The Golden Antidote

0:00I'd like to start off by defining a liberal, because what I'll be saying will be in opposition to liberals. In order to be a liberal, you have to believe that the AIDS virus is spread by a lack of government funding. You have to believe that gender roles are artificial, but being gay is natural. You have to believe that businesses create oppression and governments create prosperity. By the way, the reason that Gene Epstein wasn't here ostensibly because of the storm and the and the plane, it was really government's fault. If they hadn't been busy misspending our GDP for the last 50 years, surely we would have had innovations that would deal with a little wind and rain. To be a liberal, you have to believe that there was no art before federal funding.

0:45To be a liberal, you have to believe that taxes are too low, but ATM fees are too high. To be a liberal, you have to believe that secondhand smoke is more dangerous than HIV. And you have to believe that the only reason socialism hasn't worked anywhere it's been tried is because the right people haven't been in charge. You also have to believe, to get closer to my topic for today, that gold is an ancient barbarous relic which should be expunged from monetary considerations. Now, Mises was a gold standard advocate, and since so many fairy tales abound about this with regard to the gold standard, I'd like to begin with a fairy tale of my own. The only difference is I'll claim that this one has a kernel of the truth.

1:31So once upon a time, I guess all fairy tales have to start that way, long, long ago in a faraway land there was no trade. Everything that people consumed they had to produce themselves, food, clothing, shelter, attainment, repair services, shoes, shoelaces, whatever it was they had to produce for themselves. Self-sufficiency was attained, of which economic nationalists lack so eloquent. In this country, Ed Broadbent and the NDP is perhaps the most famous economic nationalists. Naturally, people were very poor. How can you be rich when you're a jack of all trades and master of none? And then some genius, Mises of his day, had a great idea. He'd specialize in the production of one or very few things. He'd learn more about the task. He'd innovate. He'd engage in the division of labor. He'd perfect his skills.

2:20This is reasonable. You can't become a good concert pianist or a surgeon unless you practice your craft eight hours a day. If you have to do everything else under the sun and practice your profession, say, for ten minutes a day, well, you don't get really good at anything. There's only one problem in this little idol. If you specialize in any one thing, it'll pile up. What good are mountains of shoes or tons of frisbees? You can't eat them, you can't live in them, you can't clothe yourself in them. So trade is thus imperative. You have specialization, division of labor, production, growth, technology. Civilization is going to take place, you have to have trade. Problem is that direct trade is virtually impossible. Suppose that you have a chicken and you want a pickle. Well, you're a chicken-owning pickle-wanter and you must find a pickle-owning chicken-wanter.

3:09I've been practicing that. When I first said it, I couldn't say it, and don't ask me to say it again. Or to take a more mundane example, suppose you have a skill as a computer operator, and you move to a new city, say Toronto, and you find a landlord with a suitable apartment. With no money, you have to find a landlord who wants computer services, and what are the odds of that? I mean, it's hard enough to find a place without finding a landlord who wants exactly what you have. Therefore, what happened is that indirect trade was actually more efficient than direct trade. Roundabout methods of production are sometimes more efficient than direct ones, and this occurs in money. So, to get back to the chicken-owning pickle-wanter, what you do is you first, you don't look for a guy with a pickle who has a chicken, Trade your chicken in for a widely accepted medium of exchange, say, salt.

4:08Everyone wants salt. So you trade it into salt first, and then you take the salt in the second stage and you buy a pickle with it. So that's the way money began, because people had to get around this double coincidence of wants problem. So as salt began to be used, the demand for salt increased, and now not only was it used for its own sake, but also to facilitate trade. It had direct value as a commodity and indirect value as a medium of exchange. Many items have been used in the history of civilization to intermediate trade, salt, cigarettes, sugar, tobacco, fish hooks, cows, metals, brass, copper, silver, gold. But notice one thing, they are all commodities. They had intrinsic value apart from trade, well, not intrinsic value, we're not Marxist here, but derived from consumer evaluations, namely they had some other use before they Notice, money didn't start with, couldn't start with, pieces of paper denominated in lira or yen or marks or Rothbard's or Mises's or anything like that, or entries in a ledger.

5:13The key to acceptability is knowing that others would later accept it, and that way you won't get caught holding the bag. If you accept a piece of paper for your chicken or your pickle, how do you know someone else will take that piece of paper? You don't. Whereas if it's salt or gold or something that has other value, you have assurance that someone else will accept it. So there was a competitive struggle in our little fairy tale over which commodity would become money. And everywhere in every civilized country where competition was allowed, gold won out. The gold standard thus exemplifies or stands for, not so much for the gold standard, but for the process of free competition between different commodities to be the money.

