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December 1, 2001

The Power of Gold The History of an Obsession

By Editorial Staff

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  • The Power of Gold The History of an Obsession
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by Peter L. Bernstein

(John Wiley & Sons, New York, 432 pages) $27.95

reviewed by Gregory Bresiger

The perennial debate over gold is as old as civilization. What makes money valuable? Why do we happily accept some pieces of paper and refuse to accept others?

It is because one does or doesn't have faith in the government that issues a currency. So, for example, today almost all players in the National Hockey League, Canadians as well as Americans and Europeans, expect to be paid in U.S. dollars. The American dollar recently has been a much stronger currency than the Canadian dollar.

Canada, which has a much bigger welfare state structure than the United States, also has an inflation rate much higher than its southern neighbor. Therefore, its currency is depreciating at a faster rate.

Inflation, we are reminded by the Nobel Prize-winning economist Milton Friedman, is and always has been caused by governments that print too much money (i.e. Weimar Germany, France in the early stages of the French Revolution, and the United States' Revolutionary War government, the Continental Congress. It issued so much currency that its money was said to be "not worth a continental.")

Opium of People

Inflation is caused by too much money chasing too few goods and services, with the result that people save less and buy more today because tomorrow, they think, it will always be more and more expensive.

But inflation, many great economists such as F.A. Hayek and Ludwig von Mises have warned us, is a kind of drug that, in its beginning phases, appears to be harmless. "It is the true opium of the people," Mises wrote in his great treatise, "Human Action." Inflation's damage is often overlooked by most people because it is usually gradual. (A good way of measuring the long-term effects of inflation is to price something one hasn't bought for several years). But, once inflation hits high rates, inflation becomes an addiction. And it is very difficult to break an addiction that seemed to be bestowing prosperity on a nation.

Gold is said to be the antidote to inflationary money. Governments in history that used the gold standard - and no government today does - are forced to reduce their gold stock when they run deficits. Under the gold standard, reckless spending is stopped because governments don't want to lose more and more of their gold. Gold, its advocates have said through the centuries, is designed to protect an individual against the damage caused by inflation, the disease created by central banks.

Through the years millions of men and women, facing the loss of their property because of the tendency of governments to use inflation to rob Peter in order to pay Paul, have kept some of their assets in gold. Gold was respectable. It was recognized as a hard money almost everywhere. It backed almost all the major currencies in the West until the 1930s, when many democratic governments discovered the wonders of inflation and its comrade in arms, fiat money. That's money backed by nothing but the promise of a government.

Old Habits