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Report to the Congress
of the
Commission
on the
Role of Cold
in the
Domestic
and
International
Monetary
Systems
March 1982
Volume I
THE S E C R E T A R Y O F THE
WASHINGTON
TREASURY
2 0 2 2 0
March 31, 1982
To the Congress of the United
States:
On behalf of my colleagues and myself, I submit herewith
the Report of the Commission, established pursuant to Public
Law 96-389, to conduct a study to assess and make recommendations
with regard to the policy of the U.S. Government concerning the
role of gold in the domestic and international monetary systems.
The specific findings and recommendations presented in this
report represent in each case the views of the majority of the
Commission, with an identification of minority views or recommendations where appropriate.
As should be expected in a group of
individuals with such diverse backgrounds, philosophies and responsibilities as the members of the Commission, there have been differing
opinions regarding many if not all of the issues and questions
Thus, not every member subscribes to
raised by the Commission.
each observation or conclusion contained in the report, but with
this reservation and the specification of minority views, the
report represents the product of the Commission as a whole.
In forwarding this report, we acknowledge the wide public
interest in the issues examined by the Commission and are grateful
for the cooperation the Commission received from many individuals
in testifying before us and submitting written statements of view.
The statements received by the Commission from the public, in
response to its request for testimony and written views, are
summarized in an annex to the report.
The detailed records of all
Commission proceedings, including meeting transcripts, written
testimony, staff memoranda and all papers circulated to the
Commission, are catalogued in an annex to the report and will be
available for public inspection at the Treasury Department library,
the National Archives and Records Service and the Library of
Congress.
We hope that this report on the role of gold in the domestic
and international monetary systems will be of help to the Congress
and the public in evaluating the spectrum of proposals advanced
wit!" the objective of restoring greater monetary and economic
stability in the United States, an objective we strongly support.
We regard it as an honor and a pleasure to have had the opportunity
to contribute in this capacity to the continuing effort to find
solutions to the nation's economic problems*
Respectfully,
MEMBERS OF THE COMMISSION
DONALD T. REGAN, Chairman
Secretary of the Treasury
ARTHUR J. COSTAMAGNA
Attorney at Law,
Employee Benefits
Insurance Company,
San Jose, California
J. CHARLES PARTEE
Board of Governors,
Reserve System
RONALD E. PAUL
United States House of
Representatives
HERBERT J. COYNE
President, J. Aron &
Company, New York,
New York
HENRY S. REUSS
United States House of
Representatives
CHRISTOPHER J. DODD
United States Senate
EMMETT J. RICE
Board of Governors,
Reserve System
ROGER W. JEPSEN
United States Senate
JERRY L. JORDAN
Member, Council of
Advisers
LEWIS E. LEHRMAN
President, Lehrman
New York, N.Y.
Federal
HARRISON H. SCHMITT
United States Senate
Economic
HENRY C. WALLICH
Board of Governors,
Reserve System
Federal
Corp.,
MURRAY L. WEIDENBAUM
Chairman, Council of
Advisers
PAUL W. MCCRACKEN
Edmund Ezra Day University
Professor of Business
Administration, University of
Michigan, Ann Arbor, Michigan
Economic
CHALMERS P. WYLIE
United States House of
Representatives
STEPHEN L. NEAL
United States House of
Representatives
Federal
v
ACKNOWLEDGMENT
The Members of the Commission express their sincere
appreciation to Dr. Anna J. Schwartz for her assistance
to the Commission in its examination of this important and
complex subject.
Her work in organizing the Commission's
deliberations, in providing timely and expert analyses and
in assisting the Commission in the preparation of this
report demonstrated a high degree of professionalism and
dedication, for which the Members are deeply grateful.
TABLE OF CONTENTS
Page
Volume I
INTRODUCTION AND RECOMMENDATIONS
1
Chapter 1
—
BACKGROUND TO THE ESTABLISHMENT OF
THE GOLD COMMISSION
23
Chapter 2
—
THE PAST ROLE OF GOLD IN THE U.S.
51
MONETARY
SYSTEM
111
Chapter 3
—
TYPES OF MONETARY
STANDARDS
Chapter 4
—
EXISTING
GOLD
ARRANGEMENTS
AND
PROPOSALS
FOR
CHANGE
135
Staff Appendix:
The Gold
Statistical Compendium
149
185
Market
Volume II
ANNEXES
—
Supplementary and Dissenting
ANNEX B
—
Summaries of Statements
to the Commission
Submitted
383
ANNEX C
—
Some Implications of Legal Tender
Status
523
ANNEX D
—
Continuing Audit of the United
States-Owned Gold
531
ANNEX E
—
Contents of the Commission's
Permanent Record
555
vxi
Views
1
ANNEX A
Report of the Gold
Introduction and
Commission
Recommendations
Establishment of the Commission
We, the members of the Gold Commission, were appointed by Secretary of the Treasury Donald T. Regan on June 22, 1981, pursuant to
section 10 of Public Law 96-389 (94 Stat. 1555), to "conduct a study
to assess and make recommendations with regard to the policy of the
U.S. Government concerning the role of gold in domestic and international monetary systems. 11 *
The Commission was directed to transmit
its report to the Congress no later than October 7, 1981, one year
after the date of enactment.
Due to the change in Administration and
the delay in appointment of members, it was not until July 16, 1981,
that we met for the first time. We were in general agreement that a
satisfactory report could not be prepared by the October 7 date.
Accordingly, we requested an extension of the Commission's life.
Legislation to that end was introduced to the Congress and enacted
as P.L. 97-47 on September 30, 1981.
The date for the report
of the Commission was thereby changed to March 31, .1982.
Commission
Meetings
We held 9 meetings, at two of which we heard testimony concerning
gold from 23 witnesses, representing a wide spectrum of views on the
potential roles of gold.
They commented on the use and effectiveness
of gold in past domestic and international monetary systems, and offered varying proposals for a restored role for gold, or favored the
continuation of the present system with no role for gold.
In addition
to the hearings, the Treasury Department invited written statements
on the role of gold from organizations and individuals.
Summaries
of the testimony we heard and of the statements submitted to us are
reproduced in Annex B to the Report.
^Congressman Chalmers P. Wylie — Since many observers feel the Gold
Commission became a "runaway" Commission in the Report, I would like to
call special attention to the verbatim charge of Congress in creating
the Commission.
As the transcripts will show, many, many hours were
spent debating issues which were extraneous to the Congressional
assignment for the Gold Commission.
The job assigned to the Gold Commission by Section 10(b) of Public Law 96-389 was as follows: "The Commission shall conduct a study to assess and make recommendations with
regard to the policy of the United States Government concerning the
role of gold in domestic and international monetary systems, and shall
transmit to the Congress a report containing its findings and recommendations not later than one year after the date of enactment of
this Act."
1
2
Contents of the Report
The body of our Report reflects the range of issues we discussed
during our deliberations.
Chapter 1 surveys economic developments of recent years that
were the background to the establishment of the Gold Commission.*
A
distinguishing feature of the period since the mid-1960s was rising
and persistent inflation without precedent in peacetime in the
United States.
Public attention to the activities of the Commission
reflects a desire for some institutional arrangements to ensure a
reasonable approximation of price stability in an economy whose
resources are relatively fully employed in a balanced and sustainable
way.
The chapter presents the factual record of the performance of
the economy, and reviews explanations that have been offered to
account for the lack of success of several attempts to curb inflation
in the decade and a half from 1965.**
Chapter 2 examines the historical evidence on the experience of
the United States with gold.
In 1834, though legally on a bimetallic
standard, de facto the United States adopted a gold standard.
The
chapter deals with successive changes since then in the character of
our country's monetary system.
In Chapter 3, we explore the strengths and weaknesses of alternative monetary standards, including different versions of a gold
standard, commodity standards other than gold, and the present
inconvertible paper system.
International aspects of the alternative
standards receive attention.
C o n g r e s s m a n Chalmers P. Wylie — Chapter 1 surveyed economic
developments from a monetarist perspective and did not emphasize
adequately the role of Federal budget deficits and fiscal policy in
creating the economic problems of the last fifteen years.
