8. Gold, International Currency

(Lecture delivered before the French Parliamentary Committee for Commerce, February 1950)

Much is said today about the convertibility of currencies as a condition for the restoration of international commerce. (I am aware that I am addressing the French Parliamentary Committee for Commerce.) It is a strength or a weakness of our time to apply new words to old things. To aim at the convertibility of currencies is to seek for an international standard, though this comparison may cause protest.

Prior to 1914, there existed a common standard of currency, if not for all nations at least for the most important among them. The international community had an international currency. Today all the currencies have become national, and there results a distortion of the commercial currents. Each country tries to export its merchandise less where there exists a demand for it than where there is a chance that payment will be made in the desired currency. Let us suppose for a moment that France should still be divided into provinces (it is not so long ago that an attempt was made to do this), each having its own currency. Paris being the center of the arts and sciences and the center of culture, as well as of the greatest industrial and commercial activity, it is certain that the Parisian franc would be in greatest demand. Each province, therefore, would try to sell in Paris the maximum of merchandise and services. For example, before sending its steel to Bordeaux or Marseilles, Nancy would inquire if the francs from Gascony, Provence, or Lorraine, which they would receive, could be converted easily into Parisian francs, and Bordeaux would do the same before shipping its wines to Nancy. Thus normal exchanges would be a pretense. Establish one sole currency and immediately all this speculation and its difficulties disappear and commercial operations are restored in accordance with supply and demand.

This illustration is an exact picture of conditions obtaining today in international commerce. In Europe O.E.C.E. hopes to restore a currency community, progressively, region by region. But to what international currency shall recourse be had if gold is denied this role? Only two currencies could aspire to this role: sterling and the dollar.

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The pound sterling has suffered too many upsets, and since its last devaluation, which of course has not entirely dispelled all apprehension with regard to its stability, no one thinks any more of making it the international money. If prior to 1914 sterling played this role, it was for the simple reason that it was convertible into gold. Some contend today that it was not gold which sustained sterling, but the opposite. They call to mind a certain article I read in an English paper which said that unfortunately gold had just detached itself from sterling; while in another column nearby there was an announcement that fog in the Straits of Dover had also detached the continent from the British Isles. In fact, read again all the works, all the articles before 1914; everywhere it is stated that it is its convertibility into gold that confers on the pound sterling its character of international money.

And the dollar? It fulfills the function of international currency at the present time, but could we tie all the other moneys to it for a fairly prolonged period? It too has suffered upsets. One need only recall the the Civil War, the campaign in favor of silver at the close of the nineteenth century, and then, we have had the devaluation of 1933. I do not criticize it; on the contrary, I consider it a very wise and prudent action on the part of President Roosevelt, but it was bound to leave a doubt as to the future of this currency.

Furthermore, to select the currency of one country as international currency presents grave inconveniences. That country would constantly have to be a debtor with regard to the community of the other countries. In the case of the United States I do not see how this could be. And since the currency of a country is subject to such an extent to its financial policies, what nation, what group of nations, would accept for any prolonged time a dependence on the currency of another country, however great and respectable it might be? On the other hand, at the present time, a good deal of the demand for dollars is due less to this currency being considered as international money than to the fear of not having enough of it for future payments. It is the same kind of thing that we mentioned with regard to tobacco when it was rationed: it is an important lesson. I add that I believe that the international role of the dollar is due largely to the conviction, which I believe is that of all Americans, that it is convertible into gold.

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Under these conditions there remains only one possible international currency: gold. I will not tell you that it is a perfect currency. Nothing is perfect in this world. I will say simply that it is preferable to others, because it is liable to fewer accidents. First, I should say that there is a general demand for gold at the present time. It is mentioned as little as possible, but all the papers publish the quotations not only of the free market of Paris—since we are so fortunate as to possess one—but of the markets of Cairo, Hong-Kong, India, and many other countries. The first requirement in order that a currency may be stable is the confidence of the public. For gold this condition is present.

