Monday, 4 June 2012

The good, old days of the Gold Standard

"The gold standard was "sacrosanct" to the generations brought up on the Adam Smith ideals of free markets, free from arbitrary and discriminatory interventions by governmental powers. Indeed, it was an essential instrument of economic freedom. It protected the individual against arbitrary measures of the government by offering a convenient hedge against "confiscatory" taxation, as well as against the depreciation or devaluation of the currency. It was an instrument of "mobility" within and beyond national borders. Above all, it raised a mighty barrier against authoritarian interferences with the economic process. "That insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs" (Adam Smith), had to keep the national budget in good order. Authoritarians of all denominations had to keep their inflationary propensities under control and to refrain from excessive taxation in order to forestall the loss of people's confidence in the currency, the breakdown ofthe standard. The public purse had to be held tight. The business community had to learn to live with the salutary realization that illiquidity caused by short-sighted overinvestment and irrational speculation would be penalized by loss of gold and an "automatic" tightening of the money supply, as well as a rise in the price of money.

The gold standard in the classical sense was part and parcel of an economic order. It was a keystone of the system of public law, social customs and institutions, called "capitalism"-the term coined by Karl Marx-a system that rested on what appears in perspective as virtually unlimited freedom of consumer choice, business enterprise, and markets."

Melchior Palyi; Twilight of Gold, 1914 - 1936, pg 5

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