The New Cold War
America, China, and the Echoes of History
WHILE there is much dispute today concerning the rôle which gold prices have played in the economic deterioration of the last five years, the disputants generally agree on at least one point: that the international gold standard has broken down. The causes and the effects of this breakdown, and the practicability of a prompt restoration of the gold standard by international action, are moot questions with which this article is not concerned. Its purpose is to indicate briefly the extent to which the nations have departed from gold and the extent to which the gold standard still survives.
An examination of some sixty-odd national currencies shows seventeen quoted in the foreign exchange markets at or near their gold parity, while the remainder show a depreciation ranging from 10 to 90 percent. This does not mean that seventeen countries are still on the gold standard. About one-half of these have succeeded in holding their currencies at nominal parity with gold only through such drastic measures as foreign exchange restrictions, the subsidizing of exports and the rationing of imports. Germany supplies the most conspicuous example of a country whose currency is quoted in the exchange markets at a price only slightly below its gold parity, although in business transactions involving external payments this currency shows an actual depreciation of more than 30 percent. For some time the Reichsbank's "cover" for its notes, in gold and foreign exchange, has been fluctuating around 2 percent. Obviously, Germany is no longer on the gold standard, and the German reichsmark is no longer stable. The highly complicated system of "blocked" reichsmarks has in effect created for Germany a whole series of subsidiary exchange rates with as many different discounts from parity as there are channels through which the blocked currency is handled. The action of the Foreign Exchange Control Board in July, calling upon German exporters to refuse payment in German money from their foreign customers, was virtually a repudiation by the Reich government of its currency. And yet, on paper, Germany was still a gold standard country with a stable currency.
What Germany has done on a large scale, other countries with nominally stable currencies have done in less degree. Included in this group are Bulgaria, Czechoslovakia, Hungary, Italy, Latvia, Poland, and Rumania. They have maintained their currencies at or very near gold parity by restrictions on foreign exchange or other devices. Early in 1934 Czechoslovakia, one member of this group, found that its exchange restrictions would not suffice to sustain the value of its currency at par and was confronted with the alternatives of formally abandoning the gold standard or of revaluing the crown. It chose revaluation and reduced the gold parity of its currency by 16⅔ percent.
With such varied monetary arrangements in operation and with the legal status of many currencies differing so markedly from their status in fact, it is not practicable to draw a sharp line between the countries which are on a gold basis and those which are not. For some countries, "going off gold" was not so definite and formal as it was in the case of Great Britain and the United States. A country may insist that it is still "on gold" so long as its currency is exchangeable practically at par with currencies of other countries which are indisputably on a gold basis. Hence a few countries are always in a kind of twilight zone, having a fair claim to be on gold in one month and a very poor claim the next, as their currencies move up or down in the exchange markets. The value of foreign exchange on countries which export large quantities of agricultural products is often subject to considerable seasonal variation. When such a country has succeeded in holding its currency close to parity, it may have a much better claim to be "on gold" at crop-moving time than six months later.
The difficulty in designating categorically the gold standard countries of the world is increased by the changed conception of the gold standard itself. Before the World War no country was regarded as being on the gold standard proper unless it redeemed its credit currency in gold on the demand of the holder. Today the classical form of the gold standard is virtually obsolete, and it is now referred to as the gold-coinage standard to distinguish it from the more modern gold-bullion standard. Most of the countries which were driven off gold during the war returned to the gold standard between 1925 and 1928, but they modified it to fit new conditions. As a means of economizing in the use of gold and also as a check on the hoarding of the metal, they no longer struck gold coins or redeemed their bank notes with gold in any form except gold bars, the smallest of which had a value of about $8,000. Holders of small amounts of notes could not obtain gold for them at a central bank, even though the country was on the gold standard.
Still another means of economizing in the use of gold was the establishment by many countries of a gold-exchange standard in lieu of the gold-coinage or gold-bullion standard. Under this system a central bank would use the foreign exchange of gold-standard countries instead of gold itself for the redemption of its notes. The gold-exchange standard was useful as a transitional device, but the departure of Great Britain from the gold standard in September 1931 revealed its weakness, and the shrinkage in the value of sterling reserves in the countries using this monetary basis created severe disturbances.
