7. Change in Opinion

The fear of a deflation, or at least of a deflation as sudden and extensive as that of 1929 to 1932, has dominated all monetary and economic decisions during the last four or five years, particularly by the American and British governments. The reason for the change in the trend of prices is very simple. War suspends production of civilian goods. Consumer requirements are reduced to a minimum; the requirements of the government domi nate the markets, and these requirements consist of a small number of products necessary to the conduct of the war. There results a reduction of consumer merchandise, accompanied generally by an increase in the means of payment. When war is ended, civilian production starts again. After 1918, the cry was produce, produce. After the Second World War, the slogan was invest, invest. Everywhere, in all coun tries, governments recommended an increase in tools, an increase in agricultural production, whence an increase in the offer of merchandise on all the mar kets, especially in the international markets. The aim of all this was to push exports to the maximum.

As of this date, the majority of the great countries boast of having attained records in exports far sur passing those before the war. Inevitably, the pressure on the markets of an in~ crease in offer must first of all halt the rise in prices, 83 THE TRIUMPH OF GOLD then tend more and more to lower them. If all the great periods of inflation are marked by an increase in the purchasing power as the essential motive power, all the great periods of deflation originate in the rapid increase of production of commodities of all sorts. Perfect equilibrium and stability of prices are purely idealistic notions which reality has never known. The problem presenting itself today is that of knowing whether we will escape the general rule; whether the same factors that have operated until now will cease to operate today, or again, whether the arsenal of economic policies has been enriched and fortified in the last twenty years to the point of preventing the inevitable decline in prices that follows every great war.

Let us note that there exist in the world two great tendencies in this regard. In the United States a considerable section of economic thought is con vinced that the might of the banking system, its capacity to provide the means of payment to maintain demand at an almost constant level (without, how ever, passing the point at which this demand becomes inflationary) will make it possible to avoid what is called a recession, and what we call more simply a decline in prices. Certain articles that have appeared recently, for example an aIticle by Mr. Slichter, the distinguished professor at Harvard University, ex press considerable optimism in this respect. Calcu lating the probable demand for housing, furniture, 84 THE TRIUMPH OF GOLD automobiles, etc., and comparing these needs to those which existed after the First World War, he estimate~ their level to be such that no fear of a rnajor reduc tion in prices can arise, and that (naturally if peace is maintained) relative stability, with some fluctua tion of little importance, will characterize the level of prices, in the American and world markets, in the course of the next few years.

Of course,· everyone would wish this thesis to be true. On the other hand, the might of American economy, the enormous place that a nation of more than 150 million inhabitants-all self-confident and desirous of increasing their standard of living by means of the most powerful and most ingenious methods of production known to date-occupies in world economy is such as to cast doubt on the con clusions that may have been arrived at until now through historical precedents. It is a new fact, so original and so important that we may expect from it a modification of conclusions that until now have seemed beyond question. And we can understand that their eyes being fixed on their own economy, the Americans may well deny the validity of past ex periences such as Europe has known. However, with all their power and ingenuity, I do not believe that the United States can avoid the effects of the great forces that continue to dominate the economic world, particularly the level of prices.

And among these great forces, international com petition is one of the most effective. It is on the interSi THE TRIUMPH OF GOLD national markets, on the market for cotton, wheat, tin, copper, steel, and also on the markets for ma chinery, textiles, and other objects of universal con sumption, that the trend of prices will project itself. And on all these markets, the production of Europe and that of other parts of the world surpasses, as a whole, the production of the United States. Whether we wish it or not, the international markets are sup plied by sources that, taken together, amount to more than the capacity of supply of the United States. It is here that the decisive play will be made, and it is not necessary to set down columns of figures to show even now the tendency toward a fall in prices that has been increasingly manifest during the last year or two. My prediction may be wrong. It is possible that the views· I express now may not be confirmed. But when one reads, for instance, the recent report on the overproduction of steel in the world, a report ema nating from a great international authority, one can not help but think that the balance of forces inclines in the direction of a fall in prices that I mentioned in the beginning.

As to the means of halting this decline and its con sequences, I have already expressed myself on dif ferent occasions. I think that the efforts of the United States alone to counterbalancing the tendencies to ward a decline by an appropriate monetary policy will be insufficient. Only a return to the gold stand ard and an increased production of the precious 86 THE TRIUMPH OF GOLD metal which constitutes today the only possible inter national currency will enable us to halt the fall of prices and bring about a stabilization that will be beneficial to the entire world economy. Distrust of paper currencies has become such that the restoration of an international currency that is unquestioned is the only means of restoring normal commercial currents·. But this international currency must be given sufficient elasticity and must be capable of in creasing with sufficient rapidity to sustain and strengthen the demand for products at the moment when increased technical means tend to multiply the production of commodities beyond all that previous eras have known.

To bring about this state of things, I can see but two means. The first would be for the' United States to intervene in all the free gold markets and supply them with such quantities of the precious metal as. would be capable of bringing down the price to the level of the official price for gold in New York. This procedure would produce rapid invigoration of the moneys of various countries by restoring confidence, the absence of which at the present time constitutes the gravest menace to the regular development of international commerce. I am well aware that in order to do this the United States 'would have to modify some of its policies, or even some of the legal regulations established since 1933, the period of the greatest monetary crisis they have known.. Such modifications might be possible within the frame .. 87 THE TRIUMPH OF GOLD work of present legislation. That is too complex a problem to be dealt with here, but in my opinion it should be given attention by the proper authorities.

However, the return pure and simple of the price of gold on all the markets to a level corresponding to the legal gold parity of the dollar would not take place without some inconvenience. Countries which produce gold, like the Transvaal, consider this parity too low to permit them to expand their production, considering the enormous increase in production costs and the general increase of prices in the world. To forestall this objection, which is obviously im portant, the Transvaal has strongly suggested that the purchase price of gold in the United States be changed and that the Treasury fix a price that will make possible an increase in the production of the precious metal. It is the well-knO'\vn question of the change in the price of gold in the United States, a question which it is undoubtedly indelicate for a stranger to discuss, but which is discussed now with the greatest freedom in the United States itself and which has obvious interest for the entire world. Quite recently, an excellent economist from South Africa, M. Busschau, examined this question with indispu table competence and great insight in a little vol~me entitled The Measure of Gold) which is singularly instructive reading.

I entertain no illusions as to the haste with which the world will tum toward one or the other of these solutions. I know, however, that "natural forces" will 88 THE TRIUMPH OF GOLD lead us undoubtedly and necessarily to envisage solu· tions that will bring us back to the only international currency known until now, and bring us back to it in such a way that this international currency will be produced in sufficient quantity to prevent the inter national level of prices from declining too rapidly under the pressure of a world production which ac cording to all known indications will attain propor tions incomparable with former levels.