Is Gold Too Easy to Manipulate?Thomas Allen
Many people who claim to favor the gold standard fear returning to the true classical gold standard because they believe that gold is easily manipulated—as though fiat money is difficult to manipulate. Contrary to what these people claim to believe, a major reason that governments abandon the gold standard and adopt fiat money is that fiat money is easy to manipulate and gold is difficult to manipulate.
They advocate replacing the current fiat monetary system with another fiat monetary system. Some would make gold a part of their fiat money. Others would not. Nearly all would have the U.S. government issue the new money.
If a cabal set out to manipulate gold under the true gold standard, with what would it buy the gold? Would it buy gold with gold? If so, it accomplishes nothing.
If silver were also money in its own right, as it should be, but without any legal exchange rate, the cabal could buy gold with silver. If it buys gold with silver, an equivalent unit of purchasing power of silver replaces each unit of purchasing power of gold removed from the economy. The primary economic affect is that fewer things are bought with and sold for gold and more things bought with and sold for silver.
It could possibly buy gold with paper money. However, under the true gold standard, all paper money is immediately redeemable in gold on demand. Any holder of paper money could convert it instantly to gold. The cabal could not corner the gold market using paper money unless the government suspended redemption. This action is not a problem with the gold standard; it is a problem with the legal system failing to require contracts to be honored.
As the cabal buys more gold, the remaining gold becomes more valuable. Thus, its attempt to manipulate gold can affect its value, purchasing power. This increase in value brings more scrap onto the market for the cabal to buy.
When the cabal owns most of the world’s gold, what has it accomplished? Other than replacing most monetary gold with silver, it has not accomplished much. It has imposed an enormous cost on itself by foregoing the income that it could have earned from the money that it has used to corner the world’s market in gold. (Under the true gold standard, it could not corner the gold in one country. Part of the true gold standard is the free importation and exportation of gold. Thus, as it bought the gold within the country and drove up its value, gold from across the planet would flow into this artificially high-price market. Consequently, it would have to corner the world’s market in gold.)
Once the cabal has acquired all this gold, what will it do with the gold? Will it hoard the gold and lose the income that it could have earned? It could lend the gold, which will put it back into the economy in an orderly manner. If lending were its objective, it could have earned more by lending the money that it used to buy the gold instead of foregoing this income while cornering the world’s gold.
Is it going to try to disrupt the economy by quickly dumping its gold? If so, it will have to absorb enormous losses. Furthermore, if it dumps its gold as coins, all coins beyond that needed by the markets will be melted for other uses. If it dumps it as bullion, enough of this bullion will be converted to coins to satisfy the demand for gold coins. Dumping will drive down the value of gold to about the level it was before the cabal began its hoarding. Besides greatly reducing its estate, what does the cabal gain from driving down the value of gold and disturbing the gold markets? It certainly will not increase its wealth by such action. Nor will it increase its power.
The manipulation of gold under the gold standard should not be confused with the manipulation of its price under the current fiat-federal-reserve-dollar standard. Under the gold standard, the price of gold cannot be manipulated as gold is priced in terms of itself. The price of a pennyweight of gold is a pennyweight of gold. Its purchasing power can be manipulated, but not its price. (Its price could be manipulated in terms of silver. However, this manipulation accomplishes little as the purchasing power of one metal is being replaced by the purchasing power of another metal. People who held large quantities of one metal may lose or gain purchasing power in terms of the other metal.)
Gold under the true gold standard is like the dollar under the federal-reserve-dollar standard. Under the federal-reserve-dollar standard, the price of the dollar is a dollar. Its value can change relative to other things, but its price does not change.
Under the federal-reserve-dollar standard, the price of gold can be manipulated in terms of federal reserve dollars by changing the supply of gold or dollars. Gold is being bought and sold with and in terms of federal reserve dollars.
If people oppose the true classical gold standard because gold is manipulable, why do they want to use a fiat currency, which is infinitely more manipulable? Why do they prefer letting politics instead of economics determine the issuance and quantity of the money? With fiat money, politics regulates its issuance and quantity. With the true gold standard, economics controls the issuance and quantity of money. Thus, these people in effect are saying that they trust politicians and distrust the people with the control of the country’s money. Politicians or their bureaucrats and "experts" regulate the issuance and quantity of fiat money. Under the true gold standard, the people directly control the issuance and quantity of money.
Fiat money is much easier to manipulate than gold under the true gold standard. This ease of manipulation is why governments, international financiers, statists, and other controllers prefer fiat money to gold money.
