What Russia Got Wrong
Can Moscow Learn From Its Failures in Ukraine?
DURING recent years there has been little more than a spasmodic relationship between gold and most of the world's currencies. Yet despite the depression and the vagaries of monetary policies, the position of gold has remained unchanged in one respect -- there has been an unlimited willingness to accept it everywhere. No tariffs or quotas restrict its flow in the settlement of international balances. Labor spent on producing gold in Russia buys more machinery than the same labor devoted to wheat production. Colombia can buy airplanes with gold better than with coffee. This universal usefulness of gold implies that its position is due not only to its monetary use but to its economic character apart from legislation. Governments, private corporations and individuals everywhere have therefore found gold mining an attractive enterprise regardless of prevailing monetary theory.
The following table, compiled by the American Bureau of Metal Statistics, shows the trend in the world's gold production since the World War:
|Fine Ounces||Change from Preceding Year||Index|
|(in thousands)||(in percent)||(1925-29=100)|
We see that from the low point in 1922, world gold production had increased by 1935 almost 100 percent. The 1935 figure is 58 percent greater than the average for the years 1925-1929. The average annual rate of increase in the past six years has been about 7.7 percent.
These figures offer an interesting contrast to those used in the discussions of several years ago about an impending gold shortage. Undismayed by the well-established fatuity of forecasting shortages, the Gold Delegation of the Financial Committee of the League of Nations issued an Interim Report on September 8, 1930, setting forth its estimates of the future production of gold. The Delegation presented two estimates: one a summary of official or semi-official calculations of probable production in the various countries, the other a revised estimate by the late Mr. Joseph Kitchin. Mr. Kitchin's estimates run consistently higher than the Gold Delegation totals. The actual figures for 1935 exceed Mr. Kitchin's expectation by nearly 60 percent. Production in 1930, the very year during which the estimates were compiled, exceeded the estimates for that year by over 6 percent. But although the report became obsolete promptly enough, the effect of these discussions about a gold shortage has persisted, so much so that the present relative abundance of gold production seems to deserve attention.
The greatest increase in production both in percentage and amount has taken place in Russia and Siberia. The Russians state their expectation of doubling their 1935 output of 5,650,000 fine ounces by 1939. In 1930 the figure was 1,300,000. The Transvaal, which formerly produced almost half of the world's gold output, has remained nearly stationary at a little over ten million fine ounces; it now accounts for only about one-third of the total. The other principal gold producing regions, with their production for 1935, are: the United States, 3,619,000 fine ounces (in contrast to 2,285,603 in 1930); Canada, 3,283,000 (2,102,000 in 1930); Australia, 1,365,982 (622,000 in 1930); Africa, excluding the Transvaal, 1,819,000 (1,037,000 in 1930); Latin America, 1,168,000 (606,000 in 1930); the Japanese Empire, 981,000 (592,000 in 1930).
The annual production of gold must be considered not only in terms of the previous annual production but also in terms of total monetary stocks. The argument used to be made that unless monetary gold stocks increased as rapidly as the amount of work they had to do (as measured by total production, or total trade, or some other generalized statement of economic growth), the price level would have to fall. Cassel's figure of about 3 percent (compounded year upon year cumulatively) used to be taken as standard; and the apparent unlikelihood in 1930 of increasing monetary gold stocks by this amount during the following ten years was what aroused the alarm of the Financial Committee of the League. As a matter of fact, the 1935 production of about 634 million United States gold dollars is approximately equal to 5 percent of the gold reserves of the fifty principal countries, which were estimated by the Federal Reserve Bulletin to be $12,850,000,000 as of December 1934. (Here, as elsewhere in this article, reference is made to old United States gold dollars.)
All gold produced, however, does not necessarily go into monetary stocks. Of the estimated 1930 production of 400 million dollars the Gold Delegation expected that only a little more than half would be available for monetary use. The demand from India was expected annually to require from 80 to 90 million, and industrial purposes were expected to use about 75 million dollars. In reality, instead of taking 450 million dollars during the past five years, India has exported to the West about 653 million, a net change in the estimates of over 1,100 million. The expectation of a net demand for industrial gold likewise proved misleading, for according to the Report of the Bank for International Settlements old gold surrendered by the public in 1933 and 1934 about equalled the industrial requirements. On the other hand, a new factor has appeared: hoarding on a considerable scale in England and on the Continent.
