“It is unduly materialistic to say that gold is not useful because it cannot be consumed and yields no financial return.”

John Maynard Keynes never liked the automatic character of the classic gold standard, by which the currencies of the different nations were linked to a pre-defined amount of gold. But he went even further. He denied gold any useful role in the monetary arrangements of the civilized world. In this column I express some skepticism regarding the reintroduction of a fixed gold standard as it existed during the second half of the 19th century. But contrary to Keynes and other monetary interventionists, I will defend the freedom and the opportunity of having private and public gold currencies to compete with the fiat moneys of present day governments. Gold can be used as money without it being imposed by law. We should be free to make payments in gold or gold instruments and hold them among our assets, but it is not for governments to fix the rate between their paper money and gold. That would skew the market and defeat the object of the innovation: to have individuals enjoy a real choice of currencies. Government currencies have dismally failed us in the past and are still failing us at present. We need effective monetary competition for individual freedoms to flourish. Hence, I will argue in favor of the creation of public and private currencies, none of which should be proclaimed legal tender and one or more of which could be linked to gold.

Why Keynes disparaged gold

Keynes’ earliest economic work was Indian Currency and Finance, published in 1913 before the start of the Great War. In that essay, he looked for ways to allow monetary authorities as much flexibility in the management of their local currency as was possible within the gold standard. India’s currency was then the silver rupee, whose nominal value was fixed on the British gold sovereign. Its silver content, however, was so much below its face value that it really was a sort of paper currency, “a note printed on silver.”1 This for Keynes had four advantages: it saved expensive silver; it did away with the temptation to melt down coins when the price of silver went up; it kept the rupee one month with another on a par with gold without consuming physical gold; and it left the government of India the possibility to supply the economy with abundant rupees if the need arose, as long as their convertibility into gold was not endangered.

During World War I the belligerent nations suspended the operation of the gold standard. After peace was restored, the question was whether England should go back to gold at the pre-war parity. In a second work on money and finance, A Tract on Monetary Reform published in 1923, Keynes of course rejected the return to the pre-war parity; since prices had sharply risen during the suspension, it demanded a savage deflation. In the end, Churchill took the plunge with unfortunate effects for the British economy.2 Keynes moved even further away from the gold standard in his Tract; he proposed that sterling be a managed nominal currency. In sum, he did not want gold to be used as currency at all!

Keynes’s Tract is still worth a visit after nearly a century. In it he showed that clear understanding of financial matters which made him both a monetary theorist and a practical businessman of note. Using Keynes as a foil has much to be said for it. The Tract poses a strong challenge to those among us who would not leave monetary policy to the discretion of central bankers and government ministers. It is one of his better writings, so well argued in its contrarian way that I have been known to call Keynes the Lucifer of economics—the fallen angel bought down by his very brilliance and arrogance.

From the point of view of sound theory, the Tract is a much better piece than Keynes’ most famous work, the General Theory of 1936. In the Tract he correctly defines inflation as a monetary phenomenon, “an expansion in the supply of money to spend relatively to the supply of things to purchase.”3 He understands that inflation is a tax on money and consequently attributes “the progressive deterioration in the value of money through history [… to] the impecuniosity of governments and the superior political influence of the debtor class.”4 He includes expectations in the so called ‘quantity theory’ of money—the direct relationship between money supply and inflation. And he properly formulates the less than automatic connection between the domestic purchasing power of a currency and its exchange rate. Perhaps the reason why he stayed within the orthodox camp was that he declared it beyond the scope of this essay “to deal adequately with the diagnosis and analysis of the credit cycle.”5 Would he had not strayed from this path as he did in the General Theory and had held to the monetary theories of Marshall and Fisher! But, no. The Keynes we now remember is the one who misunderstood the Great Depression, believing it to have been caused by a fall in aggregate demand and wanting the State to become the main investor of the economy so as to counter the business cycle.

Is there nothing to criticize in the Tract from the point of view of a defender of gold as an important element in the monetary arrangements of a modern society? Yes, there is. First, Keynes never got to a full understanding of why gold is valued as money. Second, he showed too much faith in the good behavior of monetary authorities.