6:01Now, our enemies, such as Milton Friedman, are likely to say that we're fetishes or we're weirdos or something like that. We love to run gold through our fingers or like Scrooge McDuck who used to dive in his money bin and swim around. You know, we sort of like to swim in gold. Well, maybe some people do. It's not my thing, but that's not really true. This is really true. For example, if platinum had won out, Mises would have been a platinum standard advocate. There's nothing particularly great about gold except that gold happens to win out in the market. So people who are gold standard advocates are really market advocates. Nothing to do with gold per se. It's just almost an accident. Well, not exactly an accident because gold does have certain advantages vis-à-vis other commodities. It's very malleable. It's cheaply divisible.

6:47if you divide it you lose no value, whereas if you cut a diamond in half to make spare change you lose, I think, one-eighth or seven-eighths of the value or something like that it's low-cost transit very high value per volume and per weight unlike cement or iron, which could conceivably be money what are the other advantages of a gold standard? Well, it's checks and balances. Lots of people say, well there's three branches, state, federal, or in this country, provincial and federal but also it's important to have a citizen check on government as a whole because there's always a tension, polite word, between government and the people government wants to spend their money the way it wants to and the people want to spend the money in their own behalf the government only can raise money in three ways, taxes, borrowing and inflation the problem with taxes from their point of view excuse me, economics is no heavy lifting but it's still hot work The problem with taxes from the government's point of view is very clear. It's crystal clear exactly who's doing the taxes.

7:51I mean, the government can't tax you and say, well, it's not really us, you know, it's those guys that are taxing. I mean, get real. Everyone knows the government taxes. Similarly, when the government crowds out with its borrowing, it can't slough off the problem and say, well, someone else is doing it. But with inflation, it's very hard to see exactly who's doing it or why. You know, they blame it on greed, you know, consumer greed or employer greed or employee greed. It's very unclear. I remember there used to be a TV show where the treasury authorities would come down the steps to look for counterfeiters. My feeling is, you know, they should just turn around and go back to where they came from and they'd find it. Why is this hard for people to see? Why is it hard for people to see a connection between the money increase on the one hand and inflation on the other?

8:38on the other. It's all because of expectations and that's why there is no direct correlation between money increase and price increase and therefore because there's no direct statistical correlation people think there's no cause and effect relationship but it's not true. The example I'd like to use to exemplify this is take the case of a housewife with pots and pans and suppose that in the past the price of pots and pans has been flat, there's been no and now all of a sudden the government starts increasing the money supply. Well, the housewife, and there is an incipient tendency for prices to rise, because more money is now chasing the same amount of goods. But what the housewife says to herself is, look, prices are rising a little bit, but for the last 50 years prices have always been flat, so what I'm going to do is I'm going to wait for my purchase of pots and pans until prices come down again.

9:31So, money is increasing, which has an incipient tendency to raise prices, but the housewife is holding back, which pushes prices down, so you have the case where money is increasing and prices aren't increasing, and the government says, see, there's no connection, we can increase money all we want and prices won't increase, and they're right in the sense that there is no correlation yet. But then eventually the housewife wants to buy pot and pan, and now prices go up higher Then the increasing supply of money, because now in addition to the increasing supply of money adding to prices, it's the housewife that's getting in on the deal and she's got to have her pot and pan. She's been deferring it for a year or two. Eventually, if this process continues, what's going to happen is that the housewife is going to buy a pot and pan not when she needs it, but because she thinks that the prices will keep rising.

10:22So even if she'll need it in two years, she'll buy it now, which means that prices will start rising a lot faster than the money supply. and eventually she's going to start saying, you know, I don't even need pots and pans, I've got too many of them, but better a pot and a pan than this money that keeps depreciating and then you get into the German hyperinflation kind of a situation where the government keeps saying, you know, it's not our fault, you know, we keep increasing the money to catch up with the people. So, just because there's no direct correlation and just because an econometrician can't see it doesn't mean that there's no causal relation. The gold standard didn't collapse as far as I'm concerned. The government abolished it to make inflation easy. We never really had a full gold standard, although we came close to it.

11:09But with a gold standard, 100% back, or money 100% back by gold, no balance of payments problems, no competing devaluations, no protectionism impetus from money, that is. I mean, obviously there are other impetuses for protection, but not from the money side. The entire world economy is integrated like one country. Well, like the US, not like Canada, because in Canada they have internal barriers to trade, which is weird. It's no accident that from 1815 to roughly 1914, that century, was a hundred years of relative peace, a hundred years of the gold standard, a hundred years of prosperity, a hundred years of economic growth. Well, let me continue my fairy tale. How did inflation start, in the absence of a government?

