Week of September 22, 1996

by F.R. Duplantier

"Gold isn't just another commodity. Gold is money. Some day an international monetary crisis may rudely awaken us to this reality."

"A 'pure' gold standard is defined as a monetary system wherein all monies, including banknotes and demand deposits, are backed one hundred percent by gold," explains economist Mark Skousen in the preface to the third edition of his book Economics of a Pure Gold Standard, published by the Foundation for Economic Education. "This is quite distinct from a gold exchange standard," says Skousen, "which is based on a fractional reserve banking system tied to a fixed price for gold. The gold exchange standard, which existed prior to 1971, proved to be unreliable and incapable of preventing monetary crises. But a 100-percent reserve commodity standard would be a vast improvement over the gold exchange standard."

Skousen maintains that "a pure gold standard provides a remarkably stable monetary system, far superior to the current precarious system based on discretionary central banking and fiat money." He argues that, "because of gold's indestructible nature, world monetary reserves and above-ground gold supplies are always rising. Historically, they have never declined." A pure gold standard thus makes possible the "gradual growth in the money supply" that many economists consider ideal.

"Furthermore," says Skousen, "under a 100-percent gold system, a monetary deflation, wherein the money supply declines, is virtually impossible. Thus, if the United States had operated on a 100-percent specie reserve system in the 1930s, the money stock could not have collapsed by a third and precipitated the Great Depression, as occurred under the Federal Reserve and a defective fractional-reserve banking system." Skousen also contends that "monetary inflation is likely to be relatively low under gold, another desirable feature. Since 1492, the world's supply of yellow metal has never increased by more than five percent in any one year."

The standard Skousen espouses "is not likely to support a stable price level, however. In fact," he concedes, "prices are likely to decline gradually over the long run if gold production does not match economic growth." Skousen asserts that such a "gently falling price level should not present any difficulties, however, as long as prices remain flexible and free from government control. At the same time, wage rates may not fall in the face of gently declining prices if worker productivity rises. Interest rates, reflecting the relative stable monetary growth pattern, are likely to remain low, thus providing a favorable climate for economic growth and long-term financing."

Why do so many "economists, journalists, and government officials" have such a phobia for gold? Mark Skousen says they've convinced themselves that "the international gold standard forced central bankers into precipitating the Great Depression of the 1930s," an opinion he considers directly contrary to reality. "They blame the gold standard for the 1929-33 debacle," he observes, "but it was really a gradual movement away from the classical gold standard that precipitated the crisis."

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