Poor on Bowen

Poor on Bowen

Thomas Allen

    In 1877, Henry Varnum Poor (1812-1905) wrote Money and Its Laws: Embracing a History of Monetary Theories, and a History of the Currency of the United States. He was a financial analyst and founder of a company that evolved into Standard & Poor’s. Poor was a proponent of the real bills doctrine and the classical gold-coin standard and, thus, the quality theory of money. He gave little credence to the quantity theory of money — especially if credit money, such as bank notes, were convertible on demand in species. Also, he contended that the value of money depends on and is derived from the value of the material of which it is made and with paper money, its representation of such value.
    In the latter part of his book, he discusses leading monetary theorists from Aristotle (350 B.C.) to David A. Wells (1875). Most of the economists whom he discussed were proponents of the quantity theory of money. We will look at his discussion on Francis Bowen. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
    Francis Bowen (1811-1890) was an American philosopher, writer, and educationalist and a professor of political economy at Harvard University. Among his works are Lectures on Political Economy (1850), The Principles of Political Economy applied to the Condition, Resources and Institutions of the American People (1856), and American Political Economy (1870), which Poor reviews.
    Poor describes American Political Economy as “a feeble and garrulous restatement of Adam Smith, Stewart, Ricardo, Tooke, McCulloch, and Mill, to whose absurdities and errors an emphasis is given by no means to be found in the originals” (p. 409).
    Bowen writes “that money is merely a contrivance for diminishing the friction of exchange; and, though safe and convenient, it is also a very costly contrivance for this end” (p. 409). Money is part of a country’s wealth, but it is not capital. It does not yield profit or interest. Only the goods transferred by the means of money yield profit. Because money is not consumed, “it is not productive” (p. 409). Therefore, “[t]he specie which a merchant or a banker holds in store, to provide against daily calls or sudden emergencies, is the only unproductive portion of his capital: he is subject to a loss of interest on the whole amount thus retained” (p. 409). “The coin which a man keeps in his pocket does not, like his shoes or his hat, contribute to his comfort: it is a convenience to him only as it supplies immediate means for making small purchases or satisfying small demands” (p. 409).
    Poor replies

[C]oin has a great many functions beside “diminishing the friction of exchange.” It cannot be called unproductive so long as it can be loaned at interest, and is absolutely indispensable in the process of distribution, without which there can be no capital worthy the name. It would be just as proper to say that a wagon or railroad car was unproductive, for the reason that it did not produce the merchandise transported by it (pp. 409-410).

[Expressing the same sentiment, Hutt states, “The essences of all these services [of money] is availability. . . . [M]oney assets are not unemployed or resting when they are in our pockets, or in our tills, or in our banking accounts, but in pseudo-idleness, like a piano when it is not being played, or a fireman or a fire engine when there are no fires.”[1] In essence, Bowen is presenting the sterility-gold-coin argument against the gold standard.]
    About exchanges, Bowen writes, “Every exchange is a barter of a quantity of merchandise for a certain sum of money which is its equivalent” (p. 410). Because money is not consumed when it is exchanged, a community does not need as much money as there is merchandise; therefore, money is immediately ready for another purchase. Bowen declares:

The circulation of money and of merchandise bears some relation to the momentum spoken of in physical science, which is composed of the velocity multiplied by the mass; the momenta are equal, though the velocity should be increased tenfold, provided that the mass is but one tenth part as great. So, also, the momentum of wealth is its value multiplied by the rapidity of its circulation. As money circulates far more rapidly than merchandise, it is evident that (the number of exchanges on both sides being equal) there must necessarily be less value in the money than in the merchandise, and as much less as the circulation of the money is more rapid than that of the merchandise (p. 410).

    Next Bowen presents an algebraic equation to describe his concept: gs=mr, where g = quantity of goods on sale; s = number of times the goods are resold; m = quantity of money in circulation; r = number of purchases effected by each piece of money. [This equation is similar to Irvin Fisher’s equation: MV=PT, where M = the amount of money; V = the velocity of money; P = prices; T = the number of transactions. In The Value of Money, Benjamin Anderson explains in great detail the flaws of Fisher’s equation and the quantity theory of money.]
    With this equation, Bowen shows “that the value of money will be inversely as its quantity” (p. 411). [That is, as the quantity of money increases, its value decreases if everything else remains constant. By value, he seems to mean purchasing power.]
    Poor remarks that Bowen errs because “[m]omentum and effective value are identical terms. All kinds of merchandise, wealth being a generic term, obey the same law. Whatever value can be predicated of one kind, due to the rapidity of its circulation, can be of all other kinds” (p. 411).
    Continuing, if Bowen is correct, then according to Poor, “the great problem for society is to determine the degree of momentum that can be secured for its merchandise, as its wealth will be increased in like ratio” (p. 411). Then, using Bowen’s equation, Poor defines “g” to stand for the “goose” instead of “goods.” Next, he states:

Now, “the value of the goose is inversely as its quantity multiplied by the rapidity of its circulation.” Assuming the formula given to express the ordinary rapidity of circulation, or, what is equivalent, the momentum, and consequently, value of the goose; then, if its momentum, or value, be doubled, the formula has only to be altered; thus: — gs=2mr, or mr=gs/2. The goose has now a value twice greater than it had before (pp. 411-412).

According to Bowen’s equation, the value of the goose is inverse to its quantity. Therefore, using Bowen’s equation, if the quantity of the goose is reduced by half, the quantity of money doubles — assuming that demand remains the same. Thus, Poor notes:

If the crop of geese should be short, and it should be desirable to increase their momentum, or effective value, say tenfold, all that would have to be done would be to increase their rapidity of circulation to be expressed by the following change in Mr. Bowen’s formula; thus: — gs/10=mr, or 10mr=gs. When the last degree of momentum was secured, a wing or a leg of the goose would have a value equal to that of the whole bird. Society will be the gainer in an equal degree, by being able to devote to other purposes the land formerly dedicated to goose-culture.

Continuing, Poor writes:

Admitting the conclusiveness of his demonstration, it must be applicable to all kinds of merchandise; for, as has already been shown, money, after it has been spent, is as functus officio to its late owner as is the goose to its owner after it is eaten. If it be objected that the money is still in existence, and the goose is not, it may be replied: that the goose has indeed been eaten, but productively, to appear in new geese, or, in other kinds of merchandise; so that whoever uses the money the second time is still confronted by a new goose or its equivalent. If the goose or its equivalent do not reappear, then the money does not. Each responds, and with equal alacrity, to the call of the other (pp. 412-413).

    Bowen notes that a large portion of specie currency can be replaced with paper currency or other substitutes. However, “the total amount of the currency will remain just as before; the value of the paper and the precious metals, taken together, will be just what the specie alone would be if paper were not used” (p. 413). Wealth and commodities are estimated in the monetary unit, such as the dollar, “and it is by the aid of such estimates that all exchanges are made” (p. 413). “Thus, the idea of money aids us, when the reality is seldom employed” (p. 413). He asserts, “Money is even now only a hypothetical or abstract medium of exchange in all the larger transactions of commerce” (p. 413). Bowen anticipates “the time, in the progress of invention and the discovery of new expedients and facilities in commerce, when it will become so universally; when, at any rate, so costly and useless a realization of the idea as gold and silver coin will be entirely done away” (p. 413). [If Bowen had lived another 85 years, he would have witnessed his dream as gold and silver were no longer part of the monetary system. Also, he could have witnessed the economic disaster that the abandonment of gold and silver coin has brought.]
    Poor responds that Bowen is greatly mistaken:

Money is still, as many find to their cost, far more than a mere scale of valuation. The holders of property, when they sell it, still persist in demanding something more than “hypothetical or abstract media of exchange.” They may be very uncivilized and selfish to demand a quid pro quo in all transactions, and the laws which uphold them very barbarous; but these laws, nevertheless, have maintained their force since laws existed (pp. 413-414).