11:54Well, here we have a situation where there's a pure gold standard and people are in the habit of leaving their extra stores of gold in the care of the goldsmith. He has the biggest, strongest safe in town. He'd store the money, the gold, he'd charge a warehouse fee and he'd give a receipt for the gold that he had on hand. And people would then start trading these receipts as money because it's easier to trade a receipt, a piece of paper that signifies a gold ounce or One day he realized that a lot of people in town stored gold with him, and his wife kept bugging him for a new mint code. So he noticed that new demand for gold was offset by the new supply. What he did is he printed up a few extra warehouse receipts and spent them on a mint code, or he lent them out at interest, and fractional reserve banking was born, and so was inflation, The Misesian radical proposal for free market money is the following, no legal tender laws, 100% reserves, no fractional reserve banking, denationalization of fiat currency, abolition of the Fed, no Milton Friedman 3% rule, no central bank, private coinage, return of the gold hoard to private hands.

13:11Now this brings up a very interesting story, because lately what's been happening is that central banks around the world have been disgorging their gold stores and the price of gold has been going down. And people are saying, well, the price of gold is going down, therefore, you know, that says something negative about the gold standard. But suppose the government was in the habit of stockpiling rulers, yardsticks, tape measures, things like that. They just store them up. It's not so crazy. They do it with the farm program, with the barley and wheat and corn, why not with rulers? And then one day, they start disgorging rulers and yardsticks, and the price of rulers and yardsticks falls. Does that mean that we should forget about inches and centimeters? No.

13:57We stand for the gold standard. Now, any particular rate of exchange between fiat currency and gold depends upon a whole panoply of things, which is irrelevant to the fact that it's an exchange, The gold medium of exchange, par excellence, and it's a store of value. So just the rate of exchange has nothing to do as far as I'm concerned with the viability of the gold standard. To continue the Misesian radical proposal for free market money, minting, mining, certification, storage of money would all be in private hands. There'd be a complete separation of money and state, just as some people want a complete separation of religion and state or schooling and state. We'd have honest-to-goodness gold standard, in which 100% of the money consisted literally of gold or warehouse receipts for the gold.

14:48So much for our brief look at the Misesian case for the gold standard. Peace, prosperity, no inflation, no artificial creation of the business cycle, which is very relevant to our concerns today. Now, for the Austrian, the business cycle is caused by a divergence between the market interest rate and the time preference rate. When government increases the money supply it reduces the market interest rate. This elongates the structure of production in effect both fools and subsidized businessmen into making investments in basic capital many years removed from consumption, more so than would otherwise occur in the absence of the increasing money supply and artificial reduction of the interest rate which fools entrepreneurs in this way and subsidizes them. But the time preference rate hasn't changed and therefore the investments that are made at the upper end of the structure of for production, the Austrian Hayekian Triangle have to be gotten rid of somehow and that's called the cleansing process of the recessionary period or the deflationary period.

15:45But this is not true of gold. First of all, new gold discoveries are typically a very small fraction of the existing gold stock. Whereas in contrast, it's very easy for the Fed to engage in expansionary open market operations or for printers to slap ink on paper. They can do that very easily, whereas it's not easy to find gold. And if it were somehow easy to find gold, where you had a new invention or Martians came along with gold or something, just go to platinum or silver. More important, gold is part of the market. Investment in mining is part and parcel of the time preference rate, therefore it can't be incompatible with it, it's part of it. Gold is part of the market in a way that government money is not. So one of the salutary effects of a gold standard is you don't have the business cycle.

16:31Now people say, well, we've cured the business cycle. Ha! That's all I can say to that one. Okay, back to the Misesian case for gold. I say it's not enough to show the glorious insightful analysis of Mises to truly appreciate him. This is necessary, but it's not sufficient. Because suppose the entire economics profession also agreed with him on this issue, then the Misesian accomplishment wouldn't be quite as big as it is. Yes, we'd praise Mises, but we keep our enthusiasm tempered. No big deal because all other economists agree with him or maybe even said it before him. So it's important to contrast Mises with the economic profession as a whole. Only in this way can we comprehend the enormity of his accomplishment. Now I'm not going to contrast Mises with Marxists and Keynesians, this is like shooting fish in a barrel, you know, they call it a bogus relic and you know it's evil and that's it.

