May 31, 2006 (RKL). Gold Is Money. Pass It On.
Its always a pleasure to read anything written by our old friend Sean Corrigan, and his latest, the text of remarks he recently delivered in Geneva, is no exception. His erudition, and his mastery of the teachings of Austrian economics, are characteristically evident throughout.
But we take exception to an important argument:
So, at last, let me come out and say it -- much though I wish it were true -- and as readily as I accept that it once was true, Gold is NOT today money. Nor, regrettably, under our present political system and amid our existing cultural milieu is it ever likely to become one again.
Now, you might reasonably ask, is there more than a semantic issue here? After all, gold bugs say gold is money; Mr. Corrigan, a spokesman for the contemporary Austrian school of economics, says gold was money, and should be money, but isnt. Is the distinction really a big deal?
No and yes. In an academic context, its a nice debate. Practical people may be forgiven for concluding its a tempest in a teapot. But in its broader implications, we agree with Mr. Corrigan that it matters a great deal, although we take the other side of the trade:
[Gold as money] is a supposition that is utterly unfounded, both economically and logically and, far from being a mere foible, it is important to extirpate it since adherence to it must seriously affect rational thinking and investment planning.
[Extirpate? Brrr. Fade to Father Guido Sarducci: Nobody expects the Spanish Inquisition!]
We agree that adherence to the notion of gold as money seriously affects rational thinking and investment planning. Positively. Conversely, we maintain that viewing gold as anything other than money also seriously affects rational thinking and investment planning. Negatively. Indeed, perhaps disastrously.
A Little Background
Mr. Corrigans remarks underscore the uneasy relationship between the gold bugs and contemporary Austrians, two branches of a somewhat dysfunctional libertarian family. (Branches about as close, we can hear the Austrians expostulating, as chimps and Methodists.)
Gold bugs are a noisy and undisciplined rabble, a cantankerous collection of misfits, malcontents, treasure hunters and dilettantes. In the former Soviet Union, most of us would have been locked up in psychiatric hospitals. For the most part amateurs self-taught on the subject of gold and money, we are something of an intellectual militia. We have no institutional framework, just a loose string of websites and commentators who periodically publish rants of mixed quality under the banner of GATA. We have no doctrine, beyond a conviction that real money is gold and fiat money is fraud. We have no following, beyond the mildly curious and the already converted.
Contemporary Austrians, by contrast, are honors graduates of the School of Couth. They are the anointed heirs of a school of economic analysis articulated by an extraordinary collection of great thinkers, importantly including Ludwig von Mises (1891-1973) and Murray N. Rothbard (1926-1995). Austrian economics, with its emphasis on individual choice as the foundation of economic inquiry, is truth serum, an antidote to the poison of Keynesian ideology that has, over the past 80 years, succeeded in driving gold out of our currency, honesty out of our public discourse, and individual liberty out of our politics. Contemporary Austrians have a well-developed institutional structure, a secular monastery dedicated to keeping alive the flame of economic truth, in the form of the Ludwig von Mises Institute (www.mises.org). They have their own hierophants, in the person of learned academics and commentators who publish papers and exchange ideas on Austrian themes. They have a substantial following, and have earned a well-deserved respectability for their sound thinking and their decorous manner.
Most gold bugs subscribe, to one degree or another, to Austrian teachings, whether they know it or not. Most, in fact, owe the Mises Institute a profound debt of gratitude for exposing them, directly or indirectly, to the great works.
That said, gold bugs have a different focus, and a different mission. Their brief is gold and money; they are generally content to leave broader economic inquiry to the Austrians. And they are more inclined to push back: although government intervention is an evil roundly deplored in Austrian writings, when it comes to exposing and defying governments monetary fraud, gold bugs have had the barricades pretty much to themselves.
Sometimes, when we turn to the sacred scrolls for inspiration, gold bugs end up respectfully disagreeing with our learned Austrian friends on the interpretation of key passages.
And so it is, with due trepidation at the threat of extirpation, that we see gold as money as a case in point.