[Today, what passes for money is little more than an abstract counter, an abstract medium of exchange. It cannot extinguish debt as it is debt. At least mankind is no longer “uncivilized and selfish” as they no longer demand “quid pro quo.” They exchange goods and services for that which has no value in itself and does not represent value.]
    Bowen explains the difference between convertible bank currency and inconvertible paper money. Convertible currency cannot be overissued. If inconvertible paper money “could be kept precisely equal to what the amount of metallic currency would be in case there were no paper in circulation, then there would be no depreciation of the paper; nay, the paper might even command a premium over the coin, if the aggregate value of it were made less than what the coin would amount to, and if it were also possible to prevent the importation of specie.” (p. 414). [Bowen errs. Uncertainty causes inconvertible legal-tender government notes to depreciate. The excessive issue of these notes, as Bowen and the quantity theory of money claims, is not the cause of their depreciation. However, an excess of issue can influence the value of these notes by affecting uncertainty. Uncertainties that affect the value of inconvertible government notes include (1) the uncertainty of when they will be paid or even if they will be a paid, (2) the ability of the government to pay, (3) the willingness of the government to pay, and (4) the kind of coin that will be used for payment. S. McLean Hardy’s statistical study of the U.S. note between 1862 and 1873 shows that uncertainty, and not the quantity of notes, was the driving force behind the depreciation of U.S. notes.] Bowen adds, “Money acquires the power of exercising its functions, not from any intrinsic quality that it possesses, but solely from convention” (p. 414). [The economists whom Poor reviews needed to study the origins of money. They would have found that money acquired “the power of exercising its functions” not from convention, but solely from its intrinsic quality that it possesses. A good place to start is the works of Karl Menger and William. W. Carlile.] Continuing, Bowen writes, “The value of paper money, not depending at all upon its cost of production, is regulated solely by its quantity” (p. 414). [Thus, the quantity theory of money explains the value of money. However, the quantity theory of money seems to have failed to explain the downward trend in prices during the last three decades of the nineteenth century in the United States. Money supply more than doubled, yet general prices declined.] Then he remarks:

A certain determinable sum of money is needed in every nation to effect its current exchanges, and to maintain prices at an equilibrium with the average prices of commodities throughout the commercial world. Coin being banished, if the issue of paper money is less than this sum, the paper will be at a premium; if greater, it will be at a discount (pp. 414-415).

[For decades, every country has operated with a monetary system of inconvertible paper money completely divorced from gold. If Bowen is correct in that the managers of the inconvertible currency can maintain price stability, then the monetary system of every country is operated by either incompetents who lack the knowledge and ability to manage properly their monetary systems or criminals who are deliberately destroying the currencies of their countries. Fiat monetary reformers would argue that they are both. They are criminals transporting the country’s wealth to the rich and powerful by destroying the currency. They are ignorant incompetents for failing to follow the fiat money reformer’s scheme for issuing the currency. However, the fiat money reformers do not agree on the correct scheme to follow except that the government, which is controlled by the rich and powerful, should issue the currency. The fiat money reformers are probably correct in that the money managers are both incompetent and criminals. For that reason, the issuance and regulation of money should be taken from governments and their central banks and left to the markets. In monetary matters, the only action required by the government is to define the monetary unit as a specific weight of precious metal and to punish violations of contracts and acts of fraud.]
    In his concluding remarks about Bowen, Poor writes:

Were Mr. Bowen the only one to be affected by his opinions, they would be of very little consequence; but they become of the greatest importance when taught to young men about to enter the world of affairs, especially when they relate to a subject which concerns, more deeply almost than any other, the welfare of society. What would be thought of a professorship in a university that should still seek to establish the wonderful properties of the philosopher’s stone? The attempt would not be a whit more absurd than his teachings upon the subject of money. The thing chiefly to be regretted is, that there does not seem to be any way in which to rid the universities and the world of such nonsense. So far as money is concerned, all are Alchemists, all are believers in the philosopher's stone, all are intent upon its realization. The first step in the way of reform should be to abolish the “professorship of Political Economy,” not only in this, but in all institutions in which it is now pretended to be taught; and either abandon instruction in it altogether, or put its duties in commission. In the latter case, whatever was taught would at least have the merit of being as broad as the course of instruction would allow (p. 415).

Endnote

1. William Harold Hutt, Individual Freedom: Selected Works of William H. Hutt, editors Svetozar Pejovich and David Klingaman (Westport, Connecticut: Greenwood Press, 1975), pp.207-209.

Copyright © 2017 by Thomas Coley Allen.

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Poor on Law

Poor on Law

Thomas Allen

    In 1877, Henry Varnum Poor (1812-1905) wrote Money and Its Laws: Embracing a History of Monetary Theories, and a History of the Currency of the United States. He was a financial analyst and founder of a company that evolved into Standard & Poor’s. Poor was a proponent of the real bills doctrine and the classical gold-coin standard and, thus, the quality theory of money. He gave little credence to the quantity theory of money — especially if credit money, such as bank notes, were convertible on demand in species. Also, he contended that the value of money depends on and is derived from the value of the material of which it is made and with paper money, its representation of such value.
    In the latter part of his book, he discusses leading monetary theorists from Aristotle (350 B.C.) to David A. Wells (1875). Most of the economists whom he discussed were proponents of the quantity theory of money. We will look at his discussion on John Law. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
    John Law (1671-1729) was a Scottish financier and gambler. He attempted to revive France by opening a bank to issue paper money. In 1716, he opened his bank, which became the Royal Bank with Law as its director. Reckless lending by his bank led to the financial panic of 1720. Poor reviews Law’s Money and Trade Considered (1705).
    Law argues “that articles of property, other than silver . . . might be made into money, or might be made the basis for the issue of paper money in place of one of silver” (pp. 81-82). [At the time that Law wrote, silver was the primary species in circulation.] According to Law, using items other than silver as money or as the basis for paper money should greatly benefit the public.
    Law declares, “The value of silver as money is its value in barter” (p. 82). He continues:

The additional value silver received from being used as money was because of its qualities which fitted it for that use, and that value was according to the additional demand its use as money occasioned. . . . Money is not a pledge, as some call it; it is a value paid, or contracted to be paid, with which it is supposed the receiver may, as his occasions require, buy an equal quantity of the same goods he has sold, or other goods equal in value to them; and that money is the most secure value either to receive, to contract for, or to value goods by, which is least liable to change in its value. . . . Thus silver having a value and qualities fitting it for money, which other goods had not, was made money, and, for the greater use of the people, was coined (pp. 82-83).

    Poor agrees that “Law was entirely right in assuming that the value of silver was its value in barter” (p. 83). However, Law “was mistaken . . . in asserting that it derives a value from its use as money, unless by its use as money he meant its use as reserves” (p. 83). [Most people who believe that money has value because of the material of which it is made believe that its use as money adds to that material’s value, whether such money is used as reserves or as a circulating purchasing medium.] Poor adds, “It is not their [gold and silver] use as a medium of exchange that constitutes their value: it is their value in the arts and their capacity to serve as reserves that give them their value in exchange” (p. 83). [In Dawn of Gold: The Real Story of Money, Philip Barton argues that gold originally received much of its value as money from its use in religion. William Carlile argues in The Evolution of Modern Money that gold evolved into money from its use as ornamentation as an expression of status.]
    Law argues:

Silver money is more uncertain in its value than other goods, so less qualified to serve as money. . . . Silver in bullion or money changes its value from any change in its quantity, or in the demand for it. . . . [S]ilver or money is dearer or cheaper, being more or less valuable, and equal to a greater or lesser quantity of goods. . . . More durable goods, as metals, materials for shipping, &c., increase in quantity beyond the demand for them, so are less valuable (pp. 83-84).

