The Lost World of the Barbarous Relic, by George F. Smith

It’s hard for a country to wage war if its government is on the gold standard. From George F. Smith at lewrockwell.com:

It’s one of the greatest ironies of history that gold detractors refer to the metal as the barbarous relic, when in fact the abandonment of gold has put civilization as we know it at risk of extinction.

The gold coin standard that had served Western economies so brilliantly throughout most of the 19th century hit a brick wall in 1914 and was never able to recover, so the story goes.  Europe turned from prosperity to destruction, or more precisely, to the prosperity of a few and destruction of others, as the Great War got underway.  The gold coin standard had to be ditched for such a prodigious undertaking.

If gold was money, and wars cost money, how was this even possible?

First, people had been in the habit of using money substitutes instead of money itself – paper bank notes instead of the gold coins for which they could be redeemed on demand.  People found it more convenient to carry paper around in their pockets than gold coins.  Over time the paper itself came to be regarded as money, with the gold it represented a clunky inconvenience from the old days.

Second, banks had been in the habit of issuing more bank notes and deposits than they had gold in their vaults and would on occasion arouse the suspicion of the public that the notes were making promises the banks couldn’t keep.  The courts sided with the banks and allowed them to suspend note redemption while otherwise staying in business, thus strengthening the government/bank alliance.  Since the deposits really belonged to the banks once they were deposited — said the courts — bankers could not be accused of embezzlement.  The occasional bank runs that erupted were interpreted as a self-fulfilling prophecy.  If people lining up to pull their money out believed their banks were insolvent, the banks soon would be.  Most people had no idea their banks were loaning out most of their deposits.  They didn’t know fractional reserve banking, a form of counterfeiting, was the norm.

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