ABOUT THE AUTHOR
Walter E. Spahr (1891 - 1970) received his M.A. from the University of Wisconsin and his Ph.D. from Columbia University. After teaching at various colleges and universities (including Dartmouth and Columbia) he joined the faculty of New York University in 1923, where he taught until his retirement in 1956. He was the Chairman of the Department of Economics from 1928 to 1956.
One of the founders of the Economists' National Committee on Monetary Policy, Walter Spahr was its Executive Secretary from 1933 until the time of his death, and the editor of the widely distributed "Monetary Notes." From 1937 to 1966 he was one of the trustees of the Tax Foundation.
Walter Spahr was the author of numerous books and monographs.
A quarter of a century of monetary change
A quarter of a century ago, Walter E. Spahr, who spent much of his life fighting for a sound monetary system, published a monograph, "Our Irredeemable Currency System," which at the time attained a fairly wide circulation. Much of what Walter Spahr foresaw in 1950 has since come to pass, and his predictions for the future have an ominous prophetic quality.
Twenty-five years ago, Spahr spoke of the governments "profligate spending and deficit financing" and warned that "the sands of time are running out on this country with dangerous rapidity." Since then, between 1950 and 1975, federal spending has risen from $43.6 billions to $324.5 billion, and the national debt from $256 billion to $576 billion. Almost 12 per cent of the national debt -- some $66 billion - has been financed abroad, which involves annual interest payments to foreign creditors materially in excess of the normal American export surplus. In 25 years the stock of money has quadrupled in America, while the supply of goods and services has risen only about 120 per cent. The dollar has been devalued twice, and its domestic purchasing power has declined by about 55 per cent. And the future is growing progressively more ominous.
The question of irredeemability of which Walter Spahr wrote may seem somewhat theoretical and "stuffy" today. Some of the terminology which Spahr used has changed during the past 25 years, and so has the basic attitude toward money problems on the part of the public and especially of the "experts". Twenty-five years ago the soundness of the currency still involved a question of public ethics. Today monetary policy has largely become a pragmatic tool of political expediency. Some of the phrases which Walter Spahr used, and some of his ideas, almost seem to come from a strange and different world; -- and, in fact, they do by today's standards!
Within a quarter of a century, the American monetary system has undergone a fundamental change, which has seriously weakened one of the most important aspects of American democracy: the control of the people over their rulers. There is much talk about "government by the people," especially in an election year, yet the country is drifting further and further away from this ideal. The progressive irredeemability of the dollar from which the country has suffered for more than forty years, deprives the people of one of the most effective tools to control the power of the 30,000 politicians and top government officials who determine the fate of 210 million Americans.
As long as the supply of money and credit was tied to gold, and the people were free to exchange the paper l.O.U.'s issued by the government for gold, the people could control the amount of fiat money which the government could create out of thin air. Deficit spending was limited, because the people could stop it at any time by demanding gold for the government's paper promises, wherever the people felt that their savings were endangered. Instead of having to rely on vague and rarely kept campaign promises, the people had a direct and highly effective way of expressing their choice between monetary stability and government spending, by simply converting the government's paper promises into gold.
As Walter Spahr pointed out, redeemability represents the basic control mechanism which the people have over their rulers, and quite logically, most politicians, the vast bureaucracy, and the pressure groups which benefit from public largess do not like the democratic controls by the people. Over a period of more than forty years they have, therefore, gradually "unshackled" themselves of these restraints.
When Walter Spahr wrote a quarter of the century ago, the country had traveled about half the way toward monetary chaos which Spahr foresaw, and which is now threatening to overtake us; - as it has already overtaken Britain.
The Committee for Monetary Research and Education Inc. feels that a rereading of Spahr's dire predictions made a quarter of a century ago should be helpful in the light of present developments. They might help to awaken the American people to the dangers which threaten the nation and the entire free world.
Except for the omission of a number of lengthy tables and a few paragraphs which have no bearing on the present situation, Walter Spahr's monograph has been reprinted in its original form. But in order to put it into the proper historical perspective and point out the drastic changes which have occurred since 1950 extensive footnotes have been added at appropriate places.
G. C. Wiegand, Editor
A 5-MINUTE SUMMARY FOR THE BUSY READER1
I. Evils of Our System of Irredeemable Currency
1. There is no subtler, no surer, means of overturning the existing basis of society than to debauch the currency.
2. Our irredeemable currency is a dishonest currency. It gives our Treasury and Federal Reserve authorities the power of creating money without the corresponding responsibility.
3. Its use has deprived our people of their power to exercise control over the government's use of the public purse.
4. It enables our government to purchase the support of pressure groups.
5. It makes possible profligate spending and the dissipation of our national patrimony.
6. It is an open gate to, and invites, Socialism. It is a necessary instrumentality of a governmentally-managed economy.
7. So long as the government can create money freely all efforts in behalf of economy in government expenditure are futile.
8. The use of irredeemable currency causes government bureaucracy to cripple private enterprise.
9. Making the dollar irredeemable has resulted in wide fluctuations of the value of the dollar in international markets.
II. On the Contentions of the Advocates of Our Irredeemable Currency
1. The contention that our gold stock cannot support redemption is false provided, gold is properly revalued.
2. The fear-of-runs contention reveals that the defenders of our irredeemable currency think our fiscal and monetary affairs are in worse condition than do the advocates of redeemability.
3. Redeemability is a repellant of, not an invitation to, hoarding of gold.
4. The argument that people's motives cannot be trusted in demanding redemption contradicts the basic democratic assumption that an informed public can be trusted to act responsibly and rationally.
5. The desire of Treasury and Federal Reserve officials to be free of problems inherent in the fractional reserve system is a case of asking for privilege without corresponding responsibility.
6. The contention that our gold standard and redeemable currency did not prevent the crash of 1929 and other wide fluctuations in business and prices rests upon false assumptions as to the functions of money and its responsibilities in such episodes.
7. The argument that irredeemable currencies are managed and that the operations of a gold standard are automatic is false. Both are managed. Management under a gold standard can be poor. But management of irredeemable currencies has been worse. The problem is to get better management under the restraints of a redeemable currency; it is not proper to free money managers of such restraints.
8. An irredeemable currency invites monetary manipulation.
9. The contention that the gold standard can operate only under favorable conditions is a case of the people blaming the gold standard for their own abuse of credit.
10. The advocacy of delay in the institution of redeemability has no valid defense and is an invitation to trouble.
11. An irredeemable currency involves a question of honesty and morals.
12. Advocates of irredeemability support wittingly or unwittingly a governmentally-managed economy.
III. Benefits to be Expected from a Gold Standard And a Redeemable Currency
1. Widely fluctuating quotations for the dollar would disappear.
2. Private enterprise would be strengthened.
3. The return by other nations to redeemable currencies would be made easier.
4. There would be a revival of confidence and greater incentive for more saving, more investment, more production, more trade, more and safer prosperity.
5. People would have direct power once more over their public purse and a protection against Socialism.
6. The fear of the power of the people under a redeemable currency would tend to cause Congress to end its profligate waste of the people's national patrimony.
7. Restorations of a redeemable currency would free our people of the prospects of great trouble or disaster inherent in an irredeemable currency, but it could not and would not insure the people against sharp ups and downs in productive activity and prices. No monetary system can do that
8. Our people would once more have an honest currency and the benefits of standards of honesty among officials in respect to the people's money.
IV. On Obtaining a Redeemable Currency
1. We need to get redeemability at the earliest possible date. The ratio of our gold stocks to currency and demand deposits was 24.6 per cent in 1941, by 1950 it had dropped to 13 per cent and by 1975 to less than .3 per cent. While in 1950 a resumption of redeemability was possible, the vast deficit spending of the intervening 25 years will now make it necessary to increase the price of gold, i.e. to devalue the dollar in terms of gold, before redeemability can be instituted.
2. The only hope to restore redeemability lies either in persuading a majority of the Congress under the present Administration to act or in electing opposition leaders who will do it.
3. Apparently neither hope can be realized unless leading citizens talk to their Senators and Representatives and, if they are not responsive, to opposition leaders who can be relied upon, if elected, to restore redeemability.
4. This requires that all concerned and responsible citizens do all within their power to get these desired and necessary results. The safety of this nation lies in the hands of that group of citizens. The majority of the present Congress, like that of all our Congresses since 1932, has shown itself to be irresponsible in respect to the restoration of a redeemable currency and, consequently, in the use of the people's purse.
Our Irredeemable Currency System
"There is no subtler, no surer, means of overturning the existing basis of society than to debauch the currency." -Keynes
Writing in 1919, John Maynard Keynes, of Kings College, Cambridge, said in part in his book, The Economic Consequences of The Peace (Harcourt, Brace and Howe, New York, 1920), pp. 235-238: "Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some .
"Lenin was certainly right. There is no subtler, no surer, means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
But further, the Governments of Europe, being many of them at this moment reckless in their methods as well as weak, seek to direct on a class known as 'profiteers' the popular indignation against the more obvious consequences of their vicious methods. The 'profiteers' are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society . . . . By directing hatred against this class, therefore, the European Governments are carrying a step further the fatal process which the subtle mind of Lenin has consciously conceived. The profiteers are a consequence and not a cause of rising prices. By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract and of the established equilibrium of wealth which is the inevitable result of inflation, those Governments are fast rendering impossible a continuance of the social and economic order of the nineteenth century. But they have no plan for replacing it."
"We are thus faced in Europe with the spectacle of an extraordinary weakness on the part of the great capitalist class, which has emerged from the industrial triumphs of the nineteenth century, and seemed a very few years ago our all-powerful master. The terror and personal timidity of this class is now so great, their confidence in their place in society and in their necessity to the social organism so diminished, that they are the easy victims of intimidation. This was not so in England twenty-five years ago. any more than it is now in the United States.2 Then the capitalists believed in themselves, in their value to society, in the propriety of their continued existence in the full enjoyment of their riches and the unlimited exercise of their power. Now they tremble before every insult; - call them pro-Germans, international financiers, or profiteers, and they will give you any ransom you choose to ask not to speak of them so harshly. They allow themselves to be ruined and altogether undone by their own instruments, governments of their own making, and a press of which they are the proprietors. Perhaps it is historically true that no order of society ever perishes save by its own hand."
Subsequent events and the application of so many of the Keynes observations to practices now being pursued in the United States justify careful weighing, by all thoughtful and concerned people in this country, of those important truths stated by Keynes in 1919.
We have an irredeemable currency, and such a currency, regardless of the variety of forms it may take, is a debauched currency. It is a dishonest currency and, of necessity, rests upon a standard of dishonesty in our behavior. It was introduced in this country by government repudiation of its contract to bondholders, by administrative violation of pre-election commitments, and by misstatement of fact as to the ability of our nation's gold stock to support a redeemable currency. Where dishonesty enters, evil begins.
Both our understanding and our honesty come into question in any worthwhile examination of our system of irredeemable currency and of the forces that are operating along with, or in consequence of, the introduction of such a currency into the economy and lives of the people of the United States. All careful observers can readily perceive the striking parallels between current events and tendencies in this country and those described by Keynes as characteristic of Europe and England after the first World War.
Perhaps the most arresting characteristics of our general behavior in respect to our use of an irredeemable currency are: (1) the tendency of a multitude of people, many of them commonly called "leaders," much of "the press," and, apparently, a majority of the United States Congress, to support and to advocate an irredeemable currency which, to use Keynes' words, "engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose"; and (2) the reluctance of leading defenders of our irredeemable currency to examine carefully and to state accurately the pertinent facts and principles involved, and to apply the standard of honesty to this currency and in their allegations regarding it.
Monetary Reform Comes From Leading Citizens And Statesmen, Not From Popular Demand
Popular understanding of principles and pertinent facts regarding a nation's monetary system is not to be expected. The field of money calls for long and intensive study if correct answers are to be obtained. Those who have spent most of their adult lives - say, twenty to forty years - as scientific students of the history and principles of money, recognize the intricacies of the subject, how much there is to learn, and the need for modesty and great care in offering generalizations that are believed to be accurate.
