What You Should Know About Inflation

If we grant that there is a great potential danger in trying to return immediately to a full gold standard at $35 an ounce, by what steps are we to return? And how are we to determine the dollar-gold ratio—which would decide the new “price of gold”—at which the return should be made?

It is a sound general principle that unless there are the strongest reasons for change, the dollar-gold ratio, once fixed, ought not to be tampered with. This rule certainly applied to the pre-1933 rate of $20.67 an ounce, because that was a real rate, at which anybody was entitled to demand gold, and got it. But the $35 rate, fixed by Roosevelt-Morgenthau whim in 1934, is not a rate at which real convertibility has existed. It is only foreign central banks, not American citizens, that have been permitted to buy gold from our Federal Reserve Banks at $35 an ounce, and even they have been allowed to do this only under certain conditions. The present $35-an-ounce gold standard is a window-dressing standard, a mere gold-plated standard. There is no reason for treating the $35 figure as sacrosanct.

The new dollar-gold ratio that we should aim at is one at which gold convertibility can be permanently maintained, and that will not be in itself either inflationary or deflationary—that will neither, in other words, in itself bring about a rise or a fall in prices.

There are some economists who contend on unconvincing evidence that $35 an ounce is that rate. Others profess to have some mathematical formula for arriving at such a rate, and on this basis confidently advocate $70 an ounce or some other figure. Their diverse results in themselves invite suspicion. Values and prices are not set by mathematical calculations, but by supply and demand operating through free markets.

Because of the enormous inflation in the thirty years since we departed from a real gold standard, and the enormous shock to confidence that inflations, devaluations, and repudiations have produced, we must test the state of confidence in a temporary free market for gold—a market that will also give us a guide to a new dollar-gold ratio that we can hold.

The following time schedule of gold resumption is put forward chiefly for purposes of illustration:

1—The Administration will immediately announce its intention to return to a full gold standard by a series of steps dated in advance. The Federal Reserve Banks and the Treasury will temporarily suspend all sales or purchases of gold, merely holding on to what they have. Simultaneously with this step, a free market in gold will be permitted.

2—After watching this market, and meanwhile preventing any further inflation, the government, within a period of not more than a year, will announce the dollar-gold ratio at which convertibility will take place.

3—On and after Convertibility Day, and for the following six months, any holder of dollars will be entitled to convert them into gold bars, but at a moderate discount on the paper dollars he turns in. To put the matter the other way, he would be asked to pay a premium on gold bars above the new valuation—equivalent, let us say, to ½ of 1 per cent a month. The purpose of this would be to spread out the first demands for conversion and discourage excessive pressure on reserves at the beginning. The same purpose could be achieved also by a wide but gradually narrowing spread between the official buying and selling prices of gold bars. Of course, the free market in gold would continue during this period, and if gold could be obtained in this free market for less than the official premium rates, it would not be demanded from the government’s reserves.

4—Six months after Convertibility Day, the country will return to a full gold-bullion standard. Conversion of dollars into gold bars, or vice versa, will be open to all holders without such discounts or premiums and without discrimination.

5—One year later still, on January 1, 19—, the country will return to a full gold-coin standard, by minting gold coins and permitting free conversion.

A full gold-coin standard is desirable because a gold-bullion standard is merely a rich man’s standard. A relatively poor man should be just as able to protect himself against inflation, to the extent of his dollar holdings, as a rich man. The reason for returning to a full gold-coin standard in several stages is to prevent too sudden a drain on gold reserves before confidence has been re-established. We achieved this end after the Civil War by delaying actual resumption for four years after passage of the Resumption Act. A program like the foregoing would provide a faster schedule.