The True Gold Standard (Second Edition)
Page 1 of 2
We identify civilization by its etymology: -- From the Latin "civis", or "civitas", meaning citizen or city. That is to say, civilization is characterized by the economy of city life. By this definition hunting and gathering cultures are, in the most fundamental sense of the word, not civilized. Indeed, the emergence of early urban cultures, over four thousand years ago, occurred coterminously with the intensification of agricultural and commercial exchange in the village markets of the Near and Middle East. In a word, the city and commerce are one.
From the standpoint of economic development, a study of history confirms that the money exchange economy, a widespread division of labor, and large scale accumulation of productive capital were economic phenomena coextensive with the origin of the early city-states. Of the many civilized institutions which originated over four millennia ago (in the urban cultures of the "Tigris and Euphrates", in the Nile Delta, and in the Indus Valley), the economic institution of money was a social and political innovation as significant as the development of the city itself. A unique medium of exchange, the institution of money, was a social invention which provided the economic means by which sophisticated commercial communities could minimize, once and for all, their capital investments in the mere process of voluntary exchange itself. As I shall try to explain, these complex economic activities and widespread commercial exchanges are, if one reflects for a moment, unimaginable without money. It is no exaggeration to say that the struggle for civilization was inseparable from the origin of its monetary institutions.
We know now that the universal success of the monetary token represented a far-reaching mutation in the economic affairs of men. Its general acceptance released a veritable flood of human resources, the rising tide of which led inexorably to man's dominion over nature and all her creatures. Man's dominion is what we mean by the idea of civilization. Viewed in the austere light of history, moreover, the culture of the cities seems to be inextricably bound up with the utility, or, more quaintly, with the soundness of its monetary institutions. Let your imagination and your understanding be persuaded as we wander through the past.
Consider, for a moment that "Pithecanthropus Erectus" emerged from the dark rain forests of the primeval ooze over a million years ago. Then, his proud heirs, "homo sapiens", ushered in the urban era, beginning with the blazing glory of the golden city of Ur in Sumer, a mere two thousand years before the advent of the Christian era. In your mind's eye imagine the volatile nomadic hunting and gathering cultures which had preceded the coming of the Sumerian towns and their markets. Contemplate the improbable contingency of this urban social order which, from the standpoint of eternity, appeared almost overnight on the banks of the Tigris and Euphrates rivers. Reflect moreover on the unceasing march of its commercial civilization as urban culture spread its tenuous dominion over life and nature. The history of the city is so brief, its life so fragile a reed, that it is fair indeed to consider its origin, as I said before, no more than an improbable contingency, unless we can ascertain the ineluctable cause of the city's development and permanence. That cause, the evidence suggests, was nothing other than the systematic accumulation of productive capital in the market through the agonizing labor and savings of men. When the tribe ceased to consume all the product of its capita1, when our tribal forbearers determined to defer present consumption -- that is, to save and to invest, in order to produce for the future -- a new society, civilization was born.
The city then is quite literally the creature of capital. Only its peace and order could have inspired stable expectations among men and women, especially as their civilized efforts increasingly bore fruit in freedom from want and violence. Just as urbanity was the social condition which gave rise to an exponential growth in the power of "Homo sapiens", so the characteristic financial institution of the city's political economy, the monetary unit, became the means of diffusion by which the currency of commercial civilization encircled the globe in a mere 4,000 years.
Money is then a necessary, if insufficient condition of urban civilization. Specialization and exchange, even in the most primitive commercial society, is unthinkable in the absence of money. Let me show you why. Consider, for a moment, an ancient village and its commercial life, carried on, as it was, in the farmers' markets, on the streets, and in the dwellings of its merchants. Imagine the innumerable economic exchanges among men in the absence of money: -- The farmer, burdened by his undesired surplus grain production, must find just that merchant or housewife who reluctantly might barter for the grain. But the very same merchant or housewife who, at that moment, actually desired cloth, must now, having reluctantly accepted the farmer's grain, find an unlikely seamstress who might be prepared to take the undesired grain inventory in payment for her cloth. Conceive therefore the required and bewildering diversity in the "Portfolio" of assets (that is to say, the varied inventory) of every farmer, merchant, seamstress, and housewife), were our primitive city bereft of the institution of money. Is it reasonable to believe that every enterprising citizen, every merchant, every housewife, albeit in a most prosperous market place, could create the necessary storage for wheat, cloth, vegetables and firewood in order to be in a position, every day, to supply the desired products to whomever would provide them the basic necessities of life?
