The 'Barbarous Relic' - It's Not What
I'm no fan of John Maynard Keynes. I find most
of his economic theories to be just plain wrong. But for the
sake of truth and accuracy, I would like to correct a terrible
injustice levied upon Keynes, and at the same time also correct
an equally terrible injustice that is time and again inflicted
How many times have you heard gold described
as the "barbarous relic"? It is a favorite phrase
of gold-bashers everywhere trying to make gold the object
of derision. Every time I hear it, which is all too frequently,
I cringe because gold is neither barbarous nor a relic, as
can be easily explained with the following chart.
This chart presents a base 100 analysis of crude oil prices
in terms of dollars and grams of gold, i.e., goldgrams. In
other words, to establish the useful comparison depicted above,
this analysis assumes that one barrel of crude equals $100
and 100 goldgrams as of December 1945, and then calculates
the month-end price thereafter based on the actual dollar
price of crude oil and the prevailing dollar-to-goldgram rate
Gold Is Neither Barbarous Nor a Relic
We can see that the price of crude oil in goldgrams is essentially
unchanged throughout this period. So it is clear that gold
communicates economic value very effectively, which is the
primary feature of money. Because money is the tool upon which
economic activity is based, which is a reality that therefore
makes money central to society, money is not barbaric. Consequently,
gold cannot possibly be barbaric because gold is money.
Nor is it a relic because gold communicates value today as
effectively as it did fifty years ago, and much better than
the US dollar, which is a point made clear by the above chart.
In contrast to today's national currencies, gold tends to
hold its value, or in other words, its purchasing power remains
relatively unchanged. In fact, this precious attribute of
gold is timeless because the aboveground stock of gold grows
approximately at the same rate of world population growth
and new wealth creation.
So how could anything so valuable and useful as gold be barbaric?
And because gold is as useful today as it ever was, how could
it possibly be a relic?
This gold pejorative is readily attributed to
Keynes. But here is what he really wrote in 1923 in A Tract
on Monetary Reform: "
the gold standard is already
a barbarous relic."
Note that it is not gold that is the barbarous relic, but
rather, Keynes is taking aim at the gold standard. There is
a very big difference here. The gold standard is the mechanism
by which national currencies at one time were defined as weights
of, and redeemable into, gold.
Though the United States continued to define the dollar in
terms of gold when Keynes penned those now infamous words,
it had become the exception. Most of Europe had stopped the
redeemability of paper currency into gold with the outbreak
of hostilities in 1914. What's more, after the war European
countries were slow to return to the gold standard because
their currencies had become terribly debased by the expansion
of credit and the concurrent printing of money that had occurred
over the intervening years.
In effect, by the 1920's the classical gold standard was
essentially dead, which was the reality observed by Keynes.
It was dead because banking interests, working hand-in-hand
with governments, killed it. They killed it because governments
wanted more money to meet their growing spending aspirations,
and seeing the profit opportunity this circumstance presented,
bankers wanted to lend it to them. The discipline of the classical
gold standard prevented the unbridled extension of credit
and the resulting creation of new money, with the result that
it had to go. So is that why the gold standard had become
a 'barbarous relic'?
To answer this question, we have to understand why the gold
standard came into existence in the first place. Its origin
can be traced back to events resulting from the formation
of the Bank of England in 1694, but to really understand the
gold standard in order to explain Keynes's trenchant observation,
we have to go back even further into monetary history to extract
one key truth - the history of money is really the history
The Distinction Between Money and Currency
It is important to note that money doesn't really change.
Money is the function it performs, so money is still the same
thing it always has been from the moment when it was first
invented in pre-history. Namely, money is a mental tool used
for economic calculation that ingeniously enables each of
us to communicate what we value in an exchange. What changes
throughout monetary history is currency. It evolves, and the
biggest change ever occurred in 1694.
