Russia Thinks America Is Bluffing
To Deter a Ukraine Invasion, Washington’s Threats Need to Be Tougher
A SHORT time ago the English newspapers carried a rather amusing anecdote that was not without its symbolic side. Dedicating a public building in Birmingham, Mr. Neville Chamberlain, the Chancellor of the Exchequer, was handed a gold key to open the door. At his first effort the key refused to turn in the lock, nor were the second and third essays more successful. Inspection proved that a very slight obstacle was interfering with the functioning of the key -- a bit of dried paint. Once it was removed, the Chancellor was more successful. The door opened wide before him.
The key to the difficulties from which the world is at present suffering is also, in my judgment, a key of gold. If all efforts to turn it in its lock seem so far to have failed, the failure has not been because the impediments are of any real magnitude, but rather because a certain number of preconceptions, born of post-war problems, are clogging the works with a slight, a very slight, layer of gum. A little coöperation, and the trouble would be removed; and then the door to a world economy less chaotic than anything we have known during these past years would swing wide open.
Is it not a strange thing that the very countries that were the most eager to preach a return to the gold standard immediately after the war should be the ones that are most discouraged about the gold standard today, while the countries that required the longest time to return to it are the ones that seem most convinced at present of the need of maintaining it? Voices are heard in England and the United States condemning the international gold standard as something outworn. Now those were the very countries that in the decade between 1920 and 1930 made the greatest effort at coöperation to reëstablish the gold standard on a world-wide basis. On the other hand, Germany, Italy, France and Belgium, which experienced all the embarrassments of inflation, and Switzerland and Holland, which underwent a first and very violent deflation in prices in 1922 and 1923, are more strongly attached than ever to the gold standard, crediting it with reestablishing their economic and social stability and maintaining it in spite of the many hard trials of these past ten years.
What happened to bring about such a change in attitude, or at least in apparent attitude, in the two groups of countries, all of which are bound together by the closest commercial and financial ties? Nothing but the great economic crisis that broke in 1929. That "crash" caused the fall of the English pound and halted industries and increased unemployment in the United States, thus inclining the two countries which hitherto had been most devotedly attached to the gold standard to question the soundness of that system and take kindly to the notion of a paper currency not convertible into gold, and "managed" in such a way as to put an end to business depression, raise prices, lighten the crushing burden of debt and thenceforth guarantee a more regular, a more satisfactory, course of business.
There must therefore be a fundamental difference between the countries that have lost, and the countries that have kept, their faith in the gold standard. That difference lies, in my judgment, less in any conflict of interests than in a different interpretation of the events of these past ten years.
The one group ascribes the violent drop in prices since 1929 to an unprecedented rise in the value of gold. Gold is the thing that can no longer be trusted. Gold is asserted to have shown its incapacity to serve as a standard. The other group views the rise in the value of gold as merely apparent, and the violence of the crisis as the consequence of serious -- perhaps unavoidable -- errors in financial policies which long prevented any return to normal price levels. Gold, in this view, has not been at fault. The trouble comes from the previous mistake of trying to tie to gold a scale of world prices that had been artificially raised too far by inflation. What we have been witnessing is the failure of that effort, not any failure on the part of gold.
If this second interpretation is the correct one, and I believe it is, there is nothing to prevent a reëstablishment of the gold standard, with all the well-known advantages which the use of that standard has meant for the world.
The reëstablishment of gold is all the more desirable in that the crisis really is now behind us. For more than a year, now, signs of improvement have been visible in all parts of the world. A certain general stability in prices is again in evidence. One of the many curious paradoxes of the Economic Conference was the fact that it had been called to find a remedy for the crisis but met when the depression had long since passed the peak and was giving way to something like convalescence. The problems it had expected to consider already had to be stated in new terms, and every day that has passed since that time has only emphasized the change.
But suppose we go into the two interpretations more fully.
If one reflects how slowly world prices in gold vary as a rule, the probability of any 50 percent jump in those prices between 1915 and 1925 (the date of the return of sterling to par) seems very scant indeed. The widest variation in prices in gold over any ten year period during the century before the war was lower than 40 percent. The rise in prices following the discovery of gold in California was 30 percent. The drop following the extension of the gold standard to all Europe (1873) was 26 percent. Between 1895 and 1913 the world stock of gold was doubled, but the price level did not rise beyond 38 percent.
