Dr. Hans sennh~~' INFLATION40c OR

GOLDSTANDARD --

INFLATION ORGOLD STANDARD?

byHans F. SennhoLz

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As Old as CivilizationAt the Democratic Party Convention, in July

1896, William Jennings Bryan made a famousspeech on the gold standard. "You shall not pressdown upon the brow of labor this crown of thorns,"he orated. "You shall not crucify mankind upon across of gold."

Is the gold standard really such a cross? Or is ita crown of public honesty and monetary stability?

Actually, the gold standard is a monetary systemin which gold is proper money and all paper moneysare merely substitutes that are payable in gold.Under the gold standard the U.S. dollar is a pieceof gold of a certain weight and fineness.

The gold standard is as old as man's civilization.Throughout the ages it emerged again and againbecause man needed a dependable medium of ex­change. And gold provided such a medium. It wasthe most marketable good that gradually gainedunivers al employment - and thus became money.Its natural qualities, i.e. its use for the manufactureof ornaments and jewelry, its easy divisability, greatdurabilky, storability and transportability, elevatedthis precious metal over all other commodities asmoney.

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Where gold coins were the accepted media of ex­change, circulating by weight rather than name,money substitutes were also payable in gold. Papernotes and clay tablets promising to pay cash ondemand were well known to the ancient world. Theancient Chinese used gold coins some 3,000 yearsago. The merchants of ancient Greece made pay­ments in gold and silver coins over 2500 years ago.

During the Middle Ages, when economic relationsdisintegrated and great poverty lipread over theWestern world, the silver standard generally replacedthe gold standard. In Great Britain silver coinsformed the basis of the monetary system until themiddle of the eighteenth century. The U.S. had ade facto silver standard until the 1830's.

Freedom Gives Birth to Gold StandardWhen trade and production expanded during the

eighteenth and nineteenth centuries, the goldstandard re-emerged. English merchants and gold­smiths found gold coins very useful and thereforebegan to mint them. It is significant that the govern­ment did not establish the standard by any consci­ous and deliberate act. In fact, the gold standardneeds neither rules nor regulations, no legislation orgovernment control, merely the individual freedomto own gold. Of course, this freedom of gold owner­ship embodies the freedom not only to buy and sell

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gold for use in industrial production, but also toemploy it in exchange.

Restoration of monetary freedom means return tothe gold standard. During and after the Civil Warwhen U.S. greenbacks were the only legal money inthe Union, there nevertheless was monetary freedomin California. Consequently, the people of the statepreferred gold over greenbacks and continued to usegold as their money . Business transactions wereconducted in gold, 'and money substitutes, such asbank notes and deposits, were payable in gold. Ifthe people are free to choose between paper moneyand gold currency they naturally turn to gold. Andthis choice then forces all issuers of paper moneyalso to make payments in gold lest their paper fallsin utter disrepute and ceases to function as money.

Failure of the Bimetallic StandardIt is significant, however, that it was not monetary

freedom that gave birth to the nineteenth centurygold standards of the Western nations . There wasno laissez-faire in monetary matters even duringthis century of individual freedom and enterprise.To regulate the people's money at least in mattersof size anti fineness was considered a proper func­tion of government. And since governments weregenerally biased in favor of the largest possiblemoney supply, which was thought to generate

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national wealth and prosperity, they favored adouble standard in which both gold and silver werelegal money. But instead of letting both metalscirculate side by side at ratios that were freely deter­mined in the money market in accordance with de­mand and supply, governments felt called upon toregulate their mutual exchange ratios. And this regu­lation, which was price-fixing of the metals in termsof each other, then gave birth to a single standard.In other words, the inevitable failure of the bime­tallic standard due to the operation of Gresham'sLaw led to either the gold standard or silverstandard. The fixed ratio between the two deter­mined the outcome.

The early history of American currency clearlyillustrates this circuitous road to the gold standard.With the establishment of the federal government abimetallic standard was adopted, and the coinageratio of gold and silver was fixed at 15 to 1. Butthis ratio overvalued silver and thus drove full­weight gold coins out of circulation. When Congressbecame cognizant of the disequilibrium in the speciecurrency, it endeavored to bring the country back tothe bimetallic basis. An Act passed on June 28,1834, reduced the gold content of the dollar from24.75 grains pure go.1d to 23.2 grains, but left thebullion content of the silver dollar unchanged. Thereduction of the bullion content of the gold dollarchanged the coinage ratio from 15 to 1 to approxi­mately 16 to 1. But just as the earlier ratio had

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overvalued silver, so did the new ratio overvaluegold. Consequently, in time gold began to replacesilver as the standard money. True weight silvercoins and silver bullion disappeared from circula­tion, the banks substituted gold reserves for silverspecie, and a de facto gold standard emerged.

