Introduction by Philip Cortney

“The one true reserve, gold.” ^*

Introduction

Charles Rist passed away in 1955. He was one of the great monetary economists of our time and enjoyed an international reputation. I had the good fortune to be one of his friends. Whatever worthwhile knowledge of monetary issues I acquired, which resisted the acid test of constant reflection and experience, I owe to him. While he had deep rooted convictions, Rist was no doctrinaire: his mind remained open, receptive and lucid until the last moments of his life. “L’histoire des doctrines relatives à la monnaie et au crédit” by Charles Rist is one of the great books on money. Unfortunately, the English translation does not do it justice. Whenever I become disturbed by the assault of fallacies expressed by clever sophisticated writers, I reread Charles Rist, whose intelligence, good sense and clarity give his ideas the power of evidence.

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Those who are pressed for time could limit their first reading to the Preface by Charles Rist and to the articles: 1) Gold and a Return to the Ideas of John Law (p. 107). 2) The Price of Gold in the the United States (p. 135), and 3) How to Evaluate the New Price of Gold (p. 208).

FROM JOHN LAW TO ALLAN SPROUL

It occurred to me that an English translation of Rist’s last book “La défense de l’or” could serve a good purpose at a time when our statesmen need clear thinking and sound guidance in order to restore monetary sanity. I chose for the English edition the title “The Triumph of Gold” because it was Rist’s conviction, as it is mine, that only a return to the gold standard is able to preserve our free society and human freedom. We shall have sound money or we shall cease to be free. Only the discipline of the gold standard will insure us sound currencies and a workable international monetary system, both essential to the preservation of the free world.

In an appendix to this book the reader will find a famous speech by Allan Sproul, delivered in 1949 before the American Bankers Association. He was then President of the Federal Reserve Bank of New York. The ideas and policies regarding gold, enunciated in this speech, have become the “constitution” of the paper money managers. Rist’s book answers most of the ideas defended by Mr. Allan Sproul. This is not surprising, because the views held and advocated by Mr. Sproul are as old as they are discredited by actual experiments in the past.

In his speech, Mr. Allan Sproul stated: “I perceive no moral problem involved in this question of gold convertibility. Money is a convenience devised by man to facilitate his economic life. It is a standard of value and a medium of exchange.” It is symptomatic of his thinking that the “store of value” attribute of sound money, universally recognized by all important writers on money, is not even mentioned. Does Mr. Sproul think that the depreciation of the dollar by more than 50% since 1940 does not matter and is not a moral issue?

Discussing the depreciation of the dollar since 1939, the National City Bank in its “Monthly Letter” dated December 1951 made the following pertinent comments, as true today as they were then:

“Gold has had the best record over centuries as a store of value (a vital function of money which many economists nowadays forget). Paper money has been good when issued by banks which have been under a legal obligation to maintain convertibility into gold at the option of the dollar. . . . Paper money directly issued by National Treasuries has the worst record, though money can be just as bad if it is put out by a bank of issue which is free from the necessity of maintaining gold convertibility and bonds to the wishes of a profligate government for cheap financing. Most of the worthless currencies issued in foreign countries during and after the war bore the stamp of a corrupted central bank of issue.”

Is the preservation of a free society not a moral issue? The issue between individualism and collectivism, between internationalism and economic nationalism is settled when a country has decided what kind of monetary system it is going to have. If the government is free to print and manipulate money at will and arbitrarily, then we cease to have a free society.

In a speech delivered also in 1949 by Mr. Randolph Burgess, then Vice-Chairman of the National City Bank of New York, one can read:

“Of course the modern economic planners don’t like the gold standard just because it does put a limit on their powers . . . I have great confidence that the world will return to the gold standard in some form because the people in so many countries have learned that they need protection from the excesses of their political leaders.”

Henry Hazlitt in his recent book “Inflation” writes as follows: “The gold standard is not important as an isolated gadget but only as an integral part of a whole economic system. Just as ‘managed’ paper money goes with a statist and collectivist philosophy, with government ‘planning’, with a coercive economy in which the citizen is always at the mercy of bureaucratic caprice, so the gold standard is an integral part of a free enterprise economy under which government respects private property, economizes in spending, balances its budget, keeps its promises, and refuses to connive in overexpansion of money and credit.”

If the gold standard did not have anti-totalitarian virtues, the Nazis would not have conducted a campaign against gold which they didn’t cease even during the war.

Moreover, the gold standard has served the cause of peace and has been an admirable instrument of international cooperation. It has coordinated the movements of prices in the different countries and it has thus unified the international monetary system. It is thanks to the gold standard that the good functioning of the international monetary system has been spared the evil influences of the doctrine of national sovereignty. It is the gold standard which has made possible the expansion of international commerce and the distribution throughout the world of the benefits that are derived from the international division of labor. It is gold and its general acceptance which permits each individual to buy what he wants and to sell the fruit of his labor any place in the world, thereby spreading the benefits of competition. It is gold which assures the individual his independence and which is the best shield of the small states against the arbitrariness of the large ones. Contrary to what a superficial judgment would indicate, gold and the gold standard are not the weapons of oppression of the well-to-do, but rather the weapons of defense of the weak and the disinherited. It is the stability of gold, its general acceptance and its liberty of movement which have made possible the development of backward countries by the savings of the capitalistic world (which means privations and individual risks!). It is gold, to sum up, which has been the best weapon against economic nationalism and its dangers.

