of their physical, chemical, and esthetic characteristics. The precious
metals are beautiful; they are relatively rare; they are readily minted
into uniform and identifiable forms, such as coins and bullion bars;
and for all of these reasons, they are universally desired as stores
of value, and universally accepted in exchange for all other goods
and services. These reasons are both necessary and sufficient to
establish the precious metals as the historical money par excellence.

The gold standard was the world standard during the Nineteenth Century,
an era of rapidly increasing wealth and liberty throughout the world.
Gold was the standard for international trade and the international
money and capital markets. Gold was the medium of exchange which
spread capitalism, industrialism, and an ever-increasing standard
of living into the remotest parts of the world, destroying ancient
prejudices and superstitions, sowing the seeds of new life and
well-being, freeing minds, creating incentives, and generating
unprecedented wealth. Gold offered the prospect of uniting all
peoples into a world community cooperating peacefully with one
another. Thus, the gold standard was both the means and the symbol
of this greatest and most beneficial of all historical developments.

The gold standard is a market generated phenomenon. It evolves and
functions spontaneously and independently of governments. Its preser-
vation and operation does not depend upon the existence of implementing
laws or government interference. It requires only that governments
abstain from deliberately sabotaging it. And it results in the optimal
cooperation of all productive people in the world marketplace.

It is important to understand how the Gold Standard operates. This is
best illustrated with a diagram--which I cannot share with you over the
telephone. But it is very simple; I will describe it, and then summarize
the key points in a few words which you can jot down for future reference.

Let us start with an economy that is in equilibrium. Suddenly, there
is an increase in the supply of gold: gold is discovered in California,
in the Yukon, in South Africa, or wherever. An increased supply of gold
means an increased supply of money, but not an increase in the goods

supply of money, other things being equal, will result in increased prices
throughout the economy. However, if domestic prices are increasing,
then cheaper goods and services will be purchased and imported

from abroad, and so imports from foreigners will increase. Further,
if domestic prices are increasing, then foreigners will buy fewer
domestically produced goods and services, and so exports to foreigners
will decrease. Therefore, the effect of more gold in circulation will
be to increase imports and to decrease exports. But this imbalance
of trade must be paid for. How? By exporting gold. And when gold
is exported, then the domestic money supply decreases and domestic
prices decrease; and thus the stimulus which upset the original
equilibrium--namely, more gold--is self-correcting.

If you have paper and pencil handy, you might want to jot down these
seven steps. 1: Gold supply up. 2: Prices of goods and services up.
3: Imports of goods and services up. 4: Exports of goods and services
down. 5: Gold exports up. 6: Gold supply down. 7: Prices down.

Again, because gold is universally desired as a medium of exchange
and store of value, the stimulus which upset the equilibrium--
more gold--is self-correcting. This negative feedback, or economic
servomechanism, functions in a totally free market to keep production,
prices, trade, and consumption in optimal balance.

The gold standard makes the determination of the monetary unit's
purchasing power independent of the policies of governments,
political parties, and pressure groups; it removes the determina-
tion of the purchasing power of money from the political arena.

The main objection raised against the gold standard is that the
prime factor in the determination of prices is something which
no government can control--the profitability of gold production--
which is itself in dynamic equilibrium with the profitability of
producing all other goods and services. Therefore, an "automatic"
market-generated factor restrains a national government's ability
to inflate the supply of money and manipulate the purchasing power
of money.

economic truth that no one can be made richer by printing more
paper money. The official abhorrence of the gold standard is due to
the myth that omnipotent governments can create wealth out of little
scraps of paper.

Granted that the purchasing power of gold is not perfectly stable.
But the very notion of stability of purchasing power is absurd.
In a continually changing world, there can be no such thing as
stability of purchasing power. But the adversaries of the gold
standard do not want the purchasing power of money to be stable;
rather, they want governments to be able to manipulate the

During the gold rushes of the Nineteenth Century, the rapidly
increasing supply of gold provoked attacks upon the gold standard
as being INflationary. Somewhat later, when the supplies of goods
and services increased faster than gold production, this provoked
other attacks upon the gold standard as being DEflationary.
The foes of the gold standard were demanding an intensification of
the prevailing upward trend of prices and wages: they wanted to lower
the monetary unit's purchasing power at an ever-accelerating rate.

Such a policy of inflationism is always popular: it appears to
increase wages. But its popularity is due to a misunderstanding
of its effects. What people are really asking for is a rise in the

In the words of the great Austrian economist, Ludwig von Mises:
"For the naive mind there is something miraculous in the issuance
of government fiat paper money. A magic word spoken by the
government creates out of nothing a thing which can be exchanged
against any merchandise a person could desire. How pale is the
art of sorcerers, witches, and conjurors when compared with that
of the government's treasury department! Professors tell us that
the government can raise all the money it needs by printing it;
allegedly, inflation can solve all problems."

