IN 1923 certain British economists, in characteristic half-serious half-humorous vein, proposed that, in the process of paying reparations and inter-allied debts, Europe should first send her monetary gold to the United States and then turn her back on the gold standard once and for all, leaving this country, quite literally, holding the bag. In the relatively tranquil period that followed, this suggestion, even as an economist's whimsy, fell into the limbo of forgotten things. Today, however, it is becoming altogether too real. The United States is, in consequence, confronted with a gold problem which almost defies solution.

In 1923 the total visible monetary gold stocks of the world amounted to eight and a half billion dollars, of which we possessed something less than four billion, or 45 percent. At the present time American holdings are approaching fifteen billion dollars -- approximately 60 percent of the world's visible stock of monetary gold. It is true that the present dollars are lighter in gold content than the dollars of fifteen years ago; but they represent more, not less, of goods, services and days' labor. In the past fifteen years we have sunk in increments to our gold supply a much greater value of goods, services, and whatever else nations give up in acquiring gold, than the equivalent of the stocks of monetary gold of all foreign countries a decade and a half ago.

We should certainly have been better off if the British economists' little joke had been realized before it grew stale and then grim. If, in 1923, our debtors on war account had sent us their gold supplies in part payment of their debt, we should, in effect, have obtained the gold for nothing,[i] rather than at the heavy cost at which it has in fact been acquired.

In 1923, of course, we were all concerned about the restoration of the international gold standard. This would probably have been precluded if the United States had then acquired the great bulk of the world's monetary stocks of gold. However, it is open to question whether, even in the sphere of international trade and finance, the restoration did more good than harm. Furthermore, the second breakdown of the standard, with its accompanying phenomena, has not only imposed upon us the burden of buying gold already in existence but has compounded this burden by adding the cost of immense supplies which were still in the mines in 1923 and would doubtless in large part have remained there if the British suggestion had been followed. Such a transfer of ownership would not, perhaps, have given the best possible turn to events but it would certainly have been greatly preferable to what has in fact occurred.

The prospect of reëstablishing once again an international gold standard is steadily receding and, for the first time in history, the world demand for gold is showing distinct signs of satiety. To the United States at least, gold has now become a nuisance of the first magnitude. We are buying, at enormous cost, gold which serves no useful purpose and which we do not want; the stock already in our monetary system provides a constant inducement to serious inflation so that we are paying heavily for what is a positive bane; so long as present policies continue, the evil is certain to grow worse instead of better; and we do nothing about it because we are afraid to face the facts.

Perhaps the most remarkable feature of the whole situation is that our gold policy has met with so little condemnation. Critics of the Government's silver policy have very justly, and vociferously, assailed the practice of accumulating large stocks of silver, but they have remained silent concerning the similar but far greater extravagance of adding to our redundant stocks of gold at a cost which makes the outlays on silver pale into insignificance. There is scarcely an argument against the silver purchases which does not apply with greater force to our acquisitions of gold.

There is, practically speaking, no chance whatever that the existing relationship between the price of gold and the relatively low money cost of producing it can be permanently maintained. In the long run we have the choice between (1) the maintenance of the present price of gold along with marked inflation, and (2) a reduction in the dollar price paid to producers for new supplies of gold. The former would lower the real cost to the buyer of a given dollar value of the metal and, by increasing its dollar cost of production, curtail output gradually; the latter would lower the real cost to the buyer, and curtail output immediately. The longer we refrain from choosing the second alternative the heavier are the entirely futile outlays with which we saddle ourselves and the greater the danger of serious economic and social disturbances.

II

At the beginning of 1929 the world's stocks of monetary gold amounted to about 18,000,000,000 present dollars. At the end of 1938 the total value was not far short of $27,000,000,000 (allowance being made for a certain amount of monetary gold in Occidental private hoards). In other words, in the past ten years the world has added to its monetary gold stocks half as much metal as had been there accumulated in all preceding time. In the same ten years the dollar value of gold stocks held by governments and central banks rose to nearly 250 percent of the 1929 figure. The increase was made up of an increment of approximately 80 percent in additions to the physical stock of gold while 69 percent came from the reduction in the gold content of the dollar. World production of gold, which is steadily increasing, is now running close to $1,300,000,000 annually.

