Gold and the Failure of the Sorcerers; A. Alsogaray

GOLD AND THE FAILURE OF THE "SORCERERS" ALVARO C. ALSOGARAY IN 1965 as I was traveling from Tokyo to Paris I had to stop over in Bangkok because of the Indo Pakistan War which had just broken out. I went to the offices of Pan American Airways to change my itinerary since the one I had, via Calcutta and New Delhi, was cut off. An American woman was talking at that mo ment with the representative of the company. She was asking that her flight to Calcutta be confirmed for the following morning. "I am very sorry, madam, but for ob vious reasons our planes cannot land there," answered the ·emMr. Alsogaray, Ambassador to the United States from Argentina, wrote this article in March, 1968. It expresses his concern over the gold problem and the meetings at that time in Stockholm and Washington. ployee. "Yes, bought my ticket and I go to Calcutta," insist y. The employee, belie he had not made himse repeated, "But, madam, as been declared and it is ible to cross that territory." ich the lady replied impert , "It is not my problem if is a war; I bought my ti 'et i the United States, yo ompa agreed to take me to certain laces, and therefore you must ma e arrange ments for me to be in Calcutta tomorrow morning." The conver sation continued in that vein for almost an hour. Finally, the em ployee, on the verge of despair, asked the traveler, "Madam, is what you have to do in Calcutta 580 THE FREEMAN October so important?" To which she re plied, "I have nothing to do there but I bought my ticket in the United States and you should stand behind your company." This is a superlative expression of the faith of the United States citizen in the value of commitments and of the social order prevailing in his country.

A few days ago when the bank holiday was decreed in the prin cipal countries of Europe as a re sult of the gold race, United States tourists in some places had to face a different situation but one that was connected with the same problem. There was no war but, in the hotels, shops, and even the banks, American dollars were not accepted except in very small amounts. If it had occurred to one of those tourists to argue that the gross national product of the United States is more than $800 billion and that the United States' potential and resources are practically incalculable, probably the clerk would have shrugged his shoulders and answered that in any case he was not prepared to change more than a few dollars. In Argentina these small-great dramas are very familiar to us. There were times when the Ar gentine peso, our national cur rency - once one of the hardest and most· stable currencies in the world -was not accepted anywhere, or else brought only a frac tion of its official value. Besides, each time a devaluation was to take place, we saw closed banks and a reluctance to change foreign currencies for pesos. We are also aware of the nature and ultimate reason for these phenomena: a lack of faith which is the malady that afflicts even powerful nations today.

Modern IISorcerersll The loss of confidence and with it the alteration or failure of an established order does not come about as a result of unforeseen factors or of natural castastro phes. Nor is it a punishment from the gods. It simply results from mistakes in human behavior, near ly always inspired by a new class of politicians and "experts" in economy which might well be termed modern "sorcerers." Like the alchemists of old and ·like Goethe's Faust, these manipula tors of the economy of the twen tieth century believe in miracle~ and promise happiness to the com· mon man without requiring from him anything other than that hE demand it vehemently from hi~ government. He is assured, be· sides, that by means of a divinE breath called "development" the~ can transform printed paper int< large hydroelectric presses, stee plants, atomic plants, and all kind: 1968 GOLD AND THE FAILURE OF THE "SORCERERS" 581 of goods that they will distribute according to an elevated "social justice." In short, that they have discovered the modern philoso pher's stone!

In Argentina some of these tlsorcerers" even had official status. There was a government that an nounced a grand development plan and the head of that government said publicly: "I have so much gold in the Mint that I cannot even walk in the corridors." And as for carrying out the plan, "why worry about money because one could always make use of Mi randa's 'magic wand' to get all one needed." When matters did not go very well, the "sorcerers" lost their official designation but con tinued to function disguised under such other names as "develop mentists," "managerial planners," "men gifted with a great social conscience," or simply "experts" in economy . For twenty years they managed· the country directly or indirectly by means of bureau cratic measures more or less se vere according to the times, but always aimed at preventing the free play of individual initiative and energies. The magic formula of the "sor cerers" in Argentina - and in all parts of the world - consists in promising the man in the street a better life and at the same time robbing him of part of the fruits of his labor in order that a few (the first to appear) may benefit from that advantage. Everything goes very well at first while the presumed beneficiaries as well as those who are forced to contribute are unaware of the fraud; but finally the system fails and the fraud is out in the open. Except, that it is then too late and the consequences are already irrep arable. The "sorcerers" who brought them about disappear from the scene or are expelled from it, but their place is soon taken by others of the same ilk.

