Unfortunately the article is emotionally charged, and thus any refutation of the arguments and conclusions drawn by Armstrong may look like a personal attack; in reality, I simply wish to express agreement with the many good points brought up by Armstrong, and to point out, where necessary, his errors of observation and logic.

In the very first line of the very first paragraph Armstrong makes the following statement; 'Gold has been one of the most hated objects among the Socialists because with each dollar it advances, it reveals the delusion that they seek to live within." This is fine, no argument with this; any increase in Gold 'price' shows the failure of the Socialist and monetarist experiment.

However, he then goes on to say "Yet Gold has been a misconceived store of wealth perhaps since the dawn of time." Yes, indeed, Gold has been a 'store of wealth' throughout Human history; why does he say 'misconceived'? This shows prejudice; either Gold is or is not a store of wealth… history proves beyond doubt that Gold is not only a store of wealth, but the Very Best store of wealth, as well as the very best money that Mankind has ever discovered. Nowhere in the article does Armstrong point out any other, presumably better, store of wealth than Gold…

Next, he talks about the Byzantine Empire; he claims that 'When the Arabs cut off North Africa, the Byzantine Empire began its fall. The great Monetary Crisis of 1092 signaled the end was near. The access to the ability to increase the money supply came to an end. The coinage of Gold for the first time begins to be debased".

There are two statements here, one about increases in the money supply, and the other about monetary debasement; they must be separated. The failure of the modern Fiat based economy is based on the fact that money supply is being increased with no end in sight; how then can he claim that a failure to increase the money supply is the cause of the Byzantine fall? The second statement is regarding monetary debasement, clearly a different issue.

In fact, the Byzantine Empire was the Eastern part of the Roman empire; the Roman or Western part collapsed centuries before the Byzantine branch… because the Romans decided to debase their coins while the Byzantines kept theirs pure for another thousand years or so; the collapse only came with debasement, this had nothing to do with 'the ability to increase the money supply'.

To give a modern day example of this, India is the greatest holder and buyer of Gold in the modern world; yet India produces NO Gold at all… the ability to mine gold has little to do with the ability to 'acquire' gold; in fact, yearly (total) mine supply is around 2,500 Metric tons, and the known above ground stocks of gold are at least 160,000 tons; the yearly supply adds no more than 1 ½% to existing stocks. Nevertheless, India has no trouble acquiring as much gold as it wants or needs; see the latest purchase of 200 tons by the RBI… in effect, India trades for its gold, as other countries trade for any resources that they need.

The very fact that the stock to flows of Gold is huge is ample proof that Gold is indeed money, and is an unmatched store of wealth; else why on earth would 80 years of mine supply exist? Of all commodities, only Silver (the second best money) has a stock to flows of a similar magnitude.

All other commodities have stock to flows of a small fraction; copper and other base metals have about 20-30 Days (Not Years…!) of stock, precious metals like Platinum and Palladium similar have even smaller ratios. Gold and Silver are hoarded because they are money… and they are money because they have been for over 6,000 years of Human history.

Armstrong falls prey to the great Keynesian and Monetarist fallacy, that the money supply must grow to 'ensure steady economic growth'… in fact, the greatest benefit of the Gold standard was that the growth of money supply did NOT keep up with the growth of the economy! This fact led to a steady, gentle increase in the purchasing power of Gold money, rewarding savers and leading to sustainable growth… in fact, it is the Quality and not the Quantity of money that is important to an economy.

May times in history we see the 'Lira' scenario play out; the old Lira has been so debased that it takes 1,000,000 L to buy a cup of coffee, and the average blue collar wage is 20,000,000 L… deciding that things have gone too far, a new Lira is issued, erasing 6 zeros in one instant; one new Lira is worth 1,000,000 old lira… and the economy does not even hiccup at the loss of 'money supply' by a factor of one million overnight.

The key is that the blue collar worker still earns twenty cups of coffee for one hour work; this is the important thing, not the actual 'money supply'. To state the economic law clearly, the money supply in an economy is irrelevant… only the ratios (relative prices) are important. In more detail, it is the Quality of money that counts, not the Quantity! Byzantine, like innumerable other empires… like the Roman, like the many Chinese dynasties… collapsed when the Quality of money was debased; never because of the quantity of money.