Since
section 3 of Public Law 96-389 specifically stated that "Congress
reaffirms its commitment that beginning with Fiscal Year 1981, the
total budget outlays of the Federal Government shall not exceed its
receipts" this ommission of references as to the role of fiscal
policy as a cause of inflation should not be overlooked.
Indeed,
the fact that the Federal Government is running a deficit of $100
billion while paying a comparable sum in interest on the total Federal
debt detracts from the credibility and utility of this Report.
•^Congressman Chalmers P. Wylie — This chapter does not mention
that the total Federal debt increased from $317 billion at the end
of 1964 to $1,004 billion at the end of 1981.
It also does not
mention that the net interest paid by the United States Treasury on
the total Federal debt in 1982 may well exceed 30 percent of the
total Federal debt for 1964.
In short, Chapter 1 does not present
the factual record of budget deficits and thus does not adequately
explain the performance of the economy during the last fifteen to
twenty years.
3
In Chapter 4, we review the current role of gold and consider
possible changes.
In relation to domestic monetary arrangements,
the changes would affect the conduct of Treasury or Federal Reserve
operations or both.
Such changes, if adopted, would also affect
private sector conduct.
In relation to the international monetary
system, the changes would affect foreign exchange rate arrangements,
the settlement of the balance of payments, and the International
Monetary Fund.
For each possible change in the current role of gold, we discuss
the main elements of the change, transitional problems, if any, potential legal and international implications, and assess the advantages
or disadvantages it presents.
Chapter 4 also brings together material on the historical market
for gold that was dominated by central banks until 1968, changes in
the location and operation of gold markets since then, the allocation
of the stock of gold between monetary and nonmonetary uses, determinants of the demand for and supply of gold, and approaches to the
determination of the equilibrium price of gold.
In addition, the
chapter provides a retrospective view on the record of gold production
over past centuries and its relation to trend movements in commodity
prices.
A statistical compendium gives time series of world and
U.S. production and stocks of gold, world and U.S. industrial use of
gold, and the nominal and real price of gold.
Aims of the Gold
Commission
Part of our mandate is to assess the role of gold in the domestic
and international monetary systems.
Assessments differ among members
of the Commission not only with respect to the costs and benefits in
the past when our monetary system was linked to gold but also with
respect to the prospective costs and benefits, were such a link
restored.
Given the size of the Commission that the Congress specified, and the diversity of our views, that result may not be surprising.
We decided that the best service we could render the country
would be to set forth in an objective way the complex issues involved
and give a fair hearing to different points of view.
Another part of our mandate is to make recommendations.
Though
it became apparent to us during our deliberations that we would not
be able to achieve a unanimous set of recommendations, on some issues,
it was possible to form majorities.
Even so, a majority vote in
favor of a specific recommendation did not signify that all so voting
had the same purposes and/or interpretations in mind.
Moreover, if
each of us had been reporting singly instead of as one of a body of
colleagues, individual members would not necessarily have expressed
themselves in precisely the way the recommendations are stated.
Differences in wording, emphasis and perceptions would have been
evident.
In some instances our recommendations touch on technical
matters, such as legal and tax considerations, that need to be studied
more exhaustively than it has been possible for us to do.
Such
technical questions should be given attention in any Congressional
hearings in connection with our recommendations.
4
Recommendations and Dissenting
Views
We report our recommendations on the following
1.
2.
3.
4.
The program of
Treasury issue
Treasury issue
The gold stock
a.
b.
c.
d.
e.
5.
6.
subjects:
Treasury medallion sales
of gold bullion coins
of gold-backed notes or bonds
owned by the United States
The public accounting for the gold stock
The relationship between gold certificates held as an asset of
the Federal Reserve System and the gold held by the Treasury
The appropriate size of the gold stock
The price at which to value the gold stock
Managing the gold stock
Domestic monetary policy arrangements*
International monetary policy arrangements*
With respect to most of these subjects, we first present the range of
views expressed in our deliberations, followed by the Commission's
recommendation.
Dissenting views are given in footnotes.
1.
The program of Treasury medallion
sales
In July 1980, the Treasury began the sale of half-ounce and oneounce gold medallions in accordance with the American Arts Gold
Medallion Act of November 10, 1978 (P.L. 95-630).
The legislation
provided that not less than 1 million ounces of gold be struck into
medallions each year for a five-year period and sold to the public
at a price covering the market value of their gold content plus all
costs.
A different American artist is commemorated on each of the
two sizes of medallions.
In 1980, Grant Wood was honored on the
one-ounce and Marian Anderson on the one-half ounce medallion.
In
1981, Mark Twain was honored on the one-ounce and Willa Cather on
the one-half ounce medallion.
Under the 1980 program covering the
period July 15, 1980, through February 28, 1981, less than 300 thousand
medallions of each size were sold, containing 434 thousand gold
ounces.
Under the 1981 program, from July 15, 1981, through March 5,
1982, about 60 thousand medallions of each size were sold, amounting
to 95 thousand gold ounces.
The price of the medallions varies daily with the market price of
their gold content, based on the settlement price at the end of the
previous day for spot gold traded on the Commodity Exchange of New York,
plus a surcharge in 1980 of $12 and in 1981 of $14 per ounce to cover
C o n g r e s s m a n Chalmers P. Wylie — Omission of the phrase "the role of
gold in" before "monetary policy arrangements" in items 5 and 6 clearly
was technically appropriate considering the material included in that
section but inappropriate given the charge to the Commission by the
Congress as to what should have been discussed.
Governor J. Charles Partee —
I wish to be associated with this view.
5
the cost of production and marketing.
The surcharge averaged
three percent of the underlying gold price.
under
The Bureau of the Mint sells the medallions directly to purchasers through mail orders placed at U.S. post offices.
Delivery
is made within six weeks.
The Treasury Department is planning a simpler and wider distribution of the medallion* to be introduced this year through a
network of dealers.
Although details are not yet finally decided,
the expectation is that sales to dealers will be made on the basis
of the daily New York gold price, plus a three percent markup to
cover costs including publicity by the Mint.
The dealers would add
a comparable fee in selling to the public and develop a secondary
market for the medallions.
Recommendation.
The Gold Commission supports the improvement of the
program of medallion sales along the general lines that the Treasury
plans.*
2.
Treasury issue of gold bullion
coins
In addition to gold medallions we discussed proposals for a
Treasury issue of gold bullion coins of specified weights to be offered
to the public at a price near market value.
Among those who support the proposal, two conceptions of the
character of the demand for such coins are evident.
Some of us expect
the demand for such coins to be an investment demand, similar to the
demand for Krugerrands, Maple Leafs, Mexican pesos, and other foreign
coins that have found a market in this country.
Others expect the
demand for such coins to be (or have the potential to be) a demand for
their use as money.
Their value would change from day to day as the
value of the gold content of the coin fluctuated in the free gold
market.
Some advocates of this proposal see such coins as facilitating
development of a dual monetary system, which would impose an additional degree of discipline on discretionary operation of monetary
policy.**
^Governor J. Charles Partee — The procedures by which gold medallions
are marketed can be substantially improved as an interim measure, but
the program should be discontinued when and if the Commission's gold
coin recommendation is implemented.
Mr. Arthur J. Costamagna —
I voted for this recommendation on the
understanding that the new program would not increase fees charged
to the consumer.
*^Congressman Henry S. Reuss —
I disagree.
A dual monetary
would impose chaos, not discipline, on monetary policy.
Governor Henry C. Wallich wishes to be associated
P a r t e e f s and Congressman Reuss 1 views above.
with
system
Governor
6
However, those opposing the proposal believe that ample supplies
of gold in forms other than Treasury coins are available to satisfy
the demand for gold in the private sector.*
So that the new issues may compete with foreign coins, some
proponents advise that the former be designated legal tender and as
coin of the realm bearing the great seal of the United States and the
motto "In God We Trust."
In addition, they advise that changes in
the dollar value of these coins should be exempt from capital gains
taxation.
