Gold Has Risen; D. McLaughlin

rule in Washington and bankers whose skill is largely in manipula tion of the technicalities of increas ingly complex instruments of credit. The long record of human history surely reveals that when money, whether in the form of precious metal or credit, is debased and abused, a nation or even the entire world suffers. Today we are in a period of such misbehavior and mismanagement but the persistent strength of gold even under these trying conditions offers hope that, if it is used wisely and effectively, order can eventually be restored. The principle currently known as Gresham's Law has been recognized for tens of centuries. It is as sound today as it was when Aristophanes used it in a metaphor to illustrate how good men were driven from public life in Athens in the same way that untrustworthy money forced better money out of circula281 282 THE FREEMAN May tion. At about the same time, Aris totle stated the concept more logi cally perhaps, but less poetically.

Today, the principle is well under stood in most high circles in Europe. In 1973, Milton Gilbert noted that gold remained unused in the vaults of the central banks-but not un loved. In America, unfortunately, the money managers and politicians seem less familiar with the classics. Since. then, eighteen governments (but not the United States) are valu ing their official gold stocks closer to market prices-or more rationally expressed are putting the currencies they hold in a realistic ratio to gold. Furthermore, by utilizing gold at a market-related rate, the recently created European Monetary System has provided the Common Market countries with a mechanism for employing their gold reserves effectively in foreign exchange transactions. These wise moves tend to reduce the discrepancies that tend to immobilize gold in response to Aristophanes' or Gresham's Law, even though they do not remove all fears arising from the continued de preciation of fiat money.

According to our official policy, gold has now been demonetized and henceforth fiat currencies and credit instruments will be relied upon ex clusively to perform the services ex Pected from money. Their most dis tinctive quality unfortunately ap pears to be a tendency to decline in purchasing power, a very trou blesome defect in anything that claims to be money. "Paper Gold" To overcome the restrictions im posed by national sovereignty and political borders, a strange device known as SPecial Drawing Rights was created by the International Monetary Fund, at first vaguely at tached to gold and now defined in terms of a cCbasket"of currencies, all of which are depreciating in real value though at different rates. In essence, the SDRs were an attempt to create an international form of fiat money. For a time, their en thusiastic supporters even referred to them as cCpapergold." So far, their acceptance even under duress has been restrained, to put it mildly.

Even though cCdemonetized" by the dictum of the United States, nearly a billion troy ounces of gold are still firmly held in the official reserves of the western nations, rather a substantial amount to de clare was no longer legal money. This obvious preference for gold should be rather disquieting for those who regard Gresham's Law as obsolete. A monetary system based exclu sively on credit possibly could be made to function, if managed by a small group of knowledgeable men of intelligence and integrity, with complete political independence and 1980 GOLD HAS RISEN-BUT REMAINS THE SAME 283 power, as well as mastery of the technical intricacies of money and .finance and unprejudiced under standing of both national and inter national conditions that influence policies. Until such paragons can be brought into existence, however, it will be safer to retain the discipline of gold as an element of the mone tary system than to expect that those who manage money based on credit and on government fiat will do so with sufficient skill that it will in time attain the confidence now commanded by gold. From the re cord of centuries this can hardly be regarded as even a forlorn hope.

Significant Experiments In the natural sciences, ideas and hypotheses are tested by controlled experiments and confirmed or re jected by their outcome. In the social sciences such definitive tests are rarely possible. But with regard to gold's place in the monetary system there have been episodes that have provided results of unusually posi tive sort. The first that should have been regarded as a significant experi ment was the effort of several gov ernments at the instigation of the United States 22 years ago to main tain the official price of gold at $35 per ounce by making gold available at this rate on the London market to all who desired to purchase it. It was a costly experiment. After several billion dollars had been spent with little effect, except to transfer gold into hands eager to accept it at a bargain price, the drain on gold re serves soon became too apparent and excessive to be tolerated and the sales were abandoned close to the Ides of March in 1968, with self serving explanations that the mis sion had been accomplished. It was accompanied by the abrupt an nouncement that sales and pur chases of gold by the participating governments would be discontinued at the official rate except between Central Banks.

The restrictions on ownership of gold were not repealed but miners and others with gold to sell were permitted to do so on the market to specifically authorized purchasers for whatever price their metal might command ..In spite of predictions by several prominent economists and politicians that without the support of the dollar the gold price would sink to much lower levels, this didn't happen. After a short period of little change, the price started to rise, and this trend has continued with the usual market swings but with each new peak rising above the last. The results of this experiment alone should have been accepted as proof that the price of gold can not be tied to an unconvertible currency, sub ject to manipulations that cause it to depreciate in value. A second test with equally deci284 THE FREEMAN May sive results occurred during the international financial turmoil in 1971 that led to the closing of the ~~gold window" on August 15th, when the United States Administra tion announced that it would (or could) no longer redeem dollars held by Central Banks in gold at the official price which by that time had been raised from Roosevelt's $35 an ounce to the strangely precise figure of $42.22 per ounce. The magnitude of claims in dollars had for some time made it apparent that the pledge to honor them in such terms had become impossible to meet. In effect, the United States admitted bankruptcy, as far as its obligation was concerned to redeem such dol lars in gold at the official rate.