BLUNDER OF MONEY MANAGERS

It is not true, remarked Mr. Sproul, that gold convertibility eliminated wide swings in the purchasing power of the dollar. “What happened to us in 1920-21 and 1931-33 under a gold coin standard should prevent a too easy acceptance of that standard as the answer to the problem of a money with stable purchasing power.” No objective defender of the gold standard has ever claimed perfection for it. The gold standard cannot offset the mismanagement of our monetary affairs by government, central banks and commercial banks, made possible by our Federal Reserve Act, nor can it correct, at times, the incompetence of the money managers. The fall in prices in 1920-21 was normal after the high level reached due to the paper money and credit inflation during the war and to the general rush to buy much needed goods accompanied by speculation fed by the banking system. Rist noted also that the convertibility of the dollar was maintained by the fact that the war compelled Europe to ship gold to the United States during the entire war of 1914-18 and immediately after until 1924-25.

As to the great depression and the fall in prices in 1931-33, this was a consequence of one of the greatest mistakes ever made by the managers of the gold standard after the end of World War I. The reason why the 1929 depression was so deep and prolonged remains a mystery to most people, instructed or not. Essentially it was due to the fact that the governments of the United States and of Great Britain failed to recognize that the huge paper money inflation during World War I and the concomitant rise of prices made impossible the maintenance of the pre-war relationship between gold and paper currencies. Germany returned to the gold standard in 1924 and Great Britain in 1925. Both tied their currencies to the dollar at the pre-war value in terms of gold. Until 1924, no central bank of any large European country was buying gold, with the result that gold was accumulated in the United States, and the illusion arose that dollar prices (due to paper money inflation during the war) were gold prices.

NO SHORTAGE OF GOLD

Most British economists hold the view, expressed again recently by Professor Triffin, that the severe fall in commodity prices after 1929 and particularly after 1931, was due to a “shortage of gold.” The fault lay, according to Professor Rist, and I share his opinion, in governments not recognizing the fact that inflated monetary means and prices had made the international liquidity in gold inadequate, and had hampered the expansion of production of gold, necessary to support high levels of economic activity at the level of prices inherited from the war. A readjustment of the price of gold in terms of the dollar and the pound should have been made in 1924-25 to bring the purchasing power of gold nearer what it would have been if the rise in prices had been due to an increase in the production of gold and not to monetized government debt. Such a readjustment would have put an end to the presumed “shortage of gold.”

The fundamental error in the management of the gold standard had two major consequences. First, it led to the adoption of the gold-exchange standard to “save gold.” As a result, in 1931 the pound-sterling collapsed because of massive withdrawals of foreign funds deposited in British banks, which accentuated the fall in dollar-prices, still tied to gold at the prewar parity. Second, the Federal Reserve Board succeeded in the 1920’s in holding up the price-level for a surprising length of time by an abnormal expansion of inflationary credit, but in so doing it helped produce the speculative boom. The collapse came when excessive private debt creation could no longer be expanded, thus putting an end to the post-war boom at a time when the trend of prices had turned downwards, making the depression the more severe.

With a complete disregard of the 1920-30 lesson, we are repeating the same mistakes now, and an abnormal expansion of inflationary money and credit was superimposed upon the paper money expansion which resulted from the financing of World War II. The lack of international gold liquidity led to the widespread use of the dollars as a reserve currency. The huge accumulation of foreign short-term funds in the United States is a constant menace to the dollar. By our deliberate policy, the free world has been put on a dollar standard, the dollar has been put on a government bonds standard, and government credit is largely dependent upon politics and labor unions. To clarify this situation, I would mention that bank notes ($31 billions) and deposits with the Federal Reserve Banks ($18 billions) are covered to the extent of about 55% by government securities ($27 billions), while foreign short-term claims in the United States amount to over $20 billions. If we decided to put an end to inflation, the disequilibrium between the general price level and the gold valuation of the world’s key currencies, at $35 an ounce, plus a low production of gold (due to its relatively low price), while the production of goods of all sorts is expanding, would exert a downward pull on prices and bring about a recession or depression and unemployment.

DISTRUST OF MONEY MANAGERS

In the same speech, Mr. Allan Sproul made the two following remarks:

“Discipline is necessary (in monetary affairs) but it should be the discipline of competent and responsible men, not the automatic discipline of a harsh and perverse mechanism.”

“When you boil it all down and try to eliminate mythology from discussion, the principal argument for restoring the circulation of gold coin in this country seems to be distrust of the money managers and of the fiscal policies of the government.” Precisely, and I wonder why Mr. Allan Sproul should be surprised. It is the mismanagement of the gold standard and of our credit system which brought us the 1929 collapse and the great depression. It took a great deal of doing to put the dollar, the strongest currency in the world only ten years ago, in the vulnerable position it finds itself, leave aside its depreciation of 57% since 1939!

In an excellent book “Banking and the Business Cycle” published jointly in 1938 by three professors, C. A. Phillips, F. T. McManus and R. W. Nelson, one can read the following statements:

“Two events occurred in 1914 that were to have a profound influence on subsequent economic developments in the United States. The first of these was external, the outbreak in Europe of the World War; the second was internal, the formal inauguration of the Federal Reserve System. Both were events propagative of an unprecedented orgy of inflation. The two, inextricably intertwined, brought about a great inflation of bank credit in connection with war finance, and both were productive of striking changes in the economic structure of the world during and after the war. When the hegemony of world finance passed to the United States during and after the War (World War I) and with it the responsibility for international monetary management, there were only a few nations remaining on the gold standard, and the inexperienced or incapable hands in this country essayed to manage a purely domestic gold standard, apparently with scant regard for the international aspects of the situation.”

Since the great depression, the hyper-elasticity of the Federal Reserve System has been still increased, (mainly by permitting bank notes to be covered by government bonds instead of commercial bills) and our monetary system has been streamlined into the biggest and subtlest inflation engine in the world.

I am coming now to one of the least understood abuses and distortions of our currency system: the tampering with the purchasing power of our standard of value.

