Money Is a Commodity Not a Promise to Pay or Fiduciary Media; The Value of a Coin Is Based on the Weight and Fineness of Its Metal Not Its Face Value

Credit money is money that has less than a 100 percent reserve in coins. “If the money reserve kept by the debtor against the money-substitute issued is less than the total amount of such substitutes, we call the amount of substitutes which exceeds the reserve fiduciary media. As a rule it is not possible to ascertain whether a concrete specimen of money-substitutes is a money-certificate or a fiduciary medium.” Fiduciary media increase the amount of money in circulation. “The issue of fiduciary media enlarges the bank’s funds available for lending beyond these limits.”

Money is a commodity, Mises insisted. It is not a promise to pay. Fiduciary media is a promise to pay. It is a promise that cannot be fulfilled at the same time to everyone who has been issued fiduciary media.

The value of a coin is based on the weight and fineness of its metal.

Nevertheless, in defiance of all official regulations and prohibitions and fixing of prices and threats of punishment, commercial practice has always insisted that what has to be considered in valuing coins is not their face value but their value as metal. The value of a coin has always been determined, not by the image and superscription it bears nor by the proclamation of the mint and market authorities, but by its metal content.

--Gary North, Mises on Money (Auburn, AL: Ludwig von Mises Institute, 2012), 23.

The Favorite Explanation of Inflation Is That Greedy Businessmen Persist in Putting Up Prices in order to Increase Their Profits

What, then, does this resurgent Austrian theory have to say about our problem [of stagflation]? The first thing to point out is that inflation is not ineluctably built into the economy, nor is it a prerequisite for a growing and thriving world. During most of the nineteenth century (apart from the years of the War of 1812 and the Civil War), prices were falling, and yet the economy was growing and industrializing. Falling prices put no damper whatsoever on business or economic prosperity.

Thus, falling prices are apparently the normal functioning of a growing market economy. So how is it that the very idea of steadily falling prices is so counter to our experience that it seems a totally unrealistic dream-world? Why, since World War II, have prices gone up continuously, and even swiftly, in the United States and throughout the world? Before that point, prices had gone up steeply during World War I and World War II; in between, they fell slightly despite the great boom of the 1920s, and then fell steeply during the Great Depression of the 1930s. In short, apart from wartime experiences, the idea of inflation as a peacetime norm really arrived after World War II.

The favorite explanation of inflation is that greedy businessmen persist in putting up prices in order to increase their profits. But surely the quotient of business "greed" has not suddenly taken a great leap forward since World War II. Weren't businesses equally "greedy" in the nineteenth century and up to 1941? So why was there no inflation trend then? Moreover, if businessmen are so avaricious as to jack up prices 10 percent per year, why do they stop there? Why do they wait; why don't they raise prices by 50 percent, or double or triple them immediately? What holds them back?

--Murray N. Rothbard, "Inflation and the Business Cycle: The Collapse of the Keynesian Paradigm," in For a New Liberty: The Libertarian Manifesto, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2006), 216-217.

The Most Successful and Pernicious Hoax in the History of Economic Thought Is the Completely Fallacious Theory of Keynesianism

So ends our lengthy analysis of the most successful and pernicious hoax in the history of economic thought--Keynesianism. All of Keynesian thinking is a tissue of distortions, fallacies, and drastically unrealistic assumptions. The vicious political effects of the Keynesian program have only been briefly considered. They are only too obvious: the rulers of the State engaging in direct robbery through "progressive" taxation, creating and spending new money in competition with individuals, directing investment, "influencing" consumption--the State all-powerful, the individual helpless and throttled under the yoke. All this is in the name of "saving free enterprise." (Rare is the Keynesian who admits to being a socialist.) This is the price we are asked to pay in order to put a completely fallacious theory into effect!

--Murray N. Rothbard, "Spotlight on Keynesian Economics," in Strictly Confidential: The Private Volker Fund Memos of Murray N. Rothbard, ed. David Gordon (Auburn, AL: Ludwig von Mises Institute, 2010), 239.

Supply-Side Deflation Is an Indication of a Growing and Dynamic Market System That Is Improving the Economic Conditions and Opportunities of the General Population

A general decline in prices may accompany significant expansions in output resulting from productivity increases and cost efficiencies. One of the competitive forces in the market economy is the never-ending drive of entrepreneurs to bring better and less-expensive goods and services to market for the consuming public.