A Treasury issue of gold bullion coins involves technical
matters, on some of which the Commission has adopted recommendations.
Congress should explore the following considerations more thoroughly
than was possible in our deliberations.
(a) Consideration of a quantity limit on the issue of the coins.
This reflects concern that the demand for the coins might exhaust
the Treasury gold stock.
One approach would be to specify a quantity
limit in any legislation to permit coinage.
An alternative means of
limiting the demand would be to set a seignorage fee well in excess of
costs of minting.**
Some who believe the demand for coins would be
a demand for money oppose a limit.
They would view large scale demand
as an indication of public dissatisfaction with the management of the
(dollar) money supply and as leading to de facto establishment of a
gold coin standard.***
According to this view, establishment of an
arbitrary quantity limit or a high seignorage fee would interfere with
this expression of public preferences.
A few others of both persuasions
^Congressmen Henry S. Reuss and Chalmers P. Wylie — We find this
sentence to be an inadequate summary of our views in opposing the
gold bullion coin and refer the reader to our dissenting views for
an authoritative statement of the harm for the economy if this proposal
were to be enacted.
**Congressman Chalmers P. Wylie — A little known fact about gold
bullion coins and other gold coins is that the gold alloys used in
coinage are several times harder than silver, nickel, and copper
alloys.
The consequence of this is that entirely different machinery
has to be used for making gold coins than regular coins.
This waste
and cost should be avoided.
***Congressman Chalmers P. Wylie —
Inadequate demand for the gold
medallions produced by the Treasury for the Arts Medallion program
has left the Treasury with many millions of dollars of unsold medallions.
Concern about waste in government forces me to caution readers
about the fiscal perils of forcing the Mint to turn our official
gold bullion into gold bullion coins when there isn't any evidence
of enough demand to absorb the official medallions we have been
producing for the public for several years.
At least, the gold
medallion program should be discontinued, if we are to start producing
gold bullion coins in accordance with Commission's recommendation.
Governor Henry C. Wallich wishes to be associated with
Wylie's view.
Congressman
7
favor Treasury purchases of gold to replace gold it has coined.*
Those who believe the demand for coins would be an investment demand
assume that it would not be quantitatively significant, and on this
ground would neither oppose nor support a legislated limit.
(b) Enabling legislation to mint coins.
Section 5 of the Gold
Reserve Act of 1934 (31 U.S.C. sec. 315b) prohibits the minting of
United States gold coin.
(c) The implications of legal tender status for newly minted coins.
Treasury Counsel prepared for us a statement on this matter related
to U.S. currency (see Annex C).
Legal tender status essentially
requires that, in any contract that does not otherwise specify the
means of payment, a debt can be discharged by the tendering of any
form of U.S. legal tender, and the creditor must accept that form of
payment in full discharge of the debt.
However, whenever a contract
specifies a specific means of payment, such as gold, and the debtor
breaches that provision and is taken to court by the creditor, the
court, as in most cases of contractual breach, normally awards
damages rather than specific performance of the contract provision.
For some who regard the demand for coins to be an investment
demand, legal tender status is an adornment for coins, but nevertheless a sine qua non for generating public acceptance of them.**
For some who regard the demand as a demand (or a potential
demand) for money, the implications of legal tender status require
Legal tender status for gold coins could
further consideration.***
compel their acceptance by private creditors for debts or by the
*Mr. Herbert J. Coyne — While I do not believe using one to two
million ounces of our gold stock for a gold coin program would make
excessive inroads into these stocks, any open-ended production of
coins could in effect amount to unlimited Treasury gold auctions.
Clearly most Commission members do not desire this.
Thus, I believe
the Treasury should purchase gold in the open market to replace any
larger amount of gold used in minting a U.S. gold coin or to refrain
from minting any larger quantities.
* C o n g r e s s m a n Chalmers P. Wylie —
can be a sine qua non.
I do not believe an adornment
***Congressman Chalmers P. Wylie — This will be our first coin
without legal tender status.
It should have legal tender status or
not be called a coin.
I had the Congressional Research Service summarize the laws of
Canada and South Africa pertaining to the legal tender status
domestically of their own gold coins which are useable in commerce
in their country of origin.
Their experience should be considered
in evaluating questions pertaining to legal tender status for the
gold bullion coins.
The summaries by CRS can be found in an appendix
to the "Dissenting Views of Congressmen Henry S. Reuss and Chalmers
P. Wylie."
8
Treasury in satisfaction of taxes.
Formidable problems, involving
potential profits and losses to private creditors and debtors, could
arise in assigning gold coins legal tender status at a fluctuating
market value.
(d) The implications of capital gains exemption for changes in the
dollar value of coins (a background paper on capital gains taxes
prepared by the Treasury is part of the permanent record of the Gold
Commission).
Advocating such exemption for coins but not for gold
bullion holdings or, for that matter, not for productive investments
overlooks the inducement the exemption would provide to shift from
such other assets to coins.
Those who support the exemption, however,
regard it as essential to the use of the coins as money.
Legislation
to prohibit local government imposition of sales taxes would involve
similar considerations.
It would clearly also deprive the states of
a source of revenue.*
(e)
Issues by private mints.
The majority of us oppose private
minting of official United States coins.
We regard the production
of "official" coins of a country as a governmental function.
The
government in effect guarantees the weight and fineness of the
"official" coins issued.
Private firms are perfectly free to mint
gold pieces of any shape and size, so long as they do not purport
to be United States coins with a U.S. Government guarantee of weight
Permission for private firms to mint U.S. coins would
and fineness.
open possibilities for fraud and could involve the Treasury in a
new and costly regulatory and monitoring function.
Problems would
be compounded if the Treasury had a convertibility obligation or an
obligation to accept the coins in payment of taxes.
(f) Convertibility at Treasury of gold bullion coins.
Of those
favoring issue of coins, about half support assumption by the Treasury
of an obligation to stand ready to purchase coin offered to it at the
market price ** on the day of redemption, the conversion producing
potential profits (or losses) for the Treasury.
C o n g r e s s m a n Henry S. Reuss — An October 5, 1981, bill, S.1704,
cosponsored by Senator Helms, provides for the minting of gold coins
exempt from U.S. and state capital gains taxes —
exactly as in the
Gold Commission's recommendation below, which is supported by all
of the Reagan Administration's Gold Commission members.
Senator
Helms' National Congressional Club expended $4.5 million on the 1980
Reagan campaign (see Congressional Quarterly, March 6, 1982, pp.
499-505).
**Congressman Chalmers P. Wylie —
"Market price" is determined in
unique ways for gold which should be studied carefully before obligating the Treasury to convertibility with its potential for losses to
the Treasury.
Congressman Henry S. Reuss —
In other words, about one-third of the
Commission supports this dangerous proposal which could provide
exhorbitant trading profits to those foreign interests who fix the
gold price.
9
Recommendation.
We favor Treasury issue of gold bullion coins of
specified weights, and without dollar denomination or legal tender
status, to be manufactured from its existing stock of gold and to
be sold at a small mark-up over the market value of the gold content,
and recommend that the Congress implement this proposal.
Furthermore,
we recommend that the coins shall be exempt from capital gains taxes
and that the coins shall be exempt from sales taxes.*
C o n g r e s s m e n Henry S. Reuss and Chalmers P. Wylie — We object strongly
to this recommendation and call the reader's attention to a statement
of objection to the recommendation signed by 30 members (two-thirds) of
the House Committee on Banking, Finance and Urban Affairs.
The recommendation ignores national problems of diminishing incentives for
productive investment in plant and equipment, of confusion over what
is and is not money, and of depriving states of the revenue needed
to cover obligations enhanced by Federal cutbacks.
I would not object to a gold coin issued
Governor Henry C. Wallich —
with a mark-up at least equal to that applying to coins like the Maple
Leaf and the Krugerrand, issued in limited quantities, and subject to
capital gains tax.
In the absence of these specifications, a gold coin
could lead to excessive depletion of the Treasury gold stock and harmful diversion of resources to unproductive investment.
I also oppose
convertibility of the coin at the Treasury.
