One of the clearest defining issues for a libertarian these days is his stand on the question of gold. Ask a non-libertarian whether or not gold ownership should be legal, or whether money should be based on the value of a gram of gold, and you will hear a cacophony of hums and haws. A libertarian will announce definitely that you ought to be able to buy gold with your dollars.
In a recent column in NEWSWEEK, the most widely read Nobel Prize winning economist in America, Paul Samuelson, came out with a vaguely reasoned put- down of the New Orleans Committee to legalize gold, among others (like the French), because gold speculators would cash in on the transaction and the government would lose money. This is not a sufficient reason for making gold a contraband good, put Prof. Samuelson has always confused the concept of the public good with the health of the state.
Others, however, have argued in favor of the gold standard without presenting the argument in terms which the financial community could relate to. The financial community is our fourth or fifth branch of government, with a de facto veto over public policy. The Federal Reserve System is not likely to be abolished in the next hundred years. The question then becomes, can a method be found to establish the gold standard within the framework of the financial community without any short term dislocations? Of course, the overall direction of monetary policy would take an about-face with the adoption of the gold standard. Yet, can this about-face be accomplished without any short term dislocations? It can.
One problem, however, with both the conventional advocate of the gold standard and the mainstream conservative banker who is against the gold standard is that both men are price-fixers. The advocate of the gold standard would say, "The dollar should equal one-half gram of gold." At that point, the banker would start to choke and say, "But there isn't enough gold in the world to supply the demand for cash balances." Excess demand is an old familiar consequence of price fixing. Price-fixing is obviously a bad idea, regardless of who advocates it.
PRICE-FIXING UNNECESSARY There should be no need to fix the price of gold in order to have redeemable dollars. The Treasury could buy gold in the free market at the free market price any time that someone turned in a dollar and demanded specie. Of course, the weight of the gold is going to change over time—if the government is debasing the money. This, in fact, would be the chief indication that a public policy of fixed and stable purchasing power was not being adhered to. This is the goal for libertarians: Money of stable value, such that the government cannot debase it.
Some of the Austrian economists, especially nonprofessional laymen, compound the problem for libertarians by arbitrarily giving a definition of "money" which is so unusual in today's economic system as to surprise any non-initiate who knows about business and finance. Let me give an illustration of this.
The American Express Company sells (or leases) the use of something which they call "the money card." This is private money—no legal tender, no government regulation. The people who carry the money card are individuals who pass certain market tests of honesty and credit-worthiness. With my money card I can buy almost as many consumer goods as with ten green Federal Reserve Notes bearing Mr. Jackson's picture. Both my money card and my greenbacks represent a liquidity asset. The fact that I have to pay in advance for the latter, and that it says "legal tender" on the front, is not relevant—because I can use the card to get the notes. Money is not a "thing" in the same way that a diamond is a "thing."
The policy objective which libertarians want to achieve with the gold standard is not the aesthetic novelty of gold coins in circulation—although we do want that to be possible, whereas today it is unlawful. We want private money of a fixed, stable value in terms of all other goods which we might want to buy with it. We understand that government money, especially when the state deliberately hinders competition, cannot be trusted. There is no way that government agents can be trusted to avoid short term fiscal folly in pursuit of their short term political careers.
Yet "government money" is here to stay. It is even superior, economically, in one way—it lowers the transactions costs of trade because it is accepted in every bank in the land where a seller might wish to deposit it. The same cannot be said in favor of all private banknotes (with the obvious exception of American Express Travelers' Checks, which are private currency). It is economically handy to have a unit of value (dollar, mark, yen) which is independent of physical dimensions (size, weight, color). The greenback dollar is a handy unit of value, widely accepted and recognized—and here to stay. What we want is for the value of the greenback dollar to stop eroding toward zero, because too many people stand to lose too much.
We see the gold standard as the way to accomplish this stable value for the dollar, but nobody has yet proposed a gold standard without price fixing. You see, a gold standard without price fixing might as well be labeled a commodity standard, or a tabular standard—based on a table of values for many commodities. The protest from the price-fixers against such an idea comes from the fallacy of assuming that money is a "thing." How can it be more than one "thing" at a time? But money is not a thing like that.
STABLE MONEY SUPPLY The research which Milton Friedman has done into the effects of changes in the supply of money over time, effects on the value of money, the planned spending levels of businesses and individuals, the consequential mistakes which are made in setting prices too high or too low for full employment, etc., all indicate that a "supply of money" which is held relatively fixed would be optimum, from the standpoint of a libertarian capitalist. Friedman does not start with a definition of "money." He assigned a working definition to his statistical regressions, and he changes the definition from time to time.
I believe that it can now be said (whereas even twenty years ago, you couldn't say it truthfully) that the money supply can be stabilized, with the market mechanisms and the information at our disposal, such that the price of gold—or any other base price commodity—would neither rise nor fall except to reflect changes in supply and demand for the metal, and not changes in supply and demand for the money.
If the Federal Reserve System would cease its attempts to manipulate foreign exchange rates, government bond prices, home mortgage interest rates, and unemployment statistics, and focus on the economic target of a stabilized money supply, it just might succeed. To stabilize the money supply is not a simple task. It cannot be done by decree. In spite of the historical fact that governments have always tampered with money, and usually because of lower transactions costs dominated the market, money is one of the most purely laissez faire inventions since language. Private money exists everywhere that you can locate a store of value which is acceptable enough generally to also become a medium of exchange. Remember the cigarettes and coffee used in the prison camps, or the negotiable value of your old car when you are buying a new one. The only thing which the Federal Reserve bankers should do is measure the gross effect of the millions of private economic transactions, and adjust the volume of outstanding greenbacks (either decrease the number, or increase it) in order to hold the prices of everything else stable—or as Milton Friedman has most lately recommended, to hold the quantity of money (specifically defined) constant and allow a slow drop in prices as the years go by.
The gold standard without price fixing is a realistic policy objective for libertarians. Legalize the ownership of gold, and stabilize the money supply of greenbacks and bank credit. Combined with free trade, the ownership of gold, or yen, or marks, or dollars would represent a very simple prescription for economic freedom for anyone who might feel insecure. On the international level, already, the multinational corporations have arrived at this solution. The Middle East Arab oil billionaires can do it. Next comes the little man in the street.
Libertarians have to come out in favor of the gold standard, but not in favor of price fixing for the dollar. The precise argument should be in favor of free ownership of gold, and a fixed supply of greenbacks and bank credit. With free banking, private deposit insurance, and competitive banknotes like American Express checks, the only function of the Federal Reserve System would be to buy and sell bonds on the open market to offset short term secular trends in monetary supply and demand.
The attempt by many libertarians to make an idee fixe out of gold coins defeats the more important goal of selling the idea of private finance capitalism, free of government pollution, to businessmen and economists who think we are nuts, m
Joe Michael Cobb is Vice-Chairman of the Libertarian Party of Illinois. He is the political analyst of the Committee for the Anti-Inflation Amendment.