Not very long before his untimely death, Jacques Rueff
in his fluent but slightly accented English commented that further
debates on the status of gold in the monetary system seemed hardly
necessary for "events were taking over." And indeed they have.
With surprisingly little fanfare, gold is maintaining
its firm place in the world's reserves where it commands a respect far
greater than any of the fiat currencies that pass for money these days.
That this could happen in spite of the persistent anti-gold position of
successive United States Administrations over more than four decades
still further emphasizes its durability as money and the firm faith all
manner of men have in it-apart from those who rule in Washington and
bankers whose skill is largely in manipulation of the technicalities of
increasingly complex instruments of credit.
The long record of human history surely reveals that
when money, whether in the form of precious metal or credit, is debased
and abused, a nation or even the entire world suffers. Today we are in a
period of such misbehavior and mismanagement but the persistent strength
of gold even under these trying conditions offers hope that, if it is
used wisely and effectively, order can eventually be restored.
The principle currently known as Gresham's Law has been
recognized for tens of centuries. It is as sound today as it was when
Aristophanes used it in a metaphor to illustrate how good men were
driven from public life in Athens in the same way that untrustworthy
money forced better money out of circula tion. At about the same time,
Aristotle stated the concept more logically perhaps, but less
poetically. Today, the principle is well understood in most high circles
in Europe. In 1973, Milton Gilbert noted that gold remained unused in
the vaults of the central banks-but not unloved. In America,
unfortunately, the money managers and politicians seem less familiar
with the classics.
Since then, eighteen governments (but not the United
States) are valuing their official gold stocks closer to market prices -
or more rationally expressed are putting the currencies they hold in a
realistic ratio to gold. Furthermore, by utilizing gold at a
market-related rate, the recently created European Monetary System has
provided the Common Market countries with a mechanism for employing
their gold reserves effectively in foreign exchange transactions. These
wise moves tend to reduce the discrepancies that tend to immobilize gold
in response to Aristophanes' or Gresham's Law, even though they do not
remove all fears arising from the continued depreciation of fiat money.
According to our official policy, gold has now been
demonetized and henceforth fiat currencies and credit instruments will
be relied upon exclusively to perform the services expected from money.
Their most distinctive quality unfortunately appears to be a tendency to
decline in purchasing power, a very troublesome defect in anything that
claims to be money.
"Paper Gold"
To overcome the restrictions imposed by national
sovereignty and political borders, a strange device known as Special
Drawing Rights was created by the International Monetary Fund, at first
vaguely attached to gold and now defined in terms of a "basket" of
currencies, all of which are depreciating in real value though at
different rates. In essence, the SDRs were an attempt to create an
international form of fiat money. For a time, their enthusiastic
supporters even referred to them as "paper gold." So far, their
acceptance even under duress has been restrained, to put it mildly.
Even though "demonetized" by the dictum of the United
States, nearly a billion troy ounces of gold are still firmly held in
the official reserves of the western nations, rather a substantial
amount to declare was no longer legal money. This obvious preference for
gold should be rather disquieting for those who regard Gresham's Law as
obsolete.
A monetary system based exclusively on credit possibly
could be made to function, if managed by a small group of knowledgeable
men of intelligence and integrity, with complete political independence
and power, as well as mastery of the technical intricacies of money and
finance and unprejudiced understanding of both national and
international conditions that influence policies. Until such paragons
can be brought into existence, however, it will be safer to retain the
discipline of gold as an element of the monetary system than to expect
that those who manage money based on credit and on government fiat will
do so with sufficient skill that it will in time attain the confidence
now commanded by gold. From the record of centuries this can hardly be
regarded as even a forlorn hope.
Significant Experiments
In the natural sciences, ideas and hypotheses are
tested by controlled experiments and confirmed or rejected by their
outcome. In the social sciences such definitive tests are rarely
possible. But with regard to gold's place in the monetary system there
have been episodes that have provided results of unusually positive
sort.
The first that should have been regarded as a
significant experiment was the effort of several governments at the
instigation of the United States 22 years ago to maintain the official
price of gold at $35 per ounce by making gold available at this rate on
the London market to all who desired to purchase it. It was a costly
experiment. After several billion dollars had been spent with little
effect, except to transfer gold into hands eager to accept it at a
bargain price, the drain on gold reserves soon became too apparent and
excessive to be tolerated and the sales were abandoned close to the Ides
of March in 1968, with self-serving explanations that the mission had
been accomplished. It was accompanied by the abrupt announcement that
sales and purchases of gold by the participating governments would be
discontinued at the official rate except between Central Banks.
The restrictions on ownership of gold were not repealed
but miners and others with gold to sell were permitted to do so on the
market to specifically authorized purchasers for whatever price their
metal might command. In spite of predictions by several prominent
economists and politicians that without the support of the dollar the
gold price would sink to much lower levels, this didn't happen. After a
short period of little change, the price started to rise, and this trend
has continued with the usual market swings but with each new peak rising
above the last. The results of this experiment alone should have been
accepted as proof that the price of gold can not be tied to an
unconvertible currency, subject to manipulations that cause it to
depreciate in value.