17:24So of course he out distances them and there's no honor there. How does he do with the rest of the profession who are not Marxists or left-wing Keynesians? Well, here's a quote from Newsweek about the economics profession which I think is very accurate. Quote, most economists have long since banned mention of gold from their discourses, unquote. I think that's very accurate. Economists just don't talk about gold. There was a very famous survey of economists which occurred in the American Economic Review And they asked 27 different questions of economists in order to determine what the view of the profession is on many different issues. Gold didn't even make the top 27 to indicate how important the economics profession thinks gold. So I'm not going to compare Mises with the bad guy Marxists and Keynesians, nor am I going to compare him with the general profession.

18:16Again, it wouldn't mean much, but what I will do is compare them with three people who have impeccable free enterprise credentials, and I've picked Milton Friedman, Friedrich Hayek and Alan Greenspan. All of them are right-wingers, free enterprises, they're in the Mont Pelerin Society, the University of Chicago, they're conservatives, they're associated with Ayn Rand, the Reagan administration, even two of them are Austrian economists, much as it pains me to say that. and what I'm going to claim is that Mises out distances even these three people so that's more of a competition at least you know here we have a fairer fight okay let's take Milton Friedman Milton Friedman has admitted the danger of government intervention in the monetary matters here's a quote from him from his book Program for Monetary Stability quote, the classical liberal that is Friedman speaking of himself is suspicious of assigning to government any functions that can be performed through the market and the Market, both because this substitutes coercion for voluntary cooperation in the area in question and because by giving government an increased role, it threatens freedom in other areas.

19:22Control over monetary and banking arrangements is a particularly dangerous power to entrust the government because of its far-reaching effects on economic activities at large, as numerous episodes from ancient times to the present and over the whole of the globe tragically demonstrate." After reading this, one can almost infer that he favors the gold standard. After all, he talks about the market, he talks about voluntary cooperation in a positive way, he talks about coercion in a negative way. What more could you want? You can almost enroll this man in the Mises Institute. In the event, however, we are very disappointed. We really, Lou, forget it, we can't enroll Friedman in the Mises Institute because we have another quote from him from his book, Capitalism and Freedom, where he talks about gold.

20:08The fundamental defect of a commodity standard, read gold standard, from the point of view of the society as a whole, which is a very dangerous phrase, is that it requires the use of real resources to add to the stock of money. People must work hard to dig gold out of the ground in South Africa in order to rebury it in Fort Knox or some similar place. The necessity of using real resources for the operation of a commodity standard establishes a strong incentive for people to find ways to achieve the same result without employing these resources. If people will accept this money, pieces of paper on which it is printed, I promise to pay X unit of the commodity standard, these pieces of paper can perform the same function as the physical pieces of gold or silver, and they require very much less resources to produce."

21:01So there we have it. It amounts to freedom is good, but it costs real resources, therefore don't do it. We have a syllogism, a ringing declaration of freedom, the first quote. Second quote, but it costs money. Conclusion, forget about it. I mean, this isn't really where it's at. This is not Misesian anymore. What about justice though the heavens fall? What about our lives, our fortunes and our sacred honors? What about millions for defense, not a penny for tribute? No, you know, it costs money, so forget it. I mean, this is Milton Friedman who is emblematic of free enterprise. We're in trouble. First of all, it's not true that it costs real resources.

21:48Digging in South Africa, burying in Fort Knox or a similar place would take place anyway. Gold is valuable. It'll be dug up and stored even if divorced from money. Perhaps it'll have slightly less value because if it were money, has more value because it has its intrinsic commodity uses plus money, but still you're going to dig up gold here and bury it there. But suppose it did cost resources. Does it now follow that it shouldn't be done? No. The question is, is it worth the cost of resources and more important, who should decide? Based on the first quote, the philosophy of Friedman's classical liberalism, each individual should to decide instead of a political vote. Based on the second quote, that goes out the window.

22:34But the point is that whenever individuals have been free to choose, which is the title of one of his books, they pick the gold standard. As I said, that's what makes gold standard synonymous with market money. We're really not defending the gold standard in a sense, we're just defending market money or markets, period, when it comes to money. This leads to the question of why do people choose gold when it costs real resources, Assuming that it does cost real resources, when they could have these green pieces of paper, fiat currency, lots cheaper, to ask this is to answer it. People have been victimized throughout history by government fiat currency inflation. Even as Professor Friedman has stated, gold is an insurance policy. It's like locks, fences and doors. These too use up real resources. Yet, in the view of the economic actor, they're worth it.