I know that back in the eighteenth century Berkeley said that gold was useless and proposed that paper money replace it. The same philosopher also said, it is true, that the outside world did not exist. I doubt that this last theory has remained valid; as far as I am concerned, I much prefer that you exist. In any case, regarding money, paper has undergone so many upsets that gold has always been found preferable. It has been said also that gold is a fetish, that it has no value. Undoubtedly. But the diamond is not useful either; alcohol, tobacco, are not only useless, they are also injurious. Nevertheless, there is a market for diamonds, for alcohol, for tobacco. In the same way there is a demand for gold, and primarily, for a very simple reason: it is rare, much more so than one realizes generally.

One of my friends has figured that if we were to melt all the gold now stored in the banks, we would obtain a cube of 13 1/2 meters. Compared with the great masses of steel, tin, and zinc that there are in the world, is this not an infinitesimal amount? It is a fact that gold conserves its value. Had anyone in France thought of burying gold in 1914 and of offering it now on the free market, he would have found it a most profitable operation. We can say what we like, the public knows it.

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Why then, is there this desire to exclude gold that we find today—especially in the Anglo-Saxon countries, the most important countries from the monetary point of view? It is the great crises—in England that of 1929-31, in the United States that of 1933—which have created this distrust. It is a trace of these bad memories that we find in the documents of Bretton Woods and in the project of Lord Keynes. The war has accentuated this feeling. As soon as it was declared, all the countries forbade the exportation of gold, which means that they thought it could be useful. On the other hand, inflation provoked a state of mind in all governments that ought to be psychoanalyzed, and is due to remorse. It was realized that this policy was not very wise, but it was hoped that the public would not be too aware of its consequences, namely, that paper—francs, dollars, pounds sterling—does not have the same gold value as formerly.

Another reason for the distrust of gold is that there is a fear that the return to the gold standard will precipitate a deflation, similar to the period 1929-1931. It is the fear of a deflation which holds back governments in their desire to restore a stable currency. They would like, in fact, that the gold value would re-establish itself by itself, which accounts for the contradictory legislation. In France, for example, we have a free gold market, but the exportation and the importation of it are forbidden. If it is considered a luxury item, it would be desirable to export it; if it is a currency, to import: we have not been able to decide. The result is, therefore, transactions between the holders of gold, and private holders only at that, since there is but one entity in France that is prevented from buying gold on the market, at a convenient price, the only one for whom it would be essential to be able to do so: the Bank of France, which is bound by the Bretton Woods Agreements. I confess that I do not understand. Is it not scandalous that a country which wants to hoard gold should arrest and condemn the people who import it, whereas the Minister of Finance and the Bank of France can only approve in petto every time gold comes into France? You have probably seen in the papers that in order to set a trap for the traders, the Swiss police have issued bogus gold coins. You will admit that when a policy has this kind of results there is something rotten in the realm of money.

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The present ideas about gold are not without precedent. I could mention, in passing, Fouché, who died a millionaire—in gold francs—after working for the depreciation of gold and silver during the Terror, and supporting brilliantly recourse to paper to promote the cultivation of the austere virtues of liberty. I prefer to go back to another doctrinaire, whose experiments cost our country dearly: John Law. Law was a great writer on economics. He committed one offense, that of writing in French, and works written in French are seldom read in England and in America. It is a pity, because his theories present striking analogies with those held today in those countries. First proposition: the value of gold and silver is due solely to the use of these metals as money—it is the theory according to which the monarch supports gold. Law forgot that the public does not demand all kinds of money indiscriminately. A currency in which the public has lost confidence it no longer demands. Everywhere one tries to substitute paper for gold; nevertheless the value of gold does not become less. There is a small free market in the United States where gold is worth forty dollars per ounce, while the official rate is thirty-five. There is no country in the world where the free price of gold is not higher than the official price in the United States.

Another idea of Law’s, which was also an idea held by Montesquieu, is that gold has only a representative value. Recently a director of the Federal Reserve Bank was telling me that the Bank of Greece, wishing to stabilize the drachma, had applied in the United States for a gold loan for this purpose. He was told that the United States was ready to send wheat, flour, foodstuffs, raw materials, and machinery, anything but gold, which was useless. Like Law, our American friends, who have such great faith in their currency, do not take into account that it is almost as indispensable to have a money that can be relied on as it is to eat and drink.