Monetary reforms, of necessity, must come from national leaders who are wise enough to be guided by the most reliable specialists in the field. Furthermore, these leaders must be honest, rather than merely politic. If a nation lacks such leaders, it is in a dangerous position.
The contention, sometimes advanced, that government officials - ours or those of other nations - will proceed properly if they respond to popular demand and that the first task is to educate the general public as to the essentials in monetary facts and principles, is without any supporting evidence. Popular education - even education of the majority of college students - in the field of money has never been realized and, apparently, cannot be realized. The public, in general, are inclined to advocate, in the field of money, the very devices that tend to injure them. The general public's ideas on money apparently reach little beyond the desire for more and more of it. As an irredeemable currency depreciates, their common demand is for more, not less, of it. Suggestions of redeemability either bring no sympathetic response or outright opposition, possibly because they fear they may get less money when they are conscious of a need for more buying power. William Jennings Bryan's famous speech, "Crucified on the Cross of Gold," has become deeply imbedded in the mores of our people - the feeling or belief being that gold is the rich man's money whereas silver and paper money, especially irredeemable paper money, are the poor man's money. It is for reasons such as these that government officials who adopt the policy of responding to popular inclinations cannot provide reliable or good leadership in the field of money.
Responsible government leadership requires, first, an understanding of the pertinent facts and principles regarding monetary systems, or at least sufficient understanding of the intricacies involved to cause officials to seek the guidance of the most competent specialist in the field. It requires, second, a determination to provide the best system known - that is, it requires unqualified honesty in ascertaining facts and principles and in acting upon them.
Our Brand Of Irredeemable Currency Has Unique Features
The frequent or common tendency to discuss our system of irredeemable currency as though it were like all other systems of irredeemable currencies, or as though there is only one type of irredeemable currency, confuses the issues. Irredeemable currency systems have assumed a variety of forms. Among leading nations of the world our system is apparently unique. Its virtues and faults cannot be understood correctly unless we describe its characteristics accurately.
We have one type of system applicable to our international relations and another type applicable domestically. Described in over-simplified terms, we have an irredeemable currency system domestically and a restricted gold bullion standard in our international relations.3 This common, simplified definition has great limitations in usefulness. Apparently there is no way in which our hybrid domestic-international systems can be fitted accurately into a brief definition. It seems necessary to describe separately our domestic and international monetary arrangements. Under such analysis it will be revealed, for example, that domestically some of our currency is redeemable (silver certificates into silver)4 and that, in our international relations, there is an element of irredeemability since redeemability is confined to central banks and governments.
A. The Domestic Characteristics of Our Currency System
Government Gives Our People Irredeemable Currency for Gold
All our currency - money and deposits- is irredeemable domestically in so far as gold for domestic monetary use is concerned. The government, in 1933, required that all holders of monetary gold turn it in to the government and receive in return irredeemable promises to pay in the form of non-gold money and deposits.
Our domestic currency is tied to gold at the statutory rate of $35 per fine troy ounce through a process of indirect convertibility related chiefly to international payments and, secondarily, to the sale of domestically-mined gold to our United States Treasury and the sale of Treasury gold for industrial uses.5
Our Treasury and Federal Reserve banks, figuratively, stand at our international boundary line ready to make and to receive payments in gold to and from central banks and governments at our statutory rate of $35 per fine ounce (ignoring handling charges). Anyone in the United States, who needs to make foreign payments, thus has his domestic money and deposits converted into gold, indirectly through his bank and a Federal Reserve bank, at the statutory rate. Those receiving payments in gold from abroad obtain domestic money and deposits at the statutory rate of $35 per fine ounce. The central bank or government, shipping gold to us, receives dollars at the rate of $35 per fine ounce of gold. The domestic gold miner receives domestic money and deposits for his gold at the rate of $35 per fine ounce. The domestic user of gold in industry pays domestic money and deposits at the rate of $35 per fine ounce of gold. 6
Through these procedures all our domestic money and deposits are linked definitely, but indirectly, to gold at the statutory rate of $35 per fine ounce. In so far as these transactions have been involved, all our domestic money and deposits have been maintained on a parity with gold at this rate since our government devalued our dollar on January 31, 1934.
It is in this system of indirect convertibility that one finds a major difference between our brand of irredeemable currency and what is sometimes called a thoroughgoing system of irredeemability in which there is no fixed link between a nation's domestic currency and gold. If a free market for gold is permitted under a thoroughgoing system of irredeemable currency, such as we had from 1861 to 1878, gold is bought and sold in terms of the irredeemable currency at rates that commonly fluctuate widely.7 A thorough-going irredeemable currency system may also exist with trading in gold prohibited or with markets in gold conducted in defiance of law.
Such depreciation of our non-gold currency in terms of gold, as has been observed in recent years, has been found abroad when and where holders of dollars, other than central banks and governments, have exchanged their dollars at a discount in terms of gold. Domestically, our non-gold currency has been exchanged at varying rates of discount in what is called the "raw" gold market.
The depreciation of our currency in the sense of its declining purchasing power in respect to goods and services, domestic or foreign, and in terms of other nations' non- gold currencies, is not to be confused with any depreciation of our non-gold currency in terms of gold.
The defects of our irredeemable currency, domestically, are not to be found in any important depreciation or fluctuation in value of our currency in terms of gold. Our system of indirect convertibility has thus far prevented such depreciation domestically, except in the case of the prices of raw gold. 8 The defects lie in the loss by the people of their power to exercise control over the government's use of the public purse, in the consequences that flow from such loss, and in the crippling of private enterprise in foreign trade and exchange.
3. Loss of the Power of Our People to Control the Use of Their Public Purse
When the Federal government, in 1933, deprived the people of the United Unites of a redeemable currency it also deprived them of their power to exercise direct control over the governments's use of the people's public purse. 9
When our people had a currency redeemable in gold, every individual had power, to the extent he possessed money and deposit currency, to register his disapproval of the policies and practices of the banks and Treasury by demanding redemption of their promises to pay. Each individual had the power to send his message of disapproval to the central signal system in the Treasury and Federal Reserve banks - to their gold reserves over the golden wires1 as it were, provided by a system of currency redeemable in, or convertible into gold. When distrust of the value of the banks' and Treasury's promises spread, the number of warning signals increased. Every demand for redemption was recorded by a drawing down of the gold reserves of the Federal Reserve banks or Treasury. No individual needed to join with other individuals in some organization for the purpose of sending a plea to the Reserve banks or to the Treasury or to Congress in behalf of sounder monetary or fiscal procedures; each individual could act alone and could record his judgment directly.
With the institution of our system of irredeemable currency, all the golden wires, running from all our people to the central signal system, were cut. The power of the people to record, in an effective manner, their disapproval or distrust of bank, Treasury, and government monetary and fiscal practices was destroyed. The signal lights went out both at the central signal board and for the people of the United States.
Since that time our people have only had the power to protest and to appeal through other devices - through organizations, appeals to Congressmen, letters to the press, and so on - all of which efforts have been ineffective because they can be, and have been, ignored.
When a government deprives a people of the power to exercise direct control over its use of their public purse, it frees itself from responsibility to them; it can and generally does ignore their protests; and it can, and often does, become their boss.
a. The Control of Our Government by Pressure Groups. When a government frees itself of the possibilities of direct control by the people over its use of their purse, it cannot be held effectively to an accounting and, if so disposed, it can use the people's purse to buy the support necessary to keep itself in office. A basic policy then is to gain the support of large vote-delivering pressure groups. The people's money is distributed in a manner designed to insure the desired political support. Vote-delivering pressure groups soon perceive that monetary favors are to be obtained in exchange for political support and rush to Washington to make the best terms possible. One result is that the government becomes the prisoner of those whose support it can purchase, and the people's purse is passed by Congress to the control of the vote-delivering and favor-seeking pressure groups.
That is, in the main, the state of affairs that prevails in the United States today, the basic cause of which lies in the institution by the Federal government in 1933 of our system of irredeemable currency.
b. The Open Gate to Socialism. The purchase of the support of vote-delivering pressure groups places the government on the road to Socialism in high degree or in a thorough-going manner. Incomes of helpless groups must be funneled to the members of these pressure groups. Wealth must be taken from some and given to others as benefits. Projects pleasing to the pressure groups must be undertaken. Competitive markets must be hampered, circumvented, or destroyed in order to extend favors in the form of price controls, subsidies, rent controls, and so on to those whom the government endeavors to favor. The government enters into unfair competition with private enterprises by engaging in productive activity, free of tax and similar burdens borne by private enterprise; by lending the people's money at non-competitive rates; by extending other aids at prices below those of competitive markets.
This great variety of government undertakings, most or all of which constitute steps in the direction of socialization or paternalism or totalitarianism, is made easy and is invited by our system or irredeemable currency. The government is freed from accountability to the people; money is made easy for the government and its beneficiaries to get; the favors of pressure groups can be obtained without the central signal board flashing any lights of protest and warning.
A nation may go through a period of irredeemable currency without being led into Socialism. But this requires that the government understand the dangers inherent in an irredeemable currency, that it be determined to institute redeemability at the earliest opportunity, and that it be not disposed to purchase the support of pressure groups in order to maintain itself in power or to lead the people into Socialism or government dictatorship in some other form..
On the other hand, it seem reasonably clear that a government could not lead a people into Socialism while the people have the power over the public purse which a redeemable currency gives them. Socialism and a redeemable currency are, fundamentally, natural enemies. It is for this reason that the British government could not provide the people of England with a redeemable currency if it is to foster and maintain Socialism.10
An irredeemable currency not only provides a wide-open gate to Socialism but it invites it. Moreover, it is a necessary instrumentality in a governmentally-managed economy.
The government of the United States has this instrumentality at its disposal, and it has been employing it as a basic means of proceeding step by step on a course which points to a thorough-going governmentally-managed economy.
There is, apparently, no instrument as potent, or as fundamental, or as necessary, as an irredeemable currency if a government is disposed to lead a people into Socialism. Conversely, there is probably no more effective device, that can be employed to arrest a march into Socialism, than to make the people's currency redeemable, thus restoring to them the power to exercise direct control over the government's use of their purse.
It should not be surprising, therefore, that apparently all who would socialize our economy and people are opposed to the restoration of a redeemable currency in the United States. Either because they understand the relationship between an irredeemable currency and the processes of socialization of the economy, or because they simply note that Socialist, Communist, and Fascist governments employ irredeemable currencies as a means of controlling and managing the people, advocates of government dictatorship seem invariably to defend irredeemable currencies with the utmost vigor. Those who, for a variety of reasons apparently satisfactory to themselves, defend an irredeemable currency, while at the same time professing to oppose the socialization of our economy, seem to have missed the relationship of an irredeemable currency to the processes of socialization and the significance of the fact that the advocates of government dictatorship are, apparently, invariably advocates, also, of such a currency. The evidence seems overwhelming that a defender of irredeemable currency is, wittingly or unwittingly, an advocate of Socialism or of government dictatorship in some form.
So long as a government has the power over a people, that is provided by an irredeemable currency, all efforts to stop a government disposed to lead a people into Socialism tend to, and probably will, prove futile. The people of the United States have observed all sorts of efforts, organized and individual, to bring pressure upon Congress to end its spending orgy and processes of socialization. It should be amply clear by this time that none of these efforts has succeeded. Moreover, there is no good reason for supposing that any of them, except the restoration of redeemability, can succeed in arresting our march into Socialism. A government possessing the powers given it by an irredeemable currency can ignore the pleas and protests of such groups and individuals. And, if it be disposed to lead a people into Socialism - which appears to be the policy or tendency of our Federal Government - it does ignore such groups and individuals.
If, therefore, the majority of Congress would spare the people of the United States the suffering and disasters inherent in Socialism, that majority must face the fact that the first and necessary, and possibly the only, means of doing this lies in the restoration of redeemability in our currency.
