It is a truism worthy of canonization in the Book of Proverbs that governments dislike gold because they cannot print it.
9,241 miles separate the middle of Australia from the center of the continental United States. 10,572 additional miles separate London and Sydney. However, the gaps between the world's cities and nations are much smaller when it comes to economic issues because the laws of economics are unchangeable and universal.
I was recently reminded of this fact while reading about Australia's economic history. I was curious to see if Australia's shift away from the gold standard had anything in common with what was happening in the US and the UK, and I found that there are a lot of striking similarities.
The majority of the world, including the United States and the United Kingdom, had currencies based on the yellow metal at the start of the 20th century. The dollar was "as good as gold" in the United States, which is equal to about one twentieth of an ounce. (The US government faithfully complied with its promise to exchange money for gold at the price of $20.67 an ounce.)
The official ratio of gold to the British pound was set in 1717 by Sir Isaac Newton, the director of the Mint. A troy ounce of gold was worth $4.25. With the exception of the Napoleonic Wars' years, that rate was essentially constant until 1914. Consumers had to learn about "inflation" from history books during the time because prices for products and services were stable. Sound, metallic money played a major role in financing the Industrial Revolution of the 18th and 19th centuries, which resulted in the largest rise in living standards in human history.
When six British colonies—New South Wales, Victoria, Queensland, Western Australia, South Australia, and Tasmania—joined forces to form a Commonwealth on January 1, 1901, Australia officially became a country. Each former colony issued its own currency for nearly ten years, including gold coins and paper that was backed by gold. The exchange rate between the various currencies was par, or one for one, and was extremely steady. Then, in 1910, the Australian dollar was established as a single national currency by the Parliament and pegged to the British pound, thereby tying Australian money to gold.
All is well thus far. The tragedy of the First World War then descended in the summer of 1914. While taxes and borrowing increased along with government spending, Australia and Britain halted the redemption of their paper currencies into gold so they could issue a lot of paper money. The US did not go that far in the war, but as a late participant (in 1917), it did make gold exports all but impossible.
The International Encyclopedia of the First World War quotes Peter Yule as saying:
The Australian government decided in August 1914 to pay for the war primarily by printing money and borrowing rather than increasing taxation…The expenditure on the war was vastly greater than any previous object of government expenditure in Australian history, with the sole exception of railway construction.
Prices in all three countries skyrocketed throughout the conflict, reflecting enormous expansions in the supply of paper money. For instance, there was no price inflation in Britain in 1914. Prices were increasing more than 25% annually by 1917. Australia's government increased paper note production by four times, which resulted in a 50% increase in prices by the end of the war. In America, inflation increased by 18% in just 1918.
Let's take a moment to remember that taxes, borrowing, and money creation are how governments around the world primarily fund their spending. There are only a few pennies from user fees and asset sales scattered here and there. Tax increases are painful and even politically challenging. Simply put, borrowing through the issuance of debt instruments like bonds necessitates future tax revenue (for principal and interest).
Even while the cost of printing money is passed on to consumers in the form of higher prices, politicians can escape responsibility by blaming business owners. Conclusion: Inflation simply provides a less direct means of financing war than taxation and borrowing, but it does not make it less expensive. In addition, it causes a variety of additional issues, including booms and busts and the depletion of savings.
It is a truism worthy of canonization in the Book of Proverbs that governments dislike gold because they cannot print it. When a country is on the gold standard, the risk of adulteration or abandonment is always present because of wars, deficit spending, central banking cartels, and other plans to debase the currency for immediate political and economic gain.
In an effort to reinstate the gold standard at the pre-War rate following World War I inflation, Britain under Chancellor of the Exchequer Winston Churchill essentially pretended that it had not printed a flood of paper pounds. Australia maintained its currency's link to the pound as a nod to British policy. This was an unsustainable error, as I detailed in "Winston Churchill's Gold Standard Folly." Australia dropped the gold standard in 1929, and Britain did the same six years later in 1931. In 1933, Franklin D. Roosevelt took American citizens' gold money. Since then, all three of these nations have been progressively inflating their paper along with the rest of the world.
Ron Manners is an expert on the mining industry thanks to his career of work. He runs the Mannkal Economic Education Foundation in Perth and is an expert on gold and his native Australia. One of the titles I hold is Ron Manners Global Ambassador for Liberty for FEE. Ron shared an enlightening experience with me when I told him I was working on this piece.
About a year ago, someone hit his car, totaling it. How did he act? He reached into his personal vault and pulled a one kilogram bar of gold. When he purchased it, gold was selling for roughly 150 Australian dollars (AUD) per ounce and one kilogram could purchase a brand-new automobile. A few months ago, he took the gold to a dealership and used it to purchase a brand-new vehicle.
Consider it in this way: In 1973, the cost of a comparable new car was around 5,300 AUD, or one kilogram of gold. That automobile is currently valued at roughly 57,000 Australian paper dollars after inflation adjustment. However, it costs the same amount in terms of gold—one kilogram. We need a gold standard, adds Manners, for this reason. It is the only accurate gauge of anything and the sole means of maintaining governments' integrity.
Billy Hughes served as Australia's prime minister during the majority of World War I and up to 1923. Hughes and US President Woodrow Wilson regularly disagreed, with Wilson memorably calling Hughes "a pestiferous varmint." The title of "pestiferous varmint" is one that political leaders in all three nations deserve for the decades of currency debasement they have inflicted on the populations of Australia, Britain, and America.