Governor Emmett J. Rice wishes to be associated with Mr. W a l l i c h 1 s
view. With respect to convertibility, no support for convertibility
at Treasury of gold bullion coins was ever explicitly voted for the
record.
An amendment by Congressman Reuss to include specific mention
in the recommendation on the issue of gold coins that such coins
should not be convertible into dollars on demand at the Treasury was
voted down, but one cannot necessarily infer from this that those
who rejected the Reuss amendment supported the assumption by the
Treasury of an obligation to stand ready to purchase coin offered to
it at the market price on the day of redemption.
Governor J. Charles Partee —
I seriously doubt that the proposed gold
coin should be exempted from capital gains taxes.
Careful and detailed study is needed, not only of the equity considerations involved
in such singular treatment, but also of the possibilities for unwanted
speculative maneuvers involving the new coin in conjunction with other
forms of gold and precious metals holdings.
Such uses could in fact
destroy the coin's value as a monetary indicator.
Congressman Henry S. Reuss — This tax exemption proposal was adopted
at the February 12 Gold Commission meeting, 8-6. Jerry Jordan, who
cast in person and by proxy the decisive votes in favor, has since
testified that he was merely recommending that Congress "consider"
the tax exemption question.
(See transcripts, Joint Economic
Committee, February 18; Gold Commission, March 8.)
Mr. Arthur J. Costamagna —
Since a majority (9 to 6) rejected the
idea that "such a coin should not be convertible into dollars on
demand at the Treasury," by implication, I believe, a majority favored
convertibility or redeemability of the gold coins at the Treasury.
10
3.
Treasury
issue of gold-backed
notes or bonds
Several witnesses at the hearings we conducted suggested that
Treasury issue of gold-backed notes or bonds would be a means of
introducing gold into our monetary system.
A limited issue, for
example, of five-year Treasury notes with interest and principal
payable in grams or ounces of gold, would provide deferred claims
on gold.
Initially, according to the advocates, the yield spreads
between gold and inconvertible dollar obligations of the same
maturities might be wide.
Success in restoring long-term confidence
in monetary discipline would eventually narrow the yield spreads.
At that time, full gold convertibility of all dollar obligations
might be contemplated.
These witnesses emphasized the savings on
interest payments by the Treasury, assuming the price of gold remained
stable or rose only moderately, and hence a positive effect on Federal
budget deficits.
In our deliberations, it was noted by opponents of gold-backed
Treasury securities that a gold-backed Treasury note or bond, if
convertible at maturity at the market price of gold at the date of
issue, would in effect be a warehouse certificate for gold.
Such an
instrument would provide the owner the same chance of gain or loss as
owning gold, without his incurring the cost of storage and insurance.
A Treasury
No obvious guideline exists for pricing the instrument.
issue of gold-backed notes or bonds, paying even a low rate of interest, would permit speculation on gold with a sweetener of a coupon.
Such issues would be comparable to a bond convertible into the common
stock of a corporation that has a low coupon because of the possibility of speculative gain.
Purchase of Treasury gold-backed issues
would indicate an expectation that the price of gold would rise.
The Treasury would then be betting against the market, with no
assurance of gain and a major risk of Treasury losses.
From a debt
management viewpoint, no need exists for gold-backed Treasury issues.
Recommendation.
bonds.
4.
We oppose the issue of Treasury gold-backed
The gold stock owned by the United States
notes or
Government
As of the end of February 1982, the Treasury Department reported
that it held 264 million troy ounces of gold.
The bulk of the gold is
*Continuation
from previous
page.
Mr. Herbert J. Coyne — The majority recommendation was made under
the misimpression that making the U.S. gold coin legal tender would
have made it money of the realm and usable in the payment of debts.
The purpose of designating a U.S. coin "legal tender" is to allow it
to compete equally with the foreign coins that are currently supplying
the U.S. market.
Popular foreign coins are designated legal tender
and therefore a U.S.
coin must be similarly designated in order to
be successful.
I recommend that the U.S. Congress consider this
market fact when designing the U.S. gold coin.
11
stored in mint depositories:
Fort Knox, Kentucky, and West Point,
New York; U.S. Assay Offices in New York and San Francisco; and the
Denver and Philadelphia Mints.
In addition, the Federal Reserve Bank
of New York is the custodian of a part of the gold stock.
a.
The public accounting
for the gold
stock
Citizens have written to us expressing concern about alleged
unauthorized large withdrawals from gold depositories.
They fear
that the actual amounts held by the Government are less than are
reported officially.
Stories in the press also have referred to
missing gold.
Public and Congressional inquiries relating to the accuracy of
the accounting records and security of the gold stock were directed to
the General Accounting Office (GAO) in the early 1970s.
In response,
the GAO conducted a partial audit of the gold stored at Fort Knox in
September and October 1974.
In its report on the audit, the GAO
recommended cyclical audits of the gold in the custody of the Bureau
of the Mint.
During fiscal 1975, at the direction of the Secretary of the
Treasury, the Fiscal Assistant Secretary of the Treasury established
the Committee for Continuing Audits of United States Government-owned
Gold stored at various depositories, with the responsibility to conduct audits at appropriate intervals.
The Committee consists of one
representative each from the Bureau of the Mint, the Bureau of Government Financial Operations, and the Federal Reserve Bank of New York,
with GAO representatives invited to observe the audits.
As of
February 1982, 80.5 percent of the U.S. Government-owned gold had
been audited and verified.
The continuing audit program is planned
to provide a complete audit of all U.S. Government-owned gold by the
end of the 10-year cycle in 1984.
The Treasury has provided us with a detailed statement of the
results of the continuing audit (see Annex D). With one or two
exceptions, we are satisfied with the Treasury's continuing audit,
find it thorough, and believe it should allay any public concern
with regard to the accuracy of the inventory, the related accounting
records, and the internal controls governing the depositories.
One
of us, however, expressed a preference for a speedier completion of
the audit.
One member is not satisfied with an audit that spans ten years
and contends that 31 U.S.C* 354 appears to require annual audits of
the gold inventory.
He disputes the Treasury's view that a 100 percent audit in a single year is not feasible, since on its own estimate
of manpower requirements, 26 men could do it. The Treasury has provided us with an opinion that 31 U.S.C.. 354 requires not annual
audits but annual settlements of account, which are being performed
regularly in compliance with this provision.
Recommendation.
We are satisfied that the Treasury is meeting the
requirements of 31 U.S.C. 354 regarding annual settlements of account
12
and that the Treasury's continuing audit of the Government-owned gold
stock provides an adequate basis for full verification of the accuracy
of inventory records.*
b. The relationship between gold certificates held as an asset of
the Federal Reserve System and the gold held by the Treasury
Some citizens have expressed the view that for the Treasury to
claim ownership of the gold stock and the Federal Reserve System to
show gold certificates as assets appears to be double-counting of the
same asset.
The gold is the property of the U.S. Government.
The
do not represent Federal Reserve ownership of the gold.
certificates
Gold certificates, which are valued at $42.22 per ounce of gold,
and are a liability of the Treasury, are issued to the Federal Reserve
by the Treasury against its gold holdings.
The certificates represent
a Federal Reserve claim on the assets of the Treasury, for which the
Treasury has received a counterpart deposit in its account with the
Federal Reserve.
All gold held by the Treasury has been monetized in this fashion.
New gold certificate credits may be issued only if additional gold
is acquired by the Treasury or the statutory price at which gold
certificates may be issued is increased.
Similarly, gold certificates
must be retired by the Treasury upon the sale of gold, with a corresponding decline in the Treasury's deposit balance.
Recommendation.
We believe that the Treasury and Federal Reserve are
following appropriate procedures in reporting Federal Reserve claims
on the Treasury represented by gold certificates and payable in
dollars.
c.
The appropriate size of the gold
stock
At year-end 1949, the U.S. gold stock was a little over 700
million fine troy ounces.
At year-end 1967, the stock was about 50
345 million ounces.
As already noted, it is now
percent smaller —
264 million ounces.
One question we discussed was the appropriate size of the gold
stock — a non-interest bearing asset of the Treasury.