B. The International Characteristics of Our Currency System
for central banks and governments
Central banks and governments may sell gold to the United States for dollars, or redeem their dollars in gold bullion, at the statutory rate of $35 per fine ounce of gold (ignoring handling charges), under conditions prescribed by the United States Treasury as authorized by the Gold Reserve Act of 1934. Other foreign holders of dollars do not in general have this privilege.11
An important question that arises is why central banks and governments have the privilege of redeemability at the statutory rate of $35 per fine ounce while this right is denied other holders of dollars. The ruling principle, is, of course, that only the rights and demands of governments and of central banks, the latter generally controlled by current governments, need be recognized. Governments, by the use of irredeemable currencies, can control their own people; but they cannot control other governments. The latter, consequently, must be paid in a money of universal acceptability; one government cannot force another to accept its irredeemable currency except at a discount, or at risk of discount, in terms of gold.1 The rights of people give way to privileges exercised by governments - privileges unaccompanied by recognition of corresponding responsibilities to the people in general.
1 Since the international convertibility of the dollar ended in 1971, the value of the paper dollar has fluctuated widely in terms of hard
currencies, as the former "yardstick", the dollar, became subject to rapidly changing supply and demand. (G.C.W.)
ratios and usable reserves
Our Federal Reserve banks are required to maintain a reserve of not less than 25 per cent in gold certificates against their Federal Reserve notes and deposits.12 But the only holders of notes and deposits who can draw down these reserves - more accurately, compel the Reserve banks to redeem their gold certificates in gold and to pay out gold - are central banks and governments. Although the reserves in gold certificates are ostensibly held against all Federal Reserve notes and deposits, all holders, other than central banks and governments, of claims against these reserves are denied the right to exercise them. The reserves are not usable domestically. They merely provide a basis for the calculation of the ratio of reserves to deposits and Federal Reserve notes, which ratio serves as an indicator of how far these liability items may be expanded. The domestic function of the reserve thus differs from its functions in respect to that portion of the Federal Reserve notes and deposits held by central banks and governments. The reserves in the Federal Reserve banks and, with minor exceptions in the United States Treasury, are therefore for the use of central banks and governments, but not for our domestic institutions and people. The latter must be satisfied with the irredeemable promises of the Federal Reserve banks and Treasury and with over-valued silver and minor coin.13
of the dollar in foreign markets
Since holders, other than central banks and governments, of dollars in foreign countries do not have the right of redemption at $35 per fine ounce, such holdings possess an irredeemable currency. The tendency is for such a currency to exchange at various rates of discount in terms of gold where gold can be purchased as, for instance, in black or other non-official markets. This situation means, of course, dual or multiple quotations for the dollar. And it is evidence, again, of the discrimination against the individual and in favor of central banks and governments. It is another instance of government management of the people with the disadvantages falling upon them.14
of foreign exchange by central banks and governments
Since gold imports and exports, legally made, are under the control of our Federal Reserve banks and Treasury, these and other government-owned or -dominated institutions automatically gain control of all legally-conducted transactions in foreign exchange. Such control reaches to exchanges of goods, to investments, and to travel, and subjects the ingenuity of private enterprise to the crippling impedimenta of government regulation. Moreover, such controls are reflected backward into the internal economy in a multitude of ways.
When the ingenuity of private enterprise is given opportunity to function, exchanges of goods and services, among people of various nations, become so complex in nature that the mind of man cannot follow the transactions. As a consequence, government control, such as that exercised as a part of our employment of a restricted international gold bullion standard, has the effect of crippling and distorting the exchanges that one might properly suppose would take place if individuals were free to pursue their desires and advantages in trade, travel, investment, and so on.
The nations of the world in general probably reached the greatest degree of freedom in their exchanges of goods and services and came closest to the concept of "one world" when the gold standard and redeemable currencies were most widely used and private ingenuity was relatively free to pursue an unhampered course. Irredeemable currencies impede the flow of currencies, goods, services, and persons across national boundaries and bring into being a great number of government restrictions and controls, all of which are impedimenta in international exchanges. A consequence of the almost universal use of irredeemable currencies today is a trend away from the "one world" idea at the very time that the latter is being advocated with vigor.
Although our restricted international gold bullion standard is much superior in various ways to the more thoroughgoing irredeemable currencies found in most other countries, it contains restrictions in respect to the export and import of gold and makes irredeemable the dollars held by all except central banks and governments. These restrictions have the effect of placing the management of our international exchanges in the hands of our government and its institutions in the field of international finance. This is an important part of government management of a nation's people and economy. It is totalitarianism at the international boundary line; and, from that point of vantage, government control is reflected back into the internal economy of our country in many and often subtle and far-reaching ways.
The road to greater production, trade, and prosperity - national and international is not to be found in irredeemable currencies and government interference with and management of international exchanges but in redeemable currencies and freedom of exchanges with governments confining themselves to regulations, distinct from management, designed to foster free and fair competition and to prevent fraud and national injury.
The Question Of The Ratio Of Our Gold Stocks To Our Non-Gold Money & Deposits
One of the current arguments against the resumption of redeemability is that our gold stock is inadequate considering the great expansion in recent years of our non-gold money and deposits.15
The United States fought through World War I without domestic suspension of redeemability on gold ratios ranging (as yearly averages) from 8.1 to 10.9 per cent. That low range compares with a ratio of 13 per cent as of October, 1949. When the ratio was at its peak of 24.6 in 1941 and at 23.2 in 1942, Congress could not be persuaded to institute redeemability "because", so the common reply was, "we are at war." The fact that we fought World War I on ratios ranging from less than half to less than one-third as high as that of 1941 was not regarded as worthy of serious consideration. Now that the ratio in recent months [early months of 1950, Ed.] has been in the range, roughly, of 13 to 15 per cent, the argument is often advanced that our gold supply is inadequate even though the range of ratios for the years 1915 - 1932, when redeemability was maintained, was from 6.7 to 10.9, the average being 8.6 per cent.
The fact that the ratio has fallen from 24.6 in 1941 to 13 in October, 1949, indicates the importance of instituting redeemability while it is safe to do so and before an expansion in money and deposits and a withdrawal of gold by foreign banks and governments reduce the ratio to a point that would make the institution of redeemability unsafe. With the return to deficit financing by the Federal government, delay in instituting redeemability invites a situation in which redeemability without devaluation may become impossible. Should that occur, it should be expected that thereafter the approach of the day of reckoning will be hastened.16
Opponents of redeemability, when confronted with conclusive evidence on the adequacy of the gold ratio, sometimes attempt to build a better case for themselves by contending that Federal and state debts should be added to non-gold money and deposits as claims on our gold stock. The office of The Gold Standard League (1 Lloyd Ave., Latrobe, Pa.) published in The Washington Bulletin of the League, September 3, 1949, a table showing that the average ratio of gold reserves to currency, plus total deposits and net federal and state debt was 5.4 per cent between 1916 and 1934, and 9.1 per cent between 1935 and 1949 despite the sharp increase in the federal debt as a result of the second World War.17
Silver And Asset Currency Ratios
In practice all our circulating currency is convertible into the Treasury's stock of silver. On October 31, that stock, held as reserve chiefly against silver certificates, was $2,301,000,000. The ratio of that stock to non-silver money and deposits was 1.2 per cent. No one has been concerned over the smallness of that ratio. Because the people believe they can get the silver upon demand, there is no unusual demand for it.18
But, when it is recommended that provision be made for redeemability in gold having a ratio of 13 per cent, the contention is often promptly advanced by opponents of redeemability that our gold stock is inadequate.
Another commentary on our lack of understanding of, and on our reactions to, the reserve ratios is the fact that our people are not disturbed in the least by the very small percentage of asset cash which the Federal Reserve banks usually have to pay out against their liabilities in the form of Federal Reserve notes and deposits. For example, on November 30, 1949, their liabilities were, in Federal Reserve notes, $23,373,496,000, and in deposits, $17,792,864,000. Against this combined liability of $41,166,360,000, the only cash the Federal Reserve banks held as an asset which they could pay out was $237,434,000.19 This amounted to a little over one-half of one per cent of their note and deposit liabilities. This is the common ratio of the asset currency, which can be paid out, held by the Federal Reserve banks against their Federal Reserve notes and deposits. (The only asset cash which Federal Reserve banks hold and can pay out domestically against their Federal Reserve notes and deposit liabilities is not lawful money for purposes of reserve, and the only money that is lawful for reserve purposes - gold certificates - cannot be paid out domestically - merely to foreign central banks and governments in the form of gold.)
The people are not disturbed by this extraordinarily low ratio of asset cash to the notes and deposits of Federal Reserve banks, doubtless because they are not aware of it.
Had the Federal Reserve banks been authorized to pay out gold or gold certificates on that date against their Federal Reserve note and deposit liabilities, they could have paid out $23,231,916,000 (ignoring penalties for going below the minimum required ratio of 25 per cent). This gold certificate reserve amounted to 56.4 per cent of their note and deposit liabilities. It was almost 100 times larger in amount than the only asset cash which they could pay out domestically.
The people of this country are told by leading Federal Reserve officials that, despite this situation which they do not describe nor explain to the interested public, it is unwise to pass a law which would require the Federal Reserve banks to meet their liabilities in terms of a reserve which is nearly 100 times larger in amount than the only asset cash they can pay out under the present system. The point is that the Federal Reserve authorities do not wish to be called upon to meet their liabilities in anything except another liability. They wish to continue to operate with liability currency - that is, to exchange their Federal Reserve notes for their deposits and their notes.
There is no valid reason why the Federal Reserve banks should be permitted to meet a liability by substituting another if the demand is for the reserve held against that liability.
When Federal Reserve bank officials advocate a continuation of our system of irredeemable currency, they are asking for special privileges for themselves - for privilege without corresponding responsibility. It may be doubted that any valid reason could be found on which to defend the granting of privilege without at the same time exacting a corresponding responsibility or the employment of a standard of ethics for Federal Reserve officials that ranks far below that required of private individuals and enterprises under our body of contract law.
The Scarcity-Of-Gold Argument
An argument sometimes advanced in behalf of an irredeemable currency is that there is not enough gold to go around if all who would have claims upon it should decide to exercise them at the same time. That contention seems to imply, often or usually, that the belief is that a currency cannot be made redeemable, safely and properly, unless the gold or silver reserve is 100 per cent of the liability.
The untenable character of such a contention lies in the failure to recognize that scarcity is a requisite of value; that all goods having value are, of necessity, scarce; and that people practice economy in the use of scarce goods. There are not enough bridges, ships, trains, airplanes, elevators, or anything else of value to accomodate all people if they should all decide to demand their services at the same time. All scarce goods are designed to meet the usual expected demand - not the full demand that could be made at a particular time. Fire escapes, exceptional devices, and policing are employed to meet unusual, emergency, or unexpected demands.
Gold, being scarce, has value. Therefore economy in its use is invited and is desirable. Banks and government Treasuries have learned from experience that they can safely keep fractional reserves against their note and deposit liabilities since, ordinarily, not all holders of these liabilities will demand payment at the same time. The problem is to avoid the creation of conditions which lead to unusual demands and to provide proper "fire escapes" to meet such demands should they arise. A well-organized clearing and collection system for notes, checks, and drafts, combined with what we commonly call "sound" banking procedures and a readiness to pay out reserves upon demand, tends to reduce the need for reserves to a relatively low level. As a consequence, fractional reserve systems have become an accepted and defensible method throughout the world for economizing in the use of such scarce goods as gold and silver.
The Fear-Of-Runs Contention
Fears of an inordinate demand for gold, which naturally and properly characterize life under an irredeemable currency, are assumed, by many people, to be characteristic of a period of redeemability in which such fears should no longer exist since their causes should have been removed.
People, while living in a period of irredeemable currency and sensing quite correctly the desires to get gold because of distrust of an irredeemable currency, seem to find it difficult to realize that redeemability is a repellant of hoarding.
