| | The Gold Standard
by Michael E. Marotta
Should the United States be on the gold standard? "Yes" is the easy answer. If the U.S. dollar were backed with gold, our government would be forced to live within its means. Our personal and corporate incomes would hold their values over time, rather than being eroded by inflation. Savings would be rewarded, rather than penalized. The process of creating a true free market economy requires putting the U.S. government on the gold standard. However, this would not be a perfect situation.
The fact is that the dollar was once defined in terms of gold. Under the Constitution, Congress has the right "to coin money and set the value thereof." The dollar of 1792 was defined as 24 3/4 grains of gold. The legal specification of the value of a "dollar" was changed in 1834 and again in 1837. In 1849, the dollar was defined as 23.22 grains of gold. In 1933, in 1961, and 1974, the dollar was again redefined. In each case, the dollar became "smaller" worth less and less in terms of gold. The dollar of 1974 was effectively 11.36+ grams of gold, less than half (46%) of its original value. Clearly, there are more basic problems to be solved.
Most obvious is the lack of political will on the part of the government to live within its means. The temptation always exists to borrow against the future. When taxes run behind expenditures, devaluation is an easy escape, and the US government is not alone is taking that "emergency" exit -- and emergencies are never in short supply.
Less apparent but more basic is the fallacy of denominating "money" in terms of a "unit of account." Calling so-many grains or grams of gold (or silver) a "dollar" allows the definition to be changed. If gold (or silver, etc.) coins displayed only their weight and fineness, the coin would be worth its intrinsic value and nothing more or less.
That actually was the case for over 2000 years from the invention of coinage about 625 BC until 1575 AD when Henry III of France issued the first coins legally known by their unit of account, the franc. This allowed coins of the same size to carry new legends announcing greater "values" -- or for new coins of smaller size to carry the old "values."
Attempting to define a national unit of account against a commodity was numerically difficult. The first dollar was 24 3/4 grains, not 25. With 480 grains to the troy ounce, an even 24 grains to the dollar would make sense. Instead, the first gold $5 "Half Eagle" coins of 1795 were 135 grains 91.6 2/3 % pure (or 123.75 grains pure, not 120 or 125). In 1834, the new $5 coins were 129 grains .899225 fine. In 1834, this stabilized for the next 100 years to a coin of 8.359 grams, (128.99 grains) .900 fine for an actual gold content of .24187 troy ounces. Today, the gold coins sold by the U.S. Mint contain 1, 1/2, 1/4 and 1/10 troy ounces of gold exactly and evenly. The reason why is that these coins have no direct relationship to the unit of account.
It is true that the one ounce American Gold Eagle says "50 Dollars" but this archaism is meaningless. Proof that the denomination is arbitrary is the fact that the one-fourth ounce gold coin is tariffed at $10, as if ten were one-fourth of fifty. These details do not change the fact that modern gold coins are struck in even fractions of a troy ounce, a method that makes sense.
When the U.S. government changed the dimensions, weights and finesses of its gold coins in the early 1800s, defrauding the public was not a motive. In fact, the government itself was being shorn. The dollar was defined in terms of both gold and silver. As the relative values of these two commodities changed over time, one became worth more or less of the other. It was possible to exchange so many "dollars" of gold for "dollars" of silver and then to sell the bullion for more "dollars" which could then be exchanged again, in a perpetual cycle. The solution was to redefine the coinage in the wake of each new crisis. The root of the problem was the fact that the "dollar" was defined in two different, and naturally unequal, commodities. If, instead, the government merely struck coins (in whatever metal) of convenient size, without denominating them in terms of money of account, this would not have happened.
These considerations still leave unanswered a more basic question: should the U.S. government even operate its own Mint (or Bureau of Printing and Engraving)? It might seem obvious to us, today. It was not apparent to the leaders of the early republic. In 1800 and 1802, "republicans" (as opposed to "federalists") in Congress introduced legislation to close the U.S. Mint. The operation was costly and inefficient. Most Americans in 2005 might find that to be a curious historical footnote. Objectivists take the question very seriously.
The purpose of government is to protect the rights of its citizens and others under its jurisdiction. A proper government is limited to courts of law, police, and armed forces. Nothing in that allows the government to operate a Mint (or a factory for paper money) any more than it would allow the government to operate a steel mill or a shoe factory. However, courts require buildings and armies must eat. How does the government pay for these things? What money or fiduciary instruments would the government use, if it did not create its own? In order to answer that, we have to step out of the colonial era and into the modern age.