The present day world suffers from too much money of progressively poorer quality. The exact opposite is true of the Gold Standard; less money of higher quality. As more bad money leads to collapse, less good money leads to pure growth. The USA was on a (partial) gold standard in the nineteenth century, and it exhibited the greatest rate of economic growth ever seen in history. Another interesting fact is that the British Empire, which encompassed the great part of the whole world, ran on Gold reserves of around 150-250 Tons; (see note 1). If this was possible, it is clear that a Thousand times as much gold is MORE than plenty to run the whole world economy.

Gold is indeed THE hedge against government. The Gold Standard Institute under no circumstances advocates that Gold should be the "official' government standard of money. Rather, we believe that Gold is Free Market money. Just as war is too important to leave to the generals, so money is too important to leave to corrupt politicians and greedy bankers.

Going on in the article, I am not sure what Armstrong means by 'hard core gold standard enthusiasts' but I did not stop reading. I will certainly NOT join with any Socialists; I have lived under a Socialist regime, so I understand on my own skin how destructive Socialism really is; I hate Socialists regimes, not Armstrong!

Several paragraphs later, Armstrong goes on to say this; "In the hard sciences, nothing was random. Social science, everything was random so it cannot be predicted." The first statement about hard sciences reflects a Newtonian view of the Universe; but Newtonian physics -the so called 'Hard' science- has undergone two major events that destroyed the very foundations it was built on; first came Einstein's relativity, which replaced Newton's idea of absolute time and distance; then came Quantum mechanics that eliminated any possibility of making long term predictions, based on the Heisenberg's uncertainty principle; Physics now accepts that it cannot make long term predictions even in principle.

On the other hand, Austrian economics, which is a 'Social' science, has not changed in its fundamentals since its inception; for the fundamental in Austrian economics is human action… and there is no way to go beyond the actions of one human being; unlike atoms that may be 'smashed' to learn more about their behavior and composition, humans cannot be smashed… else they cease being humans.

So perhaps the Social science Armstrong is referring to is at fault; Kynes and Friedman held wrong theories of economics, as did Marx… and any 'science' built on false roots will produce false answers. On the other hand, a science -such as Austrian economics- built on sound and true fundamentals can indeed provide valuable predictions and understanding.

Black Friday 1898

Armstrong states that the US abandoned the Gold Standard during the Civil War, then goes on to say that those who claim that the Panic took place because money was NOT backed by Gold are wrong… this is a contradiction. The statement that 'People who deposited $20 in Gold wanted to sell it for $162 in paper' has it backwards. The backing of paper by Gold means redeemability in gold not 'selling gold for paper'. If anything, this shows that the paper money has been debased.

Under a gold standard, Gold is Money; and as money, it is the numeraire; as well as being a means of exchange, and a store of value, Gold is used as the standard measure of value, rather like a meter stick is the standard measure of length. To say that people wanted to sell Gold for $162 actually means that the Dollar has been debased.

Whereas before the debasement occurred each ounce of gold bought 20 Dollars, after the debasement (printing dollars unbacked by Gold) the same ounce of gold would buy 162 (debased) Dollars; no wonder the bankers were hanged! Who would accept 20 debased dollars worth only 0.123 Oz (20/162) in place of the original 20 dollars purchased with one full once of gold?! Honesty would have called for a devaluation of the Dollar, so that its new value would be 162 dollars per ounce… this would have been the right thing to do, and no banker need be hanged.

Next we have the Greenback; Armstrong claims that the problem was the lack of interest, not the lack of Gold; this is nothing but a red herring. Gold pays no interest either, but it never trades at a discount to itself! How could it possibly? Furthermore, if the original Greenback paid interest, say at 5%, but depreciated 25%... then what is the big deal?

A net depreciation of 'only' 20 percent is still depreciation… the market decides the real value of paper, whether it bears interest or not… and more so if the interest is simply paid in the form of more worthless paper! Most tellingly, why did the US government issue Greenback in the first place, whether interest bearing or not… clearly because they did not have enough Money (Gold) to finance their war… very much the same reason the US Government is printing Legal Tender money today; to attempt to pay the exorbitant costs of the Warfare/Welfare state.