They seem unable to bring themselves to a realization of the fact that redeemability invites and results in dishoarding of gold, and that it is irredeemability, or fear of it, that causes hoarding. That has always been true, both in this country and abroad. To cite but one example in our history: When we instituted gold redemption in 1879 there was more gold turned in during that year for paper money than paper turned in for gold.
According to the Report of The Secretary of The Treasury for 1879, p. ix: "The total amount of United States notes presented for redemption, from January 1 to November 1, 1879, was $11,256,678. . . . Meanwhile coin was freely paid into the Treasury and gold bullion was deposited in the assay office and paid for in United States notes. The aggregate gold and silver coin and bullion in the Treasury increased, during that period, from $167,558,734.19 to $225,133,558.72, and the net balance available for resumption increased from $133,508,804.50 to $152,737,155.48."
The situation was the same in 1880 (Report of The Secretary of The Treasury for 1880, p. xiii): "The amount of notes presented for redemption for one year prior to November 1, 1880, was $706,658. The amount of coin or bullion deposited in the Treasury assay office, and the mints, during the same period was $71,396,535.67."
If the paper money is as good as gold, intelligent people do not wish to incur the expense involved in holding gold.
The problem is to convince a majority of Congressmen, disposed to act on facts, that the institution of a redeemable currency, instead of encouraging inordinate demands for gold, should eliminate all causes for them and all multiple quotations for our dollar; should provide a potent force in the direction of an expansion in production; should tend to open up foreign trade; and should give this nation a new and confident lease on life provided the managers of our money and credit behave themselves properly. It should be something like installing new and strong rails in a dilapidated and dangerous railroad structure.
Unless we get our facts in hand regarding reserve ratios and the causes of demands for gold, and unless we correct confused thinking and attitude in respect to a redeemable money, we may be destined to continue with an irredeemable currency under which the fears as to its future value should be expected to become greater rather than less, the consequence being that we may, and probably shall, end up in the pit of Socialism since such a currency is both a wide-open gate and invitation to that particular consequence.
Should profligate spending and deficit financing be continued - and these are made easy and invited by an irredeemable currency - the present very safe ratio of our gold stock to non-gold money and deposits can soon be reduced to a point which will make the institution of redeemability risky if not impossible. It is for this reason that we need to hurry into redeemability. That is our best protection against profligate spending, deficit financing, and Socialism.20
The Implication Of The Prediction, Or Fear, Of Hoarding
A noteworthy fact is that expressions of fear of hoarding of gold, or predictions that hoarding would be very heavy, if redeemability were instituted, come chiefly from the advocates of an irredeemable currency rather than from those who urge a redeemable currency for this country.
If their contention is valid, then the answer is that we should have instituted redeemability some time ago and that we should rush it into effect at the earliest possible date lest matters grow worse.
The fact of course is that, if gold reserve ratios have any significance, there is no good reason to suppose that hoarding would be any heavier than would be healthy in the light of the government's fiscal and monetary policies arid the large volume of surplus reserves held by the Federal Reserve banks. Since provision for redeemability is a repellent to hoarding, it is possible that there would be an insufficient amount of hoarding to inject the proper amount of fear into our Congressmen in respect to a continuation of their profligate spending and socialization. But the definite and correct answer is that no one can possibly know what the holders of non-gold dollars would do in respect to exercising the right to demand redemption. But, whatever it might be, that would be, and is, their proper right. No government should be free to use the people's money and credit in a manner that would make it desirable and profitable for people to hoard a relatively large amount of gold.
The test of our people's attitude toward our Federal government's fiscal and monetary policies should be made at the earliest possible date by providing them with the right to demand redemption of Federal Reserve bank and Treasury "promises" to pay. Moreover, our people should always have the right to make that test.
We cannot, with consistency, talk about our belief in opportunity and freedom for our people and at the same time deprive our people of the power to hold our Federal government and Reserve banks to an accounting in the management of the people's fiscal and monetary affairs.
The Contention That The People Should Not Be Permitted To Demand Redemption Because Of Their Possible "Undesirable" Behavior
Some of the opponents of a redeemable currency have contended that the people cannot be trusted with the right to demand redemption since they might become easily frightened, or wish to speculate, or because they might fear currency depreciation, or oppose government spending, and so on.
The answer to that is that if people in general turn to a hoarding of gold it is because the government and banks have provided them with a reason for doing so. It is this fear that people might demand redemption that would cause Congressmen, the Treasury, and the banks to exercise care in what they do. It is in this manner that the people can keep a control over the government's and banks' use and abuse of the people's money. They may not exercise this power when they should or they may not exercise it well; but the fact that they have the power to do so, regardless of whether the monetary authorities think the reasons for doing so are good or bad, is a wholesome factor in enabling the people to keep a rein on their government and monetary authorities.
Moreover the people should not be questioned as to their reasons for demanding redemption. If they hold a promise to pay upon demand, that promise is supposed to be met by the promisor without any quibbling; otherwise, the promise is not what it appeared to be when it was issued.
Presumably, if our money were to be made redeemable in accordance with some of the notions being expounded by some of our Federal Reserve authorities and other opponents of irredeemability, the paper money would carry promises something like this: "We promise to pay the face value upon demand provided the holder is not acting upon an instinctive or speculative urge, or is not resisting large government expenditures, or does not fear currency depreciation, or is not suffering from panic caused by unsettled international conditions or fright concerning the business outlook or one's individual security."
One Federal Reserve authority has advanced the idea that out currency should not be made redeemable in gold coin because "no government should make promises to its citizens and to the world which it would not be able to keep if the demand should arise." That suggests that provision for redeemability is not defensible unless the reserve is 100 per cent of the liability. The fallacy in that contention lies in the failure of its author to recognize the principle of economy employed in the use of all scarce goods. The use of fractional reserves is defensible and desirable if bankers proceed wisely. Insurance companies, for example, could not function if an attempt were made to apply such an uneconomical principle.
That argument also ignores the discrimination involved in the fact that the Federal Reserve banks will redeem in gold the dollars held by foreign central banks and governments while denying the same right to other holders of dollars. That practice, which is regarded as appropriate by that Federal Reserve official, simply means that in his opinion the Federal Reserve banks should be free to redeem for some and at the same time have no obligation to redeem for others whose claims should be equally valid. If our Federal Reserve notes were made to state accurately the theory of that official, they would read as follows:
"We promise to pay the face value in gold on demand to all central banks and government; to all other holders we promise nothing because we might not be able to keep a promise to redeem should the demands for redemption exceed our reserves "21
If the principles of redeemability or non-redeemability, being enunciated by these Reserve authorities, are defensible, they should not hesitate to have them printed on our paper money and in our deposit books. As matters stand, the legends (promises and statements as to security and redeemability) on our paper money are either outright dishonest, or misleading, or meaningless. It would be interesting indeed, though perhaps catastrophic, to see the principles of redeemability or non-redeemability, advocated by these Reserve authorities, printed accurately and lucidly on our paper money and in our deposit books.
The essence of this issue is whether or not the people should have power to control their Federal government and Federal Reserve banks, who are the people's agents in the management of their national fiscal and monetary affairs, or whether these "agents" are to be free to control our people in the manner of dictators, accountable in practice to no one but themselves.
The Desire Of The Treasury &Amp Federal Reserve Officials To Be Free Of Problems Inherent In The Fractional Reserve System And Of Obligations To Meet Promises To Pay
If the Federal Reserve banks and Treasury could maintain a gold reserve of 100 per cent against their promises to pay on demand all problems of redeemability upon demand would be reduced to a minimum or disappear.
But the Federal Reserve banks and all banks - and the Treasury to some extent - operate on the system of fractional reserves. The proper and safe size of this reserve depends upon the organization of the banking structure, the effectiveness of the clearing and collection system, the practices of the banks and their depositors, and many other factors.
The problems inherent in banking which operates on a fractional reserve system cannot be solved properly by excusing the Federal Reserve banks from meeting in gold their promises to pay on demand. Nevertheless Congress has freed those banks from that proper responsibility and they have been, and are, fighting with every device at their command to keep this position of unwarranted privilege which is now free of a proper and corresponding responsibility.
Proper banking procedure and proper banking responsibility require that bankers understand the problems and appropriate practices that go with a fractional reserve system. They do not imply that because reserves are fractional they are not subject to withdrawal by all claimants or that they are not to be paid out except to foreign central banks and governments. They do not imply that bankers should be excused from meeting their demand liabilities in terms of gold and silver reserves.
Nevertheless, our Federal Reserve authorities have managed to escape their proper responsibilities in three fundamental ways: (1) they are not required to pay out their reserves domestically nor to anyone other than central banks and governments abroad; (2) they substitute one liability for another in making payment, except for the small percentage of non-reserve asset cash which they may use; (3) all their notes and deposits and all the asset cash they can pay out are irredeemable currency in so far as the use of gold for domestic currency is concerned.
This situation, defended by the Federal Reserve authorities, has become a case of the Federal Reserve banks and Treasury versus the welfare of the people of the United States.
The dangers to the people of this country, inherent in the demands of Federal Reserve and Treasury officials for privilege without corresponding responsibility, are further high-lighted by the fact that they advocate and fight for an irredeemable currency in the face of the huge volume of Federal debt already sold and still being sold to our people. Because of its nature, an irredeemable currency carries within itself the power to impair greatly, and even to destroy completely, the value of the savings of our people as represented by this great debt.22 Every experienced person knows that the value of the people's investment in this Federal debt has already been seriously impaired in recent years. Despite this fact, our Federal officials, as they ask people to buy more and more Federal securities, do not apprise the potential buyers of this depreciation nor of the fact that the risks of depreciation are increased because we employ an irredeemable currency.
The willingness of Federal Reserve and Treasury authorities to ask for an irredeemable currency in the face of the huge Federal debt owned by our people, to say nothing of the great volume of savings stored up in the form of pensions, savings accounts, annuities, fixed incomes from investments, and so on, is an arresting commentary on official ethics or morality in our Federal government and Federal Reserve circles today.23
The Contention That Our Gold Standard And Redeemable Currency Did Not Prevent The Crash Of 1929 And Other Wide Fluctuations In Business And Prices
This contention implies that there is such a thing as a single cause for business and price fluctuations and that this single cause can be, or has been, a gold standard and redeemable currency.
Neither assumptions can find support in fact. Our most competent and careful students of business and price fluctuations have accumulated sufficient evidence to justify the conclusion that the causal factors in such fluctuations are many and operate in various combinations, and that there is no single-cause theory that can be supported by fact.
Those who assert that the gold standard is defective because it did not do this or prevent that are offering an indefensible contention not only for these reasons but for others as well. The functions of a gold standard, of gold money, and of a redeemable currency, as presented by careful scientists in the field, have never included, in so far as this author knows, that of preventing business or price fluctuations. To advance such an unwarranted assumption would be analogous to an assertion that laying good steel rails on a railroad bed would prevent wrecks despite the quality of the rolling equipment and the behavior of the operating personnel.
The functions of gold in a nation's monetary structure are (1) to provide a standard of value; (2) to provide a standard for deferred payments; (3) to serve as a reliable storehouse of value; (4) to serve as a medium of exchange; (5) to serve as a reserve against promises to pay; (6) to serve as a settler of adverse balances of payments.
While gold is used to settle balance of payments deficits, it is also used for many other purposes, since it is perhaps the most readily marketable commodity in foreign trade. It is used to buy goods and services, to seek a place of safety, to escape currency depreciation, to buy another currency, and so on.24
On top of a gold money is built a variety of substitutes such as paper, silver, minor-coin money and bank deposits in the interests of convenience and economy in the use of valuable gold. The employment of these substitutes has often been pushed to great lengths and the proper connections with gold strained or broken. In so far as the nature of a country' currency becomes an important element among the causal factors in the fluctuations of business and prices, it seems quite clear that the trouble will invariably be found in people's mismanagement of paper money and other forms of credit.
