Excerpt from: The Unadulterated Gold Standard, by Antal E. Fekete, 2002. (Lightly edited.)
Let us raise the question: what is capitalism? In its simplest form capitalism is an economic system which is based on the conception that individuals should and would produce as generously as possible and live on something less than they produce, in order that they may posses a residue in the form of property to insure the education of the young, the support of the elderly, and other future projects. However, in order to achieve these ends we must have a facility to exchange income for wealth and wealth for income. Interest, in this view, is not a premium on present goods as opposed to future goods, but the indicator of the efficiency of converting wealth into income and income into wealth. In particular, zero interest marks the least efficient way of converting, namely, the conversion of income into wealth by hoarding gold, and of wealth into income by dishoarding it.
Capitalism is an economic system that makes the spontaneous capitalization of incomes possible. In more details, capitalism means unobstructed and uninhibited capital formation through the voluntary partnership of the annuitant (typically an elderly man drawing an annuity) and the entrepreneur (who pays the annuity income from the return to capital put at his disposal in the form of wealth of the annuitant). Capitalism means a gold bond market where the residual savings of the people are pooled, parceled, and allocated. In the gold bond market the marginal producer is free to perform his function as arbitrageur between two types of earning assets: capital goods and gold bonds. It is this arbitrage that validates the marginal productivity of capital in fixing the ceiling for the rate of interest. Capitalism means a gold standard without which the marginal bondholder would be unable to perform his function as arbitrageur between present goods (gold coin) and future goods (the gold bond). It is this arbitrage that validates the marginal time preference of the saving public in fixing the floor for the rate of interest. Capitalism means a gold bill market where the marginal shopkeeper is free to perform his function as arbitrageur between the two forms of social circulating capital: fast-moving merchandise and gold bills drawn on them. It is this particular arbitrage that validates the marginal productivity of the social circulating capital, in fixing the discount rate.
Insofar as gold is the indispensable catalyst of spontaneous capitalization of incomes, the government’s deliberate destruction of the gold standard is to be considered a major step towards the destruction of capitalism. Government intervention in the gold bill and gold bond markets may bring no possible benefit to society, and is likely to make conditions for human welfare worse. Intervention in the gold bill market falsifies the discount rate, and intervention in the gold bond market falsifies the interest rate. The falsification of these important indicators causes serious misallocation of resources and paralyzes the regenerative faculty of the economy. It will, little-by-little, destroy our distinctively human symbiosis: the peaceful and voluntary cooperation of individuals under the system of international division of labor. This symbiosis was the vision of the greatest practitioners of our science: Adam Smith, Carl Menger, and others. The invisible hand of the market, through the signal system of prices, discount and interest rates, guides the ‘selfish’ pursuits of individuals, and harnesses their efforts for the greater benefit of the commonweal. In the words of the Bard: “One for all, all for one we gage.”
And this shall remain the best hope for mankind.