"Man-hours are the only real wealth and the only real capital. Gold is worth nothing anyhow, -- as the financial writer of one of our greatest newspapers, greatly daring, pointed out, some weeks ago. We spend millions of man-hours digging it out of the ground, refining it, transporting it, and then in burying it underground again in vaults which cost man-hours to dig and make proof against assault. And if an earthquake swallowed the lot nobody would be any the worse if the controlling financiers kept the knowledge to themselves." -- The Airplane, London, October 4, 1940.

CHANCELLOR HITLER and his Finance Minister have loudly proclaimed that the German reichsmark, being based on productive labor, is a far sounder form of money than the American dollar backed by all the American gold. In the "New Order" gold will have no place, and the gold hoard of the United States will lose its value. Such statements have been branded by the American Economists' National Committee on Monetary Policy as a typical totalitarian attempt to destroy the confidence of people in democratic countries in their major social institutions. This Committee asserts that Germany cannot impair, much less destroy, the value of the gold stock of the United States, and declares that even if a victorious Germany should refuse to accept our gold, "our currency would still be more valuable because it is secured by gold as an asset than it would be in the absence of such security." This view is in harmony with a common American belief that the dollar is in some way strengthened because it is "backed" by great quantities of gold. We read, for example, in the last Annual Report of the Chairman of the Chase National Bank to its stockholders that, "Our financial strength is supported by three-quarters of the world's gold." Yet it is apparent that the present value of an ounce of gold is wholly determined by the fact that it can always be exchanged at the United States Treasury for thirty-five American dollars.

Clearly the debate over "the gold problem" has come to grips with ultimate issues. It now centers around the most fundamental question that can be asked about gold: "Has it become an obsolete form of money?" This question cannot be dismissed with a resounding "No" based on tradition and emotion, nor by a resounding "Yes" backed up by pointing to the record of the past six years. It must be recognized as an open question to be debated in the light of the historical record and of the alternative policies with respect to gold which will be open to the Powers after this war.

Professors Graham and Whittlesey, who have described the inflow of gold into the United States during the past six years with great ability in FOREIGN AFFAIRS[i] and elsewhere, have performed the ecclesiastical office of baptism for this phenomenon, and have given it a name, "the golden avalanche." An avalanche is rarely recognized as serving any useful purpose and never seems to stop before it reaches bottom and destroys everything that stands in its way. "The golden avalanche," however, differs from its natural prototype in several important respects. It has performed a number of useful functions, and it may not prove to be irreversible, uncontrollable and destructive. In trying to estimate its future behavior let us look at the past. In the last quarter-century the United States has been a party to seven different methods of international gold distribution. A summary description of all seven -- rather than merely of the last three which fall within the period 1934-1941 --will help to sift out possible and probable uses of gold in the future from those which are impossible or improbable.


1. Before the first World War gold was a limiting factor regulating in a general way the expansion and contraction of credit in most countries. Gold movements were in general responsive to the ebb and flow of trade and to the needs of the world's banking and currency systems. In the short run they were useful in maintaining exchange stability; and in the long run they enabled rapidly developing countries to satisfy their expanding currency requirements without frequent and violent checks due to inadequacy of gold reserves.

This system of international gold distribution was dominated by London. It was profoundly influenced by the way in which British capital exports were controlled, and countries which shared in its advantages found that they frequently had to make economic adjustments under British pressure. Under this system the United States was a member of what was in effect a worldwide sterling exchange standard. We bought and sold gold at a fixed price in order to share with other countries the advantages of a confident international movement of long-term capital; in order to enjoy the benefits of an efficient and cheap machinery for financing international trade provided by Great Britain; and in order to avoid the dislocations incident to violent departures in the course of our prices from trends established elsewhere.

2. During the first World War the foundations of this system were destroyed. Its refined techniques were abandoned. Gold moved and credit was extended in total disregard of long-run consequences. Until our entry into the War in April 1917 our purchases of gold were in part connected with our effort to supply war materials to belligerents without breaking down the previously existing system of exchange rates. The sharp distinction previously existing between the movement of gold and goods in international exchange was blurred. This was a misuse of gold, for gold ceased to be a purely financial instrument facilitating trade, and became part of trade itself. The aberration was regarded, however, as temporary, to be succeeded after the war by a restoration of the old order.