Substituting Gold for Fiat or SilverSeveral European nations, such as Germany,

Austria-Hungary, and Russia, travelled yet anotherroad to the gold standard. Since Great Britain,the leader in world trade and finance, had agold standard, many others aimed to follow. Theyachieved a transition from other standards, such assilver or irredeemable fiat, through substitution. Inthe case of Germany the government began to paygold and claims to gold in exchange for the silvermoney and claims to silver money held by its citi­zens. The government, through the operations of itscentral bank, provided the necessary quantity of thenew metal and exchanged it for the old currency.In other countries the transition was achieved withrather small quantities of gold by permitting the oldmoney to remain in circulation. But the latter waschanged into claims that were convertible into thenew gold money made available by government.

In recent decades most governments have workedfervently in the opposite direction: to sabotage and

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destroy the gold standard. They have, in fact, beenso successful that the gold standard is now practic­ally extinct. Governments have seized completecontrol over the monetary systems, and governmentpaper money has become the fiat standard money.It is true, governments still make limited gold pay­ments to each other. But they neither publiclyredeem their paper notes in gold, nor tolerate themonetary use of gold by their citizens.

Three VariationsThe decline of the gold standard in recent decades

produced several variations.The unadulterated standard which was later called

the orthodox or classical gold standard was a gold­coin standard. Gold coins were actually in the cashholdings of the people in addition to bank notes,check book money, and fractional coins. The latterwere money substitutes payable on demand in goldcoins. It was immaterial that some notes were en­dowed with legal-tender power, that is, the legalpower to settle all debts public and private. As longas they were redeemable on demand they repre­sented definite quantities of the metal gold.

Since the beginning of this century governmentsbegan to restrict the actual circulation of gold. Theygradually established the gold-bullion standard,which affords greater leeway for inflation and

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familiarizes the people with paper money. Underthis standard the government is managing the bul­lion. Gold coins are no longer in circulation, havingbeen accumulated in the vaults of central banks.The national currency is no longer redeemable ingold coins , but only in large, expensive gold bars.This , in effect, prevents redemption by most citizensand limits it to a few specialists in internationaltrade and finance . During the 1920's several Euro­pean countries -had standards of this type.

The gold standard system was undermined evenmore by the gold-exchange standard. Governmentsnow began holding their country's gold reserves notin actual gold, but .in foreign claims to gold. Theywere selling foreign currency that actually was re­deemable in gold coin or gold bullion at rates thatreflected the legal parity. The world's monetarygold thus was gradually accumulated in a fewcentral banks that became the reserve banks of theworld.

After World War II the Bank of England 'and theU.S. Federal Reserve System controlled most of theworld's stock of monetary gold. More than 60 na­tions were holding their reserves in pound sterlingclaims to gold, forming the sterling area. Sometwenty nations, mainly in Latin America, belongedto the dollar area. But the Bank of England in turnwas holding most of its reserves in dollar claimsto gold, which made the Federal Reserve System theultimate reserve bank of the world and the gold-

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exchange standard a de facto dollar-exchangestandard.

During the 1960's, the decade of the New Fron­tier and Great Society, the U.S. dollar graduallyfell from this position of predominance. Severalmonetary crises and runs from the British pound,which triggered world-wide demands for dollar re­demption, greatly depleted the American stock ofgold and created precarious payment situations.Therefore, in March 1968, most governmentsjoined the U.S. Government in halting gold redemp­tion of their currencies. Thus ended the gold­exchange standard and began the fiat standard. Thegates were flung wide open for inflation.

AStandard Without GovernmentThe gold-eoin standard means sound money; it

makes the value of money independent of govern­ment. It is true , it cannot achieve the unattainableideal of an absolutely stable currency. There is nosuch thing as stability and unchangeability of pur­chasing power. But the gold standard protects themonetary system from the influence of governmentsas the quantity of gold in existence is utterly in­dependent of the wishes and manipulations ofgovernment officials and politicians, parties andpressure groups. There are no "rules of the game,"no arbitrary rules which people must learn to ob-

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serve . It is a social institution that is controlled byinexorable economic law.

