The Return to Gold

July 6, 1953

It is good news that the Yale University Press has made available a new edition of The Theory of Money and Credit, by Ludwig von Mises (493 pages, $5). In his introduction to the English-American edition in 1935, Lionel Robbins wrote: “In Continental circles it has long been regarded as the standard textbook on the subject.”

To this latest edition the author has added a new section of 44 pages on the present problems of monetary reconstruction. No two economists seem to agree in every detail regarding the monetary policies that should now be adopted and the order in which particular steps should be taken, but Mises’s discussion seems to me on the whole the soundest, most thorough, and most illuminating that has so far appeared.

No one, for example, has explained better than Mises the detailed process of inflation and the exact nature of the evils it entails. His basic argument for a return to the gold standard is nontechnical: “The excellence of the gold standard is . . . that it renders the determination of the monetary unit’s purchasing power independent of the policies of governments and political parties. . . . It makes it impossible for them to inflate.”

Today, unfortunately, only a minority of economists agree that it is both possible and desirable to return eventually to a gold standard. When it comes to such questions as when? under what conditions? how? and at what rate? even this minority of gold-standard advocates is split 40 different ways.

Mises’s answer runs something like this: Monetary reform presupposes first of all a change in the prevailing economic ideology. “There cannot be stable money within an environment dominated by ideologies hostile to the preservation of economic freedom.” The first step must be to put an absolute halt to any further monetary inflation. “The main thing is that the government should no longer be in a position to increase the quantity of money in circulation and the amount of checkbook money not fully—i.e., 100 percent—covered by deposits paid in by the public. . . .

“At the same time all restrictions on trading and holding gold must be repealed. The free market for gold is to be re-established. Everybody, whether a resident of the United States or of any foreign country, will be free to buy and to sell . . . to import and to export, and, of course, to hold any amount of gold, whether minted or not minted. . . . In this first period of the reform it is imperative that the American Government and . . . the Federal Reserve System keep entirely out of the gold market. . . .

“It is probable that the price of gold established after some oscillations on the American market will be higher than $35 per ounce. . . . It may be somewhere between $36 and $38, perhaps even somewhat higher. Once the market price has attained some stability, the time has come to decree this market rate as the new legal parity of the dollar and to secure its unconditional convertibility [into gold, and vice versa] at this parity.”

Regardless of their merits, these proposals are unlikely to get serious official consideration at this time. Very few monetary economists, for example, today favor anything as drastic as a prohibition of any increase in bank deposits (and, incidentally, in bank loans) beyond an increase of the same amount in gold reserves. Even most supporters of a return to the gold standard merely wish to stop the kind of credit expansion that comes through bank purchases of government bonds, not the kind that comes from an increase in the total volume of loans to business. And even most of those who favor a restriction on loans to business wish to carry it out solely through increases in interest rates (and perhaps in member-bank reserve requirements) rather than through any direct quantitative limitation.

But though there will be dissent from some of his detailed conclusions, Mises’s answer cannot be neglected by any serious student of the problem of returning to a gold standard. And that return is imperative if the world is not to drift even deeper into monetary chaos.