Gold and the Gold Standard

CHAPTER IV

The Breakdown of the International Gold Standard—Its Recovery and Relapse

C’est la guerre.—Anonymous,

For about four-fifths of the time included in the 30 years of gold-standard history reviewed in this chapter, most of the world was on a paper-money standard. The only two important nations that stand as exceptions to this statement are China, in which the silver standard ruled for about two-thirds of the time and the paper-money standard for the other third, and the United States, in which the gold standard prevailed for about 90 per cent of the time.

Only for approximately a half dozen years, ending in the early thirties, was the large majority of the leading countries of the world on the gold standard. Inasmuch as the subject of this book is gold money and the gold standard, the recent experiences with paper-money standards, important though they are for all students of money, will not be discussed here.

THE INTERNATIONAL MONETARY SITUATION FOLLOWING THE OUTBREAK OF THE FIRST WORLD WAR

At the outbreak of war in 1914, there were 59 countries classified by the United States Bureau of the Mint as on the gold standard (including the gold-exchange standard).1 They included practically all of Europe, most of Asia except China, all of North America except Mexico, and a large part of South America, including three of the four principal countries. China was at the time seriously considering the introduction of the gold standard and Mexico had only lapsed from the gold standard briefly in a period of revolution.

Then, under the stress of a world war, the gold standard was practically driven off the map within the brief period of 2 or 3 years. The last important country to abandon it was the United States, which in 1917 placed an embargo on the exportation of gold. Not only did practically all gold standards break down during the 10 years of war and reconstruction, but all the scores of countries that resorted to paper-money standards suffered very serious inflation. In some belligerent countries—like Germany, Russia, and Poland—prices rose to astronomical heights. In others the inflation, though severe, was not astronomical; for example, in France, Belgium, and Italy price advances reached magnitudes of the order of 300 to 600 per cent. In some other countries inflation, although real, was of still lower magnitude. In England, for example, between 1914 and 1920 the wholesale price level rose 195 per cent; in Norway from January, 1915, to December, 1920, 128 per cent, and in the United States from September, 1917, to the end of June, 1919—the brief period of 21 months of the gold embargo—wholesale prices rose 10 per cent.

With few exceptions, the paper-money standards of the war and early postwar period were terrible failures. In the field of economics, the war probably left no conviction stronger with the masses of the people of Europe than that never again did they want to suffer the evils of such an orgy of inflated paper money. Everywhere there was a popular longing to get back to a “solid” monetary standard, to something in which the people had confidence; and in the distracted world of that time there was no other commodity in which they had so much confidence as gold.

Public Sentiment Strong for a Return to Gold

Accordingly, in every part of the world plans were discussed and measures taken looking toward an early return to the international gold standard. It was a striking fact that in these early postwar years there was almost no public agitation for any other kind of monetary standard than gold.

The International Financial Conference held at Brussels in 1920, at which all the important nations of the world—39 in number—were represented, resolved unanimously: “It is highly desirable that the countries which have lapsed from an effective gold standard should return thereto ...” Two years later, the International Economic Conference held at Genoa declared :

An essential requisite for the economic reconstruction of Europe is the achievement by each country of stability in the value of its currency.. . . Measures of currency reform will be facilitated if the practice of continuous cooperation among central banks can be developed.. . . It is desirable that all European currencies should be based upon a common standard.. . . Gold is the only common standard which all European countries could at present agree to adopt.. . . In a number of countries it will not be possible for some years to restore an effective gold standard; but it is in the general interest that the European Governments should declare now that this is their ultimate object, and should agree on the programme by way of which they intend to achieve it.

Such, in a few words, was the situation when the postwar world began its trek back to the gold standard.

THE RETURN TO GOLD

With the removal of the gold-export embargo in June, 1919, the United States became the first country, after the war, to return to the gold standard. Inasmuch as its departure from gold had been not only brief but also slight, and inasmuch as during that period considerable gold coin had continued to circulate within the country, at parity with other money, the return was without disturbing consequences.2 During the next 8 years most of the other countries of the world returned to the gold standard, and by 1927 the number of gold-standard countries was greater than ever before.

Rates of Stabilization

One of the most controversial monetary subjects during these years of the return to gold was the rate of stabilization, i.e., the question of the proper gold content for the new monetary unit in each country, including the question of the rate at which the existing depreciated paper money should be made convertible into this new unit. This problem was one that had to be solved in scores of countries, and the literature concerning it, both official and unofficial, is voluminous. A detailed discussion does not fall within the scope of this book, but it will be useful to consider very briefly a few of the more important phases of the problem.

For many countries whose currencies had become badly depreciated, it was out of the question to return to the prewar gold parity. That would have involved a tragic deflation. For such countries the only course was to stabilize at a gold monetary unit that would represent the approximate current value (or an easy multiple thereof) of the existing paper-money unit. It was a question of giving prices and exchange rates an opportunity “to settle down to normal equilibrium” (or “purchasing power parity”) and of then stabilizing at or near that value.

