The Main Defect of the Historical Gold Standard Is the Necessity of 'Protecting' National Gold Reserves

The problems of national reserves, deflation, and so forth, Yeager points out, are due to the fractional-reserve nature of the gold standard, not to gold itself. "National fractional reserve systems are the real source of most of the difficulties blamed on the gold standard." With fractional reserves, individual actions no longer suffice to assure automatically the proper distribution of the supply of gold. "The difficulties arise because the mixed national currencies--currencies which are largely paper and only partly gold--are insufficiently international. The main defect of the historical gold standard is the necessity of 'protecting' national gold reserves." Central banking and its management only make things worse: "In short, whether a Central Bank amplifies the effects of gold flows, remains passive in the face of gold flows, or 'offsets' gold flows, its behavior is incompatible with the principles of the full-fledged gold standard . . . Indeed, any kind of monetary management runs counter to the principles of the pure gold standard."

--Murray N. Rothbard, The Case for a 100 Percent Gold Dollar (Auburn, AL: Ludwig von Mises Institute, 2001), 57.