ostensibly control “the law.”

I would argue that as long as the possibility exists that gold receipts can be counterfeited, they will be counterfeited.  And as long as those receipts are counterfeited, a State will exist to ensure that things remain that way.  It is a simple matter to bribe judges, law makers, enforcement agents, and even the public itself when one has a printing press.

The market has proven wholly inadequate at preventing the fraud of counterfeit bank notes, it can only react after the fact to punish the fraudsters.  But as we have seen, it is often too late.  Once the bankers have bought off the politicians and the public with their fraudulently acquired dollars they will be protected by the State.  The market has been trying to punish the fraud of counterfeit bank notes for the past 40 years and yet the State has held it at bay.

Thus we are back to my original question.  What system is to prevent the arbitrary replication of receipts for gold under a gold standard?  Unless we give up digital transactions and outlaw the use of paper receipts as a society, there is nothing that can prevent it.

If it hasn’t become clear by now, I hope you can see why Bitcoins (or another similar currency like it) are superior to a gold standard.  They simply can’t be inflated.  It can’t happen.  And further, since there is no bank issuing the notes, there is no one group of people who can use the power of the press to influence the public or political class with the bribery of free money.

This core problem must be addressed by gold standard advocates if they want to argue that gold is superior to encrypted digital currencies like Bitcoin.   Since gold can not be shoved down a transmission wire, unless the gold standard advocates want argue that all transactions must be made with physical specie, they have no possible way of getting around this one fatal flaw with the gold standard.

I never in a million years thought I would be saying these words, but the gold standard really is a relic of a by-gone era.  In today’s society where barter takes place across global markets using digital transactions, a gold standard currency that does not use the exact same mechanisms of Bitcoin to ensure replication of the digital representation of gold is impossible, is ultimately doomed to fail in the exact same manner it has already failed today.

Of course, the nature of Bitcoin is such that it is impossible to tie gold specie to a Bitcoin because Bitcoins can not be created in accordance with the minting of new gold.  But the nature of Bitcoin also begs the question as to why we even need to have such a currency tied to a commodity at all.

We don’t – and we shouldn’t.

It is a waste of resources to have men digging for gold, just to have it sit in a bank vault, when those same men could be making something useful for humanity instead.  Gold was only useful as a currency because it could not be arbitrarily inflated and met the requirements of scarcity, divisibility, fungibility, and recognizably better than any other physical commodity.   Today, in our new digital world, such monetary requirements are better suited to the digital realm, where the waste of resources on the production of money is not necessary.

I would like to end this article with some thoughts on money by Hoppe.

In a free society, the market would produce money, as all other goods and services. There would be no such thing as money in a world that was perfectly certain and predictable. But in a world with unpredictable contingencies people come to value goods also on account of their marketability or salability, i.e., as media of exchange. And since a more easily and widely salable good is preferable to a less easily and widely salable good as a medium of exchange, there is an inevitable tendency in the market for a single commodity to finally emerge that differs from all others in being the most easily and widely salable commodity of all. This commodity is called money. As the most easily salable good of all it provides its owner with the best humanly possible protection against uncertainty in that it can be employed for the instant satisfaction of the widest range of possible needs. Economic theory has nothing to say as to what commodity will acquire the status of money. Historically, it happened to be gold. But if the physical make-up of our world would have been different or is to become different from what it is now, some other commodity would have become or might become money. The market will decide. In any case, there is no need for government to get involved in any of this. The market has provided and will provide some money-commodity, and the production of that commodity, whatever it is, is subject to the same forces of supply and demand as the production of everything else.

Bitcoins are the first true digital commodity.

Bitcoins are free market money.

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