The benefits of a Gold Standard as written by a famous (or infamous) Senior Economist. his essay, written in 1966, argues the significance of the gold standard in promoting economic freedom and its role in a free society. Written by Alan Greenspan, Chairman of the Federal Reserve Bank from 1987 to 2006.
It’s difficult to believe a future FED Chairman actually wrote this definitive dissertation on true economic freedom being both maintained and protected via a Gold Standard for monetary policy. Too bad Mr. Greenspan abandoned his early roots when leading the United States, and the world, into the Great Financial Crisis of 2008-2011.
Alan Greenspan’s article highlights the significance of the gold standard in a free society. He argues that gold and economic freedom go hand in hand, as gold serves as a reliable medium of exchange and store of value. Greenspan criticizes the abandonment of the gold standard, which has led to excessive deficit spending and the erosion of wealth through inflation.
He suggests that the welfare state opposes the gold standard because it protects property rights and limits their ability to confiscate wealth. Overall, Greenspan’s article emphasizes the importance of the gold standard in promoting economic stability and safeguarding individual prosperity.
I have summarized Greenspan’s original essay below – without the sophisticated financial language.
The Role of Gold in a Free Society
Money is what we use to exchange goods and services. It needs to be widely accepted, have a stable value, and be a reliable store of wealth. Gold fulfills these criteria and is a luxury commodity that is universally accepted as a medium of exchange.
Advantages of Gold as a Medium of Exchange
Gold has several advantages as a medium of exchange. It is durable, meaning it does not easily wear out. It is also portable, homogeneous (each unit is the same as the others), and divisible. These qualities make gold superior to other goods as a form of money.
The Transition to a Single Medium of Exchange
In a developing money economy, different goods can be used as a medium of exchange. However, over time, one commodity tends to become more widely accepted until it becomes the sole medium of exchange. Gold, silver, and other goods have served as international media of exchange, with gold eventually becoming the predominant one due to its scarcity and advantages.
The Role of Banks and Credit Instruments
A banking system based on gold allows for the extension of credit. Banks can create bank notes and deposits, backed by the production requirements of the economy. With a fraction of the deposits held as reserves, banks can make loans and support economic growth.
The International Gold Standard
When gold is accepted as the medium of exchange by most or all nations, it fosters a division of labor and international trade. The economies of different countries act as one, with credit, interest rates, and prices following similar patterns. The gold standard helps maintain stability and balanced growth.
The Abandonment of the Gold Standard
The welfare state opposes the gold standard because it limits deficit spending. Under a gold standard, credit expansion is limited by the economy’s tangible assets. However, the welfare state relies on massive deficit spending, which requires borrowing money through government bonds. The abandonment of the gold standard allows for an unlimited expansion of credit and can lead to inflation and the confiscation of wealth.
The Importance of the Gold Standard
The gold standard serves as a protector of property rights and safeguards individuals’ wealth. It prevents the hidden confiscation of wealth and ensures stability in the economy. The welfare state opposes the gold standard because it hinders their ability to manipulate the financial system for their benefit.
Conclusion
The gold standard plays a crucial role in economic freedom and stability. It serves as a reliable medium of exchange, store of value, and protector of property rights. The abandonment of the gold standard allows for excessive deficit spending and wealth confiscation. Understanding the importance of the gold standard is essential for promoting individual prosperity and economic well-being.
Read Greenspan’s original 1966 Essay, “Gold and Economic Freedom” here: http://www.321gold.com/fed/greenspan/1966.html