This, broadly speaking, was the policy adopted by most of these countries, of which the following are typical examples. France stabilized at approximately 5 to 1, making its paper franc equivalent to a new gold franc having a pure-gold content approximately equal to one-fifth that of the old gold franc (Act of June 25, 1928). Belgium stabilized at about 7 to 1, making her paper franc equivalent to a new gold franc having a pure-gold content equal to 14.4 per cent of that of its prewar franc (Royal Decree, October 25, 1926). Italy stabilized at approximately 3.7 to 1, making her paper lira equivalent to a new gold lira containing approximately 27.3 per cent as much gold as the prewar lira. Greece stabilized with a new gold drachma representing a stabilization rate of approximately 15 to 1. Austria created a new gold monetary unit equal in gold value to about 14 cents in United States money of that time, and then made her paper money convertible into this unit at the rate of 10,000 to 1. Poland followed a course similar to that of Austria, but its conversion rate was 1,300,000 to 1. Germany stabilized at a trillion paper marks to one new gold reichsmark, which had the same gold content as the prewar mark.

For countries in which the depreciation of the paper-money unit in terms of gold had been small—e.g., the United States, Canada, Switzerland, Greece, Argentina, and Venezuela—the case for stabilization at the prewar gold parity was a fairly clear one and this was the plan they adopted.

For the intermediate countries, in which for a considerable time the currency had been at a substantial but moderate discount in terms of the prewar gold unit, the problem was a more difficult one. Should they deflate back to gold parity or stabilize near the status quo? In this group were to be found the United Kingdom, Australia, the Union of South Africa, the Netherlands, Norway, Denmark, and a number of other countries.

The principal arguments in favor of deflating back to the prewar gold parity were as follows: (1) It was the highly ethical thing to do. Debts both public and private would then be payable in the long-standing, legal monetary unit of the country, in terms of which the prewar debts still outstanding had been contracted. (2) It would maintain and perhaps even strengthen the country’s prestige in the world of finance. Take, for example, the case of Great Britain’s gold pound sterling, which had been maintained without debasement for nearly a century, and had become the international unit of account and settlement not only for a large “sterling area,” but also for much of the rest of the world. The pound had an international prestige that was clearly well worth making a sacrifice to maintain. (3) It would permit the continued use of the money then in circulation and the restoration to the circulation of the specie held in hoards3 at home and in hiding abroad; and thereby both public convenience and economy would be served.

The return of prewar gold parity was widely favored also for selfish reasons by special interests that expected to benefit thereby, such as, (1) creditors, who would be paid in a more valuable monetary unit if the old gold parity should be restored; (2) importers, who presumably would temporarily benefit by increasing the purchasing power abroad of the home monetary unit; and (3) certain groups of organized labor, whose wages had risen as wartime inflation had progressed, and who felt themselves to be strong enough to resist wage reductions as the cost of living should fall, under a national program of deflation.

The arguments advanced in favor of stabilizing at or near the existing gold value of the monetary unit, which were naturally, to a large degree, merely the other side of the shield, included the following: (1) Deflation, with its long period of falling prices and its heavy downward pressure on wages, would be disturbing to the economic life of the nation, causing business depressions, unemployment, and business failures. (2) Such a deflation program would penalize the debtor classes for the benefit of the creditor classes. (3) While temporarily stimulating the country’s import trade, deflation would also temporarily raise in terms of foreign moneys the prices of the country’s exports and thereby depress production for export. (4) The advocates of stabilization at the status quo answered the “ethical” argument of their opponents by saying that a large part of the debt outstanding at the time had been incurred in depreciated paper money since the outbreak of the war, and that it would be unethical to compel a man who, under stress of war, borrowed depreciated paper money to repay his debts in a gold-standard unit of greater value.

The nation’s export trade, the status quo advocates argued, would be in a stronger position if stabilization were effected at the prevailing value, because foreign importers could buy the country’s goods on better terms if its monetary unit were cheap than if it were dear in terms of their own money. Under deflation, it was said, the foreign-exchange value of the local money unit would rise more rapidly than export-commodity prices would fall.

In most countries of this intermediate group, of which Great Britain was the outstanding example, stabilization was effected by a return through a process of deflation to prewar gold parity.

Regardless of the merits and demerits of the two sides of the controversy as a whole, there is no question but that many economic hardships experienced during the twenties in these countries, and particularly in Great Britain, were attributable in a high degree to the policy of deflating to prewar gold parity.

THE GOLD STANDARD OF THE TWENTIES

In a brief survey of the restored gold standard of the twenties, the three most important facts to be noted are (1) the war-weakened and distorted economic milieu in which the restored gold standard had to function, (2) the changed and. debilitated character of the new gold standard itself, and (3) the brief period of its operation. These three considerations will be discussed in the paragraphs that follow.

