Paper money is fool’s gold

If we look at Britain, £100 in 1850 equalled £110 in 1900, a negligible inflation of 10 percent over half a century.

That meant a British baby born in 1850 with a silver spoon in his mouth, say a solid middle-class income of £500 a year, could live his whole life in reasonable comfort independent of the state’s largesse even if he never made a penny of his own.

By contrast, £100 in 1950 equalled £2,000 in 2000 – a wealth-busting, soul-destroying inflation of 2,000 percent. This meant that the silver spoon would quickly drop out of the mouth of a similarly hypothetical baby born in 1950.

The fact is that a modern state doesn’t really want people to be independent of it. The underlying logic is simple: control over people’s money spells a large measure of control over the people.

That’s why all modern states are counterfeiters, not to cut too fine a point on it. The lever of the money-printing press is the sledgehammer the state can take to any nest egg. A pull on the lever, and the egg is reduced to an empty shell.

The only way of keeping money real would be to limit the state’s ability to counterfeit it. This used to be achieved by pegging paper money to an objective equivalent, usually gold.

Step by step, Western governments adopted a system whereby the paper money they issued was backed up by their gold reserves. Every banknote was instantly redeemable in gold, and both the paper and the metal were equally tangible. This introduced stability into economies and greatly simplified international trade.

However, the gold standard was hard to maintain during major wars, when deficit spending was unavoidable (“Unlimited money is the sinews of war,” as Caesar wrote to Cicero).

Thus, Britain suspended the gold standard during the Napoleonic Wars, the USA during its Civil War, and most countries during the First World War. But afterwards they all returned to the gold standard to bring some deflationary sanity to the runaway inflation caused by wartime spending.

That was before modern governments realised that inflation could be a useful power tool. Once that realisation sank in, the gold standard had to go. Wishing to bind its citizens hand and foot, the state itself had to slip the tethers of fiscal responsibility.

To be fair, the gold standard has its downside. For one thing, it limits the government’s ability to increase the money supply as a means of combating recessions. This time-honoured salvage operation has often been successful in the short term, though some eminent economists, such as Joseph Schumpeter, have objected to it on principle.

They would argue that, unless an economy climbs out of a recession organically, it’ll show a remission, not recovery. This argument rings true, but there is an even stronger one. For the gold standard limits not only the state’s flexibility but also its capacity to increase its own power by using inflation the way Robin Hood used his longbow for redistributive highway robbery.

We don’t want the modern state to have the short-term flexibility to steer the economy into safe havens because we can be certain that in the long term the state can only steer it into dire straits. We must do all we can to deprive modern governments of their flexibility to meddle in the economy.

Hence the attraction of the gold standard, at least to those who value their freedom above an ability to ride the economic rollercoaster through hair-raising rises and dips.

It puts people, not the state’s whim, in control of their own pecuniary destiny. The gold standard may make an economy less upwardly mobile, but in return it will definitely make it more stable and free. For that reason, it’s anathema to any modern government.

America led the way. In April, 1933, shortly after his inauguration, FDR abandoned the gold standard. In this. he displayed the same speed of action as did Lenin, who ‘monopolised’ (which is to say confiscated) all gold and silver plate in Russia in December 1917, a mere couple of months after the revolution.

The methods the two men chose to enforce their decrees were different, but rather less so than one would expect considering their different politics.

Roosevelt operated in a country that perceived itself to be free. Consequently, such Leninist expedients as summary executions were beyond his reach, as was Lenin’s favourite trick of having men tortured until they surrendered every gram of gold in their possession.

Robbing the churches of their valuables, and murdering the priests for good measure, à la Lenin, would also have been frowned upon in the US. Given such annoying limitations, one has to admire Roosevelt for doing his level best.

In the same April of 1933 he issued Executive Order 6102, “forbidding the hoarding of gold coin, gold bullion, and gold certificates” by U.S. citizens and demanding that they sell all their gold to the government at the price set by the buyer. Failure to comply was punishable by a fine of up to $10,000 or imprisonment of up to 10 years, or both.

The amount of the fine is staggering, especially in relation to the one dollar a day being paid to the millions employed in public works. As to the threat of a tenner in prison for failure to hand in all privately owned gold within a month, Roosevelt was treading a well-beaten path: the Bolsheviks had shown the way in Russia.

But FDR added an elegant touch that was beyond the crude Bolsheviks: having forced Americans to sell their gold to the treasury for $20.66 an ounce, the next year he used the Federal Reserve machine to ratchet up the price to $35 an ounce, a level at which it stayed fixed for the next 38 years.

At that point it was allowed to float, and in the 45 years thereafter the price of gold has increased almost fifty-fold, in parallel with the practical pulping of paper money.

The difference between people keeping their assets in gold or in currency is vital. Gold sitting in a bank vault is a factor of personal independence: the money is beyond the state’s reach, more or less. Not so banknotes: we are welcome to stuff suitcases full of paper, but the government has an almost absolute control over its value.

The gold standard is thus a factor of freedom, while its absence is a potential factor of tyranny. Since all modern governments are tyrannical in their aspirations, and as tyrannical in their actions as they can reasonably expect to be able to get away with, we ought not to be unduly surprised that a totalitarian Russia and a liberal-democratic USA followed the same course of action, if by different means.

However, until 1971 some tenuous link between paper money and gold still existed, as America was still prepared to settle her foreign debts in gold. In fact, once Western countries had abandoned the gold standard, the Bretton Woods Agreement of 1944 established a version of the same system.

The signatories agreed to peg their post-war exchange rates to the dollar, while the US government undertook to keep the price of gold fixed at $35 an ounce, thus linking all the participating currencies to gold at one remove. Not a bad idea, considering; but, as such a link ran against the grain of the modern world, it couldn’t last.

In 1964 this point was emphasised by the French president Charles de Gaulle, who sent to the US a cargo ship loaded to the gunwales with paper dollars. He then demanded that his right to exchange the banknotes for gold be honoured.

This was consistent with the French president’s understanding of economics and, truth be told, also with his well-documented dislike of Anglo-Saxons. The world, he explained, needs “an indisputable monetary base, and one that does not bear the mark of any particular country. In truth, one does not see how one could really have any standard criterion other than gold.”

Other countries began to follow suit, and a run on Fort Knox looked like a distinct possibility. Added to the staggering cost of President Johnson’s egalitarian ‘Great Society’ reforms, to say nothing of the Vietnam War, this attack on the dollar left Bretton Woods dead in the water in any real sense.

In 1971 Nixon severed the vestigial link between gold and the dollar by declaring that thenceforth the US government would only settle its foreign debts in paper, either dollar banknotes or treasury bonds and bills.

Since its debts were denominated in dollars, this gave the US government an ability to run up its sovereign debt to its present level of some $34 trillion. Other Western governments followed suit (Britian’s national debt is around £3 trillion, France’s even higher), pushing the button for a potential catastrophe as destructive as any nuclear war.

The term ‘fool’s gold’ originally referred to iron pyrite, which is commonly mistaken for gold. It can now be used to describe our funny, which is to say paper, money. Its constantly inflated supply is making us less secure and, more important, less free.

Our prosperity is phony: it’s a rudderless ship cast adrift to float on a raging sea of paper. Sooner or later, it’ll run aground, but let’s enjoy the ride while it lasts, shall we?