The issuers of money substitutes, whether privateor public , keep the ir currencies at par with goldthro ugh unconditional redemption. Where there isa central bank it buys any amount of gold againstits currency or deposits at the parity rate, and sellsindiscriminately and on demand any amount ofgold against its notes or deposits. It thereby rendersno national service, nor "defends" or "protects" thenational currency. It merely fulfills the contract itmade when it issued the money substitutes.

Under the gold-coin standard inflationary policiesare not rendered impossible, but rather made diffi­cuk. Redemption demands and the threat of drainsof their gold reserves would restrain the issuer ofmoney substitutes from inflationary expansion. Forany such expansion would alarm the owners ofsubstitutes and cause them to demand redemptionin gold coin, which would spell ruin to the issuer.

An International StandardThe internat-ional gold standard evolved without

intergovernmental treaties and institutions. No onehad to make the gold standard work as an inter­national system . When the leading nations of theworld had adopted gold as their currency the worldhad an Jnternational 1l10ney. True, the coins bore

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different names and had different weights. But thishardly mattered as long as they consisted of goldand could be exchanged freely . After all, an ounceof gold is an ounce of gold whether minted ineagles or sovereigns.

The gold standard united the world as inter­national payments ceased to be a problem. It

facilitated international trade and finance, andthereby promoted world-wide division of labor.Countries specialized in those internationally tradedcommodities in which they enjoyed the greatest ad­vantage. But above all, the gold standard encour­aged exportation of capital from the industrialcountries to the backward areas. Without the fearsof devaluation losses or transfer restrictions Euro­pean capital eagerly sought profitable employmentopportunities on all continents. It developed com­merce and industry and thus impro.ved the livingconditions of millions of natives.

Economic StabilityInasmuch as the gold standard makes inflationary

policies rather difficult , it avoids the wide fluctuationsof economic activity, known as the business cycle.As it forces the issuers of money substitutes not toexceed very narrow limits, ,it is an efficient check oncredit expansion. But it is this credit expansion thatgenerates the economic boom and bust cycle.

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When a central bank operating without the re­straints of the gold standard creates new reservesfor banks, which in turn extend credit to business,the entrepreneurs begin to. expand production. Butthis expansion is based merely on banknotes anddeposits. It lacks the real supply of capital goods,and therefore must finally collapse. When theprices of production factors begin to soar and busi­ness becomes unprofitable, when the central bankfinally halts its inflation out of fear of runawayprices, the boom must come to a sudden end. It isfollowed by a recession which is a time of readjust­ment and correction.

Professo.r William Graham Sumner, the greatYale economist of the pre-Federal Reserve era, sum­marized several American experiences with irredeem­able paper currency as follows: "Scheme afterscheme has been proposed and tried for realizingthe gain which it was believed that cheap moneycould produce for the public; that is, for those whobuy and use currency. This gain has been pursuedas the alchemists pursued the philosopher's stone,by trial and failure. Whether there be any such gainor not, our attempts to win it have all failed, andthey have cost us, in each generation, more thana purely specie currency would have cost, if eachgeneration had had to buy it anew.. .. The revul­sions to which the system was subject overwhelmedus in every decade. The notions on which thesystem was based are proved to have been delusions,

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Ardent opposition to the gold standard is voicedby the nationalists in all countries. Favoring nationalautarky in all matters they resent their monetarydependence on gold. The fiat standard is theirsystem.

The American representative resents the goldstandard for two particular reasons. It puts goldinto the center of the system to which all nationalcurrencies including the U.S. dollar must adjust.Without the standard that makes national currenciesjust money substitutes, the U.S. dollar would takethe place of gold in the currency systems of mostcountries. At least, this is what our nationalists be­lieve. American preponderance in the world capitalmarkets and international trade, they say, wouldafford the dollar such an eminent position.

It is true, the gold-exchange standard has madeour Federal Reserve System the world central bankeradministering the world gold reserves. But theprominent position of the System was derived fromits prominent holdings of gold. Without this goldthe dollar standard would inevitably succumb to thegold standard, which emerges from inexorable eco­nomic law wherever there is freedom.