The Changed Economic Milieu

The new gold standard was required to function in a different environment, one that was much less favorable than that of the prewar gold standard. Among important changes for the worse may be cited the following: (1) the destruction that had been wrought by the greatest war in history—a destruction of scores of billions of dollars of property and of over 13 million lives, representing much of the best blood of the world, the blood of men who, if they had lived, would have been in the prime of life during these years; (2) the great maladjustments in the production of various basic commodities after the war, growing out of the efforts of different countries during the war to produce goods for themselves which war conditions prevented them from importing as formerly, or to produce certain classes of goods in greater volume for war needs. These created dangerous and uneconomic vested interests for the postwar period. They contributed to excess stocks of various commodities, reduced to a lower level than would otherwise have existed the efficiency of world economic production and distribution, and were an important factor in the great decline that occurred in the world’s international trade; (3) the tremendous redistribution of wealth that was caused by the inflation, with its resulting injustices, economic hardships, political resentments, and decreased capital efficiency; (4) the large and increasing amount of restriction placed on international trade in the form of higher tariffs, quotas, exchange restrictions, currency depreciation, antidumping regulations, arbitrary customs valuations and rulings, so-called trade-clearing agreements, and the like. Many of these restrictions were the results of efforts to maintain uneconomic industry, expanded production in specified lines, or unduly high wage scales, created by the abnormal conditions existing during the war. They represented wasteful efforts to resist the natural economic liquidation of the war; (5) the large backwash of basic commodities that the world accumulated by reason of its attempt to defy the law of demand and supply, through valorization schemes intended to hold up prices without controlling the supply of the products. Examples were rubber, coffee, copper, wheat, and sugar; (6) the burden of interallied debt obligations and particularly the uncertainty and tension that grew out of attempts to solve the problem of war debts.

A Changed and Weakened Gold Standard

Not only did the postwar gold standard have to function in a much less congenial milieu than did that of the prewar days, but the standard itself was of a weaker type. The three principal causes of this weakness were these:

A Gold-bullion and Gold-exchange Standard Superseding the Gold-coin Standard. Outside the United States and a few minor countries, the predominately ante bellum gold-coin standard, with its free coinage of gold and full convertibility of fiduciary money into gold coin on demand, gave way to the gold-bullion standard and the gold-exchange standard.4 In both cases, the minting and circulation of gold coin were usually nonexistent, and in both it became difficult for people of small means to obtain monetary gold. Under these new-type standards, the hoarding of gold, which creates a varying demand for the yellow metal and often serves as a check against inflationary forces, was rendered difficult for the masses of the people.

A Postwar Gold Standard That Was Subjected to More Managing. The postwar gold standard nearly everywhere was less automatic in its functioning than was the prewar standard. Under the gold-bullion and gold-exchange standards it became easier for governments and central banks to manipulate the currency supply and to “slip away from the gold points” than it was under a gold-coin standard, with gold in circulation and gold-coin convertibility. Government management of economic affairs, which had reached new heights during the war emergency, persisted long after that emergency had passed. This was particularly true in the field of money. Directly and through central banks, which they increasingly controlled, governments managed their currencies on a large scale. Central banks no longer depended for their monetary and credit controls chiefly upon modest manipulation of discount rates and occasional minor operations in the open market, but resorted extensively to large open-market operations, the exercise of foreign-exchange control, and the manipulation of reserve requirements. Some of this management was scientific and useful, while some was political or otherwise harmful. Natural checks and balances of economic forces were all too often interfered with by ignorant meddlers. Normal economic forces were sidetracked before they were given a chance to correct evils. It was not so much a question of management or no management as one of too much management and too many incompetent managers.

Inadequate Gold Reserves. In the third place, most countries that returned to the gold standard during the later twenties did so with inadequate gold reserves, which they obtained in large part by borrowing from abroad.

The Brief Life of the Postwar Gold Standard

The final outcome was that, before the new gold standard could be perfected and firmly established, it was destroyed by the world economic crisis of the early thirties. Every country that returned to the gold standard after the war and a few that had established the gold standard de novo gave it up during the years 1929 to 1936. It is often difficult to fix the exact date at which a country actually gave up the gold standard, because the date of the de jure departure from gold was usually later than that of the de facto departure; while the latter, which is the more important, was commonly not a jump but a slide. Among the 59 countries that went off the gold standard between 1929 and 1936, 20 of the more important are listed here, approximately in their chronological order.5

1929
Argentine		December
Austria		December
Uruguay		December
1931
Brazil		March
Germany		July
United Kingdom		September
India		September
Norway-		September
Denmark		September
Sweden		September
Canada		October
Japan		December
1932
Chile		April
Peru		May-
1933
United States		March
1934
Italy		May
1935
Belgium		March
1936
Poland		April
France		September
Netherlands		September

THE GOLD STANDARD IN THE UNITED STATES SINCE 1929

The fundamental reasons for the universal breakdown of the postwar gold standard have been briefly summarized, and the limits of this book preclude a discussion of the special situations in the different countries. Inasmuch, however, as the United States soon returned to a gold standard, and as we shall presently describe this new type of gold-bullion standard, it will be useful at this point to review briefly the events in the United States that led up to its establishment.

