Aspects of the Pathology of Money

15 The Case for Going Back to Gold1

This summer the gathering doubts about the strength of the U.S. economy, reflected in the stock-market plunge and the flagging of business enthusiasm, were accompanied—and indeed reinforced—by renewed uneasiness about the strength of the dollar. To be sure, as Washington spokesmen have been emphasizing, the balance-of-payments deficit has been running at a lower rate than last year. But there is still a considerable deficit, and the cumulative effect of deficits in ten out of the last eleven years has given foreigners a $16.9-billion claim against U.S. gold reserves. And although the outflow of gold itself has somewhat abated, memories of the frightening 1960 run on gold are still fresh, and its causes are still with us.

Politicians as well as monetary authorities seem deeply impressed with the perils of the situation. The Kennedy Administration professes its determination to bring the balance-of-payments deficit to an end, and in considering ways to speed up the domestic economy it is painfully aware of the need to keep up the appearance of fiscal integrity. The Federal Reserve and the central banks of Western Europe have taken steps to co-operate in meeting any speculative movement that might threaten the dollar.

Such defensive measures are reassuring, but the fear of crisis will persist and can be banished only by a positive policy that leads to a profound reform of the international monetary system. The aim of such reform must be to establish order in the monetary relations of the U.S. and its trading partners in the Atlantic family of nations.

The essentials of monetary order can be summed up in three conditions:

First, the guarantee of unqualified freedom in international payments—i.e. no controls or threat of controls on the exchange of one currency for another.

Second, a fixed relationship among the various currencies so that businessmen can plan their trade and investment operations ahead without fear that their money will suddenly change in value.

Third, a means of bringing the balance of payments of every country quickly into equilibrium so that some countries do not go on suffering chronic deficits while others keep building up embarrassing surpluses.

My contention is that these conditions of order can be brought about only by a restoration of the gold standard—in its classic sense, with currencies unconditionally redeemable in gold at home and abroad, and with the settlements of international accounts made in gold and gold only. In my judgment, this move will have to be accompanied by a revaluation of gold.

The return of gold to its once pre-eminent position as the base of money and credit is the only way of insuring against wide fluctuations in the values of currencies and restrictions on free exchange. And the sensitive response of the money supply to the flow of gold in and out of a country would be the most effective discipline on national economic policies.

The steps back to the gold standard should be taken in unison by all the advanced industrial nations of the West, but it is fitting and proper that the initiative should come from the U.S. A bold and imaginative approach to monetary order would be a natural companion policy to President Kennedy’s trade programme, for free trade cannot flourish on weak and uncertain financial underpinnings.

A Crisis of Confidence

I am aware that this proposal is highly controversial, and that it will strike some readers as preposterously anachronistic: ‘Go back to the gold standard? Haven’t you noticed that Queen Victoria has been dead for a long time?’ An eminent New York banker has gone so far as to suggest that restoring the gold standard would be ‘like repealing the twentieth century’. I am tempted to reply that the twentieth century, with its record of wars, tyrannies, and depressions, might be well worth repealing. But a more serious answer is to paraphrase a remark Winston Churchill once made about democracy: ‘It has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.’ So it might be said that the gold standard is the worst form of monetary system—except all other forms.

The monetary arrangement under which the Western world has been transacting its business for most of the past half-century is intrinsically unstable and disorderly. Monetary experts call this arrangement the Gold Exchange Standard; it is, in fact, an adulterated version of the gold standard. Its main characteristic is that only two major currencies, the British pound sterling and the U.S. dollar, are backed by gold. Other countries base their currencies partly on the reserves they hold in pounds or dollars—on the assumption that these ‘key currencies’ are ‘as good as gold’. The deficiencies of this arrangement were admirably described in Fortune a year ago by the eminent French economist, Jacques Rueff (‘The West Is Risking a Credit Collapse’, July 1961).