The Academic Aspect
Mr. Corrigan, reflecting the position of his neo-Austrian colleagues, says gold is not money, as a definitional matter:
Because any meaningful definition of the term starts and finishes with the fact that money is the medium of exchange. It is current money, i.e., it is currency. Money is the present good most readily accepted in voluntary exchange - accepted without quibble or discount (and, ideally, without compulsion) in final settlement of a trade by a sufficiently large preponderance of economic agents as to be effectively universal.
We have a number of problems with this approach.
For one thing, it is at variance with the reality of how gold is treated in practice, by institutions with a strong interest in its being considered a mere commodity. Central banks, despite their words, confirm with their actions that they view gold as money. They hold it as a monetary reserve; they lend it out at a published rate of interest; and, as noted in a recent commentary, they manipulate its exchange rate against other currencies whenever they deem it useful. Indeed, as The Greatest Central Banker in the History of the World reminded Congress in 1999 testimony:
... gold still represents the ultimate form of payment in the world. It is interesting that Germany in 1944 could buy materials during the war only with gold, not with fiat money paper. And gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold. [p. 74]
But forget practice. Lets talk theory.
For another thing, it does violence to the more nuanced treatment of the subject of money by the Austrian authorities. In this connection, it must be remembered that Austrian theory is not codified in a statute with an index and a glossary. There is not, for example, a master entry that reads: Money, n. Medium of exchange. Rather, a number of different Austrian theorists, all great thinkers, each with his own evolving emphases, have written on the subject of money at different times, over careers spanning many years. The basic definition of money, in Austrian terms, is not nearly so cut and dried as Mr. Corrigan implies.
Real Money Must Start Life as a Commodity
For example, no less an Austrian authority than Murray N. Rothbard, writing in 1962, articulated a definition of money that finished, but did not start, with the fact that money is a medium of exchange:
Money means a certain commodity, previously useful for other purposes on the market, chosen over the years by that market as an especially useful and marketable commodity to serve as a medium for exchanges. [M.N. Rothbard, The Case for a 100 Per Cent Gold Dollar (Ludwig von Mises Institute, 2001), p. 24; originally published in In Search of a Monetary Constitution (L.B. Yeager, ed., 1962)]
Rothbards definition started at the beginning, with moneys identity as a commodity, not at the end, with its utility as a medium of exchange. The sequence is important. We see why when we ask Mr. Corrigan what does satisfy his definition, if gold doesnt. His answer must be that paper currencies, chief among which is the Federal Reserve Note, or dollar, constitute money, because they are the current media of exchange.
But this is problematic under Austrian theory, which maintains, in the regression theorem developed by von Mises (The Theory of Money and Credit; Human Action) and subsequently elaborated by Rothbard (Man, Economy and State), that money has to originate as a commodity. So how does Mr. Corrigan deal with the fact that fiat currency did not originate as such, but was rather the product of a long-running government fraud in which its metal backing was gradually removed, leaving at the end only the paper tokens that formerly represented something? Implicitly, by dismissing this element of the traditional Austrian definition as merely descriptive and historical. Now this is a defensible position, we suppose. But we should be clear that it is only that, a position, one with which we respectfully disagree. It does not lend itself easily to dogmatic assertion.
Indeed, it seems to us that by focusing on the end point, rather than the beginning, of the traditional formulation, Mr. Corrigan would effectively have us knuckle under to authority and ratify its monetary fraud. Rothbard, for one, demurred:
Why is it that, historically, the relatively free market never had to worry about people wildly setting up money factories and printing unlimited quantities? If money really means dollars and pounds and francs, then this surely would have been a problem. But the nub of the issue is this: On the pristine free market, money does not and cannot mean the names of paper tickets. [ibid., p. 24]
What we find so troublesome in the contemporary Austrian view of money is that it seems to acquiesce in the power of the state to dictate not only how we transact, but how we think. Money now means paper tickets, because politicians have said so, and because we have grown used to obeying them. Are other elements of Austrian theory so easily obviated by state action? Must all Austrian principles yield to force? Surely not. Why, then, must the theory of money?