Events Leading to a New Type of Gold Standard

In the United States during the early years of the world economic depression the position of the gold standard was strong. For a number of years we had experienced a heavy net importation of gold and in consequence we possessed a superabundance of the yellow metal. Despite a highly speculative boom in the security markets during the years immediately preceding the crash of 1929, we had had in this country over a period of about 8 years one of the most stable commodity price levels we ever experienced.6 In August, 1931, the month before Great Britain went off the gold standard, our American stock of monetary gold was $4.6 billion, the highest in our history up to that date. By January, 1933, this stock had declined to $4.1 billion, but was still by far the largest stock of monetary gold in the world and constituted one-third of the world’s total known supply.

Then suddenly we were confronted with the events that culminated in the “bank holiday” of early March, 1933. There were widespread runs on our banks, a great break of confidence in the currency, and a pronounced hoarding movement, which was unique in that it involved the hoarding of unusual amounts of gold as contrasted with paper currency. This breakdown in the public’s confidence in its money and banking system was due largely to the rapidly growing fear of the cheap-money policies that were being strongly urged by men in high places, both in Congress and outside, to the failure of Roosevelt, in contrast with President Hoover, to take a strong stand for sound money in the election campaign and between his election and his inauguration,7 and to the widespread and persistent rumors immediately following the election, that the president-elect was giving a ready ear to the advocates of dollar devaluation and other radical monetary policies.

Had Roosevelt, immediately after his election, joined President Hoover in a bipartisan declaration, of the ringing, Grover Cleveland type, that the gold standard and the existing gold dollar would be maintained at all hazards and that, to this end, all the financial resources of the United States would be mobilized if necessary, such a declaration, coupled with a reasonable policy of party cooperation, would probably have prevented the disastrous collapse of our currency and banking system in early 1933. In that case the breakdown of the American gold standard with its subsequent devaluation of the dollar would have been avoided.

However, confronted with the situation as it existed at the time of his inauguration, the President and his associates handled the banking crisis wisely during March and the forepart of April. As an emergency measure, the Banking Act of March 9, 1933, was in most respects sound, as was also its early administration.

By March 4, 1933, the banks in almost all the states were either closed or operating under strong government restrictions. It was temporarily difficult for the public to obtain money, and from then on it was practically impossible for it to obtain gold coin. On March 6, the President issued his proclamation declaring a “bank holiday” and effectively suspending the gold standard. Three days later, the emergency banking bill became law.8

The response of the country to these vigorous emergency measures was prompt. Between March 4 and April 4, $1,225,000,000 of money returned to the reserve banks and the ratio of reserves to Federal Reserve notes and deposits combined advanced from 45 to 60 per cent. Funds arising out of this return flow of currency,

were used by the member banks to reduce their borrowing at the Reserve banks by $1,000,000,000 and in addition to reduce the acceptance holdings of the Reserve banks by $130,000,000. Total reserves of the twelve Federal Reserve banks combined advanced from $2,800,000,000 on March 4, to $3,490,000,000 on April 5, the highest level since the autumn of 1931. On April 7 the discount rate of the Federal Reserve Bank of New York was reduced from 3½ to 3 per cent.9

By March 29, about 12,800 banks out of 18,000 in operation before the crisis had been licensed to open on an unrestricted basis, and these banks represented about 90 per cent of the total member-bank deposits of the country.

There is no evidence, either in foreign-exchange rates or in prices, that between the end of February and the end of April there occurred any considerable depreciation in the dollar. In terms of cable transfer rates on gold-standard France, the dollar depreciated 4.4 per cent; in terms of sterling it likewise depreciated 4.4 per cent; wholesale prices rose 1 per cent and the cost of living declined 0.8 per cent, while common stocks showed an average rise of 6.7 per cent. The Federal Reserve Board’s index of industrial production rose 4.7 per cent, the Cleveland Trust Company’s index of industrial activity increased 4.9 per cent. The monthly number of commercial failures declined 19 per cent, and their liabilities, 22 per cent.

In other words, business was improving, confidence was returning, and the emergency that had justified temporary drastic measures was passing. Under the circumstances, the wise course for the Administration to have followed was to return to the gold standard at an early date, with full convertibility of paper money into gold and the removal of all restrictions on the exportation and holding of gold, accompanied by a bold assurance from the President that the government was willing if necessary to go to the limit of its resources for the maintenance of the gold standard.