The United States was the last important country to relinquish the gold-coinage standard. By the Gold Reserve Act of January 30, 1934, it adopted the gold-bullion standard and devalued the dollar 41 percent. Inasmuch as the new law leaves it within the discretion of the President further to reduce the dollar to as much as 50 percent of its former parity, and inasmuch as none of the credit currency of the United States is now redeemable in gold, the new system has been characterized by some financial authorities as an approach to the gold-bullion standard rather than its full realization. With the export of gold under strict government control, the degree to which the American system approaches the gold-bullion standard of post-war Europe will depend on the liberality of the government's policy in releasing gold for shipment abroad.
On the basis of these generalizations it is possible to classify the countries of the world according to their proximity to the pre-war gold standard. The sixty-odd nations for which data are readily available fall into eight groups:
1. Countries whose currencies are still at their pre-war parity: Albania, Dutch East Indies, Netherlands, Switzerland.
2. Countries whose currencies have been revalued since the war and have been maintained at their new parity without restrictions on foreign exchange: Belgium, Danzig, France, Lithuania.
3. Countries whose currencies have been revalued and maintained at their new parity, but in most instances only through restrictions on gold movements or on foreign exchange: Bulgaria, Czechoslovakia, Germany, Hungary, Italy, Latvia, Poland, Rumania, Soviet Union, United States.
4. Countries whose monetary systems are based on the dollar, and which have been affected by changes in its purchasing power: Cuba, Dominican Republic, Haiti, Honduras, Panama, Philippines.
5. Countries which returned to the gold standard after the war without revaluing their currencies, but which have again gone off gold: Australia, Argentina, Colombia, Canada, Denmark, Egypt, Irish Free State, Japan, British Malaya, Mexico, Nicaragua, Norway, Paraguay, Salvador, Siam, Sweden, Union of South Africa, United Kingdom, Venezuela.
6. Countries which returned to the gold standard after the war with a revalued currency, but which are again off gold: Austria, Bolivia, Chile, Ecuador, Estonia, Finland, Guatemala, Greece, India, Peru, Portugal, Jugoslavia.
7. Countries which have not formally returned to the gold standard since the war: Brazil, Costa Rica, Spain, New Zealand, Turkey, Uruguay.
8. Countries adhering to the silver standard: Abyssinia, China, Persia.
The countries in groups 1 and 2 are on the gold standard. All of those in group 3 have imposed some sort of restriction on the movement of gold or on dealings in foreign exchange. In the case of the United States this control is obviously not needed to hold the dollar up to par, but the status of the other countries is equivocal. Germany, as stated elsewhere, is clearly no longer on the gold standard. The Soviet Union maintains stability by a monopoly of foreign exchange transactions. The currencies of many other countries in this group would probably lose part of their external value if existing exchange restrictions were removed. The countries in group 4 have only partial monetary systems of their own, and they rely in large measure on the American dollar for currency. Their system may be described as the dollar-exchange standard.
The remaining groups are definitely off the gold standard. Turkey has been off longest, having suspended gold payments in 1915. Several countries whose currencies are greatly depreciated -- notably, Brazil and Jugoslavia -- have never officially abandoned the gold standard. On the other hand, New Zealand and Uruguay, which suspended the gold standard during the war and did not officially reëstablish it, temporarily attained de facto stabilization at parity before the beginning of the depression. Persia, one of the few countries on a silver standard, made an effort in 1932 to link its currency with gold, but has since abandoned the undertaking.
Although the countries which are unqualifiedly on a gold basis can now be counted on one's fingers, it would be an egregious error to infer from this fact that the gold standard is playing a minor rôle in the economic life of the world. Gold is still the international yardstick for measuring values. Nations which for years have been off the gold standard continue to use gold in effecting international settlements, and they are striving by every means to build up larger gold reserves.