The nationalists also resent the gold standard be­cause it places the U.S. in a most embarrassing light.U.S. liquid liabilities to foreigners presently exceed$35 billion in gold, which is some $25 billion morethan the U.S. Treasury can muster. If we cannot

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dom - and succumbs to laws and regulations. Itsimplacable enemy is government in search oj reve­nue.

The economic problem of government differsradically from that of its subjects. Individuals pro­duce goods and services in order to earn their live­lihood. Go.vernment expropriates individual incomeand wealth in order to cover its expenses. Whileindividual s must produce more in order to earnmore, governments must find new methods of ex­propri at ion. The tax levies must be raised, or newtaxes imposed. But taxation is often unpopular, andmay precipitate the downfall of governments. Thisis why inflation, which is the creation oj new moneyby the authorities, is such a convenient source ojrevenue .

Although inflation is a vicious form of taxation itmay even be popular because its effects are rarelyunderstood . The re are the beneficiaries of inflationwho sing loud praises of "easy money" and "creditexpansion. " The government and its economistseven invent intricate theories and doctrines in supportof inflationa ry policies. For inflation boosts govern­ment revenue and perm its politicians to spend moremoney th an they can raise by taxes. Inflation alsorepud iates government debt as it reduces its pur­chasing power. In this respect it is a silent tax onall creditors and money holders.

It is rar ely understood that inflation generates avast redistribut ion proce ss. It shifts wealth and in-

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come from the pockets of creditors to those ofdebtors. It reduces the standards of living of peoplewith fixed incomes, in particular, the aged andhandicapped. And it diminishes the value of savingsbonds and savings accounts, mortgages and lifeinsurance policies, pensions and o.ther savings. Itcauses the economic instabilities of the trade cycle.And , above all, the losses which inflation inflicts onmillions of people breed a political and economicradicalism that tends to destroy our private propertyorder.

In March 1933, the Roosevelt Administration ex­propriated the monetary gold owned by Americansand thus forcibly abolished the gold-coin standard.We entered a new era of government spending andinflating. In 1933 Federal Administrative Budgetreceipts amounted to $1.9 billion; in 1969 they areestimated at $135.6 billion. Expenditures rose from$4.6 billion to $147.4 billion.

An ever-growing part of federal activity is fi­nanced by taxes that are not even shown- in thetraditional Administrative Budget. They provide the"Trust Fund" revenues that finance more than two­thirds of gross expenditures on health, education andwelfare. The largest single trust fund operationamong more than 130 such operations is the OldAge and Survivors Insurance. Medicare is followingrapidly. From a modest beginning of $265 millionin 1937 total trust fund revenues have risen to anestimated $53 .839 billion in 1969 .

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The quantity of money has grown phenomenallyand its value deteriorated drastically. From March1933 to January 1969 the quantity of currency heldby the public rose from $5.5 billion to $42.7 billion,demand deposits from $13.5 billion to $146.7 billion,time deposits from $21.8 billion to $265 .6 billion.During this period the purchasing power of the U.S.dollar fell to 37c of the 1933 dollar.

These are government statistics. Private researchorganizations which undertook to measure the de­cline of the dollar's purchasing power in their par­ticular fields arrived at much greater rates of de­preciation. In construction, for instance, the Amer­ican Appraisal Co., Associated General Contractors,and the Engineering News-Record found that the1969 dollar has fallen to less than 16c of the 1933dollars .

The Enemies of the Gold StandardFor some 200 years governments have tried to

manipulate and regulate the people's choice ofmoney. Since the gold standard was least amenableto government control it was systematically as­saulted. It was suspended at government conveni­ence, gradually deprived of its substance, and finallyreplaced by the fiat standard. The stage thus wasset for an age of inflation.

Early opposition to the gold standard was voiced

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by the classical economists. They looked upon thecosts of a metallic currency as a waste, which thegold-exchange standard was said to reduce. Theyblithely assumed that no government ofa civilizednation would exploit the gold exchange standard forinflationary objectives. David Ricardo put it thisway: "In a free country, with an enlightened legisla­ture, the power of issuing paper money, under therequisite checks of convertibility at the will of theholder, might be safely lodged in the hands of com­missioners appointed for that speoial purpose, andthey might be made totally independent of the con­trol of ministers."