    Poor comments that Law’s assumption “are exactly opposed to the fact. The value of silver is uniform from the uniformity of its production and of the demand for it. Should there be some excess in production for one or more years, such excess would be taken up at previous prices to be held as reserves (so long as silver is legalized as money)” (p. 84). Poor continues, “Unlike other merchandise, the market for silver is the world. Until the markets of the world are glutted, it cannot fall materially in value from increase of production.” (p. 84). [As long as a country is on the silver standard, the “price” of silver will not change because the monetary unit is defined as a specific weight of silver. When the United States were on a de facto silver standard under its bimetallic system, one dollar would always buy 371.25 grains of silver because the dollar was defined as 371.25 grains of silver. That is, the “price” of 371.25 grains of silver was always one dollar, which was 371.25 grains of silver. {The price of 371.25 grains of silver was not fixed at one dollar, the dependent variable. The dollar was fixed at 371.25 grains of silver, the independent variable.} Moreover, Benjamin Anderson argues in The Value of Money that the supply of money and the demand for money does not determine its value. He argues that the “value of money is a quality of money, that quality which money shares with other forms of wealth, which lies behind, and causally explains, the exchange relations into which money enters.”[1] “Value {of money} is prior to exchange. Value is not to be denned as ‘power in exchange.’”[2] According to Anderson, the social value theory best explains the value of money: “the social value theory is the only way of giving a psychological explanation to the demand-curve, and a marginal value explanation of marginal demand-price.”[3]  Thus, the value of money derives from the value of the commodity of which it is made and from its services as money. The value of the commodity as money combines with the value of the commodity in its nonmonetary use. Like all other commodities, and everything else, the value of the monetary metal and of its use as money is psychological. Anderson concludes, “The physical weight in gold, which itself is an object of social value, is commonly the immediate basis of the value of the dollar to-day, but money may get its primary value from other sources than valuable bullion. Given this primary value, the dollar may get an enhancement in that value from the services which it performs in the social technology of adjustment.”[4].]
    Poor remarks:

Although at the outset some of Law's propositions in reference to money were eminently sound, he was compelled to sacrifice them so soon as he began to unfold his scheme. Those who came after him were incapable of appreciating him where he was right, but were certain to follow him wherever he was wrong. . . . Economists have borrowed greatly from Law, from whom, from the disgrace attached to his name, they could copy without reference and with impunity. They constructed, in great measure, from the ruins he left behind, their grotesque and absurd edifices (pp. 84-85).

    Law proposes to substitute paper money based on land instead of silver. Unlike silver, Law believes that his land-based paper money would not fall in value. Land is more likely to maintain its value than any other goods because it does not increase in quantity. [Law’s notion that land maintains its value is wrong. The value of land can vary greatly, even over a few years. In 1991, the aggregate value of all the land in Japan was almost four times that of the United States. By 2005, land in Japan had lost half its value while land in the United States had more than tripled in value.]
    Poor remarks that no one would borrow or accept Law’s land notes unless they could use them “to obtain coin, or merchandise, the equivalent of coin, — capital that could be used in their industries” (p. 86). Holders of these land notes could not convert them to the land backing them. Whether well secured or not, Law’s land notes “could never get into circulation” (p. 86). To avoid this difficulty, Law declared, “Money is not the value for which goods are exchanged, but the value by which they are exchanged. The use of money is to buy goods; and silver, while money, is of no other use” (p. 86).
    Poor is convinced that Law doubts that people would willingly receive his land money for other articles. Poor remarks, “As he [Law] could not give up his scheme, his principles had to give way to his necessities, and he was forced to assert the exact opposite to that which he had affirmed, and the truth of which he had conclusively demonstrated” (p. 86). Thus, Law declares that money “was not the value for which goods were exchanged, but the value by which they were exchanged” (p. 86). Poor continues, to Law money “was the yardstick by which goods were measured off, — a contrivance to assist in numeration, — a tally or counter to register the delivery of certain quantities or values of merchandise; in other words, value was not a necessary attribute of money” (p. 86). [This notion that money is merely a counter and that value is not a necessary attribute of money is held by most of the writers whom Poor reviews and by today’s fiat money proponents.]
    Law identifies several criteria that make land superior to silver as money. One is that land produces everything, including silver. Thus, silver is just a product. Another is that, unlike silver, land does not increase or decrease in quantity and is, therefore, more certain in its value. Also, unlike silver, land can be improved and, by that, increase the demand for it. Land cannot lose any of its uses whereas silver can. When land is used as money, it does not lose any of its other uses; however, silver used as money cannot simultaneously be used for other purposes. [See “Land-Backed Currency” by Thomas Allen, which explains the inferiority of land as the basis for money.] Poor replies, “A mortgage on real property may possess a high value, and yet bare no other attributes fitting it to serve as money” (p. 87).
    Law also knew that his land money would not be accepted abroad. Therefore, he asserts “that it was not necessary that it ever should pass abroad; that the domestic trade of a nation was alone to be considered” (p. 88).
    About Law, Poor writes:

He took the short cut of throwing his principles overboard without the least compunction, whenever they came into conflict with his purposes. He was a man of action, who never stopped to explain, but pushed right forward to the object he had in view. For him to doubt and inquire would be to give up the contest altogether. His life was a mission to promote, in the first place, the welfare of his own country, by supplying it with money — capital; and every consideration was subordinate to this grand idea (p. 88).

Copyright © 2017 by Thomas Coley Allen.

More articles on money.

Endnotes
1. B.M. Anderson, The Value of Money (New York: The Macmillian Co., 1917), pp. 8-9).

2. Ibid., p. 9.

3. Ibid., p. 42.

4. Ibid., p. 591.

Poor on Aristotle

Poor on Aristotle

Thomas Allen

    In 1877, Henry Varnum Poor (1812-1905) wrote Money and Its Laws: Embracing a History of Monetary Theories, and a History of the Currency of the United States. He was a financial analyst and founder of a company that evolved into Standard & Poor’s. Poor was a proponent of the real bills doctrine and the classical gold-coin standard and, thus, the quality theory of money. He gave little credence to the quantity theory of money — especially if credit money, such as bank notes, were convertible on demand in species. Also, he contended that the value of money depends on and is derived from the value of the material of which it is made and with paper money, its representation of such value.
    In the latter part of his book, he discusses leading monetary theorists from Aristotle (350 B.C.) to David A. Wells (1875). Most of the economists whom he discussed were proponents of the quantity theory of money. We will look at his discussion on Aristotle.
    Aristotle (384-322 B.C.) was a Greek philosopher, educator, and scientist. He is the source of the monetary theories of the ancient world and even modern times. Also, he taught the unlawfulness of usury. He had many false ideas about money that took nearly two millennia to correct. Even today some people still promote several of his false ideas.
    Poor critiques Aristotle’s exposition on money in his Politics. My comments are in brackets. Referenced page numbers enclosed in parentheses are to Poor’s book.
    Poor quotes Aristotle’s Politics where Aristotle discusses barter and money (pp. 62-65). Aristotle distinguishes between acquisition with money and acquisition by other means, e.g., natural increases of flocks and herds, and the soil and the spoils of war. Money acquisition is not natural in that it arises from some act or skill. According to Aristotle, “barter in general had its original beginning in Nature, from the fact that some men had a surplus, and others less than was necessary for them. And hence it is evident that the selling provisions for money is not naturally a part of pecuniary science; for men were obliged to use barter as far as would supply their wants” (p. 62). From barter rose the use of money. Money became necessary to import and export goods over great distances.
    Aristotle continues:

Money, then, being devised from the necessity of mutual exchange, the second species of money-getting arose, namely, by buying and selling; and this was conducted probably at first in a simple manner, but afterwards it came to employ more skill and experience as to where and how the greatest profit might be made. . . . For men oftentimes suppose wealth to consist in the quantity of money which any one possesses, as this is that medium with which trading and trafficking are concerned; others regard it as a mere trifle, as having no value by nature, but merely by arbitrary compact; so that, if those who use it should alter their sentiments, it would be worthless and unserviceable for any necessary purpose. . . . [T]he mere getting of money differs from natural wealth, and the latter is the true object of economy; while trade only procures money, not by all means, but by the exchange of it; and it seems to be chiefly employed about trading, for money is the element and the regulator of trade, nor are there any bounds to be set to the wealth which is thereby acquired. . . . [I]n the art of acquiring riches, its end has no limits, for its object is money and possessions; but economy has a boundary, though the former has not; for acquiring riches is not its real end. And for this reason it should seem that some boundary should be set to riches, though in practice we see the contrary of this taking place; for all those who get riches add to their money without end. The cause of this is the near connection of these two arts with each other, for they sometimes change employment with each other, as getting of money is their common pursuit. For they each employ the same thing, but not in the same manner; for the end of the one is something beyond itself, but the end of the other is merely to increase it; so that some persons are led to believe that this is the proper object of economy, and think that for this purpose they ought to continue to save or to hoard up money without end. . . . Such persons make every art subservient to money-getting, as if this was the only end, and to this end every thing ought to contribute (pp. 63-64).

    Aristotle adds:

[A]s to money, in some respects it is the business of the master of the family, in others not, but of the servile art. . . . [S]ince these riches may be applied . . . to two purposes, the one to make money of, the other for the service of the house; of these the one is necessary and commendable, the other, which has to do with traffic, is justly censured, for it has not its origin in Nature, but amongst ourselves; for usury is most reasonably detested, as the increase of our fortune arises from the money itself, and not by employing it to the purpose to which it was intended. For it was devised for the sake of exchange, but usury multiplies it. . . . [U]sury is merely money born of money: so that of all means of money-making this is the most contrary to Nature (pp. 64-65).

[According to an old saying, a Yankee farmer ate what he could not sell; a Southern farmer sold what he could not eat. Thus, based on Aristotle’s reasoning, the Southern farmer acted more naturally than the Yankee farmer.]
    About Aristotle’s ideas on money, Poor writes:

His method of resolving all questions by verbal distinctions, by dialectics, relieved him of all necessity of investigation into, or analysis of their law. Of this, his treatment of money and of loans of it at usury affords a striking illustration. Money was an invention for the purpose of facilitating exchanges of property. To use it for any other purpose was against Nature; usury, — “money born of money,” — a crime (p. 65)!

Thus, Aristotle’s false methodology lead to false conclusions, which, unfortunately, received the status of dogma.
    According to Poor, Aristotle had “an eminently unscientific mind” (p. 65). Moreover, at the time that he wrote, “it was in the highest degree impious to question the beliefs and traditions of the past” (p. 65) on most subjects. and “[p]henomenon still stood for law” (p.65). Poor adds:

His method was necessarily deductive, from his utter ignorance of, or inability to use, the inductive; from the imperiousness and arrogance of his nature, and from the purpose he had in view, which was nothing less than to solve, in an age wholly incapable of any thing like an adequate investigation of natural law, every question coming within the range of human experience. . . . Never disturbed by a doubt as to the soundness of his premises, he assumed to dispose by a single stroke, not only of problems for which, with all the lights of the present day, ages will hardly suffice, but those which wholly transcend human capacity (p. 66).

    Poor continues, “The premises from, which he reasoned were the untrained observations of phenomena, or the extravagant fictions of an ardent and fanciful mind. The conclusions to which he came were as grotesque and fanciful as the premises themselves” (p. 67). Aristotle’s fatal fault was assuming the truth of the premises upon which his system was constructed (p. 70).
    Poor notes that theories and opinions about money and loans of money at interest, usury, during the Middle Ages and even into modern times come from Aristotle and usually without examination or reservation (pp. 72-73). [Usury, as used by Poor and during the Middle Ages, covered any kind of interest-bearing loan, not just loans with exorbitant interest rates. Some people claim that the Bible prohibits charging interest on loans, usury. They quote Deuteronomy 23:19: “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury.” However, the Bible does not forbid usury per se. These people ignore the next verse, Deuteronomy 23:20, which reads “Unto a stranger thou mayest lend upon usury. . . .” “Stranger” means a person of a different race {v. “Stranger in the Old Testament” by Thomas Allen}. Although the Bible condemns loans at interest to a person of the lender’s race, it allows interest-bearing loans to people of other races {v. “Questions for Anti-Usurers” by Thomas Allen}.]
    Summarizing Aristotle’s views on money, Poor writes:

With him, money was invented for a specific purpose, and was entitled to no consideration, for the reason that such purposes or objects were contrary to Nature. Those that were according to Nature were war, the chase, the care of herds, and the gathering of the fruits of the fields. Such only were worthy of freemen who had a part in the administration of the government. With him, trade and the mechanical arts were contrary to Nature, were servile; and, as such, were worthy only of those who occupied an inferior political or social condition, and of slaves. Money was held in the same indifference or contempt as were those by whom it was chiefly used. It was unworthy of notice or investigation; it was base because those who used it, and the employments in which it was used, were base (p. 73).

    Summarizing Aristotle’s views on usury, Poor writes:

The views of Aristotle on the subject of usury are a necessary sequence of his views upon the subject of money. If money-getting by trade, or by exchanges in which it was used, was contrary to Nature, loans of it at usury could be no less so. They were only an aggravation of the original wrong (p. 73).

    Poor concludes his discussion on Aristotle with a quotation from William Lecky (1838-1903):

This absurdity of Aristotle and the number of centuries during which it was so incessantly asserted, without being, so far as we know, once questioned, is a curious illustration of the longevity of a sophism when expressed in a terse form and sheltered by a great name. It is enough to make one ashamed of his species to think that Bentham, so late as 1787, was the first to bring into notice the simple consideration that, if a farmer employs borrowed money in buying bulls and cows, and if these produce calves to the value of ten times the interest, the money borrowed can scarcely be said to be sterile, or the borrower to be a loser (p. 73)!

Copyright © 2016 by Thomas Coley Allen.

More articles on money.

Why Did Gold and Silver Become Money

Why Did Gold and Silver Become Money
Thomas Allen

Before man discovered money, he traded by barter. Under the barter system, a person trades what he does not need with someone who has what he wants. Barter occurs when two people agree to exchange items that they possess.

For example, a hunter wants a spear. He has a knife that he can trade for a spear. He has to find someone who has a spear and who wants a knife more than he wants a spear. Once he finds such a person, he can trade his knife for a spear. The two come together and exchange the knife and spear. This is barter.

