Herman Talmadge III posted in New Georgia Republican
Leadership for Principles above Politicians
A fully free banking system and fully consistent gold
standard have not as yet been achieved. But prior to World War I, the banking
system in the United States (and in most of the world) was based on gold and even
though governments intervened occasionally, banking was more free than
controlled. Periodically, as a result of overly rapid credit expansion, banks
became loaned up to the limit of their gold reserves, interest rates rose
sharply, new credit was cut off, and the economy went into a sharp, but
short-lived recession. (Compared with the depressions of 1920 and 1932, the
pre-World War I business declines were mild indeed.) It was limited gold
reserves that stopped the
unbalanced expansions of business activity, before they
could develop into the post-World War I type of disaster. The readjustment
periods were short and the economies quickly reestablished a sound basis to resume
expansion.
Under a gold standard, the amount of credit that an economy
can support is determined by the economy's tangible assets, since every credit
instrument is ultimately a claim on some tangible asset. But government bonds
are not backed by tangible wealth, only by the government's promise to pay out
of future tax revenues, and cannot easily be absorbed by the financial markets.
A large volume of new government bonds can be sold to the public only at
progressively higher interest rates. Thus, government deficit spending under a
gold
standard is severely limited. The abandonment of the gold
standard made it possible for the welfare statists to use the banking system as
a means to an unlimited expansion of credit. They have created paper reserves
in the form of government bonds which — through a complex series of steps — the
banks accept in place of tangible assets andtreat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect
savings from confiscation through inflation. There is no safe store of value.
If there were, the government would have to make its holding illegal, as was
done in the case of gold. If everyone decided, for example, to convert all his
bank deposits to silver or copper or any other good, and thereafter declined to
accept checks as payment for goods, bank deposits would lose their purchasing
power and government-created bank credit would be worthless as a claim
on goods.
The financial policy of the welfare state requires that
there be no way for the owners of wealth to protect themselves. This is the
shabby secret of the welfare statists' tirades against gold. Deficit spending is
simply a scheme for the confiscation of wealth. Gold stands in the way of this
insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in
understanding the statists' antagonism toward the gold standard.
Alan Greenspan, Gold and Economic Freedom (1966)
An almost hysterical antagonism toward the gold standard is
one issue which unites statists of all persuasions. They seem to sense — perhaps
more clearly and subtly than many consistent defenders of laissez-faire — that
gold and economic freedom are inseparable, that the gold standard is an
instrume...
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