A rise of 50 percent, such as took place between 1915 and 1925, could only be explained by an enormous increase in gold production the world over, whereas actually production fell off during the war and did not become normal again till 1922 and after. The unheard-of leap in commodity prices in gold in the United States, therefore, suggests out of hand that that was not, strictly speaking, a rise of gold prices in the ordinary sense of the term, but of dollar prices, the high scale being determined by the twin circumstance that paper issues had doubled American currency circulation and that, as a result of the war, the production of commodities and all sorts of transportation had fallen off tremendously the world over.
The mistake of regarding the prices of 1925 as prices in gold was facilitated by a coincidence of circumstances that has no precedent in history -- chief among them the refusal of European banks of issue to buy gold at the market price. That had the result that down to 1925 the whole of mine production was concentrated in the United States, so that the gold convertibility of the dollar was uniformly maintained in spite of the increase in currency circulation and in bank deposits. That convertibility, in its turn, created the illusion that American prices in gold were world prices in gold, and the illusion was reënforced by the fact that in 1921 American prices had undergone a first and very appreciable reduction and there was reason to hope that that readjustment crisis would be the last. This illusion was fatal to world monetary reconstruction thereafter, because it encouraged countries which wanted to return to the gold standard to tie their own price levels to an artificially high level which could be maintained only if the exceptional circumstances which underlay it continued.
What, in fact, was the situation in the belligerent countries in Europe after the war? They had all replaced their gold currencies with paper. They continued counting in pounds, francs, lire, marks; but those paper currencies, everywhere multiplied by coefficients varying from four or five in the more favored countries to several billions in Germany and Austria, had naturally lost in the same proportions the purchasing powers they had had before the war. Hence a tremendous increase in prices in the different countries. If, consequently, the idea was to restore those currencies to their pre-war gold definitions without any drop in the price level meantime, that was equivalent to saying that the gold pound, the gold franc, would henceforward have a purchasing power four, five or even more times less than it had before the war. Now nothing in the quantity of gold production justified any such reduction in the purchasing power of gold.
Some way therefore had to be found to effect artificially a result that would have required twenty years of intensified gold production to bring about normally. Since the resumption of world production after the war would in any event put an end to an abnormal under-supply of four years' standing in all commodities, and so occasion a rapid and general fall in prices, the idea of maintaining price levels the world over on the war-time scale and transforming them into a gold price level, the while maintaining old currency parities, looks today like a fantastic dream.
As regards the manner of dealing with this problem a very sharp distinction is noticeable in the monetary policies of the great European countries. Some of them, such as Germany, France, or Italy, have never thought of reducing the purchasing power of gold. For some time they hoped to raise the purchasing power of their paper currencies (a notion hardly less fantastic). But after a number of fruitless efforts they settled down to the realization that the purchasing power of the paper franc or the paper lira was a fourth or a fifth of what it had been before the war. So when they transformed their paper currencies into gold currencies they redefined the metallic content of the latter, not however without many false moves, many mistakes. In other words, hopeless of reducing the purchasing power of gold, but resolved all the same to reduce their nominal price levels as little as possible, they fixed the gold-level of their prices and consequently of their revenues on the basis of what at the moment seemed most compatible with their budgetary and business requirements.
Conversely, other countries, most important among them England, thought it possible to give to each unit in their revenues as artificially "boosted" during the war, the same value in gold it had before the war. That meant, as far as maintaining the gold convertibility of their revenues went, either that England could miraculously create at home and in her colonies the same extraordinary set of circumstances prevailing in the United States, or -- that evidently being impossible -- that the actual world demand for gold could be reduced far below the pre-war level by using new methods and practicing a far more extensive economy in the use of gold than anything formerly known.
Whence came the many suggestions that we have been hearing during these past ten years, all of them designed to reduce the amounts of gold figuring in international settlements -- such as the "gold exchange standard" policy, the "open market" policy, and so on. Hence came, also, all the suggestions that have tended to maintain as high a world price level as possible by a concerted policy of credit expansion. An English economist, R. G. Hawtrey,[i] has defined that policy very accurately as follows: "If the central banks coöperate together, they can control these monetary demands, and the value of gold will conform to the value of the currency units, instead of the value of the currency units conforming to the value of gold."
