Creature From Jekyll Island by G. Edward

The reason so many people fall for the appealing argument that the economy needs a larger money supply is that they zero in only on the need to increase their supply. If they paused for a moment to reflect on the consequences of the total supply increasing, the nonsense of the proposal becomes immediately apparent.

Murray Rothbard, professor of economics at the University of Nevada at Las Vegas, says:

We come to the startling truth that it doesn't matter what the supply of money is. Any supply will do as well as any other supply. The f ree market will simply adjust by changing the purchasing power, ot effectiveness, of its gold-unit. There is no need whatever for any planned increase in the money supply, for the supply to rise to offset 1. Those who rushed to market first, however, would benefit temporarily from old prices. Under inflation, those who save are punished.

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any condition, or to follow any artificial criteria. More money does not supply more capital, is not more productive, does not permit

'economic growth.'

GOLD GUARANTEES PRICE STABILITY

The Federal Reserve claims that one of its primary objectives is to stabilize prices. In this, of course, it has failed miserably. The irony, however, is that maintaining stable prices is the easiest thing in the world. All we have to do is stop tinkering with the money supply and let the free market do its job. Prices become automatically stable under a commodity money system, and this is particularly true under a gold standard.

Economists like to illustrate the workings of the marketplace by creating hypothetical micro and macro economies in which everything is reduced to only a few factors and a few people. In that spirit, therefore, let us create a hypothetical economy consisting of only two classes of people: gold miners and tailors. Let us suppose that the law of supply and demand has settled on the value of one ounce of gold to be equal to a fine, custom-tailored suit of clothes.

That means that the labor, tools, materials, and talent required to mine and refine one ounce of gold are equally traded for the labor, tools, and talent required to weave and tailor the suit. Up until now, the number of ounces of gold produced each year have been roughly equal to the number of fine suits made each year, so prices have remained stable. The price of a suit is one ounce of gold, and the value of one ounce of gold is equal to one finely-tailored suit.

Let us now suppose that the miners, in their quest for a better standard of living, work extra hours and produce more gold this year than previously—or that they discover a new lode of gold which greatly increases the available supply with little extra effort.

Now things are no longer in balance. There are more ounces of gold than there are suits. The result of this expansion of the money supply over and above the supply of available goods is the same as in our game of Monopoly. The quoted prices of the suits go up because the relative value of the gold has gone down.

The process does not end there, however. When the miners see that they are no better off than before in spite of the extra work, and especially when they see the tailors making a greater profit for no

Cow!,Hrray.Rothbard' What Has Government Done to Our Money? ( L a r k s p u r rad^I>me Tre e Tress, 1964), p. 13. F '

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THE CREATURE FROM JEKYLL ISLAND

increase in labor, some of them decide to put down their picks and turn to the trade of tailoring. In other words, they are responding to the law of supply and demand in labor. When this happens, the annual production of gold goes down while the production of suits goes up, and an equilibrium is reached once again in which suits and gold are traded as before. The free market, if unfettered by politicians and money mechanics, will always maintain a stable price structure which is automatically regulated by the underlying factor of human effort. The human effort required to extract one ounce of gold from the earth will always be approximately equal to the amount of human effort required to provide the goods and services for which it is freely exchanged.

CIGARETTES AS MONEY

A perfect example of how commodities tend to self-regulate their value occurred in Germany at the end of World War II. The German mark had become useless, and barter was common. But one item of exchange, namely cigarettes, actually became a commodity money, and they served quite well. Some cigarettes were smuggled into the country, but most of them were brought in by U.S. servicemen. In either case, the quantity was limited and the demand was high. A single cigarette was considered small change.

A package of twenty and a carton of two hundred served as larger units of currency. If the exchange rate began to fall too low—in other words, if the quantity of cigarettes tended to expand at a rate faster than the expansion of other goods—the holders of the currency, more than likely, would smoke some of it rather than spend it. The supply would diminish and the value would return to its previous equilibrium. That is not theory, it actually happened.

With gold as the monetary base, we would expect that

improvements in manufacturing technology would gradually

reduce the cost of production, causing, not stability, but a downward movement of all prices. That downward pressure, however, is partially offset by an