Liberal emergency measures of the general types actually taken to help the debtor classes for a reasonable period, of course, should have been adopted. On this broad question, the following statement, which was made 2 years before by the Macmillan Committee of Great Britain concerning the situation in England, is sound doctrine:10

. . . In our opinion the devaluation by any Government of a currency standing at its par value suddenly and without notice . . . is emphatically one of those things which are not expedient. International trade, commerce and finance are based on confidence. One of the foundation stones on which that confidence reposes is the general belief that all countries will seek to maintain so far as lies in their power the value of their national currency as it has been fixed by law, and will only give legal recognition to its depreciation when that depreciation has already come about de facto. It has frequently been the case—we have numerous examples of recent years—that either through the misfortunes of war, or mistakes of policy, or the collapse of prices, currencies have fallen so far below par that their restoration would involve either great social injustices or national efforts and sacrifices for which no ‘adequate compensation can be expected.. . . But it would be to adopt an entirely new principle, and one which would undoubtedly be an immense shock to the international financial world, if the Government of the greatest creditor nation were deliberately and by an act of positive policy to announce one morning that it had reduced by law the value of its currency from the par at which it was standing to some lower value . . . 11 In the atmosphere of crisis and distress which would inevitably surround such an extreme and sensational measure as the devaluation of sterling, we might well find that the state of affairs immediately ensuing on such an event would be worse than that which had preceded it.

Instead of taking action in the late spring of 1933, looking toward an early return to the pre-“bank-holiday” gold standard, the Roosevelt administration resorted to a series of radical measures deliberately depreciating the gold value of the dollar. These measures resulted in the giving up of the gold-coin standard, a permanent debasement of the nation’s gold monetary unit, the abrogation of tens of billions of dollars of specific gold contracts, including those of the government itself, the outlawing of the circulation of all United States gold coins and gold certificates, the nationalization of our gold and silver, and the granting to the President, for more than a decade at least, almost supreme dictatorial power over the nation’s currency.

On July 2, 1933, came the President’s “bolt of lightning” message to Secretary Hull in London that wrecked the World Economic Conference from which we and the leading countries of Europe had reason to expect much for the cause of international monetary stabilization on a gold basis.

A few months after this, in a radio address on October 22, the President suddenly and without previous public discussion announced the adoption as a United States policy of the Warren gold purchase plan, which was intended to raise commodity prices quickly to the desired level—presumably that of 1926—and thereafter to maintain them at that level, through a system of currency management. The plan, which was not a success, was quietly discontinued early in 1934.12

By the end of 1933, practically all hope had gone for any return to the gold-coin standard with the old gold dollar as the legal unit of value.

The New Type of American Gold Standard

The gold reserve law of 1934, which became effective at the end of January, gave to the United States a new legal monetary unit of about the gold value possessed by the paper dollar of that date, and provided the country with a currency system of a type substantially different from any ever before known throughout the world’s monetary history. In this new monetary system there were three outstanding features:

1. The first of these is a statutory stabilization of the dollar, not as previously at a fixed gold value, but, at the discretion of the President, within the fixed range of gold values represented by 50 to 60 cents of the former gold dollar.13

This provision of the law was supplemented by an administrative order of the President fixing the gold value of the dollar for the time being at the equivalent of 59.06 cents—a rate that raised the dollar price of an ounce of pure gold from the former statutory price of $20.67 to a new administrative price of $35, representing an increase of 69.3 per cent. The only kind of gold convertibility thenceforward permitted was convertibility, at the option of the government, of the new-type gold certificates, which could legally be held only by the Federal Reserve banks and by the government. The exportation, holding, and transportation of gold was thenceforth permissible only under the conditions and to the extent that the Secretary of the Treasury, with the approval of the President, should determine by administrative order.

2. The government established a stabilization fund out of its “devaluation profits.” When the stabilization law was passed, the national government and the Federal Reserve banks together owned a little over $4 billion of gold coin and gold bullion. Inasmuch as under the devaluation plan the value of the amount of pure gold contained in 59.06 cents worth of old gold coin was to constitute, at least for the time being, the new unit of value, or dollar, this $4 billion of gold coin and bullion was increased in terms of the new dollar by $2,811 million. Since the passage of the stabilization law, additional receipts of gold have raised this profit to about $2,819 million, out of which approximately $2 billion is now held by the government for a stabilization fund, and of this amount a little over $200 million is in use as an active fund.

3. The third noteworthy provision of the stabilization law was the one declaring that legal title to all gold owned by the Federal Reserve authorities should be transferred to the United States government, and should be paid for by the government in the new type of noncirculating “gold certificate.”

What is our present monetary standard? The standard created by this new legislation is difficult to define. Legally, it might be classed as a restricted commodity standard, for the law apparently contemplated the possibility of changing the gold value of the dollar according to the ups and downs of the commodity price level. Since the law was enacted, however, there has been no change in the gold content of the dollar, and the law has been administered in such a way as to make the new monetary system a de facto gold-bullion standard. So long as the government or its agencies stands ready, in an extensive market like that now provided by the governments and central banks of friendly countries, to buy and sell gold on demand at approximately a fixed gold price—now $35 an ounce—and to permit the gold so sold and bought to be freely exported and imported in unlimited quantities, and to permit the domestic supply of currency to respond to these gold movements, the gold value of the paper dollar will be maintained very close to the value of a fixed quantity of gold in a large, free international market. This is the “constituting quality” of a gold standard.

