5. Gold Inflation

CHAPTER

FIVE

Gold Inflation

The gold standard is due to an accident, a geological accident, I would say, that there is only a limited quantity available. Because its quantity is limited, it has value on the market so that we can deal with it as money. The main thing with regard to money is the question, how to restrict, how not to increase, its quantity.

You know gold too can increase in quantity even if you have the gold standard. In the last 200 years it happened again and again that the increase, that the discovery of new fields in which gold, additional quantities of gold, could be produced, brought about a slight drop in the purchasing power of every gold unit as against the purchasing power of the gold unit which would have remained in the absence of this new discovery. This same tendency toward higher prices was then brought about not only by an increase in the quantity of paper money but also by an increase in the quantity of precious metals. For instance, in the years 1848 to 1849, there was discovered gold in California and Australia. For a definite period a new quantity of gold, above the regular yearly increase in the production of gold, was flowing into the market. Lots of people went to these gold fields, tried to mine gold, and when they did find gold they spent it. The result, therefore, was that these gold miners took away from the markets more produced goods than they had taken before.

If, for instance, a poor man, who had not formerly consumed very much, went to California or Australia, and had some success in gold mining, he was then able to buy things with his gold and to live in a very comfortable manner. Within a very short time, within a few months or years, there developed towns in California, places where the gold miners lived very agreeable lives. The gold miners received in exchange for the gold real things. Where only a short time before there had been nothing but forests and swamps, there were cities, houses, furniture and imported bottles of champagne. And where did all these things come from? From the rest of the world. And what did the rest of the world, the producers and suppliers of the goods and services get in exchange for the things the gold miners bought? Higher prices! They received gold, of course, but they had to pay more for the things they wanted to buy. The effect of these great gold discoveries was that the purchasing power of each individual piece of gold was now lower than it would have been in the absence of the gold discoveries. You can, if you want, call it “inflation;” it brought about effects similar to those of a paper money inflation.

That is, in the middle of the 19th century the new gold discoveries brought about what people considered at that time as a price revolution, or something like that. But the production of additional money, gold money, was limited; it was almost without any quantitative influence upon the great markets of the whole world. When the only real money which was used was gold money or bills which were redeemable, convertible into gold, bills giving you the right to get a quantity of money, then as the quantity of gold was increasing, there was a drop in its purchasing power. And adjustments were taking place which were necessary in order to bring this in order. But this drop in purchasing power was limited because the additional quantities of gold were very soon integrated into the whole monetary system and there were no farther extraordinary increases in the quantity of money. Now these gold discoveries are exceptional cases and we do not have to deal with them.

People may make jokes about the gold standard, suggesting that one should leave the gold to the dentists, that gold is absolutely unnecessary for money, and that besides it is a waste of money and work to use as money something that has to be produced at such a high cost as gold. But the gold standard has one quality, one virtue; it is that gold cannot be printed, and that gold cannot be produced in a cheaper way by any governmental committee, institution, office, international office, or so on. This is the only justification for the gold standard. One has tried again and again to find some method to substitute these qualities of gold in some other way. But all these methods have failed, and will ever fail precisely as long as the governments are committed to the idea that it is all right for a government that has not collected enough money to pay its expenses by taxing its citizens, or from borrowing on the market, that it is all right for such a government to increase the quantity of money simply by printing it.

Now there is a doctrine that says there is not enough gold. The reason why these critics of gold are against the gold standard is due to their belief that the quantity of money must be increased. Now the quantity of money adjusts itself necessarily through prices to the demands of the public. Yet, there are authors, professors, textbook writers, who tell us there is not enough money and they suggest a paper currency and regular yearly increases in the quantity of money. They don’t know what they are talking about. Some of these textbook authors give another figure in every new edition of their textbooks by which they want to increase the quantity of money. In one edition they say 5%, in the next edition they say 8%, and so on. If a professor says that we should have a paper currency and that every year the government should add 8%, or 10%, or 5% additional new money, he does not give us a full description of what has to be done. This is perhaps an interesting fact to help us realize, let us say, the mentality of these authors, but it is not the problem which we have to deal with. The question is how the government should bring this money into circulation, to whom should it be given. What we have to realize is that the increase in the quantity of money cannot be neutral with regard to the conditions of the various individuals.

It is, of course, rather puzzling that one has no other method of organizing the system of exchanges than by the use of a definite metal, a yellow metal, gold. One may ask the question: “What would have happened if there hadn’t been any gold?” Or one may ask the question: “What will happen one day,” nobody can say anything today about it, “if people discover a method to produce gold at such a cheap price that gold will no longer be useful for the monetary purpose?” To this question, I answer: “Ask me again when this is the case.” Perhaps—I don’t know, nobody knows—perhaps one day people will discover a method of producing gold out of nothing, or, let us say, out of non-gold. Perhaps gold will become as plentiful as air, and free to everyone. If everyone could have as much gold as he wanted, it would have no value on the market. No one would then be willing to take such a value-less commodity in trade for other goods or services and it would not then become a “medium of exchange.” If you have sleepless nights and have nothing else to think about, you could think about what will happen, you know, if one day gold could be produced in such a cheap way as, let us say, paper can be produced today. It could happen! But nobody thinks it will happen. It probably will not happen. But if it does happen then people will have to deal with the new problem. And perhaps they will solve it; perhaps they will not solve it; we don’t know that today. But it is useless today to speculate what will happen, if this should happen. And as we don’t know anything about what the conditions will be at that time, we can say, “Let us wait. Let us wait to see whether really one day gold will be so abundant that it can no longer serve monetary purposes.” All right. If this should happen, the people living then—at that time—would have a problem to solve. But today we have another problem. Our problem is to keep the quantity of money from being increased and its purchasing power from being decreased through inflation.