MEANING OF STANDARD OF VALUE

Mr. Allan Sproul accepts gold as a “standard of value.” He also mentions that the Secretary of the Treasury is required, by law, to maintain all forms of United States money at parity with the gold-dollar which contains 1/35 of an ounce of gold.

Gold is both a commodity and money. It has been chosen to serve as money by traders and governments because of its intrinsic qualities as a commodity and because of its international acceptance as money.

In his book on money, D. H. Robertson defines the gold standard as “an arrangement whereby the value of a monetary unit and the value of a defined weight of gold are kept at an equality.” By “value” Robertson means “purchasing power.”

It is important to understand that our “managed currency” experiment is tampering with the purchasing power of our standard of value. Congress wanted a monetary system in which the purchasing power of the dollar is made to vary with the purchasing power of our standard of value, which is gold. However, the hyper-elasticity of our Federal Reserve System made it possible for us to monetize debt and increase the supply of money and credit to such an extent that the value of gold is made to conform to the purchasing power of the dollar instead of the value of the dollar conforming to the value of gold.

Professor Harold R. Reed in his book on “Money, Currency and Credit” makes the following comments: “The gold standard is usually defined as a monetary system by which each unit of currency is redeemable in a stipulated amount of gold. . . . Convertibility provides only a mechanistic definition of the gold standard. In monetary discussions the standard is the rule for measuring fluctuations in the value, that is, the purchasing power, of the monetary unit. . . . What must it mean then to say that a certain monetary or currency system is tied to the gold standard? The answer surely must be that the exchange-value of a unit of the currency increases when gold, as a commodity, commands more of other goods in exchange. If, on the other hand, the exchange-value of gold falls, the purchasing power of the currency unit must likewise decline.”

D. H. Robertson explains that a large and rich country (like the United States) has the possibility to make the purchasing power of gold conform to the value of her money; such a country can then maintain an arbitrary standard, while still preserving intact the full trapping of a gold circulation or gold bullion system.

Ed. Bernstein, the former Director of Research of the International Monetary Fund, expressed himself as follows on this subject: “What makes the value of gold go up or down is monetary policy. It is the policy of the monetary authorities in creating units of money that determines the value of money; and it is the value of money (the dollar) which then determines the value (purchasing power) of gold.” This is the view generally held by those in favor of paper money management. The interpretation of Bernstein’s explanation leads one to the conclusion that the standard of value is the paper dollar! In fact the paper money managers keep asserting that it is the dollar which gives value to gold and not gold to the dollar.

THE PRICE OF GOLD

It is important to realize that the present level of prices, wages, incomes is not the result of a normal relationship with the monetary gold reserves and the production of gold, but the outcome of huge monetizing of public and private non-commercial debt in the United States as well as in most other countries since 1939. The monetary means (currency and deposits) of the free world have increased to five times the amounts existing in 1939. If we had not monetized public and private non-commercial debt, the level of prices and wages would not have reached the present heights and the gold production would be much larger (because costs would be lower). The huge increase in fiat monetary means would not have been possible, if the free convertibility into gold had been maintained. These being the facts, it seems incredible that so many persons, even among the instructed, should continue to fight for the pre-war relationship between gold and the paper moneys. It is the tampering with the standard of value, which makes it necessary to raise the price of gold, in order to restore a normal relationship with the quantity of existing paper moneys (currency and deposits) and to permit an increase in the production of gold. Otherwise, if we should decide to put an end to inflation, a deflationary trend of prices or massive unemployment would be the result.

I realize that a change in the price of gold in terms of all currencies presents problems. In fact, I don’t know any solution to our money muddle to which one cannot find objections.

But what are the alternatives? Either a severe deflation (particularly in the United States and Great Britain) or managed inflation assorted with international makeshift plans à la Triffin, which sooner or later would end in a catastrophe. There is of course the alternative of national socialism, which means also inflation, but held in check by controls of prices, wages, profits and exchange controls. Who wants this kind of a system which entails the loss of human freedom?

The only fundamental solution and one which presents the least difficulties is the return to a genuine international gold standard and a rise in the price of gold.

Many people confuse the request of a worldwide rise in the price of gold in terms of all national currencies with a quest for a devaluation of the dollar. I wish to make clear that a devaluation of a currency is usually designed to take care of the lack of balance between internal prices and world prices by a change of the exchange rate, while a worldwide adjustment in the price of gold is designed to reestablish a normal relationship between gold production and the production of goods so that no deflationary trend of prices should ensue once an end is put to inflation, so as to make possible a return to the international gold standard. The adjustment in the price of gold is essentially an international issue and does not necessitate a change in present exchange rates, unless some of them are already out of tune (which may be the case of the mark).

OBJECTIONS TO RAISING THE PRICE OF GOLD

Let us now analyze the dangers usually mentioned in relation to the proposal to increase the price of gold in terms of all currencies (assuming an end to inflation and the restoration of the international gold standard):

1. It is said that a raise in the price of gold may feed inflation. But this argument amounts to saying that we are less afraid of paper inflation by means of monetizing government debt than by the potential of inflation based on gold. If the government of the free world decided to put an end to inflation, while averting deflation thanks to the rise in the price of gold, the central banks are familiar with the means of sterilizing gold if such a need presented itself. Take the case of the United States. Our Federal Reserve Banks hold about $27 billions of government securities, which are mainly the result of financing the war. If the price of gold should be doubled, the windfall of approximately $18 billions could and should be used by the U. S. government either to repurchase 18 billion dollars of bonds at present held by the Federal Reserve Banks, or still better to reimburse the short-term foreign deposits in American banks.