3. After the war the world faced economic adjustments made necessary by the distortion of world trade, a major change in the foreign investments of the Great Powers, the creation of large intergovernmental political debts, and an entirely new dispersion of price levels. The gold content of the various standard monetary units as defined by prewar law ceased to have current significance. But so strong was the hold of tradition on men's minds that statesmen and bankers did not think in terms of replacing an obsolete international convention by a new one more suited to existing conditions. Instead of seeking to establish by international agreement some new system of exchange rates they embarked on a struggle to return to "Par with Gold."

In the early stages of this struggle the United States became the sole effective buyer of gold for monetary purposes. For four years we exchanged goods for gold on an unprecedentedly large scale. Yet these transactions did have primarily a financial and monetary significance, for they were part of a nearly world-wide effort to find a new basis for exchange stability conforming approximately to the prewar model. All countries except the United States hoped that the attainment of this objective would be made easier by gold inflation in the United States. But then, as now, our power to absorb gold was exceptionally great, and the inflation was delayed.

4. After 1924 this country ceased to be the residual buyer of gold in the London market. The general "return to gold" brought other buyers at fixed prices and for unlimited amounts into the market, with bids competitive with ours. Our selling price once more took on international significance, and when the dollar was strong in the exchanges we were able once more to take gold from other central banks. But the United States did not occupy, after 1924, the same position in the international distribution of gold that it did prior to 1914. For the first time, the world had to solve the problem of managing a true international gold standard. The former nearly world-wide sterling exchange standard had shrunk to a segment of the whole. A "sterling area" now existed within the framework of the international gold standard; an important "dollar area" had come into existence; and in addition, France, after 1926, attained a temporary position of great power in the whole system. The relative importance of London in influencing the world distribution of gold was much reduced, the exchanges were supported by a new type of international lending, and the "rules" governing the old gold-standard system were disregarded.

The international movement of long-term capital was at this time dictated by the needs of one creditor country preoccupied with the necessity of defending a basically weak exchange -- Great Britain; one creditor country utterly disillusioned by defaults on almost all of its prewar long-term foreign loans -- France; and one creditor country seeking outlets under the compulsion of a delayed gold inflation and the necessities of an export trade overexpanded in relation to its willingness to accept imports -- the United States. Consequently, in the 1924 to 1929 period, the world's international financial machinery, rudely torn from the matrix of a gradually developing world economy and deprived of its former powerful and centralized control, was used to postpone rather than to facilitate radical and even revolutionary adjustments which were bound to come sooner or later. This was most clearly shown by the gold redistribution policy of 1927 and its consequences. The defense of the gold standard in England was largely dependent on the American capital market and the pound sterling was exposed to "danger" whenever America was "under-lending." When the support given to the whole system of exchange rates of the gold standard world by American foreign lending began to be withdrawn in 1928, some solution of the basic economic problems other than postponement to a distant date had to be found.

From 1929 to 1931 a rearguard action was fought in defense of the newly reëstablished system. But with Britain's abandonment of the gold standard this was replaced by a fierce battle to shift economic burdens both within and between countries. The weapons used in this battle were: exchange depreciation, total and fractional; exchange control in its Protean aspects; deflation, as exemplified by the Bruening policy in Germany; repudiation of debt, domestic and international, private and political; destruction of world markets for commodities; tariff warfare; bilateral and barter trade; and devaluation in gold by some countries, while others continued to make sacrifices to Par.

5. The use of this last weapon of economic warfare established the characteristic relationship of the United States to the international distribution of gold from the autumn of 1933 to September 1936. The general aim of the devaluation of the American dollar in 1934 and of the gold purchase policy which preceded it was to break the vicious circle of declining prices, to raise farm prices relative to other prices, and to cancel the advantages of British relative to American exports assumed to have followed the British abandonment of the gold standard and the decline of sterling in terms of dollars. This aim was to some extent accomplished because the American action forced a radical change in the world's system of exchange rates.