A government and central banking system may extend credit to such an extent that the gold reserves can no longer support the superstructure of credit. Confidence in the credit may be weakened as people observe the fall of the reserve ratio to a low level, and fears may lead to widespread liquidation and to a fall in prices and a decline in business. We had such a state of affairs in 1920. In the first part of that year eight of the twelve Federal Reserve banks paid tax penalties for deficiencies in reserves. But, in so far as money and credit were involved as causal factors, the trouble lay with the over-expansion of credit, not with some defect in the gold standard, or in gold as a money, or in a redeemable currency.25
When the crash came in 1929, the monetary gold stock was at a relatively high level - it was at its peak for 1929 - and the ratio of the reserves of the Federal Reserve banks to their notes and deposits ranged in that year from 69.3 to 73.3 per cent.
One might, with much accuracy, stress the low reserve ratio of the nation's gold and reserves of Federal Reserve banks against the greatly expanded credit as an important proximate causal factor among all that were operating to precipitate a sharp drop in prices and a contraction in business in 1920. But, even as one of the proximate causes, it was more a symptom of a situation than a basic cause. As the Federal Advisory Council pointed out on May 18, 1920: "There are many contributing causes (to the continued expansion of credit), of which the following may be regarded as paramount: (1) We recognize, of course, that the first cause is the Great War; (2) great extravagance, national, municipal, and individual; (3) inefficiency and indifference of labor, resulting in lessening production; (4) a shortage of transportation facilities, thus preventing the normal movement of commodities; the vicious circle of increasing wages and prices." (Seventh Annual Report of the Federal Reserve Board, 1920, p. 602).
In respect to the collapse of 1929, any emphasis on gold and reserve ratios as causal factors, even as one of several proximate causes, would have no validity. Nevertheless one hears it stated over and over, as though the observation deserved serious consideration, that the gold standard either caused or did not prevent the severe business recession and drop in prices that began in October, 1929.
The simple answer is that no type of monetary standard known to man can prevent expansions and recessions in business and prices. Furthermore, there is no valid reason for supposing that it could or should. One of the practices of some defenders of irredeemable currency is to point out, quite correctly, that prices fluctuated widely under the gold standard while at the same time they fail to point out the part played by money managers and the fact that the greatest fluctuations that the world has ever seen have been those associated with irredeemable currencies.
The common practice of advocates or irredeemable currency, of contending that the gold standard and a redeemable currency either caused, or at least did not prevent, the severe recession beginning in 1929 in this country and the catastrophies abroad, seems to have developed early in the 1930's. And it has been cultivated persistently since.
A closely-related doctrine as to the evils of a gold standard and redeemable currency, also cultivated with persistence, during and since the early 1930's, was that business recoveries were caused by, and came quickest with, the introduction of irredeemable currencies.26 To test the validity of this widely-expounded and widely-accepted notion, Dr. Rufus S. Tucker examined the evidence provided by the experences of thirty-four countries and published his observations and supporting statistics in a study called "Business Recovery Not Brought About by Suspension of the Gold Standard." in The Annalist (August 21, 1936). The net result of his study was that the common assertions that the suspension of specie payments and depreciation or devaluation of the currency caused a prompt turn toward recovery was not supported by the evidence. He said: "It is clear that the turning point in the United States and nine of the leading industrial countries of Europe came in the months of June, July, or August, 1932, whether or not the countries had abandoned the gold standard. It is also plain that recovery followed quickly on the abandonment of the gold standard in only two countries - Latvia and Japan. It usually came either before abandonment, or at least seven months later. In seventeen countries recovery came first; in sixteen countries depreciation came first; in one country, Palestine, the two came together. There is no reason to conclude that currency depreciation caused or helped recovery."
Apparently the evidence produced by Dr. Tucker has never been successfully challenged nor refuted by any equally responsible and careful investigator. Nevertheless, unsupported assertions, contradicted by the Tucker evidence, are commonly propounded as though they had a factual basis.
The Argument That Irredeemable Currencies Are Managed And That The Operations Of A Gold Standard Are Automatic
The contention is common and widespread, even in academic circles where responsibilities to the standards of science are not always fulfilled, that an irredeemable currency is a managed currency whereas a gold standard is automatic in nature. Out of this common assertion is developed the further contention that a managed currency can be managed properly whereas a gold standard, being automatic, not only cannot be managed but brings disaster upon a people.
The fact is that all currencies, including a gold standard, are managed. Perhaps the chief difference in respect to management is that a gold standard and redeemable currency provide brakes that can operate on the management of a people's money and credit whereas an irredeemable currency provides no effective brake - chiefly an accelerator.
With the introduction of the Federal Reserve System in this country in 1914, the currency managers were given a large field of management even with the restrictions that a gold standard and redeemable currency can, but may or may not ultimately, bring. During World War I and up to May, 1920, the managers of our fiscal and monetary affairs, along with all the other forces operating on business and prices outside their control, were part of a picture in which credit expansion ran to a point at which the brake of gold-reserve ratios began to take hold.
When the crash of 1929 came, the brake of reserve ratios was inoperative. Management had no restraints upon it in so far as the functioning of the gold-reserve brake was concerned. And the economic crash was apparently one of the worst ever experienced in our country.
These two cases demonstrate that our currency managers have not been able to prevent nor to control sharp swings in productive activity and prices even when they knew they were running into the braking influences of the gold reserve ratio in 1920 and when the reserve ratio was too high to exercise any influence in 1929.
In the face of such a record, our money managers wish to be free of any braking influence. In 1945, when the reserve ratios in the Federal Reserve banks began to fall close to the legal limits of 40 per cent of gold certificates against Federal Reserve notes and 35 per cent against their deposits, they simply persuaded Congress to lower the ratios to 25 per cent after which they were free to go on with their expansion.27 As a part of the way of doing things then current, Congress also gave the Federal Reserve banks authority indefinitely to use direct obligations of the United States as collateral security for Federal Reserve notes.28
An irredeemable currency structure such as ours invites that sort of procedure. Although one cannot turn the clock back to see what might have been done were the currency redeemable in gold at that time, logic suggests, at least, that Congress might not have taken those steps with such ease if at all. In any event, it was not attempted in 1920.
The freedom that an irredeemable currency gives money managers not only makes possible extremely bad management but it invites manipulation. We were provided with an illustration of that in 1942 - 1943 when the Federal Reserve and Treasury, in collusion, engaged in a manipulation in the issuance of Federal Reserve bank notes. The Treasury issued $660,000,000 of these notes as Treasury currency, although under the law these notes could be issued legally only by the Federal Reserve bank as a bank liability. By this manipulation, the Treasury received $660,000,000 of deposit credit, to which it was not legally entitled, on the books of the Federal Reserve banks by depositing those notes for credit. The Federal Reserve banks received these notes as reserve whereas they should have been liabilities. By adding $660,000,000 of these notes - which were unsecured (fiat) money - to their reserves, they were able, at the legal reserve ratios then prevailing, to support an additional expansion of bank deposits in the banking system to the extent of $9,900,000,000. An account of this manipulation is given in a pamphlet by this author [Prof. Spahr] entitled The Manipulation of Our Federal Reserve Bank Notes (Economists' National Committee on Monetary Policy, 1944, 31 pp.) It may be doubted that this manipulation could have been undertaken had our currency been redeemable.
The plea of our Federal Reserve and Treasury authorities that they should be free of any restrictions which gold reserve ratios and redeemability could ultimately place upon them finds its answer in what tends to happen when monetary managers are given such freedom. Monetary managers have not done well even when these ultimate restrictions have operated to call a halt on their great expansion of credit; but the story of monetary management has been infinitely worse when these managers have been free of these restrictions.29 The common practice today is to ignore these facts as though they do not exist.
We are living in a period in which the money managers, who want great, or practically absolute, freedom from any ultimate restrictions on themselves, have been able to make a majority of Congress and many of our people believe that their shortcomings in currency management were not really their shortcomings but rather a manifestation of the evils inherent in a gold standard and a redeemable currency. They ask for freedom to regulate the people's currency, but they do not wish the people to have any effective power to put any brakes on them at any time. Some of the members of the Board of Governors and their staff have even gone so far as to urge that the Federal Reserve banks not be curbed or hindered by any reserve requirements.30
The people of a nation are headed into trouble when they permit any such powers to reside in the hands of money managers. The lesson on that procedure has been repeated many times. If we are not intelligent enough to understand and to profit by it, we may be destined to learn it by firsthand and bitter experience.
Undoubtedly one of our great difficulties in respect to profiting from lessons experienced many times by others is an apparent conviction on our part that we are exempt from such experiences. We like to deplore the cry of Wolf! Wolf! We like to say "Well, it hasn't happened yet!" Indeed, we seem to take the position that a sequence of unpleasant events that recurs with a high degree of regularity for others need not concern us unless the event that is supposed to arrive in due course arrives promptly and in advance of the predicted date as proof that the event will arrive! Until it occurs, we pretend that we have no satisfactory proof; the evidence on probability does not interest nor convince us; we are convinced only when the unpleasant event engulfs us. We seem to be inviting that sort of result for the people of the United States by continuing to adhere to a system of irredeemable currency.31
The Contention That The Gold Standard Can Operate Only Under Favorable Conditions
It is often stated by opponents of redeemability that the gold standard is a fair-weather standard and that since conditions are as they are it is both unwise and futile to institute a redeemable currency.
Occasionally one can read or hear the contention advanced that the gold standard could and did operate only when most of the countries were on a laissez-faire basis. Laissez- faire is a concept; it apparently never operated in pure form in any important degree; there has always been government control or regulation in some degree. That variety of argument or straw man is of the same class as the common assertion that the gold standard was, or is, an automatic standard.
The contention that the gold standard is a fair weather standard raises the question of whether the conditions now - i.e. in 1950 - prevail in the United States under which it could operate. Advocates of redeemability maintain that they do exist and have existed since the reopening of the banks in 1933. Evidence as to ratios demonstrates that to be a fact. But, in general, opponents of redeemability ignore such factual data; their arguments are fundamentally and essentially a defense of a governmentally- managed economy of which an irredeemable currency is a necessary part. Their basic position is that the people should not have the power over a government which a redeemable currency places in their hands.
Furthermore, when they point out that the gold standard cannot stand up under all conditions, they rarely if ever deal accurately with the logic involved in that contention. For instance, they neglect to point out that anything devised by man can be destroyed by man. Because there are limits to the abuse which gold will take from man - it will flee, if it can, to places where greatest value is attached to its services - people condemn it rather than the abusive practices that cause it to seek places of safety. Among varieties of money, gold stands at the top in value; but, like a fine watch or automobiles, its best and proper use presupposes intelligence, rather than abuse. When it seeks safety to escape abuse, it leaves its abusers with silver, copper, nickel, or irredeemable paper. Then, by a peculiar process of reasoning, those left with a cheap paper money, which can be manufactured as rapidly as the printing presses can run, begin to argue that this is proof that an irredeemable paper money is superior and preferable to gold since it can stay with them despite any abuse. The simple facts are that an irredeemable currency not only stays with those who abuse better currencies, but it tends to expand and to grow with abuse and to carry the abusers to their destruction.
Irredeemable currency is man's monument to his abuse and poor management of gold and a redeemable currency - the currencies to which the world attaches the greatest value.
The Advocacy Of Delay In The Institution Of Redeemability
Many who seem to find no satisfactory grounds on which to defend our system of irredeemable currency as one that we should wish to retain indefinitely nevertheless advocate delay in the institution of redeemability.