In order to create a constitutional check on our inflationary bias and practices it may prove necessary to adopt one or more amendments to our Constitution prohibiting the institution of exchange controls in times of peace and that labor unions cannot be exempted from our anti-monopoly laws. The Federal Reserve System would have to be changed radically as well as some of the rules governing the operations of the commercial banks.

2. The second objection which is often made to a change in the price of gold is the following: if the governments are allowed to do it once they may be tempted to repeat such a change whenever it would seem expedient. In the first place, an inflation of paper money such as we had after 1939 is practicable only when countries wage a big war. Only a big world war gives rise to an inflation of monetary means of such magnitude that it makes it necessary to readjust the price of gold after an end is put to the war and to inflation. Besides, we should not raise the price of gold unless we are prepared to meet all the conditions necessary for a proper working of the international gold standard.

3. Another objection that is made to a rise in the price of gold is that by so doing the overall shortage of international liquidity may be cured but the countries that didn’t have enough reserves would still be left with inadequate reserves after the change in the price of gold. I still remember the caustic remarks made by Charles Rist in the 1920’s when this argument was put forward. In the first place, a change in the price of gold is not meant to redistribute international reserves. Nor is it supposed to help remedy the present deficit in the international accounts of the United States. Its purpose is to reestablish a normal relationship between gold production and the production of goods, and to increase international liquidity. Any country that wants to acquire or “buy” gold reserves, as Lord Lionel Robbins puts it, can do it if it puts its mind to it. The recent example of Germany is manifest proof that a country can improve its international liquidity by adopting proper policies. On the other hand, Sir Dennis Robertson remarked a long time ago that any country can in no time bring about a deficit in its balance of payments if it does not manage properly its monetary and fiscal affairs. The example of the United States does not need any commentary. It seems evident, however, that if the overall international liquidity were increased by a substantial rise in the price of gold it would be easier for each country to acquire the reserves it desires or needs.

4. One further objection is that the Russians will benefit from a rise in the price of gold. This is probably true but it doesn’t change the fact that it is to our advantage to increase the price of gold if we are to return to an international gold standard. The Russian policy regarding gold is shrouded in mystery. They know perfectly well that a big gold reserve gives a country both power and prestige. Failing to uncover the Russian mystery regarding its policy it seems clear to me what our response should be: (a) We should pursue economic, fiscal and monetary policies aimed at making the dollar and the pound as strong currencies as possible, (b) We should endeavor to acquire as large stocks of gold as possible so that the dollar and the pound should be invulnerable in times of peace and war. (c) We should encourage as large a production of gold as practicable, (d) We should buy as much Russian gold as is offered to us. All information available leads to the conclusion that the Russians produce gold at a cost much higher than $35 an ounce. This means that they can accumulate large stocks of gold regardless of cost and of the selling price.

FREE MARKETS FOR GOLD ESSENTIAL

If gold is to be the standard of value and not the dollar, it is clear that we need free markets for gold and that anyone must be permitted to import or export the metal. Yet Mr. Sproul opposes free markets for gold on the ground that the result would be gold convertibility and the possibility for the “hoarders” to acquire gold. The gold hoarders are literally a nightmare for Mr. Sproul. People have no desire to hoard gold (which does not earn any interest) as long as they have confidence in the currency. The paper money managers dislike free markets for gold because they expose the arbitrary and fictitious legal rate. Rist has a great deal to say on this subject as the reader will discover. The well-known financial editor of the “Sunday Times,” George Schwartz, wrote recently:

“The attraction and virtues of gold are that governments can’t roll it off or create it with the stroke of a pen. It imposes some monetary discipline by affording a safeguard, a store of value which may escape looting, debasement and another forms of spoliation . . . that is why the people of the East, with centuries of experience of rascality by rulers, bandits and other depredators of human welfare, hoard a few pieces of gold against the days of pillage and spoliation.” (A quotation from Melchior Palyi’s recent book “An Inflation Primer.”)

GOLD THE ONLY DISCIPLINE

The irrational, emotional fear and repugnance some people have acquired for the words “gold” and the “gold standard” is one of the strangest phenomena of our times. Experts speak about “free convertibility of currencies” but their tongue freezes if they have to say “convertibility into gold,” as if the words free convertibility made any sense if it is not convertibility into gold.

The same individuals who profess to believe that monetary policy should aim at obtaining monetary stability, free convertibility of currencies and stable exchange rates reject the discipline of the gold standard, as if the monetary discipline they declare themselves ready to accept were in their essence different from the discipline of the gold standard. And curiously enough most of them do not advocate discarding gold in monetary affairs but limiting its role to the settlement of international balances and to providing us with a guide in international finance and trade.

What kind of “discipline” are these individuals willing to accept in order to attain our professed goals? A few superficially new concepts have been coined lately like the “discipline of balance of payments,” or the discipline of a “low gold liquidity,” or the discipline of “sound monetary and fiscal policies” or the discipline of the International Monetary Fund. But the more one analyzes these supposedly “new” disciplines, the more one has to admit they imply a conduct of our affairs identical to that inherent in the concept “discipline of the gold standard.” I have stated repeatedly that the conditions necessary to put an end to inflation are not different from those to restore the gold standard. In fact those countries which handle their monetary affairs most ably and successfully behave as if they were on the full gold standard. Yet Mr. Allan Sproul holds strongly to the view that we can restore confidence in the dollar, balance our international accounts, obtain a sound “efficient international monetary system” without the compulsion of the “rude and often perverse restraint of some mechanical device,” by which he means the gold standard. He does not explain how else we can reach and maintain our professed goals except to say that he relies on the “competence and wisdom of men.” In the light of our dismal monetary history since the creation of the Federal Reserve System one wonders who in Mr. Sproul’s opinion are those “competent and wise men,” and whether he has considered the limitations put on their “wisdom and competence” by our living in a democracy with universal suffrage.