In different parts of the Tract Keynes derides “the primitive passion for solid metal,”6 of the “superstition” of the advocates of gold “for gold still enjoys the prestige of its smell and color,”7 “the gold standard […as] a barbarous relic,”8 and speaks of central bankers “having no use for barren metal.”9 He even makes a passing mention of the Golden Calf.10 These thoughts were later echoed in the famous passage toward the middle of the General Theory where, tongue-in-cheek, he presented gold as the great Platonic lie to increase employment:

Gold-mines are of the greatest value and importance to civilization. Just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance. […] Ancient Egypt was doubly fortunate […] in that it possessed two activities, namely, pyramid building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges…. 11

In the Tract Keynes did however mention the fact that gold “has a utility in itself for other purposes, aside from its use as money.”12 He also accepted that the gold standard had guaranteed the stability of exchange rates among countries for half a century and by a happy coincidence the stability of internal prices, too.13 He concluded that the only monetary use of gold “is as a war-chest to be held against emergencies.”14 All these, however, were back-handed compliments.

It is clear that Keynes much preferred “a more scientific standard” than the gold standard- to wit, a currency managed to stabilize the internal price level. Who were to be the scientific managers? In the Tract he said that “a chief object of stabilizing the exchanges [under the gold standard] is to strap down ministers of finance.”15 He then proposed that the Bank of England be put in charge of “regulating the supply of currency and credit with a view to maintaining […] the stability of stabilizing the internal price level.”16 So the managers of monetary policy should not be politicians, but civil servants (like Keynes?). Two remarks are in order. One is that Keynes sought the stability of domestic prices; he was no inflationist. The other is, why did he think that managed moneys would not be inflationary? We now know that neither politicians nor central bankers are angels.

The difficulty of a gold standard

For more information, see Gold Standard, by Michael D. Bordo, in the Concise Encyclopedia of Economics and the EconTalk podcast Gene Epstein on Gold, the Fed, and Money. For an historical contrast of a multiple standard system, see The History of Bimetallism in the United States, by J. Laurence Laughlin.

It is unduly materialistic to say that gold is not useful because it cannot be consumed and yields no financial return. Apart from its industrial applications, there is the non-material value of gold in private use. Ordinary people value gold for being beautiful, incorruptible and rare. We use it symbolically and ceremonially. We love to give it and to hold it. We also see it as a resource for a rainy day.

From the point of view of money, gold is far from being a “barbarous relic.” As money, gold has the advantage of its divisibility, its high concentration of value per unit of weight, the easiness of assaying it and its anonymity. Additionally and from a macro-political point of view, it can yield the service of imposing a limit on the activities of profligate governments, since they do not control its supply. Keynes did mention this service when he spoke of the gold standard strapping down ministers of finance, but he did not proceed to the conclusion that a rationally or scientifically managed monetary policy bent on maintaining the stability of the domestic value of money is mostly an illusion. That is why so many defenders of the market economy and democratic capitalism look back with nostalgia at the times when monetary affairs were governed by the gold standard.

The trouble with the gold standard is that it has proved to be incompatible with the social habits and institutions of 20th century democracies. The gold standard imposes a fixed exchange rate between the national currency and gold. The remedy of devaluation to align domestic costs to international prices is out. It is true that over the long run this kind of arrangement also results in stable domestic prices,17 but for this welcome result to be attained without causing unacceptable unemployment, wages must be flexible, labor unions weak and the welfare state small. One need only see the present resistance to cuts in entitlements demanded by the quasi gold standard character of the euro to understand that a return to the gold standard would be politically and socially virtually impossible.

Milton Friedman’s real gold standard

For many years meetings at the Mont Pelerin Society were enlivened by the discussions between gold bugs, who wanted to see a return to the gold standard, and Chicago economists, who defended flexible exchange rates. In 1961 Milton Friedman read a paper which to my mind reduces the difference with a new proposal.18 He explained the operation of the classical gold standard as keeping a fixed exchange between national currencies and gold and giving up all policies designed to evade the discipline of gold. To this, some members added a doubling of the official price of gold so that the starting point would be graced with abundant liquidity. Friedman for his part wanted to say good-bye to fixed exchange rates between national currencies and gold, to all commitments of governments to buy and sell gold at a fixed price, and to lift all restrictions on gold dealings by individuals and companies. There was confusion, he said, between “the use of gold as money, which I shall call a ‘real’ gold standard; [and] governmental fixing of the price of gold […], which I shall call a ‘pseudo’ gold standard.” He concluded that a ‘pseudo’ gold standard was “in direct conflict with liberal principles.”19

Friedman proposed that there should be a free market in gold bars and coins and in gold certificates issued by depositors of physical gold. These last could be used as money if people freely accepted them.