Up until that time currency was always an asset, i.e., something
tangible. Gold and silver were the most popular forms of currency,
but history records that other assets were also used, such
as cows, food crops, shells, beads and other tangible items
considered to be useful and/or rare.
The nature of currency evolved as mankind progressed, and
various scientific achievements made currency more efficient
and more reliable. For example, if you look at the evolution
of coins over the centuries, you can see marked improvement.
These improvements were important. By making coins more reliable,
the costs of conducting commerce were reduced, and reducing
costs is always a good thing. By lowering the impediments
to commerce - and the costs of handling currency and making
payments are an impediment - commerce itself is promoted,
and as commerce expands and develops, our living standards
rise. So it was natural that new advancements that improved
the currency of the day were widely welcomed, as was the advancement
introduced by the Bank of England concurrent with its creation
Gold and silver coins had disadvantages that were well recognized.
They were bulky, hard to carry, not practical in large denominations
because of the weight that would be required, etc. What's
worse, the coins wore out from usage, wasting some of the
precious gold and silver used to make the coin.
In this environment the Bank of England introduced an important
advancement that made currency more efficient. Its innovation
enabled gold and silver coins to remain safe and secure in
the bank's vault, while paper promises to pay weights of precious
metal - dubbed banknotes - circulated as currency as a substitute
in place of these coins. Paper as a circulating medium had
obvious advantages in terms of efficiency and cost and could
at any time - or in other words, on demand - be redeemed for
coin. What's more, because it was opened under a royal charter,
the Bank of England and its paper currency were perceived
to be safe, and so it was - for about three years.
By 1697 the world's first banking crisis was underway. The
Bank of England had issued far more paper than it had physical
metal on hand , basically silver, because that was still the
preferred metal of the day in England. Therefore, the crisis
arose because people rushed to convert their paper currency
into silver coin, with the result that the Bank of England's
new currency appeared to be a failure.
Despite ongoing monetary upheaval, the Bank of England nevertheless
persevered (even back then, government sponsored enterprises
seemed to take on a death-defying life of their own). But
this monetary crisis did have one beneficial and constructive
result. It made self-evident to everyone at the time that
a paper currency promising to pay metal (a money-substitute)
was different from money (gold or silver) itself. After all,
a bank liability is fundamentally different from a tangible
What the Bank of England had done was turn currency on its
head. Currency had always been money (mainly gold and silver
fabricated into coins). In other words, until 1694 the currency
of the day and money were one and the same. Thereafter, paper
currency was not money; it was only a money-substitute. Thus,
currency was no longer a tangible asset; it had become a liability
of a financial institution. This difference is as great as
night and day, or more to the point, between assets and liabilities.
The impact of this change was so profound that it had an
invasive impact on the economy, mainly with adverse consequences.
The insidious monetary turmoil wrought by the Bank of England's
new currency persisted. So to figure it all out, the British
monarch, William III, turned for help to the greatest mind
of the day, Sir Isaac Newton, who in 1699 was appointed as
Master of the Mint.
Over the next several years, Newton returned order to where
there had been Bank of England created chaos. He did this
by inventing and putting into practice what we now call the
classical gold standard. It is a monetary system that operated
under rules he established that were voluntarily followed
by banks and those governments that eventually adopted in
their own country the Bank of England's new paper currency
Newton's rules resulted in automaticity, which is what made
the gold standard so effective. It was reliable and predictable.
It was self-regulating when left unhindered, with capital
flows over time harmonizing trade imbalances arising from
disparate economic conditions in different countries.
Newton recognized that the paper banknote was an important
advancement that made currency more efficient. But he also
understood that paper currency wasn't money, and even more
so, that paper currency could be created to excess, which
would result in monetary and economic turmoil. In other words,
he realized that paper currency was useful, but only if it
had some standard by which it could be measured and controlled.
He achieved these objectives with the gold standard he created.