Unfortunately, the facts have supplied a devastating disappointment for any such hopes.
In alluding to these events I need hardly say that I have no intention of blaming anybody. No government, no bank of issue, but has made its bad mistakes, which are explainable and excusable in view of the extraordinary circumstances in which it found itself after 1918. Superhuman farsightedness would have been required to foresee all the remote consequences of a situation that had no precedent. Much less is required today to be wise after the fact. The amusement of distributing responsibilities is quite beside the point now. The one important thing is to avoid new errors in the future, and to do that we must first understand how we got to the point where we are today.
I think I have shown that the fault does not lie with the gold standard itself. The mistake was to tie the artificially inflated war prices to the gold prices of before the war. The moment production and exchange began to expand again, the moment competition which had been in abeyance during the war began to function again, a drop was inevitable. It was all the more breath-taking the higher the new prices had been pegged. A first warning of trouble ahead came in the American crisis of 1920, which caused a drop of 63 percent in prices. Protected by her inflation, Europe received only an attenuated counter-shock from that episode. But beginning with 1925, immediately after the return of Great Britain to pre-war parity along with a number of other countries, gold prices began to drop all over the world. It was the same thing that had happened in 1873 when the large European countries (and the United States) followed Germany's lead in adopting the gold standard and abandoning silver coinage.
Finally, in 1931, when a rather severe crisis in credit developed, there came a withdrawal of bank deposits; this was the more serious in proportion as the nominal values of such deposits had been left high. The inadequacy of the gold covering to cope with the situation became emphatically apparent, and a panic resulted. Following on the fall of the Austrian Kredit-Anstalt came suspensions in large numbers of foreign and domestic payments, with a new crop of failures, further shrinkages in international trade, and new price drops that forced many countries to a monetary devaluation which they had balked at up to that time.
However unprofitable, it would be none the less interesting to wonder what would have happened if the United States had decided to devaluate its currency as early as 1922, or if the banks of issue in Europe had resolved to buy gold at market prices at that same time, forsaking the fantastic idea of going back to old monetary parities and beginning then and there to build up their gold reserves instead of allowing them to trickle away to no purpose to the United States. No one thought of proposing such a thing at that time, and anyone who had would have passed as a lunatic. No such mad genius was given to the world. Yet certain it is that the inevitable drop in prices which had to follow the world's return to normal production would not then have been such a violent shock. Further, the banks of issue would more easily have maintained the convertibility of their bank notes, and there would have been no questioning of the gold standard. As regards price levels, we would probably be where we are today, but the disasters we have experienced in getting there would have been avoided.
Let us have done, therefore, with incriminating the gold standard, and ask instead, since the necessary readjustment in prices now seems to be about over, whether the hesitation of many countries to return to the gold standard may not be prolonging the depression and intensifying it.
Gold prices throughout the world have dropped below the level of 1913. The figures are so well known that I will not stop to give them. They may be found in detail in the last report of the League of Nations on the world economic situation. On the other hand, the world stock of gold is much larger than in 1913 -- 12½ billion dollars against 8¾ billions in 1913. Production in the mines has steadily increased since the end of the war. Gold production between 1920 and 1929 was larger even than it had been in the 1900-1909 decade, which was a period of rapid rise in prices.[ii] It reached a record total in 1932. The grand increase in gold production since 1919 had been 33 percent, since 1913, 42 percent. That is not as large as the increase of 88 percent in production between 1900 and 1913, but we must not forget the enormous savings in the coinage of gold that have been effected by concentrating gold in the banks of issue.
Along with this increase in the production and utilization of gold, world production of commodities and world exchange has dropped far below the level of 1913.[iii] Instead of giving gross figures which would mean very little, suppose I state the situation as regards gold holdings and commercial exchanges in the socalled "Gold Bloc" countries at the beginning of this year.
