If We Demonetize Gold

January 16, 1961

It was in the early 1960s, writes the Chinese historian Hi-Ho-Hum,* that the United States “demonetized” gold, with consequences that astonished the advocates of the plan.

In 1958, 1959, and 1960, continues Hi-Ho-Hum, the United States suffered a heavy loss of gold. The monetary authorities became worried. But an article in The London Economist of Dec. 24, 1960, suggested what seemed an easy way out of their difficulties. The article was in the form of a fable, set in an imaginary future. But its proposals were made in earnest, and so were its predictions of the economic consequences of adopting them.

What the article advocated, in short, was that the American Federal Reserve authorities put an embargo on gold, and discontinue either buying or selling it at $35 an ounce or any other figure. The International Monetary Fund was to take over this obligation for six months longer, but announced that at the end of that time gold would be demonetized entirely. It would become “just a commodity.”

WHAT WENT WRONG

The Economist predicted that everybody would rush to get rid of his gold at $35 an ounce while there was time; and that gold would finally fall to $2.50 an ounce.

In disparaging gold (adds the historian in a footnote) the Economist talked as if it were being wonderfully clever and original. It forgot that sixteen years earlier, Keynes had denounced gold as “a barbarous relic”; that Bryan in 1896 railed against “crucifying mankind upon a cross of gold”; and that Sir Thomas More, in 1516, suggested the proper use of gold was for prisoners’ chains and chamber pots.

The American and IMF authorities, continues Hi-Ho-Hum, adopted the Economist’s proposals with alacrity and even ecstasy. But the consequences, as we in 2072 now know, were the exact opposite of those the Economist had expected. No central banker, or private hoarder, was foolish enough to turn in his gold for 35 paper dollars an ounce. When the IMF tried to continue buying and selling gold at that figure, after the Federal Reserve Banks had stopped, it was drained of all its gold in three days. Gold, instead of falling in price, rose on the world’s free markets to $45 an ounce on the first day, soared to $64 in a few weeks, and then settled between $55 and $60.

There was one regrettable side effect. Emergency psychiatric wards were opened in Washington and London hospitals to take care of monetary managers and Economist editors who had advocated the step and predicted that gold would fall to $2.50 an ounce. They were suffering from shock.

HI-HO-HUM GOES ON

Yet a little thought, taken in time, might have saved them. They themselves had recommended that gold be treated just like any other commodity. The American Government took this literally. It ceased to make it a criminal offense to hold, own, or buy gold. Removing this prohibition enormously increased the demand for gold on the part of the people. Further, the gold was now being bought with, and priced in, paper dollars of unknown future value. People rightly interpreted the demonetization of gold as a mere first step to an acceleration of fiat money inflation everywhere. They sought to spend their paper dollars while the dollars still had any value.

Moreover, the “demonetization” of gold, paradoxically, led to resumption of its use as money, something not widely seen since 1914. New long-term contracts, debts, and bonds were made payable in ounces of gold, at the insistence of lenders who did not trust the future value of paper currency units. Exporters everywhere increasingly refused to sell except in terms of gold. Stores priced goods both in paper money and in grains of gold. Gold coins, privately minted and stamped with their weights, came into circulation.

After ten years, concludes Hi-Ho-Hum, the world’s governments finally recognized that for the wrong reasons they had stumbled on the right thing. They were forced, in order to give them any value, to make their paper currencies convertible into gold again.

*One of the most learned writers of the 21^st century, frequently quoted by the late Simeon Strunsky.