11. The Price of Gold in the United States

(L’Opinion, February 15, 1951)

Gold is again the order of the day. It will remain that so long as it has not been restored to its function as international money. Until then its price will continue to bring us surprises. Meanwhile, it is not idle to call attention to a few of the paradoxes caused by the strange situation in which it is placed both as merchandise and as money.

Let us remember, first, that there are two types of fluctuations of the precious metal that are not generally distinguished one from the other, which produce two rates of exchange: the exchange rate as regards various paper currencies, especially the franc, and the rate as regards merchandise, a rate which, for obvious reasons, is quoted nowhere, of which one hardly ever thinks, but which must never be lost sight of.

The rate of exchange of gold for paper expresses today the relative degree of confidence felt by the public toward these two currencies. Every time that new threats of inflation appear at one of the sensitive points of the world economy, the price of gold expressed in paper money tends to increase. This is the expression, pure and simple, of the distrust or confidence felt by the public toward the official money. The duration of the Korean War having imposed a massive rearming on the United States, accompanied by the expenses that such rearming necessitates, instantly the fear of inflation gripped both the European markets and the American market itself. The rise in the New York Exchange at the present time expresses the anxieties of the American public regarding a possible inflation. In Europe these anxieties had an immediate repercussion on the gold market.

In former times, when bank notes and bank deposits were convertible into gold, there was no question of the primacy of gold over paper. The purchasing power of gold as regards merchandise, and the purchasing power of the representative moneys equivalent to gold alone attracted attention. Paper money or gold interested the public hardly more than as regards the amount of merchandise it was able to buy, its function as reserve attracting no attention because of its being taken for granted. Today the public is interested only in the price of gold in paper money, and this price is essentially determined by the public’s concern to create reserves, paper money having lost the qualities apt to assure this essential function.

One of the fundamental needs of individuals in a normal economy is to create durable reserves for themselves. Economic man lives much more in the future than in the present. He has thus always made reserves with this future in mind, whether in accumulating real estate—lands, buildings, etc.—whether by acquiring securities—bonds, stocks, mortgages—or, finally, by simply accumulating money. The desire to create reserves is one of the fundamental needs of so-called civilized societies. This is more easily accomplished, naturally, by acquiring assets that are easily transferable, so long as their value can be expressed in stable money. Where there are no assets money serves as reserve. It is even the ideal reserve, being a general instrument of purchase, and constituting, therefore, the most general reserve for each individual, one which he can transform into any commodity or service, at any time.

When the purchasing power of money or investment assets easily “monetized” diminishes, the individual tries to find another reserve by acquiring objects whose value seems to him to be stable or increasing: objects of art, precious objects, rare stones and, finally, metals such as gold and silver, that do not deteriorate with age and for which, especially, there is a universal market.

In our time, a whole line of economists, following the German Knapp, claim to consider in money only its characteristic of “purchasing power.” These economists forget that between the moment when money is received and when it is spent, there is always a lapse of time of more or less duration. If money varies in its purchasing power in this interval, its holder gains or loses. He suffers a loss if the purchasing power decreases (in other words, if prices rise). He gains if the purchasing power increases (if prices decrease). At such times the economic activity becomes slower. Stability of purchasing power is thus essential. And this explains why in the absence of governments capable of maintaining stable money, private individuals seek to assure it for themselves, hoarding a purchasing power more stable than that of any other merchandise.

Hoarding, or the creation of reserves, has always been a thorn in the flesh of the partisans of paper money. It was criticized before Lord Keynes’s day. One need only refer to the writings of John Law, whose monetary experiments have had the well-known results, and whose modem imitators can only repeat his most characteristic arguments: “Money is only yours by the right that you have to receive it and use it to satisfy your requirements and desires. Beyond that, its use belongs to your co-citizens and you may not deprive them of it without committing a public injustice and a crime against the state, of which I do not consider you capable. Money bears the stamp of the ruler and not your own, in order that you may know that it belongs to you only because it circulates, and that you may not appropriate it in any other way. . . . It is on these occasions also that one feels the felicitous use of sovereign authority; law is necessary to save men from their own hands.”

Thus wrote Law to defend his “system,” on the point of crumbling.

Even today it is the hoarding of gold to which the partisans of paper money object. It is amusing also to observe that the partisans of paper money always choose the periods when governments have most abused paper money, have disorganized the entire price system by depreciating paper, to proclaim the capacity of governments to direct money and insure its stability.