As Rueff pointed out, the fact that other countries use dollars as reserves for their money means that they are ready to accept dollars, in lieu of gold, in settlement of U.S. balance-of-payments deficits. This in turn allows the U.S. to go on running deficits without losing a commensurate amount of gold; thus the deficits do not have the effect they should have in diminishing the U.S.’s own money supply and setting in train the retrenchment that would bring its international accounts back into balance. Moreover, foreign central banks have been basing an ever expanding supply of money and credit on the ever expanding dollar reserves they are accepting as payment from the U.S. In effect, two pyramids of money and credit have been built on the straining back of the U.S. gold reserve.

The great danger is that a crisis of confidence—a sudden fear that the dollar was no longer ‘as good as gold’—would cause a disastrous credit collapse not only in the U.S. but throughout the non-communist world. The precautions taken by central bankers to avert speculative movements would be of little avail against such a general crisis of confidence. The very counter-measures governments would be likely to take in an emergency—for example, stringent exchange controls—would only worsen the catastrophe.

Even if the situation is viewed in less dire terms, the danger is still apparent. Essentially, the Gold Exchange Standard introduces a volatile component into monetary reserves. The dollar is volatile because it can be converted into gold at any time (not by American citizens, but by foreigners); that is why dollars are held as reserves in the first place. Once dollar reserves are so converted, they disappear. But the rate at which foreigners exchange their dollars for gold is not based on any tangible, predictable economic circumstance; it depends on confidence. As we have seen in the past couple of years, the U.S. gold loss comes in flurries, each creating waves of anxiety that build into long-term uncertainty. By reducing the volume of currency reserves available to finance world trade, any sustained conversion of large amounts of dollars into gold could lead to a sudden and acute shortage of international liquidity, with deflationary effects on trade and business activity generally.

The gold standard would, above all, take this volatile component out of money. Once mined, gold remains in being, even if it is occasionally hoarded. It would provide a firm, secure reserve for money and credit and give international trade and investment much greater protection from the vagaries of confidence.

The Signalling System

Over the years, an economic mythology, built of misrepresentation and oversimplification, has grown up around the gold standard. To begin with, it was an interlocking system of national managed currencies: the price of gold was fixed by statute, bank notes were fully convertible into gold, and there was absolute freedom of gold imports and exports. Central banks had a far greater management function than is usually admitted by textbook writers; much judgment had to be exercised, and errors were not infrequent. There were, however, certain important limitations on the freedom of action of monetary managers; these were imposed by the obligation to keep notes fully convertible into gold. Thus the gold standard made it impossible, in practice, for the various countries to carry on ‘independent’ national policies of either inflation or deflation. As an empirical fact, prices ‘moved in step’ throughout the whole gold-standard area.

The gold standard also contained within it a mechanism to keep international payments in balance, operating through an international ‘signalling system’. When a country had a deficit in its external payments, it lost gold, which caused its economy to contract. When it had a surplus it gained gold, which caused an expansion. This loss or gain of gold acted as a signal for monetary authorities to undertake measures to bring external payments into balance: generally these measures amounted to changes in the official discount rate (up in deficit countries, down in surplus countries), accompanied by open-market operations that would lead, in deficit countries, to credit contraction, and, in surplus countries, to credit expansion.

The timing and extent of these measures were the major responsibility of central banks (and it is here that we find management and exercise of judgment). The important thing is that the signals were followed by appropriate policies—i.e. those that would reinforce the effect of gold movements. In practice, international payments were kept in balance by movements of short-term capital from surplus to deficit countries, induced by the differential in interest rates.

A Testimonial from G.B.S.

It should be noted that under the old gold standard there was full convertibility—i.e. convertibility into gold coin. The merit of this was well put in an essay by Oxford economist Sir Roy Harrod, who comments from the vantage point of British experience (Britain, as is well known, was the centre of the nineteenth-century gold-standard system). Wrote Harrod: ‘The British doctrine, held with great emphasis and often repeated, was that if you wanted to discourage individuals from hoarding gold as a store of value, the sovereign recipe was to make sterling absolutely freely convertible by individuals . . . into gold. By establishing free convertibility, you caused gold hoarding propensity to wither and die.’

Though it did not prevent occasional local panics and depressions, the gold standard satisfied the requirements of long-term international monetary order. For about two hundred years, ending in 1914—i.e. during the entire period that Britain was de facto or legally on the gold standard—the ‘secular trend’ of prices, expressed in sterling, was level: this means that such price movements as took place over that long stretch of years were invariably reversed, thus preserving the value of money for the saver and investor.

