Gary North, a self-identified Austrian school, and niche Presbyterian, thinker publishing at GaryNorth.com is an often thought-provoking outlier whose thinking is worth contemplating. Sometimes, however, he goes beyond outlier to outlandish, so extreme that it takes almost an Aracibo-class radio telescope to tune him in.

For example, Mr. North appears to have staked out completely untenable ground over the design of the 21^st century gold standard.  In a recent column, Counterfeit Gold Standards  North writes that anything other than a 100% gold coin standard is “fake.”  In so doing, he insults and indicts, among others, Sir Isaac Newton, Adam Smith, George Washington, John Adams, Thomas Jefferson, Thomas Paine, Alexander Hamilton, most of the delegates to the United States Constitutional Convention — and, as it happens, me.

Doing so sows gratuitous division among the ranks of gold proponents. Mr. North is guilty of, in military parlance, fragging those loyal to the true, and only historical, gold standard.  One legitimately may argue for a (theoretical) advance on the highest achievement to date in monetary policy, the classical gold standard, but to criticize the classical gold standard as “fake” only serves to bring the critic’s judgment into question.

In “Counterfeit Gold Standards,” drawing from one of this writer’s weekly columns in Forbes.com, The Dollar Sets; Gold Also Rises North attacks me as “a well-meaning advocate of a fake gold standard.”  Far more is at stake than Mr. North’s, and Mr. North’s readers, opinion of this writer.

Mr. North provides a counsel of prudence that

“Any time that you see someone in an Establishment media outlet suggest that we need a return to a gold standard, look carefully at the details of his proposition. Does it involve the reintroduction of gold coins by the national mint? If there is legally guaranteed rate of exchange between the national currency and these gold coins, meaning full redeemability? Can anyone go to his local bank and exchange money in his bank account for gold coins?”

As a matter of fact, the introduction of gold coins by the national mint, with a legally guaranteed rate of exchange between the national currency and these gold coins, meaning full redeemability, is precisely what I do advocate and have for decades.  Mr. North appears to be engaged in a sort of good natured “kill them all, God will know his own” frontier justice.

My accolade for a statement by Nobel Laureate Robert Mundell may have caused Mr. North to draw an inference that I support the gold-exchange standard.  That would be an inaccurate inference as my ample other writings demonstrate.  North mistakenly characterizes me as disciple of Mundell.  I am a profound admirer of Mr. Mundell’s work and, in fact, consider him the greatest living humanitarian for his contributions to human flourishing, and have said so repeatedly .   It was therefore with great pleasure I noted his taking a gold step in the direction of gold.

For the record I am a disciple, however, not of the esteemed Prof. Mundell but of the late Jacques Rueff (himself an admirer of one Ludwig von Mises, about whom Rueff wrote  “By his teachings he has sown the seeds of a regeneration which will bear fruit as soon as men once more begin to prefer theories that are true to theories that are pleasing,” a quote featured by Rothbard.

A fair reading of my writings at Forbes.com, at The Lehrman Institute’s The Gold Standard Now , and many other venues makes it reasonably clear that I, following Rueff, consider the gold-exchange standard to be inadequate and that my support is reserved for the classical gold standard itself (and in sympathy with parallel private).

As a point of personal privilege let it be noted that Mr. North expresses displeasure at this writer’s use of brackets and a hyperlink to the original source as a journalistic device to denote omitted text rather than a scholarly ellipsis in  The Emerging New Monetarism Using Gold To Save the Euro.   This may signal a difference in interpretation between us as to whether the words omitted were “crucial,” as Mr. North believes, or obiter dicta to my point, my interpretation.  His displeasure is duly noted.  That said, he promptly found the omitted text, as intended for interested readers, and so my denotation, while casual by scholarly standards, fully served its purpose for him.

If, apart from his scolding me for the omission of an ellipsis, his indictment was based on the assumption that I am for the gold-exchange standard, it, therefore, fails.  But correcting an erroneous inference by Gary North hardly justifies the effort to put pixels into cyberspace.  What is of real concern is his indictment of the classical gold standard itself as fake.  He writes:

That would get us back to 1914.

Yet even that gold standard would be fake. Why? Because no one is being charged for a service: storing the gold coins. Any time you find a valuable service being offered for free by any bank, you can be sure that there is a ringer somewhere in the arrangement. The bank is luring you into a deal by means of a promise that cannot be met under all circumstances. In this case, it is free gold coin storage. Somewhere in the bank’s operations there is a liability against the gold coins — a liability superior to any depositor’s claim.