Several modern economists still echo this partic­ular objection against the gold standard. But whilewe may understand the naivete of classical econo­mists, who had never experienced hyperinflationsand devaluations in a free country, the moderneconomists cannot be exculpated so easily. Theyshould know that, paraphrasing William GrahamSumner, a new gold-coin standard could be estab­lished every year out of the depreciation losses suf­fered by savers and creditors. And the needed goldcould be purchased again and again from the lossessuffered by the millions of victims of a depression.Indeed, the gold-coin standard is a bargain price foreconomic stability. In an age of inflation andcurrency crises to reiterate confidence in the mone­tary integrity of government is to be deaf and blindto reality.

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disastrous to everybody concerned, including thosewho tried to profit by them."

The False Gold StandardThe gold-coin standard cannot be manipulated by

government and, therefore, presents an insurmount­able obstacle to all attempts at credit expansion andregulation through monetary policy. When it wasgradually replaced by the gold-bullion standard andfinally by the gold-exchange standard, governmentsassumed the power to manipulate their national cur ­rency systems .

The gold-exchange standard was a false goldstandard. The monetary gold was absorbed by afew central banks that exerted a decisive influenceover the price of gold. For many years the pricesubstantially depended on the decisions of a singlegovernment, that of the United States. With gov­ernments in control the national currencies depre­ciated in every country. Dozens of currency deval­uations occurred nearly every year.

Government Control Means InflationThe gold standard never failed - it was mutilated

and finally abolished. It springs eternally from free-

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pay, the nationalist concludes, the fault must lie withthe system. Let's abolish it rather than admit failureto "those international bankers."

It is indeed difficult to admit that the accumulatedpayments deficits of more than $35 billion resultedfrom our own inflation predilection. For many yearsthe U.S. Government has been generating the inter­national payments defioits with reckless deficit spend­ing and money creation.

But the most implacable enemies of the goldstandard are the inflationists. To them federalspending and easy money are the panacea for allsocial and economic ills. They are the chronicspenders who find it so difficult to live on taxrevenue only. Year after year they prompt thefederal government to incur budgetary deficits thatare most conveniently covered by new money. Theiropposition to the gold standard usually is depictedas a desire for "freedom for each country to pursuea monetary and fiscal policy of social welfare andjustice."

There are also the apostles of credit expansion asa means for full employment and economic growth.They are convinced that newly created credit canlower interest rates , give employment and raisewages. And in recent years they even extended theirboundless faith in easy money to economic expan­sion and development. Economic growth, they say,requires more money than the gold standard canpossibly provide.

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It is true , the gold stand ard does not affordsupplementary revenue to governments. But thestated objectives, such as economic expansion andfull employment , social welfare and justice, not onlydo not require inflation, but even presuppose itsabsence. Economic growth depends on theaccumu­lation of capital through savings and profits. Fullemployment results from the proper adjustments oflabor costs to labor productivity. And social wel­fare and justice depend on sound money - infla-tionmerely compounds economic and social evils. Thisis why ages of inflation are also marked by socialand political unrest, by strife and conflict, riots andrevolutions.

The most consistent foes of the gold standard arethe socialists and communists. Their very raisond'etre is government control and direction of allphases of economic life. How can they tolerate thegold standard, which springs from individual free­dom and private property? Gold coins are a mediumof exchange - but there is no free exchange in acommand economy. To believe that Soviet Russiawill ever tolerate gold markets and gold payments isto believe that she will abolish the Soviets and turnlaissez-faire .

Popular FallaciesThe gold standard is the currency system of free

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people who exchange their goods and services forgold, their common medium of exchange. The actualuse of gold coins affords a measure of protectionfrom inflationary policies, which all kinds of govern­ment are so prone to practice. But, contrary to theshalIow charges by many foes, no gold standardadvocate expects it to protect man from his ownfolIies. It is merely a manifestation of civil liberty,a phenomenon of the market economy, but nopanacea for political, social and econo.mic evils.

It would be extremely naive to believe that agovernment bent on spending and inflating wouldtolerate the gold standard, or that interventionistsand socialists would wil1ingly forego their powerover money and credit. This would be as naive asto believe that war can be outlawed among nationsbent on waging war, or that dictatorships can bemade unconstitutional for people who want to beled. The gold standard presupposes individual free­dom, private property, and free markets.

Some foes of the gold standard, who usualIyprofess a preference for the market system, contendthat the choice of monetary system is a purelytechnical question. The monetary arrangement thatis most workable on technical grounds, whether fiatmoney or gold standard, is said to deserve our pre­ference. It is significant that these economists thenpromptly conclude, "on purely scientific grounds,"that the fiat standard is more "workable" and there­fore more desirable.