The part about 'Political Corruption' is very apropos; by the way, a 'Corner on Gold ' is simply another way to express the concept of Hyperinflation; it simply means that gold is not available to the market at any (paper) price; in spite of the fact that 80 years of gold are physically available! Clearly the real problem is that gold goes into hiding, in protest at political chicanery… not that there is 'not enough Gold'.

Gould and Fisk may have been manipulators, but notice that the 'manipulation'' involved making 'deals' with the Treasury, and bribing Government officials to their own benefit. Without a powerful government to 'manipulate', without law makers to 'influence', they could not have done the harm they did. A monopoly can only exist under the force of arms; in a true free market, monopolies do not succeed. Competition is the symbol of a free market, monopoly is the symptom of government power.

It is an interesting observation that most people understand that competition is good for the consumer, and ultimately is also good for the producer; this is in fact an economic law; monopoly is counterproductive… yet when it comes to Government, this law is seemingly forgotten; monopoly in Government is thought to be 'good' or at least 'necessary'; well, with laws of economics you can't have it both ways; either monopoly is good, or monopoly of Government is bad…

'Many people think that somehow if we had a Gold Standard that this will somehow solve all the problems'… well, we don't think this for a moment! A gold standard can only exist if society believes and lives by the belief that 'honesty is the best policy'… the motivation for the existence of TGSI is to bring this truth to people's consciousness. As the famous Austrian economist Hans Sennholz wrote near twenty years ago;

"Sound money and free banking are not impossible, they are merely illegal. That is why money must be deregulated. The Gold standard will return as soon as people realize that honesty is the best policy.

As hope of ill gain is the beginning of the fiat standard, so is honesty the mother of the Gold standard. The Gold standard is as old as civilization. Throughout the ages, the Gold standard has emerged again and again because man needed a dependable medium of exchange."

Next, Armstrong talks about the 'demonetization' of Silver; this was another act of interference in the market by Governments, at the point of a gun. The marked had decided that Silver was indeed money, and valued it at a ratio of around 15 Oz of Silver for one ounce of gold. This number was subject to change, depending on supplies, and on the cost of transporting and storing Silver… substantially higher than that of Gold, due to the lesser specific value of Silver.

The lesser specific value (value per ounce) made silver the ideal 'junior' partner to Gold; smaller value transactions could be made easier in Silver, while larger ones fit Gold best.

The problem again is government interference; by putting an artificial and fixed ratio on the price of Gold, government attempted to short circuit market forces. This powered Gresham's law; 'Bad money forces good money out of circulation under Legal Tender laws'; that is, when Gold was worth more than Silver, consumers used Silver to make purchases, and held onto Gold… and vice versa.

The bimetallic standard was doomed from day one; and the (farcical) demonetization of Silver is the result; again, the economic crisis was the result of Government manipulation, not the result of any inherent flaw in the Gold standard; the problems in today's financial world became most acute once the USA defaulted on its Gold obligations; when Nixon 'closed the Gold window'. Until that moment the US Dollar was still attached, if somewhat tenuously, to Gold.

Armstrong did good work in studying the cycles, but again, puts the cart before the horse; always and everywhere, the problems start when Gold is abandoned; and trying to re-establish the previously existent 'standard' is impossible. After Great Britain abandoned the Gold Standard to finance WWI, it tried to re-establish a 'gold bullion' standard at the pre-debasement price of the British Pound; rather like the Americans tried with the Greenback.

This was a non-starter; far more British Pounds existed after the great printing during WWI than before; an honest devaluation of the Pound, reflecting reality, would have eased the transition; instead, the Bank of England asked Benjamin Strong, first chairman of the US Feb, to inflate the US Dollar to help 'ease' Britain back onto Gold; this action, the printing of US Dollars without Gold backing, caused the boom of the Roaring Twenties, and led inexorably to the Great Depression; again, Keynesian and Friedmanite economists try to blame this on the Gold Standard!

The unpleasant truth is that the so called Business Cycle is in reality the Money cycle; the cause is simple; inflation of the paper money supply, followed by the inevitable deflation. This is the root cause of the very cycles Armstrong studied. Consequently, TGSI does NOT advocate a return to the gold standard as practiced in the nineteenth century; rather we advocate the adaptation of an Unadulterated Gold Standard as the basis of the world financial system.

