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The Case for Increasing the Price of Gold in Terms of All Currencies: A Contrary View

Published online by Cambridge University Press:  07 November 2014

Harry G. Johnson
Harry G. Johnson*
Affiliation:
King’s College, Cambridge
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Extract

In the past year there has developed a strong campaign for a devaluation of all currencies in terms of gold, a campaign in which the narrowly self-interested arguments of the gold producers have been augmented by the arguments of those who see a rise in the world price of gold as a painless way of solving the present international monetary disequilibrium. The obvious special pleading of the former, and the ignorance or naiveté of the monetary opinions of the latter, should have been sufficient to reveal the weaknesses of the case; but surprisingly enough the arguments for a higher price of gold have been allowed to pass practically unchallenged, with the consequent danger that by sheer reiteration the advocates of the scheme will secure an unthinking acceptance of their proposals.

The writer does not deny that a rise in the world price of gold would be of some benefit not only to the gold producers, but also to the non-American world generally; obviously any measure which increases the price which America is willing to pay for imports will provide more dollars for the rest of the world economy. But it is his contention that the arguments which have so far been advanced in support of the measure are of a dubious or fallacious nature, in large part attributable to a lack of understanding of the problems involved; that the arguments over-estimate the gains and under-estimate the difficulties that would follow a rise in the price of gold; and that consequently it would be a major error of policy for the British and other European authorities to commit themselves to a request for a higher price of gold as a substitute for more fundamental international economic reforms. These contentions are substantiated by an examination of the case for increasing the world price of gold, to which the remainder of this article is devoted.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 16 , Issue 2 , May 1950 , pp. 199 - 209
Copyright
Copyright © Canadian Political Science Association 1950

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References

1 This article was written in 1949 before the devaluation of sterling.

2 A11 of the arguments discussed in this article (with the exception of Dr. Busschau’s) have been advanced in letters printed in the correspondence columns of The Times over the past year. Some of these letters are included in the collection reprinted by The Times under the title of “The Dollar Gap.” The writer trusts that the reader will excuse his use of the convenient term “dollar shortage”; the situation to which it relates might equally well be described as a “pound glut,” and more honestly as “the need for American subsidies.”

3 Dr.Busschau, W. J., “The Case for Increasing the Price of Gold in Terms of All Currencies” (South African Journal of Economics, vol. XIII, No. 1, 03 1949, pp. 1–22).CrossRefGoogle Scholar

4 The hoarding demand for gold is in many cases based on traditional or contemporary distrust of the national currency, rather than on desire for an asset convertible into dollars; so that the existence of a premium on gold over dollars in some markets is no indication that the dollar value of gold is too low.

5 The writer is grateful to Professor D. H. Robertson for reminding him of this point, and for helpful criticism of the first draft of the article.

6 See above, note 3.

7 Busschau, , “Case for Increasing Price of Gold,” p. 2.Google Scholar

8 It is only fair to the South African Journal to add that Dr. Busschau’s article is followed by “A Comment,” by ProfessorRichards, C. S. (vol. XVII, No. 1, 03 1949, pp. 23–31)Google Scholar designed to raise some of the issues left untouched by Dr. Busschau. On the other hand, it is only fair to the reader to report that Professor Richard’s comments, aside from a timely warning that the Union of South Africa must face up to the ultimate exhaustion of her gold resources, does little more than raise Dr. Busschau’s estimate of 100 percent to “300% to 350%.”

9 Moreover, if the sterling area now shows signs of breaking down, it is lack of dollars rather than lack of gold which is responsible.

10 Cf. International Currency Experience: Lessons of the Inter-War Period (League of Nations, 1944).Google Scholar

11 Although European countries do not produce gold, some of them have an interest in gold production, either through ownership of mining enterprises or, as in the case of Britain and Belgium, through colonial production.

12 The mechanism of a gold inflow is as follows: the gold is sold to the United States Treasury, and paid for by a cheque on the Treasury’s account with the Federal Reserve System; in normal circumstances the Treasury replenishes its account by issuing gold certificates to the Federal Reserve System against the gold received, the effect being to increase the gold reserves of the System and provide a basis for monetary expansion. In order to sterilize the gold inflow and prevent it from resulting in monetary expansion, the Treasury must refrain from issuing gold certificates, replenishing its deposits instead from additional revenue obtained by taxation or borrowing from the public. (Borrowing from the commercial banks or the Federal Reserve System would also give rise to monetary expansion.) It should be noticed that sterilization of a gold inflow, in the sense of preventing it from leading to an expansion of the money supply, is not the same thing as neutralizing the impact on the American economy of the effective demand financed by the gold inflow. For example, sterilization operations financed by borrowing from the public are not likely to reduce domestic demand sufficiently to compensate for a gold-financed foreign demand for American goods; but sterilization operations financed by taxation might well reduce domestic demand more than sufficiently to compensate for a gold-financed demand for American securities, giving rise to a net deflationary pressure.

13 Cf. the 32nd, 33rd and 34th Annual Report of the Board of Governors of the Federal Reserve System. However it could by no means be argued that, in the absence of gold inflows, American fiscal and monetary policies would have been adequate to prevent the inflation which occurred.

14 These advantages played an important part in shaping the final form of the Marshall Plan. See Harris, S. E., The European Recovery Programme (Cambridge, Mass., 1948).CrossRefGoogle Scholar

15 An important contributory factor in the loss of monetary control has been the policy of maintaining stable conditions in the market for government bonds, which has prevented the use of open market operations to check the expansion of bank credit. This policy may or may not be justified by the need to maintain confidence in the vastly-expanded public debt of the United States.

16 The increase in the value of gold reserves already held could easily be sterilized by placing the profits to a Treasury account deliberately held inactive. This would accord with the precedent set with the devaluation of the dollar under the Gold Reserve Act of 1934; but the existence of such a large inactive account might prove dangerously tempting to the tax-reducing propensities of the American Congress.