George Bernard Shaw, who could be very shrewd, especially where money was concerned, wrote in The Intelligent Woman’s Guide to Socialism, Capitalism, Sovietism and Fascism: ‘The most important thing about money is to maintain its stability, so that a pound will buy as much a year hence or ten years hence or fifty years hence as today, and no more. With paper money this stability has to be maintained by the government. With a gold currency it tends to maintain itself even when the natural supply of gold is increased by discoveries of new deposits, because of the curious fact that the demand for gold in the world is practically infinite. You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.’

In the heyday of the gold standard, most people would have considered this advice beyond argument, and only a shrill minority of American Greenbackers and Free Silverites would have raised their voices in dissent. Why then did a monetary system that worked so well for so long fall into such wide disrepute?

Wrong Diagnosis, Bad Semantics

World War I, by disrupting the sensitive network of finance, trade, and investment in Europe, dealt the gold standard a blow from which it really never recovered. During the war, with all fiscal and monetary disciplines necessarily cast to the winds, the gold standard was honoured only in the breach. By the early 1920s the price level as expressed in currencies at their pre-war parity had risen 60 to 100 per cent. But the price of gold itself remained the same, and since the cost of producing the metal had increased along with other prices, production of new gold declined. Consequently, monetary authorities began to worry about a shortage of gold.

It was then that they came up with an arrangement that would, in the language of the 1922 Genoa Economic Agreement, ‘economize on the monetary uses of gold’. The Genoa Conference originated the Gold Exchange Standard as we know it today. The theory was that gold could be ‘economized’ if countries were not required to base their currencies on gold itself but could use as reserves those few ‘key’ currencies that were backed by gold. The adoption of the Gold Exchange Standard wrought an unwholesome change in the monetary rules of the game, for it weakened the signalling system and the whole delicate mechanism that had brought equilibrium under the gold standard. Yet the experts of that time (and even most experts today) failed to make a sharp enough contrast between the two systems. The old system came to be blamed for the faulty functioning of the new one—wrong economic diagnosis, compounded by bad semantics.

At the time of the Genoa Conference, the only nation that was actually on gold was the U.S. In 1925, Britain went back to the gold standard in a modified form called the ‘gold bullion standard’—i.e. anyone could convert pounds into gold bullion but there was no gold coinage. Thus the pound joined the dollar as a ‘key’ currency. But the mistake the British made was to re-establish the 1914 sterling price of gold. This automatically put the pound back to its pre-World War I parity with the dollar (4·86 dollars to the pound). In terms of the price levels in the two countries, this was unrealistic; the pound was overvalued by about 10 per cent.

As a result, British exports became, at least in part, non-competitive, and there ensued a period of high and chronic unemployment, aggravated in 1929 by the onset of the world-wide depression. The gold standard was blamed as a system for what amounted to two wrong decisions: (1) a mistake in fixing the parity of the pound, and (2) a mistaken belief that gold could be held at its pre-war value.

As financial chaos spread throughout Europe, central banks began converting their sterling reserves, causing a run on Britain’s gold when, in September 1931, the gold standard was suspended. The pound was devalued in relation both to gold and to the dollar, British exports expanded, and unemployment declined. The abandonment of the gold standard was given credit for what was, in effect, a long-needed correction of the currency’s overvaluation.

How F.D.R. Set the Gold Price

The crisis spread in 1932 to the dollar. U.S. bank failures undermined international confidence in the dollar, and there were large, though by no means dangerous, withdrawals of gold from the country just as Franklin D. Roosevelt took office. One of his first steps was to suspend gold shipment abroad and to order private owners of gold in the U.S. to deliver up their gold coin or bullion against bank notes. Thereupon, from the end of October 1933 until January 1934, Roosevelt progressively raised the dollar price of gold (which had long been fixed at $20.67 an ounce) as a matter of policy, because he was assured by his economic adviser, Professor George F. Warren, a Cornell agricultural economist, that this was the way to raise the general price level. In The Coming of the New Deal, Arthur Schlesinger Jr recalls the capriciousness with which this policy was carried out:

‘Starting on October 25th, Henry Morgenthau and Jesse Jones met in the President’s bedroom every morning to set the price of gold. Jones was there as head of the RFC, which did the buying; Morgenthau, because of his recent experience in helping maintain wheat prices through a government purchase programme. . . While Roosevelt ate his eggs and drank his coffee, the group discussed what the day’s price was to be. . . . One day Morgenthau came in, more worried than usual, and suggested an increase from 19 to 22 cents. Roosevelt took one look at Morgenthau’s anxious face and proposed 21 cents. “It’s a lucky number,” he said with a laugh, “because it’s three times seven” . . .’

Little wonder that ‘tinkering with the price of gold’ today makes bankers shudder.

In January 1934, the price of gold was finally stabilized at $35 an ounce of fine gold. It has stayed there ever since. The Gold Reserve Act ruled out gold coinage and declared that ‘no currency of the United States shall be redeemed in gold’. No private individual or bank in the U.S. is permitted to own gold except for industrial, professional, or artistic use (in 1961 the prohibition was extended to American citizens residing abroad). The Treasury, using the Federal Reserve as its banker, was authorized to sell gold to foreign governments and central banks in settlement of U.S. balances abroad. The dollar at home became an inconvertible paper currency, though backed by gold to the extent of 25 per cent of outstanding Federal Reserve notes and demand liabilities. This ‘anchorage to gold’ is the last safeguard against ‘printing press’ inflation.

The coup de grâce to the gold standard, so far as the U.S. was concerned, was delivered by the U.S. Supreme Court’s celebrated ‘gold clause’ verdicts on February 18, 1935. The gold clause, written into certain contracts, specified payment in gold dollars. The purpose was to protect lenders against currency devaluation, and it was obviously incompatible with New Deal monetary policy. In two five-to-four decisions the Court ruled that the authority of Congress to regulate the value of money was paramount and the gold clause was therefore void in private contracts. The effect of this ruling by the highest court of the land was to make people wonder how much any tie to gold was worth in practice.

First-aid Station for Currencies

World War II threw the international monetary system once again into chaos. The U.S. came out of the war with most of the world’s effective productive capacity—and about 60 per cent of its gold. During this period of ‘dollar shortage’, most nations struggled to conserve foreign exchange by imposing strict controls on monetary transactions. But the effort to restore normal conditions began early, with the Bretton Woods agreement in 1944, which provided that the currencies of participating nations should be given a fixed gold value; it allowed gold a minor rôle in the settlement of international accounts. Essentially, Bretton Woods revived the Gold Exchange Standard as it had originated at Genoa twenty-two years before—i.e. currencies could be backed not only by gold itself but by reserves of ‘key’ currencies that were fully backed by gold. Once again, the pound and the dollar became the ‘key’ currencies.

The great innovation of Bretton Woods was the establishment of the International Monetary Fund as a sort of first-aid station for temporarily disabled currencies. By drawing on the Fund, countries confronted by drains on their reserves could gain a breathing spell and put their houses in order before panic developed. Eventually, under the firm and expert guidance of Dr Per Jacobsson, the Swedish economist who was appointed managing director in 1956, the IMF became an important influence for monetary stability. Gradually, the nations of Europe were emboldened to begin dismantling their exchange controls. In 1954 the London gold market was reopened, and in 1958, by formal agreement, European authorities adopted ‘non-resident convertibility’—i.e. a person who does not officially reside in a country has the unrestricted right to convert the currency of that country into any other. By then, the dollar shortage had passed into history, and, ironically, it was the U.S. that was beginning to worry about its gold reserves.

The Doctors Disagree

Many leading monetary authorities, Dr Jacobsson included, insist that there is nothing wrong with the present situation that cannot be corrected by more effective use of the IMF and the exercise of stronger self-discipline by individual governments. Their assumption is that the dollar and other vulnerable currencies can be defended, in the short run, by the deployment of IMF resources to curb speculation, and, in the long run, by voluntary efforts to end balance-of-payments deficits. This optimistic reliance on voluntary policies seems to me delusory. It is precisely because the U.S. and other nations have felt insufficient compulsion to put their houses in order that we are in our present fix. And the reason why this compulsion is lacking is that the Gold Exchange Standard actually encourages procrastination.

