Economics and The Public Welfare

Chapter 62

Gold Remains Standard of Value

France, Switzerland, and the Netherlands Abandon Gold Standard. The story of gold in the period from 1933 down to the time of Munich is a very interesting and dramatic one. By early 1937 the gold standard in its old form had ceased to exist. There remained no important country in the world where paper currencies would be automatically and regularly redeemed either in gold coin or in gold bars. First France and then Switzerland and the Netherlands had abandoned the gold standard. France, extraordinarily strong in 1930, had gone back to her chronic deficits. Her finances were weakening, and in late 1936 the Bank of France informed the Federal Reserve authorities and the Bank of England that it would have to suspend gold payments.

The Tripartite Monetary Agreement. A tripartite agreement involving England, France, and the United States came into existence, with the Stabilization Fund of the United States and the Equalization Account of England cooperating with the Bank of France in preventing violent disorder in the foreign exchange market when France suspended gold payments. After the abandonment of the gold standard by France, Switzerland and the Netherlands followed with suspension of gold payments and more moderate depreciation of their currencies. The European gold bloc ceased to exist.

Exchange Stability Based on Gold Payments. Nevertheless, gold remained the standard of value, the ultimate regulator of the values of paper currencies. What stability there was in the foreign exchanges in the period that followed grew out of gold, and the indirect relations of the currencies to gold. There remained a great free gold market in London, and operations by our Stabilization Fund and the stabilization funds or central banks of other countries in this free gold market held gold and paper money more or less closely together. Our own dollar had been held approximately within the gold points since early 1934 by the continued issue of dollars against gold at a fixed rate, and by the release of gold for export whenever the dollar reached the lower gold point in the foreign exchange or foreign gold market. Between May 1, 1935, and early 1937 sterling did not vary over 2 2/3% in its relation to gold. Following the collapse of the gold bloc and the readjustments immediately ensuing, the major Continental currencies were held in very close relation to gold. Between October 17, 1936, and January 9, 1937, for example, French francs varied less than 1% in their relation to gold, Swiss francs 1/7%, Dutch guilder 1 1/2% and Italian lire

Because No Government Would Trust Another’s Paper Money. Gold remained the standard of value because neither individuals nor governments would trust anything else. None of the stabilization funds of the various countries had any desire to accumulate the paper currencies of other countries. The Bank of France wanted no sterling because the Bank of France remembered only too well that in 1931 it had lost eight times its capital through its sterling holdings when England abandoned the gold standard. The Netherlands bank had had a similar experience. Our Stabilization Fund had no enthusiasm for holdings of sterling. The stabilization funds dealing with one another apparently settled their differences in gold very promptly, and frequently every night.

The great advantage of the tripartite agreement was, not in fixing exchange rates and holding them, but in moderating fluctuations. One major advantage of the agreement, as distinguished from separate action by the British Equalization Fund and the American Stabilization Fund, was that the men operating the American Stabilization Fund did not have to get up so early in the morning, and the men operating the British Equalization Fund did not have to stay up so late at night, as would otherwise have been the case. With five hours’ difference in time between New York and London this was a very real advantage. Of course, had there been the orthodox gold standard in both countries, nobody would have had to lose any sleep at all.

Increase in Gold Production—Ounces and Dollars. A further reason for our great gain in gold was a startling increase of world production of gold measured in ounces following 1930. Declining prices and wages made it profitable to reopen closed mines and to develop new gold mines. When, following England’s abandonment of the gold standard in 1931 and our debasement of the gold dollar, there came, measured in pounds or dollars, a greatly increased price of gold with no corresponding increase in the cost of mining gold, gold production was further greatly stimulated. Measured in fine ounces, the increase was nearly 50% between 1930 and 1935 and was almost 100% between 1930 and 1940. The increase in gold production, measured in dollars, is even more startling beginning with 1934, since after January of that year each fine ounce of gold would make $35.00 instead of $20.67 as in preceding years.

* These figures are taken from the Annual Reports of the Director of the Mint, 1936 (pp. 108-109), and 1942 (p. 104). The Federal Reserve Bulletin, February, 1946, gives figures after 1941 for several countries but attempts no world summary after 1941.

† At $20.67 per fine ounce prior to 1934; at $35 per fine ounce 1934 and thereafter.

The world production of gold, in old gold dollars, in 1930 was $432,000,000. By 1936 it reached $1,158,000,000 (new gold dollars). Here was a world problem of first magnitude. The absorption of this gold in the ordinary way, letting it have its usual effects upon the money markets, meant eventually a rapid growth in the excess reserves of the banks of the countries which absorbed it, meant inevitably a great and progressive credit expansion, and meant inevitably a great rise in commodity prices measured in terms of gold.

This, to be sure, was what had been aimed at when the devaluation took place in early 1934 and when the gold buying policy had begun in 1933, but the expected thing on the part of the men who did it was that there would be an immediate and automatic response in higher prices. This had failed, but the danger of an unmanageable explosion with the steady piling up of money market resources remained.