New technologies and cost-saving innovations introduced within business enterprises enable more goods to be manufactured and sold at lower per-unit costs. Sellers, in one sector of the economy after another, increase the supplies they offer on the market, and competitive pressure results in a lowering of the prices of those goods to reflect the lower costs of production. The cumulative effect is that the general level of prices will decline over a period of time.

In the period between the end of the American Civil War in 1865 and 1900, the general level of prices in the United States declined by about 50 percent. While the American economy did experience short periods of economic depression during those years (mostly due to the federal government’s manipulation of the monetary standard), this nearly half-century period was the time of America’s Industrial Revolution, and it saw a dramatic rise in standards of living, even though it was accompanied by an expanding population.

An open, free-market system tends to foster the incentives and profitable rewards for capital investment and innovation that bring forth increasing prosperity. Greater output at falling prices provides people with higher real incomes, as each dollar they earn now buys a larger quantity of goods and services in the marketplace. Supply-side deflation, therefore, is an indication of a growing and dynamic market system that is improving the economic conditions and opportunities of the general population.

For that reason, supply-side price deflation has often been called the good deflation.

--Richard M. Ebeling, "Don't Fear Deflation, Unless Caused by the Government," in Austrian Economics and Public Policy: Restoring Freedom and Prosperity (Fairfax, VA: The Future of Freedom Foundation, 2016), Kindle e-book.

A Fundamental Postulate of the 100% Specie Doctrine Is That Paper Money Literally Is a Warehouse Receipt or Certificate for the Commodity Money It Represents

Paper money can play a definite, powerful role under the 100 percent specie standard.  Although some hard money advocates, such as Thomas Jefferson, at times favored the abolition of paper money entirely because of its “misuse,” others have pointed out that the economic advantages of paper money can be had without the disadvantages created through the fractional reserve system. Paper money turns out to be a very cheap and efficient way for the handling and transferring of metallic money. The actual transfer of gold or silver can be an expensive process, especially for large transactions, and consequently the transfer of claims for money proves to be much more convenient and efficient.

A fundamental postulate of the 100 percent specie doctrine is that paper money literally is a warehouse receipt or certificate for the commodity money it represents, just as it was under the scriveners and early goldsmith-bankers.

--Mark Skousen, Economics of a Pure Gold Standard, 4th ed. (Irvington-on-Hudson, NY: The Foundation for Economic Education, 2010), Kindle e-book.

A Pure Gold Standard Provides a Stable Monetary System, Far Superior to the Current System Based on Discretionary Central Banking and Fiat Money

A “pure” gold standard is defined as a monetary system wherein all monies, including banknotes and demand deposits, are backed 100 percent by gold. This is quite distinct from a gold exchange standard, which is based on a fractional reserve banking system tied to a fixed price for gold. The gold exchange standard, which existed prior to 1971, proved to be unreliable and incapable of preventing monetary crises. But a 100 percent reserve commodity standard would be a vast improvement over the gold exchange standard. Based on both historical evidence and the unique properties of the yellow metal, I demonstrate that a pure gold standard provides a remarkably stable monetary system, far superior to the current precarious system based on discretionary central banking and fiat money.

--Mark Skousen, preface to the third edition of Economics of a Pure Gold Standard, 4th ed. (Irvington-on-Hudson, NY: The Foundation for Economic Education, 2010), Kindle e-book.

What Is Needed First of All Is to Force the Rulers to Spend Only What They Have Collected as Taxes

Sound money still means today what it meant in the nineteenth century: the gold standard.

The eminence of the gold standard consists in the fact that it makes the determination of the monetary unit's purchasing power independent of the measures of governments. It wrests from the hands of the "economic tsars" their most redoubtable instrument. It makes it impossible for them to inflate. This is why the gold standard is furiously attacked by all those who expect that they will be benefited by bounties from the seemingly inexhaustible government purse.

What is needed first of all is to force the rulers to spend only what, by virtue of duly promulgated laws, they have collected as taxes. Whether governments should borrow from the public at all and, if so, to what extent are questions that are irrelevant to the treatment of monetary problems. The main thing is that the government should no longer be in a position to increase the quantity of money in circulation and the amount of checkbook money not fully--that is, 100 percent--covered by deposits paid in by the public. No backdoor must be left open where inflation can slip in.

