The True Gold Standard (Second Edition)
Oxygen is an excellent metaphor for the gold standard. In the political community there is some resistance to thinking about the mechanics of monetary policy.
Why? Because money is so fundamental as to be almost invisible. This invisibility may have been what Keynes was referencing when he observed that "to debauch the currency... engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
And because of its invisibility, talking about monetary policy risks being taken as arcane, or banal. Pure oxygen is colorless, odorless and tasteless. But without it we cannot breath, and the fires of industry cannot combust. Just as the fires of industry cannot impart their power to the world economy without good money. Repeated experience, documented by extensive data, shows that there is a strong correlation between the gold standard and economic growth -- and between fiduciary paper money, such as federal reserve notes, and economic stagnation.
It is therefore deeply ironic that one of the gold standard's most valiant and vociferous foes, Prof. Paul Krugman, would, as he did, write of Austrian economics (classical liberalism with a strong affinity for gold money), as “a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire.”
The Wikipedia nicely sums up the picturesque history of the phlogiston theory of fire:
"Phlogisticated" substances are those that contain phlogiston and are "dephlogisticated" when burned; "in general, substances that burned in air were said to be rich in phlogiston; the fact that combustion soon ceased in an enclosed space was taken as clear-cut evidence that air had the capacity to absorb only a definite amount of phlogiston. When air had become completely phlogisticated it would no longer serve to support combustion of any material, nor would a metal heated in it yield a calx; nor could phlogisticated air support life, for the role of air in respiration was to remove the phlogiston from the body."
Thus, phlogiston was described in a way that was basically the opposite of the role of oxygen in combustion.
History of the theory
In 1667, Johann Joachim Becher published his Physical Education, which was the first mention of what would become the phlogiston theory. Traditionally, alchemists considered that there were four classical elements: fire, water, air, and earth. In his book, Becher eliminated fire and air from the classical element model and replaced them with three forms of earth: terra lapidea, terra fluida, and terra pinguis. Terra pinguis was the element which imparted oily, sulphurous, or combustible properties. Becher believed that terra pinguis was a key feature of combustion and was released when combustible substances were burned. In 1703 Georg Ernst Stahl, professor of medicine and chemistry at Halle, proposed a variant of the theory in which he renamed Becher's terra pinguis to phlogiston, and it was in this form that the theory probably had its greatest influence.
Challenge and demise
Eventually, quantitative experiments revealed problems, including the fact that some metals, such as magnesium, gained weight when they burned, even though they were supposed to have lost phlogiston. Mikhail Lomonosov attempted to repeat Robert Boyle's celebrated experiment[clarification needed] in 1753 and concluded that the phlogiston theory was false. He wrote in his diary:
Proponents of defining money as a fixed weight of gold rely, emphatically, on the empirical data -- the equivalent to quantitative experiments -- that show, unequivocally, the superior job creation, economic growth, and benefits to the Main Street (in preference over Wall Street) of the gold standard. It is the advocates of fiduciary paper money, like Prof. Krugman, who rely instead on dogma, invective, and sophistry thereby causing economics to resemble alchemy rather than chemistry. Johann Joachim Becher would likely have recognized Prof. Krugman, as a kindred spirit in his persistent attempts to conjure, by incantation, a value into the inherently valueless inconvertible paper -- anachronistically continuing the alchemical quest to convert base materials into gold.
Yet the evidence shows that it is gold, not paper, that generates prosperity.
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Key Monetary Writings
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Kathleen M. Packard, Publisher
The Gold Standard Now
Board of Advisors:
Sean Fieler, James Grant,
Senior European Advisor