The Demise of the Gold Standard
Newton's invention remained largely untouched from its implementation
in 1707 until 1914. I say 'largely' because the rules of his
classical gold standard were occasionally broken. During periods
of war, for example, the redeemability of paper into coin
was often suspended and credit was expanded beyond the prudent
limits that normally prevailed. But the rules governing the
gold standard more or less remained in place, with the wartime
suspensions usually lifted soon after hostilities ceased.
Further, redeemability of banknotes into coin was re-established
at the pre-war rate, which deflated the war induced credit
Over time, however, bankers and politicians began to understand
that if they broke Newton's rules, they could gain an advantage.
Bankers would make a greater profit because they could expand
credit (make loans) beyond the self-imposed constraints. Politicians
could gain greater power because instead of being restricted
to just spending gold, they envisioned creating a seemingly
unlimited amount of money-substitutes and spending those instead.
Newton's rules were voluntary and worked only so far as banks
and governments agreed to them. By the 20th century, bankers
and politicians were not just breaking the rules - they were
Thus, given the powerful interests lining up against it,
it is not surprising that the classical gold standard began
being painted as undesirable, despite its splendid 200-year
track record of maintaining relatively stable prices. What's
worse, it started to be blamed for things for which it was
not responsible. For example, it was not the gold standard
that caused the Great Depression, but rather, it was imprudent
credit expansion by the banks, which was made worse by the
growth of government and the rising expenditures this burden
entailed. The last vestiges of the gold standard were jettisoned
in August 1971 , ushering in the present era of fiat currency.
So is it now clear why Keynes was taking a potshot at the
gold standard? It is not surprising that Keynes - a statist
who supported government management of the monetary system
- would claim that the gold standard is a barbarous relic.
But even though Keynes was no fan of gold, he no doubt understood
that it would be foolhardy to attack gold itself. That would
come later, from anti-gold propagandists and central bank
apologists misusing what Keynes really wrote. But that is
not quite the whole story.
The Real Barbarous Relic
There is indeed a barbarous relic, but we now know it is
not gold, nor the gold standard because of the useful role
it played for two centuries. Rather, the barbarous relic is
Central banks are barbarous too in part because they conspired
to put an end to Newton's brilliant invention that safeguarded
sound money for 200 years. But it is the process of central
banking itself as it has come to be practiced that deserves
the greatest ire.
Central banking is barbarous for the following reasons:
1. Money is a product of the free market. It is a fundamental
building block of our society because it allows people to
interact with one another in the market process. Money existed
long before governments and central banks began 'managing'
it. Tragically, instead of being a neutral and unhindered
tool in commerce fair to one and all, money has now become
a matter of force and decree, which is disruptive to the market
process and therefore harmful to society.
2. Prior to the creation of the Bank of England, every exchange
in this interchange of activity we call the market process
traded value for value. In other words, gold was exchanged
for land, silver for food, etc. - assets were traded for assets.
The Bank of England changed this process by creating money
substitutes. Its banknotes are not a tangible asset like gold
or silver. Banknotes are merely money substitutes and not
money itself. Money substitutes are a liability of the bank
issuing that paper currency, which brings with it all sorts
of payment risk that one does not have when using tangible
assets as currency.
3. Central banks act in secrecy, and consequently, they are
not held accountable. They consider themselves - and act as
if - they are above the law. What's more, this secrecy favors
the insiders, and it is this fundamental principle upon which
central bank market intervention has been constructed, including,
for example, the ongoing intervention in the gold market.
4. Central banks have freed governments from the need of
having to ask their citizens - through their elected representative
- for more taxes. Central banks can acquire government debt
and use it to create currency out of 'thin air' for governments
to spend on their latest whim. What's worse, through their
policies that create inflation, central banks enable governments
to steal from their citizens.
5. There are several tools in the central banks' arsenal,
and one of them is disinformation, which they regularly practice.
