The gold standard is a monetary system which, unlike the regime of irredeemable currency, is free of coercion. Its main significance is not to be found in the stabilization of prices, which is neither possible nor desirable, but in the stabilization of interest rates.
A gold standard is established when the unit of currency, or standard of value, is defined by the Constitution as a definite weight of gold of definite fineness. All other forms of currency are then redeemable in gold on demand at the statutory rate. To be effective, a gold standard must have a paraphernalia such as the standard gold coin, minted free of charge (exclusive of the cost of refining) at the Mint in unlimited quantities on the account of anyone tendering the metal. Furthermore, owners of the gold coins of the realm may hoard them, melt them, export them freely without penalty or the threat thereof. This right is part of the right to own property which cannot be curtailed, abrogated, or summarily suspended without due processes of law. It should be noted that, although the right of owning property in general may be subject to limitations and could be suspended temporarily in case of extreme emergency (a typical example is the ownership of grain in a town under enemy siege), gold is explicitly exempted from this provision. A shortage of gold, unlike a shortage of grain, never gives rise to an emergency. The consumption of gold is mostly in the arts and jewelry, and is never for the satisfaction of the most urgent needs of society. A shortage of gold is always a symptom of mismanagement of the credit system by the banks, usually under the sponsorship of the government. If gold is in short supply, it simply means that individual citizens and creditors of the government are dissatisfied with credit policy. Hoarding gold is the only way they can protest effectively. They will release gold in their control as soon as they have been persuaded that the banks and the government mend their ways and they will keep their promises to pay. They will keep their sight liabilities within the limits of their quick assets. They will create no debts without seeing clearly how these debts can be paid. A shortage of gold, therefore, is not a real shortage and can be ended quickly through corrective measures in bank and government credit policies. The Constitution and the legal system should recognize this by specifically exempting gold from arbitrary seizure under sections of the legal code governing eminent domain.
The gold standard has been criticized for reasons of variation in the exchange value of gold. Critics have charged that gold is not sufficiently stable to serve as the standard of value. To assess this charge we must observe that variations in the exchange value of gold during the past 500 years were the result of the over-issue of fiduciary media redeemable in gold. In the absence of this abuse the exchange value of gold would have conformed to its intrinsic value governed by gold's marginal utility. Gold was promoted to the status of a monetary metal by the markets over thousands of years of evolution that has made the marginal utility of gold as nearly constant as possible (while the marginal utility of other goods is subject to steep decline, more or less. No other commodity would be more stable when used as money. Least stable is the irredeemable currency based on debt. We may therefore conclude that if the exchange value of gold appears undermined, the culprit is to be found in the unwarranted issue of fiduciary media by the banks under the sponsorship of the government. Moreover, this abuse takes the form of illicit interest arbitrage as we have seen in this course (Lectures 11 and 12). The criticism must be re-directed from gold to the legal system of the country, which has failed to outlaw illicit interest arbitrage and borrowing short to lend long.
There is, therefore, need to re-define a gold standard in such a way that these credit abuses by the banks under the protection of the government are eliminated. In particular, the exemption of banks from the full penalty under contract law for breach of contract (including the right of creditors to sue for liquidation), and the double accounting standard aiding and abetting banks guilty of understating liabilities and overstating assets, must be abolished. The definition of the unadulterated gold standard must stipulate the removal of all special privileges for the banks. It was these privileges that allowed banks to carry on business as usual after they have defaulted on their promises to pay gold to their depositors. It was these privileges that have let banks borrow short to lend long. It was these privileges that made it possible for them to milk society through the practice of illicit interest arbitrage. The very idea that banks may be allowed to suspend payments in gold coin and continue in business is preposterous. The gold coin is there, in the first place, to protect the bank's creditors against unsound credit practices. Legalizing suspension is tantamount to condoning the practice of declaring bankruptcy fraudulently, and to confirming the thief in the possession of stolen goods. At any rate, legal protection of banks against the legitimate claims of creditors rewards incompetence and fraudulent behavior while penalizing competence and integrity. With such a code, problems will never be solved, only compounded.