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A golden path: reply to Professor Cochran

In his recent Mises Daily article “Fool’s Gold Standards“, John P. Cochran warns his readers against accepting any monetary reform less than that of money created by the free market. Therefore, he felt it necessary to criticize our previous Mises Daily article “A Golden Opportunity,” in which we advised Germany to leave the European Monetary Union, reinstate the deutsche mark, and tie it to gold.

Although he admits that our “recommendation may be a step in the right direction … it leaves Germany with a central bank and a discretionary monetary policy.” That it does — for now.

In no way was our essay intended to imply that central-bank control of gold-backed money was the point at which we desired monetary reform to cease. As Austrian economists, we fully understand and support the goal of full monetary freedom of the marketplace as that which best advances liberty, prosperity, and peace. The question becomes, how will we achieve it?

We believe that Germany is in a unique position to end the destructive forces of fiat monetary expansion that seem to gain new impetus every day. That is number one. Before we can have the perfect money, we must have a better money, and Germany is in a position to show us the way. All of us who desire liberty, prosperity, and peace should ask Germany to seize this opportunity to stop what surely will destroy free-market capitalism. By reinstating the deutsche mark and tying it to its vast gold holdings, Germany can be the catalyst that creates a cascade of similar virtuous acts that will lead eventually to full monetary freedom and all that that will bring.

Consider the likely consequences of the world’s fourth-largest economy establishing a 100 percent gold-backed currency. This currency would dominate world trade, because all trading nations would desire to denominate their exchanges in the soundest money available. For a while at least, that would be the deutsche mark. Demand would drop for the currencies of all other nations unless and until these countries did the same thing. A virtuous cycle would ensue as first one then another country linked its currency to gold. The country with the most to lose would be the United States, whose dollar currently is preferred for international trade. But as demand increased first for the deutsche mark and later for the currencies of other nations who followed Germany’s example, demand for the dollar would fall and prices would rise precipitously in the United States as countries no longer found it advantageous to hold dollars abroad. At this point, the United States would be forced to return to gold. In our opinion, nothing less will bring the world’s superpower to its senses; i.e., the United States will not voluntarily adopt gold, because it benefits the most from the current inflationary system. However, if the major trading nations of the world adopt gold-backed currencies, even the United States will be forced by the market to do so.

But this is not the end. Once the peoples of the world see the advantages to using gold money, they will begin to understand that central banks are not required to perform the money function at all. Why couldn’t HSBC, Citibank, Barclays, Deutsche Bank, or any of a number of well-respected international private banks do the same? These international banks are more nimble than any ossified government bank to meet the needs of business and finance. Furthermore, these international banks are more trustworthy than national central banks, which tend to operate in great secrecy in order to hide the risk they are taking with our money. Private banks would have to answer to stockholders employing their own independent auditors.

Consider how religious toleration arose in the West, first as an expediency by princes who vied for power with the Catholic Church. Different religions were established and protected by the state. But over time, religious tolerance came to be seen as a good in itself. Today we accept religious tolerance in the West as a universal given, yet it is a relatively recent phenomenon.

It is in this vein that we recommend that Germany end the tyranny of the inflationary euro and adopt a golden deutsche mark. Such a courageous yet self-protective action will lead to a U-turn in monetary policy, away from monetary destruction and toward better and better money everywhere.

This article was previously published at Mises.org.

2 comments to A golden path: reply to Professor Cochran

  • Paul Marks Paul Marks

    Let us say that Germany reintroduced its own fiat currency and stopped the bailouts of other Eurozone countries and Eurozone banks (by the way the bailouts, even those financed by the European Central Bank, are not counted as part of the E.U. budget – allowing the Economist magazine, and other establishment organs, to pretend that the E.U. budget is only 1% of European Union G.D.P.)..

    On the face of it a restored German fiat currency and an end to the bailouts of Eurozone counties and Eurozone banks (and other entities) would be nothing to do with gold-as-mohney or anything like that.

    However….. as with all questions of freesdom it is vital to fight AGAINST “international cooperation” “intergation” “the international community” and the whole “world governance” agenda”, of which the European Union is a part.

    It is well known that centralisation of taxes and spending leads to the vast increase in taxes and spending – as people can not longer “vote with their feet” i.e. tax COMPEITTION is destroyed.

    The same is true of regulation – the friend of freedom should be the enemy of “unification” and “centralisation” efforts.

    As can be seen in the United States where even the most regulated States (such as California) have far less regulations than the Federal government does (simply look at the physical size of the Register of Federal Regulations) – an over regulated town loses business to other towns, an over regulated State loses business t other States (but it is more difficult to uproot from a State than a town) – but when a whole country is overregulated there is no escape (other than leaving the country and, in the case of the United States, renouncing citzenship).

    Almost needless to say – WORLD “cooperation” would be a totalitarian nighmare, which is one reason why any nation should leave organisations such as the IMF (it is no accident that present head of the IMF constanty pushes for international “intergration” – on an E.U. level as a first step).

    Specifically in monetary policy…….

    What is the ultimate limit on the abuse of a fiat currency?

    That people stop using it – inspire of tax demands and legal tender laws.

    But if people (for example in international trade) stop using a currency what do they do? Use barter?

    No – they use another currency. Which is why if currencies are fiat (i.e. not commodities) it is good that be lots of different currencies and that they are NOT “coordinated”.

    Of course it would be nice if there was only one or two currencies in international trade – but NOT if those currencies are fiat (i.e. under POLITICAL CONTROL). If the currencies are fiat -there should be lots of them (or freedom dies).

    If there is only fiat currrency – or seemingly lots of fiat currencies, but under international political “coordination” the following will happen.

    There will be vast world inflation – but it will be officially denied.

    People will be cheated (looted) and will be able to do nothing about it – there being, de facto, only one currency (and it being under political conrol).

    In short the entire world will be like Argentina.

    Vast inflation (officially denied), a collapsing economy (but official figures saying everything is fine) and a general decline into the slime.

    Presently people from Argentina can go and try and make new lives in Chile – Chile has a fiat currency also, but is less insane.

    Under a WORLD system no such option (i.e. fleeing to releative freedom) would be open to people.

    Will any country adopt gold (or another commodity) as an official currency any time soon?

    I do not know.

    But I do know that, in the terrible economic collapse that is almost upon us. any nation where gold (or some other commodity) was the money would have a massive competitive advantage.

    Its money (and its economy) would be seen as a island of stablity in a collapsing world.

    Investment (and people with vital skills) would come into such a country.

    Thus enabling such a country to ride out what is comming.

  • Paul Marks Paul Marks

    As for a return to some sort of rigged gold “standard” (as opposed to gold, or some other commodity, as the money) – that would indeed be a mess.

    It would be the worse of both worlds.

    It would not prevent Central Bankers creating credit-money bubbles (see Ben Strong of the New York Fed in the late 1920s) and, yet, the blame for the resulting boom-bust would be dumped on gold (or whatever the commodity of the “standard” was).

    Commodity money is a good idea.

    Some sort of deceptive “standard” is not.

    As always the golden rule (no pun intended) applies.

    “Show me the goods”. Examine the product – make sure it is was the seller says it is. It is not a gift horse – so check those teeth.

    In this case – i.e. gold as money.

    “Show me the gold”.

    Check to see if the actual physical gold exists – that it is actually there.

    If you get computers, bits of paper, lots of complex talk and mathematical notations….. instead of the physical gold.

    Walk away.

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