Countries do not abandon the gold standard because it is easily manipulated. They abandon it because it is extremely difficult to manipulate. On the other hand, the government, that is, the cabal that controls the government, can easily manipulate fiat money. It can change the quantity of money on a whim and at will. Under the gold standard, the quantity of money is a dependent, not an independent, variable. It depends on the demand for money and is not subject to governmental manipulation. With fiat money, the quantity of money is an independent variable. The government maintains control of the money and can change the money supply to suit political considerations. Thus, any cabal inside or outside of the government prefers fait money to the gold standard, for fiat money is much easier to manipulate.
People who claim to oppose the gold standard because gold is easily manipulable are using this argument as a ruse to conceal their desire for a currency that is highly manipulable. They know that the gold standard greatly limits the power of the government and its control of the economy and the people. Gold stands in the way of unlimited credit expansion. It prevents the government from attempting to create wealth by printing numbers and words on paper. Gold forces the government to abide by the discipline of the markets. It makes the purchasing power of money independent of politics and arbitrary manipulation. The gold standard places external and automatic restraints on the government.
Mises remarks, "The eminence of the gold standard is . . . that the gold standard alone makes the determination of the monetary unit’s purchasing power independent of the ambitions and activities of dictators, political parties and pressure groups."
Because gold is difficult to manipulate, statists and their kindred oppose it. The irony is that they argue that gold can be easily manipulated, and, therefore, the gold standard cannot be used. Fiat money, which becomes nearly impossible to manipulate under their system, so they assert, must be used instead. Amazingly, statists can actually use this absurd claim to get their opponents, people who want small, limited government, to abandon the gold standard in favor of fiat money.
Joseph Schumpeter explains why statists hate gold:
An "automatic" gold currency is part and parcel of a laissez-faire and free-trade economy. It links every nation's money rates and price levels with the money rates and price levels of all other nations that are on gold. It is extremely sensitive to government expenditure and even to attitudes or policies that do not involve expenditure directly, for example, to foreign policy, to certain policies of taxation, and, in general, to precisely all those policies that violate the principles of economic liberalism. This is the reason why gold is so unpopular now and also why it was so popular in a bourgeois era. It imposes restrictions upon governments and bureaucracies that are much more powerful than is parliamentary criticism. It is both the badge and the guarantee of bourgeois freedom—of freedom not simply of the bourgeois interest, but of freedom in the bourgeois sense. From this standpoint a man might quite rationally fight for it, even if fully convinced of the validity of all that has ever been urged against it on economic grounds. From the standpoint of statism and planning, a man may not less rationally condemn it, even if fully convinced of the validity of all that has ever been urged for it on economic grounds.
Thus, people who claim that they are convinced of the gold standard’s virtues but cannot support it because it is so easily manipulable are statists at heart. If a person who truly believes in freedom and limited government, he would support the gold standard even if he were convinced that it was easily manipulable.
As Hans Sennholz remarks:
The gold-coin standard means sound money; it makes the value of money independent of government . . . [and] protects the monetary system from the influence of government. . . . As the quantity of gold in existence is utterly independent of the wishes and manipulations of government officials, parties, and pressure groups . . ., it is a social institution that is controlled by inexorable economic law.
He also notes, "The gold-coin standard cannot be manipulated by government and, therefore, presents an insurmountable obstacle to all attempts at credit expansion and regulation through monetary policy. . . ."
For a more detailed discussion of fiat money and the true gold and silver standard, see the author’s book Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money.
The following is part of the discussion on the myth of gold being easily manipulable from Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money.
The fourth major argument against the gold standard is that gold is too easy for bankers to manipulate—as though fiat money is difficult to manipulate. Bankers can cause all sorts of havoc by withholding and hoarding gold or transporting gold into or out of the country. True bankers, and others for that matter, can withhold vast quantities of gold from the markets. But they do so at an enormous cost. For them to withhold enough gold to influence the markets means a significant loss in profit. For most, it probably means not making less profit, but losing significant income.
Even if a cabal could control vast quantities of gold, that control would have only minimal impact on general prices. Most of the impact would appear in the discount rate.
Furthermore, as the conspirators removed gold from the markets, the value of the remaining gold would rise to compensate for the removal. They in effect would increase the value of gold domestically. This increase in value would cause gold to be imported. Thus, to corner the market in gold, they would have to buy vast quantities of gold globally. Even then, the remaining gold would rise in value to compensate for the removal.
On the other hand, the government or its central bank can depress the purchasing power of gold by undertaking credit expansion. The government can carry out policies to induce people to hold less cash and thereby lower the purchasing power of gold. Such policies contributed to the rise in general prices between 1896 and 1914. Nevertheless, unlike fiat money, gold does limit governmental action to lower its purchasing power.