A second test with equally decisive results occurred
during the international financial turmoil in 1971 that led to the
closing of the "gold window" on August 15th, when the United States
Administration announced that it would (or could) no longer redeem
dollars held by Central Banks in gold at the official price which by
that time had been raised from Roosevelt's $35 an ounce to the strangely
precise figure of $42.22 per ounce. The magnitude of claims in dollars
had for some time made it apparent that the pledge to honor them in such
terms had become impossible to meet. In effect, the United States
admitted bankruptcy, as far as its obligation was concerned to redeem
such dollars in gold at the official rate. Again it was made clear
except to those whose anti-gold fixation made them blind to realities
that a fiat dollar can not control the worth of gold.
The third experiment was the attempt to check the
rising price of gold on the market and the weakness of the dollar that
it revealed by substantial sales of gold from the reserves of the United
States Treasury and the gold held by the International Monetary Fund.
Whatever those who initiated this policy had in mind, it is unlikely
that they anticipated or desired that the market price of gold would
rise in spite of the large quantities they disposed of.
Furthermore, in the course of these sales, the Central
Banks of Europe have not reduced their stocks of gold and indeed have
firmly held the gold returned to them by the IMF which hardly seems in
accordance with the decision, sponsored by the United States, that gold
had been demonetized. Even a number of the Developing Countries have
preferred to accept their allotment of the IMF sales in gold rather than
in the paper in which the so-called aid would have presumably been paid
to them.
In the natural sciences, when the outcome of a series
of experiments is so definite, even the most ardent advocates of the
ideas being tested usually accept them as conclusive. Unfortunately, the
anti-gold group in power in Washington continues to ignore their clear
message.
An Encouraging Sign
Restoration of the gold standard, which would require
redefinition of the major currencies in terms of gold and establishment
of unrestricted convertibility at new fixed rates, hardly seems
attainable until the abuses of credit and the increasing worldwide
inflation have been corrected and ended. It is still an objective worth
striving for but to achieve it would require more drastic and
disciplined action than our electorate and our politicians seeking
reelection are likely to accept in the foreseeable future.
Even though restoration of the gold standard for the
time being may be ruled out, a new monetary system appears to be
evolving in which gold will continue to have an important place and be a
strong and stabilizing element. Progress toward this end is revealed,
not only by the firm retention of gold stocks by the major reserve
banks-with the exception of the ill--considered sales by the U.S.
Treasury and its sycophant, the IMF-but also by the removal of
restrictions on ownership of gold by citizens and the issuance by many
nations of gold coins whose worth is primarily determined by their
weight in gold. Among them, the one-ounce Krugerrand, various handsome
Mexican coins with gold content stated in metric units, and new coins
struck from old dies such as the Austrian Krona are notable examples.
The designations in national currency units that some still bear are
obviously meaningless. The principal contribution by the issuing
government is its seal that justifies confidence that the gold content
is as stated.
A timely step that would simplify and create better
order, as well as strengthen the function of gold in the evolving
monetary system, would be the creation and dissemination of a coin of
uniform gold content, fineness and size that could become a standard by
which other monetary devices could be measured.
A Coin of Uniform Weight
With one gram of gold adopted as the basic unit, a coin
containing 10 grams of gold (0.322 ounces troy), in the 90% alloy with
copper commonly used in coinage to provide hardness, would be a
convenient size, slightly larger than the old American fivedollar gold
coin or the British sovereign.
The acceptance of such a golden unit would probably be
facilitated if the coins were minted by each of the major nations and
their authenticity established by them. Uniformity in design would not
be necessary. Their essential quality would be the common gold content.
Competition in beauty and esthetic appeal would have much to commend it.
If an appropriate name for such 10 gram gold coins
could be found that would be easily comprehended internationally, so
much the better, but if not, there would be no harm in each nation using
a term based on some aspect of the design in which it took pride.
The unit of measurement, however, should be one gram of
gold which could be abbreviated as 1 gin Au, a designation that would be
understood and translated into any language in this age of common
scientific nomenclature. The 10 gm Au coin which could be acquired and
handled would give the unit a tangible reality. This is a quality that
Special Drawing Rights can never acquire, in spite of the presumption of
their creators in calling them "paper gold."
Leave It to the Market
The rigid discipline of the gold standard, however,
need not be imposed until desired. No tie need exist between any
national fiat currency and the golden units. Any country would be
completely free to indulge in whatever political, social or economic
policies (or nonsense) it desired. The only restraint imposed by the
gold in the reserves and the golden coins would be the effect on the
market price of the currencies expressed in grams of gold. The
objectionable term "the price of gold" could be abandoned, with
currencies, as well as commodities and services, priced on the market in
a unit containing a specific weight of gold. The plethora of quotations
of currencies - dollars, marks, francs, yen, sovereigns, and the like
expressed in each other, all variables measured by other independent and
sometimes erratic variables-could be eventually abandoned. It would do
no harm to continue such exchange quotations as long as the momentum of
tradition required. But they should be accompanied by quotations in the
proposed gold units, which would reveal the status of each national
currency in one common standard.