Side by side with such a standard, there could, of course, exist strictly national currencies. For example, in the United States from 1862 to 1879, greenbacks were such a national currency which circulated side by side with gold. Since there was a free market in gold, the price of gold in terms of greenbacks varied from day to day […]. Most prices in the United States were quoted in greenbacks but could be paid in gold valued at the market rate. […] Silver and gold, or copper and silver, have often simultaneously circulated at floating rates of exchange.20

This real gold standard system, with free trade and payments in gold and floating exchange rates between gold and the local currency could make the use of gold more widespread around the world. It would also have the advantage of taking out of the hands of governments and central banks the monopoly powers that they now enjoy and abuse.

A Swiss referendum

Examples of parallel currencies abound, usually as a means of defense against the loss of value of the local money caused by improvident governments in need of the revenues of the inflation tax. They usually are a feature of black markets when governments impose capital controls and artificial exchange rates. If such monetary competition were free, it would set a limit to abusive monetary policies around the world. But projects to create a gold money need not be a remedy of last resort in failed states. A referendum is afoot in Switzerland to obtain legal permission to launch a gold coin currency in parallel to the Swiss franc. Since the Swiss National Bank has joined the band of central banks bent on Quantitative Easing, gold may turn out to be the only defense of the Swiss against the inflation that is to come. Perhaps others could take up this idea.


Friedman, Milton (1961, 1987): “Real and Pseudo Gold Standards”. Journal of Law and Economics, vol. 4. Reprinted in Kurt Leube ed.: The Essence of Friedman, pgs. 446-460. Hoover institution, Stanford University.

Gold Coin Currency: http://www.goldfranc.ch

Keynes, J.M. (1913, 1971): Indian Currency and Finance, being vol. I of The Collected Writings of John Maynard Keynes. Macmillan for the Royal Economic Society.

Keynes, J.M. (1823, 1971): A Tract on Monetary Reform, being vol. IV of The Collected Writings of John Maynard Keynes. Macmillan for the Royal Economic Society.

Keynes, J.M. (1936, 1973): The General Theory of Employment, Interest and Money, being vol. VII of The Collected Writings of John Maynard Keynes. Macmillan for the Royal Economic Society.

Keynes, J.M. (1925, 1972): The Economic Consequences of Mr. Churchill, in Essays in Persuasion, being vol. IX of The Collected Writings of John Maynard Keynes. Macmillan for the Royal Economic Society.


John Maynard Keynes. Indian Currency and Finance. (Palgrave Macmillan), 1971, page 26.

Keynes forcefully criticized the measure when it happened. See “The Economic Consequences of Mr. Churchill,” found in his Essays on Persuasion. (1925).

Keynes’ A Tract on Monetary Reform, page 2.

Ibid, page 8.

Ibid, page 148.

Ibid, page 128.

Ibid, page 132.

Ibid, page 138.

Ibid, page 137.

Ibid, page 155.

Keynes’ The General Theory of Employment, Interest, and Money, pages 130-131.

Keynes’ A Tract on Monetary Reform, page 62.

Ibid, page 126.

Ibid, page 153.

Ibid, page 136.


In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.” From Keynes’ A Tract on Monetary Reform, page 65.

The title of the paper was “Real and Pseudo Gold Standards”, where “pseudo” was the classical gold standard and “real” was Friedman’s proposal of a gold currency with fully flexible exchange rates.

Friedman’s “Real and Pseudo Gold Standards,” pages 446-447.

Ibid, pages 456-457.


*Pedro Schwartz is Professor Extraordinary in the Department of Economics at the University San Pablo CEU in Madrid, where he teaches the History of Economic Thought and directs the Centre for Political Economy and Regulation. A member of the Royal Academy of Moral and Political Sciences of Spain, Schwartz is a frequent contributor to European press and radio on the current financial and corporate scene. Schwartz is the author of two previous books, La economía explicada a Zapatero y a sus sucesores and En Busca de Montesquieu: la democracia en peligro, and he has a book forthcoming in English, Democratic Capitalism: Progress and Paradox.

For more articles by Pedro Schwartz, see the Archive.