Unadulterated means simply there is no fiduciary component; the Gold Standard as practiced by the US during the eighteen hundreds had a large fiduciary component; Gold only backed 25% of the Legal Tender bank notes (potentially) in circulation,. Even the strongest currencies, such as the Swiss Frank, were only 40% backed. Thus, there was a significant opportunity to inflate and deflate the money supply; under the Unadulterated Gold Standard, there is NO fiduciary component; all bank notes, if issued at all, must be 100% backed by specie, that is Gold or Silver, or by Real Bills that mature into gold in not more than 91 days.

Under this system, inflation and deflation are impossible; the only things possible are gradually lower prices (increased purchasing power of Money), stable interest rates that preclude speculation, stable FOREX values… there can be no FOREX speculation if Gold is money worldwide… and peace and freedom in the world. War and the Welfare state are impossible under Gold; without printed money, neither Welfare not Warfare can be financed.

In all, Armstrong has it wrong in several ways; Gold IS money… even Marx admitted this! Gold does reflect the true value of all productive enterprise. The innumerable feedback mechanisms of the Gold Standard assure this. We can indeed turn to a Gold Standard, without 'fixing the price' of gold… the free market will 'fix' this with no problems. In fact, only a Government Monopoly can 'fix' any 'price'… a solution to be avoided at all cost.

Debt cannot be 'abolished'! Debt is a powerful financial tool, and can no more be abolished than can fire… it must simply, like fire, remain under control… again, the Unadulterated Gold Standard does an admirable job of regulating debt and interest rates. The mechanisms of the Gold Standard that regulate interest rates are simple but powerful;

Professor Antal Fekete is the Monetary Scientist at the root of the teachings of The Gold Standard Institute. Professor Fekete does not accept the definition of interest rates as being simply a reflection of 'animal spirits' driven by time preference. His definition is based on market concepts first pronounced by Menger; that there is no single price for any market item, including interest rates. Rather there is a bid and an ask price; furthermore, the price ceiling and floor are driven by disparate market forces; it is possible for floor and ceiling (bid and ask) to diverge, thus opening the spread in the price of any commodity; this is the model Professor Fekete uses to define interest rates.

By Professor Fekete's insight, the floor of interest rates is set by the marginal bond holder; if interest rates decline, the marginal bond holder will sell his (now over priced) bond, and hold gold, the present good; the bond selling opposes the drop in interest rates... thus the floor is set. This is a reflection of the bond holder's time preference, and can only operate under a gold standard. Paper 'money', unlike gold or silver, is not a present good but simply another promise!

The ceiling of interest rates is set by the marginal equity holder; if interest rates rise, the marginal equity holder will sell his equity and buy the (now under priced) bond; this buying opposes the rise in interest rates... thus the ceiling is set. This is a reflection of the marginal productivity of capital.

The Professor has thus resolved the impasse between two schools of thought, one claiming that interest rates are a reflection of time preference, and the other claiming that interest rates are set by the marginal productivity of capital; his analysis reconciles the two competing theories, and clears up the confusion in the study of the market forces that determine interest rates.

Even the quantity of Gold that is mined is subject to the discipline of market forces; for example, if the total cost mining, refining, and coining ten Gold coins of one ounce each is 11 Oz… that is, the purchasing power of Gold is less than the cost of acquisition… then clearly no one will do this at a loss (Governments excepted!) On the other hand, in case of a 'shortage' of gold, that is if the purchasing power of Gold rises, and the cost of mining/refining/coining 10 one ounce coins is nine ounces, it will become profitable to mine Gold… and entrepreneurs will undertake the task.

I hope that this refutation of Keynesian and Friedmanite fallacies is clear to the reader. I do respect Armstrong, but simply cannot accept the errors he repeats in his assay. If you have any comments or questions, I am available at www.goldstandardinstitute.com, ask the Editor. More of Professor Fekete's exemplary work is available there as well; and on his own website, www.professorfekete.com.

Rudy Fritsch
Editor in Chief
The Gold Standard Institute

1) Central Bank Gold Reserves
     An historical perspective since 1845
     Timothy Green
     Published by the World Gold Council