Changes in the distribution of the world's stocks of gold are no less striking than changes in the total. The United States has in recent years been absorbing a good deal more than the total increase in the world's supply. Major shifts in the relative holdings of a few of the more important countries are indicated below:

GOLD RESERVES OF THE CENTRAL BANKS AND GOVERNMENTS OF
SELECTED COUNTRIES
(In millions of present gold dollars)
1913 1929 1933 1938
(October 31)
United States 2,184 6,603 6,793 14,065
Great Britain 279 1,202 1,571 2,690[ii]
France 1,150 2,765 5,117 2,428
Italy 452 462 630 210
Germany 472 921 155 29

A map of the world indicating the net international movements of gold from 1933 to the present time would show heavy lines running from the principal gold producing countries, especially South Africa, to the great gold market at London, there being joined by other lines from the Orient and Western Europe representing gold released from public and private hoards, and all moving on in heavy volume to the United States. There would be lighter lines running direct to the United States from other countries, especially Japan. At the end of 1933 our gold stocks amounted to 6,793,000,000 present dollars. At the end of 1937 they totalled $12,760,000,000 and one year later had risen to nearly $15,000,000,000. Estimates indicate a gold production, in the five years 1934-38, of about $5,800,000,000. Gold released from Oriental hoards was about $650,000,000, while an undetermined but probably smaller sum came out of private hoards in the Occident. This is to say that, during the five years in question, this country absorbed not only all new production of gold, plus the amounts released by the Orient and private hoarders in Western countries, but also a substantial part of the former monetary reserves of other nations.

As has been intimated, the country from which gold moves to the United States may be simply an intermediary. Since London is the central market for gold it is most important to note the movement and countermovement between Great Britain and the United States. Since 1934 the great influx of gold to this country from Great Britain has, to all intents and purposes, been attended by no countermovement whatsoever. Recurring apprehension as to Europe's political future has set in westward motion tidal waves of gold which, though they may subside temporarily, are soon repeated. In the intervals of comparative calm the gold remains in this country and the result is a persistent accretion to our supplies.

Since we have been purchasing considerably more than the current world output the cost of buying gold may not remain indefinitely as high as it has been in recent years. As public and private stocks of gold find their way to a greater extent to this country new purchases will gradually be limited to the volume of gold currently produced. At the existing level of prices, with its prodigious profits to gold producers, this is not likely to decline below the present output for many years, so that a continuing cost to this country of upwards of a billion and a half dollars a year is quite possible. Moreover, we must not forget that there still remain outside this country about twelve billion dollars of monetary gold, and a large but not determinate supply of nonmonetary gold, which may find its way to our shores. It might happen that an improvement of conditions abroad, or some international agreement, would lead to the net absorption of a certain amount of gold by foreign countries. In this case a considerable reduction in the new burdens placed on us, and conceivably even an alleviation of the existing burden through an outflow of the metal, might occur. But to admit that such a development is possible is far from saying that it is probable. It assumes that other countries will be economically blessed to a greater extent than seems likely and that they will be dominated more largely by tradition than by reason.

III

A variety of explanations for the unprecedented gold movements of the past five years has been offered. It is frequently asserted, for example, that gold has come to the United States as a result of the devaluation of the dollar. It is to be noted, however, that all other currencies have been devalued at least once since the World War, and, since 1931, the price of gold has been raised in terms of most other currencies by as much as, or more than, it has been raised in terms of dollars. There is nothing, therefore, in the dollar devaluation, as such, which would cause a movement of gold to this rather than to other countries.

Nor are gold flows to be explained on the more sophisticated ground of differences in relative national price levels. If, in comparison with other countries, we were offering more currency for gold than for goods we would tend to get the gold while the other countries got the goods. Such an offer would take the form of a lower commodity price level in the United States than in other countries. For most of the period since the devaluation of the dollar, however, the price level in terms of gold has not been especially low in the United States as compared with that in many other countries. It has, in fact, on a 1929 or any other base, been nearer the top than the bottom of the scale of comparative national price structures. It follows that the price situation arising from the dollar devaluation cannot, any more than the devaluation itself, be accepted as the reason for the flow of gold to this country.

This conclusion is confirmed by an analysis of our foreign trading situation. From the date of devaluation of the dollar in 1933 until the business slump in this country in 1937 -- for which international prices, in all probability, were in no way responsible -- the ratio of our merchandise imports to our merchandise exports was steadily rising. In addition to confirming the conclusion that the price level in this country has not been unduly low, as compared with price levels abroad, this indicates that, up to a year ago at any rate, the inflow of gold was not in fact caused by excessive exports of American goods.

In the same period, our net annual debit on service items has been rising and our net annual credit on interest and dividends falling. Both phenomena would tend to drive gold abroad rather than attract it. They reinforce the influence of the rising ratio of merchandise imports to exports. The argument that the devaluation of the dollar has been an important factor in diverting gold to the United States is therefore quite without foundation.

IV

We may turn now to what appears to be the true explanation of the heavy flow of gold.

