That means that the labor, tools, materials, and talent required tomine and refine one ounce of gold are equally traded for the labor,tools, and talent required to weave and tailor the suit. Up untilnow, the number of ounces of gold produced each year have beenroughly equal to the number of fine suits made each year, so priceshave remained stable. The price of a suit is one ounce of gold, andthe value of one ounce of gold is equal to one finely-tailored suit.
Let us now suppose that the miners, in their quest for a betterstandard of living, work extra hours and produce more gold thisyear than previously—or that they discover a new lode of goldwhich greatly increases the available supply with little extra effort.
Now things are no longer in balance. There are more ounces of goldthan there are suits. The result of this expansion of the moneysupply over and above the supply of available goods is the same asin our game of Monopoly. The quoted prices of the suits go upbecause the relative value of the gold has gone down.
The process does not end there, however. When the miners seethat they are no better off than before in spite of the extra work, andespecially when they see the tailors making a greater profit for no
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THE CREATURE FROM JEKYLL ISLAND
increase in labor, some of them decide to put down their picks and turn to the trade of tailoring. In other words, they are responding to the law of supply and demand in labor. When this happens, the annual production of gold goes down while the production of suits goes up, and an equilibrium is reached once again in which suits and gold are traded as before. The free market, if unfettered by politicians and money mechanics, will always maintain a stable price structure which is automatically regulated by the underlying factor of human effort. The human effort required to extract one ounce of gold from the earth will always be approximately equal to the amount of human effort required to provide the goods and services for which it is freely exchanged.
CIGARETTES AS MONEY
A perfect example of how commodities tend to self-regulate their value occurred in Germany at the end of World War II. The German mark had become useless, and barter was common. But one item of exchange, namely cigarettes, actually became a commodity money, and they served quite well. Some cigarettes were smuggled into the country, but most of them were brought in by U.S. servicemen. In either case, the quantity was limited and the demand was high. A single cigarette was considered small change.
A package of twenty and a carton of two hundred served as larger units of currency. If the exchange rate began to fall too low—in other words, if the quantity of cigarettes tended to expand at a rate faster than the expansion of other goods—the holders of the currency, more than likely, would smoke some of it rather than spend it. The supply would diminish and the value would return to its previous equilibrium. That is not theory, it actually happened.
With gold as the monetary base, we would expect that
improvements in manufacturing technology would gradually
