By: Nathan Lewis
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 Twitter economics and policy channel@NLeconandpolicy


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The Gold Standard: An Austrian Perspective

May 20, 2019

Today we are looking at The Gold Standard: An Austrian Perspective, edited by Llewellyn Rockwell (of It is a collection of papers from a conference in November 1983 — apparently quite a big conference, with more than 400 people gathered in the Caucus Room of the Cannon House Office Building on Capitol Hill. It has papers from Murray Rothbard, Hans Sennholz, Richard Ebeling, Roger Garrison, Joseph Salerno, Lawrence White and Ron Paul — apparently, not all the speakers that presented that day.

It is interesting to see so many familiar names. They were a lot younger then, 36 years ago.

I am generally rather critical of the gold standard advocates of that time. They were confused on many issues. Murray Rothbard was, at the time and through the 1980s, promoting his “100% gold dollar” scheme, which was not very helpful especially since, to accomplish this end, he proposed devaluing the dollar by a factor of ten to twenty:

Depending on how we define the money supply- and I would define it very broadly as all claims to dollars at fixed par value-a rise in the gold price sufficient to bring the gold stock to 100 percent of total dollars would require a ten- to twentyfold increase.

This is rather stupid, but unfortunately it remains a popular argument even to this day. Rothbard reiterated similar schemes in this book.

Nevertheless, in general I find that the papers in the book are pretty good. I especially liked Lawrence White and Ron Paul’s contributions, as I think they avoided many of the common errors of the time. The gold standard advocates of the 1960s were really quite bad (I think I will write more about that later), and I think the younger people of the 1980s could perceive that. Unfortunately, the leaders of the 1960s were still quite influential in the late 1970s and early 1980s.

Rather than commenting paper-by-paper, I think I will simplify by bringing up a few items that seem worthy of note.

Richard Ebeling, putting on his scholar’s cap, wrote a paper describing Ludwig von Mises’ ideas surrounding the gold standard. This is an idea where I think Mises and other Austrians went wrong:

The heart of Mises’ disagreement with the arguments for a neutral money was that it appeared to him as a will-o’-the-wisp just as illusive as the search for a “stable” money. It implicitly viewed money as an element in the economic system yet somehow apart and separable from it. In the 1920s Mises used much ink in arguing against those who at the time were advocating a policy of price level stabilization. He saw them as drawing a dichotomy between money and the real economy that was fundamentally flawed. … (p. 46)

Unfortunately, with arguments like this, Mises and his followers threw the baby out with the bathwater. The ideas of the late nineteenth century held that the ideal money (per Ricardo) was one that was absolutely stable in value. The outcome of this was that prices would be allowed to form reflecting the supply and demand for goods and services, without being distorted by changes in the value of money. The best way to achieve this “stability of value” and, consequently, “neutrality” of money was to link the value of the currency to gold, and maintain an unchanging parity with gold. This was, as all commentators have admitted, only an approximation of perfect “stability,” but one that has always worked rather well, and one that we apparently do not have anything better to replace it with. Of course I have adopted all of these ideas today, as I think they were correct.

In the late nineteenth century, notably with Irving Fischer although he was just one of many (including Gustav Cassel and A.C. Pigou), the idea arose that the “value” of a currency was equivalent to its “purchasing power,” and therefore, a “stable” and “neutral” money should be based on a commodity basket, not gold. Freidrich Hayek, as we have seen, embraced this idea throughout his life. To promote their schemes, they adopted the “stable, neutral” terminology that had been common at the time, and which had developed over the previous century of the gold standard worldwide. Mises, and Ricardo before him among many others, rejected this, saying that commodity prices (or any and all prices) could go up and down for any number of reasons affecting the supply and demand for goods and services, even when expressed in a currency of perfect unchanging value. Unfortunately, Mises, in rejecting these fallacious notions, also rejected the idea of a “stable” and thus “neutral” money altogether.

When one does this, one also throws out any rationale for adopting a gold standard system. Mises remained a gold standard fan because he could see that it worked, and also, that it served as a means to remove the control of money from the government. The history of governments that abandon the gold standard, whether in the form of a coinage debasement (lowering the metal content, and thus market value of the coinage) in ancient times or a floating fiat paper currency more recently, is uniformly bad. Nevertheless, shorn of any expression of its purpose, for Mises gold simply became an anti-government alternative. He called it “sound” money, an old term, but expressly rejected the idea that gold was “stable” or “neutral.”