The common assertions are that the time is not propitious, we should wait until European countries stabilize their currencies, we cannot have a redeemable currency until other countries adopt a gold standard too, we must first reduce Federal expenditures and balance our budget,32 we must wait until we have the conditions which would insure the successful operation of the gold standard, we must wait until we have settled our differences with Russia lest Russian agents stir up runs on our banks, and so on.33
None of these arguments has any validity. In general they seem to be offered as excuses by those who cannot readily be required to offer proof as to their validity. In part, they are the common material of those who employ hit-and-run tactics in opposing prompt provision for redeemability. In part, they seem to be the tools of those afflicted with what might be called a case of pernicious inertia but which is apparently regarded as a manifestation of wise caution. That they belong to the field of psychology seems clear.34
The propounders of such arguments seem not to consider the fact that we have already delayed redemption for a period of seventeen years (1933 - 1950); that our gold ratio is ample to support redeemability;35 that this ratio has fallen from 24.6 per cent in 1941 to a ratio of 13 per cent (in 1950), and that, in the face of our Federal government's profligate spending and deficit financing, the sands of time are running out on this country with dangerous rapidity; that the delay they advocate is an invitation to continuation of wasteful Federal spending and to the introduction of thorough-going statism in this country.36 They ignore such facts as that we maintained a gold standard and redeemable currency during World War I and down to 1933 on gold reserve ratios ranging from 6.7 per cent to 10.9 per cent; that we maintained a redeemable currency while currencies abroad were depreciating, being devalued, and collapsing; that while Europe was experiencing such chaos during World War I and in the 1920's our dollar was regarded, and properly so, as a factor of stability in a world of great instability; that we maintained a redeemable currency during the period of unbalanced Federal budget in 1917, 1918, and 1919 with the budget unbalanced to the extent of $13,363,000,000 in 1919; and that, in so far as foreign central banks and governments are concerned, we have been maintaining a gold standard and redeemability at $35 per fine ounce for a period of seventeen years.
This author has yet to see an advocate of delay in our return to redeemability produce an argument that is supportable. Such advocates are engaging in a dangerous enterprise despite the fact that by conventional standards many of these people are commonly rated as among our most responsible leaders. They undoubtedly have fears regarding redeemability - perhaps in many cases arising from a confusion of those attitudes of people, including their own, which characterize a period of irredeemability with what they incorrectly suppose would exist if redeemability were instituted. Being thoroughly conscious of these fears under an irredeemable currency, they clutch at any vague argument that would seem to enable them to oppose with respectability a change to a state of affairs they obviously fear might be undesirable.
The fact that they cannot, and do not, produce evidence in support of the vague arguments they offer as an excuse for delay seems to be brushed by them to one side with relative ease. This is apparently because those who resort to this procedure cannot be held to an accounting before a critical and competent jury able to say publicly "You stultify yourself unless you produce facts that will support your assertions."
The continuation of an irredeemable currency in this country is a dangerous undertaking. Every supposedly- responsible person who speaks out in public on this matter has the obligation to be as accurate as possible. It seems reasonably clear that for many people the battle over redeemability versus irredeemability is a sort of game in polemics or politics rather than a matter of scientific procedure in dealing with facts and principles. Congressmen seeking facts in respect to redeemability versus irredeemability will not get help in support of redeemability from that active group of economists who are Socialist or advocates of a governmentally-managed economy in some other form since an irredeemable currency is a necessary instrumentality of a dictatorial government. It is on the side of Socialists, Communists, and advocates of other forms of governmentally-managed economy that the proponents of delay in instituting a redeemable currency find themselves.
For the first time in our history we have had, since 1933, a government that has been willing to take advantage of the ignorance of the mass of people regarding the principles involved in a redeemable versus an irredeemable currency. Similarly, for the first time we have had what appears to be a majority - or at least an aggressive minority - of the academic profession in the social science fields rushing into, and giving support to, a political movement in the direction of a governmentally- managed economy.
During the past suspensions of specie payments in this country, there have been statesmen of the type of John Sherman who recognized full well that popular understanding and attitudes in respect to irredeemable currency were not reliable guides as to what is good or bad in money and who set about to give the people a good money despite the inability of the mass of people to distinguish the good from the bad in money and monetary principles. That sort of statesmanship has been lacking since 1933, and, unless it emerges, our people are apparently destined to continue with the poison of irredeemable currency permeating their economy and political and social system until a day of reckoning teaches once more a very old and oft-repeated lesson.
The advocates of delay in instituting redeemability are inviting that danger and result.
The Evasion Of The Issue Of Dishonesty Involved In Our System Of Irredeemable Currency
Another noteworthy aspect of the arguments offered by the defenders of our system of irredeemable currency is the practically uniform avoidance of the question of dishonesty involved in the use of such a currency.
Occasionally one of its defenders attempts to dispose of the issue by stating, simply, that there is no question of honesty or morality involved. But a mere assertion that an Irredeemable currency involves no question of honesty or morality is valueless without supporting evidence. This author has yet to hear or read any local and defensible reason why an irredeemable currency is not a dishonest currency and why its issuance does not rest upon an act of dishonesty.
The general avoidance of this issue by defenders of our system of irredeemable currency raises the question as to why, if such a currency is honest in nature, that fact is not presented in lucid and accurate terms. If, for example, the issuance of irredeemable promises to pay by the Treasury and Federal Reserve banks rests upon the standard of honesty, why would not an individual also be honest if he issued promises to pay which he does not redeem? In his case, he is held to a different standard - that of fulfillment or declaration of bankruptcy - by our body of con- tract law. On points such as this, the defenders of our irredeemable currency are silent. They do not wish to discuss the matter. They slip away without providing answers.
This nation cannot be served well when issues of dishonesty are dodged. This evasion, which in itself reveals a trait of dishonesty, is possibly one of the evil effects of an irredeemable currency which every experienced monetary economist knows undermines the integrity of people in a multitude of ways.
It would be hard to find in the scholarly literature on money and monetary standards a defense of an irredeemable currency as an honest money or of its issuance or maintenance as an act of honesty.
If, after seventeen years (1933 - 1950) of irredeemable currency in this country, its most competent defenders cannot produce a valid set of contentions as to the principles of honesty on which such a currency rests, one may be assured that common standards of honesty need not be altered, that they stand with as much validity and firmness today as in generations and centuries past, and that they indict an irredeemable currency as one of the manifestations of the fact that governments are often dishonest.
What Should Be Expected Under A Redeemable Currency
quotations for the dollar should disappear
With provision for redemption of our currency into god we would have in nature the best type of monetary standard and paper money thus far evolved by man. The gold certificate and gold would be interchangeable. All our other currency would be convertible into, and have equal value with, gold. Multiple quotations for different kinds of dollars should disappear.
enterprise in foreign trade should be revived
Return to a thorough-going gold standard and redeemable currency would permit a free flow of all our money into and out of the country. Private individuals, free to go when and where they can and will with their dollars of all kinds, should revive and stimulate foreign exchanges of goods and services in every form. Private ingenuity could go to work once more; and, when millions of interested people, in search of profit and pleasure, are given freedom and opportunity to accomplish their purposes, they usually manage to succeed in high degree. No government agency or plan can match the accomplishments of private individual initiative in the development of international exchange of goods and services.37
return by other nations to redeemable currencies should be made easier
With the great benefits of private ingenuity freely available once more in international exchange, and with all our dollars freely interchangeable with gold at a fixed rate, at least those aspects of the difficulties in exchange which now exist between us and the rest of the world, because of the irredeemable features of our currency, would be eliminated. The great benefits of our return to redeemability, which should soon be obvious, should set an encouraging example for other countries, should hasten the removal of restrictions by them, and should in the end make their road back to redeemable currencies much easier.38
domestic social benefits should be invited
In so far as the basic money of a nation can be an influential factor in the economic life of a people, the introduction of redeemability should instill confidence and provide incentive for more saving, more investment, more production, more trade and, consequently, more and safer prosperity.
This has been the common, though not universal, experience of a people following resumption of specie payments.
The consequences depend much upon the management of credit and the behavior of all the other forces that affect production and prices. A good basic monetary system, like good strong rails on a railway, is a great facilitating instrument and, moreover, contains some elements of safety. But neither provides an insurance against the consequences of human foolishness, or stupidity, or recklessness, or bad management. Although, the institution of redeemability should invite great social benefits, bad fiscal and banking policies and practices could precipitate a serious situation despite the existence of a gold standard and redeemable currency. The problem is to get good monetary management under the restraints of a redeemable currency. The solution is not to be found in freeing money managers from these restraints.
would have direct power once more over their public purse and a protection
Power to control the government's use of the people's purse would be returned to their hands where such power belongs. The fact that they might exercise that power slowly or too late, as has been the case sometimes in the past, does not alter the fact that the constant threat of its use tends to keep a government and the banks within bounds which do not raise fears. Every individual would be free to exercise his own judgment as to what percentage of his dollars he would prefer to put in gold in an effort to protect the value of his savings. If, with this freedom of choice, people are misled and fail to take the proper protective measures, they cannot charge their misfortune to a lack of power to use their own judgment. With a redeemable currency at their disposal, they would have a power not possessed today, and, it seems reasonable to suppose, if our government should continue with its pro- grams of profligate spending and dissipation of our national patrimony, many people would begin to exercise their power to protect their savings and to this degree tend to bring this practice to a halt.
The fact that the government could 'again plunge them into an irredeemable currency to deprive them of this power - a point sometimes offered by defenders of an irredeemable currency as an argument against redeemability - merely means that governments can and often do take possession of the people's purse and become their dictatorial bosses. The implication of such argument is that since governments can engage in bad practices we should not endeavor to arrest such a practice if it is in current use. That remarkable contention by a defender of irredeemable currency does not alter the fact that the power over the people's purse must rest with the people if they are to have protection against an autocratic government.
Although in principle, an anti-Socialist political party, if elected to office and if determined to save our people from Socialism, could change the trend even under an irredeemable currency, the last seventeen years (1933 - 1950) have demonstrated that the people of this country cannot count on either political party to bring big government to a halt and to start a strong trend toward the encouragement and development of private enterprise so long as the support of vote-delivering pressure groups can be purchased so easily with irredeemable currency and so long as both parties have that as a basic purpose. A restoration of a system of redeemable currency provides the best and apparently the only assurance that our march into Socialism will be brought to a halt.
6. It would
free our people of the prospects of great trouble or disaster inherent in
A restoration of redeemability could' not and would not insure the people against sharp ups and downs in productive activity and prices. All that it could do is to provide the best type of currency known - one that, by its nature, does not cause a country to take the course to disaster made possible by an irredeemable currency. Before that unfortunate course can be taken the redeemability of a currency must be destroyed.
Business and price fluctuations are the result of a multitude of forces. The part played by a redeemable currency might well be of minor or negligible importance in the fluctuations of production and prices. In no event could it be the controlling factor. In high degree it is a facilitating instrument, a self-liquidating, and therefore sound, medium of exchange -- a passive factor. It is an irredeemable currency that becomes a potent causal force because the element of depreciation and the potential dangers inherent in such a currency enter into people's calculations and plans. A gold standard and redeemable currency, on the other hand, do not carry these germs of disease; they must come from outside - from abuse in the use of credit.
people would once more have an honest currency and the benefits of standards of
honesty among official in respect to the people's money
A resumption of redeemability would involve a return to standards of honesty in respect to honoring promises to pay on demand. Dishonesty is a fatal element in the social and political fabric of a nation. Its consequence is trouble. There is no valid defense of dishonest practices. And there is no ground on which to justify the implied contention that government and Federal Reserve bank officials may properly practice dishonesty while private citizens, by a highly-developed body of contract law, may be compelled to fulfill their promises to pay and the other obligations of contract. Indeed, if there is to be any difference shown in standards of ethics, the highest should be among governments and Federal Reserve officials. But they have given themselves, and they are fighting to keep, a standard of responsibility that is not recognized in the legal obligations of contract applicable to private persons and non-government enterprises.
The employment of a low standard of honesty in officialdom can have, and tends to have, a demoralizing effect upon other people. Such practice diffuses its evil influence in many and subtle ways throughout a nation. When the bonds of integrity are loosened at the official level, the disease of dishonesty spreads rapidly through the foundations of society and its social institutions. The general avoidance of this issue by the defenders of an irredeemable currency, or their denial that there is a moral issue involved, has not been to their credit, nor has it been helpful.
