Enumerate this Right, please
A self-regulated Economy being necessary to the prosperity of a free Society, the right of the people to keep and bear Gold and Silver, shall not be infringed.
This assertion isn’t meant as a parody. It just mimics a key article of the Bill of Rights which we should all recognize as the Second Amendment—a hint at the import of this closely related topic. I hope you agree that the analogy between the corresponding terms: Gold and Silver for Arms, Society for State, and prosperity for security is obvious. The first substitution, self-regulated Economy for well-regulated Militia, may seem less obvious at first. It is meant to remind us of Congress’s duty to regulate (i.e. standardize) gold and silver coins by chartering a mint. And conversely, to remind Congress that commerce makes its own equity via the common laws of free trade. I’ve even used Enlightenment-era capitalization to emphasize the signal concepts. (Note to editors: rewind your style manuals to the XVIIIth century or just print this as submitted).
If this level of pompous presumption is too sudden or jarring, please suspend judgment briefly as you would for a TV series episode that opens with the hero in some non-sequitur of a situation. Let’s cut to the next scene with title text saying EARLIER THAT DAY. How did we get here?
A tale of two mindsets
Arguments about money are really about control. In major social crises, the daily political disputes over resource distribution tend to escalate into disputes over the very definition of money. Populist blogger Charles Hugh Smith’s recent headline reads “If we don’t change the way money is created and distributed, we change nothing; the only real solution in my view is to create and distribute money at the base of the pyramid rather than to those in the top of the pyramid.” Populists and neo- Marxists are always eager to sell us an easy solution on their terms. Their observations of income and wealth inequality are based in fact, though they misread the causes, as Keith Weiner discussed last year. However, the argument about whether it’s better to use “primary dealers” vs “helicopters” to distribute new cash is a divisive distraction from the real issue which is the unnatural assumption that money is something a rule or a ruler can “create”. Excuse the pun, but such an idea lacked currency even 145 years ago.
As President Lincoln’s Treasury Secretary, Salmon Chase had lobbied for the Legal Tender Act of 1862. He is shown in this Currier & Ives cartoon grumpily inflating away for the war effort. In a rare triumph of wisdom rejecting experience, just eight years later while serving as Chief Justice of the Supreme Court, he found the 1862 act unconstitutional in the 4-3 decision of Hepburn v. Griswold (1870). Tellingly, on the day that decision was handed down, President Grant stuffed the court with two new judges. Their votes in subsequent 5-4 decisions quickly overturned Hepburn v. Griswold and restored Grant’s power to print in what became known as The Legal Tender Cases. The dissenting opinions to these decisions could not be more eloquent in defense of the limited extent of the power to coin gold and silver money. The arguments in favor of paper money were certainly influenced by its expeditious uses in prosecuting the war. The supporters at the margin clearly owed their posts to the winning general, a man who’d acquiesced to practices now described as total war, the sitting president: Ulysses Grant. Though still upheld by Progressives, the assenting opinions ring hollow; the effect of irredeemable paper systems has been to eventually consume, for state purposes, great swathes of the nation’s wealth.
The collectivist, socially-expedient mindset will be with us always. Keeping it in check is a political endeavor; not even the best philosophizing can heckle the hope for a free lunch out of men’s dreams. One common ground on which we can base tighter constraints is the concept of human rights—Mr. Griswold’s contractual rights or as we’ll see next, our individual and collective right to economic self-defense.
Four score and seven years ago in another Depression
Seeking a magical lender of last resort to help them through market panics, in 1913, banks on the legal tender gold standard won a congressional franchise to form the Federal Reserve system. Its charter enumerates as reserves (to redeem as few as 40% of the issued Federal Reserve Notes) only gold, gold deposit certificates, and gold bills of (commercial) exchange acceptable to any commercial bank of the day. By 1917, Harvard-based Austrian economist Benjamin Anderson Jr. noted two disturbing alternate trends: 1) New York investment banks had found callable margin loans drawn against portfolios of capital stock to be just as liquid as gold bills, and 2) due to the collapse of international trade and the supply chain militarization of WWI, there were no more commercial bills on the Fed’s balance sheet—just gold, certificates for gold, and lots of sovereign war bonds.
The Peace of Versailles continued the war in the form of sustained trade sanctions. Gold that had fled Europe to the US during the war was recalled or loaned out to finance reparation payments and recovery efforts. With margin loans and government bonds dominating its bank balance sheets, the US economy boomed and bubbled. In October, 1929 as Congress negotiated significant new international tariffs, the US stock market panicked again. Margin loans had to be called in. The decline persisted—steadily wiping out marginal businesses and the balance sheets of banks that had financed them.
The Federal Reserve system had balkanized banks to serve small undiversified regions. By 1933, lacking collateral against which to borrow from the Fed they were failing catastrophically. Bank runs (i.e. withdrawals of cash and gold) were widely reported. President Roosevelt declared a bank holiday to suspend the panic. In a series of Executive Orders, culminating in the Gold Reserve Act of 1934, Roosevelt ordered US citizens to sell all their gold into the Federal Reserve system at $20.67/ounce, where it would henceforth be valued for foreign exchange at $35/ounce. (Note: $20.67 was the $20 tale plus the $0.67 “gold point”, the official asking price for gold.)