A number of American and European experts agree that improvisation and stopgap measures will not work. But a brief look at some of their recommendations for monetary reform shows that they differ as sharply in their diagnosis as they do in the cures they offer.

One widely publicized group of money doctors considers the problem to be entirely one of insufficient liquidity, by which they mean that insufficient means of payment are available for settling international accounts. The contention is that there is sufficient liquidity only so long as the U.S. has a payments deficit and keeps pouring out dollars; if the U.S. deficit were to disappear, liquidity would dry up. The cure this group proposes is to establish an entirely new international currency, to be issued by the IMF against reserves of gold and key currencies that the Fund would acquire from national central banks. The latter would be required to deposit a set fraction (say 20 per cent) of their own reserves with the IMF, in exchange for an equivalent amount of the international currency. In addition, the IMF would engage in credit and open-market operations that would enable it to issue more of its currency as growing international trade created the need for it.

The Triffin Plan and Others

The best-known advocate of this approach is Professor Robert Triffin of Yale, whose ‘Triffin Plan’ has been making the international rounds since 1959. The grandfather of the idea was Lord Keynes, who proposed an international currency and ‘clearing union’ in 1943, a year before the IMF was born. Keynes called the international currency unit ‘bancor’, a concept used, with variations, by Triffin.

Logically, this scheme, which would erect a vast structure of IMF credit on a very inadequate gold base, would lead eventually to the demonetization of gold. This is hardly surprising, considering that Keynes called gold ‘a barbarous relic’, and Triffin makes no bones about referring to the monetary uses of gold as ‘absurd’. If gold ceased to be of any importance, what would keep the international currency from expanding indefinitely into a runaway inflation? In Triffin’s view, the board of directors of the IMF would have the sole power to issue ‘bancor’, and this power would be strictly limited so as to avoid inflation. But it is not clear how this safeguard would work in practice, or how the vaguely defined open-market and credit operations of the IMF would affect monetary conditions in individual countries. Perhaps the most telling criticism of the Triffin Plan was made not long ago by Under-Secretary of the Treasury Robert V. Roosa, when he derided ‘the often proposed types of action that basically involve an oath of allegiance by all governments and central banks to a synthetic currency device, created by an extra-national authority bearing neither the responsibilities nor the disciplines of sovereignty’.

A second school of monetary reformers shares the Keynes-Triffin disrespect for gold but comes to very different conclusions. The so-called ‘floating rates’ approach, advocated by Professor Milton Friedman of Chicago University, among others, would abandon gold reserves and fixed exchange rates and allow the market-place to determine what a currency was worth. Currencies would be fully convertible with each other, and would fluctuate the way stocks do in response to the play of supply and demand. If a country were running a balance-of-payments deficit, the ‘market’ for its currency would be poor and its rate of exchange would fall. This would have the effect of boosting exports and eventually erasing the payments deficit. Conversely, a country running a payments surplus would find its currency in great demand and quoted at a high exchange rate; its exports would decrease, and the surplus would disappear. The great appeal of the ‘floating rates’ system is that, in theory, it would automatically keep the balance of payments of all nations in equilibrium and thus remove that problem from the realm of practical preoccupation. In practice, however, movements of exchange rates would not have a corrective effect on the balance of payments unless accompanied by appropriate government fiscal and credit policy. A country bent on inflating its economy would feel far less restraint than at present. Moreover, floating rates would cause intolerable confusion. World business is made up of thousands of individual decisions that must be based on the ability to anticipate future conditions. The absence of fixed exchange rates would remove the stability that is an essential of monetary order.

To Gold in Two Phases

Only a return to the gold standard can satisfy the need for monetary order. I do not pretend that the path to this fundamental reform will be easy. It will require the closest international co-operation, the sure hand of monetary authorities, and the most enlightened and courageous statesmanship.

