23. Forecasts on the Convertibility of Currencies

these last having been banished from the language of the Anglo-Saxons as being in supremely bad taste, as they remind one much too vividly of the un seemly conduct of the yellow metal during the crisis of 1931. The signs portending a return to gold which are mentioned most frequently are the following: the reopening of the gold market in London (despite its incomplete character); the strengthening of the 220 THE TRIUMPH OF GOLD gold reserves of various Western countries, particu larly Great Britain, France and West Germany, not to speak of the national hanks of Belgium; the Netherlands and especially Switzerland, whose gold reserves are constantly growing; the sales of gold being effected on Western markets by countries such as the USSR, which up to now had maintained an attitude of reserve; the relative stability of wholesale prices in the last two or three years; the return to a balanced budget in the leading industrial nations with the exception of France, etc., etc.

Against all these favorable factors, two elements persist which incline observers toward pessimism: I. The official refusal by the United States to modify the price of gold, a refusal which was again under lined very recently, at the end of March, in the testi mony given by Mr. Burgess, Under-Secretary of the Treasury, before the Committee of the Senate. 2. The'psychological attitude peculiar to all Ministers of Finance, after the long-drawn-out period of anxiety through which they have lived, and which is the very natural hesitation of each of them to "cross the Rubi con," before making sure of every last condition as suring the success of such a step. The report of the Bank of the Netherlands, just published, underlines that it is ready to resume con vertibility, but· that a small country such as Holland cannot undertake this venture all by itself. I am not speaking, of course, of the uncertainty which still remains concerning the reestablishment 281 THE TRIUMPH OF GOLD of peace in the Far East, and until any such uncer ..

tainties cease to exist no Minister of Finance will feel able to make a final decision. Under these circumstances, those who like myself, favor and have always favored, a return to gold, are limited to two or three elements on which to base their forecasts. The first, and the main one, is the general movement of prices. It is well known that, on this point, economists and statisticians have widely varying opinions: some declaring that a drop (in prices) is unavoidable; others, and especially the Americans, assure us that the "recession" which we have just witnessed is already ended, and that we are once more on our way towards a new era of rising (prices) which will be facilitated by a policy of liberal credit. Others, on the contrary, are convinced that the trend towards lower (prices) is written in all the economic conditions of the present. This last possi.. bility seems to me to be infinitely more probable than the first one. Whatever the outcome, w'e are faced by two different possible situations: In the first case, if we are really at the inception of a new era of rising prices, such an era will require, to assure its continuation, the necessary creation of means of payment which will keep step with the increase in production. This policy is advocated in the United States by a number of authorities. But, if such a policy is not accompanied by gold converti ..

bility, it will lead us, in my opinion, to consequences 222 THE TRIUMPH OF GOLD which no one can contemplate without apprehension. It will, in fact, constitute a complete novelty in the monetary management of the world. It is thus an unprecedented adventure upon which the world economy will embark under the leadership of the United States. In the second case, that of a regular drop in world prices, either the United States will maintain the present price of gold, or, on the contrary, they will give their consent to an increase. If the price of gold is maintained, which seems more likely at present, the gold reserves of other countries will be increased almost exclusively through an improvement of their trade balances, exchanges of capital remaining necessarily limited and precari ous. It will thus require a fairly considerable time for these governments to decide to "cross the Rubi con." If, on the other hand, the United States should consent to a change in the price of gold (and the drop in prices could serve here as a lever sooner than one thinks), the resulting increase in existing stocks as well as in the production of (gold) mines could give a strong impetus to the reestablishment of con vertibility.

All that has just been said obviously concerns those countries which have pursued their financial rehabili tation to the point where they are secure against re newed inflation. This is not the case of France. With a budget deficit of 800 billion francs, the reestablish223 THE. TRIUMPH OF GOLD ment of convertibility would again be a hazard. This is sad, but true. The above predictions are based on a number oJ hypotheses, each of which merits a particular study. What I wish to underline is that all of them depend on the trend of prices during the coming years in the United States. It is a fact that the American economy constitutes in itself, because of its uniquely powerful character, a potent factor of incertitude. 2~1 Appendix Remarks of ALLAN SPROUL, President}Federal Reserve Bank of New York at the SEVENTy-FIFTH ANNUAL CONVENTION OF THE AMERICAN BANKERS ASSOCIATION San Francisco, California November 2,1949 As a native Californian-and a native San Francis can-I have tried to think of something I might discuss which would be of special interest to our generous hosts at this convention. The fact that this is 1949, and that the whole State of California has been engaged in a two-year round of celebrations of the lOOth anniversary of the discovery of gold in California, and of its immediate consequences" gave me an obvious lead. Gold is something in which we are all interested. Nor is this an untimely topic on other grounds. The recent wave of currencydevalu ations which swept around the world, following upon the devaluation of the British pound sterling six weeks ago, has fanned into modest flame the always smouldering fires of the gold controversy. In addition, I was eager to review the gold question because it is 227 THE TRIUMPH OF GOLD a good starting point for an understanding of the place of the Federal Reserve System in the monetary and economic life of the country. When I finish with gold, I shall want to say something more specific about the System, and about your relations with it.