Money matters

Recent developments in the Republican Presidential platform debates in the US have been most encouraging to proponents of sound, commodity-based money. Regardless of whether anything substantial materialises from them in the short-term, the mere fact that gold standards and central bank audits are being discussed openly and seriously at the heart of a major political party is a positive sign that the debate is heading in the right direction for those of a libertarian or conservative persuasion.

With this American narrative in mind, it is perhaps a good time to re-consider the arguments in favour of a return to a commodity standard of money (be it backed by governments or produced privately on the free market) and why a commodity standard is essential for a sound economy, more stable prices and for keeping the growth of government firmly in check.

To those visiting the site for the first time and who are perhaps new to free market economics, I hope this article will form a useful introduction to the question of money from an Austrian school perspective.  For others, it is merely intended as a starting point for further discussion on an issue which is sometimes thought of as an interesting aside (albeit never on Libertarian Home, whose focus on Hayek and currency competition is laudable ).

Commodity v Paper

© Tax Credits

Whilst there are various reasons why printing more money can be politically expedient in the short-term, its longer term consequences usually result in some economic or currency disaster or just the plain old expansion of government.

Thus the three major problems with the paper standard and a “flexible” paper money supply in general are:

1) Distortions in economic calculation, causing the boom and bust cycle;

2) Price inflation (and in extreme cases, hyperinflation), causing hardship;

3) The inevitable growth of government.

Taking each of these points in turn.

Booms and Busts

The logic of the Austrian Theory of the Business Cycle (ATBC), as this theory is also known, is beautiful in its simplicity. In short,  ATBC teaches that any artificial expansion of the money supply (whether by governments or by its central bank proxy) causes the market price of interest to be lower than it would be otherwise on the free market, in turn sending misleading  economic signals to producers who consequently invest and cause a boom in all sorts of interest-rate sensitive industries such as housing and construction. As the real savings and resources in the economy needed to sustain such projects do not really exist, the projects must inevitably be unwound, at which point can it be said the “bust” part of the cycle has kicked in.

Thus can it be said that the responsibility for the devastating booms and busts witnessed in the Wall Street crash stock of 1929, the “tech wreck” of the early 2000s, and the housing market collapse of 2007/2008 rests squarely at the feet of the central bank and the paper standard.

Needless to say, a return to a commodity standard would take the printing presses firmly away and thus remove the ability of central planners to foster such malinvestment and havoc.

Price Inflation

An inevitable consequence of continuously increasing the money supply, a paper money standard reduces the purchasing power of people’s savings over time and erodes their standard of living. Indeed, since the establishment of a universal paper standard in the twentieth century the value of national currencies relative to the goods and services they can buy has suffered an inexorable decline.  In the bygone days where gold or silver were in official use as currencies, people saved for retirement knowing that the purchasing power of their currency medium would be preserved. Not so today, where people who would stuff their hard-earned paper notes under the mattress would right be viewed with genuine human concern.

Whilst a return to a commodity standard would not abolish year to year fluctuations in the price of goods and services, there is little doubt the purchasing power of the circulating medium would be much better retained over the long-term.  James Turk, founder of the precious metals bank GoldMoney, often uses the example of how 2 silver dimes are able to buy the same amount of petrol at the station today as when a child his parents would fill up the family car.

Growth of Government

Perhaps most insidious of all, paper standards facilitate the sort of government expansion that would simply not be possible under a commodity standard. For with a licence to print, resting with the government itself or its central bank proxy, the political class is no longer forced to make the difficult case for raising taxes or increasing borrowing but can instead turn to this imaginative and more invisible third way of funding itself.

Under such an arrangement all sense of financial reality is abolished, that critical impediment to the inexorable growth of government. The secret darling of socialist ideologues and power-hungry political elites, a paper standard means there is no longer any real requirement to deliberate on the affordability of going to war, increasing state benefits or creating a new government agency to run some bold new initiative.  Money, it appears, does grow on trees after all.

Under such an arrangement there is no limit to the growth of the state and its concomitant influence over the lives of its people.  The opposite is true for a commodity standard, which at the very least forces a degree of transparency from the central planners who, forced to rely on more traditional methods of self-funding, have to appeal to the people directly anytime they wish for more government largesse.


Assuming then the superiority of a commodity standard over a paper one, the tricky question comes over the process of implementation. Leaving aside the question of the political obstacles that would have to first of all be surmounted, what would the new system look like? Should governments introduce a new gold standard to back their national currency? Should they permit gold and silver to trade freely in the market place in competition with their national currency? Should they remove themselves from the business of money production altogether, turning it over to a free market system of currency competition, as advanced by Hayek?

Whilst many of us would like to see the Hayekian solution, a return to a government-backed gold standard would be a step in the right direction. Yes, governments cannot be relied upon to keep their promises (i.e. to stay on the gold standard once on it) but if such a change were to ever take place it would have to be a reflection of a radical change of thinking amongst the populace at large (either through education or as a result of a financial crisis) who might just help to keep the government in check.