Mr. North is astute in noting that “there is a liability against the gold coins — a liability superior to any depositor’s claim.”  He pushes this further, though, into a claim of fraudulence, or at least fakeness, a “ringer somewhere in this arrangement.”  This charge does not withstand scrutiny.

As I stated in a later column, “The Grave Economic Consequences of Money for Nothing http://www.forbes.com/sites/ralphbenko/2011/09/06/the-grave-economic-consequences-of-money-for-nothing/:”

Some libertarians insist that the dollar must have 100% gold backing.  Currency becomes a warehouse receipt for gold — exempt from preferential claims, whether legal or governmental.  It is an elegant thesis.   It also is an academic one, and as such, tends to preoccupy academics like Prof. Eichengreen.  Yet it is tangential to the policy discourse.

Another response to the “Paper Tigers” is that of the conservatives.  Conservatives believe in a restrained, but not “libertarian night watchman,” role for the government.  As one leading conservative gold standard proponent (Forbes.com columnist and advisor to the American Principles Project and to the Lehrman Institute’s http://thegoldstandardnow.org/, both of which this columnist advises professionally), Charles Kadlec, noted, “Proponents of today’s paper dollar regime ignore the monetary error that was at the heart of the latest financial crisis, a crisis which they now blame for the prolonged period of high unemployment.  Abandonment of the gold standard promised to avoid exactly this outcome.”

Kadlec, in the latest issue of  Forbes Magazine, simply examines the data showing that that the gold standard worked better at creating jobs and wealth than does paper.  The conservative approach is empirical not theoretical.  The issue of job creation deserves to be addressed on the evidence, which is abundant.

Conservatives embrace the classical gold standard, which some libertarian purists call “false.”

Calling it false makes one considerably “more Catholic than the Pope.” The classical gold standard is the one that actually existed — for nearly two centuries, with lapses.  It was designed by Sir Isaac Newton as Master of the Mint, managed by the Bank of England, and rhapsodized about by Adam Smith.  The gold standard in history used a fractional, rather than 100%, reserve recommended at a 20% ratio.  From Wealth of Nations:

When, therefore, by the substitution of paper, the gold and silver necessary for circulation is reduced to, perhaps, a fifth part of the former quantity, if the value of only the greater part of the other four-fifths be added to the funds which are destined for the maintenance of industry, it must make a very considerable addition to the quantity of that industry, and, consequently, to the value of the annual produce of land and labour.

Some libertarians find fractional reserves rather too “unfettered.”  Of course, Smith’s key clause is “if the value … be added to the funds which are destined for the maintenance of industry.”  If these funds are appropriated by the government they naturally are counterproductive.  Under the “grotesque caricature” (as termed by the leading conservative gold proponent of the 20th century, Jacques Rueff) of the Bretton Woods version these funds automatically are lent to the government rather than “destined for the maintenance of industry.”

Despite their differences conservatives and libertarians are united in opposition to the Bretton Woods type system.  While focused on convertibility conservatives are open, encouraging, and supportive of the Austrian proposal of a parallel currency.   They (including this writer) merely note that the classical gold standard represents, in the words of Rueff protégé Lewis Lehrman in his 1996 address to the Parliament of France, “the least imperfect monetary mechanism, both in theory and in practice, by which to maintain global trade and financial balance, a reasonably stable price level, and to insure budgetary equilibrium.”

Mr. North, however, says:

The entire economics profession, except for the Austrian School, believes in central banking and fractional reserve commercial banking. This means that economists favor a cartel. In universities, they assign a textbook with a chapter on cartels which argues that cartels are profit-seeking, government-licensed, oligopolies that act against the public interest. But textbooks never extend this analysis to central banks and commercial banks. I have said this before, but it bears repeating. Fractional reserve banking and central banking get a free ride from academic economists. They also get a free ride from financial journalists.

Economists call for their favorite pseudo-market, government-administered limitation on this or that aspect of banking. But they do not call for 100% reserve banking, as Rothbard did. They do not call for free banking, as Ludwig von Mises did.

Putting aside Mr. North’s indictment of Adam Smith as pro-cartel, Mr. North omits to note that there are an abundance of very well respected free market, libertarian, economists who are perfectly fine with fractional reserves so long as disclosed.  Indeed, no less distinguished a thinker than Dr. Kurt Schuler recently has written at Free Banking

Fractional reserve banking has always outcompeted 100% reserve banking. By 100% reserve banking which I mean an arrangement where the bank holds assets for clients as a kind of warehouse and does not grant credit.