Since the War it has been customary to regard the United States as a great lending nation. It will be a shock to many to discover the degree to which we have been reversing our position in this respect. Instead of being a lender nation on current international account, as had been the situation from 1914 on, we have, in recent years, been a net borrower of billions: $360,000,000 in 1934; $1,536,000,000 in 1935; $1,169,000,000 in 1936; $1,187,000,000 in 1937; almost certainly not less, and perhaps much more, than a billion in 1938. All of this indebtedness has, in a very real if not literal sense, been incurred in the purchase of gold on which we laid out, net, $1,134,000,000 in 1934; $1,739,000,000 in 1935; $1,117,000,000 in 1936; $1,586,000,000 in 1937; and $1,974,000,000 in 1938.[iii]

There is, in short, a close connection between our imports of gold and the recent increase in our borrowing abroad. But, as will be seen, the connection is wholly anomalous; it is completely the reverse of what would ordinarily be expected. In former times net gold imports to any country were normally the consequence of, and equal to, a current credit balance on other items in the international account. Gold did, it is true, sometimes move into a country as a result of a current credit balance established by borrowing abroad, but the decision to borrow almost always preceded the acquisition of gold and the initiative lay with the borrower. The acquisition of gold was incidental, was preliminary to the import of capital in the form of goods, and was not expected to be permanent. Only in times of crisis was borrowing undertaken for the purpose of financing a gold import for its own sake.

At the present time, however, our gold imports are the consequence neither of a credit balance on merchandise and service items, nor of a current credit balance on financial account acquired by prior borrowing by this country abroad; on the contrary, they are themselves the cause of our indebtedness. The volume of gold movements has not been determined by the amount of our borrowing. Rather, the amount of our borrowing -- which is largely involuntary -- has been determined by the volume of gold movements. That is, since gold is being sent here not to extinguish American claims on the outside world, but to establish foreign claims against this country, we are, without any intent on our part to assume the rôle, being forced into a debtor position on current international account. The initiative has passed from our hands. We are importing gold not on our own volition but in accordance with the will of foreign sellers.

Rates of exchange have no longer any decisive influence on gold movements even though gold movements still have a marked influence on rates of exchange. The significant point is that discretion as to whether gold will be imported or exported, not only in their own country but here also, rests entirely with foreign monetary authorities who can also dominate exchange rates when they so elect. So long as they possess, will take, or will export, gold, they can put exchange rates practically where they want them; even without gold, they could do this in some degree through the purchase and sale of dollar claims provided we remained ready to buy and sell gold at a fixed price in dollars. On the other hand, if they are indifferent to the exchange value of their currency, they can export, retain or acquire gold by the simple expedient of changing their daily buying price for the metal in correspondence with current movements in rates of exchange.

The wishes of foreign monetary authorities with respect to exchange rates have not been revealed, but gold is, in any event, coming here solely because foreigners prefer dollars to their own currencies or gold.

V

The motive that inspires the extraordinary export of gold from foreign countries to the United States is, to a considerable extent, fear. But this by itself is not enough. If price level adjustments, such as the gold standard used to provide, had followed the flow of gold, or if gold did not command a fixed price in dollars, the incentive to transfers would be quickly reduced. The fact that we maintain a fixed price for gold, while failing to have the increase in gold exert its former expansive effect on the volume of circulating medium, prevents the operation of equilibrating adjustments.

A movement of funds such as that under discussion is not, on the face of it, inconsistent with the traditional international functioning of gold. It is conceivable that it might have arisen under an international gold standard but it is not conceivable that it could have lasted for long. Certain corrective adjustments in the countries losing or gaining gold would automatically have stopped an excessive flow in one direction. The mechanism of this self-adjusting system was relatively simple. So long as currencies were attached, by means of certain legal or conventional reserve requirements, to the volume of gold within the gold standard countries, a change in the international distribution of gold was closely associated with changes in the relative volume of money in the different countries. This resulted in such a shift in relative national price levels, and in the international movement of goods, as to bring about a more even balance in the international accounts and to render further shipments of gold unlikely. Whenever, for any reason, gold movements in one direction were excessive, the same process of adjustment would in due course lead to a return flow. The quantity of gold held by each country was thus automatically adjusted to the trading requirements of the several countries; there was no question of any one country absorbing an undue share of the world's stocks; and new supplies of gold were distributed in approximate proportion to existing holdings.

Under the ordinary operation of the international gold standard any extraordinary preference for dollars would have been subject to steady diminution when, as a sequel to the movements of gold, prices in the outside world fell relatively to dollar prices. Dollars would then have been in steady process of becoming less valuable in domestic purchasing power relative to the domestic purchasing power of the alternative currencies obtainable with a like amount of gold, so that the trading, investment, speculative or refugee demand for dollars, as against these other currencies, would have rapidly waned. Gold would then have ceased to come to this country.

At the present time the fundamental bases of this automatic mechanism no longer exist. Only in the United States, and possibly Belgium, does even the outward form of the system remain. Since gold is elsewhere completely divorced from any direct connection with the pricing mechanism, it has ceased to be a regulator of international economic relations. When gold moves today, it may leave unchanged -- may even aggravate -- the fundamental causes of the movement. These observations lead to the extremely important conclusions that gold flows are now in no way automatically corrective or self-limiting and that imports of gold to countries willing to buy it in unlimited amounts may therefore continue indefinitely.

