17. The Failure of the International Monetary Fund

(L’Opinion, June 5, 1952)

In economic matters, the most important phenomena are not always those that are talked about the most. On the contrary, those which escape public attention are often destined to play the essential role. Here is an example.

It is known that the policy of the International Monetary Fund has consisted, for some years, in prohibiting free markets in gold, in order to reserve to the central banks or to the government treasuries all the new gold produced by the mines. The aim is to concentrate the gold—the new as well as the old-under the guardianship of the monetary officials of the different countries, and to make this sacred metal inaccessible to the public.

Since the Korean War, however, that is since the second half of 1950, the new production of gold, far from precipitating itself toward the official treasuries, has been disappearing, on the contrary, into the hands of the hoarders. During the second half of 1950, out of 438 millions of dollars produced only one hundred entered the official monetary reserves. The remainder, or 338 million dollars, has been absorbed by industry and by private individuals. (See the Twenty-first Report of the Bank for International Payments.) For 1951, the figures are still more significant. World production rose to 840 million dollars (not counting USSR), of which 180 million only have been absorbed by the official reserves. The remainder, or 660 millions, has “vanished” into industry or into the hands of private individuals.

It is difficult to imagine a more complete failure of the policy of the Monetary Fund.

And yet, nothing is more natural than this phenomenon. In spite of all that the doctrinaires may say and think about monetary evolution leading everyone to abandon gold in favor of paper, the public continues to desire gold. Undoubtedly, in the opinion of the doctrinaires, these private individuals are ignorant, barbarians or fetishists. But for a long time, Mr. Everyone has had more sense than Mr. Voltaire. This is more true in monetary matters than elsewhere. There are also old economic laws which have not been discarded, Lord Keynes notwithstanding. One of the best known consists in the fact that merchandise goes to the markets where it is best paid. Gold is no exception. Being better paid in the free markets than by the central banks or the treasuries, it finds its way to the free markets.

This is a small fact that should provide food for thought for the doctrinaires, if the characteristics of a doctrinaire were not precisely to remain blind to the most obvious facts.

Let us say, on the other hand, that it should be greeted with joy by the doctrinaires themselves if they would only reflect. The events of the War of 1914 and their results, added to the short-sightedness of governments, have produced a phenomenon that will be considered by the historians of the future as one of the outstanding events of monetary history: it is the concentration of gold in the United States, a concentration which, to a large extent, is responsible for the monetary troubles since that time. But what is happening now is that the natural movement of merchandise-gold is turning from the American market toward the markets of the rest of the world. This is an extremely felicitous circumstance that should please everyone.

Far from opposing it, the Monetary Fund should aid it in every way.

In the face of these facts, the objections of the adversaries of gold, who like to point out all the inconveniences of this hated metal, can only make us smile. John Law, too, when he declared his notes to be legal tender, consecrated numerous and brilliant pages to demonstrate that metallic money was the most variable of the standards, and that it was to the interest of the state to replace it by paper money. It is true that the Anglo-Saxon writers never reread the works of John Law, for the very simple reason that he made the mistake of writing in French, and that political economy, as one knows, is a science that has never been understood on the continent, with the exception, however, of Montesquieu, who Lord Keynes, for some reasons unknown in France, considers the greatest French economist.

It is the same doctrinaires who reproach Mr. Pinay for having based his loan on gold, a fact that seems to indicate, wrongly in their eyes, a faith in the stability of the metal which they prefer to forget or not to mention.

This is not the only point where the policy of the Monetary Fund has met with a serious defeat. Following a war that was accompanied by such a formidable paper inflation in all the belligerent countries, the first object of a rational policy should have been to facilitate in every way an increase in the production of gold. It would have been the only way of providing a broader base for the paper moneys whose purchasing power could only progressively decline, and thus prevent the unavoidable reaction that the increasing production of merchandise would necessarily provoke in prices, a reaction of which even now one can note the first symptoms.

The annual world production of gold in tons of pure gold is the following for the years mentioned:

One sees that in no year has the prewar production been reached. In other words, the production of gold in the world is less than it was formerly, when it should be much more.

One of the most curious arguments of the doctrinaires is that the production of gold and its monetary use constitute a phenomenon of inflation, and that, therefore, the increase of the production of gold, or eventually the increase in the purchase price by the control banks, incurs the risk of increasing inflation, whereas all the efforts of governments today tend toward reducing it.

One can only repeat here what was said more than a century ago by the old economist Newmarch, that in comparing the increase in the production of gold with that of paper money, there is no common measure, one contributing to the increase of prosperity and the consolidation of credit, and the other provoking monetary distrust. The argument in question reminds me of the story of the morphine addict who, on being cured at last of his illness, or his weakness, with all the inconveniences attached to it, complained that the suppression of the morphine did not prevent him from catching head colds. No one has ever maintained that the value of gold in relation to merchandise did not fluctuate, but these fluctuations, compared to paper money, are insignificant, and they have never started the waves of distrust and of monetary hoarding which characterize essentially the paper-money systems; nor have they caused all the social and financial disorders we know.

I would not be surprised if in a short time we will not be glad to have recourse to this inflation of gold to alleviate the effects of a crisis that is starting. If the decline in prices should become accentuated and if unemployment should result, there would remain one way to check it, the way which President Roosevelt used in 1933. to increase the official price of gold. The increase of the reserves of the central banks and of the mining production which would result from this would greatly benefit world economy.