For example, central banks have come to make us believe that
inflation is "rising prices". But wet streets do
not cause rain. By changing the definition of inflation to
one of "rising prices" rather than what it really
is - monetary debasement engineered by central banks - the
true culprit - which is the central banks themselves - is
masked, which leads into the next point.
6. Not only are central banks guilty of disinformation, deception
is one of their most frequently used tools. The history of
banking is replete with examples that demonstrate not just
a lack of disclosure, but rather, outright deception. To give
just one example, look how central banks today account for
their gold loans. They carry gold in the vault and gold out
on loan as one line item on their balance sheet. In effect,
central banks are saying they can ignore the truthful disclosure
established by generally accepted accounting principles, and
they can as a result report cash and accounts receivable as
one and the same thing. Accounting like that would make even
the people at Enron blush, but it also highlights the seventh
7. Central banks have in effect turned the market into a
command economy. The power to create money out of thin air
brings with it the much greater power to control a nation's
economy and therefore the economic destiny of millions. Central
bankers today are no different than the former Soviet Union
politburo members, who pulled strings and pushed buttons to
try making the economy - which means each and every one of
us who participate in the economy - bend to their beck and
call. But it is not only the economic destiny of millions
that is determined by central banks, which brings us to the
eighth reason central banking is barbarous.
8. Central bankers and their comrades in government know
that this command economy power forces them to walk a fine
line between prosperity and economic collapse, given the inherent
fragility of this credit-based monetary system they operate.
To try reducing this ever-growing fragility - in a vain attempt
to make it easier for central banks to effectively and totally
control this command economy - governments take away peoples'
freedom to act. Central banks usher in controls (like the
reporting now required by the Patriot Act) and policies (ever
hear of the 'too big to fail' doctrine that underwrites bad
decisions at banks with taxpayer money) to perpetuate their
stranglehold on power regardless whether they are doing a
good or bad job - and it is usually bad - in commanding the
9. The command economy that central banks operate encourages
the growth of debt, rather than savings. Banks want to expand
their balance sheets - i.e., make more loans - in order to
earn greater profits, and governments want central banks to
accommodate this objective because the resulting credit expansion
provides opportunities to acquire new things, which create
an illusion of prosperity that makes people believe their
wealth is rising. The result of this debt-induced, pseudo-prosperity
is a complacent populace, the net effect of which tends to
perpetuate government power and politicians' perquisites.
Instead of following a sound and time-tested 'pay as you go'
policy, consumers, businesses and governments have adopted
a new creed - 'buy now and pay later'. So the mountain of
debt that exists in the US today, and the excessive consumption
that continues to enlarge that mountain, is directly the result
of central banks and their need to grow more debt to avoid
the inevitable 'bust' that would follow if this growth in
debt were to stop. Newsletter writer Richard Russell explains
it very simply in just three words - "inflate or die".
That reality explains why Ben Bernacke (presently the chairman
of the President's Council of Economic Advisors, but a former
Federal Reserve governor who reportedly is being considered
to replace Alan Greenspan as chairman) has said that he would
in effect drop $100 bills from helicopters if necessary to
inflate the economy.
10. What central banks do domestically, they also do to the
international monetary system. Thus, the inherent fragility
and the huge structural imbalances arising from cross-border
trading exist today because of central bank actions. The automaticity
of the classical gold standard ensured that imbalances such
as trade deficits were relatively short-lived. In contrast,
present central bank policies have perpetuated the long running
US trade deficits, which are now several decades old. What's
worse, the US trade deficits are growing. The debt being created
to finance these deficits impacts the monetary environment
of each US trading partner. So central bank engineered imbalances
are not just domestic problems; they also have global implications.
So central banking is indeed barbarous, but I have only completed
one-half of the bargain. Having provided some of the many
reasons why central banks are barbarous, I also need to explain
why central banking is a relic, but that's easy to do.
Central banking has been around for more than 300 years.