In 1913 the total gold stocks of France, Italy, Switzerland, Belgium and Holland amounted to 11,221,000,000 Swiss francs, 5,636,000,000 being held in banks of issue. At the end of 1932 the whole stock was concentrated in banks of issue and amounted to 24,243,000,000 Swiss francs -- that is, it had more than doubled. On the other hand, the total foreign commerce of those countries (imports and exports combined) which had reached the value of 46,000,000,000 Swiss francs in 1913 had dropped to 27,400,000,000 in 1932 -- nearly half -- and the commercial deficit had dropped from 5,705,000,000 to 4,546,000,000.
In the face of such figures one surely cannot pretend that an insufficient gold supply is impeding the resumption of business. On the contrary, in view of the present stagnation in production the world gold price level is much lower than it should normally be.
How does it come about, then, that the relative stability in prices that has been noted everywhere since early in 1933, and the resumption in production and exchange which seemed to be materializing just a few months ago, now seem to be less marked and a new period of stagnation seems to be setting in? Why is it that instead of diminishing, gold hoarding is every day increasing?
There can be no doubt as to the answer. The prevailing uncertainty as to the future destinies of the more important world currencies and the rates at which they are to be fixed in the immediate future accounts for the hesitation on the part of manufacturers and businessmen. Everybody feels that as long as rates have not been fixed serious displacements in prices can again come in to upset all calculations, and that the great ebbs and flows of capital which have been disturbing the money markets during the past ten years are still possible, with all the catastrophes that follow. The conclusion is that the wise policy is to wait and see, and meantime to find refuge for menaced fortunes in the one metal that so far has never betrayed its holders -- gold.
For -- as the events of the past ten years have forced every impartial observer to realize -- far from losing in importance in the public mind, the gold convertibility of paper, in other words, gold itself, has come to be more and more regarded as the one safe medium for conserving wealth. A wider and wider gap is opening every day between this deep-rooted conviction on the part of the public and the disquisitions of those theoretical economists who are representing gold as an outworn standard. While the theorizers are trying to persuade the public and the various governments that a minimum quantity of gold -- just enough to take care of settlements of international balances -- would suffice to maintain monetary confidence, and that anyhow paper currency, even fiat currency, would amply meet all needs, the public in all countries is busily hoarding all the national currencies which are supposed to be convertible into gold.
So long as the crisis remained strictly economic, in other words down toward the end of 1930, no special amount of hoarding was apparent. In fact down to May 1931 deposits in all the banks of issue steadily increased. But since the financial crisis broke with the fall of the Kredit-Anstalt, since the public began to grow alarmed regarding the solvency of banks, the panic has very visibly been extending to money, hoarding has rapidly increased and has been still further stimulated by the checks on capital flights instituted by many countries. Characteristically, this hoarding has in largest part come not from the less enlightened classes but from corporations, business houses and institutions that are concerned to keep the capital for which they are responsible unimpaired as against any further drop in values and a graver and graver menace of depreciation in currencies so far regarded as the safest.
Need one list all the symptoms which indicate the public's more and more determined resolve to trust only to gold? For some months past the normal prices of gold as measured by rates of exchange between pound and franc on the London market have risen by a premium that reflects nothing else than the intensity of the demand for gold with hoarding in view. The London Economist recently noted that the gold thus being purchased is piling up in the safe deposit boxes of the English banks. The amount was estimated some weeks ago at more than 70 millions sterling. In countries where gold convertibility of paper is still being maintained, old gold coins have been fetching a premium for two or three years past. Since even in such countries coinage of gold pieces has been ended by law, and nothing but ingots can be obtained at banks of issue at very high figures, the public is greedily hunting for old mintages of all kinds -- sovereigns, eagles, louis, napoleons, and will buy them at premiums to stow them away. The fact of such premiums is known to everybody and naturally increases distrust of paper, so much so that it might be better for those countries to resume coinage of gold pieces. That would restore public confidence and people would hoard relatively unimportant sums. But the most impressive evidence of the increased trust in gold is the ebb and flow of short term investments between one country and another according as investors believe in the convertibility of a currency or fear its suspension. In the course of the last ten years, concern to avoid monetary depreciation in operating funds of business enterprises and in invested capital has been at the bottom of nearly all the great movements of funds between one country and another.[iv] These goings and comings of money are no longer determined by differences in interest rates between one market and another. Much more often it is a question of fear lest a given currency is going to be shaken or of hope that one is going to be stabilized. Hence now and again the huge accumulations of gold reserves in central banks that did not need them, and then again withdrawals of deposits from banks that were sorely in need of them.