To the extent, however, that the government interferes with such free exportation and importation of gold or prevents the gold coming into the country from increasing the country’s monetary supply by the amount imported or prevents the gold going out from decreasing the monetary supply by the amount exported, or to the extent that the government exercises its legal authority frequently to vary the gold content of the dollar by changing its official price for gold, the gold value of the dollar will tend to depart from the value of a fixed quantity of gold in a large, free, international market, and to that extent we shall depart from the gold standard.

According to the concept of the gold standard thus defined, probably no important country in the world except the United States is now (1944) on the gold standard, or has been for several years. A number of countries, however, now have standards that are close approximations to the gold standard, e.g., Brazil, Colombia, and Venezuela.

SELECTED BIBLIOGRAPHY

CRAWFORD, ARTHUR WHIPPLE: Monetary Management under the New Deal, American Council on Public Affairs, Washington, D.C., 1940.

Cunliffe Committee: Committee on Currency and Foreign Exchanges, Report, His Majesty’s Stationery Office, London, 1918.

Director of the Mint: Monetary Systems of the Principal Countries of the World, Government Printing Office, Washington, D.C., 1917.

GREGORY, T. E. : The Gold Standard and Its Future, Methuen & Co., Ltd., London, 1932.

–––––: Britain and the Gold Standard, Foreign Affirs, January, 1933.

HARRIS, S. E. : Monetary Problems of the British Empire, The Macmillan Company, New York, 1931.

HAWTREY, R. G. : The Gold Standard, Economic Journal, December, 1919.

HOOVER, HERBERT: Addresses upon the American Road, 1933-1938, Charles Scribner’s Sons, New York, 1938.

KEMMERER, EDWIN WALTER: Gold and the Gold Standard, Proceedings of the American Philosophical Society, vol. LXXI, 1932.

———: Kemmerer on Money, 2d ed., John C. Winston Company, Philadelphia, 1934.

———: The A B C of Inflation, McGraw-Hill Book Company, Inc., New York, 1942.

———: Inflation and Revolution, Princeton University Press, Princeton, N.J., 1940.

KEYNES, LORD JOHN MAYNARD: A Treatise on Money, 2 vols., Harcourt, Brace and Company, New York, 1930.

LAYTON, W. T.: British Opinion of the Gold Standard, Quarterly Journal of Economics, February, 1925.

LEHFELDT, R. A.: A Restoration of the World’s Currencies, P. S. King & Son, Ltd., London, 1923.

Macmillan Committee: Committee on Finance and Industry, Report and Minutes of Evidence, 3 vols., His Majesty’s Stationery Office, London, 1931.

MYERS, WILLIAM STARR, and WALTER H. NEWTON: The Hoover Administration, Charles Scribner’s Sons, New York, 1936.

RIST, CHARLES: La Déflation en pratique, Marcel Giard, Paris, 1924.

ROOSEVELT, FRANKLIN D. : The Public Papers and Addresses, 9 vols., Random House, Inc., New York, 1940.

WILBUR, RAY LYMAN, and ARTHUR MASTICK HYDE: The Hoover Policies, Charles Scribner’s Sons, New York, 1937.

YOUNG, JOHN PARKE: European Currency and Finance, Commission of Gold and Silver Inquiry, vols. I and II. United States Senate. Government Printer, Washington, D.C., 1925.

———: Inter-war Currency Lessons, No. 9: The Monetary Standards Inquiry, New York, 1944.

 

 

14 Monetary Systems of the Principal Countries of the Worlds 1916, pp. 3 and 4.

15 There was no coinage of gold (except a few memorial dollar pieces) at American mints during the 3 years, 1917-1919.

16 For an instructive episode in Mexico of the war period, involving a widespread restoration of hoarded gold coin to circulation after a long period of inflation, see Edwin Walter Kemmerer, Inflation and Revolution, pp. 114-118.

17 Under the gold-bullion standard, redemption was usually only in gold bars of large denomination; and under the gold-exchange standard, redemption was entirely or chiefly in gold drafts of large denomination drawn on a reserve fund deposited in some financial center or centers outside the country. See pp. 152-160 and 174-176.

18 See League of Nations, Monetary Review, 1937, p. 111.

19 KEMMERER, EDWIN WALTER, Gold and the Gold Standard, Proceedings of the American Philosophical Society, vol. LXXI, No. 3 (1932), pp. 87-102.