Money Is Different from Currency
To take another example, Mr. Corrigans definition explicitly equates money with currency. Its certainly true that during much of the period during which the great Austrians wrote their seminal works, this conflation of the two terms would probably have passed without objection, since gold was still linked in some fashion to official money. However, in the last years of von Misess life, the United States defaulted on its gold redemption obligations under the Bretton Woods Agreements, and severed the last link between paper currency and real money. This radical change in conditions created the need for an adjustment in terminology to take account of the paper currencies left in the wake of Bretton Woods. The old term fiat money, used in Austrian writings for over a century to denote media of exchange that lacked metallic backing, was scarcely adequate to analyze a situation in which a repudiated, irredeemable scrip now served as both a circulating medium of exchange and as the principal global reserve asset, the very backing for all the currencies of the world.
Tantalizingly, Rothbard hinted at, but never fully developed, a distinction between currency units and money in a paper delivered at a Mises Institute conference in 1983:
The essential meaning of a fiat paper standard is that the currency unit - the dollar, pound, franc, mark, or whatever - consists of paper tickets, marked as dollars, pound, and so on, and manufactured by the central government of the nation-state. The government (or its central bank) is able to manufacture those tickets ad libitum and essentially costlessly. The cost of the paper and the printing is invariably negligible compared to the value of the currency printed. [M.N. Rothbard, The Case for a Genuine Gold Dollar, in L.H. Rockwell, ed., The Gold Standard, An Austrian Perspective (D.C. Heath, 1985), p. 2]
It was James Turk, a gold bug, who recognized the potential in Rothbards tentative distinction between currency and money, and who explicitly articulated the theory:
Money is therefore a tool of economic calculation, while currency is the medium that facilitates the exchange of goods and services between participants in the market process. [J. Turk, Do Central Banks Control the Gold Market? (monograph, 1994)]
We can immediately see the practical utility of Mr. Turks distinction in an example raised by Mr. Corrigan; he cites as a disability, supportive of his thesis, the fact that he cant use gold to buy a drink in Geneva:
Had I a grain of gold in my pocket, I would not be able to use it here to buy a drink at the bar - and thats not just because a Swiss hotel might charge more than the value of that grain!
But is it any less true that he cant use Federal Reserve Notes either? He must first convert his dollars into local currency. On his reckoning, that does not make dollars any less a money.
Contemporary Austrians will object that this approach elevates to first place what ought to be considered a secondary function of money, that of providing a unit of account. Yes, this is so, but we submit that it is a rational response to an awkward fact: the demonetization of currency. We submit further that in doing so, we are in impeccable Austrian company. Von Mises himself, writing in 1953, well before the final plunge into fiat madness, was moved to do the same thing:
The most remarkable thing about this allegedly new monetary policy, however, is its complete failure. True, it substituted fiat money in the domestic markets for sound money and favored the material interests of some individuals and groups at the expense of others. It furthermore contributed considerably to the disintegration of the international division of labor. But it did not succeed in eliminating gold from its position as the international or world standard. If you glance at the financial page of any newspaper you discover at once that gold is still the worlds money, and not the variegated products of the divers government printing offices. These scraps of paper are the more appreciated the more stable their price is in terms of an ounce of gold. Whoever today dares to hint at the possibility that nations may return to a domestic gold standard is cried down as a lunatic. This terrorism may still go on for some time. But the position of gold as the worlds standard is impregnable. [L. von Mises, The Theory of Money and Credit (Liberty Classics, 1980), p. 461] [Emphasis supplied.]
Contemporary Austrians will object further that as a practical matter people nowadays dont calculate their affairs in this background money of account. True enough; it is only a handful of gold bug newsletters that routinely provide charts showing how, for example, the Dow has been cut in half since the year 2000 in terms of real money. But here we would urge a little patience. As the inevitable collapse unfolds, and the ongoing deflation of paper assets against real money gathers steam, we predict this practice will become more common.
Now, we dont claim that this distinction between money and currency is the best possible means of dealing with the novel situation we confront today, namely that what passes for media of exchange, worldwide, fails to satisfy the Austrian definition of money. We would be delighted if the contemporary Austrians would bend their considerable talents to the task of improving upon it. But in the meantime it seems to us to be a useful start. In any event, it does not seem helpful simply to bulldoze the issue by baldly asserting that money is currency.
In short, although we concede the matter is not entirely free from doubt, we see nothing either in the texts or in the gloss that shakes us from our view that Austrian theory supports, rather than impeaches, our dogged position:
Gold is money.