If the person with the spear wants a bowl instead of a knife, the trade does not take place. The hunter with the knife must find someone with a bowl who is willing to trade it for a knife. If he finds such a person, he trades the knife for the bowl. Now he can trade the bowl for the spear that he really wants.

This hunter is on his way to discovering money. He has obtained the bowl not to consume it, but to exchange it for that which he wants to consume. In this exchange, the bowl is functioning like money for the person who wants to exchange a knife for a spear.

In another example, an egg man wants a pair of shoes. A pair of shoes is worth 12 dozen eggs. However, the shoemaker wants only two dozen eggs. The egg man wants shoes, and the shoemaker wants eggs. Yet the shoemaker does not want 12 dozen eggs at once. Under barter, the only way that the trade can be made is for the shoemaker to suffer a great loss and accept only two dozen eggs or accept 12 dozen eggs and discard 10 dozen eggs that he does not want. Thus, this trade will not take place unless the shoemaker changes his valuation of eggs and values two dozen eggs more than he values the shoes. How are the shoemaker and egg man going to solve this problem?

The shoemaker discovers that eggs are highly marketable in his community. He realizes that he can easily trade excess eggs for other things that he wants. Thus, the shoemaker accepts the egg man’s 12 dozen eggs for a pair of shoes. The shoemaker keeps the two dozen that he wants to consume and uses the other 10 dozen to trade for other things. He trades one dozen to the baker, who always needs eggs for his products, for a loaf of bread. Next, the shoemaker trades three dozen eggs with the butcher for a pound of meat. Finally, he trades the remaining six dozen eggs with the tanner for leather.

Observing the action of the shoemaker, the tanner uses eggs to obtain other things that he desires. As the tanner only wants two dozen eggs, he trades one dozen for bread and five dozen for his assistant’s labor. Following the example of his master, the tanner’s assistant consumes one dozen and trades one dozen for bread and three dozen for meat.

Thus, the shoemaker, the tanner, and the community have discovered money. Eggs have become money. People start acquiring eggs not to consume them, but to trade or exchange them. They are trading for eggs so that they can trade eggs for products and services that they want.

Barter is a highly inefficient system of exchange. With barter, trades often cannot be made because one party does not want what the other has to trade. Or the difference in value of the items being offered for trade is too great for the trade to occur. That is, one or both parties in the potential trade value what he has to offer more than he values what the other person is offering.

Furthermore, with barter no common denominator of value exists. Under the above example with eggs, eggs become the common denominator of value. People begin comparing the value of things in terms of eggs. Thus, three loaves of bread (worth one dozen eggs each) equal one pound of meat (worth three dozen eggs). In other words, the price of bread is one dozen eggs per loaf, and the price of meat is three dozen eggs per pound. (Under the gold standard, people compare the exchange value of various things in terms of gold, or more correctly, in grains of gold.)

Money makes the comparison of the values of various items easy by reducing everything to a common denominator. Consequently, money measures value.

In order for money to function as a measure of value, i.e., the thing by which the values of things are compared, it must have value itself. It must have purchasing power. People must be able to exchange it for the items that they are comparing.

Jevons sums up the difficulty of barter as follows:

The first difficulty in barter is to find two persons whose disposable possessions mutually suit each other’s wants. There may be many people wanting, and many possessing those things wanted; but to allow of an act of barter, there must be a double coincidence, which will rarely happen. . . .

A second difficulty arises in barter. At what rate is any exchange to be made? If a certain quantity of beef be given for a certain quantity of corn, and in like manner corn be exchanged for cheese, and cheese for eggs, and eggs for flax, and so on, still the question will arise—How much beef for how much flax, or how much of any one commodity for a given quantity of another? In a state of barter the price-current list would be a most complicated document, for each commodity would have to be quoted in terms of every other commodity, or else complicated rule-of-three sums would become necessary. Between one hundred articles there must exist no less than 4950 possible ratios of exchange, and all these ratios must be carefully adjusted so as to be consistent with each other, else the acute trader will be able to profit by buying from some and selling to others. . . .

A third but it may be a minor inconvenience of barter arises from the impossibility of dividing many kinds of goods.[1]

Money eliminates the first two of Jevons’ difficulties. It eliminates the first because people trade for money not to consume it, but to exchange it for things to consume. It eliminates the second because it is the common denominator by which values are compared. If a commodity like gold or salt becomes money, it eliminates the third as gold and salt are highly divisible.

Man has used many and various commodities for money. In different times and places, these commodities have included salt, furs, tea, tobacco, sugar, cocoa, iron, copper, base metals, ivory, and cowrie shells. Slaves and women have also functioned as money. Cattle were the most popular form of money in the ancient world as cattle were usually the most saleable commodity. The cattle standard still existed in some regions at the time of Mohammed.[2] As more people began living in towns and cities, the marketability of cattle declined, which caused their use as money to decline. Eventually, the markets settled on gold and silver as the best commodities for money. What each of these commodities possessed at one time or another and in one place or another was their high saleability. Each was the commodity most easily sold at that time and place. Thus, money became the medium through which exchanges were made. That is, it became the medium of exchange. Ultimately, gold and silver became the most saleable commodity and, therefore, money.

One of the earliest recordings of a precious metal being used as money is Genesis 23:16. Abraham bought a burial plot for 400 shekels of silver. This verse shows that commodity money (real money) has three components: quantity (400), measurement of weight (shekel), and substance (silver).

In pre-1933 money, if a person bought something with a $20 gold coin, he paid with money that had quantity (20), measurement (dollar, a unit of weight equal to 23.22 grains), and substance (gold). If he paid with a $20 gold certificate, his currency promised to deliver money containing these three components on demand.

The current federal reserve note lacks two of these three components. For example, a $20 federal reserve note has quantity (20). The dollar appears to be its measurement. However, it is not. It is an abstraction. It measures nothing of substance. A unit of measurement has to be something concrete and definable like the foot, ounce, minute, or horsepower so that things can be compared to it. It has to be something that instruments can determine. It also lacks substance as its monetary value exceeds the value of the material of which it is made and it does not promise to deliver anything concrete.

With pre-1933 gold money, a $20 gold coin weighed twice as much as $10 gold coin. Even if the disks had no inscription on it, a disk containing 464.4 grains of gold had twice the purchasing power of a disk containing 232.2 grains of gold. It was twice as large and weighed twice as much.

Federal reserve notes cannot be measured. If all the inscriptions are removed from them, a $20 federal reserve note would look like a $10 federal reserve note. They would both have the same value: nothing.

What are the attributes of gold and silver that led them to become the money of choice? For any commodity to serve adequately as money, it needs to be portable (relatively high value per unit of weight), homogeneous or uniform, durable, divisible, recognizable, highly marketable (highly liquid, universally acceptable), and stable in value. Only the most marketable or saleable commodities become money. They must be readily acceptable in exchange for all goods offered in the markets. Gold and silver possess these qualities. They have survived the historical test of time to emerge as the monetary commodities par excellence.

The great advantage that gold and silver have over other commodities is that their flow-to-stock ratio is extremely low. That is, newly mined gold or silver coming into the markets each year (flow) is small compared to the existing quantity that can be easily converted to monetary use (stock). (Some refer to the quantity of a commodity that is readily available for conversion to money or anything else as “inventory.” They call stock the total quantity of the commodity in existence, which includes inventory and the quantity of the commodity bound up in products, such as copper wire in houses or gold in fillings.)

