I suppose that I wasn’t entirely aware of how hard-core Henry Hazlitt was on the gold question until re-reading The Inflation Crisis and How to Resolve it:
This brings us to gold. It is the outstanding merit of gold as the monetary standard that it makes the supply and the purchasing power of the monetary unit independent of government, of office holders, of political parties, and of pressure groups. The great merit of gold is precisely that it is scarce; that its quantity is limited by nature; that it is costly to discover, to mine, and to process; and that it cannot be created by political fiat or caprice. It is precisely the merit of the gold standard, finally, that it puts a limit on credit expansion.
But there are two major kinds of gold standards. One is the fractional reserve system, and the other the pure gold, or 100 percent reserve, system.
The fractional-reserve system is the one that developed and prevailed in the Western world in the century from 1815 to 1914. It is what we now call the classical gold standard. It had the so—called advantage of elasticity. And it made possible—we might justly say it was responsible for—the business cycle, the recurrent round of prosperity and recession, of boom and bust.
With the fractional-reserve system what typically happened was that in a given country—let us say Ruritania—borrowers would be given credit by the banks, in the form of demand deposits, and they would launch upon various enterprises. The new money so created, perhaps after taking up a slack in business and employment, would increase Ruritanian prices. Ruritania would become a better place to sell to, and a poorer place-to buy from. The balance of trade or payments would begin to turn against it. This would be reflected in a fall in the exchange rate of the Ruritanian-currency until the “gold export point” was reached. Gold would then flow out to other countries. in order to stop it, interest rates in Ruritania would have to be raised. With a higher interest rate or a smaller gold base, the volume of currency would be contracted. This would mean a deflation or a crisis followed by a slump.
In brief, the gold standard with a fractional—reserve system tended almost systematically to bring about the cycle of boom and slump.... (p. 172-73)
AGAIN:
“Governments should be deprived of their monopoly of the currency-issuing power. The private citizens of every country should be allowed, by mutual agreement, to do business with each other in the currency of any other country. In addition, they should be allowed to mint privately gold or silver coins and to do business with each other in such coins... The issuers should be required to hold at all times the full amount in metal of the notes they have issued, as a warehouse owner is required to hold at all times everythign against which he has issued an outstanding warehouse receipt, on penalty of being prosecuted for fraud.... As the use of the private currencies expanded, a private gold standard would develop. And because of the restrictions placed on it, it would be a pure, a 100 percent, gold standard. The government fractional-reserve gold standard—which was the classical gold standard—was finally stretched and abused to the point where, in my opinion, it can never be restored by any single national... But this, when one comes to think of it, will be ultimately a tremendous boon. Though people will probably again never trust a fractional-reserve gold standard, they will trust a full gold standard....” (p. 187-88)