--Ludwig von Mises, The Theory of Money and Credit, trans. H. E. Batson (Indianapolis: Liberty Fund, 1981), 480-481.

Ideologically, Sound Money Belongs in the Same Class with Political Constitutions and Bills of Rights

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the nonobservance of old customs by kings. The postulate of sound money was first brought up as a response to the princely practice of debasing the coinage. It was later carefully elaborated and perfected in the age which--through the experience of the American continental currency, the paper money of the French Revolution and the British restriction period--had learned what a government can do to a nation's currency system.

--Ludwig von Mises, The Theory of Money and Credit, trans. H. E. Batson (Indianapolis: Liberty Fund, 1981), 454.

True Free Trade Does Not Require Treaties or Agreements between Governments; True Free Trade Occurs in the Absence of Government Intervention

In spite of my strong support for free trade, I have felt compelled to oppose many of the trade agreements that have appeared in recent years. For instance, although I was not in Congress at the time, I opposed both the North American Free Trade Agreement and the World Trade Organization, both of which were heavily favored by the political establishment. Initial grounds for suspicion was the sheer length of the text of these agreements: no free-trade agreement needs to be 20,000 pages long.

Many, though not all, supporters of the free market supported these agreements. Very different was the situation nearly six decades ago when the International Trade Organization was up for debate. At that time, conservatives and libertarians agreed that supranational trade bureaucracies with the power to infringe upon American sovereignty were undesirable and unnecessary. Businessman Philip Cortney, a close friend of the great free-market economist Ludwig von Mises, led the charge against the WTO with his book The Economic Munich. Henry Hazlitt, author of the libertarian classic Economics in One Lesson, included Cortney's book against the WTO in The Free Man's Library, his annotated reading list of books important to the study of freedom. . . .

To establish genuine free trade, no such transfer of power [to the WTO] is necessary. True free trade does not require treaties or agreements between governments. On the contrary, true free trade occurs in the absence of government intervention in the free flow of goods across borders. Organizations like the WTO and NAFTA represent government-managed trade schemes, not free trade. The WTO, purported to exist to lower tariffs, is actually the agency that grants permission for tariffs to be applied when complaints of dumping are levied. Government-managed trade is inherently political, meaning that politicians and bureaucrats determine who wins and loses in the marketplace.

--Ron Paul, The Revolution: A Manifesto (New York: Grand Central Publishing, 2008), 95-97.

Artificial Fixing of the Exchange Rates between Gold and Silver Creates a Shortage of the Artificially Undervalued Money and a Surplus of the Overvalued Money

Bimetallism, the system of legislative fixing of the exchange rate between gold and silver, has been generally regarded as a form of price control, and therefore undesirable from a free market point of view. Brough blames this “artificial obstruction” in bimetallism on the government for the creation of Gresham’s Law, which states that “bad money drives out good.” Gresham’s Law would not occur on the free market, according to Brough: “The more efficient money will always drive from circulation the less efficient if the individuals who handle money are left free to act in their own interest. It is only when bad money is endorsed by the State with the property of legal tender that it can drive good money from circulation.” Later, writers such as Ludwig von Mises show that Gresham’s Law is caused by government intervention rather than a characteristic of the free market. The government’s artificial fixing of the exchange rates between gold and silver creates a shortage of the artificially undervalued money (“good money”) and a surplus of the overvalued money (“bad money”).

--Mark Skousen, introduction to Economics of a Pure Gold Standard, 4th ed. (Irvington-on-Hudson, NY: The Foundation for Economic Education, 2010), Kindle e-book.

The Gold Exchange Standard, an Earlier Form of the Reserve-Currency System, Was a Machine for Perpetual Inflation in the Late 1920s

The reconstruction carried out in the twenties proved entirely ineffective, because instead of restoring the gold standard, governments and the experts who guided their decisions preferred to substitute for it the Gold Exchange Standard, i.e. an earlier form of the 'reserve-currency system'. In the latter twenties, the system proved to be, to borrow Dr Holtrop's phrase, 'a machine for perpetual inflation'. But the inflation did not prove to be as perpetual as all that--no inflation ever is, except maybe the Brazilian. It broke down on the occasion of the New York Stock Market crash in the autumn of 1929 and was followed by the deepest depression the modern world has known. That depression led, in 1931, to a run on Britain's gold (sterling was the principal 'reserve currency' of the twenties). There ensued years of competitive currency depreciations, of growing restrictions on international trade and payments, and not till the autumn of 1936 did the United States, the United Kingdom, and France reach a 'tripartite agreement' introducing a small but significant degree of order into foreign exchange markets. But the war was almost upon us and further measures of reconstruction could not be planned, let alone adopted.

