A monthly in-depth analysis
September 15, 2001

In Gold We Trust
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A gold standard is not something that can be imposed, because it is a market outcome, or market process, as Mr. Garrison calls it. Wolves in shepherds clothing may offer up their ideas for an institution that can function like a gold standard, and in fact they have, for that is what the Federal Reserve System is all about, at least according to Mr. Greenspan.

Jude Wanniski is one of these people who thinks that he knows the way the world works, and consequently, he not only "knows" that gold is money, but he also claims to know the precise ratio that the dollar and gold should trade at relative to each other, in order to prevent either inflation or deflation. Thinking like this is part of the problem because it assumes that monetary stability is the same as price stability.

However, as we hope to show, a gold standard is as unfeasible (and immoral) to impose on any society as the belief in God is on any man/woman. For one thing, what if the market begins to prefer something other than gold as money. No, that is not the case today, as some would have you believe. A true gold standard is one that allows a market to choose the best money, and in fact, it may be inappropriate to call it a "gold" standard.

Nonetheless, ever since gold was first discovered to be the ideal money relative to other choices, governments (some might say captors) have tried to persuade us that their money is better.

How many miracles must the free market perform before we have faith in it? How many central banks has the immovable gold standard tossed into a trash bin? Three in the United States prior to the establishment of the FRB. In fact, there is a deliberate reason that the Federal Reserve Board was not created to look like, work like, or was not referred to as, a central bank: to inspire a confidence it otherwise could not.

If anything has been imposed on our free will, immorally, it is the Fiat(3) dollar.

So we can think of no better time to ask Mr. Greenspan this very serious question, which is unlikely to get an answer:

In this treatise we propose that a gold standard cannot be imposed, that it is a process engendered by the free market, and that any imposition of monetary policy is unjust and immoral.

We argue that gold is still by far the freely preferred choice of money, by focusing on the most important differentiating characteristic of money: its store of value.

We will further argue that monetary stability and the concept of a store of value have been displaced by the long running inflation agenda of the Federal Reserve System. In other words, the long-lasting inflation has created the propensity for investors to shun safety and stability, and has forced them to become virtual speculators.

History has shown, however, that under a paper standard (fiat) the demand for an objective value of money is never obsolete as the monetary influence of the paper boom wears out.

This is happening now, and investors are going to need to decide between the dollar and gold, for their savings. So far this year, they have been choosing gold, presumably because it is becoming increasingly clear that there is too large an large investment premium on the dollar.

It is likely that the process of monetary selection is far from complete, and it is likely that the monetary tyrants, who exercise control over the current monetary order, will continue to fight the trend as they have been for the past 88 years.

Thus, we are only in the midst of one battle in a long enduring war. But it is a critical one, for if our hypothesis is correct it could lead to the most significant dollar devaluation since the decade of the seventies. Thus, it is pivotal for the war, or process of natural monetary selection, if you will.

The dollar may survive, but we're betting it won't look like it does today, and it is not likely to maintain its position on a pedestal. Although we've argued that the euro was created in order to dissuade the market from choosing either gold or yen, it hasn't been successful so far.

Gold Prices in Euro

Our view on the euro is that it is a tool of dollar policy, not just because Robert Mundell conceived it, but also because it uses as its reserves the dollar rather than gold.

Finally, we argue that the goal of full employment is a social(ist) distraction from the realities that the world was faced with a quarter of a century ago, the realization of which has brought about liabilities that can never be paid. We argue that the market will see through this charade and it will choose gold.

We're also going to define our view of what a gold standard is, and discuss the various arguments for and against a gold standard that have been neatly summarized in a 15-year-old paper by Roger Garrison. Then we'll discuss what still stands in the way.

We will also try to determine our point in history as society, the fallacy of Fiat deflation, and lastly, in the finale we will deal with the current market environment as usual.

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