Under existing conditions the immediate effect of gold imports into the United States is to depress the exchange value of the dollar. So far, and no farther, does the analogy with international gold standard conditions hold. The tendency for prices in the United States to rise on the receipt of gold is now largely nullified, whereas there is no reason whatever to expect these gold movements to depress prices in other countries. This follows from the fact that gold is no longer used in these countries either as money or as a regulator of the money supply; exports of gold, therefore, have no more influence on prices than exports of any other commodity.[iv]

A decline in the exchange value of the dollar attendant upon gold imports has now a tendency to raise the ratio of American exports to imports of goods and services. This is because the shift in exchange rates makes it easier for foreigners to buy in this country and harder for Americans to buy abroad. Such an outcome is just the converse of the situation under an international gold standard where imports of gold were normally attended by price movements provocative of a fall in the ratio of commodity exports to imports in the country receiving gold. There is now not only no automatic tendency toward the checking of a flow of gold but a strong impetus to its acceleration. The provisional conclusion must be that in the absence of intervention there is no reason to suppose that our gold imports will decline until we have exhausted the world's stocks and are taking all of the then current output of the metal.

Even if the fear-motivated flight from other currencies to the dollar should cease, the statement just made would hold true in the long run. The flight is, indeed, responsible for an undetermined, but certainly sizable, proportion of our recent gold imports. It has been supporting, and even enhancing, the exchange value of the dollar against the tendency of the imports of gold to depress it. If the flight were checked, the presumptive effect would be a drop in the exchange value of the dollar. We should then, in consequence, probably pay for continued imports of gold by an increase in the ratio of commodity exports to commodity imports rather than by the sale of securities or the purveyance to foreigners of what are substantially demand claims to dollars.

VI

"Hot" or refugee money has played so important a rôle in gold movements that a further word should be said about it. The immediate effect of flight from a currency is to increase the exchange value of the currencies in the countries of refuge. This prompts the sending of gold from the refugee country to prevent an abrupt rise in the price of foreign currencies. Resort to sterling as a refuge has so far been in greater volume than the British retention of gold. That is to say, the British monetary authorities have not kept a gold reserve equal to the demand claims of foreigners on balances arising from shipments of gold to London. London is therefore in a precarious position. Whenever fear develops, the "City" is likely to be subjected to the international analogue of a run on a commercial bank. Sterling, however, partly as cause and partly as consequence of the export rather than retention of gold by the British, has tended to rule relatively high on the exchanges. The British ratio of commodity imports to exports has, in consequence, shown a rising tendency and this, in turn, has stimulated exports of gold. If, as seems likely, refuge in the future is sought more in this country than in England the only alternative to a sharp fall in the dollar exchange value of sterling and associated currencies will be further shipments to this country of the gold now held by the British and other foreign monetary authorities. This would continue until a reversal of the trend in the balance of British and similarly affected trade was accomplished, and it is by no means impossible that British reserves of gold and foreign exchange would be exhausted in the process.

If the United States had not offered an unlimited market for gold at a fixed dollar price, the volume of "hot" money seeking refuge here could scarcely have attained its present proportions and flights to sterling would also have been curtailed. Any attempted flight to dollars would then have raised the price of dollar exchange in the refugee currencies to levels which would have made the process so costly as to put an effective damper upon it. If the United States, moreover, had not offered the British the prospect of the indefinite continuance of a favorable market for gold, the flight to sterling would have encountered similar difficulties since the British would then have been reluctant to acquire as large gold supplies as they have in fact absorbed. Furthermore, such flights as occurred would, in these circumstances, have been a mere swapping of currencies, with the sellers of dollars or sterling acquiring claims on foreign currencies coincidently with the transfer of claims on dollars or pounds to the buyers. Movements of exchange rates great enough to inhibit flights from currencies might, however, be a seriously disequilibrating factor in international trade.

With the shipping of gold to this country the foreign shipper acquires indefeasible claims on dollars since we undertake to pay $35 for every ounce of gold offered; we, on the other hand, do not acquire even a potential claim on foreign currencies since foreign monetary authorities can always refrain from purchasing any gold we might later offer them. Foreigners fleeing from their own currency under the influence of fear would, in the absence of gold movements, be obliged to sell us their currency so cheaply that the terms of trade would turn strongly in our favor. The flight of hot money would then entail a penalty for the individuals and countries sending funds abroad and a gain for the country to which it was sent. But when foreigners send us gold this does not happen. They are then not selling us their own currency cheaply, or at all, but are buying at fixed rates one form of American currency with another form which used to be, but is no longer, part of their own currency supply, and which will reënter it, if ever, only as they themselves may determine.

Since refugee gold, so far as it comes out of the monetary use, is currently supplanted by some form of debt money in the country from which the flight occurs, the reimport of the metal would presumably be superfluous, inflationary and expensive. Under such circumstances reimports of gold are not likely to be sought for long with any enthusiasm. "Repatriation of capital" will take the form of outpayments of the foreign currency, by the central banks of the countries concerned, in exchange for dollar credits held by their nationals. Refugee gold, like all the rest that has found its way to the American Midas, is therefore not likely to move away even temporarily from our borders.