--Michael A. Heilperin, Aspects of the Pathology of Money: Monetary Essays from Four Decades (Auburn, AL: Ludwig von Mises Institute, 2007), 284.

Capitalism with a Crippled Price Mechanism in the "Semi-Autarchic Welfare State" of France

The true scope of the recent French monetary and fiscal reform has been little understood in Europe, still less in America. For Poincare, in 1928, all that mattered was to balance the budget, to stop monetization of the public debt, and to return to gold convertibility of the currency. (The budget was actually over-balanced for the four years, 1927-1931.) For De Gaulle, convertibility is a remote goal, genuine budget balancing perhaps even more so. Stabilizing the budget deficit and the external value of the franc are the prime agenda. At the same time they are means to an overriding objective. What is now a chief objective, was scarcely even problematic thirty-odd years ago: the restoration of the price mechanism.

By a myriad of devious techniques, the French price system and income distribution had been effectively distorted, until even the semblance of competitive markets had almost vanished.

The semi-autarchic Welfare State has nowhere been more fully, more "scientifically," and more disastrously, developed than in France before De Gaulle came into power. As a result, French prices had lost contact, more or less, with the world markets and with domestic costs.

--Melchior Palyi, A Lesson in French Inflation (New York: Economists' National Committee on Monetary Policy, 1959), 38.

This Upside-Down Economics Was Made Possible by What Is Euphemistically Called "Managed Money"

At present [1959], the purchasing power of the French franc is less than one-two-hundredth, about 0.4 per cent, of what it was in 1914. . . .

This French monetary-fiscal debacle was brought about by the process of printing paper money in order to pay for the deficit the government was running in 38 out of 44 years--or rather, for the part of the deficits that could not be covered by pushing the bonds down the throats of the public and of the savings institutions. . . .

Only a dictator could force monetary and fiscal discipline upon a public almost every sector of which was determined to milk to Welfare State for its own private benefit.

And there was always a convenient excuse available for not going to the root of the trouble: first the need for reconstruction; then the Indo-China war; the cost of the Algerian rebellion since 1954 which, in reality, accounts for scarcely more than 10 per cent of the total of governmental expenditures. (The Indo-China war was paid for largely by the United States taxpayer.) The truth is, as a French economist, Dr. Jacques Rueff, summed it up, that the French were consuming more than producing, investing more than saving, importing more than exporting, and hiding a good portion of their profits in gold at home or in assets abroad. This upside-down economics was made possible by what is euphemistically called "Managed Money."

--Melchior Palyi, A Lesson in French Inflation (New York: Economists' National Committee on Monetary Policy, 1959), 12-13.

The "One Pocket Owes it to the Other" View of the National Debt Applies Only to a Communist Society

Is the national debt a burden on the nation? It is not, provided it is being held domestically, proclaimed President Franklin D. Roosevelt. "One pocket owes it to the other." . . . Since the public debt is no debt in the common meaning of the term, it need not be and virtually never has been repaid, according to the managed-money and creeping-inflation advocates. We should learn to live with the mammoth debt and accept the alleged necessity of its further growth. Let us go on accumulating budget deficits whenever "needed." . . .

But the principle of "one pocket owes it to the other" applies to a communistic society only. When everything belongs to the state, all liabilities are a matter of mere bookkeeping. Conversely, he who denies that the debt is more than a bookkeeping item, wittingly or unwittingly, negates the system of private property. Under that system, the "pockets" of creditors are distinctly separate from those of debtors.

--Melchior Palyi, An Inflation Primer (Chicago: Henry Regnery Company, 1962), 98-99.

The Terms of Trade between East Germany and the USSR Were Established by Using Average World Market Prices

Soviet Russia would not be able to function at all, if she could not refer to prices outside her borders. She has no other way of knowing which is the cheapest material to use to make anything. Without a domestic market, she must look beyond her borders to see whether tin, iron, steel, aluminum, or what not is the cheapest metal for a particular use. She must first find out their relative values in the world markets; and it should be remembered that these prices cannot reflect the demand and supply conditions within her country. So the Soviet Union is steering her economy down a road without any helpful signposts. She lacks the price signs that guide all production in a market economy.

