Inflation—or Gold?

October 22, 1962

LONDON—The more closely we examine the world’s monetary chaos, the more obvious it becomes that the only solution is a return to a full gold standard. This means that currencies must be made unconditionally redeemable in a fixed quantity of gold, on demand, at home or abroad, by anybody, even a citizen of the country that issues the currency.

Some of the reasons why this is in the long run the only satisfactory monetary system were admirably explained in a recent article in Fortune by Michael A. Heilperin. Other reasons have become clear in recent years. They were inadvertently emphasized by the proposals at the meeting of the International Monetary Fund in September. The history of the world’s currencies since the operation of the IMF began (i.e., since about 1947) has been a history of chronic inflation, followed by exchange controls, price controls, depreciation, devaluation, and repudiation. The most sweeping devaluations came in the fall of 1949, when the overnight slash of the British pound from $4.03 to $2.80 was followed in a few weeks by corresponding devaluations of 30 or more other currencies.

This process is not safely in the past. On the contrary, within the last twelve months or so, a dozen currencies have been partially or wholly devalued. These include not only those of such chronic offenders as Argentina, Brazil (five devaluations in the past twelve months), Chile, the Congo, Egypt, Israel, Indonesia, and South Korea, but Venezuela and Canada. There is no reason for supposing that this process has ended.

THE IMF DEPLORES

It is true that the culprits have violated some of the paper rules of the fund. It is true that the IMF always piously deplores inflation, exchange control, and devaluation, and exhorts its member governments to monetary virtue. But the IMF system itself encourages domestic inflation and devaluation by removing or postponing the natural penalties. It is internal inflation that chiefly brings about a deficit in a country’s balance of payments. When that country does not have to meet its external liabilities in gold, when its foreign creditors can be told that it is an ungentlemanly thing to ask for gold and its citizens that it is a criminal thing to own gold, when it can demand credit or support from the IMF as a matter of right to tide it over the difficulties it has brought on itself, it can continue its inflationary policies longer and without sense of guilt.

And it is significant that whenever the IMF meets, the chief proposals by its national members are always for more domestic or world inflation. The British propose that the IMF print its own paper currency for individual central banks to use as “reserves.” The Americans want everybody to conspire to support the dollar, by swapping paper currencies and letting every nation count the others’ paper money as part of its reserves. This is officially called “increasing world liquidity.” A plainer term for it is increasing world inflation.

HOW TO RETURN

Only a return to a full gold standard can bring this chronic inflation to a halt. Each inflating nation must be made to pay the penalty for its inflation immediately. It must no longer be able to demand the automatic support of other nations through the IMF in helping it to continue its inflating.

The problems of how to return to a full gold standard, and at what gold value for the dollar and other currencies, are awkward ones. They are political and legal as well as economic. Heilperin suggests that a new gold price be fixed at $70 an ounce and that the problem be solved internationally through a committee of the Organization for Economic Cooperation and Development. There is much to be said, however, in favor of the U.S. acting alone. If it does act internationally, then the IMF seems the appropriate instrument through which to do it. But once the world, or even the U.S. alone, recognizes the necessity of returning to gold, problems of method should not be insuperable.

One central relationship must be kept in mind. The world is unlikely to halt inflation until it returns to gold; and no nation can stay on gold unless it refrains from serious inflation.