There is an organization already in being through which the advanced nations of the West can work together to construct a new monetary framework. Its mouth-twisting title is the Monetary Sub-Committee of the Economic Planning Committee of the Organization for Economic Co-operation and Development. Represented on it are the U.S., Canada, Britain, France, West Germany, Italy, the Netherlands, Sweden (as delegate for the Scandinavian countries), Switzerland, and Austria. The chairman is Emile van Lennep, the able Treasurer General of the Netherlands. The van Lennep group is already engaged in creating a more favourable monetary environment for durable monetary order. It is exploring, in particular, ways of co-ordinating national fiscal and credit policies for countering cyclical recessions. At present its scope is limited to encouraging voluntary co-operation, but it could easily be converted into an instrument for formal commitments.

As I envision it, the return to the gold standard would be accomplished in two phases. Phase I would be an agreement by all the nations in the van Lennep group—meaning, in effect, the whole Atlantic Community—henceforth to pay off all balance-of-payments deficits in gold and gold only. Countries that based their currencies in part on reserves of dollars or sterling would continue to do so for the time being, but further accumulation of such reserves would be halted. This step would bring to a halt the perniciously deceptive spread of dollar holdings abroad under the Gold Exchange Standard. The U.S. would be compelled to get its payments into balance in a hurry—or face immediate and continuing losses of gold. This transition would give the participating nations a chance to get used to the new discipline, and to begin synchronizing their monetary and interest-rate policies.

Phase II would comprise three separate but simultaneous moves:

1. A decision by the U.S. to pay off in gold all short-term dollar obligations held by foreigners. This would finally get rid of the Gold Exchange Standard and put the dollar once again on firm footing. No longer would an uncertain threat hang over U.S. gold, encouraging speculation and threatening financial crisis.

2. An agreement by the nations in the van Lennep group to make all their currencies fully convertible into gold. Convertibility is, of course, the essence of the gold standard. The U.S. would have to repeal the New Deal monetary legislation and restore private ownership of gold. Quite apart from other considerations, this would be a welcome reaffirmation of a property right that has been denied Americans for a quarter of a century.2

3. Joint action, again by the van Lennep group, to double the price of gold in terms of all currencies. For the U.S., this would mean raising the price from $35 to $70 an ounce. My motive is not, I must emphasize, to get the U.S. out of its present scrape. Nor do I share the view of economists such as Sir Roy Harrod that a rise in the gold price, by itself, would solve our monetary problems by increasing international liquidity; the root of these problems is not shortage of liquidity but disorder. My reason for revaluing gold is that, otherwise, the transition to a true gold standard would be impossible. For one thing, if the U.S. were to pay off immediately its dollar debts abroad at $35 an ounce, it would lose so much of its reserve that none would be left to support the domestic currency.

For another thing, though there is no real liquidity shortage in the world today, one might eventually develop when the expansion of money and credit became tightly linked to gold. Just as it did after World War I, the price of gold has remained unchanged while the prices of everything else have risen sharply. As a result, gold production has been discouraged, and additions to the world gold supply have lagged far behind the expansion in world trade. Over the past decade, newly mined gold provided only about one-third—and since 1958 one-fourth—of the annual increase in currency reserves (not including those of U.S.). The difference was made up by gold from U.S. reserves (which dwindled from $23.2 billion worth in 1952 to $16.4 billion worth this year) and by increased dollar holdings abroad.

Many People will be Provoked

When the gold standard is re-established, nations will no longer be able to augment their reserves by increasing their dollar holdings. When gold becomes the exclusive means of international payment and the exclusive backing for currency, therefore, it will become crucially important that the supply of new metal keep pace with the growth of trade. The present price of gold is inadequate to ensure such a supply.

The proposal to revalue gold will provoke a number of objections. Some people will see it merely as a devaluation of the dollar. This is such an explosive issue that hardly anyone in a responsible government position will even admit that it is being considered. But a careful distinction must be made between a unilateral devaluation of the dollar, undertaken in panic, and a readjustment of the gold price, accomplished by international agreement as part of a plan to restore monetary order.

A second objection that will be raised is that revaluation will have a great inflationary effect because, rightly or wrongly, people associate any jiggering of the gold price with inflationary finance. But this danger will be averted under my proposal because revaluation will be accompanied by full gold convertibility of the dollar, the best possible safeguard for stable money.