GOLD MONEY VERSUS PAPER MONEY

Whether a country has a gold standard system or a paper money system, it requires “management” of a sort. The essential difference between the two systems is that in a gold standard system there is a limitation on the expansion of money and credit, and when properly managed the banking system, and particularly the central bank, cannot monetize government debt; these are precisely the very virtues of the gold standard.

What are the differences between the management of a paper money currency, as compared with the management of a gold standard currency, assuming that our goals are monetary stability, free convertibility of currencies and stable exchange rates?

The main characteristics of a paper money system are the following:

a) The printing of bank-notes and the expansion of credit are not limited by the amount of gold held by the central bank.

b) Government bills or bonds are considered a sound substitute for gold reserves.

c) The use of fluctuating exchange rates, when considered desirable.

d) The use of exchange controls, when and to the extent considered necessary.

If we assume, however, the above-mentioned goals to be the guide-posts of our monetary policy, the only difference I can see between the management of a currency on the gold standard and that of a paper money currency is the amount of gold held as reserves.

In other words, a country which is on the gold standard has to correct, in case of balance of payments deficits, its monetary and fiscal policies earlier than a country which has a paper money currency.

The main instrument of “managed money” is the purchase or sale of government bills or bonds by the central bank, the so-called “open market operations.” In Great Britain it is the banking department of the Bank of England which conducts such operations. The European central banks, which were on the gold standard, did not consider it sound practice for the central bank to buy government bonds. It was the Federal Reserve System of the United States which, under the pressure of the needs to finance World War I, started the practice of a central bank buying and selling government bonds. I agree with Benjamin Anderson, Lionel Robbins, Charles Rist, and others that it is these purchases of government bonds that in 1924, and particularly in 1927, stimulated and fed the speculation in stocks and real estate ending in the 1929 crash.

I wish to make clear that I am not opposed to open market operations, even in a country on the gold standard, in order to give more elasticity to the credit management by the central bank. However, if such operations are to be allowed, the extent to which a central bank can hold government securities should be strictly limited. For instance, it seems to me that at the present time the Federal Reserve Banks of the United States do not need more than $3 billions to take care of the desirable elasticity of the credit mechanism. If the figure of $3 billions were initially adopted, (assuming, of course, a radical reform of the Federal Reserve System), it could be increased from time to time according to some rules, easy to be imagined, which should take into account the amount of gold reserves held by the Federal Reserve Banks.

OBSTACLES TO GOLD STANDARD

If the above arguments are valid, what are the objections to restoring the international gold standard system? It would require super-human ability, competence and wisdom, and a different political set-up than we have, with so many sovereign nations, to manage a paper money system on the rules of a gold standard system. It was precisely a virtue of the international gold standard system that it made possible a well-knit worldwide economy, despite the sovereignty of individual nations, and semi-automatic adjustments of the balances of payments, without the intervention of governments and without requiring a super-human knowledge and infallibility on the part of the money managers.

A return to an international gold standard system is possible and advisable only on the two following conditions:

a) An end should be put to monetizing of government debt and private non-commercial loans, as well as to inflationary practices by government, labor and business. (This prescription applies also to obtaining domestic monetary stability, as explained later).

b) The price of gold will have to be increased to a minimum of $70 an ounce if we are to avoid a fall in prices and/or a recession or depression.

These are formidable obstacles, indeed. It is no use minimizing the difficulty of overcoming the inflationary bias and practices of our times. This is a task for our statesmen and leaders. What are the alternatives? The continuation of the present policies, with the accompanying constantly recurring disturbances, ending probably in some kind of monetary chaos. Or drifting cowardly into exchange controls and national socialism.

The British may overcome their repugnance for the gold standard (in fact, more to the words than to the substance), because they have been erroneously taught by the good professors (starting with Keynes), that the gold standard was responsible for their economic and monetary difficulties in the 1920’s and 1930’s.

The main stumbling block to a change in the price of gold is the United States. It is due primarily to propaganda, to a lack of understanding of the issue by many people instructed or not, and because the people have not been told what the alternatives are. Lord Lionel Robbins wrote a few years ago:

“Now we must recognize at once that this proposal (a rise in the price of gold) is like a red rag to a bull to many of our friends in the United States.” Indeed it is, but this is a problem for our professors and statesmen. It should not prove unsurmountable.

INTERNATIONAL MONETARY SYSTEM

Even before World War II ended the countries of the Western World were concerned with the economic and monetary problems which would emerge at its end. In various official documents published by the allies, it was declared that our policies should aim at a high and stable level of employment, expansion of unfettered multilateral international trade and steady increases in the standard of living. (Master Lend-Lease Agreement and Atlantic Charter) The allied governments were aware that monetary stability was a prime condition for the attainment of the declared aims. However, the fear was expressed that the post-war economic reconstruction would entail balance of payments difficulties and a scarcity of dollars. It was also expected that the United States would suffer again a serious economic post-war depression and make the dollar even scarcer.

At the end of the war the International Monetary Fund was established by the Western World in order to provide the free countries with an international monetary system or mechanism which should make possible the revival of a well-knit integrated world economy. The statutes of the IMF were devised to the effect that its policies should be directed at monetary stability, stable exchange rates and free convertibility of currencies. The statutes also provided for an orderly change of the exchange-rate of a currency which might become necessary because of wrong monetary and fiscal policies aimed at obtaining or maintaining full employment. They also stipulated the procedure to be followed for a uniform change in the price of gold in terms of all currencies.