By 1936, seven years of unrelieved economic contraction stood as an embarrassing counter-example to the efficacy of economic planning. One key planner, economist John Maynard Keynes, sought to redirect this skepticism against the classical liberal tradition. His landmark book The General Theory of Employment, Interest and Money being theoretical, does not mention Roosevelt’s edicts, but he quietly nullifies the very idea that outlawing gold could even have had an economic impact. Keynes’s aggregate, macro analyses try to discredit asset hoarding as an effective action—it’s just “an optical illusion.” In chapter 6, his definitions simply omit it:
“Income = value of output = consumption + investment. Saving = income – consumption. Therefore saving = investment.”
The General Theory is not a consistent framework to explain the New Deal; for instance Keynes says “digging holes in the ground (gold-mining) not only adds nothing whatever to the real wealth of the world but involves the disutility of labour.” So why write an emergency order to transfer all gold into Federal Reserve bank vaults? How can the author of this slur on gold miners go on to support government-run make-work projects for the sake of pumping up aggregate demand? Why do Keynesians today blame the gold standard for the Great Depression if no “real wealth” was ever in play? It wasn’t until reading Keynes that I appreciated why his opponents in the Austrian School are so admired for their comprehension of the evolving structure of capital. While the “confiscation” itself left the citizens just as liquid as before, it altered their capital structure—swapping the Federal Reserve’s risk profile for theirs—which dollar devaluation then exploited.
Hoarding is the act of neither consuming nor investing a part of one’s income. It is the singular act which expresses the limits of one’s counter-party risk tolerance. And it only works if the hoarded asset is a good store of value. As Antal Fekete explains, the marginal propensity to save is not delimited by a choice to consume, but to hoard (i.e., to save, literally risk-free, at zero percent interest). It is this choice, made by the marginal investor, who by quantifying his risk-premium draws there the lower bound on the interest rate within a gold standard. The best Keynes can offer is a weaker notion of liquidity preference.
Footnote: Fans of Professor Fekete’s new Austrian theory of interest should, however, examine Keynes’ quite similar reconciliation of time preference vs productivity of capital. Here the same terms are argued in support of a conclusion both share. Side-by-side they are a textbook example of the difference in methodology. Which do you find to be more humane?
When marginalized, act on the margins
It took the dedicated political theater and civil disobedience of James Blanchard III to finally re-legalize gold on December 31, 1974. But it was also a matter of good timing and catching the opponent with his guard down. The August 15, 1971 “closing of the gold window” (to foreign bank redemption of dollars for gold) had by then gone beyond being a temporary measure. In the new monetary landscape Keynes and Milton Friedman had triumphed and the powers-that-be felt certain that gold was no longer special—just pointlessly inert capital structure.
So savvy, then, of Mr. Blanchard to call their bluff! With the price of gold gyrating up and away from $35, where it had been pegged by the post-WWII Bretton Woods agreement, there were now profits to be made brokering gold trades. It was intolerable to the large banks to have an antebellum executive order deprive them of a rich US market. Doing good politically involves more than just being right. One must look harmless but have a powerful constituency on whose gratitude politicians can count.
The gold standard’s constituency is on the rise—even emerging on the fringes of the Republican presidential primary field. Sound money is not likely to arise from a presidential election. Strictly speaking it cannot be instituted by executive or legislative dictat. But candidates are free to pick their target and their opponent on this issue to maximum effect. I will just suggest that reinstalling the gold standard might not be the most credible pledge. A high-minded, but theoretically harmless, human right could garner all the same support with none of the doubting or sneering opposition.
Executive orders, acts of Congress, and even Supreme Court rulings come and go. In so doing they’ve established a precedent which grants the government broad discretion to control what gold’s standard-bearers say ought be an article of natural law or certainly of the common law. Could seizing that high ground be in sight?
Freedom would suffice
Many analyses of the Second Amendment exist, but I’m persuaded that its essence is to reserve to the people the ultimate coercive political power—to re-revolt. Its real meaning is metaconstitutional. Likewise, citizens in command of gold act as the ultimate economic power—hoarding, coining, melting, or exporting it as a veto over monetary foolishness. If our opponents are right, keeping gold is just a harmless perversion, they lose nothing by tolerating it, which they have since 1975. Bearing gold (into commerce) is a more direct challenge to the Legal Tender Acts, but here they must, like President Grant, actually brandish weapons. That is politically unappealing. No force (except the inalienable right to hoard) is being exercised on our part. If gold is as economically useless as they say, they have nothing to fear. We need not overturn their right to print, only their authority to extinguish gold debts with paper credits.
Legal Tender advocates must oppose hundreds of articulate already-written opinions wherein the Founding Fathers et al. forswear the kinds of paper money that bankrupted the Continental Congress. For instance, in Federalist #44, James Madison explained why the United States Constitution requires its states to surrender the power to coin money in the form of bills of credit: “The loss which America has sustained since the peace, from the pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in the public councils, on the industry and morals of the people, and on the character of republican government, constitutes . . . an accumulation of guilt, which can be expiated no otherwise than by a voluntary sacrifice on the altar of justice, of the power which has been the instrument of it.” There is enough bluster on record to keep a candidate looking patriotic right through the election. Who’ll step up from the field and give it a try?
Perhaps someday a guarantee of the liberty to hoard and circulate monetary metals will be ratified alongside its fellow inalienable rights on the hallowed parchments that try to constrain governments of the people, by the people, and for the people.
Greg Jaxon is an American software engineer who has been studying New Austrian School economics for over a decade, in part by fact- checking Professor Antal Fekete’s revisionist historical claims.