In that time, an institution becomes either a venerable object
or an obsolete relic. If central banks once served a useful
purpose, it was when they were governed by the discipline
of the classical gold standard. Having abandoned Newton's
rules, central banks are abusive to free markets and antithetical
to sound money. The reasons that make central banks barbarous
also make them an unwanted relic. Central banks are a relic
of empire, nationalism and war.
Having existed now for hundreds of years, they have survived
not because they advance commerce or contribute to raising
mankind's standard of living, but rather, solely because they
are disingenuous, slavish parasites dutifully serving the
omnipotent State, no matter how mindless or harmful that bidding
may be. Central banks pursue reckless policies that erode
- and in some cases destroy - the value of the currency. In
this way, central banking is not only a barbarous relic of
the past, it has become dangerous as well.
So when confronted with attempts by anti-gold propagandists
to bash gold, we now know how to respond. The barbarous relic
is central banking and any central bank that prevents the
restoration of sound money.
Not too many years from now - when the US dollar collapses,
as just one in a long list of fiat currencies that have collapsed
before it - people will look back and ask themselves how it
was possible barbarous institutions like central banks could
have hoodwinked so many people into thinking that central
banks were a good thing. The answer is that central banks
have created the illusions of prosperity. Because people think
they are well off, they have no reason to question basic tenets
that they are led to believe. For this reason, people are
easily coddled into believing that gold is the barbarous relic,
that central banks are doing a good job, and that their financial
future is secure, but nothing could be further from the truth.
It is what some on Wall Street like to call "bubble mentality",
and while it may be true that this condition is a state of
mind, it is also true that it arises without any thinking
going into it.
So in conclusion, the gold standard is dead, but as the chart
at the beginning of this essay shows, gold remains the standard.
It is the value by which all things are measured, just as
it was when Newton's great invention, the classical gold standard,
This observation is important to the future of gold, which
needs to circulate once again as currency in parallel to -
and competing with - government controlled and central bank
'managed' national currencies. The future of gold depends
on the opportunity for gold to do what it has always done
throughout history, namely, to provide a neutral tool that
people can use voluntarily - without force or coercion - as
currency as we go about our business each day participating
in our market economy to fulfill our needs and wants. It is
upon this vision that my partners and I are building GoldMoney.
1. There are many examples
that illustrate gold's ability to maintain its purchasing
power. Items as dissimilar as men's suits, Colt-45 revolvers
and the set menu lunch at London's Savoy Hotel have been used
to demonstrate that gold retains its purchasing power, as
the price of these items in terms of gold remains relatively
unchanged over long periods of time. For a detailed analysis
of the historical relationship of gold to commodity prices,
see The Golden Constant: The English and American Experience,
1560-1976, Roy W. Jastram (John Wiley & Sons: New York,
2.This observation rests largely
upon logic because it is difficult to locate all the hard
facts needed to support it. World population growth is estimated
at 1.14%, http://www.cia.gov/cia/publications/factbook/print/xx.html.
The World Gold Council estimates that as of 2002, 147,000
tonnes of gold have been mined throughout history, http://www.gold.org/value/stats/faqs/index.html.
Allowing for additional production since then of about 2,500
tonnes per year, total production is 154,500 tonnes. Because
gold is accumulated - in contrast to other commodities, all
of which are consumed - most of this gold exists in today's
aboveground stock. The weight of gold lost due to shipwrecks,
attrition of circulating coinage, etc. is unknowable, but
generally believed to be fairly small because of the care
given to gold in view of its high value. If we therefore assume
that the aboveground gold stock is 150,000 tonnes after adjusting
for the weight of gold lost over time, then 2,500 tonnes of
new production is increasing that stock by 1.66% annually.
The rate of new wealth creation is harder to determine. The
CIA Factbook referenced above estimates world GDP grew by
4.9% last year, but not all of this economic production increased
the world's net wealth. It is in my view therefore not unreasonable
to assume that the rate of new wealth creation rests approximately
somewhere between 1.14% and 1.66%, which explains why gold's
purchasing power remains consistent over long periods of time.
