What You Should Know About Inflation

It may perhaps be argued that the collapse of the attempted return by Britain in 1925 to the old gold parity, or the hardships involved in the American resumption of specie payments after the Civil War, are irrelevant to the present problem of the United States because (1) we are already on a de facto gold standard at $35 an ounce so far as foreign central banks are concerned, and (2) even in the black market the price of gold bullion has sometimes been no higher than $35 an ounce.

These arguments have some weight, but they are far from conclusive.

As regards the first argument, it may be pointed out that our restricted gold standard at $35 an ounce has been maintained only in a highly abnormal world situation that cannot be counted on to continue. It would, in fact, prove ultimately disastrous if it continued. For even this token American gold standard has been tenable only because the United States has for twenty-six years been the least unsafe place for gold, and because most other leading countries have inflated even more. A slight shift in this situation could easily lead to a heavy drain on American gold. There has been a substantial drain on our gold, in fact, since the high point of $24.5 billion was reached in 1949.

The better the monetary behavior of foreign countries becomes, in other words, the more precarious will become the maintenance even of our closely restricted gold standard at $35 an ounce. And this $35 an ounce standard might give way entirely if private citizens, private businessmen and private bankers, American and foreign, were as free to demand gold for their notes as are foreign central banks. In fact, it is this very fear that is used to justify the present prohibitions against gold convertibility for the private citizen.

As regards the second argument, I do not believe that the black market price of gold bullion, under present circumstances (gold coins are still at a premium), is a reliable guide to anything in particular. There are innumerable possible leaks between the American buying-and-selling rate of $35 an ounce, and the black market, which make the former dominate and control the latter. (The American Federal Reserve Banks feed out gold to the Bank of England to help it hold down the “free” London market price.)

There are more than a hundred member nations in the International Monetary Fund. How can the American Federal Reserve System, or the I.M.F., supervise and police them all?—not to speak of individual officials in them? Many of these member nations are very poor; it would help their position, or the position of their central banks, if they could buy gold at $35 an ounce from the American Federal Reserve and resell it to private individuals in their own country at a premium. If something like this were going on, even in a few instances, it would mean the existence of “arbitrage” transactions which would prevent more than a moderate spread between the black market and the official market.

I am not framing this as an accusation, but simply as an illustration of one way in which the disappearance of the former black market premium on gold bars could be accounted for. Nicolaas C. Havenga, the South African Minister of Finance, and the eminent French economist, the late Charles Rist, have both implied, in fact, that a sufficient explanation of the disappearance of the black market premium price is that the demand for gold is still subjected almost everywhere to legal restrictions and prohibitions, while the available supply has been becoming more and more abundant. In any case, it would be a very dubious inference to take the absence of a black market premium as any guarantee of the “rightness” or tenability of the present official $35 price.

And certainly any such coincidence of price is not a valid argument for continuing to prohibit a truly free American and world market in gold. The reason free markets in gold do not exist under a full gold standard is not because they are forbidden, but because the universal ability of everyone to buy or sell gold at the official rate leaves no need for a free market. Under a full gold standard, a free market would have nothing to do, no purpose to serve, no function to perform. It is needed only under a paper-money standard, or under a discriminatory and half-fictitious “gold standard” of the sort the United States has had since 1934. It is precisely when a free gold market is needed that most modern governments seek to suppress it. For it reflects and measures the extent of the lack of confidence in the domestic currency; and it exposes the fictitious quality of the “official” rate. And these are among the very reasons why it is needed.