- Why Gold? / Artikel v. Hans Sennholz (engl.) - - ELLI -, 06.03.2003, 15:47
Why Gold? / Artikel v. Hans Sennholz (engl.)
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<font color="#002864" size="1" face="Verdana">http://www.mises.org/fullstory.asp?control=1175</font>
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<font face="Verdana" size="2"><font color="#002864" size="5"><strong>Why Gold?</strong></font>
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<font size="2"><font size="4">By Hans Sennholz</font>
[March 6, 2003]</font>
<font size="2"> Like
that of any other economic good, the value of gold changes according to
changing perceptions and situations. This must be emphasized because there are
many goldphiles who wax eloquent about the eternal, immovable value of gold.
They obviously have never experienced, and cannot think of, a situation in
which basic essentials that sustain or safeguard human life do soar in value
while that of gold in any form plummets. In fact, in desperate situations
people may prefer a pound of bread to an ounce of gold, essential clothing and
shelter to a pound of gold and, when their lives are at risk, their lives to a
ton of gold.
The supply of gold is plentiful. For thousands of years it has been mined and
accumulated; very little is consumed or lost. Existing supplies in the form of
coins, jewelry, decoration, and plated coating are greater by far than current
production. No matter how much gold is produced in South Africa or Russia,
current output is rather negligible when compared to the quantities in
individual possession throughout the world. This characteristic, in which it
differs from all other metals, reduces the risk of sudden changes in quantity
and, therefore, sudden changes in its value. Even silver, which has many
characteristics similar to those of gold, is subject to great changes in
production and consumption that may affect its value.
The special characteristics which man ascribes to gold have made it the most
marketable economic good of all, the popular medium of exchange and unit of
economic calculation and account; they have made it man's money. For more than
2500 years, from ancient Greece to modern USA, gold coins have served as money
and the standard of calculation and account.
Throughout the ages governments have had a love-hate relationship with gold.
Most of the time they sought to amass it in their treasuries and monopolize
its use. They claimed and brutally enforced a monopoly of the mint. At other
times governments waged war on gold, seeking to ban it under penalty of fine,
imprisonment, or even death.</font>
<font size="2">During the French Revolution hundreds of businessmen died on
the guillotine because they had dared to calculate prices in gold or ask for
gold. In the United States of 1933 to 1975, it was a crime punishable by fine
and imprisonment to own standard gold coins. At the present, the U.S.
government, while clinging to a sizeable hoard buried in Fort Knox, seeks to
disparage it and make little of it as an unimportant metal.
We are living in an age in which all governments, regardless of the system of
political and economic organization, whether interventionistic, socialistic,
democratic or dictatorial, are occupying an economic command post. Most of
them work through central banks issuing legal-tender notes and through
government mints manufacturing coins. In 1971, they all suspended gold
payments and made the most important and most stable currency, the U.S. dollar,
take the place of gold. The world has been on a dollar standard ever since.
For the federal government the dollar standard has been a magical guide to
cheerful spending and soaring debt. It released the Federal Reserve System
from the shackles of gold and set it free to finance federal deficits no
matter how large. In 1971 the federal government deficit amounted to $23.033
billion and the federal debt stood at $409.5 billion. By now, the 2003-2004
federal budget calls for expenditures in excess of $2.1 trillion and a debt of
some $7 trillion.</font>
<font size="2">Since 1971, the American dollar has lost almost 70 percent
of its purchasing power and is losing more every day. That makes it difficult
to project future debts and deficits, but it is likely that the dollar
standard will disintegrate if foreign investors should ever lose their
confidence in the U.S. dollar.
For the American people the world dollar standard has been, and continues to
be, both a welcome boon and a dreaded affliction. It is pleasant and
beneficial as it permits the Federal Reserve System to engage in massive
credit creation that generates unprecedented trade deficits now running at a
rate of over half a trillion dollars a year. At some five percent of gross
national product (GNP), the trade deficits actually have lifted the levels of
consumption of the American people while they depressed the levels in creditor
countries. Moreover, the dollar standard has enabled the U.S. Treasury to
place much of its new debt with foreign investors and thereby shift much of
the burden of debt to foreigners.
The dollar standard also has been a dreaded affliction as it allowed the Fed
to depreciate the American dollar every year and finance a frightful expansion
of government functions and powers. Dollar savings have lost some 70 percent
of purchasing power while the number of government rules and regulations
probably has risen by a similar proportion.</font>
<font size="2">Many economists are convinced that the current pattern of
Treasury deficits and Federal Reserve money and credit expansion is not
sustainable. They call for large tax increases or drastic spending cuts that
would allow the Federal Reserve to decelerate its money fabrication. But they
also are aware that large tax increases at this time of economic stagnation
and rising unemployment would depress economic activity even further. Spending
cuts, on the other hand, probably would bring relief to the ailing economy but
undoubtedly would be unacceptable to the political forces that benefit from
the spending. They usually cite old notions and theories that advocate deficit
spending as a panacea for economic evils and difficulties.
The huge budget deficits may yet be solved in another way:Â the Federal
Reserve may continue to cover them with new money and credit, which may
depreciate all dollar debt as fast or faster than it can be added. A
five-percent inflation depreciates the purchasing power of a $7 trillion
federal debt by $350 billion a year. At the 1980 rate of inflation of 12.5
percent, the federal debt would shrink by $875 billion in purchasing power,
and at the 1990 rate of inflation of just 6.1 percent by $427 billion. But
such a solution may cause a crisis of confidence in the integrity of the
American dollar and precipitate the end of the dollar standard.
For most of a generation the almighty dollar has been a great object of
confidence and trust throughout the world. It brought honor, friends,
influence, and possession to the United States. As a symbol of power and
prestige it answered all things. Although we do not know what the future has
in store for us, we are fearful that the age of the world dollar standard may
some day draw to a close. Huge federal government deficits and chronic Federal
Reserve inflation may destroy it.</font>
<font size="2">The deficits force the Fed to generate ever more money and
credit which in turn weaken and erode the dollar's trustworthiness in the eyes
of the world. Its present weakness toward many other currencies, such as the
euro, the Swiss franc, and the British pound, is an early symptom of the
erosion.</font>
<font size="2">No other currency, national or international, can
conceivably take the place of the American dollar. They all suffer seriously
from the same ideological malady: they are the creation of political concern
and authority. Whatever we may think of gold, it always looms in the
background, beckoning to be used as money, as it has been since the dawn of
civilization.</font>
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Hans F. Sennholz, emeritus professor of economics at Grove City College, is
an adjunct scholar of the Mises Institute. Send him MAIL.
See also his Mises.org Articles
Archive and his Personal
Website.
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