All of us
agree that a zero stock is not the appropriate size and therefore
oppose auction sales which are intended to dispose of Treasury
holdings over some stated period of years.
A minority prefers that the Treasury maintain the stock at its
present level as an important strategic and monetary resource.
This
•Congressman Ronald E. Paul — The Treasury should assign adequate
manpower to complete a 100 percent audit of the gold stock every
13
view is consistent with the belief that an increase in the monetary
role of gold is not now timely but the stock should be held as a
reserve for possible future use, should a restored role for gold
then appear feasible, or against other contingencies.
In support
of this view, it was suggested to us that should an international
monetary conference of free world nations be convened to recommend
changes in the international monetary system, it would be useful
for the United States to hold a substantial gold stock to influence
possible future deliberations and to be in a strong position if gold's
role were reestablished.
A variant of that view, held by the majority of us, is that some
depletion of the gold stock, for example, for the issue of medallions
or the recommended program of coinage, is acceptable but to a limited
extent only.
Recommendation.
We recommend that, while no precise level for the
gold stock is necessarily "right," the Treasury retain the right to
conduct sales of gold at its discretion, provided adequate levels are
maintained for contingencies.*
d.
The price at which to value the gold
stock
The Treasury currently values the gold stock it holds at $42.22
per ounce.
Since the free market in gold was established in 1968,
It has
the price has fluctuated between $35 and $850 per ounce.
recently been priced at under $350 per ounce.
One argument for revaluing the gold stock at a price closer to
the market price is that it would enable the Treasury to raise
revenues by sale of part of its gold.
The revenue could be used to
retire debt, thus saving interest payments on outstanding Treasury
securities, or to finance the current Federal budget deficit.
All
these objectives are attainable simply by selling gold at the market
price, and so there is no cogency to this argument for revaluing the
gold stock.
The same comment applies-to the suggestion that an
advantage of an international agreement to value gold at the market
price is that it might be a step toward gold becoming an accepted
*Mr. Herbert J. Coyne — I favor the recommendation that was
initially voted for by a larger majority of Commission members than
the one that was passed.
I believe this first recommendation more
closely represents the sentiments of the Commission:
"We are opposed
to auction sales of gold stock held by Treasury and recommend that
under circumstances such as those that presently exist, the stock be
maintained at its present size."
Governor Henry C. Wallich — While I would not rule out
the gold stock when a particular situation may urgently
as a general rule the Treasury should avoid sale of the
Under circumstances such as those that presently exist,
should be maintained at its present size.
the sale of
require it,
gold stock.
the gold stock
Mr. Arthur J. Costamagna — The Treasury should retain the right to
conduct purchases and sales of gold at its discretion.
14
international medium for payment of balance of payments disequilibria,
and that it could also be used for intervention purposes in foreign
exchange markets to influence the exchange rate of the dollar.
Another argument is that it is unrealistic to value the gold
stock at an outdated fixed price.
Doing so distorts the true
significance and cost of the U.S. gold asset position.
We regard the choice of a price at which to revalue gold reserve
assets as independent of a decision on the price at which to restore
One proposal was made during our deliberations for
a gold standard.
a gradual increase in the statutory price of gold to a price closer
to the market price.
The proposal was incidental to a plan to require
gold certificate reserves be kept behind Federal Reserve notes.
No
other proposal with respect to the determination of a price at which
to revalue gold reserve assets was brought to our attention.
Recommendation.
The Commission recommends that the Treasury and the
Federal Reserve conduct studies of issues that would be involved in
a move towards valuing gold realistically, at something more closely
approximating market prices.
The change should be subject to the
legislative constraint that the proceeds of this new valuation not
be monetized by the Treasury or in any way used to enhance the government's spending power.
The studies should develop a formula and
timetable for valuing U.S. gold stocks in a manner realistically
related to gold market value.*
e.
Managing
the gold
stock
One general proposition that we examined is the desirability
of finding constructive uses of the gold stock rather than keeping
it immobile, as is currently the case.
Specific suggestions we considered included:
(1) The United States should offer swaps, leases and make other
commercial arrangements with respect to its gold stock in order to
generate a modest revenue flow.
(2)
If revalued, gold should be used for intervention purposes in
foreign exchange markets and for the settlement of the balance of
payments (see subject 4d. above).
^Governor Henry C. Wallich — Any revaluation of the gold stock carries
with it the danger of an inflationary use, directly or indirectly, of
the resulting gold profit.
Repayment, from this source, of part of
the Federal debt poses the same temptations as would a more direct use
of the profit for government expenditure.
Revaluation close to the
present market price further raises the question of what should be
done if the market price should fall below the official price.
Governor J. Charles Partee — Any such study must give important
weight to the need for retaining ample central bank flexibility in
meeting the "lender of last resort" function while at the same time
avoiding unwanted overall monetary expansion.
This requires the
maintenance of an adequate stock of portfolio assets that could be
sold as any such loans are booked.
15
(3) The Federal Reserve System should engage in open market
tions using gold as well as government securities.
opera-
In our discussion of the general proposition, it was noted
the proposed uses were not easy to assess and the advantage of
turning to unconventional uses of gold was not obvious.
that
Moreover, if any of the suggested uses of gold yielded a profit,
use of the profit to retire public debt or to spend it for budgetary
purposes might encourage fiscal imprudence.
Recommendation. We do not favor unconventional uses of the gold stock,
since the objectives sought by adding gold to the policy instruments of
the monetary and fiscal authorities are attainable without such use and
the side effects of so using gold may be undesirable.
We do favor continued study of the role of gold in the monetary system and recommend
that Congress hold hearings on the subject.*
5.
Domestic monetary policy
arrangements
Currently, transactions in gold are not used in the implementation
of monetary policy by the Federal Reserve System.
Gold certificates
are carried as an asset of the Federal Reserve and therefore comprise
one element in the sources of the monetary base.
However, the Federal
Reserve does not use its holdings of these certificates as a device for
changing the base.
We considered a number of alternatives that would serve to reintroduce gold into our domestic monetary policy arrangements.
The
*Mr. Herbert J. Coyne -- The Federal Reserve and the Treasury should
conduct studies to consider different ways in which gold can be used
as a helpful policy instrument.
It seems implausible to keep our vast
stocks of gold completely idle, if worthwhile uses can be developed
which do not entail depleting those stocks.
Governor Henry C. Wallich —
I do not favor unconventional uses of the
gold stock and would regard continued study and Congressional hearings
on the role of gold in the monetary system as an unproductive use of
government resources and a potential source of market unsettlement.
Governor Emmett J. Rice —
I believe that little would be gained from
further study of the role of gold in the monetary system.
The Commission has examined a variety of possible roles for gold in the monetary
system.
The Commission's recommendations state that it sees no merit
in issuing gold-backed bonds, does not favor unconventional uses of
the gold stock, does not regard restoring a gold standard as a fruitful way to deal with inflation, and does not favor change in the
usage of gold in exchange rate arrangements.
It would appear inconsistent to reach these conclusions and then call for further study
of presumably these same "roles."
Congressman Henry S. Reuss —
I agree with Governors Rice and Wallich.
16
objective would be to improve monetary control through the discipline
of gold for the purpose of reducing inflation.
Linking changes in
the growth rate of money or of some component of money, such as
Federal Reserve notes, or of bank reserves, to the change in the gold
stock is one approach which was considered for imposing the discipline
of gold.
One way to reintroduce gold would be to require the Federal
Reserve System to maintain a minimum ratio between the U.S. Government's gold stock and the Federal Reserve monetary base (i.e., Federal
Reserve notes plus bank reserves) or some monetary aggregate.
A
variant would fix upper and lower limits to the ratio, so that the
System would be required to take expansionary actions when the ratio
was at its upper limit, or contractionary actions when the ratio
The gold cover requirement might be valued
was at its lower limit.
at the price of $42.22, or adjusted gradually, or allowed to fluctuate
with market prices.
Along traditional gold-standard lines, the United States could
define the dollar as a specified weight of gold (that is, fix the
price of gold), set gold cover requirements for the Federal Reserve
System, and allow the value of the gold stock to be determined by
domestic and international gold flows.