The belief of the so-called gold-bloc countries at this time that the number of grains of gold in their monetary units was in itself something important was the lever by which America was able to replace a system of exchange rates which we did not like by one which we did like. These countries were subject to an unlimited drain of gold until their exchange rates on New York conformed to the new gold parities established by our devaluation. More important by far was the fact that sterling also was forced to appreciate in dollars. Sterling had to adjust itself to the new position of the gold-bloc currencies, and the power of the British authorities to check the rise in sterling was limited by American policy. The United States, though buying gold freely at its new price, would sell only to the central banks of gold standard countries, and consequently sterling could not be held down by British purchases of gold in America.

The use of gold in this way as an instrument of economic warfare, however justifiable as tactics in the battle for immediate advantage, had grave defects as strategy in the campaign for lasting economic stability and peace. It started the golden avalanche, first by making gold imports the technical means for forcing the new system of exchange rates into existence, second by adding to the internal difficulties of France the element of grave uncertainty concerning the future of the currency, and third by providing the greatest stimulus to increased gold production in history. A crisis in French finance was not long in coming, and it provided the occasion for the sixth stage in the evolution of America's relationship to the international distribution of gold.

6. In the summer and autumn of 1936 the United States took advantage of a series of capital flights from France to obtain British consent to a French devaluation without retaliatory action on the part of England and the United States. In exchange Britain acquired a new and flexible exchange stabilization agreement under which she was given access to American gold. A tripartite agreement was negotiated, avoiding permanent commitments to any given system of rates. One of the main contracting parties, Great Britain, was not in any formal sense a gold standard country. The American authorities who negotiated the Agreement, from the President down, were hostile to the gold standard and did not regard the new arrangements as a return to gold. Yet there was a sense in which the stabilization was dependent on gold, for without the buying and selling of gold it would not have been technically workable.

The essence of a multilateral exchange stabilization agreement between countries which do not use rigid exchange control methods is that all countries adhering to such an agreement undertake to support their own currencies when they are weak in terms of the other currencies in the group, and to support any of these other currencies when their own currency is strong. There are three ways by which such a policy can be carried out. The financial authorities of the country with a weak exchange may have a long position, built up at some previous time, in the currencies of the countries with strong exchanges, and may sell these currencies in the market to strengthen the demand for their own currency; they may persuade the financial authorities in the countries with strong exchanges to take a long position in the weak currencies; or they may sell them some generally acceptable asset, provided that they can agree upon a price. Under the Tripartite Agreement it was taken for granted that gold was such an asset. Accordingly long positions in the foreign exchanges taken in execution of the coöperative arrangements were, as a matter of routine, liquidated by conversion into gold within twenty-four hours. Given the rates within which the fluctuations of the sterling dollar exchange were to be held, and the rate at which the French franc was to be stabilized in terms of dollars, and also given a fixed price of gold in the United States, the prices at which the French should buy and sell gold in francs and the prices at which the British should buy and sell gold in sterling were indicated. This principle could be extended, and later was, to include Belgium, Holland and Switzerland.

Such arrangements provided for an international distribution of gold responsive to the requirements of short-term exchange stability as between its members, leaving them, however, to work out special clearing arrangements with countries practising rigid exchange control. They also provided a very large area of free exchanges by the use of which multilateral trade between the countries members of the group, and even between the members of the group and other countries using the milder forms of exchange control, could be carried out with a minimum of difficulty. Since the alternative to this Agreement was for France to join the ranks of the exchange control countries and for the relations between the pound and the dollar to remain indeterminate and subject to a renewal of currency warfare, the Agreement was important. Because of its flexibility and the now extremely loose connection between gold movements and internal banking policy, it differed profoundly from the familiar gold standard arrangements of the past. If a readjustment of exchange rates were later agreed upon, in response to a new set of conditions, the system could be kept in full operation by appropriate changes in the buying and selling prices of gold of the various members. This was most easily accomplished by a change in the British sterling price for gold, because that was subject to the discretion of the managers of the Exchange Equalization Account. It was least easily accomplished by changes in the French, Belgian, Dutch and Swiss gold prices, for such changes involved a formal act of devaluation. The position of the United States was intermediate. The Secretary of the Treasury had power to buy and sell gold at any price he determined upon, and the President had power to alter the number of grains of gold in the dollar within certain limits. These, however, were really reserve powers not intended to be used, but useful in making sure that any adjustment in the system of exchange rates by changes in the gold price of other countries should really be made with our consent.

