The Free Market 5, no. 4 (April 1987)
Not all hard-money supporters favor the gold-coin standard or any Treasury minting of gold coins. A few “purists” charge those of us who advocate a gold standard with being “gold socialists” because the Treasury would, at least initially, be minting the gold coins. Why not, they say, simply start minting gold coins privately by weight (in one ounce, half ounce, etc. denominations), and encourage people to use these coins as money, thereby bypassing the entire statist monetary system?
One critic, a man from Kansas City, has, for almost a decade, been minting such coins, only to find that his “Hayeks,” “Harwoods,” “Friedmans,” etc. have most decidedly not come into use as media of exchange, much less graduated to the general use that would make them money.
The problem with this critic, as with the proponents of many other monetary schemes such as F.A. Hayek’s private (non-gold) currency unit, the “ducat,” is that they all ignore Ludwig von Mises’ critically important “regression theorem,” the pons asinorum of monetary theory.
Mises demonstrated, as early as 1912, that no good can become a medium of exchange, much less a money, unless it has a previous non-monetary usefulness on the market. In short, money can only emerge as a commodity on the market, and cannot be imposed by the government, by social contract, or by various schemes of economists or other observers. Such plans have elsewhere been labeled correctly by Hayek himself as “constructivist.” In short, media of exchange and therefore money can only arise “organically” out of market processes and cannot be imposed by outside schemers.
It is, of course, true that gold and silver were, when available, always chosen by the market in preference to all other useful commodities to serve as media of exchange. And it is also true that every currency unit, past and present, originated as units of weight of gold or silver. In the last half of the 19th century, economists and statesmen organized several international monetary conferences, which, in contrast to the socialistic paper-money schemes of the 20th century, attempted to transform all currency units from “dollars,” “marks,” etc. into units of weight of gold or silver. Unfortunately, these conferences founded on the bimetallist gold-silver problem, and the attempts were soon forgotten when World War I ushered in a century of statist and fiat money international schemes.
Unfortunately, however, once the dollar, mark, franc, etc. were established as currency units and habituated among the public, it became easy for governments to go off the gold standard, sever any link with gold as a unit of weight, and continue using the old currency names as independent fiat monies, cut off from weights of gold. Once in general use as money, the dollars, pound, etc. could continue as monies while functioning as independent names, or entities, under the total control of the State. In short, governments managed to nationalize the dollar and all other currencies. The United States has long been suffering, for example, from “dollar socialism.”
The question before us, then, is how to denationalize, or “privatize,” our currency unit, the dollar; how, in other words, to transfer control of the dollar from the State to private hands.
The trouble with all the constructivist schemes, from the private medallion issuer to Hayek’s ducat, is that it leaves the country’s money, in our case the dollar, squarely in government hands. The ducat won’t become money because the ducat violates the regression theorem; no one knows or cares about the ducat, which has no pre-existing purchasing power or general acceptance. The same is true for the “Hayek” and the “Harwood.” In the first place, as estimable as Hayek and Harwood et al. are, far fewer people have heard of them than have heard of the U.S. or other governments, much less have they heard of the man who issues these would-be coins.
More important, the public hasn’t used gold ounces as the day to day currency unit for centuries. At this point the public would never directly use gold ounce coins as media of exchange. The public has been habituated to dollars, they want dollars, and will only use dollars. Only a hyperinflationary holocaust will ever induce them to give up dollars, and even then, most people still cling to the dollar or mark, even though its value is virtually vanishing at the very moment of contemplation.
All these plans, then, violate the regression theorem and are therefore profoundly irrelevant. They fail because they do not even begin to address the main problem: how to denationalize the dollar or pound or mark.
In the United States, there is only one way to denationalize the dollar: to tie it once again to a weight of gold. In 1933, the U.S. government confiscated virtually all the gold in the country, exchanged it for dollars, and buried it at Fort Knox under the ownership of the Federal Reserve System. Certainly any believer in private property or the free market would advocate denationalization of the Fed’s gold hoard. How is this to be done?
There is only one way to denationalize both the gold stock and the dollar at the same time: to retie the dollar to gold as a definition of weight, and then to abolish and liquidate the Federal Reserve System. Liquidation of the Fed, as of any organization, means the distribution of its assets to its creditors. In this case, it means disgorging the Fed’s hoard of gold by (a) redeeming all the Federal Reserve notes in gold coins denominated in dollars and minted, yes, by the Treasury, and (b) redeeming Federal Reserve deposits in gold, coin or bullion, which would go to the commercial banks.
The public, then, would still have its dollars, which would remain as the currency unit, except now the form of the dollars would not be the now-liquidated Federal Reserve notes, but in gold coins, and, we would hope, private bank notes and demand deposits with gold at 100 percent reserve to these demand dollar claims. Note that the Treasury minting of coins need only be a one-shot affair. Once the gold is in the hands of the public, there is no reason why the Treasury could not leave the minting business and throw it open to private competitors, who would tend to produce a better and cheaper product.
I hope that, over the decades, as the public became used to dollar-denominated gold coins tied firmly to a unit of weight, they would eventually be ready to scrap the dollar, mark, etc. altogether and fulfill the promise of the late 19th century by being willing to use only “ounce” or “gram” denominated coins. The ideal would be one economic world, all using only weight-denominated gold and silver coins as money. But that day is long a-coming. Right now, we are stuck with dollars, pounds, etc. and they must be denationalized and tied to gold.
The money question is but one illustration of a general point. Where governments have nationalized and seized control of much of the economy, there are often no easy or selfevident solutions on how to go about denationalizing. There have been thousands of anti-Communist theorists and writers in the last forty years, for example, yet none of them have in any way prepared themselves for the question: how to de-Communize.
If Gorbachev or some successor were someday to read Mises and then say, “you’re right, I quit,” and handed the reins of power over, say, to the U.S. government, how would we go about de-Communizing? What would happen to the land, the factories, etc., much less to the ruble? I am not, of course, saying that these problems are insoluble, only that they have received very little thought. Those, such as the Mises Institute, who are trying to find a way out of the mess, whether in money or some other key area, are doing extraordinarily important work.