If the value of the gold
stock rose through an inflow of gold, the Federal Reserve would be
required to undertake actions to expand the money stock.
If the
value of the gold stock declined, it would be required to take
contractionary actions.
Most members of the Commission believe that a return to the
gold standard is not desirable.
Even if that were not our view, for
most of us there are two major problems in contemplating the feasibility of a return to a domestic gold standard.
One is the absence
of a sound guide on how to determine the fixed dollar price of gold
at which resumption of a gold cover requirement could be introduced.
The other one is the absence of a sound guide on the extent of feasible convertibility of domestic dollar obligations.
Since the decade of the 1970s, not only in the United States
but also in other industrialized nations, monetary authorities have
experimented with self-imposed rules of conduct of monetary policy,
sometimes expressed as target rates of growth of money.
Long-term
monetary discipline, not linked to gold, has been the objective.
A
variant of this approach would impose such discipline by legislative
prescription, that is, a monetary rule.
Although some objection was expressed to consideration of
domestic monetary arrangements not linked to gold as overstepping
the Gold Commission's mandate, in fact we discussed all the foregoing
alternatives.*
In addition, we considered continuation of our present
•Governor Henry C. Wallich — No data or studies were presented,
however, for this part of our discussion, nor did the discussion cover
such aspects as the definition of the money to be targeted, the
17
domestic monetary arrangements, under which the Federal Reserve
exercises full discretion with respect to monetary actions and chooses
the ranges of growth in a variety of monetary aggregates, which it
believes appropriate to the economy's needs and proposes to seek,
reporting to several Congressional committees both its plans and their
results.
Recommendation.
The Commission recommends that the Congress and the
Federal Reserve study the merits of establishing a rule specifying
that the growth of the nation's money supply be maintained at a
steady rate which insures long-run price stability.
In addition,
the Commission concludes that, under present circumstances, restoring
a gold standard does not appear to be a fruitful method for dealing
with the continuing problem of inflation.
The Congress and the
Federal Reserve should study ways to improve the conduct of monetary
policy, including such alternatives as adopting a monetary rule.*
techniques by which such targeting would be conducted, nor the effects
of stable money growth on prices, incomes, and employment.
Governors Partee and Rice wish to be associated with Governor Wallich's
comment.
^Governor Henry C. Wallich — The Commission's mandate was to assess
"the role of gold in domestic and international monetary systems."
The only part of the recommendation that focuses on gold, and with
which I agreef is the conclusion that restoring the gold standard
does not appear to be a fruitful method of dealing with the continuing
problem of inflation.
The remainder of the recommendation deals
with aspects of economic policy that are outside the Commission's
terms of reference, and I, therefore, oppose this recommendation.
Governors Partee and Rice and Congressman Wylie wish to be associated
with Governor Wallich's view.
Congressman Wylie raised a point of
order against the first and third sentences as being not germane.
Congressman Henry S. Reuss — Since the Gold Commission's jurisdiction (P.L. 96-389) is concerned only with "the role of gold,"
the first and third sentences in this recommendation, commenting
about a monetary rule, are outside the Commission's jurisdiction.
In addition, the first and third sentences are redundant.
Governor Emrnett J. Rice — Besides being outside the mandate of the
Commission, this recommendation does not recognize that the Federal
Reserve already specifies ranges for the annual growth of money and
bank credit aggregates with a long-term objective of promoting sustainable economic growth in a noninflationary environment.
Adoption of
and adherence to a rigid rule of a predetermined percentage rate of
monetary growth to be achieved (if at all possible) regardless of
developments in the economy would likely lead, in my judgement, to
price and output instability.
18
*(Continued)
Congressman Stephen L. Neal —
I offered
the following
resolution:
"Whereas the majority of those who supported the creation of
the Gold Commission did so with the hope of finding a method for
better insuring consistent and persistent price stability** and;
"Whereas the inflationary process
excessive growth in money*** and;
is ultimately related
to
"Whereas it is clear that inflation cannot persist over the
run in the absence of excessive monetary growth then;
long
"The Commission recommends that the Congress by legislation
establish a rule specifying that the growth of the nation's money
supply be maintained at a steady rate which insures long-run price
stability."****
The members were evenly split on the vote for the
resolution.
**Congressman Chalmers P. Wylie — The preamble to the resolution is not a correct statement.
The reader is referred to the
Congressional Record of September 18, 1980, pages H9136-7 for the
entirety of the House debate establishing the Gold Commission.
Neither the concept of inflation nor the phrase "price stability"
were mentioned in connection with the establishment of the Gold
Commission.
***Congressman Chalmers P. Wylie —
I would like the record to
show that I feel that our inflation problems since about 1965 are
ultimately related to excessive Federal spending and to persistent
deficits in the Federal budgets, rather than "excessive growth in
money," as the resolution states.
****Governor Henry C. Wallich —
I am opposed to this resolution
because it is outside the mandate of the Commission.
The Commission,
moreover, did not have before it facts or analyses upon which to
base a recommendation, nor did it discuss the merits of a rule for
monetary policy.
My effort to introduce material to document the
instability of the velocity of circulation of money and, therefore,
the unworkability of a rule, did not lead to discussion of this
evidence.
Establishment of a fixed rule for monetary policy would
invite the danger of destabilizing output, employment, prices, and
the international value of the dollar.
Congressman Stephen L. Neal — The merits of a monetary rule
regulating the growth of the money supply have already been extensively studied and debated.
Moderate and steady growth of the money
supply is necessary, over the long run, for price stability, low
interest rates, robust productivity, and full employment.
The monetary history of the past decade suggests the need for a legislated
rule to enforce monetary restraint.
We need to enact such a rule,
not endlessly debate its merits.
Accordingly, 'i proposed the resolution quoted above, on which the Commission is evenly split. While I
support the recommendation finally adopted by the Commission, I
19
6.
International monetary policy
arrangements
We discussed a number of aspects of international
arrangements during our deliberations.
monetary
Under present conditions, the exchange rate of the dollar is
determined in foreign exchange markets by the demand for and supply
of doll ars and also by the demand for and the supply of other
currencies.
The foreign exchange value of the dollar floats, changing from day to day as market influences (or government interventions)
determine.
Adopting a gold standard with a fixed price of gold in terms of
dollars would fix exchange rates between the dollar and the currencies
of those of the United States 1 trading partners that also fixed the
price of gold in terms of their currencies.
Those who support a
system of fixed parities argue that it facilitates international
trade and finance and, along with convertibility of the U.S. dollar
to gold, would promote the goal of internal price stability.
Under present conditions, deficits or surpluses may be observed
in our balance of payments, and the deficits or surpluses are settled
in dollars automatically.
Even though dollars are not convertible
into gold at a fixed price, they are convertible into U.S. goods and
services including gold at market prices.
Other countries and their
residents continue to use dollars as an intervention currency in
foreign exchange markets, in payments and receipts for
international
transactions, and as a reserve asset. We do not use our gold in
payments and receipts for international transactions and neither do
our trading partners.
Most of us believe that even if other countries with substantial
gold stocks and the major gold-producing countries were to agree
with us on a restoration of an international gold standard, the
United States — and the system as a whole — would confront an as
yet unsolved problem of the vast quantity of dollars world-wide with
potential claims to gold convertibility.
We are not in fact aware
of international interest in restoring a gold standard.
Indeed, a
number of foreign officials have expressed negative views towards a
gold standard.
think that, by recommending more study rather than outright enactment
of a monetary rule, we missed a golden opportunity to help secure
long-term price stability, low interest rates and high employment.
I intend to continue my efforts to enact a monetary rule through
legislation.
Mr. Lewis E. Lehrman —
I favor
with a fixed price of gold.
It
in the U.S. monetary base which
gold purchases and sales by the
the restoration of a gold standard
is the means to achieve discipline
will then increase or decrease with
monetary authorities.
20
One other question we discussed was the desirability of taking
steps to seek a restitution of the gold that the United States and
other member countries subscribed to the International Monetary
Fund (IMF).
