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Gold has often been considered to be
the best form of money. The free market
has been correctly and justly lauded
as the best form of organization for
an economy. It comes as no surprise,
therefore, that one of the most popular
proposed solutions for economic problems
of almost any sort is the proposal
to use metal-based money in a perfectly
free market, or at least a market free
of governmental interference.
There has never been a free market
for any significant time period in
written history. Those free markets
which have been observed in the world
have been those of very primitive
technology, (hunting and gathering)
societies which have only dogs as
domestic animals. But we will ignore
that and, as a mental exercise, consider
what would happen if there were to
be a true free market with a fixed
(or nearly so) supply of gold serving
as its only form of money.
Let us assume that the gold is evenly
distributed and the level of technology
is that of the mid-20th century.
We further assume that there is a
true free market and that the free
market is maintained throughout.
We will even assume that there are
no taxes at all and, to keep the
system "pure" we will assume
no foreign trade. Finally, we assume
that all parties are law-abiding
and that business organizations never
form trusts or other means of restraining
trade or generating monopolies so
we can be sure that "pure competition" is
maintained. These assumptions are
wildly unrealistic but will permit
us to exclude possible disruptive
influences.
The economy functions in this way
for a few years. At the end of that
time, some people will have acquired
more of the gold than others. But
since the supply of gold is fixed
(or changes very slowly) the gains
of some must be matched by losses
of others. So let us consider the
persons who have the most gold. Starting
with the top gold owner and working
our way down the list we add their
gold until we reach a gold total
that represents 10% of the gold in
the economy. Let us assume that this
requires only two percent of the
population so we observe that two
percent of the population owns 10%
of the gold. (I believe this to be
a very conservative estimate given
the distribution of knowledge, talent,
determination, effort, skill, luck,
and opportunity.) It seems to me
that this top two percent will continue
to gain on the rest of the population
in the proportion of the economy's
gold. The personal consumption of
each of these "rich" people
will be greater than that of each
of the poorest 20% of the population
but will probably not be 10 times
as much.
Therefore, the proportion of the
gold owned that is freed for investment
for the rich will be much greater
than that available to the bottom
20%.
So let us assume that this top 2%
place their gold in bank accounts
at 3% interest. In 25 years the amount
of gold they own will have doubled
to 20% of the total gold. In 25 more
years it will have doubled again
to 40%. In a further 25 years they
will own 80% of the gold. So within
100 years, the economy will grind
to a halt since all the gold will
be owned by that two percent. That
will not work.
Let's assume that the top 2% invest
their 10% in various businesses.
Since they achieved their status
in the top 2% on the basis of being
superior at gaining money, one must
assume that whatever advantages they
had to get into the top 2% they retain.
If this assumption is correct then
it is only reasonable expect that
over the next few years, they will
be able to use their superiority
and the power, influence, and opportunities
that having more money provides to
gain a still greater proportion of
the existing gold. Is there any reason
to believe that these advantages
will be reduced as they control a
greater and greater proportion of
the gold? I think not. I think experience
tells us that those who are good
at getting money will continue to
be so.
Of course as the top two percent
gain more and more of that limited
supply of gold there is less and
less gold available for others. Now
just as experience has shown that
some are better than others at getting
money, so some are considerably worse than others at this skill. In fact,
there are many foolish, disabled,
irresponsible, and just plain unlucky
people. As these people lose money
they will have very few ways to gain
money. They lack skills to produce
goods and services. They lack capital
goods. They lack knowledge. They
become increasingly poor until they
have no gold at all. For despite
being poor they still have to spend
gold to live.
This generation of poverty will
always happen with a free market
because everyone who is better able
to get money will do so. The poor
will always be weaker and less able
to defend their money. Even when
the market is free and fair the poor
will be unable to generate income
because everyone else is better at
getting and keeping money.
As the poorer part of the population
grows, they have less and less to
spend. Therefore, prices must fall
or production must be reduced for
there can not be as much demand.
Since the poor will slowly stop buying,
production of consumer goods will
also slow. This will result in the
loss of jobs by many in the middle
group. Since they also must continue
to spend or die, they also come to
have less and less gold. Many of
them become poor. This process accelerates
as the rich gain a higher and higher
proportion of the gold until the
system fails.
No matter how we arrange or rearrange
things, the gold tends to accumulate
in fewer
and fewer hands until the economy
fails.
Note that this is because the supply
of money is fixed. In our
imaginary economy there is no banking
system
that expands the money supply by
loans. But even if there were such
a banking system, the proportion
of the money in the economy in the
hands of the rich would still increase.
But we have already shown that if
there are banks paying interest at
all, the system cannot succeed.
Of course this is all just a fantasy.
There is no free market in reality.
There are all sorts of ways businesses
can
conspire
and prevent the functioning of a
free market. The government both
influences and is influenced by business.
We know that the sort of monetary
system we currently use bestows all
sorts of
power and influence and
provides numerous
opportunities to cheat. We know that
there is a considerable amount of
force and fraud in the real business
world.
We know
that
in the real world, money also concentrates
in the hands of a few.
In the real world, just as in our
fantasy free market world above,
the money becomes more and more
concentrated until the system fails. This is the
nature of any physical object money
regardless of whether it is coins,
paper, or just computer accounts.
This is the experience of every nation
and every economy around the world
for which we have information.
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