Originally posted on Thursday, April 12th, 2012
[T]he State can supplant a spontaneously evolved monetary system with a centrally controlled system only after a prolonged struggle in which it must slowly and gradually overcome (through propaganda and the use of coercion) the market’s reluctance to abandon gold. It is the gold standard’s substantial immunity from State manipulation and tinkering, and not the associated superstition and mythology, that recommends gold as a monetary standard.
— Roger Garrison
Professor Roger Garrison Image courtesy of Auburn University.
Roger Garrison is a professor of economics Auburn University and adjunct scholar of the Ludwig von Mises Institute. In 1985 he contributed an essay to Llewellyn H. Rockwell, Jr.‘s The Gold Standard: An Austrian Perspective entitled The “Costs” of a Gold Standard.” This erudite essay makes very clear the critical distinction between the organic nature of the classical gold standard and the arbitrary nature of the paper money (and other central planning based) imposed monetary regimes. Garrison’s essay offers lucid, incisive, and compelling thinking that becomes even more valuable as the gold standard begins to emerge in the policy process.
For example:
Economists who oppose the gold standard may recognize what has to be achieved in order to make a centrally controlled paper standard superior to a decentralized gold standard. Milton Friedman poses the key question: “[H]ow … can we establish a monetary system that is stable, free from irresponsible tinkering, and incapable of being used as a source of power to threaten economic and political freedom?” How, in other words, can we design a system that we cannot tinker with? While Friedman goes on to suggest how such a system might be designed, economists who support the gold standard argue that this objective is self-contradictory and operationally impossible. Any monetary institution that is designed and implemented by a central authority can be abused by that central authority.
The proponents of gold are not suggesting that irresponsible tinkering is inevitable—whatever the nature of the monetary system; they are instead making the sharp distinction between a designed institution and an evolved institution. A monetary institution that has been consciously designed is much more subject to tinkering than one that simply emerged as a consequence of market processes. F. A. Hayek points to the positivist slogan that “what man has made he can also alter to suit his desires.” The positivists were correct so long as they were referring to consciously and deliberately designed institutions such as a paper standard. Of course, it is government officials (not “man”) who design the paper standard, and it is government officials who can (and do) tinker with it. Hayek goes on to point out the limits of the positivists’ view. The slogan is a “…complete non-sequitur if `made’ is understood to include what has arisen from man’s actions without his design.”
A gold standard—one that has emerged as a consequence of market processes—cannot easily be altered to suit the State’s purposes. It would be an overstatement (and a matter of historical inaccuracy) to claim that the State cannot even in the long run interfere with the operation of the gold standard. What is true (both theoretically and historically) is that the State can supplant a spontaneously evolved monetary system with a centrally controlled system only after a prolonged struggle in which it must slowly and gradually overcome (through propaganda and the use of coercion) the market’s reluctance to abandon gold. It is the gold standard’s substantial immunity from State manipulation and tinkering, and not the associated superstition and mythology, that recommends gold as a monetary standard. In the words of Ludwig von Mises, “the advantage of the gold standard … is due solely to the fact that, if once generally adopted in a definite form, and adhered to, it is no longer subject to specific political interference.” In the judgment of the proponents of the gold standard, the benefits of gold, immunity from State intervention and the resulting monetary stability, outweigh the resource costs of gold—and any other costs that might be associated with the gold standard—by a comfortable margin.
VIII. Concluding Remarks
Opponents of the gold standard calculate the costs of gold in dollars and cents and report their calculations as a percentage of the economy’s output. The intended interpretation is clear: But for the costs of gold, the economy would have had an output that much greater. Proponents of the gold standard would be ill-advised to respond with a cost figure of their own. If the true costs of a gold standard could be calculated at all, it would have to take into account the monetary instability associated with alternative standards and the consequent loss of output. But incorporating these considerations would undoubtedly cause the cost figures to turn negative. The gold standard has net benefits, not net costs. An appreciation for these benefits, but not a precise quantitative estimate, can best be gained by comparisons of historical episodes which are illustrative of economic performance under a gold standard and economic performance under a paper standard. The superiority of the former in comparison to the latter constitutes the net benefits of the gold standard.
Ultimately, the cost of any action, commodity, or institution is the alternative action, commodity, or institution forgone. The opportunity cost is the only cost that counts. The cost of one institution is forgoing some other institution; the cost of the gold standard is forgoing a paper standard; the cost of sound money is forgoing unsound money.
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