What Price for Gold?

January 18, 1954

Granted that it is desirable, and even imperative, to return to a full gold standard, by what methods should we return? And at precisely what dollar-gold ratio—i.e., at what “price for gold”? These difficult problems have split into dissident groups even the minority of economists who are actively urging a return to a gold standard.

One group, for example, contends that we can and should return to a full gold standard immediately, and at the present price of $35 an ounce. It bases this contention on the arguments that we are already on a limited gold standard at that rate (foreign central banks, at least, are permitted to buy gold from us and sell it to us at $35 an ounce); that we should not suspend this limited gold standard even as a transitional step for a few months; that in the interests of good faith and stability there should be no “further tampering” with this rate; and that at this rate we would in fact have a large enough gold reserve to maintain full convertibility against present outstanding paper currency and deposit liabilities.

These arguments, however, rest on debatable assumptions. Some superficial comparisons, it is true, seem to support them. At the beginning of 1933, the United States money supply (time and demand bank deposits plus currency outside of banks) was $44,854,000,000, and the country’s gold holdings (measured at the old rate of $20.67 an ounce) were $4,237,000,000, or only 9.4 percent of the country’s money supply. Today our outstanding money supply is $205,400,000,000, and our gold holdings against it (measured at the current rate of $35 an ounce) are $22,100,000,000, or 10.7 percent.

Thus our gold reserve situation appears on the surface to be as good as that in 1933. But do such comparisons really prove anything? Let us remember, first, that we were thrown off gold in 1933. (Or, more accurately, we had the choice of going off gold, which we did, or suffering still further deflation.) The run on gold in 1933, before payments were suspended, means that the gold reserves were not in fact sufficient, in relation to other conditions, to maintain confidence.

These comparisons overlook, moreover, that prior to 1933 the United States held a much smaller percentage of the world gold supply than it holds today. In December 1926, the United States held only 45 percent of the world’s monetary gold supply (excluding Russia); in December 1933 it held only 33.6 percent. Today it holds 60.8 percent. If the United States alone returned to gold it could conceivably continue to hold this abnormal percentage for a certain time. But if other countries followed suit within a few years (which would be both desirable and probable), they would presumably attract their previous proportion of the world’s gold. If our own supply were forced back to, say, 40 percent, our reserves would be drawn from the present $22,100,000,000 to only $14,600,000,000. This would leave us with gold reserves against present liabilities of only about 7 percent.

But the real error of those who think we could safely return to a full gold standard at a rate of only $35 an ounce lies in the assumption that there is some fixed “normal” percentage of gold reserves to outstanding money liabilities that is entirely safe under all conditions. This, in fact, is not true of any gold reserve of less than 100 percent. In periods when public confidence exists in the determination of the monetary managers to maintain the gold standard, as well as in the prudence and wisdom of their policy, gold convertibility may be maintained with a surprisingly low reserve. But when confidence in the wisdom, prudence, and good faith of the monetary managers has been shaken, a gold reserve far above “normal” will be required to maintain convertibility. And today confidence in the wisdom, prudence, and good faith of the world’s monetary managers has been all but destroyed. It may take years of wisdom, prudence, and good faith to restore it. Until that is done, any effort to resume a full gold standard at $35 an ounce might precipitate a violent deflation.