03 Jun 2011

Was the US Gold Standard a Promise, a Pledge, a Platitude…?

Gold 26 Comments

[UPDATE to the description of Mises’ views.]

You gotta love the internet. In the comments of a previous post we have somehow begun a fierce debate over whether, in an alternative universe in which FDR didn’t confiscate gold coins under threat of 10-year prison sentences, “going off gold” would have amounted to theft. There’s analogical fun for the whole family. We talk about checking your coat in a restaurant, giving someone money for a car only to have him speed away, having your refrigerator taken and being prohibited from buying another one…we cover all the bases, as you would expect in any discussion of monetary and legal theory.

Anyway, there is a line of argument saying that the U.S. government never reneged on anything in 1933. As a matter of policy, up till then the government had pegged the dollar at $20.67 per ounce of gold, and then it changed its mind in 1933, sort of like raising the speed limit. What’s the big deal? When the facts change, I change my redemption policy–what do you do?

I’m admittedly biased since I thought the classical gold standard was pretty swell, but even so I think that this line of reasoning is demonstrably false. I am not a legal scholar so I can’t say whether the USD’s tie to gold pre-1933 was of the same status as, say, a Treasury bond. But here are some points:

* In reading Mises’ Theory of Money and Credit (first written in 1912), it’s almost cute how in his mind, money just is the precious metals. He grudgingly concedes the theoretical possibility of a true fiat currency, but he is skeptical it would ever get off the groundthat it had ever existed historically, because he thinks even those currencies that had suspended convertibility were “credit money” because people thought they would eventually be linked back to metal. (Quote below.) And he points out with pride how real businesspeople don’t care about the markings the State puts on coins; all anyone cares about, duh, is the weight of the metal.

* When the government went off the gold standard, FDR’s budget director supposedly said it was the “end of Western civilization” and resigned. (Good for him, though Wikipedia makes it sound like the resignation was for deficit spending, not going off gold. A bit weird, that you could tolerate your boss destroying Western civilization, and then later put your foot down.)

* Here are some excerpts from the Gold Standard Act of 1900:

An Act To define and fix the standard of value, to maintain the panty of all forms of money issued or coined by the United States, to refund the public debt, and for other purposes.

Be it enacted . ., That the dollar consisting of twenty-five and eight-tenths grains of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard, and it shall be the duty of the Secretary of the Treasury to maintain such parity.

SEC. 2. That United States notes, and Treasury notes issued under the Act of . . . [July 14, 1890] . . ., when presented to the Treasury for redemption, shall be redeemed in gold coin of the standard fixed in the first section of this Act, and in order to secure the prompt and certain redemption of such notes as herein provided it shall be the duty of the Secretary of the Treasury to set apart in the Treasury a reserve fund of one hundred and fifty million dollars in gold coin and bullion, which fund shall be used for such redemption purposes only, and whenever and as often as any of said notes shall be redeemed from said fund it shall be the duty of the Secretary of the Treasury to use said notes so redeemed to restore and maintain such reserve fund in the manner following, to wit: First, by exchanging the notes so redeemed for any gold coin in the general fund of the Treasury; second, by accepting deposits of gold coin at the Treasury or at any subtreasury in exchange for the United States notes so redeemed; third, by procuring gold coin by the use of said notes, in accordance with the provisions of section thirty-seven hundred of the Revised Statutes of the United States. If the Secretary of the Treasury is unable to restore and maintain the gold coin in the reserve fund by the foregoing methods, and the amount of such gold coin and bullion in said fund shall at any time fall below one hundred million dollars, then it shall be his duty to restore the same to the maximum sum of one hundred and fifty million dollars by borrowing money on the credit of the United States…

SEC. 6. That the Secretary of the Treasury is hereby authorized and directed to receive deposits of gold coin with the Treasurer or any assistant treasurer of the United States in sums of not less than twenty dollars, and to issue gold certificates therefor in denominations of not less than twenty dollars, and the coin so deposited shall be retained in the Treasury and held for the payment of such certificates on demand, and used for no other purpose. Such certificates shall be receivable for customs, taxes, and all public dues, and when so received may be reissued, and when held by any national banking association may be counted as a part of its lawful reserve.