Whilst a new gold standard might be far from perfect, any system that might restrict the government’s ability to cause harm through excessive money printing should be given due consideration.  Such a new gold standard could serve as the first step towards re-integrating the notion of commodity money into society at large and paving the way for the complete privatisation of money production. Most importantly, it would serve to debunk and deposit that failed notion of a paper standard into the ash heap of history, where so many actual paper currencies have wound up in the past, again and again.





  1. Thanks Sam, I am coming to the view that this cluster of issues is more important than the vast majority of other issues that libertarians talk about. Compound inflation, the sick opposite of compound interest, is responsible for so much suffering and so many shattered dreams.



  2. The problem is, of course, that shifting to a gold standard requires a couple of things:

    1. The State to let go of power. This is highly unlikely except when it is torn from its cold, dead hands(tm)

    2. To perform this switch, notes, coin and reserves lodged at the Bank of England need to be converted to gold. I do think it is far far easier to build a new gold-backed currency than try and convert a fiat currency.

    If one starts a new currency, people come with their fiat money to exchange it for gold-backed currency. The fiat money is used to buy gold on the open market and they converter will get as much of the new currency as will buy gold to put into the vault. Sorted.

    The currency can be electronic or issued as paper, but the total of electronic + paper must equal the correct amount of gold.

    Now, how does one do this for, say, Sterling? This is the problem. Every person I have asked this question has not provided a reasonable answer, even Madsen Pirie could not. He was stumped. He could not explain how we get from here to there,how we segue the existing currency.

    There is no point looking up at a galaxy and saying “lets jump up there and start a new life” until you can work out how to achieve escape velocity, survive the journey and set up a new, sustainable home without everyone else dying in the process.

    Do we create a Golden Pound and allow people to convert? Will there be a massive bank run, for, remember, existing balances are just loans, not hard cash one can buy gold with? But then what of the old Pound? Who wants it? Do you think anyone who had gold would want to take old Pounds? Could the old Pound survive? What stability? Lots of little people, the old, the unaware are at risk of being totally burnt to a crisp who do not convert in time.

    As so often, the segue is the killer.

    If someone can come up with a workable segue, I am all ears!

    What will it be? On Golden Pound or The Pound of the Baskervilles?



    1. Good questions, Tim.

      1. Agreed. I suspect a particular government may go back to a gold standard out of pure political desperation, when the inflationary trajectory we are on sets off a sterling crisis and a very public run to the precious metals and other hard assets.

      2. This is somewhat more complicated and deserves more thought (on my part).

      Suffice it to say for now that the general question is being posed on the global stage and the direction of reform seems to be in the direction of gold (consider the recent changes in Utah, allowing gold and silver to be used as currency, and the fact China are loading up on the yellow metal like never before). And men such as Jim Rickards (Author of “Currency Wars”) and Jim Grant are thinking long and hard about the problems of implementing a new gold standard, from a new “gold dollar” perspective but with the implied involvement of the rest of the world. Perhaps something for a new post.

      However, assuming a worse case scenario, I’m not sure they’ll be an opportunity for a neat and orderly transition back to a gold standard, either here or in the US.

      History has certainly never allowed such a transition, and teaches that holding paper assets at any point in time is a dangerous thing to do as when you have a paper standard politicians will never be able to always resist the temptation to try and print their way out of problems. And with the Bank of England’s monetary radar currently set to infinity, I don’t think we should rule out the possibility of a sterling collapse in the UK (although I obviously hope I’m wrong).

      With this backdrop in mind, perhaps we should assume we won’t be given the luxury of time to plan the transition and instead concentrate our efforts on educational campaigns teaching people about what money really is and why keeping some of it in the precious metals is a prudent thing to do.



  3. @Tim: Is it just a question of speed? If so, it just occurred to me that legalising the formation of business contracts paid in physical gold would have a very slow impact, being infrequent, high risk and technically difficult. I could be wrong.



    1. I was not aware of any law against a contract in gold.

      However, if they came about, an easy form of settlement would be needed and that, I’d suggest, would evolve into one or more gold clearing banks where the institutions providing banking services to such people or companies wanting those transactions could perform those operations without constantly moving and re-checking bullion. Such services would be far cheaper and so market forces are likely to favour them.



  4. A couple of points. First we shouldn’t give the impression that Austrian economics aims to end booms and busts. People will always make bad investment decisions so booms and busts will continue it’s just they shouldn’t be as pronounced as they have been over the last 80 years or so.

    Also history tends to suggest that it is government expansion that leads to monetary expansion, rather than the other way around.

    And I believe I have to agree with Tim, there will be no sound currency until the current fiat system destroys itself. If you just read about Weimar Germany political, public and media hubris lasted for years before anyone tried to change things. And even after the collapse we may not get what we want, with the damage caused to society we could end up with something far worse.



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