When the Fund was established, it was widely assumed that the dollar would be a scarce currency for an indefinite period. It was largely in the post-war period that the dollar became the principal international reserve currency. An important reason for the emergence of the dollar as a reserve currency was its interchangeability with gold. The rules of the Fund were supposed to provide the free world, at the end of a five-year provisional period, with the nearest approximation to an international gold standard.

Unfortunately, international monetary affairs did not evolve as was expected at the time the IMF was established.

PRECARIOUS MONETARY SYSTEM

Although the expansion of world trade was most impressive since the end of World War II, and the convertibility of currencies made considerable progress, the free world is still beset with too many restrictions on trade or currency transactions, and with recurrent crises in foreign payments in one country or another—not merely the under-developed countries, but the great trading nations as well.

It is a fact that the progress in the expansion of international trade, in freer convertibility of currencies and in the improvement of reserves of the European countries and of Japan, is due on one side to a large part to the assumption by the United States of so much more than its fair share of aid, grants, loans and foreign military expenditures, and on the other side to sound monetary and fiscal policies pursued by the European countries.

The huge increase in Germany’s foreign reserves is an indication of a disturbed international monetary mechanism which creates a serious imbalance in the current international payments. At the present time the United States is faced with the urgent problem of balancing its foreign accounts and the pound-sterling may be moving once more into more turbulent waters. Since there is no automatic adjustment under the present system of international currency exchange, there is a danger that countries which are running an abnormal deficit of payments may eventually be forced into deflationary actions in an attempt to rectify the position. The Western nations should make a joint approach to these problems before disequilibrium reaches the stage of crisis.

The international monetary system seems to me on a very precarious foundation. Whatever useful services the IMF has rendered it has not as yet fulfilled its original mission. The problems of how to obtain monetary stability and a sound monetary system are still with us.

FUNDAMENTAL TRUTHS

The world has however relearned the hard way a few fundamental truths:

(1) There is no hope of establishing a sound and workable international monetary system on another basis than gold.

(2) There is a close relationship between domestic monetary and fiscal policies and the balance of payments of a particular country.

(3) Monetary stability is essential to sound domestic economic expansion as well as to the proper working of the international monetary system. But what do we mean by “monetary stability” and how is it obtained or maintained? Unfortunately the quest for monetary stability has come to be confused with the demand of a policy aiming at the stabilization of prices, an aim which cannot be reached, if at all obtainable, except in a completely planned economy. A policy aiming at monetary stability will secure a relative stability of prices, but the economic history of the 1920’s teaches us that a policy whose goal is stabilization of prices may result in inflation of money and credit, and very unsound speculation.

What do we then mean by “monetary stability”? A cursory definition would be: “a policy aiming at avoiding abnormal credit expansion or credit contraction.” This definition leaves open the question: “What is normal and what is abnormal?” The fact is that we cannot answer the question quantitatively, but we can provide guidance on how to obtain monetary stability. In the first place monetary stability cannot be obtained if the banks monetize government debt or if they finance inflationary credits to private industry and commerce. In other words, the commercial banks should limit themselves to the financing of self-liquidating commercial or industrial credits and buy bonds or grant long-term loans only to the extent of savings deposited with them. A policy of monetary stability requires also a reasonable level of taxation, competition and the prevention of inflationary practices by labor unions and some powerful business interests.

(4) The gold exchange standard is a device whose purpose is to save the use of gold. It is an inflationary system because the same gold reserve serves to permit expansion of money and credit in two countries. It brought about the collapse of the pound when the foreign countries withdrew their deposits in the British banks and it was greatly responsible for the depth and length of the Great Depression of 1929/1933. The gold exchange standard considerably reduces the reactions which tend to correct imbalances of international payments.

It is also the gold exchange standard which has recently led our country into the strange policy of keeping short-term interest relatively high, in order to prevent the outflow of foreign funds and to lower the long-term interest, in order to help us get out of the recession. I doubt that the attempt will prove successful.

(5) Balance of payments. It becomes clear that inflation is the main cause of balance of payments deficits. Contrary to what many people believe, the effectiveness of the international monetary system is not increased by policies aiming to correct directly the imbalances of current payments. Experience proves that we can expect a self-adjusting of the imbalances of current payments only by first restoring a sound and efficient international monetary system.

In the present condition of our international monetary system it is left to each government to maintain or restore their international payments accounts by means of government intervention and controls of one sort or another. As long as each nation is free to manage its national monetary system, without the discipline of the international gold standard, there is no self-equilibrating mechanism to restore equilibrium in the balance of payments accounts.

A SOUND INTERNATIONAL MONETARY SYSTEM

There is one important lesson which we have not yet learned. An abnormal rise in prices and an artificially stimulated economy due primarily to the huge monetizing of government debt during the war, and abnormal inflationary banking credit after the war, will have as an aftermath, sooner or later, a recession and a fall in prices. These can be severe if proper monetary readjustment is not made some time after the end of a big war and the stoppage of paper money inflation. An abuse of “paper money” can be corrected only by a monetary amputation, while an abuse of credit by the commercial banks can be corrected only by a deflation of credit.

There is little hope of establishing a sound international monetary system, of obtaining monetary stability and a relative stability of prices, and perhaps preventing a too painful readjustment of the economy and the price level reached since World War II by other means than the restoration of a workable international gold standard.

One may agree or disagree with the views of some economists that the international liquidity is adequate for our present needs and those of a growing free world economy at least for a few more years. I do not believe, however, that students of money who are not influenced by politics, or who are not willing to shut their eyes to the obvious dangers in the present situation, can concur with the view that our international monetary system is sound. If we do not overhaul it drastically we may be confronted in a very few years with unmanageable problems.

