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Monetary Reform: Fiat vs. Market

By: Gary North

 -- Published: Wednesday, 20 April 2016 | Print  | Disqus 

By: Gary North

Remnant Review

What is fiat money? It comes from “fiat,” which means a formal authorization or proposition or a decree. Synonyms are these: edict, order, command, commandment, injunction, proclamation, mandate, dictum, diktat. It is an arbitrary order.

The phrase “fiat lux” comes from Genesis 1:2: “Let there be light.”

Fiat money is the money issued by a self-proclaimed divine state. It rests on the premise of divine right: no higher appeal. It is the court of final appeal. In short, it is divine.

A free market money system is an operational system to which people can appeal to because it is not statist money. People use gold coins or silver coins to buy what they want. Or they use legal claims to such coins. The state is not in the “money business.”

No nation-state ever allows this. Every nation-state wants to be the highest court of appeal, especially in monetary affairs. Every nation-state claims legal sovereignty over money.

Any gold standard in which civil government is the defining agency is a pseudo-gold standard. It is a counterfeit. When you think “government-guaranteed gold standard,” think “counterfeit.”


In times of great crisis, money dies. The things that money could buy in normal times are not available at any price close to that which prevailed in normal times.

The Bible’s most famous example was the famine in Egypt under Joseph’s administration. We read that the money failed (Gen. 47:15). But there was another case.

And there was a great famine in Samaria: and, behold, they besieged it, until an ass’s head was sold for fourscore pieces of silver, and the fourth part of a cab of doves’ dung for five pieces of silver (II Kings 6:25).

So revelatory are prices of the underlying social conditions that Elisha prophesied the end of a siege by forecasting a dramatic fall in prices: “Then Elisha said. Hear ye the word of the LORD; Thus saith the LORD, Tomorrow about this time shall a measure of tine flour be sold for a shekel, and two measures of barley for a shekel, in the gate of Samaria” (II Ki. 7:1). Before it ended, silver did not count for much. Or put differently, they had to count out a lot of silver to buy anything worth owning. What was worth owning was food.

Normal pricing reveals normal times. When prices today are close to what they were yesterday, we can be confident that society tomorrow will be pretty much what it IS today unless something totally unforeseen happens. Rarely does it happen.

Money prices are indicators of broad social trends. Gold reached its highest price, denominated in U.S. dollars, the week before Gettysburg. On July 3. 1863, Lee’s army was defeated. On July 4, Vicksburg fell to Grant’s forces. The dollar price of gold fell the following business day and did not reach these heights for a century. The world believed that the Union would win the war, no matter what the South’s politicians and generals said in public.

What was the South’s leadership to say? “Well, that does it. It’s all over but the shouting. The North’s shouting. We might as well surrender now. Why continue this bloodbath? The Yankee dollar is up. Gold is down. Gold says we’re beaten. We might as well face it.” Had any politician said this, he would not have served out his term. Yet this was exactly what the South’s leaders should have said. They continued the bloodbath, yet the outcome was what the price of gold had projected.

All of this is to say that the price of gold, back in the days when governments tied their currencies to it, was a better indicator of social conditions than the speeches of politicians.

No matter what politicians want people to believe, if they preach good times while the price of gold is rising, the public would be wise to discount the politicians words. Free men make evaluations of the state of the world, and the price of gold reflects their judgment. So do interest rates. They can be wrong in their forecasts, but their forecasts are best reflected in these two market prices.


Why should gold be the focus of attention, the ultimate indicator? One reason is because it usually has been. When gold is not widely used as currency, silver has served the same function. These two precious metals are the most familiar indicators of underlying economic trends. People have learned after millennia that the purchasing power of gold and silver also reveals a great deal about social stability. When the price of either or both keeps rising, the world is alerted to nations underlying crisis. When the prices of basic commodities rise faster than the price of gold and silver, that society is becoming desperate.

Ludwig von Mises defined money as the most marketable commodity. For most of the last century, beginning in the early months of World War I, gold was legally severed from currencies. National fiat currencies have served as money. Also, bank deposits serving in lieu of paper money have become money. These deposits have multiplied. Today, economists are not sure exactly what constitutes money or how to measure it. There are numerous competing measures. Gold and silver rarely serve as money. But Mises’ definition remains accurate: money is the most marketable commodity. You can buy what you want: (1) immediately, (2) without offering a discount, and (3) without advertising. In this sense, money is said to be liquid. It is the supreme measure of liquidity. Inside a national border, gold and silver are no longer as liquid as what a solvent national government calls money. We must pay a commission to buy a gold coin or a silver coin. In this sense, gold and silver are not money. They are not the most marketable commodities.

This raises an interesting question: ls our era an anomaly? Are we living in a monetary new world order? Is this situation likely to persist? Or will we see a return of gold and silver as the most marketable commodities?

If men are at long last trustworthy, if politicians tell the truth, if central bankers can be trusted not to inflate whenever there is a recession, and if things continue to operate smoothly, then the modern world will have escaped the unsentimental constraints of gold. Gold will not again become money, except as an accounting device for settling international payments among central banks.

Yet this raises another question: Why do central banks stubbornly refuse to abandon the “barbarous relic,” as John Maynard Keynes derisively called it? If gold is not good for us little people to use as money, why is it good for central bankers to use in order to settle their accounts? If gold is just another commodity, why don’t central banks sell all of it that is stored in their vaults and invest the money in U.S. Treasury bills or some other nation’s interest-paying debt? What do they know that the public doesn’t know, and gold-hating economists don’t know?

There is an answer: central bankers do not trust other central bankers. They do not trust the reliability of civil governments. They know that when push comes to shove in the business cycle, other central bankers will crank up the printing presses. When this happens, they all want to be in gold. So should the rest of us. To keep their credit worthiness in a crisis, they have to own gold. So do the rest of us.

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