In reality, those theoreticians dislike monetary stability, because they dislike the fact that by means of money the individual may escape the arbitrariness of the government. Stable money is one of the last arms that remains at the disposal of the individual to direct his own affairs, whether it be an enterprise or a simple household. It is certain that nothing so facilitates the seizure of all activities by the government as its liberty of action in monetary matters. If the partisans of paper money really desire monetary stability, they would not oppose so vehemently the reintroduction of the only system that has ever insured it, which is the system of the gold standard.

---

The strongest argument of the Anglo-Saxon economists is precisely to have been able to accuse gold of being an unstable currency after the depression of 1930. Instead of blaming their own stubbornness in restoring the pound sterling to its old value, (in terms of gold) they have preferred to make gold responsible for one of the greatest monetary errors of all history.

---

Besides the exchange of gold for paper money, there is yet another exchange to which no one gives thought today. It is the exchange of gold for merchandise. Let us forget the intervention of paper money for a moment. One may trace in the following manner what would have been the rate of exchange of gold against merchandise, starting with the war, if currencies had remained convertible into gold.

During the war, that is, from 1940 to 1944, one should have witnessed a rise in the price of merchandise in gold, for during this entire period, the quantity of merchandise diminished in the entire world. This scarcity ought to have been sufficient in itself to increase prices, even if there had not been a decrease in the production of gold. The offer of merchandise becoming more and more restricted and that of gold remaining stable, we should in all probability have seen a characteristic rise of the gold prices of all products. On the contrary, because of the almost total disappearance of gold in all the markets, we witnessed a spectacular fall in the price of merchandise in an over-valued gold. First contradiction.

On the other hand, once peace was restored, the rapid increase of production of merchandise, faced with a production of gold that remained about the same, should have caused a drop in the price of the merchandise, expressed in terms of gold; the rate of exchange of gold as against goods would have thus risen, bringing about a deflation which, of course, everyone feared. In fact, what happened? There again, special legislation applied to gold produced a phenomenon which is really curious and sufficient in itself to show the absurdity of the present situation in the gold market.

The only country where one may convert gold into paper money (the reverse conversion is, besides, forbidden) is the United States. An ounce of gold brought to the American Treasury is paid at the rate of thirty-five paper dollars. At the same time, the price of everything has undergone a considerable increase; an automobile, for example, costs double what it cost before the war. If I bring ten ounces of gold to the United States, they will continue, as before, to pay me three hundred and fifty dollars, with which I can only buy half an automobile. What does this mean if not that the rate of exchange of gold against merchandise has doubled, and that one requires twice as much gold than before the war to buy merchandise? Far from increasing, as the real economic facts warrant, the purchasing power of gold has decreased by half.

There is here a paradox that shows clearly the absurdity of the present system of maintaining unchanged the official purchase price of gold.

If the Monetary Fund had not imposed all sorts of restrictions on South Africa, it would long since be selling all its gold in the free markets, so as to obtain a number of dollars more in conformity with the real purchasing power of this metal.

Part of the renown and authority of the old economist Ricardo is due to the fact that, contrary to the official authorities of his country, who believed that the increase in pounds sterling of the value of the gold ingot, during the Napoleonic Wars, was due not to a decrease in value of the pound sterling, but to an increase in the value of the precious metal, he affirmed that the increase in the price of the ingot meant only the loss of value of paper money. This doctrine has become classic and its demonstration has contributed to the glory of its author. Today this same statement is considered a heresy. To affirm that gold has preserved all its purchasing power, while the dollar has lost its own, appears like a paradox.

The conclusion to draw from these observations is that it is impossible to maintain legally an artificial value to a merchandise or to a currency, while all the economic factors give it a real value which differs from its legal value. Some day an adjustment will have to be made between the one and the other of these values. If the United States were to decide not to return to the gold standard, to keep henceforth to the paper dollar, and if it were to stop buying, as it does today, all the gold that is offered it, the logical consequence would be that gold would be considered as a simple merchandise, and its price would be fixed freely, in the markets of the entire world, as happens with any raw material which is not indispensable to national defense. This freedom of action would be felt immediately—do not doubt it—by a rise in the price of gold expressed in paper money on all the markets, and there would be considerable private purchases of gold for hoarding.

If, on the contrary, the United States maintains the monetary character of gold, it will become indispensable not, as is currently said, to modify the price of gold in paper dollars, but, more correctly, to modify the price of the paper dollar in gold. We will then see that the gold now extracted from the mines is worth more than before and not less, in its exchange for merchandise, and a great step will have been taken toward the inevitable re-establishment of a true international money.