Banknotes are fool’s gold

Having finally bothered to look up my Wikipedia page, I found out they had made me a year younger than I am. This is most welcome, unless of course it’s their subtle way of saying that, when one reaches a certain age, a year here or there doesn’t really matter.

When money was real

Then I discovered one sentence that calls for an explanation: “He has also proposed that a return to the gold standard would restore monetary rectitude.”

This goes to show how silly ideas may sound if taken in isolation, outside the philosophical context into which they fit. Thus, I’ve never proposed any such thing: that would be like proposing to turn back the whole course of modernity.

However, I do think that a currency pegged to an objective equivalent creates a better society, if not necessarily a more dynamic economy. In the good tradition of Aristotelian induction, this belief takes off from a verifiable fact.

In Britain, the last 50 years of the 19th century produced a combined inflation of 10 per cent. For the last 50 years of the 20th century, the corresponding figure is 2,000 per cent. Hiding behind these numerals is a sweeping existential shift, not just an economic one.

Since inflation is mostly caused by government overspending, a question arises. Why do governments spend more than they take in if they know that such profligacy will turn money into wrapping paper (or, in our days of electronic transfers, not even that)?

The only logical answer is that they want money to lose value. They must feel that they thereby advance their objectives.

The most imperative one is a steady increase in their own power, which these days comes out of the money purse more often than out of the barrel of a gun. The mechanism involved seems intricate but is really simple.

By reducing the purchasing power of a monetary unit, the state makes people seek a greater and greater number of such units to make ends meet. Apart from producing wage slavery, this increases state control at both ends of the economic scale.

Winners and losers alike have to be wholly committed to economic activity to stay afloat. This commitment has to be expressed not only in working halfway around the clock but, whether or not they are so able or inclined, also in taking a gambler’s risks with investments.

Those who fail will have to fall back on the government’s largesse in order to survive – this is self-explanatory. But even those who succeed will also depend on the government, if less directly and more negatively.

After all, a quick pull on the printing press lever can usher in, say, a 15-percent inflation rate. A few years of that, and a nest egg lovingly hatched over a lifetime is broken, with no omelette anywhere in sight.

Inflation, be that of money or assets, thus sends a message to the people: a half-hearted commitment to the pursuit of money won’t get you even a half-decent life. You can’t swap a modicum of discomfort for more freedom to pursue what really matters to you. No gentlemanly sinecures await; it’s all or nothing.

You must barter your soul in order to survive (in the sense in which survival is now understood). Ostensibly you may be working for your own well-being, but in fact the state, swinging the double whammy of taxes and inflation to claim much of what you earn, will make sure you toil mostly for its benefit. Nothing short of a Faustian transaction will do if you don’t wish to tumble into the clutches of the social services.

If you were prepared to take such a fall, that would be fine too – your dependence on the state would become even more total and direct. One way or the other you sit white-knuckled on a non-stop rollercoaster speeding so fast you can’t jump off.

To keep inflation going governments have to spend more than they collect in tax revenues. Hence, if they wish to use inflation for crowd control, they must be able to increase the money supply as they see fit, with no constraints to curtail this ability.

And if governments can arbitrarily issue any amount of paper currency they fancy, then such currency can have nothing but virtual value. Real money has to be replaced with the fake variety. Ignoring the legalistic casuistry for a moment, governments have to get into the counterfeiting business.

The only way of keeping money real would be to limit the state’s ability to counterfeit it. Traditionally this used to be achieved by pegging paper currency to a precious metal, 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 redeemable in gold, and both the paper and the metal were equally real and tangible. This introduced stability, enabling people to plan for their future with confidence.

All major Western economies eventually went on the gold standard. Britain did so in 1717, the USA in 1834 (de facto), Germany in 1871, immediately after her formal unification. It was, however, understood that a rigid monetary system based on the gold standard would be hard to maintain during major wars, when deficit spending was unavoidable (“Unlimited money is the sinews of war,” wrote Caesar).

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 in that distant past they inevitably relied on the post-war return of the gold standard to bring some deflationary sanity to the crazy inflation caused by wartime promiscuity.