Quite recently, during the very course of the London Conference, the mere declaration by the "Gold Bloc" countries that they intended to maintain convertibility, taken with the prevailing uncertainty as to the monetary intentions of the British Government, was enough to cause a flight from London to gold-standard countries of huge sums that had taken refuge in England at a time when there were prospects of a rise in the pound. Fluctuations in exchange during these past years have reflected strictly monetary worries of that sort more often than considerations of interest returns on money. The moment stable currency and gold convertibility are restored the great shifts which now keep throwing the money market off balance will cease as if by magic, and banks of issue will again resume control of money movements by interest rates, the movements being no longer determined by fears but solely by the quest for the best returns.
People have of late been wondering whether the dropping of the gold standard by countries still on it would not end such movements, and whether a world-wide suspension of convertibility would not be the best way to entice gold from its hiding places and so again bring it down in value. In my opinion, such suggestions manifest a very bad sense of psychology. The public cannot be cured of its taste for a thing by putting the thing beyond its reach -- the hankering, rather, would be intensified. The day when no gold is obtainable at any bank of issue will mark a mad rush of the public to the mines to buy new gold at whatever price, and gold would reach unheard-of altitudes. The banks of issue would be left standing passive witnesses to the rise in value of their gold deposits. They would then have no other recourse than to turn them loose upon the market, and the result would be an ingot circulation that would soon force the governments to resume coinage of gold pieces. That would bring us back very soon to a general gold circulation, to the very result, in other words, that many currency theorizers are contemplating with alarm.
It is a curious thing that most of the measures the governments have taken to protect their currencies have only accentuated the run on gold which now has been in progress for some years. Every time a country abandons the gold standard to go back to paper, it is exactly as though it were diminishing its gold reserve by the amount of gold sales on the market. The effect of that policy, therefore, is to deplete the gold stock still further, though its present depletion is represented by the partisans of that policy as responsible for the present lowness of prices. The only stocks that can be drawn on at present are the stocks of the "Gold Bloc" countries and new metal at the mines. Is it surprising, in these circumstances, that gold is continually rising in value and that private individuals are thinking of it as the one investment certain to improve? If it be noted that this artificial rarefaction of world gold has kept step with the devaluations of British and American currencies (the practical effect of which has been to lower gold prices on English and American goods, leaving their prices in sterling or dollars either stable or but slightly raised), it will be evident that the drop in gold prices is a hard thing to stop. It is striking that the very countries which have been most emphatic in declaring that their objective is to raise prices generally, have contributed indirectly to the lowering of gold prices by the measures they have taken. Really the only prices that can be raised at will are paper prices. At the London Conference, Mr. Schuller, the Austrian delegate, pointed out, not without a tinge of irony, that Austria had succeeded in raising prices on all commodities in a very short time from 1 to 24,000 crowns! Meantime, one of the good results of the present situation has been to encourage owners of gold mines to produce more metal in proportion as its value (whether expressed in paper or merchandise) goes higher. In that way they are preparing -- against a day when gold has again become the international monetary standard -- an abundance of yellow metal which will surely contribute to the much desired rise in gold prices. Unluckily, that is for a relatively distant future, especially if the new metal from the mines is impounded the moment it is taken out of the ground. Meantime, the new activity that is manifest in all the mines shows that their owners share with us the conviction that gold is far from having played its whole part in the world.
Certainly the gold standard is far from being perfect. I am not closing my eyes to any of its shortcomings. The problem is not a new one. For hundreds of years peoples have been seeking ways to get some more stable standard. It is a sort of humiliation to people of a logical turn of mind to realize that the great world movements upwards and downwards in prices are to an extent dependent on the chance discovery of this or that deposit of gold-bearing ore. We understand the feeling, though a great deal might be said on the point.