Again it was made clear except to those whose anti-gold fixation made them blind to realities that a fiat dollar can not control the worth of gold. The third experiment was the at tempt to check the rising price of gold on the market and the weak ness of the dollar that it revealed by substantial sales of gold from the reserves of the United States Trea sury and the gold held by the Inter national Monetary Fund. Whatever those who initiated this policy had in mind, it is unlikely that they anticipated or desired that the mar ket price of gold would rise in spite of the large quantities they disposed of. Furthermore, in the course of these sales, the Central Banks of Europe have not reduced their stocks of gold and indeed have firmly held the gold returned to them by the IMF which hardly seems in accordance with the deci sion, sponsored by the United States, that gold had been de monetized. Even a number of the Developing Countries have pre ferred to accept their allotment of the IMF sales in gold rather than in the paper in which the so-called aid would have presumably been paid to them.

In the natural sciences, when the outcome of a series of experiments is so definite, even the most ardent advocates of the ideas being tested usually accept them as conclusive. Unfortunately, the anti-gold group in power in Washington continues to ignore their clear message. An Encouraging Sign Restoration of the gold standard, which would require redefinition of the major currencies in terms of gold and establishment of unrestricted convertibility at new fixed rates, hardly seems attainable until the abuses of credit and the increasing worldwide inflation have been cor rected and ended. It is still an objec tive worth striving for but to achieve it would require more drastic and disci plined action than our elector ate and our politicians seeking 1980 GOLD HAS RISEN-BUT REMAINS THE SAME 285 reelection are likely to accept in the foreseeable future. Even though restoration of the gold standard for the time being may be ruled out, a new monetary system appears to be evolving in which gold will continue to have an important place and be a strong and stabilizing element. Progress to ward this end is revealed, not only by the firm retention of gold stocks by the major reserve banks-with the exception of the ill-considered sales by the U.S. Treasury and its sycophant, the IMF-but also by the removal of restrictions on ownership of gold by citizens and the issuance by many nations of gold coins whose worth is primarily determined by their weight in gold. Among them, the one-ounce Krugerrand, various handsome Mexican coins with gold content stated in metric units, and new coins struck from old dies such as the Austrian Krona are notable examples. The designations in na tional currency units that some still bear are obviously meaningless. The principal contribution by the issuing government is its seal that justifies confidence that the gold content is as stated.

A timely step that would simplify and create better order, as well as strengthen the function of gold in the evolving monetary system, would be the creation and dissemi nation of a coin of uniform gold content, fineness and size that could become a standard by which other monetary devices could be mea sured. A Coin of Uniform Weight With one gram of gold adopted as the basic unit, a coin containing 10 grams of gold (0.322 ounces troy), in the 90% alloy with copper commonly used in coinage to provide hardness, would be a convenient size, slightly larger than the old American five dollar gold coin or the British sovereign. The acceptance of such a golden unit would probably be facilitated if the coins were minted by each of the major nations and their authenticity established by them. Uniformity in design would not be necessary. Their essential quality would be the common gold content. Competition in beauty and esthetic appeal would have much to commend it.

If an appropriate name for such 10 gram gold coins could be found that would be easily comprehended internationally, so much the better, but if not, there would be no harm in each nation using a term based on some aspect of the design in which it took pride. The unit of measurement, how ever, should be one gram of gold which could be abbreviated as 1 gm Au, a designation that would be un derstood and translated into any language in this age of common sci entific nomenclature. The 10 gm Au 286 THE FREEMAN May coin which could be acquired and handled would give the unit a tan gible reality. This is a quality that Special Drawing Rights can never acquire, in spite of the presumption of their creators in calling them upaper gold." Leave It to the Market The rigid discipline of the gold standard, however, need not be im posed until desired. No tie need exist between any national fiat currency and the golden units. Any country would be completely free to indulge in whatever political, social or economic policies (or nonsense) it desired. The only restraint imposed by the gold in the reserves and the golden coins would be the effect on the market price of the currencies expressed in grams of gold. The ob jectionable term Uthe price of gold"

could be abandoned, with curren cies, as well as commodities and services, priced on the market in a unit containing a specific weight of gold. The plethora of quotations of currencies--dollars, marks, francs, yen, sovereigns, and the like ex pressed in each other, all variables measured by other independent and sometimes erratic variables~ould be eventually abandoned. It would do no harm to continue such ex change quotations as long as the momentum of tradition required. But they should be accompanied by quotations in the proposed gold units, which would reveal the status of each national currency in one com mon standard. Abuses of credit and excesses in creation of fiat currencies based on debt could hardly be concealed, for they would be promptly revealed in the price of the paper in gold. The economy obviously needs both elements~redit and stable mon ey-but with gold effectively utilized in the monetary system a badly needed base would be pro vided upon which deficits, changes in quantity of fiat money and infla tion, among other evils of the times, could be clearly revealed.

