What I'm
about to write here, I have believed for close to 40 years. I wrote about it
decades ago in Remnant Review. I'm not going to look through all of the
published issues to find when I wrote it.
What good
is gold in the vaults of any central bank? I understand why it's a good idea to
have bullion gold coins in your "vault." I don't understand why it's
a good idea for central bankers to put gold bullion bars in their vaults.
Central
banks buy gold from the general public. They also buy gold from each other. Why
do central bankers buy gold? They have to pay good money for it, meaning bad
central bank fiat money.
They can
buy any financial asset. Why do they buy gold bullion? They never intend to
sell gold to the public. So, they don't intend to make a profit on their
holdings of gold. It just sits there.
Central
bankers don't own the assets that the banks hold. It doesn't matter to them
personally whether it's gold or government bonds.
THE GOLD
COIN STANDARD
In the
era of the gold coin standard, when citizens could bring in paper money and
demand gold coins from a local bank, this transferred tremendous authority into
the hands of the general public. The public could participate in a run on a
local bank's gold. If this took place nationally, this would cause a run on the
central bank's gold. This would force the central bank to stop inflating
through fiat money. That was the great advantage of the gold coin standard. It
transferred power into the hands of the general public. The general public
could veto central bank policies of monetary inflation.
This is
why all the governments of Western Europe outlawed the gold coin standard soon
after World War I began in August 1914. Commercial bank runs began almost
immediately. So, central banks and governments allowed commercial banks to
break their gold contracts with their depositors. Then the central banks
confiscated the gold in the commercial banks. They wound up with the public's
gold. It was a gigantic act of theft. It was the end of the gold coin standard.
There was a huge loss of liberty.
This
happened in the United States on Monday, March 6, 1933, at 1 AM. President
Roosevelt unilaterally allowed the federal government to steal the public's
gold at $20 an ounce. Then, when the government had a lot of the gold, Congress
hiked the price to $35 an ounce, thereby enriching the federal government by
75% on the stolen gold. This was a gigantic act of theft. The public did not
care. Most of the economists did not care.
The only
logical case for having government ownership of gold was under a gold standard.
The government had to sell its gold at a fixed price. Because the government
always asserts a monopoly over the monetary system, and because the gold coin
standard did allow a veto of central bank policies, there was a case -- weak --
for a central bank's vault full of gold.
It would
have been far better if the governments of the world had never been allowed to
exercise any control at all over the monetary systems. Money is like anything
else of value. It is best managed under liberty. It is best managed by private
ownership of the means of production. Government monopolies over money always
lead to inflation, and the inflation creates the boom bust business cycle. But
economists, other than Austrian School economists, do not believe this.
As soon
as the gold coin standard is abolished, there is no further economic case for
letting the government hold gold. If the public cannot veto central bank
policies of monetary inflation by joining bank runs across the country, then
there is no free market case in favor of the government ownership of gold.
There is no free market case for the government ownership of any of the means
of production.
Calling
for the government ownership of gold is, in principle, the same as calling for
the government ownership of the railroads, the airline industry, and the
housing mortgage markets. Oh, I forgot. That is what we have today: Fannie Mae,
Freddie Mac, and VA loans. The public loves it. The public loves
government-subsidized mortgages. Does this come as a surprise?
Similarly,
gold bugs love government-subsidized gold prices.
ADAM
SMITH ON MERCANTILISM
The
argument in favor of large amounts of gold in government vaults goes back to
mercantilism in the 17th century and 18th century.
Mercantilists
believed that it was a good policy for the government to build up gold
reserves. They believed this was a mark of the wealth of the nation. In order
to build up these reserves, governments were supposed to pursue policies that
would lead to more exports then imports. Mercantlists discouraged imported
goods. They encouraged subsidies to exports. This would lead to an inflow of
gold into the country, they argued. Then the government could tax businesses
and stick more gold in the government's vault.
The great
opponent of this argument was Adam Smith. Smith argued that the government
should not interfere with trade. It should not subsidize exports. It should not
restrict imports. It should let the free market work.
Smith
argued that the basis of national wealth is the nation's economic output, not
the amount of gold held in a government vault. Free trade leads to increased
output. Therefore, interventionist policies that are designed to increase the
amount of gold in a government vault should not be implemented. Here is a
summary of Smith's position by Eamonn Butler, head of Britain's Adam Smith Institute.
The first theme in The Wealth of Nations is that
regulations on commerce are ill-founded and counter-productive. The prevailing
view was that gold and silver was wealth, and that countries should boost
exports and resist imports in order to maximize this metal wealth. Smith’s
radical insight was that a nation’s wealth is really the stream of goods and
services that it creates. Today, we would call it gross national product. And
the way to maximise it, he argued, was not to restrict the nation’s productive
capacity, but to set it free.
Smith
also said that the gold will not do the government much good. In a war, the
gold would be depleted rapidly. The only way for governments to build up their
own wealth is to encourage freedom of exchange. Let the economy grow. Then, if
the government needs money, it taxes a growing economy instead of a stagnant or
shrinking economy.
How can
the government do this? By abandoning its programs of intervention.
GOLD BUGS
AND MERCANTILISM
Gold bugs
still hold the mercantilist position. They think that the essence of wealth for
a nation is for the national government to increase its gold holdings. They
will not accept the arguments of Adam Smith. They have never read Smith. They
know nothing about his arguments.
