By Congressman Ron Paul | Congressional Record, February 23, 1981
MYTH NO. 1: THERE ISN’T ENOUGH GOLD
I find it amazing that economists can make statements like this, for it is an elementary principal of economics that if one raises the price of a commodity, one will always have enough of that commodity. What we saw in the run up of gold prices is in fact the raising of the price of gold to match the depreciation of the dollar that has occurred, and still is occurring.
Simply put, there will always be enough gold so long as no one interferes with the free market mechanism.
At $700 an ounce the United States government has enough gold reserves to more than cover all the Federal Reserves notes outstanding. If we were to establish a gold standard by the procedure I have outlined in my bill H.R. 7874, then the world would be fully informed of the gold holdings of the United States Government and the price of gold could adjust accordingly, so that when redemption of our greenbacks – our Federal Reserve notes – began, the price would be the market-clearing price. Quite simply, the statement that there is not enough gold is false. It is a scare tactic used by opponents of the gold standard.
MYTH NO. 2: A GOLD STANDARD WOULD ENABLE RUSSIA AND SOUTH AFRICA TO HOLD US HOSTAGE
The second myth that should be challenged is that the Soviet Union and South Africa could hold us hostage were we to establish the gold standard. It is true that the Soviet Union and South Africa, because they have vast gold deposits, have reaped a windfall in the past decade. Yet we are not today on any sort of gold standard. It is the present inflationary policies of governments the world over that create these windfalls. Rather than giving the U.S.S.R. and South Africa windfalls, we should institute the gold standard.
Stabilization of our monetary system – and perhaps the world monetary system, if the world emulated us – would remove any speculative premium that the Soviet Union and South Africa presently receive. We would see a stabilization of the world price of gold and an end to inflation throughout the world. In such a condition, the Soviet Union and Africa would no longer be in a position to reap windfall benefits.
During the first several months of this year the Soviet Union has withheld gold from the international gold markets. It has recently been rumored that they have sold hundreds of tons to Saudi Arabia at a premium price. Whether or not that is the case, it is easy to see that the inflationary problems that beset us and the rest of the world create the conditions for Russia and South Africa to reap vast economic benefit. The present inflation causes fear and panic among the world’s peoples.
Were we to institute a sound money system – a full 100 percent gold coin standard – the fear and panic would be eliminated. There would be no premium to be reaped by the Soviet Union and South Africa, and they would not receive any windfall from the sale of their bullion and their coins. Nor would Russia and South Africa be able to hold us hostage.
The gold reserves of the United States are immense, but no matter what their size, it is extremely difficult to see how Russia and South Africa, either by restraining their production or by dumping gold, could seriously affect us here in the United States. When we reach a full gold coin standard and our unit of account is a weight of gold, as I have indicated in my bill. H.R. 7874, the world’s entire production for one year would not influence significantly the value of that weight of gold.
MYTH NO. 3: GOLD CAUSES DEPRESSIONS
The third myth is, “that a return to the gold standard will cause a depression.” Now this statement is a half-truth, for if we improperly institute a gold standard, then we might in fact have a depression. Following World War I, the government of Great Britain returned to a gold standard, but in a deflationary fashion. Britain re-established the link that existed between the pound and gold, prior to World War I, not taking into account the increase in the number of pounds that had occurred during the war when Great Britain was off the gold standard. The result was a short depression, because the political experts completely ignored the damage that had been done by their policies during the war.
Were we to establish a gold standard, we would have to pursue a course that would not result in deflation and would not cause a depression. We would redeem at the market price for a period of one year the greenbacks we have printed, and then cease redemption, allowing the gold coins we have put into circulation to function as our money of account.
If we proceed to a gold standard in an orderly fashion, such as I have proposed in my bill H.R. 7874, then there will be no depression. A gold standard cannot be achieved if we do not end our budget deficits as well. The standard must be accompanied by tax cuts, an end to the printing of paper money, and a significant reduction of federal regulations if we expect a restoration of a sound economy.
Unless we are committed to all these things, even the establishment of 100 percent gold coin standard cannot stop our descent into economic chaos. We must cut the federal government down to constitutional size, and the establishment of a full gold standard is part of that process. The Constitution explicitly forbids any state government, and implicitly the Federal government, from making anything except gold or silver coin a legal tender in payment of debt.