Dr. Schuler is by no means alone.  A similar point recently was made by a very highly regarded free market economist and professor testifying at the recent hearing of the House Subcommittee on Domestic Monetary Policy chaired by Rep. Ron Paul.

There may be a very elegant case to be made for the superiority of full rather than fractional reserves as superior to the classical gold standard.  I, for one, am keen to understand the argument, academic though it may — or may not — prove.  But Mr. North has a burden of proof to carry and takes an indefensible position when he denigrates the motive of all those who are prepared to accept a (voluntary and transparent) fractional reserve to mean:

they do not trust the free market to maintain a money supply limited only by mining expenses and voluntary contracts. They give lip service to free market competition, but not at the center of every economy, the money supply. Here, they want final government authority and central bank administrative authority. They believe in people with badges and guns as reliable central planners.

This takes an unsustainably jaundiced view of the motives of quite a number of free market advocates who do embrace the superior integrity of the rank-and-file people, and the free markets, and who, as in my own case, are on record as utterly rejecting the central planning ability, and legitimacy, of the “people with badges and guns.”  (Or, for that matter, any central planner, with or without badge and gun.)

Mr. North goes into a nice peroration in which he observes “The gold coin standard removes final economic authority from people with badges and guns and turns it over to the masses.”  This writer, who Mr. North indicts for advocating “a well designed, well managed, gold standard …  better adapted than a monetary standard managed at the discretion of elite civil servants to maintain price stability and strong economic growth” (i.e., popular convertibility, not central planning) is a long-time advocate of gold as true (small r) republican money.

Perhaps Mr. North is a radical democrat and, as such, is mistrustful of my own merely republican radicalism.  This may be no trivial distinction, but, if so, he is blurring another major distinction.  The founders of the United States — including our original, and the only Constitutional, precious metal-based monetary system—themselves distrusted radical democracy and chose to give us, as termed by Ben Franklin, “a republic, if you can keep it.”   If Mr. North wishes to indict the founding fathers for giving us a republican rather than democratic constitution…  paging Aracibo!

Mr. North indicts Newton, Smith, Washington, Hamilton, Adams, Jefferson, Paine, and the drafters of the Constitution of the United States of America, among many others, as conniving at a fake. It is an extraordinary honor to have been included, however peripherally, in an indictment of so many towering figures in the annals of political economy.  The indictment fails.

“It’s not even a theory; it is a theology.” So Nouriel Roubini, with his best Strangelovian inflection, describes the gold standard to Yahoo Finance’s The Daily Ticker, and in doing so displays shocking ignorance of the gold standard and either the work of Ben Bernanke or a presumption that the rest of the world is ignorant.

In slurring supporters of gold as “lunatics and hacks,” Roubini falls into lockstep with other leading defenders of the status quo: Prof. Barry Eichengreen in “A Critique Of Pure Gold” in The National Interest‘s September-October issue, Thomas Frank, in the July issue of Harper’s Magazine, calling gold “yet another eccentricity of the right-wing fringe … into the mainstream of American life,” Paul Krugman’s July 6 New York Times blog post, “The Armageddon Caucus“: “Gold bugs have taken over the GOP,” Think Progress‘ June 9 report by Marie Diamond stating that “Tea Party groups are determined to make returning to the gold standard a litmus test for GOP presidential candidates. And it looks like they’re succeeding,” and the Roosevelt Institute’s Mike Konczal blogging on April 27, “Conservatives are organizing against a full employment mandate and rallying around the gold standard wing of their party.”

Professor Roubini launched an amusing 16 hour War via Twitter, tweeting against Tangent Capital Management’s James Rickards and his Currency Wars: The Making of the Next Global Crisis. But in prosecuting that war Prof. Roubini steps on a landmine. He attempts to refute Rickards by reference, in part, to the writings of one Ben Bernanke.

Whatever one thinks of Bernanke, this is the intellectual equivalent of an unforced error. As this writer previously has noted here then-Professor Ben Bernanke observed, in an NBER Working Paper written with Harold James, that the sustained deflation that was the precipitating factor of the Great Depression was not the fault of the gold standard, but was “the result of a mismanaged international gold standard.”

Years later, in remarks at Washington and Lee University in 2004, then-Governor Bernanke noted that

The gold standard appeared to be highly successful from about 1870 to the beginning of World War I in 1914. During the so-called ‘classical gold standard period, international trade and capital flows expanded markedly, and central banks experienced relatively few problems ensuring that their currencies retained their legal value.

And: “unlike the gold standard before World War I … the gold standard as reconstituted in the 1920s … proved to be both unstable and destabilizing.”