Short of saying, “Cross our heart and hope to die,” I don’t know what more the Act could have said, in order for FDR to have reneged in 1933. For those who continue to claim that FDR did not violate any legal obligations to the people holding US dollars in 1933, let me ask this: Is it possible for him to have been so beholden, in your mind? Or by definition, can the State do whatever it wants with respect to its paper notes, at a moment’s whim, regardless of what it has done in the past?

UPDATE: Here is the full Mises quote I had in mind:

It can hardly be contested that fiat money in the strict sense of the word if theoretically conceivable. The theory of value proves the possibility of its existence. Whether fiat money has ever actually existed is, of course, another question, and one that cannot off-hand be answered affirmatively. It can hardly be doubted that most of those kinds of money that are not commodity money must be classified as credit money. But only detailed historical investigation could clear this matter up. [Mises, TOMC, p. 61]

So that’s what I had in mind. What I wrote originally was clearly going beyond Mises’ words here. From many other scattered remarks, I still stand behind my view that I don’t think Mises believed there would be fiat money as a worldwide phenomenon, but I have no smoking gun quotation.

26 Responses to “Was the US Gold Standard a Promise, a Pledge, a Platitude…?”

  1. Silas Barta says:

    Do you think I went to far when I started talking about Blackadder’s nutrition regimen as an infant? I don’t, but this is probably one of those “reasonable people can disagree” things…

    That reasoning from Mises doesn’t make him look so hot, by the way.

    • bobmurphy says:

      Do you think I went to far when I started talking about Blackadder’s nutrition regimen as an infant?

      Search your feelings, young Skywalker.

      That reasoning from Mises doesn’t make him look so hot, by the way.

      Which part? Anyway, the point (coupled with the “end of Western civilization” quote) is that it was inconceivable to a lot of people that the Western governments would abandon their gold pegs indefinitely (as opposed to a temporary suspension because of a war). So when people nowadays are saying, “What’s the big deal? They tweaked a policy,” I think they are clearly wrong.

      It’s sort of like, 4 or more years ago, I literally would use the reductio ad absurdum of, “I mean, nobody thinks it would be a good idea if the federal government tried to run car companies. So why do we think…?” But now I can’t use that anymore. And I’m not embarrassed by my rhetorical device. I’m embarrassed that the American people allowed a little financial crisis to completely upend what they were willing to allow the feds to do.

      • Silas Barta says:

        The quote from Mises definitely establishes people’s expectations, but it shows he clearly blundered in thinking that fiat currencies couldn’t exist.

        • bobmurphy says:

          Hang on there. Even my original wording didn’t say he thought “that fiat currencies couldn’t exist.” Anyway I posted the full quotation so you can see his exact (translated) words.

          • Joseph Fetz says:

            Seems to me that Mises was an honorable man that gave great institution to “promises”. He didn’t neglect that such promises would not be made, but was very honorable (and, maybe naïve) in seeing that such promises were fulfilled. Sure, he didn’t say it as vociferously as Rothbard would have (Mises was a humble man), but he did hint that the breaking of the government contract with its peoples was crime; probably the worst of crimes.

            Mises always talked of fiat currencies, because he knew that they had existed before. But, he was very positive in the people’s recognition of such atrocity.

            If there is one primary fault in Mises, it is that he gave people far too much credit….But, those that do read his work tend to reconcile the balance.

  2. John Becker says:

    “No government is, however, powerful enough to abolish the gold standard. Gold is the money of international trade and of the supernational economic community of mankind. It cannot be affected by measures of governments whose sovereignty is limited to definite countries” (Human Action 472). Is that the type of quote you were after?

    • Avram says:

      I wonder if that statement is a left over from his German book. I am surprised he couldn’t see that the U.S government wasn’t just ANY government whose sovereignty is limited to a definite country. Specifically in the realm of currency in 1949 when that book was published the U.S.A had a stranglehold over all of western europe and had already established the dollar as the reserve currency everywhere, surely it would have been clear that whatever the U.S.A wanted then, they would get.

      • bobmurphy says:

        Right, but the dollar was tied to gold. That was why the other powers agreed to Bretton Woods. And it took another 22 years (from 1949) before Nixon abandoned the peg.

