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Historic Reports
Larry Myles Reports
All the effusions of the
contemporary welfare school are,
like those of the socialist authors,
based on the implicit assumption
that there is an abundant supply of
capital goods. Then, of course, it
seems easy to find a remedy for all
ills, to give to everybody according
to his needs and to make everyone
perfectly happy.
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Defining the Gold Standard
In
response to one of my most oft asked
questions: "Can you define the gold
standard and its various formats?"
What is the Gold Standard?
by Nathan Lewis
The U.S. used a gold standard from its
inception in 1789 until 1971, a stretch of
182 year. In 1965, all major countries in
the world participated in the worldwide gold
standard system known as the Bretton Woods
arrangement.
With this experience, you would think these
things would be well understood, but they
are not. We have to start again at the most
basic level: What is the gold standard?
Whether the most rudimentary system in which
gold bullion is used as money, or in more
sophisticated systems in which paper money
is linked to gold, all gold standard systems
share one trait: The value of the currency
is linked to gold.
Thus, a gold standard system’s point of
focus is the value of the currency. The goal
of a gold standard is to produce the most
stable money possible – money that does not
go up or down in value. David Ricardo wrote,
“A currency, to be perfect, should be
absolutely invariable in value.”
But how is this accomplished? John Stuart
Mill explained:
In order that the value of the currency may
be secure from being altered by design, and
may be as little as possible liable to
fluctuation from accident, the articles
least liable of all known commodities to
vary in value, the precious metals, have
been made in all civilized countries the
standard value for the circulating medium;
and no paper currency ought to exist of
which the value cannot be made to confirm to
theirs.
A gold standard is a tool for specific
purpose – to create a currency that is, to
the extent humanly possible, perfectly
stable in value.
It does not matter whether you have gold
coins or not. In the 1933-1971 period it was
actually illegal for U.S. citizens to own
gold coins, but they still had a gold
standard, with the dollar pegged to gold at
$35 per ounce during those years.
Nor does it matter whether some entity holds
huge quantities of gold in storage. When the
U.S. ran the international gold standard,
immense quantities of bullion were socked
away in vaults. In 1941 the U.S. government
held 52% of all the gold in the world, which
is probably an all-time record in terms of
concentration of ownership. However, in
1910, when Britain ran the international
gold standard, the Bank of England had only
about 1.2% of all the gold in the world. By
that time Britain had been on a gold
standard for 212 years.
We can also see that it does not matter who
owns the gold, whether it is this central
bank or that one, or private investors or
jewelry enthusiasts. Gold is the same value
no matter who owns it.
Gold imports and exports are irrelevant; as
long as trade in bullion is unrestricted,
gold is the same value everywhere.
The amount of metal piled in a vault has
little relationship to the value (or
quantity) of paper banknotes. In 1779 the
Bank of England held 953,066 ounces of gold
in reserve. In 1783 this had fallen to
339,261 ounces. One year later, in 1784, it
had grown to 1,683,724 ounces. A year after
that, it was down to 703,692 ounces, but in
1786 it bounced back up again to 1,535,538
ounces. These gyrations had no effect on the
value of the British pound, which was pegged
to gold at 3.89375 British Pounds per ounce.
Nor did banks ever have a 100% reserve of
gold. In 1888 U.S. banks had a gold reserve
ratio of 34.86%. By 1895 it had fallen to
12.33%. In 1906 it had grown again to
42.42%. None of this mattered to the value
of the dollar, which was pegged to gold at
$20.67 per ounce.
A gold standard does not place some
artificial limit on the supply of money, nor
is the supply of money constrained to the
output of gold mines. The supply of base
money grows or contracts as necessary to
maintain the currency’s value in line with
the gold parity. Between 1775 and 1900, the
U.S. base money supply increased 163 times –
in line with an expanding economy and a
population that went from 3.9 million in
1790 to 76.2 million in 1900. Over this
125-year period, the amount of gold in the
world increased by about 3.4 times due to
mining.
The only thing that mattered was the value.
The dollar maintained its link near $20.67
per ounce throughout the 19th
century (with a lapse during the Civil War).
When we understand that the purpose of a
gold standard is to create a currency of
perfectly unchanging value, we can also
understand why nobody uses a gold standard
today. Beginning in the 1930’s, and
especially after the introduction of
floating currencies in 1971, economists have
been fascinated by the idea of a
discretionary money policy. They believed
that they could solve various economic
problems by jiggering the currency. Today
Ben Bernanke is attempting to influence
asset prices and economic behaviour with his
quantitative easing plan.
A gold standard prevented this currency
fiddling. That is why, according to the
currency manipulators, the gold standard had
to go.
We will learn once again – sooner rather
than later, by the looks of it – that
you cannot devalue yourself to prosperity.
How could any country grow wealthy just by
monkeying with the unit of account? Of
course it is absurd, which is why there is
not a single historical example of a country
that succeeded with this method.
At some point people’s goals will change.
They will no longer believe their problems
can be solved with currency manipulation.
They will finally understand, probably from
difficult experience, why those 19th-century
economists always aimed for the most stable
currency possible.
When the goal is a stable currency, then the
preferred tool is a gold standard system.
This has been the case for the last 500
years of Western Civilization, and it
remains true today.
Nathan Lewis is the author of Gold: The
Once and Future Money (2007)
Larry Myles
Larry Myles Reports
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1-877-405-7600
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Larry Myles is neither a
geologist nor a financial analyst. I do not
purport to offer personal investment advice
nor recommendations. While all statements of
fact are derived from reliable sources, an d
are believed to be accurate, I make no
warrant that they are so. You must do your
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that, my opinions. I do not accept any
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may experience resulting from actions taken
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recommended and may increase or decrease
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