3.Of the books that explain
how and why banking interests and governments killed the gold
standard, my favorite is Pieces of Eight: The Monetary Powers
and Disabilities of the United States Constitution by Edwin
Vieira, Jr. (Sheridan Books: Fredericksburg, Virginia, 2002),
For my recent review of this book, see: http://www.fgmr.com/pieces8.htm
4.See Human Action, Ludwig von Mises, p 209. Mises describes
the "exchange ratios between money and the various goods
and services" to be the "mental tools of economic
planning". Given that money is the means that enables
individuals to communicate their subjective view of value,
money itself is also a mental tool. On p. 177 Mises states:
"Language is a tool of thinking as it is a tool of social
action." In my view, the same thing can be said about
money because like language, money is a means of communicating.
5.This process is known as
fractional reserve banking. Banks only keep in reserve a fraction
of the total weight of metal needed for them to redeem all
of their liabilities to pay metal. For a detailed discussion
of fractional reserves, see Murray N. Rothbard, The Case for
a 100 Percent Gold Dollar: In Search of a Monetary Constitution,
Leland B. Yeager, ed., Cambridge, MA: Harvard University Press,
1962, pp. 94-136, and Auburn, AL: Ludwig von Mises Institute,
6.The key rules accomplished
the following: (1) defined the British pound in terms of a
specific and unchanging weight of gold, (2) confirmed that
pound banknotes circulating as money substitutes were redeemable
into coin upon demand of the holder of the banknote, (3) confirmed
that pound coins and pound banknotes were of equivalent value,
meaning they could be exchanged 1-for-1, and (4) established
that the Bank of England was responsible for maintaining prudent
policies to ensure redeemability of banknotes into coin, which
was essential for an orderly monetary system. The practical
result is that it became accepted Bank of England practice
in the 18th and 19th centuries to maintain a gold reserve
equal to approximately 40% of its gold liabilities. The British
pound became the world's international currency, largely supplanting
gold in that role because even though banknotes were not 100%
backed by gold, the pound was generally considered to be 'as
good as gold'. The expansion of the British Empire was not
just the result of the British navy; sound money also played
an important role. The pound - managed as it was under the
classical gold standard - enabled the global expansion of
commerce. "The gold standard had become, in effect, the
global monetary system. In all but name, it was a sterling
[i.e., British pound] standard." See Niall Ferguson,
Empire: The Rise and Demise of the British World Order and
the Lessons for Global Power, (Basic Books: New York) 2003,
7.The cause of the Great
Depression should be "placed where it properly belongs:
at the doors of politicians, bureaucrats, and the mass of
'enlightened' economists." This quote is from America's
Great Depression, Murray N. Rothbard (Sheed and Ward, Inc.:
1975, 3rd Edition), p. 295.
8.On August 15, 1971, President Nixon declared the 'gold window'
of the Federal Reserve to be closed, which meant that dollars
were no longer redeemable into gold.
9.From the July 2005 issue of The Moneychanger by Franklin
which included a noteworthy critique of central banking.
10.See the work published by
www.GATA.org for a detailed analysis of this intervention.
I also recommend the analysis of John Embry and Andrew Hepburn,
Not Free, Not Fair: The Long-Term Manipulation of the Gold
Price published in August 2004 by Sprott Asset Management,
www.sprott.ca, an investment
firm based in Toronto, Ontario, Canada.
11.See footnote #9.
12.See for example the European Central Bank's balance sheet,
Also, this point is reviewed in the Embry/Hepburn paper; see
13.Richard Russell is the
editor of Dow Theory Letters, http://www.dowtheoryletters.com/dtlol.nsf
2004 by The Freemarket Gold & Money Report. All rights reserved
James Turk is the founder of GoldMoney <www.goldmoney.com>
and the co-author of The Coming Collapse of the Dollar <www.dollarcollapse.com>.