Let me refer to a news item in the New York Times of April 19, 1966. It reports on an East German trade treaty with the Union of Soviet Socialist Republics. At that time, about 50 percent of East Germany's foreign trade was with the Soviet Union, and only 10 percent with West Germany, which had refused to give her long-term credits. East Germany got 90 percent of its steel and 100 percent of its crude oil and iron ore from Soviet Russia. The gentleman who negotiated this trade treaty for East Germany, a Dr. Erik Apel, committed suicide because of complaints that this trade treaty was not fair to his country. It had been alleged that the treaty was too favorable to the Soviets and too costly to the people of East Germany.

After Dr. Apel had committed suicide, he was succeeded by a Mrs. Elsa Bauer. She defended the trade treaty by saying: "There is no unfairness in the terms of trade with the Soviet Union. The terms are considered correct. Prices have been based on the average world market prices over the last three years."

How would you like to buy goods at the average prices of the last three years? How would you like to sell goods at the average prices of the last three years? This is how a socialist society has to operate. If the whole world were socialist, there would not be any market prices of either the present or "the last three years" to use in calculating production costs of different things and processes. Without prices, all decisions on what and how to produce must be completely arbitrary.

--Percy L. Greaves, Understanding the Dollar Crisis (Boston: Western Islands Publishers, 1973), 155-156.

Taxpayers on Strike in Chicago

During an age of tax revolt, Chicago easily qualified as a potential trouble spot. In most of the rest of the country, the effects of the depression fueled the onset of taxpayer unrest. In Chicago, economic decline only fired the embers of a revolt well under way before the 1929 crash. These conclusions are fairly clear. The problem starts when we begin to wrestle with the tricky questions of how and why the legal forms of revolt evolved into an outright strike.

The breakdown of the tax-appeals system provided the immediate spark. A flurry of protest overwhelmed the traditional outlet for complaints, the Board of Review. In one day alone, 29 November 1930, 4,000 taxpayers jammed into the board's offices to file protests. When the board's members turned a deaf ear to the mountain of pending appeals, aggrieved taxpayers resorted to the only avenues of protest left open to them. In Chicago, this meant court litigation and/or nonpayment of taxes.

--David T. Beito, Taxpayers in Revolt: Tax Resistance during the Great Depression (Chapel Hill: University of North Carolina Press, 1989), 60.

Interest Is the Payment Made for the Use of Someone Else's Property, i.e., Someone Else's Purchasing Power

Those who provide finance to others do so to earn interest, which is the name given to the payments made in exchange for the purchasing power that has been made available by others. There is a vast economic literature on the reason that interest is actually paid but here I will only provide the most basic. Interest is the payment made for the use of part of someone else's property--in this case someone else's purchasing power--and can thus be seen as a form of rental. One lends out one's ability to buy at the present time in the same way as one might rent out one's house. At the end of the rental period, the aim is to have the full amount lent out returned, in the same way that one intends to reclaim one's house when the tenant moves out.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

Mill's Fourth Proposition Was Once Considered the Touchstone of Economic Thinking: Demand for Commodities Is NOT Demand for Labour

Mill's fourth proposition was once considered the touchstone of economic thinking, 'the best test of a sound economist' as it was once said. If you could not understand why it is true, you were seen as incapable of understanding how an economy works. This proposition has, however, now grown so far from present usage that it would be a very rare economist who has even heard this statement, let alone accepts what it says. Yet for all that, it remains as valid today as the day it was first penned.

Mill's fourth proposition states that 'demand for commodities is not demand for labour.' Its meaning: when you buy goods and services you are not increasing the number of jobs. . . .

When someone buys goods they are not themselves employing the labour or paying the wages. By the time the good is bought, the work has already been done and workers have already been paid their wages. The employment of labour is an entrepreneurial decision made in advance of production and sale. It is not the consequence of someone having finally bought the product. . . .

The conclusion that should never be lost sight of in understanding how economies work is that buying things creates no value. To purchase is not to produce, nor is it to employ. Demand of itself creates no value and cannot put people to work.

--Steven Kates, Free Market Economics: An Introduction for the General Reader, 3rd ed. (Cheltenham, UK: Edward Elgar Publishing, 2017), Kobo e-book.