The Investment Aspect
Outside the cloister, it seems to us, the Austrian scripture is unequivocal in its import. We had best prepare ourselves for a mighty reckoning, for it is at hand.
In Human Action, von Mises described vividly, in a passage gold bugs never tire of quoting, how inflation borne of credit expansions must end:
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved. [Fox & Wilkes, 4th rev. ed., 1996, p. 572]
In an earlier passage, he described the catastrophic end point of inflation:
But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against real goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
It was this that happened with the Continental currency in America in 1781, with the French mandates territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last. [ibid., p. 428]
That we are today many years into the greatest credit expansion in history, based upon an experiment in fiat money in which for the first time in history no currency in circulation is tied to anything other than politicians self-interest, is a proposition accepted by gold bugs and Austrians alike.
Mr. Corrigan, with his customary elegance, puts it thus:
Indeed, we would forcibly argue that, for its scale, spread, speed, and sheer ferocity, the present inflation -- not just of money, but of all forms of credit and of the manifold derivatives constructed thereon -- is beyond all parallel.
And that cracks are now appearing in the foundations of the resulting tower of global debt, speculation and corruption, is similarly a proposition we take to be self-evident.
So this is the context in which current investment strategy must be evaluated. It is a context, we submit, in which a belief that gold is not money is a very risky business indeed. Why? Because it will lead us to fail to distinguish between gold itself, on the one hand, and the many forms of gold derivatives -- shares, futures, options, etc. -- on the other. And whereas we must agree with Mr. Corrigan that the derivatives may represent better or worse investment or speculation choices at any given time, gold itself -- the inert metal that pays no yield -- is not an investment at all, but rather money. It satisfies the liquidity rather than the growth or income needs of a portfolio. If we treat gold just like any other investment, we miss that crucial point, and risk finding ourselves embarrassingly short of money when the paper game implodes.
Yelling Sit Down! in a Burning Theater
Mr. Corrigan gets it exactly right when he observes that whats happening around us now is not so much a rise in the prices of investment assets as a decline in the value of paper money:
we can draw attention to the exuberance in the financial markets -- not least the record-setting flood of debt-financed takeovers and buyouts -- but also to the rise in the prices of houses, office blocks, objets dart, diamonds, autographs, metals, soft commodities, energy products, formerly exotic stocks, and -- until very recently -- just about every variety of bond.
Ask yourself whether the prices of all these disparate entities are rising, or whether the price of money is falling?
But he treats gold as just another investment asset now being sought in preference to fiat money. He takes pains to assure us that the rise in the gold price is not because gold is money. Its because gold is scarce, plain and simple:
What it is, of course, is a scarce asset -- if, perhaps, not one which derives too much of its demand from genuine productive use, rather from a desire to escape some of the problems caused by our over-abundant paper money.
To Mr. Corrigan, the monetary motivation here -- escape from fiat money -- relates only to what is being sold, not to what is being bought; gold could just as easily be Honus Wagner baseball cards.
But he sounds the monetary theme again, this time on the buy side, toward the conclusion of his remarks:
In such a world, it is likely to be the case that people will, from time to time, seek to acquire holdings of a relatively scarce, high value-by-weight, easily fungible, liquid, storable, real asset as an alternative to their holdings of a much less scarce, eroding value paper asset, such as comprises todays money.
Now, if we didnt know him as a sober thinker, we might take this as a cruel joke. He leads us to the still waters, only to call them a mirage. Citing golds monetary properties, and conceding that gold will likely be acquired in preference to todays money, he nevertheless denies the obvious implication of his words: that gold is money. For why else would people buy it as a monetary alternative? Because it may be seen by others as tomorrows money? As an investment matter, is this a distinction that makes a difference?
Calling a Top in the Ark Market
Mr. Corrigan is careful not to say we shouldnt buy gold. But, as with any investment, we must be careful to buy low:
I would not cavil at such a choice, though I would gently point out that the success of any seemingly sound investment is critically dependent on the initial price one pays.
And he intimates that gold isnt cheap now, because its a lot higher than it was a few years ago:
In that context, it must be noted that the equation is an entirely different one today, at a spot price anywhere between twice (in the case of Canada) to more than three times (as in South Africa) that which prevailed in the major producers local currencies when gold hit its late 1990s lows.