Abuses of credit and excesses in creation of fiat
currencies based on debt could hardly be concealed, for they would be
promptly revealed in the price of the paper in gold. The economy
obviously needs both elements-credit and stable money-but with gold
effectively utilized in the monetary system a badly needed base would be
provided upon which deficits, changes in quantity of fiat money and
inflation, among other evils of the times, could be clearly revealed.
The Individual's Choice
The individual should of course have the privilege of
acquiring the golden coins at rates determined by the market price of
the currency he possessed. The denial of such a freedom by any
government would in all probability be immediately and unfavorably
reflected in the price of the currency.
The right to buy gold - especially coins - -actually
puts into the hands of anyone desiring to do so, a very special
commodity that has long possessed the essential qualities of money,
viz., a medium of exchange, a means of measuring the relative value of
other commodities and services, and a safe way to store wealth. The
latter quality is not possessed today by any national currency.
The existence of a dominant gold coin-such as the one
proposed, containing 10 grams of gold-would provide a simple constant,
so to speak, against which all currencies could be measured with ease
and confidence. It would, of course, not be a constant of value in the
strict sense the term is used in mathematics and the physical sciences,
but it would at least stand for a fixed quantity of gold. No commodity -
not even gold - an claim to be invariable in worth and to provide an
unchanging base for measurement of values of materials and services, but
over the centuries gold has come nearest to doing this, as Roy Jastram
has so well demonstrated in his recent book, The Golden Constant: The
English and American Experience, 1560-1976 (John Wiley & Sons, Inc.,
1977).
Three years ago, the title of a speech I gave at an
annual gathering in a redwood grove in California was "The Resurrection
of Gold Without Benefit of Clergy." Since then, in spite of the high
priests in the Treasury and elsewhere in the government, Gold Has Risen
as the dollar and other fiat currencies have deteriorated, and yet its
worth, expressed in the cost in gold of a good dinner, a suit of
clothes, a haircut or even a barrel of oil has not changed much. The
Resurrection of Gold should now be regarded as demonstrated and as an
important advance toward a sounder monetary system, with clear
distinction between the status of money based on the relatively stable
worth of the traditional monetary commodity -gold-and the variable
national currencies that represent nothing more than credit in one form
or another.
If this is coming about without formal conferences and
long debates, so much the better. The open market even for currencies is
a masterful device and one that is essential for economic freedom. It
will continue to prevail and exert its influence even over the value of
unconvertible currencies. With the variety of trustworthy coins now
available, gold is already gaining more and more recognition as money in
which currencies can be measured, and if a gold coin of established
quality gains wide acceptance, the monetary system will be approaching a
status in which there will be far better hope of attaining stability
than has existed since World War II.
Flat Money Rejected
How the present uncertainties will end is hard to
predict. In the last few months, the market "price" of gold has risen at
an unexpectedly rapid rate. There are undoubtedly some undesirable
factors involved, such as excessive transactions in gold futures, but by
and large the accelerating rate at which gold has risen is to a much
greater extent a result of the growing concern about the domestic
economy and the deteriorating international situation, not to mention
the persistence of deficit financing and the resulting unavoidable
inflation. If the price of currencies were quoted in units of gold
rather than the other way around, the instability attributed to gold by
some of its detractors would be more clearly revealed as weaknesses in
the artificial devices we now must use as money.
I do recall, however, that a few years ago when I was
asked in a radio interview how high the price of gold would go, I
replied that it had approached infinity in German marks in 1923. That
need not and should not happen in America but with a few more years of
persistent deficits and unwillingness to forgo extravagances in our way
of life, it is a possibility that should not be lightly dismissed.
Stop Deficit Spending and Monetization of Debt
The first essential step to prevent such a disaster is
to keep expenditures by the government within its income and to end
monetization of debt. The second even more serious need is to find the
least painful means of dealing with the tremendous and still mounting
debt - domestic and international- that has now reached magnitudes that
make its retirement by conventional means practically impossible.
Reduction by default and/or by inflation are unfortunately much easier.
Repudiation of debt in a more dramatic way would be the substitution of
a new dollar for a number of existing dollars. Unfortunately this
procedure is not without precedent. In 1926-28 Poincaré and in 1958
Charles de Gaulle created new francs for the then current francs that
became known as "ancien francs." The creation of the Deutsche Mark is
another example. These procedures were drastic though probably
unavoidable. Such moves, however, in general are likely to be a mixture
of good and evil-probably more of the latter than the former. But, if a
country is forced to "bite the bullet" to correct past mistakes and
excesses, liquidation of excessive debt by payment of a small fraction
in sound money may not be the worst way and might even be the best way
if the new currency - or the new dollar or whatever it might be - were
made convertible into gold, when a durable rate could be established.
None of these disturbing developments is inevitable,
but unless the American people and their leaders who are dependent on
their votes have the will to put our house in order and accept the
austerity that must be faced, events will indeed take over-and they are
not likely to be pleasant.
At the time of the original publication, Dr. Donald H.
McLaughlin, mining geologist and engineer, formerly served as
president and continued as a director and chairman of the executive
committee of Homestake Mining Company.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
May 1980, Vol. 30, No. 5.
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