Under this system the United States continued to receive gold for three years at the rate of about one billion and a half dollars a year. Yet America had not returned to the position of residual buyer of the world's gold which she occupied from 1919 to 1924. For under the 1936 system there were many bids and offers in the gold market; but so long as at the chosen stabilization levels there was persistent pressure for the dollar to appreciate, these bids did not become effective. The situation of 1919 to 1924 seemed to be reëstablished.

The causes of the gold inflow which brought to this country seven and a half billions in gold at the new valuation of $35 an ounce from 1934 to the outbreak of the crises immediately preceding the present war have often been enumerated. Under our legal arrangements this gold was not needed by our banking system. Its amount bore no relation to changes in the amount of money work to be done in this country. It may to some extent have stimulated productive effort in the making of export goods which might otherwise not have been called forth. And it fitted in well with the philosophy of our government in providing cheap and abundant supplies of money. On the other hand, it unquestionably gave rise to difficult banking problems and was a potential inflationary threat. We gave up our foreign investments and our goods and went into debt to foreigners to whom we gave bank balances and to whom we sold our own securities. For all this we received gold. On the face of it this was not an advantageous exchange, but in reality we bought gold in preference to sacrificing other values. We had become the central cog in a machine that maintained, in a period of unexampled crisis, a very considerable degree of stability in exchange rates and preserved free exchanges in a large part of the world. We made it possible for very large movements of capital to take place without disrupting this system of rates to a point where, for example, our trade agreements program would have had to be abandoned. Finally, we helped to undo some of the damage caused by our original dollar devaluation by permitting successive adjustment in the exchanges to be made in an orderly manner. Had this time of chronic crisis been followed by peace rather than by war, gold might have resumed its useful service as a balancing item in international exchanges under the mechanism then in force. But it was not, and we entered the seventh stage of our relationship to the international distribution of gold.

7. We recently have been buying gold chiefly because it is something which Great Britain could offer us in exchange for war materials. After the gold supplies of Japan had been exhausted, we could conveniently continue this policy without legal discrimination and also without the embarrassment of helping the totalitarian Powers. The securities which we sold to the British and the balances which we gave them in earlier years are now being used to buy war materials. Though a considerable part of our exceptionally large gold imports in 1939 and 1940 was sent to us for safekeeping and is held under earmark, the golden avalanche is, in the main, resolving itself into a gigantic exchange of goods for gold. Gold has once more, for the time being, lost its character of a financial instrument in international trade. It has become just a type of merchandise which we are willing to accept at a certain price on grounds of high national policy, as part of the tactics of an undeclared war. Yet we still treat this gold in our banking system according to existing rules and allow it to create bank reserves and bank deposits.

When the economic stagnation which permitted us to absorb great additions to our money supply without inflationary consequences began to give way to the activity of a war boom, our monetary authorities recognized the danger and proposed strong counter-measures. These took the form of the abortive Eccles proposals concerning gold sterilization, increased reserve ratios and sale of government bonds to others than banks. Such proposals, however, do not go to the root of the matter. If we continue to take all the gold that other countries can send us, we shall run out of palliatives and shall have to admit that gold is an anachronism in our monetary system.


No one imagines that the conditions of the nineteenth century can be reëstablished, but the historical record from 1914 to 1940 shows the dangers of failing to integrate the international distribution of gold with credit and commercial policy. The question now to be resolved is: "In the world as it is likely to be organized after this war, will gold be able to perform a genuine service as money that no other means can render as well or better?" Since no one knows how the war will end, this question cannot be given a categorical answer. Yet we can establish in general terms the conditions under which the answer would be in the affirmative, and if we do so it will be found that much more will be required of the United States than a mere willingness to continue buying all the gold offered to us at a fixed price.

