One of the great ironies of history is that the detractors of gold call it a barbaric relic of history. In fact, abandoning gold as money has put civilisation in great danger, writes George Ford Smith, author of eight books and programmer.
The following is an article by George Ford Smith that appeared on the website of the Mises Institute:
The classical gold standard, which served Western economies for almost the entire 19th century, hit a stone wall in 1914. Since then, the gold standard has not been restored in its proper form.
After the start of the First World War, Europe’s focus shifted from prosperity to destruction. Or rather – some became richer, while others were destroyed. To carry out this revolution, it was necessary to abandon the classical gold standard.
If gold is money and war pays, how is this possible?
First of all, people were already used to using fiat money, i.e. banknotes, which were backed by gold, instead of gold coins. Carrying paper was more convenient than carrying coins. Over time, however, paper itself became money, and gold was considered an inconvenience from ancient times.
Second, banks had a habit of creating more notes and deposits than they had gold in their vaults. From time to time, it raised suspicions among the people that the bank had made promises that could not be fulfilled. The courts sided with the banks and allowed them to stop issuing notes and continue doing business, which strengthened the alliance between the government and the banks. Because the courts ruled that the deposits belonged to the banks, the bankers could not be accused of embezzlement or theft.
The occasional bank run was seen as a self-fulfilling prophecy. If people waited in line at the bank because they believed that the bank would soon become insolvent, it soon did. People had no idea that banks were lending out most of their deposits. They didn’t know about fractional reserve banking, a form of counterfeiting that had become normal.
The terms of the gold standard imposed restrictions on fractional reserve banking. The banks did not mind such restrictions. Since banks could also lend to governments, spending by governments was also limited. So they didn’t like the gold standard either.
So, we get to the wall where the gold hit.
Preparing for war means preparing for inflation
Economist Benjamin Anderson writes in his 1949 book Economics and the Public Welfare:
1941. The war came as a great shock, not only to ordinary Americans, but also to those who were well informed. The same was true for Europeans. In this respect, Germany, Russia and France began to collect gold before the war. Germany was the first to start it in 1912. Gold was taken from the people and transferred to the reserves of the Reichsbank, the central bank of Germany. People were given paper that replaced the gold in circulation.
Gary North explains what pre-World War I gold standard policy was like:
In essence, all European governments abolished the gold standard at the same time. Then they went down the path of inflation financially. This kept secret how expensive war really is. They imposed an inflation tax and accused those who raised prices of unpatriotism and extortion. This was possible because people were ignorant of currency inflation and price inflation. They could not have done this if citizens had been able to demand payments in gold coins at a fixed rate. They would have staged a bank run. Governments could not have caused monetary inflation if they had kept their promise to exchange their currencies for gold coins. So they reneged on their promises and still had the gold. Their logic was that it was better to break the promise sooner rather than later.
If the governments had not broken their promise to exchange paper money for gold, they would have had to hold talks with each other to resolve their differences. This would have helped prevent one of the bloodiest wars in human history. Abandoning the gold standard, which has always been under government control, was a decisive factor in going to war.
Although the US did not formally abandon the gold standard during the war, the withdrawal of gold from banks was discouraged and the currency was doubled. Blanchard Economic Research discusses the situation in its paper “War and Inflation”:
War creates inflation, which is caused by a sudden increase in money and credit. In World War I, Americans did not want to finance total war with tax increases. The same was true for the Civil War, World War II, and the Vietnam War. The costs of the First World War were covered mainly by increasing the money supply.
Governments had a choice: wage a long and bloody war for seemingly compelling reasons, or maintain the gold standard. They chose war. US leaders felt this decision was inevitable. JP Morgan, Woodrow Wilson, Edward Mandell House and Benjamin Strong did not have to fight in the trenches.
When we hear stories that “giving up gold” was the prerequisite for world peace and harmony, we should be reminded of places like the Meuse-Argonne Cemetery in France, where the grave markers seem endless. These are mainly the graves of young men who died only because of the lies of politicians and the profits of those associated with them. Gold did not want to be part of the slaughter. But the politicians and bankers knew that fiat paper currency was the prerequisite for fulfilling their goals.