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.