And, sure enough, shortly after Mr. Corrigan delivered his remarks, the price of gold expressed in paper currencies took a substantial hit, validating his investment acumen and spreading fear and consternation among those of modest conviction.
So whats our problem?
Our problem is this. Given the non-trivial risk that a flood of Biblical proportions is on the way, does it make sense for ordinary mortals to haggle over the cost of an ark, or to try to time an interim top in the ark market? Mr. Corrigan, an expert economist and a skilled investment professional, will no doubt make a killing for himself and his clients through deft trading as the waters rise. But we cant help thinking that in asserting publicly that gold is not money, he risks leaving his followers ill-equipped to grope their way to the boat.
Now, it may be objected that we exaggerate the risk of financial catastrophe. Perhaps. Still, we think a close reading of the Austrian scripture and a thoughtful application of its teachings to current conditions would suggest not. It may be further objected that we exaggerate the lifesaving propensities of gold. Perhaps, but we would put the matter another way: In which of the worlds top ten financial calamities of the past would we have elected, given the choice, not to have owned gold in preference to paper assets? None comes to mind.
The gold bugs investment thesis is simple. The ghastly credit expansion built on fiat money will end, and soon. When it does, the exchange value of real money will rise, dramatically. People holding only financial assets denominated in fiat currencies -- including those purporting to be money -- will be wiped out. The end game has already begun; that is the meaning of the high gold price. And in the pandemonium to come, if only at the margin, we may be aided in making rational choices by adhering to one simple maxim:
Gold is money.
The Political Aspect
Mr. Corrigan concludes his remarks with a set of rather gloomy musings that we could have written ourselves, if only we had the requisite gift for words:
Reluctantly, I cannot fail to conclude that we are on a path toward ever less personal liberty and to ever greater violations of the sacred rights of private property. Thus we are on a path where genuine entrepreneurialism and the creation of real wealth are very much hampered.
It is a path whose weary milestones are scored with the wasteful disincentives of welfarism and which is misleadingly signposted with the daubings of post-modernist voodoo, its billboards shrieking the slogans of group victimhood and emblazoned with demands for the suppression of the individual.
It is a path whose crumbling paving stones are being overrun by the toxic, green shoots of that shrill new Inquisition which is today's cult of environmentalism.
It is a path that echoes to the cadenced tramp of men marching out to fight yet another vain war in the hope of postponing, by feats of arms, the impending decline of our present suzerains.
This is also, by necessity, a path to monetary adulteration and to a creeping corruption of body and soul.
It is a path beside which Atlas may, indeed, be seen to shrug.
Quite. Its hard to read even the funny pages today without despairing of our condition. The steady torrent of lies and propaganda, and the relentless and systematic elimination of our civil liberties, suggest the only question is one of timing: whether our police state will become fully operational before, or after, the collapse of our empire built on bad checks.
The Austrian scripture delineates the modern threat to individual liberty with characteristic foresight and clarity:
Society needs an apparatus of defense, a state, a government, a police power. Its undisturbed functioning must be safeguarded by continuous preparedness to repel aggressors. But then a new danger springs up. How keep under control the men entrusted with the handling of the government apparatus lest they turn their weapons against those whom they were expected to serve? The main political problem is how to prevent the rulers from becoming despots and enslaving the citizenry. Defense of the individuals liberty against the encroachment of tyrannical governments is the essential theme of the history of Western civilization. [L. von Mises, The Theory of Money and Credit (Liberty Classics, 1980), p. 454]
But in noting the integral relationship between gold and individual liberty, it provides both a ray of hope for the denizens of the future, and a bit of balm for prisoners of the present:
It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. [ibid.]
The ray of hope consists in the possibility that after the monetary collapse, people may once again somehow find their way to making gold the basis for a successor monetary system. Indeed, we hope and expect that the contemporary Austrians will themselves seize the opening and play an important role in educating people and fighting for this outcome. The bit of balm consists in the possibility that we as individuals can preserve our dignity, our spirits and our sanity, through a small gesture of defiance, a simple assertion that two plus two still equals four.
How? By denying the legitimacy of the coercive fraud that lies at the heart of the assault on our liberties. By affirming, as loudly and as often as we can, the ultimate inconvenient truth:
Gold is money. Pass it on.