Finally, critics will point out that any change in the gold price will have to be approved by Congress, which might spend many months in debating the matter; meanwhile there would be such a mighty run on U.S. gold reserves as to precipitate the very crisis of confidence we have been so fearful of. This is a telling objection, but it is not insurmountable. If all the countries in the Atlantic Community undertake these reforms in the proper international spirit, it should be possible for central banks to take the joint action needed to stem a run on gold during the time revaluation is under public discussion. This will require considerable ingenuity and skill, but the stakes of lasting monetary reform surely justify the effort.

Freedom of Action

The most serious objection to the whole idea of reviving the gold standard is that it would deprive governments of their freedom of action in dealing with cyclical unemployment and recession. In fact, however, the gold standard would allow governments considerable leeway in fiscal policy. For example, the U.S. could run a deficit to counter a recession if it met the deficit by borrowing at high enough rates of interest to tap genuine savings—and not, as has been the case in the past, at such low rates that it was in effect pumping inflation into the economy. The gold-standard discipline would not prevent the U.S. from coping efficiently with domestic problems; it would merely narrow the choice of methods used.

Those who believe that the U.S. should be free to inflate its way out of recessions will doubtless feel frustrated; perhaps it is high time they were. Americans still suffer, as a nation, from a hangover of economic nationalism from the days when we were a much less important economic and political influence on the world scene. We have learned a great deal about our international rôle in the past forty years. This is one more lesson.

Once these reforms have been carried out, the great edifice of free trade can at last be completed—on a foundation of stable money. The U.S. will play its rôle as the world’s greatest creditor nation with a currency that inspires universal confidence. The whole non-communist community of nations will take on greater political and economic strength with which to protect its freedom and assist the backward countries to improve their lot. By reinstating gold as the heart of the international monetary system we shall be drawing upon successful past experiences, rather than taking a hazardous flight into the unknown. We shall have built a bridge over the half-century of disorder.

 

3 Article first published in Fortune Magazine, New York, September 1962; copyright 1962 by TIME Inc.

4 A number of advocates of the gold standard, notably Professor Walter Spahr of New York University, urge a return to gold coinage. Gold-bullion convertibility—i.e. the right of individuals to exchange sizeable sums of money for gold-bullion bars—would serve the purpose of the gold standard without introducing the complications that the issue of coins might entail.

• 1* This monograph was prepared in the years 1943–44 for one of the research institutes in the United States. Circumstances did not allow its publication at the time, although a mimeographed version of my text was circulated to a large body of leading American experts of the day. More recently the institute in question, which wishes to remain unnamed, kindly reverted the copyright to me. May I extend to it my sincere thanks, both for having made the study possible and for having allowed me to publish it now? I should perhaps explain that when this monograph was written, one of the questions which preoccupied American experts a good deal was: how to avoid the inflationary mistakes of the previous post-war period during the years that were to follow the end of World War II. No one of us had the slightest doubt that this end would be victorious.
• 2To illustrate, see for example the voluminous and penetrating Annual Reports of the Bank for International Settlements.
• 3Post-war European Inflations, World War I A Study of Selected Cases*
• 4The fifties were a period of increasingly obvious recovery, both in world monetary affairs and in the economic life of individual countries. The great opportunities offered during that decade, however, for carrying out a sweeping international monetary reform have not been utilized. True, the European Payments Union had been formed at the beginning of the decade, to be dissolved, due to improved conditions in Europe, towards the end of it. But this was at best an attempt at making inconvertibility more liveable with and at undoing part of its evil effects on intra-European commerce. The International Monetary Fund (established by the Bretton Woods Conference in June 1944) could have blossomed up, but did not do so, during the fifties, whereas what actually did take place was a great revival of the Gold Exchange Standard, amplified into the so-called ‘key currency system’. It should also be noted that the alleged (though never really existing) ‘dollar shortage’, which caused rivers of scholarly ink to flow for many years, has been reversed and a far more real dollar glut took its place at the end of the fifties as a result of the large balance-of-payments deficits which the U.S. started to experience in 1958.