Such intervention as would reduce our imports of gold, and perhaps check the flow entirely, need not occur on this side of the water. A drop in the exchange value of the dollar is identical with a rise in the exchange value of other currencies, and the ensuing presumptive increase in the ratio of American commodity and service exports to the corresponding imports is identical with a decline in the similar ratio for foreign countries taken as a whole. To a world still mercantilistic, even if it has lost its hankering for gold, this may not be very palatable, and foreign countries may purchase and hold gold with the deliberate intent of increasing the exchange value of the dollar, diminishing the pressure of competition from American commodity exports, and keeping the way open for their own. This may well be the principal basis on which such gold as is not coming to the United States is now being held or purchased abroad and it is probably our best chance of future relief from continuous dumping of the metal. Under existing conditions, the possibility of reducing our imports of gold therefore turns on the outside world being as mercantilistic in pushing commodity exports as we ourselves seem to be in engrossing gold.

Some countries, however, are beginning to value commodity imports more highly than exports and to look upon exports solely as the means of providing themselves with the desired imports. This sensible attitude is making rapid headway under the course of preparation for war. To such countries the purchase of gold looks like a very poor substitute for direct imports of the materials of war and they are likely to send what gold they have to us in order to enlarge their purchases of those materials. The tendency in this direction is reinforced by the fact that, where gold is no longer turned into currency, it is almost wholly superfluous, while its purchase by the government involves a direct and uncompensated charge on the budget. Under this strain many foreign countries are much more likely to move in the direction of reducing than of increasing their supplies of gold. They may therefore show an increasing indifference to a rise in the exchange value of their currencies and may even welcome it as facilitating the imports which they covet.

If this occurs we can, of course, expect from them no intervention to stem the flow of gold, and the existing trend toward the complete absorption by this country of the world's stocks, as well as the new supply from the mines, will be greatly strengthened. Under present legislation there is nothing that we could do about it. Gold would come here whether the exchange value of the dollar should rise, fall, or remain unchanged, since the foreign currency price offered for the metal would be correspondingly set at a figure low enough to prevent any diversion of the gold from this to other markets.

VII

Under the practice of maintaining a fixed dollar price for gold, we can neither refuse to buy the metal nor refrain from selling it freely for purposes of export. This may not inevitably mean that we have no means for influencing exchange rates, since that can be done through the purchase or sale of foreign currencies by our monetary authorities.[v] It does mean, however, that we are powerless to affect gold movements. Any control we might otherwise have over exchange rates is thereby rendered all but completely nugatory.[vi] For, if our monetary authorities desire to raise the exchange value of the dollar, and therefore sell foreign currencies, foreign monetary authorities can nullify our action by buying the currencies we are selling with the dollar proceeds of gold remittances to us. If, on the other hand, our monetary authorities desire to depress the exchange value of the dollar, and therefore buy foreign currencies, the foreign authorities can nullify this action by directly supplying us in indefinite volume with their respective currencies (which they can print at will) or by taking in gold.

In a sense, then, our present plight is a consequence of the general abandonment of the gold standard; but our weakness is attributable not to the abandonment itself but to our resumption of that standard while other countries were leaving it or, if already off, were remaining "unregenerate." We should be at no relative disadvantage if the rest of the world were on gold, but we should similarly be at no disadvantage if we had stayed off gold instead of returning to it. The trouble arises from the fact that we are on gold and the rest of the world is not, and that we have a standing offer to buy gold in unlimited amounts, at a high fixed price in dollars, while the monetary authorities in other countries can take it or leave it at their discretion.

It is somewhat ironical that the " friends " of the gold standard, repeating the history of silver, are proving to be the greatest enemies of the standard they favor. It is they who are largely responsible for an untenable position from which, so long as foreign countries refuse to alter a status in which they are at a marked advantage, we can perhaps best extricate ourselves by the definitive demonetization of gold. Once off the gold standard in 1933 we could easily have avoided the emergence of our present difficulties. But conservative bankers and business men protested that failure to tie the dollar to gold was dangerous, and that we must return, orthodoxly and at once, to the traditional standard. (The new gold content of the dollar was, they alleged, a matter of secondary import and they were content to have the dollar stabilized at its then current gold value.) Partly in bafflement and partly in weakness, the Administration at Washington capitulated. Some of the monetary policies then in vogue were unquestionably ill-conceived, but the establishment of a new fixed price for gold was surely a mistake, even though it was hailed by bankers and business men with an enthusiasm which they have accorded to very few acts of the present administration. Whether we should or should not have devalued the dollar is perhaps an open question; but once having broken the link between our currency and gold, we should certainly have been in no hurry to go back alone. If we had not done so we could readily have lowered the dollar price offered for gold when, as now, the occasion required it. As matters stand, however, such an action, for reasons presently to be adduced, could be taken only with great misgiving.