International Cooperation to Support the Gold Standard Is the Maintenance of a Cheap Money Policy without Suffering the Loss of Gold

Thus, the close international Central Bank collaboration of the 1920s created a false era of seemingly sound prosperity, masking a dangerous worldwide inflation. As Dr. Palyi has declared, "The gld standard of the New Era was managed enough to permit the artificial lengthening and bolstering of the boom, but it was also automatic enough to make inevitable the eventual failure." The pre-war standard, Palyi points out, had been autonomous; the new gold standard was based on the political cooperation of central banks, which "impatiently fostered a volume of credit flow without regard to its economic results." And Dr. Hardy justly concluded, "International cooperation to support the gold standard . . . is the maintenance of a cheap money policy without suffering the loss of gold."

--Murray N. Rothbard, America's Great Depression, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2000), 149.

The Gold-Exchange Standard Collapsed in 1931 When "Hard Money" France Attempted to Cash in Its Sterling Balances for Gold

The point of the gold-exchange standard is that it cannot last; the piper must eventually be paid, but only in a disastrous reaction to the lengthy inflationary boom. As sterling balances piled up in France, the United States, and elsewhere, the slightest loss of confidence in the increasingly shaky and jerry-built inflationary structure was bound to lead to general collapse. This is precisely what happened in 1931; the failure of inflated banks throughout Europe, and the attempt of "hard money" France to cash in its sterling balances for gold, led Britain to go off the gold standard completely. Britain was soon followed by the other countries of Europe.

--Murray N. Rothbard, What Has Government Done to Our Money? (Auburn, AL: Ludwig von Mises Institute, 2010), 96.

Once Legal Tender Laws Are Established, Debt Repudiation through Monetary Depreciation Becomes a Common Practice of Government Finance

Government achieved full control over paper money with the passage of legal tender laws, which dictate to people what their legal money can be. Such laws are obviously meaningless and superfluous wherever the ordinary law of contract is respected. Where government wants to issue inferior coins or paper notes, it must use coercion in the form of legal tender legislation. It then can replace honest money with dishonest money, gold coins with fiat notes, and silver coins with money tokens; falsify the exchange ratios between both forms; and discharge its debt with fiat notes or make payment with tokens. In fact, once legal tender laws are enacted and enforced, debt repudiation through monetary depreciation becomes a common practice of government finance.

--Hans F. Sennholz, Money and Freedom (Cedar Falls, IA: Center for Futures Education, 1985), 24.

The Gold Exchange Standard Is Inflationary Because the Same Gold Reserve Serves to Permit Expansion of Money and Credit in Two Countries

The gold exchange standard is a device whose purpose is to save the use of gold. It is an inflationary system because the same gold reserve serves to permit expansion of money and credit in two countries. It brought about the collapse of the pound when the foreign countries withdrew their deposits in the British banks and it was greatly responsible for the depth and length of the Great Depression of 1929/1933. The gold exchange standard considerably reduces the reactions which tend to correct imbalances of international payments.

--Philip Cortney, introduction to The Triumph of Gold, by Charles Rist (New York: Philosophical Library, 1961), 30.

The Gold-Exchange Standard Was One of the Major Causes of the Wave of Speculation That Culminated in the September 1929 Crisis

By the same token, the gold-exchange standard was a formidable inflation factor. Funds that flowed back to Europe remained available in the United States. They were purely and simply increased twofold, enabling the American market to buy in Europe without ceasing to do so in the United States. As a result, the gold-exchange standard was one of the major causes of the wave of speculation that culminated in the September 1929 crisis. It delayed the moment when the braking effect that would otherwise have been the result of the gold standard's coming into play would have been felt. 

The wiser for this experience, I witnessed with great concern, after the Second World War, the resurgence of the practices that had brought about the Great Depression after the First World War. However, their consequences had been masked until 1958 because they were hidden and given an inverse orientation by the process of inflation in individual countries that had generated the dollar shortage.

--Jacques Rueff, The Monetary Sin of the West, trans. Roger Glémet (New York: The Macmillan Company, 1972), 19.

The Growing Similarities Between the International Monetary Developments of 1958-1961 and the Latter Part of 1926-1929

Some will no doubt be surprised that in 1961, practically alone in the world, I had the audacity to call attention to the dangers inherent in the international monetary system as it existed then. I must, however, pay a tribute here to my friend Professor Robert Triffin of Yale University, who also diagnosed the threat of the gold-exchange standard to the stability of the Western world. But while we agreed on the diagnosis, we differed widely as to the remedy to be applied. On the other hand, the late Professor Michael Heilperin, of the Graduate Institute of International Studies in Geneva, held a position in every respect close to mine.