MYTH NO. 4: GOLD CAUSES INFLATION
The fourth myth about the gold standard, is that “It will cause inflation.” Opponents the gold standard point out that the world supply of gold increases by about two or three percent per year, and such an increase in supply would result in inflation in any country that adopts a gold standard.
I do not wish to challenge the proposition that the world gold supply increases by 2 to 3 percent per year. For the sake of argument, I will accept that as given. The result of such an increase is that prices might stay stable rather than falling. It is useful in this regard to point out the behavior of prices during our history. For most of the 19th century we had an imperfect gold coin standard. In the 67 years prior to the beginning of the Federal Reserve system in 1913 the consumer price index in this country increased by 10 percent, and in the 67 years subsequent to 1913 the C.P.I. increased 625 percent. This growth has accelerated since 1971 when President Nixon cut our last link to gold by closing the gold window.
In 1833 the index of wholesale commodity prices in the US. was 75.3. In 1933. just prior to our going off the gold standard, the index of wholesale commodity prices in the U.S. was 76.2: a change in hundred years of nine-tenths of one percent. The index of wholesale commodity prices in 1976 was 410.2. Today. the index is 612.3. For 100 years on the gold standard wholesale prices rose only nine-tenths of 1 percent. In the last 45 years of paper money they have gone up 536%.
The index of wholesale commodity prices emphasizes the stability of these prices during the entire 19th century. This stability was first overturned during the Civil War – the greenback period – then in World War I, and once again in World War II, and with the inflation that has persisted since that war.
Rather than causing inflation, the gold standard has historically been a bulwark against inflation. It is politically-manipulated money such as we have had since 1934 that causes our inflation.
People today have come to expect that prices will continue to rise, and we see the beginnings of a hyperinflationary psychology setting in.
If we are to avoid the horrendous consequences of such a psychology, we must take dramatic action and give our country an historically proven system, a full gold coin standard.
MYTH NO. 5: GOLD WOULD BE SPECULATIVE
The last myth about the gold coin standard that I would like to address is the notion that such a standard would be subject to undesirable speculative influences.
This assertion was most recently made in a letter sent by the Federal Reserve Chairman William Proxmire of the Senate Banking Committee. The letter argued that because gold is a commodity used in jewelry and in industry, it is subject to speculative influences that are undesirable in setting up a stable monetary system.
I find such an argument amazing, for it is precisely because it is a commodity and not subject to the manipulation of a bureaucracy in Washington or London that it is desirable. If one wishes to speak of undesirable speculative influences, one need only look at the speculation that occurs daily in the U.S. dollar.
A gold standard would eliminate all speculation about the political motivations of the monetary authorities in governing the supply of money. The great virtue of the gold standard is that it removes discretionary power over the money supply from any one agency, thus ending the most fertile source of speculation. A gold standard puts the power of the monetary system into the hands of the people and takes it away from the politicians and bankers, thus removing a potential vehicle for establishing a tyranny.
Gold cannot be mined as cheaply as Federal Reserve notes can be printed. Nor can its supply be manipulated on a daily basis. There is a great dispersion of power in a gold standard system. That is the strength of the system, for it allows the people to check any monetary excesses of their governors and does not allow the governors to exploit the people by debasing the money.
The letter from the Federal Reserve System to Chairman Proxmire closed with a call for more faith in the System and its good intentions. For over 60 years the American people have been exercising such faith and they have suffered the worst depression and the worst inflations in their history. Let us hear no more of faith in men, but bind government with the chains of an honest monetary system – the full gold standard.
In the Coinage Act of 1792 the Founders provided the death penalty for any government employee who debased the money. One wonders if such a penalty were enforced today how many members of the Federal Open Market Committee would survive the month.
GOLD: THE MEASURING ROD
In his “Tract on Monetary Reform” published in 1923, the father of the age of inflation, John Maynard Keynes, wrote: “The individualistic capitalism of today . . . presumes a stable measuring rod of value. It cannot be efficient – perhaps cannot survive – without one.”
Lord Keynes was correct. Unless we have a stable measuring rod of value, such as a gold coin standard, capitalism and freedom cannot survive. If not vigilant, we will evolve into the sort of fascism that resulted from the great German inflation following World War I.
The choice before us is simple: Shall we have gold and political freedom or shall we have paper and political tyranny?