With the end of this war will end also the era of postponing radical solutions to economic problems. Voluntarily or involuntarily, the United States will have to accept the fact that in international affairs the policy of exchanging goods for gold can no longer serve a useful purpose, and indeed is merely the economic equivalent of giving goods away. Gold will no longer be a deus ex machina to solve the problems of our trade relations with the rest of the world by postponing to some distant date the establishment of a real international economic equilibrium. The world will be impoverished and there will be, as after the last war, an insistent demand for all sorts of things which America can supply. In addition there will be in full operation a nearly world-wide system of exchange controls covering both goods and capital transactions. The essence of these controls is that exporters are obliged to surrender the proceeds of their exports to government authorities, who distribute them to importers in the order of the urgency of their imports. The dollar will probably still be what is known as a free exchange, but it will be free only in a limited sense. It will be in great demand, and Americans who possess dollars will be able to purchase goods and services in almost every country, but the dollars that American importers give up will not reappear on a free exchange market. The character and amount of American exports will be determined, not by the quality and price of the services which we can render, but by the decisions of governmental authorities elsewhere. The pressure for the expansion of American exports will be extremely great, but the question of payment will be very difficult. The exporters of this and certain other countries will proceed to sell foodstuffs and other urgently required goods abroad. They thus will come into possession of claims on foreign countries which they can liquidate only by finding purchasers who in turn wish to buy goods either in those countries or in the economic areas which they control or with which they have multilateral clearing agreements.

The economic difficulties arising from this situation will probably be met in part by the formation of larger economic units than those defined by prewar national boundaries. If Germany wins the war, the continental multilateral clearing system now in process of formation, with the reichsmark as the settling unit, will be further developed, probably to include the entire area of German political and economic domination. If Britain wins, there will probably also be larger economic units. They might be composed of groups of countries, including possibly colonial areas with complementary economies, having in effect a single currency and without tariff barriers. The negotiations between the governments-in-exile of Poland and Czechoslovakia are harbingers of such a development. In either case there will be less basis for small and restrictive clearing and compensation agreements within the larger units and for blocked accounts awaiting settlement between the smaller political entities.

If Great Britain does not win but nevertheless survives then there is likely to exist, side by side with a multilateral continental clearing system focussed on Berlin, a large multilateral sterling clearing system like that at present existing within the orbit of British exchange control. The United States and its economic dependencies may be another such system; Russia and its dependencies another; and there may be a yen bloc as well. Some important countries like the Argentine will not fall naturally within any such group, and will depend for their economic welfare on their ability to offset credits in one group against debits in another. This will be true in less degree of every country having, or capable of having, a general international trade. Unless each country or area within these larger groups is forced to regulate its dealings with countries in other groups on a strictly bilateral clearing basis, there will be trade between the large currency areas in all directions. This trade is not likely to be free, in the sense that it will be governed solely by price and quality considerations. It will be controlled and the rule will be applied that those who will not buy cannot sell. Nevertheless, exchange controls, especially if chiefly confined to the non-merchandise items in the balance of payments, can still be used to promote mutually advantageous trade; and there is some ground for hoping that if they are so used they can gradually be relaxed.

From a long-run point of view it will be to the interest of all countries to substitute for the detailed control of individual items entering into international trade a more flexible and more general type of exchange control. This will have the effect of releasing the individual importer as much as possible from a rigid system of priorities, and the individual exporter from uncertainty as to his ability to convert the proceeds of his shipments into his own currency. Gold clearing between the large economic units is an appropriate instrument for accomplishing such a purpose. The techniques worked out from 1934 to 1938 can probably be adapted to provide it if the nations decide that exchange stability between the larger currencies at agreed rates is preferable to official control over the proceeds of exports or to violently fluctuating exchanges. There will then be a technical place for gold in the financing of international trade; for a general stabilization of exchange would be extremely difficult unless the control authorities were able to convert foreign credit balances into some generally acceptable asset.

Such a system, however, would entail some sacrifices of national sovereignty as regards domestic credit policy. More important from our point of view, it would mean establishing a proper relationship between exports and imports. Some such limitations of national sovereignty are implicit in any system which is both peaceful and international. Americans would be apt, however, to resist them. There will be pressure for large credits to finance the transition to a peacetime economy by expanding export markets. But if we are interested in establishing permanent and advantageous trading relationships, the first consideration governing foreign loans should not be how much immediate relief they will give to the borrowers but how they are to be repaid.