My fears at the time were based essentially on the growing similarities between the international monetary developments of the years 1958-1961 and those of the latter part of the 1926-1929 period. There was the same accumulation of Anglo-Saxon currencies in the monetary reserves of European countries, in particular France, and the same inflation in creditor countries.

In both periods the monetary system was characterized by the widespread application of a specific, adventitious procedure that Anglo-Saxon countries termed the gold-exchange standard. . . .

Between 1930 and 1934 I was Financial Attaché in the French Embassy in London. In that capacity, I had noted day after day the dramatic sequence of events that turned the 1929 cyclical downturn into the Great Depression of 1931-1934. I knew that this tragedy was due to disruption of the international monetary system as a result of requests for reimbursement in gold of the dollar and sterling balances that had been so inconsiderately accumulated.

--Jacques Rueff, The Monetary Sin of the West, trans. Roger Glémet (New York: The Macmillan Company, 1972), 15-16.

Lord Keynes Tells the House of Lords: This Bretton Woods Plan Is the Exact Opposite of a Gold Standard

Mr. Boothby is a Member of Parliament and chairman of the Monetary Policy Committee in London.

In both letters Mr. Boothby pointed to what he called certain "major obscurities" in the Bretton Woods Monetary Fund agreement, and he pointed out that regarding several of them precisely the opposite interpretations had been made in Great Britain from those generally made here:

You have been led to believe that the Bretton Woods proposals take us all back along the road to a gold standard, currency stability, non-discrimination and multilateral trade. We have been assured that they constitute the exact reverse of a gold standard, that exchange rates will be flexible and that reciprocal trade agreements involving discrimination will be permissible.

Treasury spokesmen, discussing Mr. Boothby's contentions before the House Banking and Currency Committee, do not appear to have dealt with them very satisfactorily. They questioned Mr. Boothby's motives and his purpose in being in this country at this time. Such personal considerations do not meet the real issue, which is, Do the obscurities and ambiguities which Mr. Boothby alleges to be in the Bretton Woods agreement in fact exist?

There can be not the slightest doubt that they do. Widely different interpretations have been made of the Fund agreement here and in London. It was Lord Keynes, leader of the British delegation at Bretton Woods, who declared before the House of Lords: "If I have any authority to pronounce on what is and what is not the essence and meaning of a gold standard, I should say that this plan is the exact opposite of it." It is Lord Keynes, also, who in a letter to The Times of London contended that the Bretton Woods plans would still permit Britain to make purely regional trade and currency arrangements, a view that has been disputed in the United States. There has developed in addition a vital difference of opinion concerning whether the credit granted by the Fund is automatic, regardless of unsound currency or other economic policies in the borrowing countries, or whether the Fund has a right to withhold credit because of such policies.

--Henry Hazlitt, From Bretton Woods to World Inflation: A Study of Causes and Consequences (Chicago: Regnery Gateway, 1984), 109-110.

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.

According to Bimetallists in the USA, Gold Monometallism Produces FX Instability between Countries on Different Metallic Standards

Another argument advanced by bimetallists against the substitution of gold monometallism for bimetallism was that it had broken down the so-called nexus between countries on different metallic money standards. As long as some countries were on a bimetallic standard, with the unlimited coinage of both gold and silver at a fixed mint ratio, the fluctuation would be very slight in the gold price of silver in gold-standard countries and in the silver price of gold in silver-standard countries. Foreign exchange rates, therefore, among countries on all three standards--bimetallic, gold, and silver--would be stable, as they were prior to 1873.

Since discontinuance of bimetallism, it was said, all this had been changed. The nexus between gold and silver was broken and each metal had gone its own way. There was thenceforth no limit to the possible variation in exchange rates between a gold-standard country and a silver-standard country. This brought a large new element of risk and speculation in foreign trade between countries on different metallic standards. It was an obstacle to the development of trade between gold- and silver-standard countries, as well as to the flow of funds for investment between such countries.

--Edwin Walter Kemmerer, Gold and the Gold Standard: The Story of Gold Money, Past, Present and Future (New York: McGraw-Hill Book Company, 1944), 91-92.