THE DOLLAR EXCHANGE STANDARD

How can we help being disquieted by the present international monetary system? It is based essentially on a yearly balance of payments deficit of the United States of $1 to $2 billion, for the simple reason that at the present price of gold the total increase in monetary gold stock that can be expected from new gold production and Russian gold sales is only about $700 million a year. This is less than 1.5% of current world reserves of gold and foreign exchange. Worse yet, in order to supplement the insufficient supplies of monetary gold, the greatest part of the U.S. balance of payments deficits has been used in the last ten years to increase the foreign deposits in the American banks. This is the famous gold exchange standard. It is a dangerous inflationary device, feeding speculation both in Europe and in the United States. Large scale conversion of the foreign dollar liabilities into gold may at any time topple the whole structure as it did in 1931. The concern regarding the dollar exchange standard is shared by Per Jacobsson who stated recently that if he were an American he would prefer that people abroad take more gold rather than continue to build up foreign bank balances in the United States.

What is the way out of this mess? Professor Triffin has recently called attention to the dangers implicit in a world monetary system depending so heavily on national currencies as international reserves. Furthermore, he sees a continuing deficiency in additions of gold and foreign exchange to monetary reserves, once U.S. payments are restored to balance. He proposes to meet these two difficulties by converting the International Monetary Fund into the equivalent of a World Central Bank, holding deposits that can be used as reserves. Professor Triffin himself admits that his plan would endow the Fund with a lending capacity which, if improperly used, might impart a strong inflationary bias to the world economy. Moreover, his plan would bring about monetary management on a worldwide scale, the policies of which could influence or disturb the economic situation of each and all countries.

Edward Bernstein, the former chief economist of the IMF, proposes another scheme aiming to increase the resources of the Fund so that it may meet any extraordinary contingency that would arise. The plan does not do away with the danger inherent in the use of national currencies as international reserves, and it does not seem to me to meet the other prerequisites of a sound domestic and international monetary system.

PREREQUISITES AND PROBLEMS

What are these prerequisites and the problems facing us if we are to restore monetary order by returning to an international gold standard?

1) The most pressing and difficult one seems to be domestic monetary stability, which implies an end to inflation and to inflationary practices. Unfortunately I find a quasi-general distrust in the willingness and ability of governments in the free countries to stop further inflation. The popular distrust is expressed in the refusal to buy fixed interest securities, and particularly government bonds. Therein lies the greatest danger of our times. Some of our wisest economists have come to think that only the discipline of low gold liquidity and the competition from abroad will be able to keep inflationary forces in check in our country. They hope that under such pressures we may revert to the policy we had at one time before the Great Depression, of translating into lower prices the greatest part of productivity increases due to technological progress. It cannot be repeated strongly enough and often enough that inflation will not cease as long as twelve to fifteen million workers, working in highly mechanized industries, and organized in powerful labor unions, are able to extort constant wage raises, often even larger than the increases in productivity in their industries.

Unfortunately people have been led to believe that we can violate fundamental economic laws with impunity, and that if wages rise above their economic level, inducing unemployment, the government has the duty and the means to correct the situation.

Yet, in a famous posthumous article which appeared in “The Economic Journal” of June 1946 no other than Keynes warned the economists:

“I find myself moved, not for the first time, to remind our contemporary economists that the classical teaching embodies some permanent truths of great significance, which we are liable today to overlook because we associate them with other doctrines which we cannot now accept without much qualification. There are in these matters deep undercurrents at work, natural forces, one can call them, or even the invisible hand, which are operating towards equilibrium. If it were not so, we could not have got on even so well as we have for many decades past. . . . But in the long run these expedients will work better, and we shall need them less, if the classical medicine is also at work. And if we reject the medicine from our systems altogether, we may just drift on from expedient to expedient and never really get fit again.”

We should cease trying to “square the circle”. It should be obvious by now that we cannot have at the same time a high level of employment, constantly rising wages, powerful monopolistic labor unions and stable prices. The sooner we recognize this truth the better off we shall be.

The restoration of monetary stability will require in the U.S.A. an overhauling of the Federal Reserve System and of our commercial banks. We may also need to add one or two amendments to our Constitution.

2) The world must be provided with an adequate overall quantity of gold for the reestablishment of a unified international monetary system. This can be done only by a change in the price of gold in terms of all currencies.

3) The yearly additions of gold to the existing gold reserves must bear some satisfactory relationship to the annual increases in economic activity in general and to international trade.

4) An end should be put to the gold exchange standard, which implies a liquidation by the United States and Great Britain of their present liabilities to foreign central banks.

5) The monetary arrangements to be made should have in mind the probability of incipient recession and downward trend of prices.

6) If and when all measures have been taken to put an end to inflation and to inflationary practices the price of gold will have to be raised to at least $70 an ounce.

7) Free markets for gold should be established in all the important countries, and trading in gold, its export and import should be absolutely free.

8) There are indications that the amount of gold hoarded in the world is about fifteen billion dollars. Should gold be revalued there is no doubt that a considerable part of this gold would be sold on the free market. It would be advisable to make certain that the dishoarded gold is permitted to exercise only gradually its influence on the monetary system and on prices.

A STRANGE PHENOMENON

It is a strange phenomenon that while all kinds of plans—basically dangerous, inadequate to meet the present needs, and essentially inflationary—are put forward, no one in responsible positions for the conduct of our monetary affairs is proposing the only known solution able to satisfy the above requirements of a sound and workable international monetary system. This is a return to the international gold standard, accompanied by a rise in the price of gold in terms of all currencies (provided, to repeat once more, an end is put to the monetization of government debt and private inflationary credits).

