The Case for a Genuine Gold Dollar by Murray N. Rothbard – Commentary

When we recently encountered “The Case for a Genuine Gold Dollar” by Murray Rothbard, we decided it deserved a critical read and commentary, especially in the context of our post: “Gold: Always a Store of Value but Never a Currency“. Since the issue of gold or gold-backed currency will never die, any informed input to the debate is important. Ours follows:We will display direct quotes in italics and follow with our comments in normal text.

Hayek is surely correct that a free market economy and a devotion to the right of private property requires that everyone be permitted to issue whatever proposed currency names and tickets they wish.

Not at all. A currency by its bilateral nature has to be a public property and as such opens itself to regulation by the sovereign state.

In short, money cannot be created out of thin air, by social contract, or by issuing paper tickets with new names on them.

The refutation of this assertion is that all money in use today is created in exactly this way. Hence the term fiat currency. That F. A. Hayek would propose an unrestricted regime of fiat currencies is bewildering.

Americans have been used to using and reckoning in “dollars” for two centuries, and they will cling to the dollar for the foreseeable future. They will simply not shift away from the dollar to the gold ounce or gram as a currency unit.

A good point we had not considered – public inertia.

Only privatization of the dollar can end the government’s inflationary dominance of the nation’s money supply. … There is only one way: to link the dollar once again to a useful market commodity. Only by changing the definition of the dollar from fiat paper tickets issued by the government to a unit of weight of some market commodity, can the function of issuing money be permanently and totally shifted from government to private hands.

Rothbard’s argument goes like this. The government willfully and easily debases a fiat currency by inflating the supply. The only way to avoid inflationary debasement is to privatize money creation (a fallacious assertion as we will shortly show). Hayek’s proposal of the private printing of fiat currency won’t work as Rothbard shows because a plethora of fiat currencies cannot be readily valued and have no intrinsic value. Therefore, a commodity-based currency with an established intrinsic value is the solution.

The first observation is that Rothbard and Hayek are arguing for, in the case of a country with a million inhabitants, the establishment of a million sovereign money creators. Any proposed currency that can be debased by an original sovereign (state) is replaced by a currency that then has a million sovereigns available to work out debasement schemes.

If in fact a commodity-based currency can be created that cannot be debased and can enjoy the confidence of the populace, then the original sovereign need only adopt it and there would be no need to privatize money creation.

[Suppose] the dollar is defined, not as a weight of a single commodity, but in terms of a “market basket” of two or many more commodities.The government could and would, then, alter the ratios of weights, adjust the various fixed terms, and so forth.

Rothbard identifies the means that a sovereign uses to debase a commodity currency – readjusting its composition. Proposing a single gold commodity currency does not remove the possibility of debasement as history shows.

A final and vital flaw in a market-basket dollar is that Gresham’s law would result in perpetual shortages and surpluses of different commodities within the market basket.

The argument is that commodity prices continually change due to market dynamics – supply and demand. Valuing a basket of commodities becomes more complex then than valuing a single commodity, particularly if relative weights are fixed. But reducing the problem to a single commodity reduces calculational complexity but does not remove the underlying issues of supply and demand that affect the individual commodity prices. The factors that he cites to discredit a market basket approach remain in the limit when the number of commodities in the basket is reduced to 1.

To be real, the definition of the dollar as a unit of weight of gold must imply that the dollar is interchangeable and therefore redeemable by its issuer in that weight, that the dollar is a demand claim for that weight in gold.

As we discussed in “Understanding Money: Part 1 – Introduction“, this is a representational currency. In short: been there, done that.

But if money is on a gold standard, the dollar and gold will no longer be two independent commodities, whose price should be free to fluctuate on the market.

Which is why a gold standard can’t work over time. The supply of gold fluctuates so its market value must fluctuate. In addition, part of gold’s intrinsic value is the cost of production, a cost that is constantly rising. One estimate of this cost is given in the article “Gold miners need gold above $1650 to keep nose above water“. The article notes that The average cost to produce an ounce of gold, all up, everything loaded in, is about $1,200 to $1,250. Even in ancient times, the cost of mounting a war to acquire your neighbour’s gold was not trivial.

a truly free market in money will exist only when the dollar is once again strictly defined and therefore redeemable in terms of weights of gold.

We see nothing “truly free” about something that is “strictly defined”.

At this point in his treatise, he describes how the transition from a fiat paper currency to a gold coin-based money system could be accomplished. And all our arguments against the feasibility of such a system apply. Using his own example of converting the monetary base of Federal Reserve Notes (FRN) into gold coins using 1981 figures, a $1 FRN would be exchanged for 1/676 gold ounce.

Now a 1/10th ounce gold coin is pretty small, but a 1/676 oz. coin? This demonstrates part of the impracticality of a commodity-based gold currency as we have discussed.

Our conclusion is that Rothbard has contributed nothing of value to the debate.


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