The people of the United States cannot be served well in respect to this serious and urgent matter of our irredeemable currency system unless all facts and issues involved are faced fully, honestly, and completely, and an accurate picture is presented - so that a majority of Congress can understand it and act wisely in behalf of the best interests of the people of this country. Ignorance has to be excused. But presentation of half truths, the setting up of straw men, the misstatement of issues, the distortion or neglect of pertinent facts by debaters who are in positions of responsibility and are supposed to be able to get and to recognize facts are inexcusable. Supposedly smart quips and cliches, hit-and-run statements, hollow pontifications, ponderous and platitudinous pronouncements of the do-nothing variety, although common current substitutes for careful presentation of verifiable fact and principle, are not in the least helpful to a Congress that needs facts and reliable aid.
If we mend our ways and get our facts, principles, and lessons in hand, and if, then, Congress will act upon them, and thus in the best interests of the people of this country, we should expect our currency to be made redeemable. The reason is that there is no valid argument for maintaining an irredeemable currency in this country. To argue for an irredeemable currency is to argue for a diseased monetary agent.
On The Prospects Of Obtaining A Redeemable Currency
Monetary history teaches that there never has been a permanent suspension of specie payments. The reason is that paper is paper and gold is gold. Paper is no better, in the long run, than the value of the promise made by the promisor. Such promises have a notoriously poor record. Gold, on the other hand, is free of these weaknesses of human beings. It carries fulfillment in settlement in accordance with the weight and fineness of the amount of gold employed. It does not falsify. Its value does not depend on the promise of any man.
Many governments have attempted to put men's promises to pay on a par with gold without using gold to fulfill those promises; but, in due course, such attempts have been, and are, subjected to the acid test of their value as against fulfillment in gold, and failure in part or fully has been, and is the common result.
Our government, as others have done, may profit from past experiences and return to redeemability before morn severe damage is done our people. Or, it may follow a course, also common, of letting our present experiment with irredeemability carry us to a point of collapse in our fiscal and monetary affairs following which we shall be compelled to face the basic facts regarding the virtues of a redeemable versus an irredeemable currency as we attempt to dig ourselves from the ruins then engulfing us.
As matters stand, the Executive Department of the United States Government, the Treasury, most Federal Reserve authorities, the majority of Congress, and, of course, the general public, including a large number of economists of the Socialist, pro-government-management variety, seem determined to continue with this dangerous enterprise.
The only hope that the United States may be spared the tragedy to be expected from the continuation of this course rests with the efforts of the thousands of concerned and responsible citizens scattered across this country who may succeed in persuading a majority of Congress to act or in developing an opposition party with statesmen who will succeed in the restoration of redeemability of our government's and Federal Reserve banks' promises to pay.
There is undoubtedly a rapidly-growing movement among disturbed and responsible citizens to do all within their power to see to it that our currency is made redeemable at the earliest possible date. Busy men with heavy burdens, many of them tired and in need of rest, are devoting time, energy, and money, in an effort to find, if possible, a majority in Congress, or opposition leaders, or both, who will act in behalf of our national welfare by providing a redeemable currency. These men and women are making this supreme effort with the utmost unselfishness and patriotism. They are Democrats and Republicans, industrialists, bankers, insurance executives, professional people, economists, government officials, financial writers, and a multitude of others from practically every field of human activity.
If this nation is to be saved from the logical consequences of using an irredeemable currency, it will be because this body of intelligent, patriotic, and unselfish men and women succeed in their efforts. If they should fail, then we may expect the United States and its people to be confronted in the course of time with a major tragedy in monetary and fiscal affairs.39
1 Walter Spahr provided a "7-Minute Summary" which has been reduced here to "5 Minutes" by eliminating a few points which are of little concern at present, and by bringing paragraph IV.1 up-to-date.
2 The symptoms which Keynes observed in Britain after the first World War, and which he thought were absent in the United States at that time, have since become only too obvious in America as well. In Britain as in the USA, the middle class and business "allow themselves to be ruined and altogether undone by . . . governments of their own making." In his classic "Fiat Money inflation in France" Andrew D. White quoted Mirabeau as saying in 1789, on the even of the revolution, that irredeemable currency is "a nursery of tyranny, corruption and delusion; a veritable debauch of authority in delirium."
3 The international redeemability of the dollar was progressively reduced during the 1960's under a cloak of "international cooperation."
In April 1967, for instance, Germany agreed officially not to demand gold in exchange for the growing dollar balances held by the Bundesbank, after such a policy had been pursued informally for some time. Japan, Canada and Italy also agreed not to demand gold, while France, the Netherlands and Belgium declined to give such an assurance.
In its "Business in Brief," the Chase Manhattan Bank suggested at the time that Washington should make it "unmistakably clear" that in case of a crisis, the U.S. would stop converting dollars into gold, thus leaving "the burden of decision regarding the defense of the dollar" to the European governments. In a speech before the New York Chamber of Commerce, Rudolph A. Peterson, the President of the Bank of America, suggested that if the strain were to become "intolerable," the U.S. "as a last resort" should stop the international convertibility of the dollar. "There is no overwhelming reason why we should sustain the dollar value of gold."
The international redeemability of the dollar was finally ended on August 15, 1971, foreign exchange rates were allowed to float, the dollar depreciated in terms of hard currencies, and the prices of imports rose sharply.
4 As the price of silver increased, and the value of the silver content of silver coins rose above the face value of the coins, the convertibility of Silver Certificates into silver dollars was ended in 1968, and the U.S. Mint discontinued the coinage of silver 10¢, 25¢, 50¢, and $1 coins, using an inferior alloy instead.
5 These indirect links ended August 15, 1971.
6 This indirect link between the dollar and gold ended with the closing of the gold window in 1971. While the official price of gold was raised in two stages first to $38 and then to $42.22, the free market price rose to an average of $159 in 1974 and $162 in 1975. More important, the decision to terminate the limited international redeemability of the dollar destroyed the last ties between the dollar and gold, and thus removed the last restraints upon the government which was now free to create paper dollars without limit. Between August 1971 and the end of 1975 the money stock (M2) increased by more than 45 per cent, while the output of goods and services grew by less than 10 per cent, resulting in an increase in consumer prices by more than 35 per cent.
Washington did not plan it that way. In the State of the Union Message of February 1961 President Kennedy stated clearly, "we need not - and we shall not - take any action to increase the dollar price of gold from $35 an ounce. . . . This Administration will not distort the value of the dollar in any fashion. And this is a commitment." And in August 1964, Treasury Secretary Douglas Dillon declared at the IMF meeting in Tokyo: "The fixed price of gold is, of course, the anchor of price stability for the world."
But the chronic and growing federal deficits caused by the rapidly expanding welfare state resulted in a vast expansion of credit (the commercial bank credit grew from $199 billion to $461 billion between 1960 and 1970), a rapid increase in the supply of paper money (from $213 billion to $418 billion) and a rise in consumer prices by almost 35 per cent. Between 1933, when the price of gold was fixed at $35 an ounce, and 1975, consumer prices in America rose by 320 per cent, so that an increase in the price of gold to $1 12 merely reflects the depreciation of the dollar, making no allowance for the growing demand for gold.
7 In 1975, the price of gold in London, for instance, fluctuated between $197 and $128 an ounce.
8 As the price of gold fluctuated widely after 1971, the value of the dollar rose and declined in terms of gold, which, however, had only an indirect effect on the American economy. On the other hand, the 'value" of the dollar, expressed in its domestic purchasing power, declined by about 35 per cent between August 1971, when the international convertibility of the dollar was ended, and the end of 1975.
While the huge Federal deficits and the sharp increase in the money supply, both made possible through the removal of the gold standard restrictions, probably had a more direct effect on the price level, the formal act of "closing the gold window" symbolized that the final restraints upon the government's monetary policy had been removed.
9 Under the gold standard, a nation's money supply, and the level of world liquidity were tied to the supply of gold, which effectively limited the amount of money and credit which governments could create. Neither a runaway inflation nor chronic inflation were possible under the traditional gold standard. Governments could not manipulate the economy by creating fiat money, and provide special benefits for pressure groups. The modern, all-powerful state, therefore, strives to rid itself of the restraints of gold. As Morgenthau noted about the early years of the New Deal Administration: "They unshackled themselves. . . and made the manipulation of the value of the currency an open and admitted instrument of public policy." During the subsequent 40 years, the dollar lost about 75 per cent of its value.
10 The same is true, of course, of the United States. The welfare statism of the 1960's and 1970's, which favors powerful groups of voters, the politicians and the bureaucracy at the expense of the majority of the people, virtually precludes a return to sound monetary policy. It assures continued inflation and the progressive expropriation of the middle class and private business.
11 All these arrangements which prevailed before and after the second World War were officially abandoned in 1971.
12 Under the Federal Reserve Act of 1913, the Federal Reserve was required to keep a gold reserve of 40 per cent against Federal Reserve Notes and of 35 per cent against the Member Bank deposits. The reserve ratio was changed in 1 945, when Congress fixed the reserve at a flat rate of 25 per cent, which enabled the Federal Reserve to provide enough money to feed the inflationary boom of the postwar years. In twenty years, 1945 - 1965 the money supply (M2) increased by about 90 per cent, and prices rose by about 80 per cent. In 1965, Congress wiped out the 25 per cent reserve requirement for Member Bank deposits held by the Federal Reserve, thus making it possible for the Federal Reserve to increase the money supply more rapidly. The "experts" suggested that all reserves be removed, but President Johnson vetoed the idea because it might undermine the confidence in the dollar.
Two years later, however, the reserves against the dollar notes were removed and the last restraints fell. The government had completely "unshackled" itself. At the same time, the IMF promoted the idea of SDRs, the international paper l.O.U.'s to "supplement" gold. As The New York Times commented at the time: "The growth of reserves in the future will be controlled rather than subject to such haphazard factors as how much gold is mined in South Africa." (NYT 9-30-67, p.1). Actually, the removal of the gold "shackles" removed all controls. While prior to 1965, the money supply in the United States had increased by 90 per cent in twenty years, it increased more than twice as fast after the last barriers had been removed, i.e. by more than 110 per cent within ten years.
13 This distinction disappeared in 1971 when the gold window was closed, and not only individuals but also the foreign central banks lost all control over the creation of paper dollars by the United States government.
14 During the 1960 presidential campaign, the London gold price suddenly shot up to $40, and under the existing regulations which prohibited the sale of gold by the U.S. government to anyone but governments and central banks, the Federal Reserve could not intervene to hold down the gold price. As a result of this incidence, the so-called London "gold pool" was created to maintain the price of gold at $35 an ounce by manipulating the London gold market. The attempt cost the participating central banks $1 - 2 billion of their gold holdings.
15 This was a central argument against the resumption of convertibility during the 1940's and 1950's and well into the 1960's, and Professor Spahr made it a point to contradict the argument by showing in a number of lengthy tables (which are omitted in this reprint) that between 1915 and 1933, the ratio of gold stocks to total money and deposits exceeded 10 per cent only in one year, 1917. During the remaining 18 years, the ratio fluctuated between 9.8 per cent (1916) and 7.2 per cent (1928), and nobody regarded the ratio as inadequate. Following the increase in the official price of gold from $20.67 to $35 per ounce in 1934, the ratio increased to 15.3 per cent, and as a result of the heavy influx of foreign gold as a result of the war rose to 24.6 per cent. By 1946 it had again declined to 10.6 per cent and by 1949, when about 60 per cent of the world's monetary gold was concentrated in the U.S., it stood at 13 per' cent, well above the average which prevailed between 1913 and 1933 when the dollar was fully convertible. The popular argument of those who opposed resumption of the gold standard that the available gold reserves were inadequate was thus obviously without foundation at the beginning of the 1950's.
During the subsequent 10 years (1950 - 1959) the U.S. lost about 20 per cent of its monetary gold (the holdings declined from $24.5 to 19.5 billion) and during the 1960's another 40 per cent (at the end of 1969 gold reserves amounted to $11.8 billion). At the same time, the money supply expanded rapidly, thus reducing sharply the ratio of gold stocks to total money and deposits. By the end of 1975 the ratio of gold stock to currency and deposits (M2) stood at about 1.75 per cent. A resumption of convertibility on basis of the then official price of $42.22 would thus seem risky in a turbulent world.