This was the case before modern governments realised that inflation could be a useful power tool – before they became fully aware of their inner imperative. 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 isn’t without its downside. For one thing, it limits the government’s ability to increase the money supply as a means of combatting recessions.

However, the gold standard limits not only the state’s flexibility but also its ability to increase its own power by using inflation for redistributive highway robbery, the way Robin Hood used his bow.

We don’t want the modern state to have the short-term flexibility to steer the economy into safe havens, for we know that in the long term the state will steer it into dire straits.

As a matter of fact, we must do all we can to reduce modern governments’ flexibility to meddle in the economy. As Burke wrote, “The moment that Government appears at market, all the principles of market will be subverted.”

Hence the attraction of the gold standard, at least to those who value their freedom above the ability to ride the economic rollercoaster through hair-raising climbs and dips. It puts people, as opposed to 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 is anathema to any modern government.

That’s why they have all seen fit to devote much energy to waging a sustained war of extermination against the gold standard. Finally the right tool for the job was found.

It was perhaps partly for the purpose of phasing the gold standard out that the quasi-independent Federal Reserve system was created in 1907: the US government wanted to abrogate some responsibility for what was bound to follow. And in 1913, the year the Federal Reserve Act came into effect, the Sixteenth Amendment to the US Constitution was passed, empowering Congress to levy federal income tax as it saw fit.

In due course, the gold standard disappeared everywhere in the West, and the power tools of runaway taxes and inflation were plugged into the mains. That two-prong strategy was to be used by modern states over and over: the shock of one blow can affect the people so deeply that they may hardly notice the second one.

Yesterday’s eccentricities become today’s orthodoxies. Since the gold standard was phased out, people have learned to regard both exorbitant taxation and inflationary public spending as simply a fact of life, like hurricanes or for that matter death.

A few generations of that conditioning, and they no longer realise how those two evils affect not only their economic behaviour but indeed their lives in general. More and more they have to strain every sinew just to acquire the necessities of life, becoming more dependent on the state, one way or another.

I cited one telling comparative fact earlier; let me end on another. The side streets around me are lined with small two-up-two-down houses built in the late 19th, early 20th century. At the time, they cost roughly the average annual income, which is why they are still called workers’ cottages.

Today they cost about £3 million, which is greater than the average income by two orders of magnitude. This is a small tessera in a vast mosaic. Using it you can reconstruct the whole picture – and perhaps appreciate the virtual world created by the debauchment of real money.   

6 thoughts on “Banknotes are fool’s gold”

  1. .”Gwent reported 391 cases of non-life-threatening arson. ”

    All arson to a structure is said to be “life-threatening”. It must always be assumed that someone might be inside the “structure” and their life threatened. At least USA.

  2. I have never heard it said what exactly would occur if modern societies were to revert to the gold standard.

    I guess from the standard of the modern welfare state the government would be constrained as to how much dollar, pound, yen, etc. could be printed. No more printing funny money that is used to finance social welfare programs.

  3. “The moment that Government appears at market, all the principles of market will be subverted.” Burke was correct, but how many people today would agree with this statement? It is not just the “principles of market” that have been subverted. The public assistance (welfare) that originally carried a stigma and men impoverished by the great depression were embarrassed to accept has now become an entitlement. The market, the system, the Republic, and the people themselves have all been subverted, with no end in sight.

    In what industry or service does the government excel? And people constantly advocate for the government to do more. As President Reagan quipped, the nine scariest words in the English language are, “I’m from the government and I’m here to help.”

    1. … or, barring that, to make sure you can’t help yourself. People — especially those of the leftist persuasion — judge Reagan by his second term, when he wasn’t quite compos mentis. But watch his appearances on Firing Line, and you’ll see a witty, intelligent man exuding good cheer. Shame about the dyed hair though.

  4. Candidate and President Reagan started all of his speeches with a joke. It was often about politicians or the Russians, and he was not above a healthy dose of self-deprecating humor. After that, however, he was deadly in his criticism of the status quo. We are likely never to hear another politician speak as he did in his 1966 speech in New York on “The Myth of the Great Society”.

    Ever wonder what those who were critical of Reagan’s mental acuity think about Biden?

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