Paper Bugs, or, Stupid Arguments Against Gold

Eduardo Porter responds to recent pro-gold testimonials of various Republican presidential candidates and conservative talking heads. Such persons aren’t exactly heavyweights when it comes to making good arguments for returning to gold. Yet in trying to show just what lightweights they really are, Mr. Porter mainly succeeds in revealing his own featherweight grasp of monetary economics and history.

For his opening salvo Mr. Porter turns to R.A. Radford’s famous article on the employment of cigarettes as money in German P.O.W. camps, noting how, according to Radford, the prices of other goods sometimes fluctuated dramatically in response to new cigarette deliveries or to cigarettes’ gradual disappearance in the absence of such. This experience, we are assured, proves that a gold standard is a dumb idea since gold, “as money,…share’s tobacco’s basic drawback” of being a commodity.

This would be an unanswerable argument against the gold standard were it not for two minor issues: first, gold isn’t tobacco; second, P.O.W. camps aren’t ordinary economies. Those who plead for a return to gold have a right to be understood to be extolling the merits of a gold standard rather than those of a tobacco standard or a cowrie shell standard or some other commodity standard; and the instability exhibited by any standard in a P.O.W. camp might not supply an accurate indication of the same standard’s likely performance in a more usual economic setting. I would bet, for example, that the real price of cigarettes was subject to more violent changes within the confines of Stalag Luft III than in the surrounding German economy; and since the war the real wholesale price of cigarettes, in the U.S. at least, has actually been pretty stable, with changes in excise taxes accounting for most observed changes in their retail price. Finally, there isn’t even any good reason for supposing that cigarettes were a poor monetary medium for P.O.W. camps, given the available options.

While the general thrust of Mr. Porter’s essay is that one has to be daft to say nice things about the gold standard, he is generous enough to allow that this might not be the only reason for Ron Paul’s defense of gold. After all, Porter informs us, “much of his [Paul’s] wealth is tied up in gold-mining stocks.” Consequently, Porter reasons, Paul “would certainly benefit if even more American’s caught the gold bug.” But would he? Have a look at any plot of the real price of gold, and ask yourself whether, if you had “much of your wealth” in gold mining, you would be pleading for a return to the gold standard, or pulling hard for a continuation of the fiat-money status quo. Besides not making sense, and being nasty, Porter's argumentum ad hominem is profoundly silly. Would he have us conclude that Paul is pro-life only because he’s a pediatrician, or that, since he favors drug legalization, he must be long on marijuana, coca, and poppies?


Keynes v Hayek, recorded on 26 July 2011 at the London School of Economics.

Speaker(s): Professor George Selgin, Professor Lord Skidelsky, Duncan Weldon, Dr Jamie Whyte
Chair: Paul Mason

Fractional Reserve Banking: Options?

“In order to overcome these objections to the claim that fractional reserve banking accords with the principle of freedom of contract, White and Selgin then, as their last line of defense, withdraw to the position that banks may attach an “option clause” to their notes, informing depositors that the bank may at any time suspend or defer redemption, and letting borrowers know that their loans may be instantly recalled.[26] While such a practice would indeed dispose of the charge of fraud, it is subject to another fundamental criticism, for such notes would no longer be money but a peculiar form of lottery tickets.[27]

It is the function of money to serve as the most easily resalable and most widely acceptable good, so as to prepare its owner for instant purchases of directly or indirectly serviceable consumer or producer goods at not yet known future dates; hence, whatever may serve as money so as to be instantly resalable at any future point in time, it must be something that bestows an absolute and unconditional property right on its owner.

In sharp contrast, the owner of a note to which an option clause is attached does not possess an unconditional property title. Rather, similar to the holder of a “fractional reserve parking ticket” (where more tickets are sold than there are parking places on hand, and lots are allocated according to a “first-come-first-served” rule), he is merely entitled to participate in the drawing of certain prizes, consisting of ownership or time-rental services to specified goods according to specified rules. But as drawing rights—and not unconditional ownership titles—they only possess temporally conditional value until the time of the drawing, and they become worthless as soon as the prizes have been allocated to the ticket holders; thus, they would be uniquely unsuited to serve as a medium of exchange.”

          — Hans-Hermann Hoppe, Against Fiduciary Media