Zurbuchen estimates that 4,720 million ounces of gold have been mined through 2004. (All ounces in this paper are troy ounces.) Of this amount, he estimates that 4,250 million ounces are available for monetary use.[3] The rest has been lost, or its recovery is not economically feasible. About 79 million ounces of gold were mined in 2004.[4] Thus, the gold supply available for monetary use increased by about 1.9 percent in 2004.

For silver, Zurbuchen estimates 45,380 million ounces of silver has been mined through 2004.[5] Of this amount, he estimates that 20,990 can be easily converted to monetary usage; this is the silver inventory. With a sufficient increase in value, another 4,000 million ounces could be converted, which gives a total of 24,990 million ounces.[6] Much more silver than this is recoverable, but under present conditions, such recovery is not economically feasible. About 40.2 million ounces were mined in 2004.[7] Thus, the silver supply readily available for monetary use increased by about 0.2 percent in 2004. However, because manufacturers use a large quantity of silver as essential components in their products, the quantity of newly mined silver available for monetary usage would be much less.

Platinum is a precious metal that has occasionally been used as a monetary metal and is at times promoted as a monetary metal. However, platinum lacks one of the important characteristics of gold that makes gold an excellent monetary metal and platinum a poor one. Unlike, gold, platinum’s flow to stock ratio is high. That is, the quantity of newly mined platinum entering the markets is high compared to the existing stock that could easily be used for money. Most of the above-ground platinum is in products that make its conversion to money uneconomical.

Platinum has an available stock (inventory) of about 10 metric tons or 321, 510 ounces. The annual production of platinum is about 200 metric tons or 6,430,000 ounces. Thus, platinum’s flow to stock is about 200 percent as compared to gold’s less than 2 percent.[8] Conversely, the stock-to-flow is 5 percent for platinum and 54 percent for gold.

When a commodity’s stock is large compared to its flow, its value varies little. Consequently, gold’s value is fairly stable. Conversely, when a commodity’s flow is large compared to its stock, its value can fluctuate enormously. Such large changes in value are seen annually in many agricultural commodities. Likewise, platinum is prone to more significant changes in value than either gold or silver.

However, a commodity with an extremely low stock-to-flow ratio does not necessarily make it a good candidate for money. Land has an almost infinitesimally small stock-to-flow ratio. Yet it makes poor quality money. It lacks homogeneity as its value is highly dependent on location, fertility, and underlying mineral content. It is not portable; one cannot move an acre of land from Australia to Greenland. Land lacks liquidity and is not universally acceptable and, therefore, is not highly marketable. Unlike gold, land cannot be exchanged (sold) quickly without a noticeable loss in value.

When land has been used to back the currency, the results have been disastrous. France used land for money, i.e., as backing for the assignat, between 1790 and 1796. Even the Reign of Terror failed to maintain its value. The assignat inflated itself to death.

People have many misconceptions about the gold and silver standards. Under the gold and silver standards, gold and silver are money, i.e., the monetary unit is defined as a specific weight and fineness of gold or silver. Paper money is a substitute for gold or silver and is redeemable in gold or silver on demand. Neither the government nor its central bank manages the money. If the government or its central bank manages gold and silver to carry out a monetary policy, then a true gold and silver standard does not exist. When the government or its central bank decides the money supply instead of the markets, fiat money exists even if the money is made of gold or silver.

Gold is often used in the monetary system in ways that do not constitute the true gold standard.

First, gold can be used to back a currency that is irredeemable. For example, between 1933 and 1968, Congress required federal reserve notes to have some gold backing.

Second, the government may issue paper money that is redeemable in gold. The government buys gold and uses it, either as coins or bullion, to back its paper money. Often it issues more notes than it has gold backing it. An example of this type of money is the U.S. note between 1879 and 1933.

Third, the government buys gold on its own account and coins it. This type of monetary system looks like a gold coin standard, but it is not. The government arbitrarily decides the quantity of coins to issue. An example of this system in the United States involved silver dollars between 1873 and 1900. After 1873, the U.S. government no longer allowed the free coinage of silver. Instead, it bought silver bullion on its own account and coined it into silver dollars, which it declared legal tender and standard money and did not directly redeem them into gold until 1900.

Fourth, requiring the Federal Reserve to expand or contract the money supply and credit to keep the price of gold within a specific range, as some supply-side economists recommend, is obviously not a gold standard. It is a fiat monetary system where the price of gold becomes the index by which to adjust the money supply.

Fifth, Irving Fisher’s plan to make dollars redeemable in gold based on purchasing power as determined by an index instead of weight is not a true gold standard.

Although these systems use gold (or silver), they are not commodity standards. They are forms of fiat money because the government or its central bank arbitrarily controls the money supply. The quantity of money does not expand or contract to meet the needs of commerce; the law and the U.S. government’s collections and disbursements fix the quantity.

Two other forms of standards that use gold are sometimes promoted. They are the gold bullion standard and gold exchange standard. These standards, especially the gold bullion standard, are more like commodity standards. However, gold coins do not circulate under either of these standards.

Under the gold bullion standard, paper money is redeemable only in large bars of gold bullion. The country’s money is not redeemable in gold coins. Consequently, it is considered a rich man’s standard. Because redemption is in large high-value bars, few besides specialists in foreign trade redeem notes for gold. Gold bullion presented to the government or its central bank is not coined. Instead, the government or its central bank pays the presenter in government notes or bank notes.

About the gold bullion standard, Hazlitt comments, “A full gold-coin standard is desirable because a gold-bullion standard is merely a rich man's standard. A relatively poor man should be just as able to protect himself against inflation, to the extent of his dollar holdings, as a rich man.”[9]

Under the gold exchange standard, gold can only be used to transfer payments in gold to approved foreign institutions. Governments created the gold exchange standard. It is a politically created system and not a product of the markets. The gold-exchange standard allows governments and their central banks to manipulate international gold flows for political reasons. The government holds the reserves of its foreign claims in gold. Most of the world’s gold ends up in the vaults of a few central banks. The gold exchange standard offers little resistance to the desires of governments to inflate their currencies. Gold is subordinated to governmental policies and goals. Because of domestic inflation, against which it offers little resistance, the gold exchange standard becomes unstable and dysfunctional. Most of the world operated under a modified gold exchange standard between 1944 and 1971. (This standard was more of a dollar standard as foreign currencies were pegged to the dollar, which was pegged to gold at $35 per ounce.) It ended when President Nixon refused to exchange gold for dollars held by foreign institutions.

Under the true gold standard and silver standard, the value of the metal in its monetary uses equals its value in its nonmonetary uses. To maintain this equality, people must be free to convert bullion into coins and coins into bullion and other products. No restrictions, including tariffs and quotas, can be placed on the importation and exportation of the monetary metal in any form. Restrictions on importation and exportation distort the markets and the value of the monetary metals and artificially interfere with the equalization of the value of the metal in its monetary and nonmonetary uses.

In summary, the true gold and silver standard has the following attributes:[10]

1. Gold and silver do not back the money; gold and silver are the money.

2. The price of gold and silver is not fixed. The monetary unit is a specific weight of gold or silver.

3. Gold and silver coins circulate as money.

4. The value of a coin is the value of its metal content.

5. There is the free coinage of gold and silver: Anyone can bring any amount of gold and silver to the mint, which does not have to be owned by the government, and get it coined.

6. Anyone can melt coins without restriction and use their metal for nonmonetary purposes.

7. No restrictions are placed on exporting or importing gold and silver.

8. All paper money is redeemable in gold or silver on demand.

9. The supply of money is self-regulating and automatically adjusts to meet the demand for metallic money. The government does not manage or otherwise manipulate the money supply. No monetary policy is necessary, and none is desirable.