When foreign countries, exercising their present privilege, refrain from taking gold it must come here because there is nowhere else for it to go.[vii] Individual hoarders abroad may, of course, absorb a certain amount of the metal. It is more to the point, however, to turn the gold into dollars since the value of gold abroad will not go above its present value in dollars unless we perpetrate either or both of the almost incredible follies of further increasing the price of gold or of refusing the right to export the metal. Either procedure would magnify our present difficulties. The belief is professed in some quarters that raising the dollar price of gold would depress the exchange value of the dollar and improve the position of our commodity exporters. This belief is almost wholly illusory and derives from the period when a number of foreign countries were on gold. Raising the dollar price of gold would probably have no effect whatever upon dollar exchange rates against currencies which are in no way tied to gold, except for some slight depression of the dollar attendant upon the increased imports of gold which such a step might occasion. If it were thought, however, that the step would be repeated, the exchange value of the dollar might actually rise by reason of the withholding of gold abroad in the hope of getting a higher dollar price later on. Any movement in exchange rates which might occur would no doubt be followed by a corresponding alteration in the foreign currency price offered for gold, modified slightly according as foreign private persons, or monetary authorities, wished to enter on one side of the market or the other.

If the real value (purchasing power) of dollars should fall through inflation, the real value of gold, which is tied to the dollar, would fall in precisely the same degree. Except, therefore, on the very improbable conditions stated above, gold can be no better than dollars. But, because gold would immediately fall in dollar value if we should adopt the logical course of ceasing to buy the metal freely, gold may prove very much worse than dollars. Dollars, moreover, can be invested in short-term securities yielding some interest -- which cannot be done by holding of gold. No shrewd speculator is therefore likely to purchase gold rather than dollars, unless he has wind that we are about to commit one of the stated follies. He will turn such gold as he has into dollar claims.

It would be surprising if monetary authorities abroad should fail to be impressed, eventually, by the considerations which must affect intelligent private hoarders. Gold is for those authorities almost solely a means of acquiring dollars. Since dollars can now and apparently always will be able to do practically anything that gold can do, and possess unique advantages besides, there seems to be no reason whatever why foreign monetary authorities should hold on to the metal. This not only involves storage cost, and deprives them of such interest as they might earn by holding dollar credits, but it exposes them to a by no means negligible danger of loss through invasion of their territory. The holding of direct claims to dollars permits them to escape this danger.

Only one remote possibility not yet mentioned would give reason to a preference for holding gold rather than dollars. If, as a result of war or otherwise, we should repudiate foreign claims to dollars, the holders of such claims would perhaps have done better to have gone in for stores of gold; though what they would do with it under those circumstances is worth pondering. It should be borne in mind that in the World War Sweden refused to accept gold in payment for her exports though she eagerly took dollars. This precedent seems likely to be widely copied in any major future war.

Since all but the most far-fetched considerations tell in favor of foreigners divesting themselves of their stocks of gold in favor of direct claims to dollars, the hitherto tentative conclusion that, unless we change our policy, we can expect to gather to ourselves practically all the monetary gold in the world, is strongly buttressed. We are already well on the way toward this result and, though we may expect temporary interruptions of the flow and occasional reversals, it seems highly probable that the long-run trend in the present direction will continue. The monetary authorities in countries which still have large holdings of gold will perhaps, for some time yet, fail to recognize that the king is naked and will continue to do obeisance to him under the illusion that he is clothed in royal raiment. But the light will eventually break even in these dusty corners. Even now, fealty shows signs of wavering. Central banks in a number of the lesser countries have, as the occasion seemed to warrant, shifted part of their assets from gold to dollars or sterling; and the British monetary authorities, in turn, do not seem to have been averse to holding dollars.

The fact is that, having ceased to employ gold as money, the public and private holders of gold outside the United States have no use for the metal. It is true that the foreign world has not so far acted in the matter with rigorous logic. Under the influence of tradition, and of the assumption that gold might again be restored to its former sovereignty, foreign holders have not, as a group, consciously sought to rid themselves of it. In some cases they have added to their stocks and, in others, have seen them diminish with regret. As time goes on, however, and they discover that they are not hampered by the loss of gold, especially when it is replaced by claims to dollars, this attitude will almost certainly change so that the transfer to this country of most of the remaining stocks is likely to be accelerated rather than retarded. The present value of gold is purely factitious: it is solely dependent upon the policy of this country and the extremely faint possibility that some other country would, or could, support the price of gold if we should abandon the attempt to do so. So long as we provide an unlimited market at a favorable price, foreign countries would be foolish not to take full and early advantage of the situation.