The very description of such a marketplace evokes the absurdity of such a capital intensive exchange process. Our historic village would have been the most overcapitalized, uneconomical, village in the world. A community without money, we now see very clearly, must overinvest too large a part of its scarce resources in the very process of exchange itself. The real economic result of a moneyless economy is to impoverish a community which might otherwise have used the real capital resources required by barter (i.e. excessive personal inventories) to produce new goods and services, thereby adding to the general economic welfare. For the purpose of economic exchange, the monetary unit, you see, is an efficient substitute for the varied and burdensome inventories required of both producers and consumers in a barter economy. But inventory is working capital. Therefore, money conserves this scarce capital. So the monetary unit is, among many other things, the paramount conservator of capital in a civilized community. Every producer and all consumers, by reason of the universality of the monetary unit's acceptance, reduce to zero the capital they might otherwise have invested in a diverse stock of goods which, in our imaginary city of barter, they were required to hold in order to supply what was demanded in exchange for day-to-day necessities. If, as I previously argued, the historical origin of the city coincided with the sustained accumulation of productive capital, then the monetary unit may be seen as the preliminary condition of the city's very existence. The monetary token is not only the means of exchange, nor is it simply an article of wealth, a mere good available in the market. It is above all the hemoglobin which actuates the life blood of commercial civilization.
Even an aesthete might reasonably conclude, after having been persuaded by all this, that money, no less than art, is the hallmark of civilization. But the statesman must perceive that the monetary unit is so central an institution of society that its political uses are surely as important as its economic functions. It should be no strange thing to us, therefore, that from time immemorial, the power to mint the coin of the realm has been, but for rare episodes, a sovereign prerogative. Nor is it an accident to discover (even in a democracy, especially in ours, the architects of whose constitution paid such careful attention to the free market sentiments of Adam Smith) that the Congress of the United States should have reserved to itself the same dominion, a monopoly, over the coin of the realm. If, as it is often said, war is too important a matter to be left to the generals, then the same statesman might have said, with equal effect, that money is too important a political institution to be left to the economists.
The monetary unit, we observe upon reflection, is much more than the adolescent totem of an industrial society's greed from which, according to some Marxists, post-industrial society will liberate itself upon maturity. We now recognize money as the means by which society conserves its scarce resources and removes from each citizen the intolerable economic burden of over-capitalizing and overdiversifying his personal assets. In a world of scarce resources, money liberates man from the uneconomical yoke of barter, enabling him to make an efficient demand (with a simple monetary token) for what he needs from the supply of goods offered by his neighbors. Money is a foundation stone in the political framework of a civilized community, the stable structure of which is the necessary condition for the development of voluntary exchange.
Oct 20, 2014
Lawrence H. White is an economics professor at George Mason University who teaches graduate level monetary theory and policy. Lawrence White As described by the Wikipedia, "White earned his BA at Harvard University (1977) and PhD at the University of California at Los Angeles (1982). Before his current role at George Mason...
The Federal Reserve System's James Narron and David Skeie, career officials with the Federal Reserve System, are two eminent historically erudite figures. Writing in the New York Federal Reserve Bank's online publication, Liberty Street Economics, they recently provided a continuation of their valuable historical "revue," Crisis Chronicles: The Collapse of the...
Jul 23, 2014
An article headline in Saturday’s Wall Street Journalread “Rate Talk Heats Up Within The Fed.” As Journalreporters Jon Hilsenrath and Michael Derby...
Apr 07, 2011
Key Monetary Writings
Atlas Foundation Conference on “Consequences of Progressive Policy on Money and Investment” Dallas, TX, 1 April 2011 I’m grateful for Alex Chafuen’s invitation—I’ve...
Why the Gold Standard?