In Praise of Paper

December 12, 1949

The recent speech of Allan Sproul, president of the Federal Reserve Bank of New York, before the American Bankers Association, was a startling revelation of official doctrine. It has already provoked some excellent answers—notably those of Joseph Stagg Lawrence in the Empire Trust letter and of Prof. Walter E. Spahr in The Commercial and Financial Chronicle of Nov, 10. I have space to make only a few random points.

“I perceive,” said Sproul, “no moral problem involved in this question of gold convertibility.” Let’s help him to perceive one. Prior to the year 1933 our government pledged itself to pay interest and principal on its bonds in gold of a specified weight and fineness. It also pledged the holder of every currency note that it would redeem that note on demand in gold of a specified weight and fineness. It violated its most solemn pledge. It deprived the rightful owners of their gold. And it made the possession of gold by anybody but the thief illegal.

And now we are all being slapped on the back and told how lucky we are at last to have a system at home of irredeemable paper. Sproul sings paeans in praise of paper. “We use a paper money,” he says, “which has the supreme attribute of general acceptability.” He neglects to add—at a constantly falling value. The purchasing power of a paper dollar, according to the Department of Commerce, is now only 52 cents, as measured by wholesale prices, in terms of the 1935–39 dollar.

Sproul resorts to flag waving. “The integrity of our money does not depend on domestic gold convertibility. It depends upon the great productive power of the American economy....” Those who recall the disastrous paper-money inflations of history must shiver at this argument. Listen to Andrew D. White’s report of speeches made in the French Assembly in 1791 to defend the paper assignats: “‘Fear nothing; your currency reposes upon a sound mortgage.’ Then followed a glorification of the patriotism of the French people, which, he asserted, would carry the nation through all its difficulties.”

The nub of Sproul’s defense of our internal irredeemability is that the bureaucrats must be trusted implicitly but that the people cannot be trusted at all. It appears that when you allow the people to redeem their money in gold they always want to do it at the wrong time—i.e., just when it is most embarrassing for the government to meet the demand; in other words, just when the government has connived in an inflationary expansion and issued more paper claims than it is able to honor.

“The principal argument for restoring the circulation of gold coin,” Sproul declares, “seems to be distrust of the money managers and of the fiscal policies of government.” He couldn’t have said it better. What he fails to see is that this mistrust has been richly earned. In addition to the shabby record of Sir Stafford Cripps, we need to remind ourselves that some 30 governments instantly followed the British example. They wiped out overnight, by simple ukase, part of the value of every paper currency unit in the hands of their own people.

Yet in the face of this almost universal record of currency debasement (not to bring up our own sorry record of currency inflation since 1933), Sproul can seriously speak of leaving everything to what he calls “competent and responsible men.” Said Sir Stafford Cripps, in explaining his devaluation record: “Even if we had then had some future intention of altering the rate of exchange, which in fact we had not, no responsible minister could possibly have done otherwise than deny such intention.” Here, then, is an authoritative definition. A “competent and responsible” monetary manager is one who not only lies to his people regarding the future of their currency but even considers it his duty to deceive them.

Sproul’s currency theory may be summed up thus: Put your faith in the monetary managers, who have always fooled you in the past.