Sometime in the future, I would like to talk about some of the errors of the Austrians including Mises. These errors led Mises too along some strange paths.

Roger Garrison’s paper was on the “costs” of a gold standard system. I like Garrison’s simple, plain-spoken approach here:

A monetary commodity is more like a reference commodity, a base point, or benchmark … an immutable reference value for gauging all other values … (p. 74).

This is a nice departure from all those mistaken writings which are concerned with the quantity of gold moving here or there, in vaults, being mined, being traded etc. None of it matters because gold is the same value everywhere. The only thing that matters is whether gold’s value is stable and unchanging enough to serve as a superior standard of value for a currency; and it appears that it always has been.

Here is a nice summation of a wide variety of monetary schemes:

The different opponents of the gold standard have radically different reasons for wanting to reject gold as money. Some what to harness the monetary forces and put the reins in the hands of government; others want to nullify the monetary forces that are inherent in any commodity standard. The former like to think of monetary stability as those monetary arrangements that result in full employment; the latter like to think of monetary stability as those monetary arrangements that result in a constant price level. Proponents of the gold standard hold that neither full employment nor a constant price level is an appropriate goal of government policy. Nor is either of these goals consistent with monetary stability. And achieving the goal of stable money, which may well result in both fuller employment and a more nearly constant price level than would otherwise be possible, requires only that the government refrain from interfering with the commodity money chosen by the market. (p. 75)

Good! Here we see Garrison embrace the idea of “stable” money, which is also, by its nature, “neutral” — of course, the ideas that Mises rejected.

Lawrence White had a nice paper describing “free banking” systems based on gold. He had a nice summary of potential free banking (that is, multiple independent currency issuers) systems with currencies based on other things too, even floating fiat currencies, which is basically what Bitcoin is. There seems to be another alternative promoted by some today (I think this is George Selgin’s stance) that you could have “free banking” based on a fiat currency instead of gold; this being roughly the state of Scotland and Hong Kong today, where there are multiple currency issuers based on the British pound and U.S. dollar. This is “free” in the sense of multiple currency issuers, but not free in the sense of the standard of value which is uniform, but that was also the case when gold was the sole standard of value too. I don’t find this to be much improvement, but advocates of the plan seem to think that it will help resolve some issues with short-term “lender of last resort”-type functions.

Ron Paul had a nice paper to conclude, in which he proposed to reintroduce gold coinage into circulation. (Paul eventually did exactly this, in 1985.) In the paper, Paul described that he wished the new one-ounce gold coins to have no denomination whatsoever, but rather to be like Krugerrands, simple one-ounce coins. Paul also indicated that these coins should be free of all taxes and other restrictions on commerce, so that they could function as a monetary alternative. Of course what we have today has violated this plan. The one-ounce American Eagle and Buffalo coins (which resulted from Paul’s efforts) have a face value of $50, making them problematic for commerce since their market value is more like $1250. They are officially “legal tender” but, nevertheless, they have many taxes and restrictions, de jure and de facto, which limit their usefulness as money. (Several States have begun to remedy this problem.)

This pattern is nevertheless similar to what brought Britain onto the gold standard in the eighteenth century. The gold guinea coin was intended to have a value of one pound, but in practice it traded at a variable market rate compared to silver coins, which had been the regular coinage since the eighth century. In time, the value of the silver coins had some considerable instability and unreliability related to coin wear, which led to the recoinage in 1698-99. Bankers were beginning to introduce banknotes at the time, and, due perhaps to the unreliability and uncertainty of the low-quality silver coinage, the banknotes were generally redeemable for gold guineas rather than silver pennies and shillings. Eventually this led to an adjustment in 1717 that rendered gold the cheapest-to-deliver option in the bimetallic system, which, combined with the spread of banknotes and token coins, led later to gold monometallism in Britain.

All in all, the quality of the papers in this book is pretty high. But, then as now, I think the circle of capable gold standard advocates was much too small to get things done. I see the need for a much larger circle — let’s say, twenty people — who have good “expert class” knowledge, and knowledge that is not so full of error and fallacy that it is unusable. Around this, we need a larger circle of people, who more-or-less understand the arguments and support them. These are the first “political” steps, as I see it.