Even as a war resource, and on the unreliable assumption that we shall not change our policy, it is hard to see how gold can offer any net advantages over claims to dollars. In time of war, those suppliers of materials who would be unwilling to accept in trade the goods, currency or credit of buyer belligerents, would probably take claims to dollars as readily as gold. The only conceivable exception is that involving two countries both of which in a future war were enemies of the United States and at the same time were suspicious of each other.

VIII

What now remains of the functions of gold and what is now its international rôle? Of the traditional functions not a single one remains intact. Gold is no longer employed, either as coin or as bullion, to redeem paper currency; its function as a regulator of the money supply has either fallen into complete desuetude or is retained as a fifth wheel;[viii] and the sole remaining attribute of monetary gold, that of serving to "adjust" international payments, has been perverted and is now in process of atrophy.

To make the last point clearer it will be well briefly to recapitulate. Gold does, it is true, move between countries, but the movement is almost wholly in one direction. Far from serving to settle international obligations, the flow of gold is now chiefly instrumental in creating them. Nowhere in the world are imports and exports of gold the means of regulating the currency supply. Instead of serving as a stabilizing influence, gold movements are the agency for disturbing flights of capital. Apart from the positively harmful or potentially dangerous aspects of the rôle now played by gold in international economic life, its chief function is to improve the international position of producers and disbursers of the metal. The total volume of goods, days' labor and the like now annually devoted to paying for new gold (for which the world has no economic need) is more than twice what it was ten years ago when there was a genuine need for the metal. This is of substantial benefit to producers of gold, but by the same token it represents a corresponding burden to the final purchasers. The same is true as between the disbursers and the buyers of the gold accumulation of the ages. The most significant monetary purpose that gold still serves is probably its use as the basic element in exchange stabilization funds. In this capacity it is one of the instruments whereby monetary control is exercised, rather than, as formerly, the controlling device itself, and for all countries but our own this function can be better performed by the possession of reserves of dollar exchange.

IX

Adequate discussion of different alternatives for meeting the dilemma that faces us is impossible in the space that remains. We must be content with a few general observations and shall have to forgo full explanation of why they appear to be justified.

Restoration of an international gold standard system appears to be very improbable. Sentiment in favor of such a step is not strong abroad, nor are conditions propitious for international loans of the magnitude that would be required if such a system were to be set up. Even more conclusive is the fact that the causes that brought about the second collapse of the international gold standard, beginning in 1931, are still present in aggravated form. These influences were sufficient to destroy the gold standard at a time when its prestige was high; it is most unlikely therefore that the standard, whose prestige has been impaired by the events of recent years, could survive even if it were reinstated by some great coup.

Continuance of the present policy, whereby the United States undertakes single-handed to maintain a fixed price for gold, is likely to entail upon us a burden more or less equal to the cost it has imposed during recent years. In short, the cost to this country may be expected to amount to something like a billion and a half dollars a year; and there is no foreseeable cessation of the flow through limitation of the current output of the metal.

If we disregard the escape by way of inflation, which is open to all the familiar objections, the obvious solution is to abandon the present fixed price for gold and permit it to find its economic level. This would automatically provide relief from the burden that excessive gold production now imposes upon us. Changing the price of gold would have no great or necessary long-run effects upon important exchange rates, on prices, or, with exception of adjustments to the new dollar value of our gold purchases, on the course of trade. The long-run economic consequences of this step would therefore be far less serious than those of the maintenance of present policies even if, under these policies, inflation is avoided. The short-run effects on countries which are important producers of gold might, however, be devastating and there is a strong probability that there would be extremely disturbing repercussions on our own economy including, as one incident, the rushing of gold to this country to prevent further anticipated loss on a falling market.

The step is open to the very practical objection, moreover, that it would constitute an admission of error on the part of the Administration. Indeed, it would look bad even on the record of any future administration. Every drop of a dollar in the price of an ounce of gold would mean a loss of about $430,000,000 in the nominal market value of the gold stock we now possess. If the price of gold were allowed to seek its "natural" level, there can be little doubt that it would fall far. Even if the price should fall only to the old mint par of $20.67 per ounce -- and there is good reason to believe that it would go beyond this -- the book loss would be about six billion dollars or well over twice the book profit obtained at the time of devaluation in 1933-34. This would, it is true, be only a paper loss and there is, moreover, much to commend such a move. There is little likelihood, however, that it could be put into effect. The prospect of so great a paper loss is more forbidding, from a political standpoint, than the annual real burden of a billion and a half, or more, that might go on forever.

The substance of the gold problem, then, is this. At present there is a grave disequilibrium between the low cost of producing gold and the high price at which it sells. Existing policies perpetuate this condition and compel the United States to foot the bill. The obvious means of reaching a solution are, for one reason or another, objectionable. A possible compromise is some device that will result in a fall in the price of gold abroad -- thus checking production and discouraging the flow of gold to this country -- and will at the same time maintain its price within the United States and permit us to preserve the fiction that our gold is worth what it purports to be. Such a two-price system for gold could be created without serious technical difficulty. It would simply call for a sizable import duty on gold. This might be on a sliding scale and accompanied by a corresponding export subsidy to facilitate an efflux of the metal without loss to foreign buyers. The details of such a scheme cannot be elaborated here. It is enough to say that it might be made more effective through an extension of the so-called Tripartite Agreement to include an undertaking by the six participating countries to aim at the absorption, by each, of stipulated percentages of the new supplies of gold coming on the market.

