(Joseph Solis-Mullen, Money Metals News Service) Few things are more head-shakingly trying to the sound money economist than listening to the endless academic and policy debates about trade.

Lost amidst the back and forth over surpluses and deficits, the “appropriate” level of subsidies or tariffs, is the fact that were a sound, i.e., a reliable and trusted monetary standard adopted, all would be well – surpluses and deficits would be naturally moderated by the impartial hand of the market, to the advantage of all and the disadvantage of none.

While not intuitive to the uninitiated, this is all actually perfectly simple to show. To illustrate this, let us consider international trade under a pure gold standard, first using a simple example and then expanding it to encompass the global economy:

Imagine two countries, Graustark and Bumblestan. Suppose Graustark runs a trade surplus with Bumblestan: it exports more goods than it imports, and the difference is settled in gold.

Gold flows into Graustark and out of Bumblestan. As Graustark’s gold reserves rise, its domestic currency supply expands, putting upward pressure on prices and wages.

Over time, Graustark’s goods become relatively more expensive, reducing its export competitiveness while making imports more attractive. The surplus begins to shrink.

In Bumblestan, the reverse occurs. Gold outflows contract the domestic currency supply, exerting downward pressure on prices and wages. As costs fall, Bumblestan’s producers become more competitive internationally.

Exports rise, imports fall, and the initial deficit is gradually corrected. What begins as an imbalance sets in motion forces that work toward its own reversal.

In the absence of any intrusion on the part of governments, whether in terms of monetary, fiscal, or regulatory policy, this state of affairs will continue indefinitely.

Moving beyond this simple, initial example, one finds that the same logic holds when we move beyond two countries to the global system as a whole.

Each country’s balance is tied to the others through a network of monetary flows. Gold movements affect domestic price levels, which in turn reshape trade patterns. The result is not a fixed equilibrium but a continual process of adjustment – an undulating pattern of surpluses and deficits responding to shifting prices, capital allocations, and consumer preferences.

No central authority is required to coordinate this process; it emerges from decentralized decisions and the monetary constraints imposed by gold.

With this understanding in hand, one can see that trade surpluses and deficits are not signs of economic ascendancy or terminal decline, but are signals reflecting deeper economic conditions. Further, one can see that these conditions, a country being in surplus or deficit, only become pathological or persistent when the actions of governments make them so.

Finally, with trade not a zero-sum contest between nations but a series of voluntary exchanges between individuals, each expecting to benefit, it is clear that a sound money standard would allow these benefits to reach their maximum level.

Among modern economists, these critical insights have been most clearly preserved by the Austrian School.

One of the clearest articulators of the benefits to be gained by a hard money standard in the realm of international trade was Ludwig von Mises.

In his book, The Theory of Money and Credit, Mises explains how balance-of-payments adjustments under a gold standard are inseparable from changes in the money supply and domestic price levels.

While in Human Action, he further emphasizes that balance-of-payments statistics are descriptive rather than normative: a deficit may accompany strong investment and rising living standards, while a surplus may reflect restricted consumption or capital flight.

For Mises and the Austrians, the key point is that international trade balances are not targets to be managed but outcomes of an underlying market process driven by money, prices, and individual choice.

While the imposition of sound money will be fought tooth and nail by beneficiaries of the present arrangement (from governments and their technocrats to big banks with their comfy, corporatist ties), by eliminating the harmful effects of floating fiats managed by central banks, actually free and fair international trade under a hard money standard would be a boon to human prosperity everywhere.

While impossible to calculate, it must be counted as a minor tragedy to think of the opportunity cost of not having had such a sound monetary standard – imagine, if you will, the amount of hours spent by bright minds in vain calculations about questions of trade, which could otherwise have been fruitfully deployed in any number of other pursuits.

Quite apart from the deadweight losses imposed by industrial policy writ large, whether tariffs, quotas, subsidies, et cetera, those millions of man-hours could have been put to use in the economy producing things actually desired by consumers.

It need not be this way – and the more people who recognize the gains to be had from a hard money standard, the closer the world comes to removing the needlessly harmful effects of the global fiat regime.

Img Credit: Alpha Stock Images, Original Image, Nick Youngson

Joseph Solis-Mullen is a political scientist, economist, and Ralph Raico Fellow at the Libertarian Institute. He teaches history and politics at Spring Arbor University and economics at Jackson College.