As early as the year 1700 John Law addressed a famous memorandum to the Scottish Parliament declaring that silver money was out of date. The complaint at that time was not of any rise in the value of the monetary standard but of its cheapening. Law proposed to substitute a paper currency based on land values. That did not prevent the silver standard from holding in Europe for a century and a half longer, and when it was dropped it was not because of the rarity of the metal but because of its great abundance. Overabundance, we may note incidentally, and not rarity of the chosen metal is what ruins a monetary standard; which is another reason for not foreseeing the abandonment of gold in any near future. The important thing is not that gold should be a perfect standard. It only needs to be the best one available at the moment. What, in fact, are we offered as a substitute for it? The theoretical economists propose a "managed" currency, which in their opinion would have the advantage of keeping the price level stable, by enabling one to contract credit as circumstances required, and so of avoiding crises.
Unfortunately the partisans of that system have never so far given answers concerning a number of difficulties that experience immediately suggests to the mind. The main one is that the general price level does not depend altogether on the quantity of currency and what is called "rapidity of circulation;" it depends also on the amount of goods and services that are offered on the market. To try to change prices by working upon one only of those three variables is tantamount to acknowledging defeat in advance. So long as there is no regulation of the production of goods both as regards relative proportions between commodities and as regards total quantities to be manufactured, and so long as there is no direct means of influencing rapidity of circulation, it is futile to try to influence general gold price levels by mere increases of monetary agencies made available, let us say, through banks of issue.
History offers plenty of examples of periods during which increases in currency, no matter how large, have proved entirely unable to influence general price levels. The most instructive period in that regard is the half decade between 1890 and 1895 when the Transvaal mines were first opened. The gold from the new mines was continually piling up in the safes of the banks of issue, but at the same time prices continued to fall, without that enormous increase in money and the drop in interest rates having any influence on the general depression. More recently the efforts made by several banks of issue to revive economic activity by easing credits seem not to have had any better success.
The impotence of increases in currency as influences over prices is made apparent whenever a violent crisis is rampant in the world. A sort of wrestling match takes place between two influences. For a long time, the force of the depression seems to be the stronger and prevents the newly created money from having its effects, until the moment when the crisis comes to an end following a process which economic science, it must be confessed, has so far not succeeded in explaining altogether satisfactorily.
The other objection is that any system of managed currency has necessarily to be strictly national. One of two things has to happen: either the system is tied up with gold, in which case it is powerless, as we have just seen, to struggle all by itself against the great world movements in prices; or else it stands frankly apart from gold, and then the country that adopts it loses all the advantages that an international currency has hitherto brought. That a country can get along for a considerable period in such a situation no one will deny -- it is leaning indirectly, in such circumstances, on gold standard countries. But for the leading countries in the world deliberately to desert the only known instrument for bringing their economic systems together, an instrument that has been functioning successfully for hundreds of years and the extension of which has formed the groundwork for the amazing prosperity of the nineteenth century, would spell an immediate return to an incredible chaos.
The essential advantage of the gold standard is its automatic functioning in regulating the reciprocal relations of the great countries of the world, an advantage that no system of managed currency, however ingeniously engineered, has so far been able to replace. The absence of that automatic functioning since the crisis of 1931 has thrown all the countries into economic nationalism. "The worst of nationalisms," an American economist said recently, "is monetary nationalism." And by that he meant that it contained all other nationalisms in germ.
In the absence of a common international standard, which today can be only the gold standard, the monetary markets, as well as the commodity markets, are thrown completely out of gear. At this late day the world cannot get along without an international exchange of capital nor without an international exchange of goods, on pain of relapsing into standards of living which it has definitely overpassed.
As regards movements of capital on long or short terms, no one has ever explained how they could continue to take place in the absence of a common international currency. The moment any country could feel free to change the purchasing power of its currency and consequently its rates of exchange with the currencies of other countries, all transactions in capital would come to an end. France suffered just that financial isolation during her inflation period. Uncertainty as to the future and the impossibility of foreseeing governmental decisions that shifted according to most varied circumstances created a barrier that credit could not cross.
In the world in which we now live national economies stand in close mutual dependence, not as a result of incidental circumstances but owing to deep-seated and abiding conditions. Now in actual practice they can take cognizance of that interdependence only through the medium of a common standard, which is gold. Shipments of gold, along with the precedent variations in rates of exchange, are the only things that reveal changes in the reciprocal debt and credit balances of the various countries. There is no other way of knowing what they are and of rectifying them. If that trusty and swift-working thermometer were not there, a country could indulge in the wildest orgies of domestic credit, leading up to the worst disasters, in blissful ignorance.