This does not mean that we should adopt a hard and brutal attitude towards European reconstruction after the war. But it does imply that we do something which we and other countries have not done in the period since the World War -- have a careful and well-thought-out coördination between monetary, credit and commercial policy. In this scheme, we should aim to increase our total trade, but to allow our imports to grow faster than our exports. We should not lend to countries which do not have a reasonable prospect for making repayment in the form of goods, directly to us or indirectly through other countries. Unless we accept this radical readjustment in our point of view the proceeds of our exports and the funds which accumulate abroad for the repayment of our loans and advances will merely be impounded in blocked mark, blocked sterling and blocked yen accounts. The experience of all countries trading with Germany in recent years has demonstrated what advantages accrue to debtors under a system of blocked exchanges. We can, of course, accept gold in exchange for accumulated credits, up to the limit of the world's annual new gold production. But if we do so we shall not be contributing to a constructive system of international gold distribution, but simply exchanging goods for gold as a permanent policy. In that case, whether we admit the fact or not, gold will have become in truth an obsolete form of money.

If after winning the war of arms Germany should then elect to continue the economic war by offering very favorable barter terms of trade to all countries in which our exports compete, and should attempt to force a destructive competition in our own markets by the use of export subsidies raised by levies on the whole subject economy of Europe, it would not be peace. For us, under such circumstances, to give goods in exchange for the gold obtained by Germany from conquered countries, and to follow that up by entering into the trap of accumulating credit balances in blocked marks in order to serve the short-run interests of our export trade, would be to show ourselves lacking in the most elementary economic as well as political intelligence.


Nothing has been said so far as to the value of our great accumulated stock of gold. As long as we continue to purchase gold at $35 an ounce there can be no change in the nominal dollar value of this stock; and as long as we continue to buy gold at this rate and as long as American dollars are universally in demand gold will always be acceptable elsewhere. This does not mean that if we were to cease to pay this price gold would become quite valueless, for in great areas of the world there is a feeling about gold as a desirable commodity which would be sufficient to give it value. This makes it conceivable that even if all present and prospective monetary controls were to break down some new world monetary system might be reconstructed on the basis of gold.

But these are distant speculations. What does concern us now is the value, in terms of foreign currencies, of that portion of our gold stock which we shall wish to use in the settlement of balances arising in the future from our international transactions. This will depend on the rates of exchange which are established, the presence of other buyers in the gold markets, and the prices that these other buyers will pay for gold. We are also urgently concerned with the dangers of inflation which face us because we choose to treat each ounce of gold held in the form of gold certificates by our central banks as $35 in reserve funds. We have inherited a dangerous banking position from the misuse of gold in the past and the failure of all countries, including ourselves, to find a commercial policy which would restore a balanced international trade and a proper utilization of the world's productive resources. We do not, however, need to be greatly preoccupied with the nominal dollar value of our existing stock.

The only reason why the total value of the stock of anything is important to the holders is that they wish to be able to exchange it for other things. The United States does not wish or intend ever to purchase twenty-two billion dollars' worth of other things with its stock of gold. Some part of this may be redistributed when peace comes, either in order to repatriate foreign capital or to form a basis for setting up a new system of gold distribution. The great bulk of our gold, however, has come to stay. It has done its work, whether for good or ill. Should its dollar value decline as a result of some future international agreement, we could, if we wished to, substitute government bonds for gold certificates among the assets of the Federal Reserve banks, just as the Issue Department of the Bank of England has substituted government bonds for its entire gold reserve, without important consequences for the national welfare. Even complete demonetization of gold would not confront us with anything much more than an accounting problem; the loss (shared with others) of a useful mechanism for international settlements; and unemployed gold mines.

If we consider the gold problem as only one of the many facets of our economic foreign policy, and if we deal intelligently with the domestic problems arising out of whatever decisions we make concerning it, gold may once more become our servant and the servant of the world economy. If, however, we insist under all circumstances on paying $35 an ounce for gold, regardless of whether it is being used constructively to promote international trade or not, and regardless of the internal banking problems it creates for us, then gold will be our master.

[i] "Has Gold a Future?" April 1939.

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