In Argentina, in less than a quarter of a century, the "sor cerers" were able to downgrade the currency by more than 99 per cent and to transform a potentially rich country, full of possibilities, into a comparatively underde veloped one. The Gold Crisis This story is applicable to the present crisis in the international monetary system and the race for gold. The common man, and not just the speculators and hoarders, has begun to lose faith in the cur rency of the most powerful coun try in the world and of the mone tary system created by the "ex perts" to by-pass the rigid disci pline imposed by gold. The new system was an attempt to replace that discipline by a voluntary and 582 THE FREEMAN October conscious discipline to be put into practice by politicians and "ex perts" in economy. For many years, that anony mous common man, who consti tutes the basic cell of human so cieties, did not notice that his leaders did not adjust to that new discipline and that they allowed the modern "sorcerers" to direct the course of the economic proc esses by means of equations and statistical indices. Then some of those men, who make up the vast majority of the people everywhere in the world, began to realize what was happening. They tried to es cape from the ills they felt in stinctively were approaching, by buying gold. Then the whole com plex system devised as a substi tute for the order imposed by gold underwent such a shake-up that everyone was obliged to accept the truth: that printed paper no long er had the value the governments said it had. Today, those who worked and saved can no longer buy the same amount of gold they could yesterday. Soon, if heroic measures are not taken, they will no longer be able to buy ordinary goods at former prices. Overnight, a good portion of the fruit of their labors has evaporated.

Confusion Among the "Sorcerersll The "sorcerers" cannot under stand why all their complicated scaffolding has fallen about them. For many years they asserted that "the new economic science" had found a way to manage the econ omy with more finesse and tha t the crises of the past could not be repeated. They were now in' con trol over the "blind and irrational" forces that unleashed such crises. Their methods, all of them based on subtle ways of restraining the economic freedom of the individual and substituting for the latter the intelligent decisions of high gov ernment officials, would prevent the recurrence of the old prob lems. Having discovered new ways of choking freedom, they felt se cure in their position of disguised dictators. Today, they cannot un derstand what is happening to them. What these "sorcerers" did not know is the big. secret, as old as humanity, that man is free and that sooner or later he is bound to rebel against any kind of slavery, whether it be visible and brutal as in political tyrannies, or subtly imposed by means of an economic system. The only subjection that man admits is that imposed by law.

When the "sorcerers" attempted to oblige workmen and business men to pay forced tribute through inflation, those men, even the most humble and least informed, re acted against that veiled form of 1968 GOLD AND THE FAILURE OF THE "SORCERERS" 583 slavery and tried to free them selves by buying gold. It is use less for the "sorcerers" to accuse the speculators and the hoarders. There are always speculators and hoaders; but they can never cause harm when freedom reigns, how ever imperfectly. Only when offi cial regulations reach a point at which they begin to choke the common man and he rebels do the speculators and the hoarders find a propitious soil for their activi ties. And this is what has hap pened at the present time. A Discipline as Well as a Protection For thousands of years gold has represented, for some reason deep seated in human nature, a disci pline and at the same time a pro tection for the individual. On the one hand, it guarantees his sav ings which are the result of his work. On the other, it obliges him to submit to certain rules the most fundamental of which is that he may not enj oy anything that is not the product of that effort. On the government level it works in the same way. The gold reserves of a country constitute the best guarantee and protection for its inhabitants and are the result of the intelligence and work of the whole nation. At the same time, if the reserves are well used, they prevent the modern "sorcerers"

(demagogues and false "experts" in economy) from wasting the re sources of the community and sur reptitiously enslaving men. These "sorcerers" can fall back on all the magic formulas they want to, but in the end they will be unable to prevent men from buying gold; and the discipline this imposes will prevent the "sorcerers" from carrying out their designs. This discipline annoys the "sor cerers." The impotence they feel is well reflected in a cartoon pub lished in the United States during the recent crisis. In it appears a monument with a resplendent gold calf. At the foot of the monument, the World is kneeling. The caption below says, "Still doing business in the same old way!" Though the symbolism is differ ent-because the annoyance is not against the "materialism" of gold but rather against the discipline it imposes - what appeared to be dead seems to reappear with char acteristic immutability.

If the "sorcerers" - and others -- wish to escape from the disci pline imposed by gold, they should invent another discipline. They cannot live with a permanent defi cit. They cannot squeeze blood from a turnip. They cannot multi ply material goods by means of the simple expedient of printing a piece of paper. They have to work, save, invest; and only then, when 584 THE FREEMAN October the desired goods have been pro duced, may they enjoy them. The "sorcerers" still have a card up their sleeve to justify themselves. They will now say that there has been an excess of eco nomic freedom in the world, that the lack of sufficient controls on international trade has brought about imbalances and that the gov ernments have not known how to plan and take a firm enough hand in the economic processes. That is to say, they will fall back on the great. political fraud of blaming the crisis upon a freedom that has not existed, taking care to hide the fact that their maneuvers in the monetary and investment plane principally those of a public na ture - and other more refined con trols that restrain freedom have actually precipitated the crisis.

