Liberty Eroding, Gold Rising: 30 Years of Warning
By Richard Salsman, American Institute For Economic Research
Substantive change has occurred in the subjects examined in my second book, Gold and Liberty (AIER, 1995), since it was published three decades ago. That change has been mostly negative, unfortunately, especially during the first quarter of this century. As economic liberty has decreased, gold has increased, a historical pattern which is by no means random.
The theme of Gold and Liberty is straightforward: the statuses of gold-based money and political-economic liberty are intimately related. When a government is sound, so also is money. One of the book’s premises is that sound money is gold money (or gold-based money) because it’s economically grounded, non-political, and exhibits a fairly steady purchasing power over long periods. A second premise is that while sound government makes sound money possible, sound money alone can’t ensure fiscal-monetary integrity in public affairs.
A sound government is, in this sense, one that respects private property and the sanctity of contract, a state that’s constitutionally limited in its legal, monetary, and fiscal powers. Sound money is a predictable and reliable medium of exchange, serving as a reliable yardstick due precisely to the relative stability of its real value (that is, “the golden constant”). Unrestrained states “redistribute” wealth rather than protect it, tending to spend, tax, borrow, and print money to excess. That erodes an economy’s financial infrastructure.
The dollar-gold price reached yet another all-time high milestone ($4,000/ounce) in October, having surpassed $3,000/ounce last March and $2,000/ounce only thirty months ago. So far this month, it has averaged $4400/ounce – triple its level in March 2020 (when COVID lockdowns and subsidies began). Gold breached $1,000/ounce sixteen years ago, amid the financial crisis and “Great Recession” of 2009. Only two decades ago, it was $500/ounce.
What Bretton Woods Got Right
Under the relative discipline of the Bretton-Woods gold-exchange standard (1948-1971), when the dollar-gold ratio was officially maintained at a steady level ($35/ounce), the Fed’s main job was to keep it there and issue neither too few nor too many dollars. Its job was not to manipulate the economy by gyrating interest rates. The dollar wasn’t a plaything in foreign exchange. Both US inflation and interest rates were relatively low and stable – not so since.
Gold and Liberty illustrates how the commonly cited dollar-price of gold is really the dollar’s value (purchasing power) in terms of real money, such that a rising “gold price” reflects the dollar’s debasement by profligate politicians. When this occurs – due largely to perpetual expansion of the fundamentally unnatural, unaffordable, and unsustainable welfare-warfare state – public finance (spending, taxing, borrowing, money creation) becomes both political and capricious. At the base there’s an erosion of real liberty. From that comes money debasement, the trend since the US left the gold-exchange standard in 1971.
The value of a monopoly-issued (fiat) currency reflects the competence and quality of public governance no less than a stock price reflects the competence and governing quality of a private-sector company. The empirical record makes clear that the US dollar held its real value (in gold ounces) for most of the period from 1790 to 1913, when government spending was minimal and there was no federal income tax or central (government) bank. In contrast, since the US established its money monopolist (the Federal Reserve) in 1913, the dollar, whether measured as a basket of commodities or consumer goods, has lost roughly 99 percent of its real purchasing power, most of that since the abandonment of the gold-linked dollar in 1971.
Debasement doesn’t get much worse than 99 percent – unless the loss occurs quickly and catastrophically, as in a hyperinflation. That’s not impossible in America’s future.
Having re-read Gold and Liberty recently, I feel both pride and chagrin. I’m proud that it refutes many monetary myths, gets the analysis basically right, and is prescient. It’s got solid data, history, economics, and investment advice. But its main, most helpful purpose is to make clear that money, banking, and the economic activity they support remain sound only in a capitalistic setting. That is, when government sticks to protecting rights to life, liberty, and property, by providing the three necessary functions of police, courts, and national defense.
Measures of Gold and Freedom
Why was this not the path taken this century? Why has government been expanded so much that it now routinely violates rights and spreads chronic fiscal-monetary uncertainty? Where’s the case, made so well in the second half of the twentieth century, for a more classically liberal political economy? In short, where have all the pro-capitalists gone? They were...(READ THIS FULL ARTICLE 100% FREE HERE).