20. Has the Free Price of Gold Rejoined Its Official Price?

(L’Opinion, October 23, 1952)

One of the readers of this paper has asked me the following question: “Since the rate of gold in the free markets is very close to the official American rate of thirty-five dollars per ounce, is there still any advantage in asking for an increase in the price of gold in the United States? Is the official rate at which the United States continues to buy gold not confirmed by the free rate of gold?”

I would like to reply in the simplest way possible to this question which observation of the rates of gold must raise quite naturally in the minds of a large number of persons.

Let us state, first of all, that the prices of gold in the free markets continue to be quite artificial. They should not be considered as representing the price which gold would bring if the demand were entirely free. I say “if it were entirely free” because, in fact, the number of markets in which the gold is freely quoted is extremely restricted.

In the speech, so full of sense and good sense, made in Mexico by the Minister of Finance of South Africa, Mr. Havenga justly pointed out that one could not draw any conclusions from the prices in the free markets, because the demand is still impeded by numerous restrictions, while the offer in the premium markets has become more and more abundant. Mr. Havenga added that besides, and notwithstanding this double movement, the premium for gold, calculated in dollars in relation to the official price, was still about 7 1/2 per cent above the latter. If, therefore, he concluded, the demand could exercise itself as freely as the offer, it is logical to suppose that that figure would be considerably higher.

Let us not forget another important fact, which it is well to recall to the minds of those who talk about an inflation of gold in case of a rise in its price: the number of countries that would like to put gold in reserve today, either in their central bank, where they have one, or let private individuals hoard it is greater and greater.

Fifty years ago, when a considerable number of countries were under the silver standard or the double standard, the demand for gold was much less than it is today. The potential demand of all the Asiatic, African, American, and European countries desirous of restoring their monetary systems at the present time, is enormous. In Europe, it suffices to consider Italy or Germany, whose mark, by a kind of miracle, is maintaining itself in the absence of any gold reserve. Outside of Europe, the countries of South America and Africa are very avid for gold. The official world demand would by far exceed that of former times if the markets were free and if the banks of issue again bought gold at prices closer to economic reality.

But there is still another argument, the most important of all, in my eyes. After the orgies of paper money to which many governments have resorted under the pressure of circumstances, and due also to their own thoughtlessness, what the public now clamors for is a money whose value will be as stable as possible. What international commerce needs is a common and unquestioned money to which all the international prices can be pegged. The strength of the great monetary systems prior to 1900 came from the fact of their resting on a common gold basis whose stability was more or less assured. Actually, it is not the quantity of money that is insufficient—it is superabundant, on the contrary—it is the amount of sure money. This sure money, at the present time, is only constituted by gold. To restore to the paper money in circulation the security which it lacks today, it is indispensable to encourage and to stimulate the production of gold in the world. Therefore, one must assure to the producers of gold a remuneration that will encourage them to increase the existing stocks of the yellow metal. Since 1944, that is to say since the end of the war, the annual production of gold has remained stable, instead of increasing. The increase of the quantity of gold is nevertheless a vital necessity for all the great economies, as well as for relations between these different economies. At the present time the cost of extracting gold continues to increase, while the official purchase price of the largest gold purchaser remains stationary. Therefore, the production of gold is discouraged while it should be encouraged by all means possible.

I know that two objections are currently made to this. The first consists in saying that the increase of gold stocks constitutes inflation. In replying, I will limit myself to quoting a sentence from the old economist and monetary expert Tooke, in his work on the history of prices. That sentence goes back one hundred years. It is still good for meditating.

“Between the stable and active demands due to the new influx of gold and the increase of demand which may result in any country using a system of paper money which is legal tender, there is, one might say, no common feature.” Paper money has no intrinsic value and the point is soon reached at which the restricted area where it may alone circulate makes any new issue react immediately on the prices to the full extent of the increased amount. The precious metals, on the contrary, are the object of universal desire, and constitute the instrument of circulation between all nations. The increasing demand for merchandise and services which they occasion is diffused in a circle that becomes wider every day and it is supported by causes that make new regions benefit from advantages initially reserved to only one locality.

A second objection hardly deserves considering. One cannot ignore it, however, because it is often brought forth. It is that gold has no utility, while coal, iron, apples or prunes are of a general utility which is universally recognized. This argument, which attracts many superficial minds, comes up against a psychological fundamental fact: man has need, rightly or wrongly (but who would pretend to find a reasonable reason for all the deeper instincts of the human soul?) of objects in which the products of his work and of his savings are preserved automatically. That is why, in all periods, and still today, precious stones, art treasures, and rare metals have been the object of his desire. To imagine that, from one day to the other, the governors of the banks of issue and the ministers of Finance will appear to the great public as sufficient guarantees of monetary stability and as equivalent themselves to gold, this is an illusion on which it is useless to dwell, whatever degree of respect one might feel for these great personalities.