On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory

III. The Return to Gold

III The Return to Gold 1. Eminence of Gold In the years preceding and during the war, the authors who prepared the way for the present monetary chaos were eager to sever the connection between the monetary standard and gold. So, in place of a standard based directly on gold, it was proposed to develop a standard which would promise no more than a constant exchange ratio in foreign money. These proposals, insofar as they aimed at transferring control over the formulation of monetary value to government, need not be discussed any further. The reason for using a commodity money is precisely to prevent political influence from affecting directly the value of the monetary unit. Gold is not the standard money solely on account of its brilliance or its physical and chemical characteristics. Gold is the standard money primarily because an increase or decrease in the available quantity is independent of the orders issued by political authorities. The distinctive feature of the gold standard is that it makes changes in the quantity of money dependent on the profitability of gold production. Instead of the gold standard, a monetary standard based on a foreign currency could be introduced. The value of the mark would then be related, not to gold, but to the value of a specific foreign money, at a definite exchange ratio. The Reichsbank would be ready at all times to buy or sell marks, in unlimited quantities at a fixed exchange rate, against the specified foreign money. If the monetary unit chosen as the basis for such a system is not on a sound gold standard, the conditions created would be absolutely untenable. The purchasing power of the German money would then hinge on fluctuations in the purchasing power of that foreign money. German policy would have renounced its 20 • stabilization of the monetary unit influence on the creation of monetary value for the benefit of the policy of a foreign government. Then too, even if the foreign money, chosen as the basis for the German monetary unit, were on an absolutely sound gold standard at the moment, the possibility would remain that its tie to gold might be cut at some later time. So there is no basis for choosing this roundabout route in order to attain a sound monetary system. It is not true that adopting the gold standard leads to economic dependence on England, gold producers, or some other power. Quite the contrary! As a matter of fact, it is the monetary standard which relies on the money of a foreign government that deserves the name of a “subsidiary [dependent] or vassal standard.”1 2. Sufficiency of Available Gold There are no grounds for saying that there is not enough gold available to enable all the countries in the world to have the gold standard. There can never be too much, nor too little, gold to serve the purpose of money. Supply and demand are brought into balance by the formation of prices. Nor is there reason to fear that prices generally would be depressed too severely by a return to the gold standard on the part of countries with depreciated currencies. The world’s gold supplies have not decreased since 1914. They have increased. In view of the decline in trade and the increase in poverty, the demand for gold should be lower than it was before 1914, even after a complete return to the gold standard . After all, a return to the gold standard would not mean a return to the actual use of gold money within the country to pay for smalland medium-sized transactions. For even the gold exchange standard [Goldkernwährung] developed by Ricardo in his work, Proposals for an Economical and Secure Currency (1816), is a legitimate and adequate gold standard,2 as the history of money in recent decades clearly shows. Basing the German monetary system on some foreign money instead of the metal gold would have only one significance: By obscuring the true nature of reform, it would make a reversal easier for inflationist writers and politicians. 1. Schaefer, Carl A. Klassische Valutastabilisierungen. Hamburg, 1922, p. 65. 2. [By 1928, Mises had rejected the flexible (gold exchange) standard as adequate for curbing inflation and recommended a pure gold coin standard. See Mises’s 1928 treatise, below, pp. 62–67.—Ed.] the return to gold • 21 The first condition of any real monetary reform is still...