The Small-Change Problem: The Three Options--Strike All Coins from the Standard Metal, Use Bimetallism, or Issue Fiduciary (Token) Coins--All Had Drawbacks

How might the eighteenth-century British government have tried to supply its citizens with small change? Having defined its basic monetary unit in terms of one precious metal, the government faced three options. It could

1. strike both large- and small-denomination coins from the standard metal, with the coins' weights corresponding to their face values;
2. resort to bimetallism, with low-denomination coins made from the less valuable metal, and large-denomination coins made from the more valuable one; or 
3. issue avowedly fiduciary or token small-denomination coins, on government account. 

Each option had its drawbacks. [What follows is a much-simplified analysis of the small-change problem.]

Under the first option, if the standard metal was sufficiently valuable, coins of lower denominations would be too small to be practical, as happened with Great Britain's quarter guineas. A still more egregious case was that of the silver farthings the Royal Mint issued in 1464. Weighing only three troy grains each, these were "lost almost as fast as they were coined." The standard metal could, of course, be one from which convenient small-denomination coins might be made; but then large-denomination coins of the same metal would end up being too bulky. 

A bimetallic system might have avoided the problem of undersized or oversized coins. But it suffered from its tendency to give effect to Gresham's law, with one metal alone being taken to the mint for coining and with coins of the other metal being clipped, filed, sweated, or melted. The nation would then be exposed to shortages of decent small or large change, depending on which metal was overvalued. The situation might not be much better, in other words, than if the mint stuck to a single metal. 

The token coinage alternative, finally, had its own peculiar drawback: the large difference between token coins' nominal, or face, value and their "intrinsic worth" would tempt counterfeiters. Unless legitimate coins could be distinguished from fake ones (by mint authorities, if not by the general public), false coiners would foil the mint's attempts to keep the supply of token coins in line with the demand for them, causing both real and fake token coins to be discounted. If the mint tried to limit the supply and prop up the value of its token coins by offering to redeem them in full-bodied (silver or gold) coin, counterfeiters might take the mint to the cleaners. If, on the other hand, it avoided losses by refusing to take back unwanted coins, counterfeiting might give rise to a glut, eventually driving the tokens' value down to a level no greater than their "intrinsic worth," and making them no more fit to serve as money than matches, nails, or . . . buttons. 

--George Selgin, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821; Private Enterprise and Popular Coinage (Oakland, CA: The Independent Institute, 2011), 13-15.

Under Gold/Silver Bimetallism, Silver Is "Overvalued" and Gold "Undervalued" at the Mint if the Gold/Silver Mint Ratio Falls Short of the Market Prices Ratio

The mint price of bullion is the nominal or "face" value of coins given in exchange for bullion brought to the mint, while the mint equivalent is the nominal value of coins actually made from the bullion. When coinage is gratuitous, as it was in Great Britain, the two values are equal. Otherwise, the mint price will fall short of the mint equivalent by the charge for coinage, which may include a profit to the mint or government. That profit is known as seigniorage, after the lords, or seigneurs, who exercised the right of coinage in medieval France. . . . 

Under bimetallism, the government allows free coinage, usually with little or no seigniorage, of two metals, assigning a mint equivalent and corresponding mint price to each. The mint ratio is the ratio of mint prices for the two metals, which represents the relative values assigned to them by the mint. For example, if the mint pays £44 10s (or 890 shillings) in gold coin for each troy pound of gold brought to it, while paying £3 2s (or 62 shillings) in silver coin for each troy pound of silver, the gold/silver mint ratio is 890 ÷ 62 = 14.355. A pound of gold is, in other words, officially worth 14.355 times as much as a pound of silver.

In a gold and silver bimetallic arrangement, silver is said to be overvalued and gold undervalued at the mint if the gold/silver mint ratio falls short of the ratio of the metals' market prices. Suppose, for example, that a pound of gold is worth thirteen times as much as a pound of silver in the open market. In that case, a mint ratio of 14.355 overvalues gold while undervaluing silver. Even if some mint ratio is initially consistent with market prices, changes in the metals' relative scarcity are likely eventually to cause one to become officially undervalued relative to the other.

--George Selgin, Good Money: Birmingham Button Makers, the Royal Mint, and the Beginnings of Modern Coinage, 1775-1821; Private Enterprise and Popular Coinage (Oakland, CA: The Independent Institute, 2011), 10-11.