10. The government does not issue any paper money or buy gold or silver and coin it on its own account.

11. Gold and silver coins are the property of the individual holding them; they are not the property of the government. No restrictions or controls are placed on the private ownership of gold or silver.

12. Legal tender laws are unnecessary and undesirable.

13. The government’s monetary duties are limited to defining the monetary unit, coining all gold and silver presented to it for coinage and guaranteeing the weight and fineness of such coins, punishing counterfeiters of such coins, punishing issuers of paper money who fail to redeem their paper money on demand, and punishing acts of fraud and enforcing contracts in monetary matters.

A common misunderstanding about a commodity standard is that the government fixes the price of the monetary commodity. Many people believe that under the gold standard, the government fixes the price of gold. For example, if an ounce of gold exchanges for $20, the government has fixed the price of gold at $20 per ounce. No one would sell gold bullion for less than $20 per ounce because he could take the bullion to the mint and get it minted into coins at $20 per ounce. Furthermore, no one would pay more than $20 per ounce for bullion because he can melt coins to obtain bullion.

Under the gold standard, the government does not fix the price of gold. It defines the monetary unit, such as the dollar, as a specific weight of gold. That is, the dollar is a specific weight of gold. For example, the dollar is defined as 1/20 of an ounce of gold or 24 grains of gold. The dollar is 24 grains of gold. It is a unit of weight like the pound. It is just limited to money. By declaring the dollar to be 24 grains of gold, the government has no more fixed price of gold than it has fixed the price of a pound by declaring it to be 7000 grains. The dollar is a unit of weight like the pound or gram. It is just limited to gold. The dollar is fixed in terms of gold; gold is not fixed in terms of the dollar.

Another way of stating this point is in terms of the independent variable and the dependent variable. People who claim that the price of gold is fixed under the gold standard are claiming that an abstract unit of value, e.g., the dollar, is the independent variable. A concrete weight of gold is the dependent variable. Thus, an abstraction fixes the value of a concrete weight of gold.

Conversely, people who claim that under the gold standard that the price of gold is not fixed claim that the value of gold is the independent variable. The monetary unit is the dependent variable as it is a fixed weight of gold. A concrete weight of gold fixes the value of the monetary unit.

“The metre is the length of the path travelled by light in vacuum during a time interval of 1∕299 792 458 of a second.”[11] If they are consistent, people who claim that the government fixes the price of gold instead of gold defining the value of the monetary unit must argue that the government fixes the distance that light travels in a fraction of a second instead of defining that distance as the length of a meter. How absurd. The government defines the abstraction, the “meter,” in terms of the tangible distance that light travels in a fraction of a second. It does not define the tangible distance that light travels in a fraction of a second in terms of the abstraction. Likewise, with gold, the government defines the abstract monetary unit in terms of a tangible weight of gold.

This discussion may seem to be an unimportant discourse about semantics. It is not. The distinction is highly important. Is gold to be fixed in dollars, i.e., gold is priced in dollars? That is, the government declares that the dollar is an abstraction, and it has arbitrarily fixed the price of gold. This notion leads quickly down the road to paper fiat money. On the other hand, is the dollar to be fixed in gold, i.e., the dollar is a unit of weight of gold? The government declares the dollar to be a tangible and defines it as a measurable amount of gold. This notion is the essence of the gold standard; the monetary unit is a weight of gold.

In closing here is what some notables, in no particular order, have said about the gold standard.

Friedrich A. Hayek:

[I]t [the gold standard] created in effect an international currency without submitting national monetary policy to the decisions of an international authority; it made monetary policy in a great measure automatic and thereby predictable; and the changes in the supply of basic money which its mechanism secured were on the whole in the right direction.[12]

Henry Hazlitt:

The gold standard not only helps to ensure good policy and good faith; its own continuance or resumption requires good policy and good faith. . . . just as “managed” paper money goes with a statist economy in which the citizen is always at the mercy of bureaucratic caprice, so the gold standard is an integral part of a free-enterprise economy under which governments respect private property, economize in spending, balance their budgets, keep their promises, and above all refuse to connive in inflation—in the overexpansion of money or credit.[13]

Ludwig von Mises:

The eminence of the gold standard consists in the fact that it makes the determination of the monetary unit’s purchasing power independent of the measures of governments. It wrests from the hands of the “economic tsars” their most redoubtable instrument. It makes it impossible for them to inflate. This is why the gold standard is furiously attacked by all those who expect that they will be benefitted by bounties from the seemingly inexhaustible government purse.[14]

Benjamin Anderson:

Gold is an unimaginative taskmaster. It demands that men, banks, and the government be honest. It demands that they create no debt without seeing clearly how these debts can be paid. If a country will do these things, gold will stay with it and come to it from other countries. But when a country creates debt light-heartedly, when a central bank makes interest rates low and buys government securities to feed its money market, and permits an extension of credit that goes into slow and illiquid assets, then gold grows nervous. There comes a flight of capital out of the country. Foreigners withdraw their funds from it, and its own citizens send their liquid funds away for safety.[15]

Barry Eichengreen:

There can be no question that the development of the international gold standard in the second half of the 19th century and the enormous growth of international trade and investment which took place are no mere coincidences. The hallmark of the prewar gold standard was precisely its ability to accommodate disturbances to financial markets without causing severe business cycle fluctuations. . . . For more than a quarter of a century before WWI, the gold standard provided the framework for domestic and international monetary relations. Currencies were convertible into gold on demand and linked internationally at fixed exchange rates. Gold shipments were the ultimate means of balance of payments settlement. The gold standard had been a remarkably efficient mechanism for organizing financial affairs. No global crisis comparable to the one that began in 1929 had disrupted the operation of the financial markets. No economic slump comparable to that of the 1930s had so depressed output and employment.[16]

Alan Greenspan:

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense —perhaps more clearly and subtly than many consistent defenders of laissez-faire—that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.[17]

Edwin Vieira:

Silver and gold as currencies supply the foundation necessary for economic democracy and limited government; whereas fiat currencies inevitably function as the tools of fascism, socialism, and every other form of financial imperialism.[18]

Mises again:

The excellence of the gold standard is to be seen in the fact that renders the determination of the monetary unit's purchasing power independent of the policies of governments and political parties. Furthermore, it prevents rulers from eluding the financial and budgetary prerogatives of the representative assemblies. Parliamentary control of finances works only if the government is not in a position to provide for unauthorized expenditures by increasing the circulating amount of fiat money.[19]

Mises again:

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.[20]

Joseph Schumpeter:

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.[21]

Mises again:

The struggle against gold which is one of the main concerns of all contemporary governments must not be looked upon as an isolated phenomenon. It is but one item in the gigantic process of destruction which is the mark of our time. People fight the gold standard because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty.[22]

Walter E. Spahr:

It should not be surprising that apparently all who would socialize our economy are opposed to the restoration of a redeemable currency in the United States. Either because they understand the relationship between an irredeemable currency and the processes of socialization or because they simply note that Socialist, Communist, and Fascist governments employ irredeemable currencies as a means of controlling and managing the people, advocates of government dictatorship seem invariably to defend irredeemable currencies with the utmost vigor. The evidence seems overwhelming that a defender of irredeemable currency is, wittingly or unwittingly, an advocate of socialism or of government dictatorship in some form.