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It is undoubtedly true that the fiat standard ismore workable for economic planners and moneymanagers. But this is the very reason why we preferthe gold standard. Its excellence is its unmanage­ability by government. And we also deny that thefiat standard which is charaoterized by rapid self­destruction and has failed wherever it was tried,compares favorably on purely scientific grounds withthe gold standard which is as old as man's civiliza­tion. Out of the ashes .of fiat money the goldstandard always springs anew because it is no tech­nical creation of a few expert advisors, but a socialinstitution that flows from economic freedom andeconomic law.

The most popular objection against the goldstandard rests on the notion that there is just notenough gold in the world to accommodate themonetary needs of mankind. How can $42.7 billionin paper dollars held by the American public beredeemed by some $ 10 billion of gold held by theU.S. Treasury? And how can some $150 billion ofdemand deposits be payable ~n gold?

The answer is simple. The fiat money now in thecash holdings of the people must stay in circulation.It must not be replaced by gold, but be permittedto function as money side by side with gold. Forhundreds of years both gold coins and silver coinsserved simultaneously as money. It is true , theirexchange ratio varied greatly over the centuries.But one metal did not replace the other as long as

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eager governments did not fix their prices and setinto operation Gresham's Law.

Return to the Gold StandardHow can a rebirth of the gold standard be

achieved under present conditions? And how wouldit work?

No reasonable economist would want to revolu­tionize economic life through a radical monetaryreform. He does not want to make gold the onlymoney , forbidding government issue of any kindand suppressing banknotes and demand depositsused as media of exchange. Such a reform wouldrequire radical government intervention and greatlyreduce the country's money supply. Prices andwages would have to be drastically cut, which nomodern society could withstand in an orderlyfashion.

The answer to our questions can be found in3,000 years of experience with the gold standard.How did it emerge in the past? As described above,it arose from three different situations: unadulteratedmonetary freedom, failure of the bimetallic standard,and government substitution of gold for othermonies .

The last avenue was chosen by a few nations whoendeavored to imitate the financial success and pro­gress of the gold standard nations. When the indus -

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trialized countries, such as England and France,prospered with the gold standard, others adopted itthrough quick substitution. Their approach was thatof latecomers who for good reasons imitated thesuccessful leader . It is obvious that in an age offiat money this avenue to the gold standard is closedfor lack of leader. And it is rather unrealistic toexpect the U.S. Government to provide this leader­ship. It would have 10 renounce its inflationary waysand, at heavy expense, substitute gold coins forFederal Reserve notes while it owes more than $35billion in gold to foreign creditors.

Most Western nations arrived at We gold standardvia the bimetallic standard. Similarly, a doublestandard in which both gold and fiat money arelegal money could be used to re-establish the goldstandard. But it requires the cooperation of govern­ment which an administration indulging in deficitspending is unlikely to provide. It would have toabandon any further inflation and prevent anyfurther expansion of money substitutes. At the sametime all restrictions on gold trading would have tobe repealed, which would permit a free market forgold to emerge.

A free American gold market would probablyresult ,in an inflow of considerable quantities offoreign gold as many Americans would want to ownsome gold. After some oscillation on the market theprice of gold would stabilize. Let us assume it tobe $100 per ounce.

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If the government now decrees that both FederalReserve money and gold are legal money we are ona double standard. If the government establishes alegal parity of the dollar to gold at any ratio otherthan 100 to 1 it brings into operation Gresham'sLaw. That is, artificially overvalued money tends todrive artificially undervalued money out of circula­tion. Let us say the government sets a ratio of 105to 1, or even 11010 1. It obviously overvalues thegold and thereby creates the gold standard. Goldgradually replaces government money in the people'scashholdings.

This road to the gold standard is rather circuitous.Nevertheless, as it makes few demands on govern­ment it has been the most travelled road duringthe last 200 years. The U.S. Government used it in1834.

Ludwig von Mises, the great dean of monetarytheory, would establish the gold standard withoutthis circuitousness. He would, once the market priceof gold has been found, adopt this price as the newlegal parity of the U .S. dollar and secure its uncon­ditional convertibility at this parity. A new "con­version agency" would sell gold bullion to the publicagainst paper dollars, and buy any amount of goldoffered at the legal parity. Finally, transition fromthis gold-bullion standard to the gold-coin standardwould be achieved by the U.S. Treasury exchangingall five, ten, and perhaps also twenty dollar billsagainst newly minted gold coins.