Consider
this question. "Is it better for private citizens to hold a valuable
asset, or is it better for the government to hold it?" Let me put it
another way. "Is it better to have wealth in private hands or the
government's hands?"
In
matters other than gold, gold bugs say that they want to strengthen the private
economy. They don't want government interference in the economy. They think
that liberty is better for the creation of wealth. But if you ask them about
gold, they love to hear about central banks buying gold and putting it in
government or central bank vaults.
This is
an economically self-interested argument. They want government intervention
into the private sector: gold's price. They want central banks to issue fiat
money to buy gold. They want the price of gold to go up. They want a central
bank subsidy for the price of gold. They cheer when a central bank buys
gold. "This is liberation. Let's have the governments of the world issue
lots more fiat money, come into the market, buy gold, and thereby raise the
price of gold!"
Adam
Smith was right: we cannot trust capitalists to do the right thing when their
personal profits are under consideration. They will sell out liberty every time
in order to line their pockets with money.
People of the same trade seldom meet together, even for merriment
and diversion, but the conversation ends in a conspiracy against the public, or
in some contrivance to raise prices. It is impossible indeed to prevent such
meetings, by any law which either could be executed, or would be consistent
with liberty and justice. But though the law cannot hinder people of the same
trade from sometimes assembling together, it ought to do nothing to facilitate
such assemblies, much less to render them necessary. (Wealth of Nations,
Chapter X, Part II)
Think
this through. Most gold bugs have not thought it through.
Central
banks buy investment assets with newly created money. They never sell assets,
such as government bonds, in order to get money to buy gold. They always create
money out of nothing in order to buy gold.
Therefore,
asking the government's central bank to buy gold is asking for fiat money
inflation. This fiat money is going to go into the economy. Prices are going to
rise, or else not fall. People who own gold benefit. Most people do not
benefit. People on fixed incomes are hurt. For them, the central bank's
purchase of gold is a liability. Prices go up. Their income does not go up.
They have to cut back on spending.
Here is
the reality of civil government intervention into a private market. If one
group is benefited by government action, some other group is hurt by the same
action. This is as true of the purchase of gold by a central bank as it is
true of the purchase of government bonds by a central bank. Somebody wins. Most
people lose. That's the nature of civil government.
Gold bugs
say they understand this. But they do not believe it as soon as their personal
profits are on the line. Whenever they can make a buck, meaning a digital buck,
they rush to get the government to take action. They love intervention as long
as it lines their pockets.
Am I
cynical? You bet I am. I have read Adam Smith on collusion, and I believe him.
CENTRAL
BANKS SHOULD SELL ALL OF THEIR GOLD
Central
banks should sell every ounce of gold in their vaults. Why do I say this?
Because gold is a valuable asset. Valuable assets should be owned by
individuals, not governments.
I don't
want to see the expansion of government. I don't want to see a government get
richer as a result of creating money out of nothing, and then buying assets from
private citizens.
Governments
tell their central banks to buy foreign bonds by going into the market with
newly created fiat money and buying these bonds. The central bank could buy the
domestic government's bonds just as well. But politicians want to hold down the
value of the domestic currency in order to subsidize exports. This is
mercantilism. It was a bad idea in 1650. It was a bad idea in 1776. It is a bad
idea today.
If a
central bank buys gold from another central bank, this increases the amount of
money in circulation in the nation's commercial banks. This lowers the value of
the domestic currency. This is a bad thing for the economy. The same is true if
the central bank buys gold from South African gold mines. It doesn't matter
what the government buys. The central bank is going to create money in order to
buy it. This is inflationary. It is an intervention in the economy. This is a
Bad Thing.
What can
the governments do with the gold? It's useless to them. They don't sell it.
I wish
they would sell all of it.
RETURNING
STOLEN GOLD
Most
people can't follow long chains of economic reasoning. Actually, most people
can't follow short chains of economic reasoning. Most people also love to see
whatever they own as an investment asset get subsidized by the government. So,
gold bugs abandon all traces of free market theory, and they call for more gold
purchases by central banks. They don't care which governments buy the gold. As
long as governments are buying gold, they rejoice.
I do not.
Gold is a tool of monetary stability, but only when it is in private hands. It
is a tool of production, but only when it is in private hands. Gold is an
economic asset, which is why I do not want governments or central banks to have
vaults full of gold.
They
stole the gold in 1914 and 1933. Why should anybody who promotes the free
market want these thieving governments not only to hang on to the stolen goods,
but increase the amount of goods stolen from the public by issuing central
banks' counterfeit money to buy more? Why is a policy of theft in 1914 and 1933
a bad thing, but exactly the same policy today -- theft through monetary
inflation -- a good thing?
Ludwig
von Mises had a term for this outlook: polylogism. He said that people
don't apply the same logic of economics to every market. They exempt certain
markets from the logic of economics. This is surely the case of gold owners who
believe in the gold coin standard, but who also believe that central banks can
and should buy the people's gold with newly created counterfeit money, and put
the gold into the banks' vaults. This makes no economic sense, but it is almost
universally believed by gold bugs.
CONCLUSIONS
End the
Fed. (Deadline: next week. November 1 at the latest.)
Mint gold
coins. (Deadline: end of fiscal year 2019: September 30)
Sell the
coins. (Deadline: as soon as they are minted)