        A purist might even say that gold is still the “world’s money,” but I think that would be cheating. In any event, it would not have been obvious in 1949 that the whole world would be on fiat currencies in 25 years.

        • John says:

          I don’t buy the argument that gold is still the world’s money, unless you’re saying that the world’s reliance on the dollar is a holdover of the days when the dollar was tied to gold. But even then I’d say that it has more to do with the economic might of the US making the dollar attractive as the bedrock fiat money.

          However, I think you could still make the argument that our experiment in fiat currencies is just a historical exception and an experiment bound to end in disaster sooner or later. I fully agree with Mises that gold is the only suitable form of money, but I think he should have been a little more forthcoming about the theoretical possibility of fiat money.

          • bobmurphy says:

            Sure I don’t think it works to say gold is still the world’s money, at least not without a big asterisk. I’m just saying, some people would argue that Mises wasn’t disproven.

            • John Becker says:

              I’m personally hoping history proves him right for believing that only gold can work as money. There’s not a single fiat currency out there that’s even close to being a suitable reserve currency. The dollar, euro, yen, and yuan all have huge flaws.

        • Avram says:

          Bob, at the end of World War 2, there were no other powers (capitalist ones, socialist states had no interest in (sound) money). There was the United States and the United States Europe flavor. No one was really asked to agree to anything except in formality. The United States could have easily said then “I have atomic weapons, you have nothing, and you certainly no longer use gold” and all the other “powers” would have immediatley agreed to that as well.

          Also, you’re right it wasn’t obvious that fiat money *would* happen, far from it, but it should have been obvious that it *could* happen. The argument presented was basically “no one nation can get rid of gold everywhere cause it can’t get rid of gold in all the others, and they’ll just keep using it” but at that point in time the U.S had put itself in position where it really could alter domestic policy in any number of different “sovereign” nations, so the original argument by Mises, presented in that quote, doesn’t really hold for just after World War 2.

  3. MamMoTh says:

    Mises didn’t realize that money was always credit. And that a state currency is always a fiat currency and the price of the currency is set by the state when it spends it or lends it.

    The government has the same pricing options with its money of any monopoly supplier of an absolute necessity. An analogy can be drawn, for example, with an electric utility monopoly although taxes give the currency monopolist a tool to regulate demand that the electric utility monopolist does not have.

    How does the monopolist price his product? There are two options:

    1) Set price, p, and let quantity, q, float, or
    2) Set q and let p float.

    The first option is generally preferred, with a gold standard or the proposed ELR program two examples of using the first option.

    However, the government is currently employing the second option. It sets a budget that determines q (spending), and lets the market determine p (price level) as all purchases are made at market prices. If the monopolist decides to set q, and let the market decide p, it must constrain q so that demand exceeds q, or, for all practical purposes, the price of its product will fall towards 0. Government constraint of q to control p means using continuous unemployment and excess capacity to maintain price stability. Surely this would never be considered a viable option in running an electric utility monopoly, for example.

    A gold standard uses the monopolist’s alternative of setting p, in this case the price of gold, and letting q, the quantity of government spending and lending, float. Taxes create demand for the currency. The government sets a price at which it will buy and sell gold, and makes all other purchases at market prices. It is then fiscally and monetarily constrained to a policy that spends little enough on non-gold items, and adjusts interest rates, to maintain a desired buffer stock of gold. The government must limit its non-gold spending to less than the demand for the currency created by taxation, so the excess demand for the currency is evidenced by gold sales to the government. Excessive non-gold spending results in gold sales to the private sector. As long as the buffer stock and legal convertibility are in place, the price of gold set by the government is the currency’s value. All other prices float at market levels and reflect nominal value relative to the set price of gold.

    The global gold standard failed for the same reasons the Euro is probably going to fail: there was no supranational fiscal entity that could mitigate imbalances.

  4. Gene Callahan says:

    ” Gold is the money of international trade and of the supernational economic community of mankind.”

    Isn’t it wonderful how people can take a very special historical circumstance, one that existed for about 50 years in all of human history, and elevate it into an a priori principle?

    • bobmurphy says:

      I was OK with your rips on living Austrians. I was even OK with your rips on Rothbard. But I’ll thank you to leave poor Mises alone.