The United States would be entitled to buy up to 23,6
million ounces of gold from the IMF at SDR 35, or approximately $40,
per ounce at time of writing, if by an 85 percent vote of the IMF
membership a decision were taken to sell gold for currency to
members of the IMF in proportion to their IMF quotas as of August
1975.
The argument for such a restitution of IMF gold to its members
is that currently gold has no central role in the international
monetary system and no longer serves as the common denominator of a
par value system or as the unit of value of the SDR; its official
price has been abolished; members of the IMF have no obligation to
use gold in transactions with the IMF; and the IMF is prohibited
from accepting gold unless approved by an 85 percent vote of its
members.
The 1976-80 program of IMF gold sales also attests to the
intention to establish a diminished role for gold in IMF resources.
The argument against seeking such gold restitution by the
is essentially the same one that underlies the belief that the
States should retain significant gold holdings.
If gold is an
portant strategic and monetary resource for the United States,
should also be so regarded by the international community, and
retained by the IMF for possible use in various contingencies.
IMF
United
imit
Recommendation 1. We favor no change in the flexible exchange rate
system.
In addition, we favor no change in the usage of gold in the
operation of the present exchange rate arrangements.*
Recommendation 2. We oppose action by the United States to seek a
restitution of IMF gold to member countries.**
C o n g r e s s m a n Chalmers P. Wylie — I raised a point of order against
references to the flexible exchange rate system since the House of
Representatives made no reference to that subject in its charge to
the Gold Commission.
It is not germane to the report.
Congressman Henry S. Reuss and Governor Partee wish
with Congressman Wylie's comment.
to be
associated
Mr. Lewis E. Lehrman — I support fixed exchange rates for the U.S.
dollar to be introduced at the earliest possible date.
**Congressman Ronald E. Paul — I support steps to seek a restitution
of IMF gold to member countries.
I would use the additions to U.S.
gold stocks for coinage by the U.S. Treasury.
21
Conclusion
In presenting our report, we are conscious of the complexity
of an attempt to define what the role of gold should be in the
domestic and international monetary systems.
The majority of us at this time favor essentially no change
in the present role of gold.
Yet, we are not prepared to rule out
that an enlarged role for gold may emerge at some future date.
If reasonable price stability and confidence in our currency
are not restored in the years ahead, we believe that those
who advocate an immediate return to gold will grow in numbers
and political influence.*
If there is success in restoring
price stability and confidence in our currency, tighter
linkage of our monetary system to gold may well become supererogatory.
The minority of us who regard gold as the only real money
the world has ever known have placed our views on record:
the
only way price stability can be restored here (indeed, in the
world) is by making the dollar (and other national currencies)
convertible into gold.
Linking money to gold domestically and
internationally will solve the problem of inflation, high
interest rates, and budget deficits.
We have made no attempt to conceal the divisions among us.
In that respect, our views probably represent the range of
opinions held by the country at large. We hope, nevertheless,
that our report will make a contribution to public understanding
of the important issues involved.
In that event, the time we
have devoted to preparatory study before our meetings and to
the deliberations themselves will have been well spent.**
C o n g r e s s m a n Henry S. Reuss —
I doubt it. More likely, those who
advocate sensible fiscal, monetary, and anti-inflation policies
"will grow in numbers and political influence."
**Mr. Arthur J. Costamagna — Within three to five years, a new
gold commission should be appointed to review the effects of the
foregoing recommendations and Congressional implementation thereof,
and to make their own recommendations at that time.
Chapter 1
Background
to the Establishment of the Gold
Commission*
The focus of this chapter is the period before October 1980
when the provision to create the Gold Commission was enacted.
That
provision was a product of growing concern in many quarters in this
country over the persistence and acceleration of inflation here since
1964.**
Many citizens believe that an expanded and more explicit
role restored to gold in the U.S. monetary system is the solution to
the problem of inflation, arguing that it will both promote monetary
and fiscal discipline and reduce inflationary expectations.***
^Governor Henry C. Wallich —
I dissociate myself from what seems to
me a not sufficiently balanced and excessively monetarist interpretation of inflation.
Congressman Henry S. Reuss —
Wallich.
I associate myself with
Governor
**Congressman Chalmers P. Wylie — This paragraph is in error, and
this chapter should have been omitted from the Report of the Gold
Commission.
The Congressiona1 Record of September 18, 1980 pp.
H9136-7 records the brief discussion between Representatives Paul
and Neal prior to the unanimous consent acceptance of Representative
Paul's amendment which created the Gold Commission.
The word "inflation" was not used even once during the entirety of the consideration
of the amendment in the House of Representatives which created the
Gold Commission.
Congressman Henry S. Reuss — The Gold Commission was established as
part of a legislative compromise to secure passage of a needed International Monetary Fund quota extension.
It had nothing to do with
concern about inflation, a fact which is reflected in the Commission's
recommendations, which are irrelevant to the problem of inflation.
***Congressman Henry S. Reuss — Very few citizens believe an
expanded and restored role for gold would serve any useful purpose.
But those few do have the wherewithal to make themselves heard.
23
24
The Record of
Inflation
Inflation may be defined as a sustained rise in the price
level.1
It can be observed in the pattern of behavior of both
the price deflator implicit in GNP and the consumer price index
presented in Chart 1-1. The rate of increase in the deflator
rose from less than 1 percent per year in 1961 to 9 percent in
1980/ while the rate of increase in the consumer price index
rose from 1 percent to 11 percent in the same p e r i o d .
We
report the movements of the consumer price index since they are
the measure of inflation with which the public is most familiar.
However, there are well-known biases in this measure, particularly
the effect of housing mortgage costs, that may overstate the
degree of inflation in the economy.2
The rate of price
increase was not steady but ratcheted upwards with fluctuations
in economic activity.
Economists are divided on the root causes of inflation.
Some attribute it to excessive wage demands fostered by aggressive unions, profit-push pricing by monopolistic firms, random
factors like poor agricultural harvests, and institutional
and sociological patterns, each of greater or lesser importance
in specific inflationary episodes.
Other economists regard
inflation as primarily a monetary phenomenon, explained by
monetary growth in excess of the long-run trend of real output
growth.
They recognize, however, that other factors may
temporarily
affect the inflation rate independent of the rate
of monetary growth.*
No one has stated these p r o p o s i t i o n s more
lucidly than Chairman Paul A. Volcker of the Board of Governors
of the Federal Reserve System who observed on February 1, 1980:3
"Our policy, viewed in a long-term p e r s p e c t i v e ,
rests on a very simple premise —
that the inflationary process is ultimately related to
excessive growth in money and credit.
This
***Continuation
from previous
page.
Congressman Chalmers P. W y l i e —
It is much more true to say that the
evolution of the Gold Commission went through a stage in its developmental process in which its creation was one of a number of political
"cards" being played in an attempt to obtain funding to increase the
quota of the United States in the Interanationa.1 Monetary Fund.
Section 10 of Public Law 96-389 created the Gold C o m m i s s i o n .
Prior
sections gained votes by taking politically popular positions on
Taiwan, the Palestine Liberation Organization, and El Salvador. Section
3 assuaged fiscal conservatives by stating, "The Congress reaffirms
its commitment that beginning with Fiscal Year 1981, the total budget
outlays of the Federal Government shall not exceed its receipts."
*Congressman Henry S. Reuss —
and more sophisticated views.
Many other economists hold
different
CHART 1 -1
INFLATION AND CHANGES IN THE RELATIVE PRICE OF ENERGY
PERCENT
80
60
40
to
U1
20
0
20
1960
1963
1966
1969
1972
1975
1978
1981
26
relationship is of coarse a complex one, and
there are many facets of it that are sensitive
to nonmonetary economic variables.
But, in
spite of all the nuances, it is clear that
inflation cannot persist over the long run in
the absence of excessive monetary growth."
It is not our purpose here to settle the long-standing
division among economists on the causes of inflation.
Our
purpose is simply to present some pertinent background information on the state of the U.S. economy in the decade and a half
preceding October 7, 1980.
