The Rueff Proposal

May 10, 1965

When President de Gaulle insisted on drawing more gold out of the United States in exchange for dollars, his action was interpreted here chiefly as more evidence of his anti-Americanism. And when he called for a return to the gold standard, people here and in England said he was asking for a world that was lost forever.

But then they became belatedly aware that the eminent economist Jacques Rueff, the author of the French monetary reform of 1958 (and the newest member of the French Academy), had been advocating these ideas for a long time. In fact his book, The Age of Inflation, published in paperback by Henry Regnery last year, reveals that he has been publicly asking for the abolition of the “gold-exchange standard,” and a return to a world gold standard, at least since 1932.

He has recently been advocating this reform with increased urgency. Among the proposals for world monetary reform that have attracted recent attention, his stands out for one great merit: instead of proposing new gadgets to continue world inflation, it proposes to put an end to inflation.

‘GOLD EXCHANGE’

The “gold-exchange standard” was formally adopted at an international monetary conference at Genoa in 1922. This meant that central banks were allowed to count as part of their reserves not merely gold, as previously, but foreign currencies that could be exchanged for gold, that is, sterling and dollars. The purpose was to “economize the use of gold” and to allow credit and currency expansion.

Rueff holds that the gold-exchange standard did harm from the very beginning. It “unquestionably triggered the disaster of 1929–1933.” And today it is “chiefly to blame for the balance-of-payments deficit of the United States.”

The evil of the system, as Rueff sees it, is this. Under the old gold standard, when a country lost gold it had to contract its credit and currency correspondingly. But under the gold-exchange standard, when the United States has a deficit in its balance of payments, instead of paying gold to a creditor country, it pays dollars. These end up in the creditor country’s central bank. “But the dollars are of no use in Bonn, or in Tokyo or in Paris. The very same day, they are re-lent to the New York money market, so that they return to the place of origin. Thus the debtor country does not lose what the creditor country has gained. So the key currency country never feels the effect of a deficit in its balance of payments.” The result is that both debtor and creditor expand credit on the same base.

$70 AN OUNCE?

There is no doubt that this gold-exchange system—which might better be called the dollar-exchange system—is a major and almost inevitable cause of world inflation. As a minimum reform the central banks should no longer permit their dollar holdings to increase; and they should work out some provision for their gradual repatriation over a period of years.

But Rueff wants to make the reform at one stroke. He therefore suggests that the “world” price of gold be doubled from its present $35 an ounce to $70. This would automatically double the present $14 billion remaining U.S. gold reserves to $28 billion. The world’s central banks could then convert their $13 billion of dollar holdings into American gold, leaving the U.S. still with $15 billion of higher-priced gold. Rueff argues that the U.S. and other countries would then have substantially the same reserves as before, therefore this reform would be neither inflationary nor deflationary. And the world would be back once more on a real gold basis.

But would it happen that way? Would not doubling the price of gold—i.e., cutting in half the legal gold content of every currency unit—not lead to an immediate rise in world prices? Would not most countries, finding their gold reserves suddenly almost doubled, set off on a new inflationary spree? What about the shock to the dollar and to our moral prestige if we broke our often repeated pledge to keep the dollar “immutably” at $35 an ounce?

But whatever the remedy, Jacques Rueff has correctly identified one major monetary disease—the gold-exchange standard.