The Individual's Choice The individual should of course have the privilege of acquiring the golden coins at rates determined by the market price of the currency he possessed. The denial of such a free dom by any government would in all probability be immediately and un favorably reflected in the price of the currency. The right to buy gold--especially coins-actually puts into the hands of anyone desiring to do so, a very special commodity that has long possessed the essential qualities of money, viz., a medium of exchange, a means of measuring the relative value of other commodities and ser vices, and a safe way to store wealth. The latter quality is not possessed today by any national currency.

1980 GOLD HAS RISEN-BUT REMAINS THE SAME 287 The existence of a dominant gold coin-such as the one proposed, con taining 10 grams of gold-would provide a simple constant, so to speak, against which all currencies could be measured with ease and con fidence. It would, of course, not be a constant of value in the strict sense the term is used in mathematics and the physical sciences, but it would at least stand for a fixed quantity of gold. No commodity-not even gold-can claim to be invariable in worth and to provide an unchanging base for measurement of values of materials and services, but over the centuries gold has come nearest to doing this, as Roy Jastram has so well demonstrated in his recent book, The Golden Constant: The En glish and American Experience, 1560-1976 (John Wiley & Sons, Inc., 1977)~ Three years ago, the title ofa speech I gave at an annual gather ing in a redwood grove in Califor nia was ~~The Resurrection of Gold Without Benefit of Clergy." Since then, in spite of the high priests in the Treasury and· elsewhere in the government, Gold Has Risen as the dollar and other fiat currencies have deteriorated, and yet its worth, ex pressed in the cost in gold of a good dinner, a suit ofelothes, a haircut or even a barrel of oil has not changed much. The Resurrection of Gold should now be regarded as demon-· strated and as an important advance toward a sounder monetary system, with clear distinction between the status of money based on the rela tively stable worth of the traditional monetary commodity-gold-and the variable national currencies that represent nothing more than credit in one form or another.

If this is coming about without formal conferences and long de bates, so much the better. The open market even for currencies is a mas terful device and one that is essen tial for economic freedom. It will continue to prevail and exert its influence even over the value of un convertible currencies. With the va riety of trustworthy coins now avail able, gold is already gaining more and more recognition as money in which currencies can be measured, and if a gold coin of established quality gains wide acceptance, the monetary system will be approach ing a status in which there will be far better hope of attaining stability than has existed since World War II. Fiat Money Rejected How the present uncertainties will end is hard to predict. In the last few months, the market ~~price" of gold has risen at an unexpectedly rapid rate. There are undoubtedly some undesirable factors involved, such as excessive transactions in gold futures, but by and large the accelerating rate at which gold has risen is to a much greater extent a 288 THE FREEMAN result of the growing concern about the domestic economy and the de teriorating international situation, not to mention the persistence of deficit financing and the resulting unavoidable inflation. If the price of currencies were quoted in units of gold rather than the other way around, the instability attributed to gold by some of its detractors would be more clearly revealed as weak nesses in the artificial devices we now must use as money.

I do recall, however, that a few years ago when I was asked in a radio interview how high the price of gold would go, I replied that it had ap proached infinity in German marks in 1923. That need not and should not happen in America but with a few more years of persistent deficits and unwillingness to forgo ex travagances in our way of life, it is a possibility that should not be lightly dismissed. Stop Deficit Spending and Monetization of Debt The first essential step to prevent such a disaster is to keep expendi tures by the government within its income and to end monetization of debt. The second even more serious need is to find the least painful means of dealing with the tremen dous and still mounting de bt domestic and international-that has now reached magnitudes that make its retirement by conventional means practically impossible. Re duction by default and/or by infla tion are unfortunately much easier.

Repudiation of debt in a more dra matic way would be the substitution of a new dollar for a number of existing dollars. Unfortunately this procedure is not without precedent. In 1926-28 Poincare and in 1958 Charles de Gaulle created new francs for the then current francs that became known as U ancien francs." The creation of the Deutsche Mark is another example. These procedures were drastic though probably unavoidable. Such moves, however, in general are likely to be a mixture of good and evil-probably more of the latter than the former. But, if a country is forced to ((bite the bullet" to correct past mistakes and excesses, liquida tion of excessive debt by payment of a small fraction in sound money may not be the worst way and might even be the best way if the new currency-or the new dollar or whatever it might be called-were made convertible into gold, when a durable rate could be established.

None of these disturbing de velopments is inevitable, but unless the American people and their lead ers who are dependent on their votes have the will to put our house in order and accept the austerity that must be faced, events will indeed take over-and they are not likely to be pleasant. @ Ludwig von Mises Politics and Ideas IN the Age of Enlightenment, in the years in which the North Americans founded their independence, and a few years later, when the Spanish and Portuguese colonies were trans formed into independent nations, the prevailing mood in Western civilization was optimistic. At that time all philosophers and statesmen were fully convinced that we were living at the beginning of a new age of prosperity, progress, and freedom. In those days people expected that the new political institutions-the constitutional representative gov ernments established in the free na tions of Europe and America would work in a very beneficial way, and that economic freedom would continuously improve the material conditions of mankind.