So long as a government has the power over a people that is provided by an irredeemable currency, all efforts to stop a government disposed to lead a people into socialism tend to be, and probably will be futile. The people of the United States have observed all sorts of efforts, organized and individual, to bring pressure upon Congress to end its spending orgy and processes of socialization. It should be amply clear by this time that none of these efforts has succeeded. Moreover, there is no reason for supposing that any of them, except the restoration of redeemability, can succeed in arresting our march into socialism.[23]

Spahr again:

A gold-coin standard provides the people with direct control over the government's use and abuse of the public purse. . . . When governments or banks issue money or other promises to pay in a manner that raises doubts as to their value as compared with gold, those people entertaining such doubts will demand gold in lieu of . . . paper money, or bank deposits. . . . The gold-coin standard thus places in the hands of every individual who uses money some power to express his approval or disapproval of the government's management of the people's monetary and fiscal affairs.[24]

Spahr again:

What is the meaning of a gold standard and a redeemable currency? It represents integrity. It insures the people’s control over the government’s use of the public purse. It is the best guarantee against the socialization of a nation. It enables a people to keep the government and banks in check. It prevents currency expansion from getting ever farther out of bounds until it becomes worthless. It tends to force standards of honesty on government and bank officials. It is the symbol of a free society and an honourable government. It is a necessary prerequisite to economic health. It is the first economic bulwark of free men.[25]

Ferdinand Lips:

. . . the abandonment of the gold standard of the nineteenth century is the greatest tradey of all time.[26]

Lips again:

Gold is a precondition for a free society.[27]

Harry Schultz:

. . . we should fight for a pure gold standard, the old-fashioned form, because it worked! And not just for fiscal reasons! It forced nations to limit their debt, spending and socialist schemes, which meant sound behavioural habits were formed around those limitations, and those habits rubbed off on everyone. People were more honest, moral, decent, kind, because the system was honest and moral. Cause and effect. Today we have cause and effect of the opposite standard: no limits on what governments can do, control, dictate; no limit on government debt, welfare or socialist schemes. There is no governor on the government.

This habit rubbed off on the public, causing them to go into debt, lose respect for the system and morality. The effect brings us more divorce, fraud, crime, illegitimate births, broken homes.[28]

Philip Cortney:

It is the gold standard which has made possible the expansion of international commerce and the distribution throughout the world of the benefits that are derived from the international division of labor. It is gold and its general acceptance which permits each individual to buy what he wants and to sell the fruit of his labor any place in the world, thereby spreading the benefits of competition. It is gold which assures the individual his independence and which is the best shield of the small states against the arbitrariness of the large ones. Contrary to what a superficial judgment would indicate, gold and the gold standard are not the weapons of oppression of the well-to-do, but rather the weapons of defense of the weak and the disinherited. It is the stability of gold, its general acceptance and its liberty of movement which have made possible the development of backward countries by the savings of the capitalistic world (which means privations and individual risks!). It is gold, to sum up, which has been the best weapon against economic nationalism and its dangers.[29]

Turgot:

Gold and silver were constituted, by the nature of things, money and universal money, independently of all conventions and all law.[30]

Hugo Salinas Price:

The gold standard is the generator and protector of jobs.[31]

Endnotes
1. W. Stanley Jevons, Money and the Mechanism of Exchange (New York, New York: D. Appleton and Co., 1896), pp. 3-6.

2. Carl Menger, Principles of Economics, trans. James Dingwall and Bert F. Hoselitz (New York, New York: University Press, 1976), p. 264.

3. David Zurbuchen, “The World’s Cumulative Gold and Silver Production,” Jan. 14, 2006, http://www.gold-eagle.com/ editorials_ 05/zurbuchen011506.html, Oct. 8, 2008.

4. William A. McGeveran, Jr. et al., ed., The World Almanac and Book of Facts 2006 (New York, New York: World Almanac Books, 2006), p. 106.

5. David Zurbuchen, “The World’s Cumulative Gold and Silver Production,” Jan. 14, 2006, http://www.gold-eagle.com/editorials_05/zurbuchen011506.html, Oct. 8, 2008. David Zurbuchen, “The Real Silver Deficit” http://www.gold-eagle.com/editorials_05/ zurbuchen052006pv.html, Oct. 16, 2008.

6. David Zurbuchen, “The Real Silver Deficit” http://www.gold-eagle.com/editorials_05/ zurbuchen052006pv.html, Oct. 16, 2008.

7. McGeveran, p. 106.

8. [Sandeep Jaitly], “Currency and Marginal Utility” http://www.bullionbasis.com/web_documents/ currency_and_marginal_utility.pdf, July 10, 2010.

9. Martin A. Larson,. The Federal Reserve and Our Manipulated Dollar (Old Greenwich, Connecticut: The Devin-Adair Company, 1975), p. 217.

10. Thomas C. Allen, Reconstruction of America’s Monetary and Banking System: A Return to Constitutional Money (Franklinton, North Carolina: TC Allen Co., 2009), p. 106-107.

11. “Metre,” Wikipedia, http://en.wikipedia.org/wiki/Metre, July 10, 2010.

12. Friedrich A. Hayek, Individualism and Economic Order (Chicago, Illinois: Henry Regnery Co., 1948), p. 209.

13. Larson, p. 216.

14. Ludwig von Mises, The Theory of Money and Credit, new edition, translator H.E. Batson (Irvington-on-Hudson, New York: The Foundation for Economic Education, Inc., 1971), p. 438.

15. Antal E. Fekete, “Monetary Economics 101: The Real Bills Doctrine of Adam Smith,” Lecture 13, Oct. 28, 2002, http//www.shoemakerconsulting.com/GoldisFreedom/PVFfiles/lecture101-13pvf.htm, Sept. 12, 2007.

16. Richard M. Salsman, Gold and Liberty (Great Barrington, Massachusetts: American Institute for Economic Research, 1995), p. 44-45.

17. Alan Greenspan, “Gold and Economic Freedom,” Capitalism: The Unknown Ideal, (New York, 1967) p. 96.

18. Edwin Vieira, Jr., “Silver and Gold Guarantee Freedom,” Apr. 18, 2008, http://www.gata.org/ node/6244, Apr. 23, 2008.

19. Mises, Theory of Money and Credit, p. 416.

20. Percy L. Greaves, On Current Monetary Problems: An Interview with Professor Ludwig von Mises (Lansing, Michigan: Constitutional Alliance, Inc.), p. 30.

21. Salsman, p. 58.

22. Ludwig von Mises, Human Action: A Treatise on Economics, 3rd revised edition (Chicago, Illinois: Henry Regnery Company, 1963), p. 475.

23. Garet Garrett, The People’s Pottage (Caldwell: The Caxton Printers, Ltd., 1953), p. 46.

24. Murray N. Rothbard, A History of Money and Banking in the United States (Auburn, Alabama: Ludwig von Mises Institute, 2002, 2005), pp. 383-384.

25. The Gold Standard Institute, Newsletter #3, August 24, 2009, p. 1.

26. Ferdinand Lips, Gold Wars: The Battle Against Sound Money as Seen from a Swiss Perspective (New York, New York: The Foundation for the Advancement of Monetary Education, 2001), p. 21.

27. Ibid., p. 174.

28. Ibid., pp. 243-244.

29. Charles Rist, The Triumph of Gold, translator Philip Cortney (New York, New York: Philosophical Library, 1961), pp. 5-6.

30. J. Laurence Laughlin, The History of Bimetallism in the United States (New York, New York: D. Appleton and Co., 1886), p. 5.

31. Hugo Salinas Price, “The Gold Standard: Generator & Protector of Jobs,” June 16, 2010, http://www.gold-eagle.com/editorials_08/salinas061610pv.html, June 16, 2010.

Copyright © 2010 by Thomas Coley Allen.

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