20 See CRAWFORD, ARTHUR WHIPPLE, Monetary Management under the New Deal, Chap. II; William Starr Myers, and Walter H. Newton, The Hoover Administration, pp. 297-300 and Chaps. XVIII and XIX; and Ray Lyman Wilbur and Arthur Mastick Hyde, The Hoover Policies, pp. 470-475.

21The act gave the President “during time of war or during any other period of national emergency” practically unlimited power to regulate and control foreign-exchange operations, credit transfers and payments, and the “export, hoarding, melting, or earmarking of the coin or bullion.” It also gave him authority, which he promptly exercised, to require the public “to pay and deliver to the Treasurer of the United States any or all gold coin, gold bullion, and gold certificates “owned by anyone, payment therefor to be made in “an equivalent amount of any other form of coin or currency coined or issued under the laws of the United States.”

The law further provided that during the emergency “no member bank of the Federal Reserve system, shall transact any banking business except to such extent and subject to such regulations ....’as’ may be prescribed by the Secretary of the Treasury with the approval of the President.” The law provided methods by which the Government throughout the emergency could aid and administer banks that were in difficulty.

22 Federal Reserve Bulletin, April, 1933, p. 209.

23 Macmillan Committee, Report, pp. 110 and 111.

24 The italics are my own.

25 Cf. KEMMERER, EDWIN WALTER, Kemmerer On Money, Chap. III.

26 Even these limits were apparently removed by sections 8, 9, and 10 of the law, which authorized the Secretary of the Treasury to buy gold in unlimited quantities at any price “he may deem most advantageous to the public interest, any provision of law relating to the maintenance of the parity . . . to the contrary notwithstanding” and “to sell gold in any amounts ...and at such rates . . . as he may deem most advantageous to the public interest . . . ”

The authority granted to the President administratively to change the gold content of the dollar at his discretion to anywhere between the equivalent of 50 and 60 per cent of that of the former gold dollar was restricted to 2 years, but was renewed by Congress biennially until 1943. Its nonrenewal in that year was apparently of no consequence, since the above-mentioned sections 8, 9, and 10 of the Act of 1934 were not repealed, and they still seem to give the President the power to change the gold content of the dollar at will without limits.