A device of the type here suggested is, of course, a palliative rather than a solution of the problem. Whether it is to be preferred to more drastic measures is a political rather than an economic question.

X

In no way are the views advanced in this paper to be interpreted as an attack upon the gold or any other standard. The present monetary outlook is unassuring, whatever standard is employed. However, we may as well face facts. The outstanding facts are these:

1. Barring changes so great as to be all but out of the question, it is improbable that an automatic international gold standard can be restored except as a possible consequence of the abuse of existing or future paper currencies.

2. Subject to the same reservations, it is likely that, if such an international gold standard were restored, it would fall again within a few years.

3. The present relationship between the price of gold and the cost of producing it is not an equilibrium relationship and, if not modified by positive action, seems certain to collapse with effects not pleasant to contemplate.

4. There is nothing in sight to interrupt a continuance of the flow of gold to this country.

5. Granted that present policies are maintained, it is therefore not only possible but probable that the United States will come into possession of virtually the entire world's stock of monetary gold.

6. In this event we shall have incurred the enormous cost of acquiring the gold and may find it impossible to avoid the inflation that the gold threatens.

It behooves us either to bring gold back into familiar use under conditions favorable to its maintenance as money, or to abandon it as a monetary material. Unless we make of the gold standard something more than a rainbow, the pot of gold in which rainbows are said to terminate is likely to turn to ashes in our hands. To continue to buy gold as at present is not likely to keep this from happening; in the end, it may simply mean more ashes. A complete and final surrender of the use of gold as money would, perhaps, be the better course. Under existing conditions the value of our gold, for any purpose, seems little less evanescent than that of its celestial counterpart. The English economists in 1923 were not offering us an important asset, and they knew it.

[i] Nothing, i.e. in excess of what we had already transferred to our debtors during the war. On the principal of our war loans we have not been able to make any net collections and, presumably, never will. Even such interest as was paid on these debts was more or less directly dependent upon the receipt, by our debtors, of a much larger sum in German reparations which, in a similar more or less direct fashion, we may be held to have financed by loans to private German borrowers. Most of the German "securities" have, like the war debts, been repudiated in whole or in part, so that, instead of getting paid by our debtors we actually contrived to secure large payments to them at our expense and, on top of all this, paid them anew for the gold we might have had in lieu of debts that have now gone into the discard.

[ii] Bank of England holdings only. Early in 1939 the Bank of England transferred to the British Exchange Equalization Account $1,650,000,000 of gold so that the Bank of England's holdings are now presumably not much above $1,000,000,000. The figures on British gold reserves ought, of course, to include not only the stocks of the Bank of England but, after 1931, those of the Equalization Account as well. The latter are not currently available. Total British gold holdings when this table was prepared are, however, probably not more than 2,800 million dollars.

[iii] The assumption of new liabilities fails to cover the entire cost of our gold purchases. The difference has been made up by the encashment of foreign obligations to this country and by the use of American claims on foreign currencies accruing from interest, dividends, and a current excess of commodity and service exports over imports.

[iv] If prices in the United States should rise under the impact of gold imports from other countries, it is more probable than not that they would not fall, but rise, in at least equal measure, in foreign countries. In England, for example, a loss of gold probably induces a slight immediate, if not necessarily permanent, tendency toward inflation. Space does not permit a discussion of the reasons for this paradoxical tendency, but it should be noted that the ever present possibility that prices may rise in any foreign country not only in equal, but in indefinitely greater, degree than in the United States, is a strong reason for the shift, via gold, from these currencies to dollars.

[v] The unconditional purchase of weak currencies, is, however, a dangerous expedient inasmuch as a possible devaluation may involve the purchaser in heavy losses. Such losses would already have been realized if francs had been unconditionally purchased, over the past year or two, by non-French monetary authorities or anyone else.

[vi] The Tripartite agreement on exchange stabilization may be of service to us in this connection but only if the other parties to that agreement are under obligation to buy gold when dollar exchange tends to fall. It is not likely that there is any hard and fast obligation of this sort.

[vii] Some relatively small amounts might be sent to Belgium if, as is unlikely, the sellers of gold should prefer belgas to dollars.

[viii] As has been noted, in most countries gold is frankly divorced from the monetary system. In the United States the two have been separated but are now somewhat uncertainly reunited. Even in this country, however, gold exercises over the money supply only a very remote control and is wholly superfluous for that purpose. The cost of separation -- or "sterilization" -- coupled with our determination to maintain gold, was so great a burden on the treasury that it had to be abandoned.

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