Plunder -- modern style
In the same light I wish to examine the across-the-board price rises that occurred under the gold standard in 1896-1921 and, again, in 1934-1968. These episodes are no more explained by a greater abundance of gold than are those of 331 B.C. and 1533 A.D. The key to the understanding of these, surprising as it may sound, is also plunder -- making marketable goods relatively scarcer. It is true that the plunder involved is of a subtler kind than the brutal events of 331 B.C. and 1533 A.D. Subtle or not, plunder remains plunder. Here is what happened.
As monometallism was gaining ground over bimetallism, there was a great increase in gold prospecting and production. However, a funny thing happened to gold on its way from the mines to the mints. Central banks hijacked it, in order to build a credit-pyramid, up to twenty times as great, upon their increased gold reserve. Without this interference from the banks there would have been no extra demand for marketable goods and, hence, no price increases -- regardless how fast output of new gold may have grown.
The new gold would have entered circulation in coined form. The Haberler-Pigou effect, to be described in the next paragraph, would have prevented any across-the-board price increase. The real cause of price increases in the inflationary episodes of 1896-1921 and 1934-1968 was not the pronounced increase in gold output. It was the unwarranted credit expansion engineered by the central banks that hijacked the gold.
The same is true of the California gold rush and other similar episodes. Prices of goods and services rose in California in the wake of the 1848 discovery of gold because of the scarcity caused by the influx of newcomers. But why did prices also rise in New York and elsewhere a little later? Well, they did because of the unwarranted credit expansion that the banks in New York and elsewhere constructed upon the hijacked gold that was not allowed to flow into circulation. If anyone denies this proposition, then he assumes the burden of proof that no credit expansion took place following the California gold rush -- clearly an impossible task.
Consumers controlling the gold coin could effectively resist price rises either in delaying purchases, or in buying alternative products and in shifting custom. An across-the-board price increase would represent a capital loss inflicted upon holders of the gold coin, who would scramble to recoup their losses by restricting purchases. Voluntary restraint on consumption is the ultimate factor blocking price increases. Note, however, that the Haberler-Pigou effect operates only on the gold component of the money supply, but not on the credit component.
As far as the latter is concerned, restricting purchases is an empty gesture. It is true that the holders of bank notes also suffer capital losses represented by the price rise but, because they are creditors to the extent of their holdings of fiduciary media, another group of people -- their debtors -- will have experienced an equivalent capital gain. The stepped-up spending of the latter group will offset the spending restraint of the former, and the net result is an across-the-board increase in prices. (For more on the Haberler-Pigou effect see: R. Hinshaw, ed., Monetary Reform and the Price of Gold, Baltimore, 1967.)
Abolishing the gold standard because it could not prevent price rises due to plunder (followed by a collapse in prices) is akin to putting the bearer of bad news to death. Gold was simply doing its job in reporting the extent of economic disruption caused by plunder, credit expansion, flood, earthquake, war, etc. In no way can gold be held responsible for the disruption itself.
Rumors about the death of the gold standard are grossly exaggerated. In 1930 Keynes correctly described the impact of the two great historic dispersals of gold on the future monetary role of the metal in his book A Treatise on Money. He made a convincing case that dispersal of gold from fewer to more numerous hands has always been instrumental in promoting the monetary qualities of the yellow metal. But Keynes went on to prophesy that the exact opposite would take place in the 20th century -- probably having a fatal effect on gold's future prospect to continue as the monetary metal par excellence.
What he referred to was the weaning of the public from the gold coin, the concentration of gold in central bank vaults, and the unprecedented increase of bank notes in circulation. We need not be surprised that Keynes avoided using the word 'plunder' to describe this process: he himself was the chief instigator of the trick of "taking gold away from man's greedy palms".
However, Keynes' prophecy concerning gold's future fell short of the mark. Keynes failed to foresee the coming of the third (and so far the greatest) dispersal of gold a generation after his death in 1947. It took the form of a great official gold dumping, ushered in by the U.S. Treasury gold auctions in 1974, followed by further auctions of central bank gold under the aegis of the International Monetary Fund (IMF). Later the auctions were suspended -- possibly because it was belatedly realized that the U.S. Treasury and the IMF had made themselves the laughing stock of the world.
They were throwing away their most reliable asset in exchange for irredeemable promises to pay -- at ludicrous prices to boot. Still, official holders such as Canada, Belgium, and the Netherlands occasionally dump gold on the market. Moreover, in 1995 there was more talk about new IMF gold give-aways (ostensibly to raise funds for economic aid to support the less developed countries). Thus the third great dispersal of gold is still continuing. It may be confidently predicted that the ultimate effect will be the same as that of previous historic dispersals: a reconfirmation of gold's position as the paramount monetary asset of the world.
The irony is that the authors of these gold dumpings were the most ardent students of Keynes, but they completely misunderstood the teachings of their prophet about the consequences of gold dispersal. When all has been said and done, these authors will appear as foolish as King Canute ordering the ocean to recede.
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