Thus, quite apart from new production, there can be said to exist three main gold reservoirs which may draw from or feed into world gold monetary stocks: (1) the Eastern gold hoards; (2) the Western gold hoards; (3) and the industrial or personal stocks of gold, jewelry, rings, etc. The Eastern gold hoard is made up primarily of the Indian hoard; the Chinese and Egyptian holdings have been relatively small. From 1890 to September 1931, when the pound sterling became no longer convertible into gold, India imported gold in all but three years, and during that period Indian net imports of gold were roughly 2,250 million dollars. Before net exports began in September 1931, the Indian hoard was thought to amount to about 3,300 million dollars; net exports to the West from September 1931 through January 1936 were about 653 million. The Chinese hoard is thought to have been about 240 million dollars, of which about 175 million has been shipped to the Occident. The Egyptian hoard of about 300 million dollars is believed to have remained unchanged. Thus, the Eastern hoards in the aggregate have yielded to the West over 800 million dollars in the past four years.
The Western hoard is a comparatively new phenomenon. Part of it is held by individuals in secret places or in public vaults, part is held as unrevealed reserves of central banks or exchange equalization funds. As of the end of 1934, the Bank for International Settlements estimated the value of Western hoards to be 7,000,000,000 Swiss francs, or $1,400,000,000. About half of this amount was estimated by the Bank to have been in London.
This figure would seem to be low, for the new imports of gold into London during the period September 1931 through March 1936 have been over 1,500 million dollars, whereas the reported gold holdings of the Bank of England have increased only 328 million. This would indicate the presence in London alone of the equivalent of $1,200,000,000. France is estimated to have in private hoards from 10 to 15 billion gold francs, or between 400 and 600 million dollars. Holland, Switzerland, Belgium and other European countries may together have a similar amount. The aggregate for Europe is thus possibly equal to 2,500 million dollars.
The industrial and old jewelry supplies need not be estimated. Suffice it to say that these supplies have filled the demand for new industrial gold and have probably provided part of the bars that make up hoards one step nearer monetary utilization.
In summary, the distant and supposedly unavailable Eastern hoards have sent West approximately 825 million dollars; industrial demand has been filled from industrial and second hand jewelry. The Gold Delegation expectation for the six years 1930-1935 was for a gold production of 2,410 million dollars, less exports and industrial use of 1,110 million, leaving net for monetary use of 1,300 million. Actually, production was 3,125 million dollars, plus imports of 800 million, making 3,929 million net, or three times what the Gold Delegation expected. Of this 3,900 million dollars about 2,362 million went into visible monetary reserves and 1,600 million into equalization funds, secret reserves or hoarding in the West, that is, where it might readily become part of the monetary stock.
The following table gives the published figures of visible monetary gold stocks in 1913 and from 1925 to 1935 (in millions of old gold dollars): [i]
|Total monetary||Total reserves||Total reserves||Reserves of|
|stocks||incl. Russia||excl. Russia||50 countries|
It would be folly, as precedents show, to attempt to define precise and inevitable consequences of this unusual abundance of gold. The consequences will depend upon human behavior, of which economic behavior is only one unpredictable aspect. If conclusions are drawn on the assumption of ceteris paribus -- all other things remaining the same -- they will probably be wrong, for all other things do not remain the same. The abundance of gold should tend, however, to make payment of international balances relatively easier, and should help in part to overcome the difficulty caused by tariffs, quotas and the settlement of balances with merchandise. There has been less heard of the pressure of Russian exports on the lumber, hide and wheat markets since the great increase in Russian gold production.
Eventually, this abundance of gold should operate toward raising the level of commodity prices. There is no direct proportional relationship between the amount of monetary gold and the level of commodity prices: a small disparity between the rate of growth of monetary gold stocks and that of general business cannot adequately explain sweeping changes in the price level. For decades there have been too many cushions between the monetary gold supply and the amount of money available for business use for any small disparity to produce a major dislocation. This is truer now than ever. None the less, substantial increases in gold production and monetary gold supply have been followed in the past by rising commodity prices, and they may well be expected to do so in the future.
[i] League of Nations: "Selected Documents on the Distribution of Gold," 1931, p. 66; "League of Nations Yearbook 1934-35," p. 240; League of Nations Monthly Bulletin of Statistics, October 1935, p. 457; Federal Reserve Bulletin.