• 1For a brief discussion of the origin, nature, and definition of money, see Edwin Walter Kemmerer, Money, pp. 3-16.
• 2“If a man have destroyed the eye of a freedman, or have broken the bone of a freedman, he shall pay one mina of silver” (§198). “If a doctor have operated . . . he shall receive ten shekels of silver” (§215). “The wage of an artisan . . . five Sĕ of silver, of a brickmaker . . . five Sĕ.. . . ”(§274).
• 3obviously, it is impracticable in a book such as this to do more than to touch briefly on the more elementary facts and principles. Where important controversial questions are involved, the best we can do is to follow a highly responsible recent authority and to refer the reader to the selected bibliography at the end of the chapter, in which a number of the principal studies (some of them containing extensive bibliographies) are cited.
• 4DUBBERSTEIN, W. H., Comparative Prices in Later Babylonia, American Journal of Semitic Languages and Literatures, January, 1939, pp. 20ff.
• 5Pictures of a number of these very early coins, including one of a gold coin of Croesus, are given by William Atherton DuPuy in The Geography of Money, The National Geographic Magazine, December, 1927, pp. 744-768.
• 6BURNS, op. cit., p. 160.
• 7The principle of Gresham’s law appears to have been known in ancient Greece. Aristophanes, writing about 405 B.C., said in Frogs, “In our Republic bad citizens are preferred to good. Just as bad money circulates while good money disappears.” For a brief explanation of Gresham’s law, see pp. 135-136, note.
• 8The history of the Roman as is both intriguing and controversial. Concerning it there is a voluminous literature.
• 9GAIUS PLINIUS SECUNDUS, Historia Naturalis, Bk. XXXIII, 3.13.
• 10It is interesting to note that our word money has its origin in early Roman times. Money then was coined in a temple of Juno on Capitoline Hill in Rome. One of Juno’s many names was Moneta, a word cognate with Latin monete (to warn). Moneta was guardian of finances (as well as the protector of the female sex). Our words money and mint are cognate with Moneta.
• 11MATTINGLY, HAROLD, The First Age of Roman Coinage, Journal of Roman Studies, Vol. 19, pp. 20 and 23.
• 12Ibid., p. 17.
• 13BURNS, op. cit., p. 151.
• 14The gold standard in its “orthodox form” is a product of the nineteenth century. Its roots, however, go deep into the past. This chapter will explore briefly this early history of gold as money, i.e., as a commonly accepted medium of exchange.
• 15The earliest references I have been able to find in recorded history to the use of one of the precious metals as a medium of exchange—in these cases, passing by weight—are in the Code of Hammurabi, King of Babylon. They refer to silver in about the year 1870 B.C.
• 16Thanks to the careful studies made by classical scholars over many generations, we know today much more about the money of classical times than the ancients knew. There are, however, many gaps in the chronology of the coins that have come down to us, and the story that these coins tell is far from complete. It is still full of controversial questions concerning which the modern literature is voluminous, but progress in their solution is being, made continually.
• 17Coinage was originally of the nature of a seal or hallmark punched on a nugget of metal as a guarantee of its quality or its weight. The beginnings of coinage appear to have been made in the countries of the eastern Mediterranean early in the eighth century B.C. Sennacherib, King of Assyria (705-681 B.C.), said, “I built a form of clay and poured bronze into it as in making half-shekel pieces.”
• 18I have in my possession a gold daric, one of the oldest and most famous gold coins in history. It is made of almost pure gold and is about the weight of our late American $5 gold piece. It looks like a roughly molded gold nugget and bears a crude stamp of an archer with his bow and spear. The coin was made during the reign of Darius the Great of Persia, about 500 years before Christ. Only about two generations before this, in the reign of Croesus, which began 561 B.C., there circulated in Asia Minor the coins of which Herodotus said, “The Lydians were the first people, so far as I know, to adopt a gold and silver coinage.”
• 19The first gold coin to circulate in Hellas proper was the aforementioned Persian daric or stater (meaning “to weigh”), which weighed about 130 grains and which enjoyed an extensive circulation for several centuries. It was never debased and was “practically the only gold coin for about 200 years, as well in Asia Minor and the mainland of Greece as in the Persian Empire.” It was known in Palestine during Biblical times.
• 20In the Greek world there were, on occasions, official ratings of the coins of one metal in terms of those of the others. Ratings were changed from time to time and recoinages were made, to prevent a cheaper or overrated metal from driving out of circulation a dearer or underrated one, under the force of what we now call Gresham’s law.
• 21Bronze Money. In Italy, as elsewhere, one of the first forms of metallic money consisted of unstamped bullion. But here, unlike the situation in some other places, where gold was readily available, the first metal to circulate was bronze. Originally, the bronze circulated in the form of a rough lump (aes rude), the lumps varying in weight, shape, and size, and bearing no stamp. Later it was hammered into the form of a bar, known as an as (meaning “unit”) in order to give it a convenient form for bartering the metal, which was in demand for the making of tools, weapons, and utensils. As time went on, the conventional length of this bar became a foot (the length of a man’s foot), which, with the conventional diameter, gave the bar a convenient weight of about 1 pound. The bar was later marked off into 12 thumbs, or inches. Since these bars (asses) varied considerably in weight, the custom gradually developed of passing them by weight instead of by tale. The weight of metal then became the important consideration, and the unit of value became the pound of bronze, the as libralis, while the 12 thumb divisions, or inches, became 12 ounces.
• 22Weighing bronze was, however, inconvenient, and the practice developed toward the close of the regal period of placing upon the asses an authoritative stamp certifying their weight, so that again they could pass by count. There are early records of 2-pound bars and also of bars of ½ and ¼ pound. The earliest coin marks on the bars that we have preserved are crude drawings of animals. According to Pliny, “King Servius first stamped bronze.. . . It was stamped with the impressions of animals, whence it was termed pecunia ...”
• 23Long after the as libralis ceased to circulate, it was used as a unit of account, in terms of which people thought and expressed monetary values even when payments were actually made in the standard silver money. In contracts then it appears to have been called the as grave, to distinguish it from the current as.
• 24Silver Money. Silver in the form of ingots and of foreign coins, notably those of the Greeks, Etruscans, and Sicilians, circulated in Italy during part of the bronze-standard period just described. According to Mattingly, the aes grave of Rome and Italy, which we have previously mentioned, represented “only a short stage of transition from the early use of uncoined bronze as a measure of value, to the Greek use of silver money . . . ” Rome, learning the use of silver and of token bronze from the Greeks of southern Italy, was led to give at least the form of a coinage to the bronze that she was accustomed to use for trading with the Italian peoples.
• 25In the year 217 B.C. the as was reduced to a standard of 1 ounce and was retariffed at the rate of 16 instead of 10 to the denarius, while the denarius itself was debased. About the beginning of the second century B.C., “the Roman coinage enters on a long period of quiet and orderly movement with little of external change to mark it.” This situation continued during the early centuries of the Empire, during which, however, silver met increasing competition from gold. The yellow metal finally superseded silver as the dominant standard, just as silver had previously superseded bronze. To this story we shall now turn.
• 26Contemporaneously with the circulation of bronze and silver in Rome and other Italian cities during early times, there was a circulation by weight of gold in the form of nuggets and of foreign coins. This gold was used principally in the larger transactions. Although destined ultimately to supplant both bronze and silver as the basic monetary metal, gold was in this territory the least important of the three, prior to the beginning of the Christian Era. Evidence that there was a substantial circulation of gold as early as the fourth century B.C. is found in the fact that there was a law at that time requiring that a certain tax be paid in gold.