Inflation may appear to be benign as long as the housewife thinks:
"I need a new frying pan today. But prices are too high today;
I shall wait until prices are lower." The critical stage begins
when the housewife thinks: "I don't need a new frying pan;

of the inflation is near. In its last stage the housewife thinks
"I don't need any more frying pans; I'll never need any more
frying pans. But it's wiser to buy something tangible with
these scraps of paper that the government calls money,

Inflation ceases to work as soon as the populace becomes aware
of its effects upon the monetary unit's purchasing power. In the
early stages of an inflation, only a very few people discern what
is going on, manage their business affairs in accordance with
this insight, and deliberately aim at reaping inflation gains.
The vast majority of people are too dull to grasp what is really
happening. Filled with indignation, they attack as "profiteers"
those few who are astute enough to understand and take

But is it rational to base a monetary system upon the intentional
deception of the great majority of the citizens? Obviously not.
Such a policy is self-defeating. Eventually, the masses come
to understand the schemes of their rulers; and then the clever
plans of the inflationists collapse. Inflationism is not a
reasonable alternative to a sound money policy: it is difficult,
if not impossible, to stop an inflationary spiral before the
masses have seen through their rulers' schemes.

Those who are intent upon maintaining political power and political
favoritism have always wanted to sabotage the evolution toward
increased prosperity, peace, and liberty. They loathed the gold
standard, not only because of its economic value, but also because
it was symbolic of all those doctrines and policies they wanted

to destroy. Nationalists and isolationists fight the gold standard
because they want to sever their countries from the world market-
place and establish national autarky. Interventionist governments
and pressure groups fight the gold standard because they consider
it the most serious obstacle to their desires to manipulate prices
and wages. But the most fanatical attacks against gold are made
by those who believe that unlimited expansion of bank credit is the
panacea for all economic ills. They believe that unlimited expansion
of bank credit could lower or even entirely abolish interest rates,
raise wages and prices for the benefit of everyone, free the State
from the necessity of balancing its budget--in short, make all
decent people prosperous and happy. They believe that only the gold
standard, that devilish contrivance of the wicked and stupid classical
economists, prevents mankind from attaining everlasting prosperity.

And thus John Maynard Keynes, the ideological father of deficit
spending, proclaimed in the British House of Lords, on May 23, 1944,
that gold was "a barbarous relic." And whoever today suggests that
the world should return to the gold standard is dismissed as a lunatic.

Credit expansion based on fiat money can produce a temporary boom, but
at the cost of making economic calculation impossible. The basis of the
boom is funny-money, not an increase in capital goods. The inevitable
failure of all political attempts at credit expansion based on fiat money

And now these political prophets without vision are trying to con us
once again--with electronic money which is nothing more than blips
on computer screens. A stable and automatically balanced economy
must be based upon a monetary system that involves a universally
accepted medium of exchange AND store of value. Historically,
only the precious metals--predominantly gold--have met these criteria.
Neither fiat money nor electronic money is a store of value; and so
the eventual results of electronic money will be the same as those
of fiat money: hyperinflation, a massive loss of confidence, an
unprecedented level of economic chaos, and deep depression

Indeed, all government interference with market phenomena must fail
to achieve the ends sought. We call this the "180 degree phenomenon."
A discussion of this crucially important subject is beyond the scope
of today's presentation, but it is covered in the offshore seminars.
When an interventionist government tries to remedy the negative
effects of its previous actions by intervening further and further,
it eventually converts its country's economic system into socialism.
It then abolishes the domestic market altogether, and with it money,
even though it may maintain some of the terms and trappings of the
market economy. But in any event, it is not the gold standard that
frustrates the intentions of the political authorities; it is their
own contradictions.
* * *

Governments have tried to abolish it in order to pave the way for inflation--
to expand credit without limits in order to lower interest rates and
to improve the balance of trade. It is obvious that the gold standard
cannot function properly if the buying, selling, and possession of gold
is illegal, and legions of judges, gendarmes, and informers are busily
enforcing the law. The whole grim apparatus of oppression and coercion--
policemen, custom guards, penal courts, prisons, in some countries even
executioners--had to be used to destroy the gold standard. Solemn pledges
were broken, retroactive laws were promulgated, provisions of constitutions

The most remarkable thing about this allegedly new monetary policy,
however, is its complete failure. It substituted fiat money in the
domestic markets for sound money, and favoured the interests of

some individuals and groups of individuals at the expense of others.
It also contributed to the disintegration of the international
division of labor. But it did not succeed in eliminating gold from
its position as the international world standard. Gold has achieved
its eminence, and it will retain its eminence, because millions of
participants in the world marketplace voluntarily prefer it to all
other forms of money. If you glance at the financial pages of any
newspaper you discover that gold is still the world's money, and not
the colorful products of the various government printing presses.

No government is powerful enough to abolish the gold standard.
Gold is the money of international trade and the economic community
of mankind. It cannot be affected by the actions of governments
whose sovereignty is limited to definite countries. It does not
matter that governments confiscate gold coins and bullion, or that
they seize and punish those holding gold as felons. He who buys or
sells on a foreign market calculates the advantages and disadvantages
of such transactions in terms of gold. If a government wants to
sever its domestic price structure from that of the world market,
it must resort to other measures, such as prohibitive import and
export duties and embargoes. Nationalization of foreign trade,
whether effected openly or indirectly by foreign exchange control,
does not eliminate gold: The world's medium of exchange is still gold.

The policy of all contemporary governments to denigrate gold is not
an isolated phenomenon. It is an integral part of the almost universal
process of destruction which is the hallmark of our era: the denigra-
tion of values, integrity, responsibility, productivity, and prosperity.
Governments want to substitute economic isolationism for free trade,
plunder for production, poverty for prosperity, political power and
control for individual liberty, and war for peace. They are trying
to fake Reality, and in the long run, Reality cannot be faked.