Let no one imagine that any concerted action on the part of banks of issue could provide a substitute for the warning given automatically by a rise in exchange rates or an exodus of gold. Such a notion could only come to a person who had never had to deal with the difficulties of international coöperation. The physician's thermometer is a surer guide for him than all the information imparted by word of mouth by the patient or the patient's relatives. I could mention numerous instances where banks of issue have not been able to come to an agreement on their mutual discount rates because at that moment the monetary market of the one thought that it was to its interest to expand credit while the monetary market of the other thought it better to restrict credit. The movements of gold, on the other hand, are inexorable. When they take place, banks of issue can only follow their lead, and regulate their discount rates in such a way that credit on the respective markets is forced automatically to fall in line.
In a world system of autonomous currencies, not only the distribution of capital but the production of goods would be left without a compass.
The fact of preserving a common gold standard has been the only thing which permitted those comparisons of prices in accordance with which a division of labor is made between the different countries. This has hitherto been regarded as the basic element in all progress. To have a multiplicity of national currencies which were constantly changing their reciprocal rates of exchange would make such comparisons impossible and introduce a speculative element into each transaction which would of itself be enough to paralyze our very best men of business. Even as it is, protectionism in many cases distorts the normal flow of production. One has only to think of what has happened in the countries that succeeded the old Austria-Hungary. But if protection is to be supplemented with the possibility of creating or destroying this or that industry by monetary manipulations, the natural relations between the expansion of industry in one country and the expansion of industry in another will be altogether replaced by arbitrary relations, to the great damage of general prosperity. Those who have been in a position to observe the extent to which monetary uncertainties in Europe during the past two years have served as pretexts for the worst practices of unfair competition, and helped to turn normal commercial currents from their proper channels, will surely not gainsay me on this point.
No one, as a matter of fact, disputes these advantages of gold as an international monetary standard. Nor has any one so far suggested that a managed currency could compare with the yellow metal in those regards. Such systems are never thought of as applying to anything more than this or that specific country. At the present time the bitterest critics of the gold standard do not go so far as to advise banks of issue to get rid of their gold reserves, nor the countries that have stuck to the gold standard to abandon it. Quite the contrary, each country seems to be trying to strengthen its stock of metal. Why is that, unless in view of an eventual return to gold?
If there is still hesitation about frankly restoring gold to its former functions, it is because the various governments would like to be sure that the new stabilization rates at which they would stop would be the rates best adapted to their circumstances. That is a problem which each country has to solve for itself, though its terms are virtually all known already. In my opinion the sooner it is solved the better it will be for world prosperity.
I hope I have shown that the severity of the depression through which the world has been passing for four years now is not ascribable to any intrinsic imperfection in gold as a standard, but rather to the mistakes that were perhaps unavoidably made in reëstablishing it after the war. I also hope I have shown that at a time when, as everybody agrees, the world crisis is drawing to a close, the thing most needed as a help to the revival of world business is confidence in the various currencies and certainty as to their futures. If the monetary uncertainty that prevails at present could be brought to an end, problems that seem insoluble today would solve themselves. Restrictions on imports and the use of quotas, for one thing, would magically vanish. If, on the other hand, the uncertainty continues much longer, new problems will not fail to arise, and they will be harder to solve than any that we have met so far. Not only would international business not escape from the doldrums it is in, but there would be a general increase in the uneasiness which has been steadily growing for four years now, and which at any moment may burst forth in the most far-reaching social and economic catastrophes.
Who will be courageous enough to make the first turn of the gold key in the lock?
[i] "The Gold Standard," p. 94.
[ii] See Joseph Kitchin, "Gold," in the Encyclopedia of the Social Sciences, and the report of the Committee on Gold of the League of Nations.
[iii] "Independent estimates agree that, in 1932, the level of industrial production in the world as a whole fell below that of 1913," (League of Nations: "World Economic Survey, 1932-33," p. 82).
[iv] I say "almost," because an exception has to be made for the enormous displacements of capital that took place in 1929 in view of the rates on call money prevailing in New York.