To restore a ratio between gold stock and currency and total deposits to the level of about 8 per cent prevailing during the 1930's, the price of gold would have to be increased to about $190, an increase of 50 per cent above the free market price prevailing during the first half of 1976.
16 At the end of the 1950's - ten years after this was written - a resumption would still have been possible without incurring a major risk, since the gold reserves were still equal to about 9.75 per cent of the currency and total bank deposits. But during the subsequent five years of "getting the economy going again" the situation changed very rapidly. By the end of 1964 the ratio had declined to 5.4 per cent, and five years later to 3 per cent. Thus in ten years of planned inflation and social engineering the basis for a redeemable stable dollar was destroyed.
17 The situation did not change materially during the 1950's, but by the end of the 1960's the ratio had declined to 1.5 per cent.
18 In 1950, three major types of paper money were in circulation in the U.S. By far the most important were the Federal Reserve Notes of which $23.3 billion were in circulation, but in addition there were $2.1 billion Silver Certificates which were convertible dollar for dollar into silver dollars, and $313 million United States Notes. To this must be added the minor coin and various types of paper money in the process of being withdrawn, all-in-all about $700 million. All these types of money were interchangeable and could thus be exchange for Silver Certificates which in turn could be redeemed in silver dollars. The ratio of silver in the Treasury against the potential call on these silver reserves was thus minute.
In the early 1960's the Treasury sold a substantial portion of its silver to hold the market price down to the official price of $1.29. By 1 965, however, hoarding spread and more and more Silver Certificates were redeemed against silver dollars. In fact Silver Certificates sold at a premium in terms of other paper currency and rapidly disappeared from circulation. Finally, in July 1968 the Treasury ceased to redeem Silver Certificates and thus defaulted on its promise clearly inscribed on the Certificates at a time when some $269 million of the Silver Certificates were still in circulation.
19 The amount consists of minor coin and a small amount of U.S. Notes.
20 Between 1950 and 1975, public spending grew from $65 billion to about $535 billion, the number of public employees from five million to well over fourteen million, and the public debt from $256 to $576 billion. The money supply (M2) rose from less than $170 to more than $660 billion, and the dollar lost about 55 per cent of its purchasing power.
21 In 1963 a subtle but extremely important change took place in the American monetary system. For fifty years the Federal Reserve Notes has been l.O.U.'s, providing clearly that the issuing Federal Reserve Bank, the Federal Reserve System and the United States Treasury "will pay to the bearer on demand" a specified sum of money, and that the Notes were "redeemable in lawful money at the United States Treasury, or at any Federal Reserve Bank."
After 1963, the two phrases promising payment in "lawful money" were dropped, and the notes merely specified that the notes were "legal tender for all debts, public and private." The Federal Reserve Notes, the nation's basic currency thus ceased to be promises to pay money, and became "money" in their own right. The change was made perfectly legally in accordance with the Federal Reserve Act which provided that the Federal Reserve Notes "shall be in form and tender as directed by the Secretary of the Treasury." In other words, without a special act of Congress, the American currency was turned from l.O.U.'s into l.O.U. nothings.
It may be argued that the change in the wording really did not affect the existing situation. Since 1933, the American people had been unable to convert their paper money into gold, which prior to that date had been the "lawful money." The people could only demand United States Notes and minor coin. The change in the wording thus merely removed what had in effect been a fictitious promise for half a century. And yet, the change symbolized the end of an era. As Justice Joseph P. Bradley wrote in the famous Legal Tender Cases of 1871, the issuance of United States Notes during the Civil War was "not an attempt to coin money out of valueless material. . . . It is a pledge of national credit. It is a promise by the national government to pay dollars; it is not an attempt to make dollars. No one supposes that these government certificates are never to be paid."
The Federal Reserve Notes issued since 1963, on the other hand, "are never to be paid." They are "money coined out of valueless material" and they can be printed without any legal or institutional restrictions.
22 In 25 years, since this was written, the dollar lost almost 55 per cent of its domestic purchasing power.
23 In 1950 the total debt, public and private, amounted to about $550 billion. By 1960 it had risen to just short of one trillion. During the 1960's the debt more than doubled reaching $2.1 trillion in 1970. By 1975, the debt was approaching $3.2 trillion. Debt represents past consumption and investments in excess of current earnings. The repayment of the debt requires a reduction in consumption, and thus the lowering of the standard of living. Only by repudiating part of the debt can the burden of repayment (and the resulting impact on the standard of living) be avoided, and the easiest way of repudiation is continued inflation. The 500 per cent increase in total indebtedness over a period of 25 years thus in itself has become an inducement to repudiation through inflation and a barrier to the restoration of a stable monetary standard.
24 The wide fluctuations in its price since 1971 has greatly impaired the usefulness of gold as an international medium of exchange. At Bretton Woods the price of gold was fixed at $35. In 1973 it averaged $97, in 1974 $159, and in 1975, despite a general steady downtrend, $162. The attempt to replace the system of stable foreign exchange rates based on gold by a system of "free floating" or "managed floating" rates resulted in fluctuations in the exchange value of the dollar in relation to other key currencies of twenty and more per cent within a year, thus making any form of long-term international financing extremely difficult.
25 The growth of Federal Reserve Bank credit and commercial bank credit (which ultimately rests on the Federal Reserve Bank credit) is shown in the following table: (in billion dollars)
End of Year
Federal Reserve Bank Credit
Commercial Bank Credit
The figures indicate clearly the explosive growth of Federal Reserve Bank and commercial bank credit beginning in the 1960's as the restraints formerly provided by the partial convertibility of the dollar were progressively removed.
26 In a similar vein, politicians and intervention-minded economists have been arguing during the depression of the 1970's that a return to prosperity can best be achieved through even larger deficit spending and the creation of even more money. The form of the argument changes over the decades, but the substance remains the same: prosperity can supposedly be achieved through paper money inflation. Yet the records of the postwar years seem to indicate that the countries with the lowest rate of inflation showed the greatest rate of economic growth and the highest level of employment. The most often cited examples are the development during the 30 years following the end of the war in Britain (which followed an inflationary policy) and in Germany (which fought inflation).
27 From 1913 to 1945 the Federal Reserve was required to maintain gold reserves (after 1933 in the form of Gold Certificates) of 40 per cent against Federal Reserve Notes and of 35 per cent against member bank deposits (which in turn regulated the amount of credit which the member banks could create). In 1945, the rate was reduced to a flat 25 per cent; in 1965 the reserves against member bank deposits were removed; and in 1967 the reserves against the Federal Reserve Notes were done away with. The Federal Reserve was thus free to create money and credit without institutional restrictions, which largely explains the more than 80 per cent increase in the money supply between 1967 and 1975.
28 Originally, the Federal Reserve could only rediscount, and make advances on basis of, so-called "eligible paper," created for "productive purposes, ' i.e. commercial paper and bank acceptances representing goods in the process of production or goods in transit. The maturity of the eligible paper was limited to 90 days, except for agricultural paper which could have a nine months maturity. The original Federal Reserve Act did not provide for the monetization of the federal debt. As part of the World War I emergency, however, the Federal Reserve was authorized to provide 90 day advances to member banks secured by direct obligations of the United States government. Instead of financing the production of goods, the Federal Reserve was thus empowered to finance the deficit spending of the federal government, and what had been an emergency measure during the first World War, gradually became the accepted practice during the 1930's and 1940's, until, by this time about 90 per cent of the Federal Reserve Bank credit is based on government paper and virtually none on "eligible paper" created for "productive purposes." The supply of money is thus no longer tied to the production of goods, but to the deficit spending of the government.
29 The following table indicates the growth of the money stock (M2) in relation to the real GNP and the resulting increase in the cost of living during the three postwar decades: (G.C.W.)
Increase in M2
Increase in Real GNP
Rise in Consumer Price Index
30 The last reserve requirements, as we pointed out, were removed in 1967.
31 During the 25 years since this was written, the dollar lost more than 55 per cent of its purchasing power.
32 Similarly, at the Jamaica conference of 1976, the participants agreed that there was no way of establishing a stable international monetary system until the major countries return to sound monetary and fiscal policy at home. This argument completely disregards the basic notion of a system of redeemable currencies and fixed international exchange rates, which, prior to the Great Depression, was assumed to bring pressure upon the respective governments to pursue non-inflationary policies at home. When inflation became the widely accepted instrument of domestic policy in virtually all countries, the restraints resulting from a redeemable currency (i.e. the threat that the country would lose its gold reserves) and stable foreign exchange rates became inconvenient and were thus progressively abolished.
Yet the public is being told that governments will do without restraints, what they refused to do while they were still partially restrained, i.e. stop the printing presses.
33 To these traditional arguments is now added a new argument which is the direct result of the inflationary policies of the past 25 years. Between 1950 and 1975 the money stock (M2) grew from $168 billion to $663 billion, and the portion of the Federal debt held abroad increased to more than $66 billion, while at the same time the American monetary gold reserves declined from more than 650 million ounces (valued at $22.8 billion on basis of $35 an ounce) to less than 275 million ounces (valued at $11.6 billion on basis of $42.22 an ounce). In view of the drastic decline in America's international liquidity since 1950 - brought about by unsound monetary and fiscal policies which the irredeemability of the dollar made possible - the opponents of a redeemable currency now argue that by this time it is obviously impossible to return to the monetary restraints of redeemability.
The argument becomes less convincing, of course, if the official gold price were raised to $125 or $150 an ounce which would correspond to the average market price which prevailed during 1974 - 1976.
34 The basic reason for the opposition to a return to a stable monetary system - in 1950 and in 1975 - is not economic in nature but political. Monetary stability impedes inflation, and inflation has come to be regarded as the politically most expedient tool of shifting wealth from the productive to the less productive - at home and internationally thus furthering greater economic equality which is the aim of our age. The arguments against convertibility and monetary stability are essentially ideological, and hence cannot be countered by economic reasoning.
35 If the price of gold were properly adjusted.
36 In 1950 public spending accounted for about 21 per cent of the GNP and there were 6 million public employees. By 1975 the share of public spending had risen to 35 per cent of the GNP, and the number of public employees had risen to well over 14 million.
37 Despite the fact that the dollar has been irredeemable for American citizens since 1933, and as far as international monetary institutions and foreign central banks are concerned since 1971, there have been only minor restrictions on the freedom of travel, trade and international financial transactions by American citizens. This is not true of course, in other countries where these freedoms have been severely curtailed, and even in the U.S. the government has tried at one time or another to impede American travel abroad and restrict foreign investments.
Nor has the growing international monetary instability seriously affected international trade. Between 1970 and 1974 world trade grew from less than $290 billion to $750 billion, or, eliminating the impact of inflation, from $288 billion to $404 billion. But the rapid growth of international trade, despite the impediment of widely fluctuating foreign exchange rates, was probably due to the explosive growth of international credit. In 1975 the volume of international trade dropped by 6 per cent, the largest drop since the second World War.
38 Since the late 1960's, the United States has actually been more opposed to stable foreign exchange rates than some of the European countries and Japan, because of the vast deficit spending and rapid growth in the supply of money and credit resulting from the welfare state experiment.
39 Since this was written in 1950, the dollar has been devalued twice; its domestic purchasing power has declined by 55 per cent; the per capita tax burden has risen from less than $470 to well over $2,200; the number of government employees, planning and regulating the lives of the people down to the minutest details, has increased from 6 million to well over 14 million; the share of public spending has risen from 21 per cent of the GNP to 35 per cent; and at the 'modest' rate of inflation of 5 per cent a year, those Americans who were frugal and saved part of their income, are robbed every year of about $150 billion of their savings, with the federal government alone in effect repudiating some $25 billion of its debts by progressively reducing the value of the dollar. As Professor Spahr wrote: "The sand is running out."
(c)1976 Committee for Monetary Research and Education
Parks, Executive Director