Inflation: Cause of the Crisis The fundamental cause that has lead to the present crisis can be found in inflation. Inflation does not consist, as many. believe, in the rise in prices. This is simply a consequence of inflation or a visi ble sign of it, in the same way that fever is a sign of illness. Inflation occurs when, through various schemes, greater means of payment are placed in the hands of the public than should be avail able from goods already produced and from certain individual expectations with regard to liquidity and savings. Among those schemes, the most usual are defi cits in national budgets, privileges granted to certain large private and state enterprises that are al lowed to exist outside the market in a state of insolvency, salary raises above increases in produc tivity, and attempts to force de velopment by financing with cur rency issues and false credits. This all means one thing: a deficit.

It implies a political and moral problem; not an economic one. One lives with a deficit because that is the way he prefers· or be cause there is no will to resist pressures .exerted by those who use techniques to bring it about. Ultimately, the problem simply comes down to the fact that one spends more than he produces. Inflation is the social cancer of our times. Individual freedom and order in. free communities depend on whether it is possible to over come that ill. I should like to re mind you' here of warnings ex pressed more than a decade ago by two eminent men who have played a decisive role in the re construction of the postwar world: Ludwig Erhard and Jacques Rueff. With regard to the individual problem, Erhard pointed out: "These ideas, thought out fairly and consistently, should move us to include monetary stability 1968 GOLD AND THE FAILURE OF THE uSORCERERS" 585 among the fundamental rights of man who has the right to expect the State to protect everycitizen .... "

On the fate of communities, Rueff has been tirelessly repeat ing warnings such as these: Since 1945 we have been develop ing the mechanism which, unques tionably, unleashed the disaster of 1929-1933. It is up to us to decide if we are going to allow our civili zation to be propelled toward the inevitable catastrophe. Though we are on the brink of disaster it is still possible to avoid it if we are determined enough. . . . The prob blem (of the present international monetary system) will be solved soon either under pressure of an emergency or by peaceful delibera tion. . . . If action is taken. in time, the peoples of the West will be saved from the disorder and suffering of a new world crisis .... Today, after 40 years of inflation, freedom will be saved through the rehabilitation 01 money .... Inflation, which moved slowly at first but gained momentum during the past few years, has already led us to the first lap of the crisis. I have heard many people ,say, "Nothing will happen to gold or the monetary system until Novem ber be<:(!)lsethen there will be elec tions in the United States and it is not advisable to deal with such problems during the election period." As if it were possible to avoid crises until convenient to the political parties! The fact is that the inflationary illness has ignored the electoral calendar and obliged everyone to take heed of it.

On Saturday the 16th and Sun day the 17th of March of this year, a meeting took place in Washington among the governors of the principal central banks and international financial institu tions; .and they did the only thing they could do: they gained time. Some of them have been express ing warnings that no one wanted to hear and now they have thedis agreeable task of doing what they never wanted to do. With the few instruments at their disposal, they have obtained a respite that should be utilized. The future of free so ciety depends on what is done dur ing the next few months. The measures that were taken do not in any way solve the prob lem. They simply postpone it, and at the cost of admitting that it was not possible to keep faith. This is a severe blow to stability and confidence, subtle mechanisms on which the whole social order is based. But there was no other way, and it had to be done.

The Two-pronged Problem There are two separate prob lems which, due to the relationship between them, are often confused.

586 THE FREEMAN October The first is the price of gold and the holdings of dollars in the cen tral banks. The second is the dis cipline to which community life must adjust in order not to spend more than is produced. The first problem can be solved by means of monetary artifices and a political decision taken jointly by the principal nations. But if the second problem is not solved simultaneously-that is, ad j usting from now on to a specific discipline in order to eliminate def. icits - the gold problem will crop up again and the sacrifices im posed by its temporary solution will have been entirely worthless. A monetary devaluation - or gold revaluation - makes sense if it is aimed at canceling past errors and building a better life in the future by avoiding further errors of that nature. That cancelation, that is in the nature of a surgical operation, does not in itself solve the problem nor does it guarantee that it will not reappear. It simply puts an end to an untenable sit uation; after that, everything depends on whether the true causes of the ill are eliminated.