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This proposal for reform is most comprehensiveand complete, as it envisions creation of a classicalgold-coin standard by a single law. Of course, itassumes a state of eco.nomic and political enlighten­ment that surpasses by far the present state ofeconomic and political thought.

Restoration of the gold standard may be a longand arduous task. As it was lost in a gradual erosionof monetary freedom we may have to retrieve itslowly and painstakingly on the road back to free­dom, which gives it birth and meaning through in­exorable economic law. This is why we seek noreform law, no restoration law, no conversion orparity, no government cooperation, merely freedom.

The road is short and direct. And yet, dependingon the resistance offered by popular ignorance andprejudice, by government greed and lust of power,it may take us many years to traverse. For theweary traveller .i t has several intermediary stopsthat provide convenient targets for supreme effort.

The first objective must be the freedom to tradeand hold gold. Everyone must be free to buy andto sell, to lend and to borrow, to import and toexport any quantity of gold , to hold it at home orabroad, whether minted or unminted. There mustbe no government interference with the goldmarkets, no regulation or controls, no taxation ordictation that would sabotage the gold markets.Dozens of nations in all continents actually enjo:ythis rudimentary freedom. Americans lost it " tern-

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porarily" in 1933 when the Roosevelt Administra­tion seized all private gold holdings.

The next objective must be the individual freedomto use gold in all economic exchanges. The peoplemust be free to buy gold by selling their goods andservices for it, and to sell gold when they buy goodsand services, without the interaction of governmentmoney. That is to say, the legal tender law whichdecrees that government money must be acceptedin payment of all debt, public and private, mustexempt "gold contracts" and "gold clauses" thatspecifically call for payment of certain measures ofgold. In short, the ordinary law of contract mustbe permitted to function.

At this point we ' have arrived at the "parallelstandard." It would not in the least curtail govern­ment operations or impede government finance. TheFederal Reserve System could continue its opera­tions, its inflation and credit expansion, and theU.S. Treasury would receive taxes and make pay­ments in Federal Reserve money. All contractsstated in U.S. dollars would have to be met in U.S.dollars; but contracts in ounces and grains of goldwould have to be met in gold. Government moneyand gold would be circulating side by side. Therelative supplies of and demands for the two monieswould determine 'their exchange ratio, which wouldcontinually fluctuate in response to demand andsupply.

The third objective on the road to the gold

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standard would be the individual freedom to mintcoins. The first coins were minted by private in­dividuals and goldsmiths. And private coins havecirculated throughout history, in California as lateas 1848. As these coins would not be endowedwith "legal tender," no one would be obliged toaccept them in payment of a debt. He who woulddeem them too much trouble to weigh or test, orwould distrust the minter's stamp and guarantee,would be free to use Federal Reserve notes. Afterall, only Federal Reserve money would be legaltender except where gold payment is contractuallyrequired.

The fourth and final phase is not really vital forthe restoration of the gold standard. An enlightenedgovernment may at this time decide to make its ownmoney freely convertible into gold. It may adoptthe going exchange ratio between the two as thelegal parity and then secure unconditional converti­bility of its money into gold. This phase, which doesnot materially enhance our monetary freedom, wouldmerely legalize the gold standard that would gradu­ally emerge on the road to freedom.

Step by step the federal government has assumedcontrol over our monetary system. It thus captureda potent source of revenue and a vital commandpost over the economic lives of its people. This iswhy every friend of freedom is dedicated to therestoration of free money which is also soundmoney. It is the gold standard.

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Hans Sennholz is Professor of Economics andChairman of the Economics Department at GroveCity College, Pa. He took his Master's at MarburgUniversity and his Ph.D. in Political Science atCologne University in Germany, and also earned aPh .D . in Economics at New York University. Prof.Sennholz has publi shed more than 200 articles invarious journals, and has authored or co-authoredmany books. He is a Trustee of lSI , Member ofthe Board of YAF, Director of the PennsylvaniaRight-to-Work Committee, and a member of theEconomists' Nat ional Committee on MonetaryPolicy.

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POLlT"SVoL. IV. No. 20 * M~y 28, 1969

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