One hears every day the classical argument used by Law even in his day, that paper money is the outcome of evolution through the bills of exchange and the check, which proves that the public no longer desires gold.

For my part, I do not think that it constitutes a recommendation for present theories to identify them with those of Law.

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I was saying, then, that we find an undefined feeling in all governments that one day it will be necessary to restore to gold its role as international standard of currency. This does not mean necessarily that people will use it in the form of coins. It can serve as a medium of payment while remaining in the Bank. How can we obtain this restoration?

One method which seems to me illusory is the one which consists in saying: let us first restore the balances of trade and then the gold standard. After the previous world war this system was tried with respect to the United States for some years: however the United States continued to sell more than it purchased. Today we see Great Britain and other countries curtailing their importations from the United States. Commercial transactions are not restored with statistics: the deficit will decline a bit, but it will not be suppressed, because the exports will decline with the imports.

Since Mr. Chairman has alluded to 1926, I remember that at that time there were two schools. Some proposed the method I just mentioned. The others—and I was among them—said, “Let us restore the currency first and we will find our balances of payments restored.” I am still of this opinion. Stability of the currency is the first condition.

A first means of increasing the stocks of gold in the world would be to open the free markets where the price of gold is higher than in the United States. Gold would flow to these in large quantities; it would no longer be absorbed by the banks of issue, and there would result a considerable increase of gold-hoards on which the Bank of France, for example, could draw to rebuild its treasury some day, by purchasing at a rate which it considers right (on condition that it is no longer bound by the shackles of Bretton Woods). It is precisely by this method that the United States attracted involuntarily the gold that filled its coffers after the First World War. It was much more advantageous at that time to sell one’s gold in New York and obtain dollars which were sold on the foreign exchange markets, than to take the gold to the banks of France or England, which were absurdly obstinate in maintaining the prewar price. Today one would have to begin inversely, but on condition, of course, that the financial situation be such that everyone does not hasten to buy foreign exchange. The chances of success would increase still more if the United States itself would use its gold stocks in the free markets. For example, it has been suggested that the United States sell gold in India to keep it from continually quoting higher than the official gold-value of the dollar. It is also proposed by Mr. Bevin that America redistribute its gold.

Finally, there would be a second method. I hesitate to mention it, as I would not like to appear to meddle in the politics of a foreign country, especially a country for which we should feel so much gratitude: it would be that the United States consent to increase the price of gold.

This step, which has just been recommended in a very remarkable book by a South African economist, Mr. Busschau, would have the result, by spurring an increase in the production of gold, of bringing about the essential factor of any financial and commercial restoration: it is necessary indeed that the international money be available in sufficient quantity lest we have a deflation.

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It is not as a theorist that I have tried to talk to you. Monetary problems are not abstract. They affect immediately and most directly the interests of commerce, industry, and labor. And if the gold problem has assumed the urgency and acuteness which we find, it is because it controls the problem of the restoration of the economy. One must not overlook the fact that every commercial transaction comprises two phases which are equally essential: the shipment of the merchandise and its payment.

In the work of restoration which has become necessary, France can play a large role, for hoarded gold can help it to back up its currency solidly some day. I do not suggest that we decorate the hoarders, but when the financial conditions have been attained, they will be considered the saviors of the currency.

You will remember that in 1944 we were still subject to a very painful regimentation, which we all at one time recognized as necessary, but those authoritarian features, unfortunately, had seduced many minds. However, if one had studied to any extent the economic history of the world, it would have been possible to say, even at that time, that nothing would remain of this system today. And this is what has happened. Now I wish to make a prophecy which is just as certain. Minds of the greatest probity, who seek very sincerely the good of their country, think at the present time the return to the gold standard would be disastrous for the world. I dare to state before you that within a year or two nothing will remain, or hardly anything, of the exceptional regime which we have at the present time.