Some claim that exporting gold caused the Great Depression in the United States. Not only did the country lose monetary gold, which had a deflationary effect; more important, the credit based on that gold contracted. This contraction of credit greatly magnified the deflation.
From 1920 through 1933 the gold stocks of the United States rose in most years, and overall a net increase occurred. Fremling remarks, "Gold flows generally do not equal changes in gold reserves, because gold flows measure movements of gold between countries not only of reserves, but also of private gold stocks."
If exporting gold exacerbated the Great Depression, then the importation should have ameliorated the deflation. Great Britain was the primary recipient of the gold exported from the United States, but it seems not to have benefitted from the importation of gold. A global credit contraction caused the Great Depression, and not exporting gold. Credit contracted in countries that imported gold as it did in exporting countries. Furthermore, the quantity of gold increased during this era.
Under the classical gold-coin standard, the export of gold would not have caused general prices to fall. It would cause the discount rate for bills of exchange to rise. . . .
Another form of manipulation occurs when international banks export gold from their banking system and thereby contract their gold reserves. When bank reserves are contracted, banks must cease lending and call in loans to increase reserves. This action contracts the money supply and leads to a recession or depression. (The same thing occurs if the public unexpectedly starts removing their money from banks in gold coins.)
This problem has more to do with improper lending than with the gold standard. If banks do not borrow short and lend long, i.e., do not use demand deposits for loans (or allow two people to have access to the same money simultaneously), and if the government does not require a minimum reserve, much of this problem would cease. Then the effect of international bankers exporting gold from the banking system would be the same as any other manipulator removing gold from the markets.
When the government decrees an arbitrary minimum gold reserve, banks are compelled to contract lending and call in loans to maintain their reserves. Legal reserves increase the demand for gold, which increases its value, which intensifies deflationary effects. (Deflation occurs when gold’s purchasing power increases.) . . .
As the above remarks show, the gold standard is incompatible with centralized banking. Central banks (or governments if they are the monetary authority) accumulate most of the world’s monetary gold stock. With such a large hoard, they can manipulate the value of gold and cause sharp fluctuations. This manipulation can be deliberate or inadvertent. Nevertheless, the gold standard does limit such manipulation. To affect the prices of internationally traded commodities domestically requires changing their prices globally, which requires changing the value of gold globally.
The purpose of a fiat monetary system is to have money that is easily manipulated. Gold is much more easily manipulated under a fiat monetary system where gold is consolidated under the ownership of the government or its central bank. Gold is difficult to manipulate when paper money is redeemable in gold on demand.
Some opponents of the gold standard argue that international financiers profit by artificially shipping gold between countries to drive their currencies up and down. Gold naturally moves from countries where it is over valued to countries where it is under valued. International financiers could ship large quantities of gold from one country to another to manipulate the value of their money. When the physical difficulties and cost are considered along with the quick disappearance of any advantages that they created, they could make more money in other ventures. With fiat money, they can easily manipulate the value of money of various countries through their control of political leaders and central banks and make enormous profits just by moving electrons through computer circuits. International financiers could easily accomplish this goal even if all central banks were abolished and money issuance became a governmental function. They could still control (own) the political leaders, most of whom are among the easiest people in the world to corrupt.
The gold standard was not abandoned because it is easy to manipulate. It was abandoned because it is nearly impossible to manipulate. The government can increase the supply of fiat money at will and without limits, but it cannot increase the supply of gold at will. Increasing the supply of gold depends on the profitability of mining gold.
As Spahr notes, "Only a currency of unsound quality lends itself to manipulation." Gold and silver are the highest quality money and, therefore, difficult to manipulate. Fiat paper money is low quality money, and is, therefore, easy to manipulate—especially if the government spends it into circulation.
1. Thomas Coley Allen, Reconstruction of America’s Monetary Banking System: A Return to Constitutional Money, pp. 136-138.
2. Percy L. Greaves, Jr., On Current Monetary Problems: An Interview with Professor Ludwig von Mises, p. 30.
3. Richard M. Salsman, Gold and Liberty, p. 58.
4. Martin A. Larson, The Federal Reserve and Our Manipulated Dollar, p. 237.
5. Ibid., p. 238.
6. Allen, pp. 124-128.
7. Board of Governors of the Federal Reserve System, Banking and Monetary Statistics, 1914-1941, p. 536.
8. Gertrud M. Fremling, "Did the United States Transmit the Great Depression to the Rest of the World?", The American Economic Review, LXXV (December 1985), 1181.
9. David Glasner, Free Banking and Monetary Reform, p. 105.
10. James Washington Bell and Walter Earl Spahr, ed., A Proper Monetary and Banking System for the United States, p. 32.
Copyright © 2009 by Thomas Coley Allen.
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