Thus, to rely on Bernanke in making his overheated abjuration of the gold standard Prof. Roubini has misstepped, badly. Roubini’s critique seems to be based on a failure to grasp the distinction between the classical gold standard and the gold-exchange standard.

Under a gold-exchange (exchange therein employed as a noun, not verb) standard a key currency – the pound sterling, then, after Bretton Woods, the dollar – is deemed “as good as gold” and is given the status of a legitimate central bank reserve asset interchangeably with gold.

President DeGaulle’s chief economic advisor, Jacques Rueff prophetically condemned the gold-exchange standard as the gold standard’s “grotesque caricature.” It was the inexorable collapse of the gold-exchange standard, not the gold standard itself, which precipitated the Great Depression.

The Daily Ticker, quoting Roubini: “One of the major causes of the Great Depression was the existence of the gold standard and the return to the gold standard after World War I … and lead eventually to the Great Depression.” Prof. Roubini enjoys international prestige from his claim to have foreseen the collapse of the housing market and the attendant 2008 recession. His failure to distinguish between two superficially similar but substantively different monetary regimes threatens his credibility and, if noted, maybe his tickets to Davos.

Beyond Bernanke, Roubini’s reliance on Lord Keynes as an authority in ridiculing the gold standard is slightly off kilter. As the greatest living student of Keynes, Lord Robert Skidelsky, wrote in The Financial Times, “Keynes’s famous dismissal of the gold standard as a ‘barbarous relic’ does not quite capture his opinion of the metal, which he thought would be useful as a constitutional monarch but disastrous as a despot.” Lewis E. Lehrman (with whose eponymous institute this writer is professionally associated) quotes Keynes as the epigram for his new book, The True Gold Standard: A Monetary Reform Plan without Official Reserve Currencies: “If the gold standard could be reintroduced…, we all believe that the reform would promote trade and production like nothing else, but also stimulate international credit and transfers of capital to the places where they are most useful.”

Bernanke, unlike Roubini, precisely makes the distinction between the gold standard and the gold-exchange standard. Roubini’s sloppy characterization of the gold standard as causing the Great Depression — viewed as inaccurate by scholars of Bernanke’s stature — is commonplace but wrong.

This erroneous view is derivative to the widespread misunderstanding that there is “not enough gold,” leading to deflation and depression. That myth recently again was dismissed by Forbes.com’s own Nathan Lewis in Applying the Numbers To Gold Supply and Demand:

If you look at any historical gold standard system, such as the Bank of England in the 1880s, you find that the “money supply” (base money) is in fact quite variable….

For example, in 1900, the U.S. monetary base increased to an estimated $1,344 million, from $1,126 million in 1899. That’s an increase of 19.4%.

In 1896, however, the U.S. monetary base fell to $944m from $1,022m in 1895, a decrease of 7.6%.

There’s nothing stable at all about the “money supply” with a gold standard system. It adjusts, automatically via the value parity, to the economic conditions of the time.

The “stable” part is stable value. The British pound maintained a defined value compared to gold. Gold, likewise, maintained a stable value in part because the supply was very large and stable.

Lewis’s debunkings now are supplemented by Christopher Potter, president of Northern Border Capital Management. Potter, in a recent column exclusive to the Lehrman Institute’s gold standard website, TheGoldStandardNow.org (to which he serves as advisor), published “Price Stability and the Gold-Linked Dollar“:

Price stability, not deflation, was the hallmark of a dollar convertible to gold both in the 1800s and the pre-1971 20th century … The US price level (CPI) was the same in 1914 as it was in 1834. The absence of inflation for almost a century did not come at the expense of economic growth. On the contrary! US real Gross Domestic Product (GDP) grew approximately 4% per year for that entire interval, the greatest period of growth in US history. Even during the period 1914 to 1971, as the gold standard was progressively diluted by the gold exchange standard, the residual link between the dollar and gold restrained the CPI, and promoted robust economic growth. After Nixon suspended convertibility of the dollar to gold in 1971, the CPI began its steep, modern-day ascent and the US economy, while continuing to grow, never regained the growth level and price stability seen from 1834 to 1971.

The American, and world, economy continues to teeter. Monetary reform is receiving some freshly respectful looks both here and abroad. Chatham House, the Royal Institute of International Affairs, in London has convened a task force to “re-assess the advantages and weaknesses of the current fiat currency monetary system and explore the possibility of a new role for gold.” TheStreet’s Alix Steel observed last month, in “4 Ways a Gold Standard Can Work,” that “A gold standard isn’t for the gold bugs and crackpots. It’s a viable money system that could save countries with runaway spending.”