BETRAYAL BY INTELLECTUALS

About a generation ago a French writer, Julien Benda, wrote a book called “La trahison des clercs” (The Betrayal by Intellectuals) in which he stressed the responsibility of the intellectuals in the social and moral crisis of France. I am wondering whether the same indictment should not be uttered against our professors of monetary and economic issues in our universities. Their general complacency and reluctance to be publicly vocal could be compared to a situation wherein our country would suffer from a serious epidemic, difficult to diagnose, and the professors of medicine would remain inert and silent in their Ivory Towers. To this very day we don’t have an intelligible and realistic diagnosis of the 1929 depression. It is my belief that if our country had been provided with an objective, realistic and intelligent analysis of the causes of the 1929 depression and of the 1937/38 recession we might have prevented a repetition of some of the mistakes we committed after the end of World War I. Who else but the academic economists can be blamed for this lack of diagnosis? If we are unable to analyze a situation like that of 1929 on the basis of all known facts, it is simply a mockery to teach or to profess the belief that we can put our economic destiny in the hands of government interventionists and money managers.

A STRANGE IDEA

On the other hand, there is in our country a rather strange phenomenon. A group of economists known as the Economists’ National Committee on Monetary Policy are fighting persistently and obstinately for a return to a gold coin standard, but they are rejecting even the idea of a change in the price of gold. This group has an Executive Committee of rather prominent professors. Most of them, I gather from my correspondence and from their writings, do not seem to be bothered at all by the present abnormal relationship between our gold reserves and annual gold production on one side, and the price level, wages and the quantity of monetary means (as a result of the money and credit inflation during and after the war) on the other side. For some reason which escapes me they don’t seem to agree with the view that this abnormal relationship can be prolonged only either by deflation and recession, or by further monetizing of government debt and/or further and large expansion of bank credit. A continuation of inflation by way of monetizing of government debt is not possible because the European countries have become very weary of inflation and we cannot any more disregard the movement of prices there. We experimented with the use of bank credit to prolong an abnormal situation similar to the present one after World War I, and it brought us the great depression. Therefore the only alternative left is deflation, and here is where I am really baffled. We don’t even know how to get the governments, and particularly our government to put an end to inflation and inflationary practices. And yet the distinguished professors on the Committee expect the government and the country to accept a deflationary policy to correct the present abnormal relationship mentioned above!

THE ESSENCE OF THE GOLD STANDARD

Our standard of value has a weight and a value (purchasing power). It is not clear why the Economists’ National Committee on Monetary Policy is exclusively concerned with the gold weight of our standard of value. The gold weight parity of the gold standard is its technical aspect, while the essence of it is the conformity of the purchasing power of the currency with the purchasing power of the standard of value. Our present monetary system is so novel and absurd that it cannot be called a gold standard system by any stretch of the imagination. To be on a gold standard it is not enough to have a legal parity for the currency with a definite weight of gold, but it is a sine qua non condition of the gold standard that there should be free markets for gold and that everyone should be allowed to trade freely in gold as a commodity. It seems obvious to me that at the present time, with a relatively low production of gold and a very high production of commodities of all sorts, the purchasing power of gold would tend to be very high at our fixed price of gold in dollars if we had a real gold standard system. The purchasing power of gold has been artificially reduced by the huge monetizing of government bonds and inflationary bank loans made possible by the great economic power of our country, its monopoly of gold, and the lack of free markets for gold as a commodity, while maintaining a limited convertibility of the dollar into gold.

The Committee is reasoning as if we had been incessantly on a genuine gold standard since the beginning of World War II. The fact is that since 1939 we have multiplied our monetary means by four or five, the largest part by monetizing government debt and non-commercial private debt. We had the illusion that the dollar remained convertible into gold (although strictly restricted) because when the war began we had a very large stock of gold, and during the war and for a few years after gold continued to flow into the United States in payment of goods which only our country was able to supply. The argument of the Committee is based on the false assumption that the prices of commodities have been gold prices throughout the war and post-war period. They argue that it is the essence of the gold standard that one does not tamper with the weight of the standard while, in fact, we are not on the gold standard and we have been tampering constantly with the value (purchasing power) of the standard.

DEFLATION AFTER CIVIL WAR

The recommendation of the Committee for deflation to correct the present monetary imbalance is frequently justified by them with a parallel of what happened after paper money inflation of the Civil War. However, the gradual rise of the greenbacks toward pre-war gold parity was accompanied by a continued fall of commodity prices, (and a panic and economic stagnation!) and at the time of the resumption of gold-redemption the wholesale prices were down to the pre-Civil War level. Besides, many circumstances and facts were completely different than those existing in our present situation as is so clearly explained by Henry Hazlitt in his recent book “Inflation” (p. 50).

Contrary to what the Economists’ National Committee on Monetary Policy asserts, it would not be enough to return to a gold coin standard to obtain a sound currency. In the 1920’s we had a gold coin standard and the government was continuously reducing its national debt, and yet the period ended in a great depression. There is no doubt in my mind that our monetary system was not sound in 1929 despite the fact that we had a gold coin standard. It is my strong conviction that we shall not obtain a sound currency without an overhauling of our Federal Reserve System and of the banking laws, and without putting an end to the monopolistic power of the labor unions.

RETURN TO GOLD!

The two main obstacles to a return to an international gold standard are: (a) the unwillingness of the governments to put an end to inflation and the acquiescence of the people, and (b) the refusal of the United States to consider a rise in the price of gold in terms of all currencies.

The alternative to a return to monetary sanity is more inflation, which would end, sooner or later, either in a monetary and social chaos or in exchange controls and regimented economies.

Many people believe that we still have a choice between inflation and non-inflation. It is my deep-rooted conviction that our real choice is between inflation and freedom.

Philip Cortney

New York, April 1961

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^* In an article: “Monetary Magicians,” New York Times, April 8, 1961.