How to Return to Gold

January 25, 1954

If we grant that there is a great potential danger in trying to return immediately to a full gold standard at $35 an ounce, by what steps are we to return? And how are we to determine the dollar-gold ratio—which would decide the new “price of gold”—at which the return should be made? It is a sound general principle that unless there are the strongest reasons for change, the dollar-gold ratio, once fixed, ought not to be tampered with. This rule certainly applied to the pre-1933 rate of $20.67 an ounce, because that was a real rate, at which anybody was entitled to demand gold, and got it. But the $35 rate, fixed by Roosevelt-Morgenthau whim in 1934, is not a rate at which real convertibility has existed. It is only foreign central banks, not American citizens, that are permitted to buy gold from our Federal Reserve Banks at $35 an ounce, and even they are allowed to do this only under certain conditions. For example, they are not supposed to buy from us at $35 an ounce in order to resell it at a profit in the open market. The present $35-an-ounce gold standard is a window-dressing standard, a mere gold-plated standard, a sham gold standard. We have been able to maintain it only because most other nations in the last twenty years have been inflating even more than we have. There is no reason for treating the $35 figure as sacrosanct.

The new dollar-gold ratio that we should aim at is one at which gold convertibility can be permanently maintained, and that will not be in itself either inflationary or deflationary—that will neither, in other words, bring about a rise or a fall in prices.

There are some economists who contend on unconvincing evidence that $35 an ounce is that rate. Others profess to have some mathematical formula for arriving at such a rate, and on this basis confidently advocate $70 an ounce or some other figure. Their diverse results in themselves invite suspicion. Values and prices are not set by mathematical calculations, but by supply and demand operating through free markets.

And because of the enormous inflation in the twenty years since we departed from a real gold standard, and the enormous shock to confidence that inflations, devaluations, and repudiations have produced, we must test the state of confidence in a temporary free market for gold—a market that will also give us a guide to a new dollar-gold ratio that we can hold.

This time schedule of gold resumption is set forward chiefly for purposes of illustration:

1—The Administration will immediately announce its intention to return to a full gold standard by a series of steps dated in advance. The Federal Reserve Banks and the Treasury will temporarily suspend all sales or purchases of gold, merely holding on to what they have. Simultaneously with this step, a free market in gold will be permitted.

2—After watching this market, and meanwhile preventing any further inflation, the government, some time before June 30, 1955, will announce the dollar-gold ratio at which convertibility will take place.

3—On and after July 1, 1955, foreign central banks will be permitted to convert dollar holdings into gold bullion, and vice versa, at the new ratio. The free market will continue to be permitted.

4—On Jan. 1, 1956, the country will return to a full gold-bullion standard. Conversion of dollars into gold bars, or vice versa, will be open to all holders without discrimination.

5—On Jan. 1, 1957, the country will return to a full gold-coin standard, by minting gold coins and permitting free conversion.

A full gold-coin standard is desirable because a gold-bullion standard is merely a rich man’s standard. A relatively poor man should be just as able to protect himself against inflation, to the extent of his dollar holdings, as a rich man. The reason for returning to a full gold-coin standard in several stages is to prevent too sudden a drain on gold reserves before confidence has been re-established. A program like the foregoing would provide a faster schedule.