The True Gold Standard (Second Edition)
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Forerunners of man lived upon the planet several million years ago. But the unique social order of man – civilization – emerged only four to five thousand years ago. Historical and archaeological evidence suggests that the institution of money evolved coterminously with civilization among all the institutions of life on earth; therefore, civilization and money are but young and fragile reeds. Their growth and development occurred only recently and today their very existence is threatened with extinction. But modern civilization is unthinkable without money as even a moment’s reflection suggests. Why is this so? What accounts for the appearance of money in the civilized affairs of men? In fact, what is money?
The economist defines money as a medium of exchange. It is the token we supply in order to effect payments for the goods we demand. Money is also a standard, a unit of measure, by which we value economic goods. Money units express prices which are the vital information necessary for efficient exchange. Other experts describe money as a store of value. Many different forms of money have been selected in the market order to serve the practical purposes of working people. True money is more or less a permanent receptacle in which we save part of the value of our labor for future contingencies. The money of history is no ivory tower abstraction. In fact, it was a real article of wealth until recently. All monies are, but convenient and desirable substitutes for all the wealth we produce. It is the superior marketability of money over other forms of wealth which makes it generally acceptable in exchange for other real goods and services.
It seems that money evolved through a historical process unlike that of trial-and-error or natural selection. But money as we know it, standardized and certified coins, originated as an act of human creativity around 700 B.C. in the cradle of civilization – the Near East. Throughout history many crude forms of money were tried and discarded. Each form of money had to meet the test of acceptability established by working people – because it was they to whom money was supplied in return for the product of their labor. Seeking ever more marketable and efficient articles with which to transact business efficiently, the merchants, farmers, and workers of different cultures attempted to advance beyond the commerce of barter and potlatch by means of different early currencies – cattle, iron, and in the 7th Century B.C., gold and silver coins. Over time freely acceptable, widely circulated, stable forms of money did evolve – and some of these early monetary tokens, i.e., coins, survive unto this very day.
In a word, money is a commercial and political institution of the market with a long history. Like the wheel, money is an invention of civilized man. But as some forms of the wheel have worked better than others, so is it with money. Not all forms of money are equally acceptable to free men. Nor do all wheels rotate evenly. Like a wheel without its spokes, money without real substance tends to break down. As with all breakdowns, disorder follows. The breakdown of money is associated with the depreciation of its value, or the decline in its purchasing power. This social disorder goes by the name of inflation. Ours is an era where in the monetary institutions have broken down. Historians will recall our times as the age of inflation. Instead, inflation is a monetary breakdown, a decline in its value. Inflation means the destruction, or the over turning, of an essential instrument of the market place, the political institution of stable money. The endurance of civilization is linked to this institution. When an overturning of stable political institutions occurs, it is called revolution. Inflation is a price revolution. It often precedes a more thoroughgoing political revolution. Inflation prevails in America and the world today because of a breakdown in the trust that men once had in the dollar. Working people no longer gladly accept and hold the dollar. They try to get rid of it for something real such as a house, a car, antiques, or coins – almost anything real and lasting. Producers and consumers have lost faith and trust in the dollar because the U.S. government and the Federal Reserve System have created more dollars than Americans desire to hold. Excess dollars have been created because the government has overproduced paper and credit in order to pay for its colossal deficits and also in order to manipulate the economy, prices, demand, and employment levels. As a result, the paper dollar has ceased to be real money. Ultimately, paper money is neither an article of wealth nor is it linked permanently to anything of real value.
It may be worth a moment to reflect upon this view in order to determine its merit. We know from history that civilization advanced beyond the primitive conditions of a barter economy by means of commodity money. Commodity money requires human effort to be produced – copper, gold, silver, wampum. A barter economy consists in the moneyless exchange of one man’s goods for the goods of another. The transition from a barter economy to a money economy was the first and most important commercial revolution. Instead of each family storing varied goods – such as wheat and wood to exchange directly for the goods of others – cows, tools, and coal – civilized man gradually learned to substitute an indirect, more economical means of exchange. Over a long period, working men and women invented money – simple, convenient tokens – which they labored to produce or obtain in order to exchange them for the goods they desired. To supply money for goods and goods for money indirect exchange, is the hallmark of commercial civilization.
It may be that the long historical transition from the barter, economy was marked by many different forms of indirect premonetary commerce, such as potlatching and other primitive forms of investment and risk-sharing. Potlatching means to give a gift with the hope but not the certainty of a return. Potlatching is superior to barter because barter cannot always work. For example, what I produce may not be desired by the person to whom I try to barter it. Indeed such a person may supply me in exchange with a product which I do not desire. Thus, to potlatch, to “give” my supply of goods to others, hoping that later they would reciprocate, actually advances the social order beyond inelastic direct barter. Everyone continues to produce without an immediately satisfying barter. Potlatching overcomes the rigidity of barter and tends to encourage indirectly the unconditional production of wealth. Production in a potlatching community goes on as if all members freely invest goods in one another, receiving in exchange unwritten “promissory notes”, which are the implied liabilities of their grateful fellows. These implicit liabilities form the invisible currency, the money, of a community of unconditioned producers. These claims of the producers, the circulatory system of commerce, are redeemed by gifts of goods from the debtors in the future. Thus, the recipients of gifts make good on the essential faith and trust entrusted to them by the giver. The counterpart of the gift – the liability of the receiver somehow to repay the producer – is repaid in kind with interest. As George Gilder puts it, this productive circle of givers, or investors, increases the sympathy of its members for the special needs of one another. Potlatch amplifies barter, making it more efficient by the currency of faith. Barter and potlatch are way stations of exchange on the road to commercial civilization.
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