23:20So just because something costs money is no argument not to use it. I mean, this tie costs money, that doesn't mean I shouldn't use the tie. The clothes cost money, the wristwatch costs money. That's a crazy argument that because something costs money we shouldn't do it. Surely the answer is, yes, it costs money, but is the value more or less than the thing? An individual should choose, not majorities who can then impose on minorities. In addition to his fame in opposing the gold standard, In the gold standard, Friedman has a high profile in supporting flexible exchange rates between different currencies. In contrast, the gold standard has fixed exchange rates between different currencies. For example, if the pound has 4 grams of gold, the dollar has 2 grams of gold, and the yen has 1 gram of gold, then you'll have a fixed exchange rate in a 4-2-1 ratio.

24:09It is sometimes argued by the Friedmanites that this is like price controls, and hence it's anti-free market. There's a fixed exchange rate between nickels and dimes, between one dollar bills and five dollar bills, between feet and yards, between centimeters and meters. That doesn't mean that there's a price control or anything like that. There's no violation of the market. Another problem of flexible exchange rates is that there are no barriers to inflation, or at least the barriers to inflation are lessened. Any one currency inflates under a fixed exchange rate, there's a balance of payments crisis. In flexible, there's not. There's just a change in the ratio of the monies. There's no need for devaluation. There's relatively painless depreciation of the currency.

24:54At least fixed exchange rates serve as a barrier. All countries could maybe inflate together, but they would have to do it together and all countries don't usually cooperate. But not on the full pure gold standard, unless King Midas comes along or a philosopher's stone where you can turn lead into gold, in which case we go to platinum or silver or whatever the market wants. Next, I turn to Hayek. It's possible to make excuses for Friedman. At least, you know, he's an orthodox economist. What can you expect from an orthodox economist? He's not an Austrian. He may never even heard of Mises. By the way, I got a Ph.D. in Columbia and I never heard of Mises until I happened to meet Murray Rothbard fortuitously and I think one of the benefits of the Mises Institute is that it's harder to say that now for the present generation of Ph.D.s in economics.

25:49In my day, you could get through a Ph.D. program and never hear of Mises or Hayek. And nowadays, thanks to the Mises Institute, that's becoming less and less possible. Okay, so let's consider Hayek now. Hayek is a student of Mises. Well, he didn't pay attention. He didn't take good notes or he was sleeping during the lecture or something. Because in his book, Choice and Currency, Hayek specifically opposes, quote, or any organized attempt to restore the gold standard." Instead, he proposes elimination of legal tender laws. This note is legal tender for all debts public and private. Yes, to be sure, let's get rid of legal tender laws by all means, but this is necessary, not sufficient.

26:34It's good to do, but we must do more. It runs counter to the Mises-Menger regression theorem inside that money is accepted in return for goods or commodities because of the expectation that when one wishes to buy goods with the money, A pattern of trust and acceptability based on market commodity. The reason we all accept US or Canadian currency is not because of legal tender, it's because of this moneyness or expectation that other people will accept it. Get rid of legal tender tomorrow and the US or the Canadian currency will still reign supreme within these two countries. Only hyperinflation will put this at risk and we certainly don't want to go there. Further, while there's nothing wrong with competition indeed, I'm in favor of competition.

27:21We want competition between market commodities, not between fiat currency and other things. Let me now turn very quickly to the third person on my list, and that's Alan Greenspan, who is absolutely amazing, because he is a Missessian. He presents the greatest challenge to the task of contrasting Mises and other prominent economists for Greenspan is good on gold. He's as good as gold. And I have a whole bunch of quotations from early Alan Greenspan when he was an Ayn Rand buddy that show that he's very much in favor of the gold standard, which I won't read because I'm almost out of time. How then to account for the fact that Greenspan is head of the Fed, an amazing place for a Mississian to be, and that the Fed hasn't disbanded, and that the gold standard isn't coming about.

28:13I mean, if Mises was head of the Fed, there'd be no Fed, and there'd be a gold standard, to the extent that he had the power to do that. Murray Rothbard's analysis, I think, has the ring of truth. Mises, Greenspan does favor the gold standard and laissez-faire, but only in a high philosophical level. In practice, he's a conservative Keynesian like his predecessors. In contrast, say what you will about Mises, he championed the market, not as a philosophical curiosity to be kept hidden in the closet, not as an intellectual game, but as a living, breathing, vitally alive philosophy and economic premise to be applied to the real world. It is up to us to promote the laissez-faire philosophy of Mises, to make sure it never dies, to make sure it is taught to the young, and that one day it becomes the public policy of the country. Thank you.

29:01Thank you very much.