Today, it is possible to pay your federal income tax via Visa or Mastercard. Even before the days of plastic cards and electronic funds transfers, you could always write a check. Therefore, it is not necessary for the government to actually produce its own coins and paper money. If this afternoon the U.S. dollar were declared to be backed in gold, then at a current price of about $450 per ounce for gold, the dollar would be defined as 0.0691 grams of pure gold. If your annual income were 76.419 troy ounces of gold and your income tax were 9.213 ounces, you could pay that with a bank draft or other transfer. Similarly, the U.S. Treasury could pay salaries and rent, buy uniforms and bullets, ships and planes and fuel for them, and everything else, without actually striking coins or printing notes. Even now, a Social Security payment of $398.31 does not require the printing of an 8-dollar note or the striking of a 31-cent coin. Objectivists deny the moral validity of income taxes and Social Security payments. That does not change the essence of the question and its answer. Even if, in a previous era, it was necessary for the government to run factories for the production of money objects, that need is gone.
Even so, cash is convenient. It is anonymous. Direct payment of gold or silver in coin form removes the moral risk of indirect payment. Without the government, who would create money? Anyone who wants to. Today, dozens of firms, large and small, create money objects. You can go to almost any coin store and ask to see their "bars and rounds." The chemical company Engelhard makes them. Silvertowne of Winchester, Indiana, is highly respected for its consistent products displaying a wide range of patriotic, traditional, and novel art. Monex, an investment and arbitrage firm, issues one-ounce silver rounds, more as advertising and publicity, although they do not turn down the profits that come from selling $4.50 of silver as a $5 retail item. Today, private mints generally make tokens for casinos, public mass transit, laundromats, etc. However, secondary issuers of silver bars and rounds hire these manufacturers. Anyone can create and sell coins of their own design. Clearly, then, even without government factories for coins and notes, there would still be an available stock of circulating money.
How would you know what is "good" money? The answer is that reputation travels quickly. The firms cited in the previous paragraph are all well known in the marketplace. Many others exist. If you include the governments of Austria, Australia, Canada, South Africa, and the United Kingdom, with their precious metal coins in gold and silver, platinum, and even niobuium and rhodium, the size of the market -- and the integrity of its participants -- is undeniable. More to the point, these governments are not known for giving anything away. An American Silver Eagle one ounce coin always contains one ounce of silver to the most exacting measurements possible with mass production. However, the smaller firms, in order to establish and maintain a market position, often issue "one ounce" silver rounds and bars with more than 31.1 grams of silver in them. No one gives away the farm, but private "one ounce" coins of 31.2 and even 31.3 grams are not unknown. The difference in value is measured in small fractions, but the importance in the marketplace is undeniable.
So far, this presentation has focused on gold as money, with a nod to silver. By extension, any commodity can be money. Over the millennia and across continents, a wide range of commodities have been money: cattle, wheat, salt, tobacco, gold, silver, copper, cowery shells and more. In most of western history, silver had been the preferred medium. When the Spanish looted the Americas of silver, that changed. The influx of silver and continuing discoveries of new supplies resulted in a new standard. It took about 300 years, but gold became the internationally recognized medium of commerce. Could this change? Of course, it could. The oceans hold more gold than has ever been mined. Today, extracting gold from sea water is far more expensive than mining it, but new technology might alter that. Would such an event cause a crisis? Perhaps it would. The fact remains that an open and unregulated economy is best able to respond to new circumstances.
On the other hand, over the centuries, governments attempted to maintain mystical relationships of 12-to-1 or 15.5-to-1 or 16-to-1 between the values of their gold and silver coins. Finally, reality forced them to give up. In the last decade, the ratio in value between silver and gold has fallen from about 90 to 1 to about 40 to 1. You probably did not notice. That is because today gold and silver trade in true free markets, rather than being expressions of government policies. As a result, the U.S. Treasury sells gold coins in convenient sizes at the market price.
When the government treasury exchanges its paper for gold, that is a gold standard. Does this force our government to limit spending? No, it does not. Does money hold its value over time? Federal money may not; gold apparently does. Does this de facto gold standard reward savings in a way that inflationary fiat money cannot? Again, savings in gold (or silver, etc.) might be better rewarded than accounts denominated in dollars. In fact, there have been years in recent history when the paper dollar outperformed gold. Through the 1980s and 1990s, as federal spending was curtailed, the federal fiat dollar strengthened. From 1996 to 1999, the price of gold fell from over $400 per ounce to just above $250 -- and in the last year has regained that level and gone higher. This underscores the fact that there is no simple answer to the question of what you should do with your money. Different investments carry different risks and rewards. "Gold bugs" and "hard money" advocates are correct in pointing out that even a merely de facto gold standard is a control on government spending, which in turn makes federal dollars assets that are sought and saved, rather than liabilities that are avoided and spent.
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