    • John says:

      Gold was the bedrock of international trade from the discovery of the Americas until the closing of the gold window in 1971. Before that it was the basic currency of the Roman Empire while silver was the currency of the “barbarians.” Gold coins dominated Europe since then, I believe they did in Asia as well, but I’d have to fact check on that. By contrast, fiat currencies have only been the standard for a measly 40 years. Besides, I believe Mises was making a prediction there rather than stating an a priori principle, and who hasn’t made a prediction that was incorrect at some point?

    • MamMoTh says:

      Good point Gene. State currencies have always been fiat currencies, the gold standard being just a special case of how the state sets the value of its currency. Any analysis of currencies should be based on the general case not in a particular example.

      • John says:

        “State currencies have always been fiat currencies”

        I didn’t think anyone still followed the idea that money was created by a wise king one day a long time ago. Money emerges naturally in the market process as a result of the fact that some commodities are more marketable, easy to divide, easy to transport, have a high value for their weight, etfc and therefore allow people to use indirect exchange instead of barter. With the gold standard, governments just made laws based on what people were already using.

      • John says:

        Fiat currencies are the specific case while the use of precious metals were the natural choice. If that wasn’t the case, it wouldn’t have been necessary for Roosevelt to confiscate gold and for Nixon to close the gold window. Precious metals were money until 1971. I can’t understand why people think that fiat currencies are the general case besides a failure to look at history.

      • MamMoTh says:

        Yes, money naturally emerges as credit. But state currencies have always been fiat currencies valued above the value of what they were made of. A state fiat currency under a gold standard is just a special case of how the price of the currency is set by the state.

        Maybe metals were a natural form of primitive money (settling debts) in the past, as much as it is natural to abandon their use as money, and as much as it will be natural to abandon cash and coins in the future since all we need now are databases that keep record of credit and debt.

        • John Becker says:

          I don’t see what you mean when you say that all money is credit. Commodity money is an economic good traded against another economic good; no credit involved at all. What made the commodities money was simply the fact that individuals in the market place generally accepted it as payment which gave the commodities a premium. Fiat money was the result of canceling the redeemability of paper notes.

          • Blackadder says:


            As I understand it, originally metals were used as tokens to represent given amounts of grain. It was only later that they themselves became a store of value.

            • John Becker says:

              Commodity money doesn’t even mean precious metals, just a generally accepted medium of exchange. You could just as well use sea shells. Money simply emerges because it’s generally accepted and easy to use. Bob wrote a good piece about this a few months back in a Mises daily. Money has nothing to do with being a token. You could also read Bob’s Lessons for the Young Economist.

  5. Blackadder says:

    Short of saying, “Cross our heart and hope to die,” I don’t know what more the Act could have said, in order for FDR to have reneged in 1933. For those who continue to claim that FDR did not violate any legal obligations to the people holding US dollars in 1933, let me ask this: Is it possible for him to have been so beholden, in your mind?

    It’s a general feature of legislation that it can always be amended or repealed. If the obligation to exchange gold for U.S. notes at $20.67 an ounce comes from the Gold Standard Act of 1900, then repealing the Act repeals the obligation. (Similarly, the U.S. government is obligated to pay Social Security benefits to Americans under certain conditions, but that doesn’t mean that Social Security benefits can’t be cut or eliminated in the future).

    • Silas Barta says:

      Good thinking, Blackadder. And it’s a general feature of restaurants that they reserve the right not to serve anyone. If their obligation to redeem my ticket for my coat comes from their sign that says “Coat Check”, why, they can just take that down, and *poof!* no more obligation!

  6. Rob Jones says:

    We sort of do have a fairly universal gold standard. It is the federal minimum wage, which sets the minimum price for unskilled (or skilled) labor. Forgetting for the moment the problems with such a value basis (that output of unskilled labor is not constant, and that it is not entirely universal), it is instructive. While it sets the price of labor hours, it fixes $7.25 dollars to one hour of labor – or the standard of 1 dollar equivalent to about 8 minutes of labor. So it is also a fiat equivalence and is inflationary in nature. Every time Congress raises the minimum wage, it must be met with more printed money since the value of the dollar is eroded – so if you double the minimum wage, you half the value of the dollar for labor.