In Chart 1-2, the quarterly rate of inflation at annual
rates, calculated from the index numbers for the deflator, are
plotted together with the trend rate of inflation generated by a
twelve-quarter moving average of lagged monetary growth.4
a
fairly close link between the two series may be observed, with
the major exceptions of several quarters in 1974-1975 and
1979-1980. 5
Both of these episodes can be explained by the
large rise in the relative price of energy, defined as the
annual rate of change in the producer price index of fuels and
related products and power minus the GNP price deflator (see
Chart 1-1). Though the inflation since the 1960s may be
regarded as primarily a monetary phenomenon,* it is still
essential to account for the factors that produced excessive
monetary growth as well as other independent sources of inflation.
Table 1-1 presents, on an annual basis, as well as for
six subperiods, a number of relevant measures of economic
performance crucial to an understanding of the development of
U.S. inflation from 1960 to 1980.
Columns 1-5 give the annual
(and subperiod average) rates of growth of the money stock,
defined as M1B, real GNP, the GNP price deflator, the CPI, and
the real price of energy.
Columns 6-11 give the annual (and
subperiod average) unemployment rate, the Federal budget
surplus (deficit) as a ratio to actual GNP, the high employment
surplus (deficit) as a ratio to high employment GNP, the ratio
of funds raised by the U.S. Government to total funds raised
by the nonfinancial sector, the balance of payments surplus
(deficit) on an official settlements basis, the dollar value
of the U.S. monetary gold stock, and the trade-weighted dollar
exchange rate (beginning 1967
We begin by describing briefly six subperiods of the past
two decades before turning to a more detailed examination of
the salient factors that account for the persistence of inflation, despite recurrent attempts to curb it.
Congressman
Henry S. Reuss —
I dissent from this
statement.
CHART 1 -2
ACTUAL AND PREDICTED INFLATION17
ANNUALIZED L09 GROWTH RATES
12
ACTUAL
PREDICTED
-i
10
8
6
-
2
•f
0
I I
1960
1 I IJ
1963
I I I 1_L
1966
1969
1/ WITH FIRST-ORDER AUTOCORRELATION CORRECTION
1972
1 I 1 liiihnlinliiil 2
1975
1978
1981
N.)
Table 1-1
Selected Economic Indicators, Annually, and by Subperiods, I96O-I98O
Calendar
Year
I960
1961
1962
1963
196U
I96O-6U
1965
1966
1967
1968
1969
1970
1965-70
1971
1972
1973
1971-73
197U
1975
197U-75
1976
1977
1978
1976-78
1979
1980
1979-80
M1B
(1)
Annual Rate of Change (in percent)
Implicit
Real
Price
Price of
Real
Deflator
Energy
CPI
Output
(1972-100) (1972-100) (1967-100)* (1972-100)
(U)
(2)
(3)
(5)
0.6
3.1
1.8
3.6
U.5
2.8
U.5
2.U
6.3
7.5
3.1
5.1
U.9
6.3
8.8
5.U
7.0
U.2
2.2
2.6
5.8
U.O
5.3
U.3
6.0
6.0
2.7
U.6
2.8
-0.2
3.1
3.U
5.7
5.8
5.6
1.6
0.9
1.8
1.5
1.5
l.U
2.2
3.2
3.3
U.U
5.1
5.U
U.l
5.0
U .2
5.7
U.8
8.7
U.7
-1.1
-1.1
5A
5.5
U.8
5.0
3.2
-0.2
-0.2
9.3
8.9
5.2
5.8
7.3
6.U
6.3
7.8
7.9
7.6
7.1
6.2
6.2
-0.6
8.5
9.0
8.6
1.6
1.0
1.1
1.2
1.3
1.2
1.7
2.9
2.9
U.2
5.U
5.9
U.2
U.3
3.3
6.2
U.6
11.0
9.1
8.8
5.8
6.5
7.7
6.8
11.3
13.5
12.6
Unemployment
Rate
(6)
Ratio of
Federal
Budget
Surplus
(Deficit)
to GNP
(7)
Ratio of
High Employment
Budget Surplus
(Deficit) to
High Employment
GNP
(8)
-0.7
0.2
-2.2
2.1
-U.U
-2.1
-0.U
-0.8
-0.7
-5.6
-3.0
-0.1
-2.0
3.2
-1.1
7.0
2.8
Ul.U
5.5
6.7
5.5
5.7
5.2
5.7
U.5
3.8
3.8
3.6
3.5
U.9
U.O
5.9
5.6
U.9
5.5
5.6
0.6
(-0.7)
(-0.9)
0.1
(-0.5)
-0.2
0.1
(-0.2)
(-1.7)
(-0.7)
0.9
(-1.2)
-0.5
(-2.0)
(-1.U)
(-0.U)
-1.3
(-0.8)
2.1
1.2
o.u
1.1
0.1
1.0
0.1
(-0.9)
(-2.0)
(-1.3)
0.5
(-0.3)
-1.0
(-0.9)
7.U
7.1
3.0
7.5
0.7
U.O
8.5
7.1
7.7
7.0
6.0
6.9
5.8
7.1
6.5
(-U.5)
-2.7
(-3.1)
(-2.U)
(-1.U)
-2.3
(-0.6)
(-2.U)
-1.5
(-1.5)
-0.6
(-1.1)
(-1.1)
(-0.6)
-0.9
(-0.1)
(-0.7)
-O.U
16.7
29.1
25.5
(-1.0)
(-0.7)
-0.9
(-0.U)
Ratio of
Total Funds
Raised ty
U.S. Federal
Government
to Total
Nonfinaneial
Sector Funds
(9)
n.a.
15.U
12.9
6.9
9.2
11.1
2.6
5.2
15.6
13.7
-3.9
12.6
7.6
16.3
8.5
U.l
9.6
6.2
U0.5
23.U
25.u
16.8
13. U
18.5
9.5
21.6*
15.6
Balance 0
of Payments
Deficit(-)
Surplus(+)
($ millions)
(10)
TradeWeighted
U.S.
Exchange
Monetary
Rate of
Gold Stock d the dollar
($ millions) (1972-100)
(12)
(11)
672
-158
265
-1,608
-l,U89
-U6U
1,091
1,2U2
-5.87U
-3,0U8
-2,U80
-3,560
-2,105
-23,813
-9,769
-5,868
-13,150
-12,013
10,892
11,859
11,070
12,155
10,206
10,U87 f
11,6526
10,782
11,652
-7,876
-9,9U5
-20,251
-36,950
-3U,025
-30,U09
16,5U3
-6,872
U,836
11,599
11^626
11,598
11,719
11,671
11,663
11,172
11,160
11,166
17,8oU
16,9U7
16,057
15,596
15,U71
16,231
13,8o6e
13,235
12,065
119.96
122.06
122.39
121.07
121.37
117.81
109.07
99.iu
108.67
101.U2
98.50
99.96
105.63
103.35
92.39
100.U6
88.07
87.39
87.73
29
Notes to Table 1-1
a
Year-to-year percent
change,
k Average of first three quarters seasonally
data,
adjusted
c
foreign
U.S. net official reserve assets minus net
official assets plus allocations of SDRs.
d See note a to Table 2- 1 below.
e See note b to Table 2- 1 below.
f See note d to Table 2- 1 below.
g See note e to Table 2- 1 below.
Source by Column
1-4, 6-8, 10:
Economic Report of the President/ January 1981,
Tables B-59, B-3, B-31, B-74 as ratio
of B-l, B-62, B-99.
For Col. 8, before 1972,
Ecqnqmic Report, January 1979 Table B-62;
February 1970, Table C-52.
For Cols. 2 and 9, full year data for 1980,
from Survey of Current Business, March 1981,
pp. S-6 and 50, lines 38 and 57.
5:
Federal Reserve Bank of St. Louis data bank.
9:
1960-78:
Survey of Current Business 60
(November 1980):
24-5; 1979-80:
ibid. 61
(May 1981):
3.
lis
Table 2-1 below.
12:
Federa1 Reserve Bulletin 64 (August 1978): 200;
67 (October 1981):
A-68.
30
1960-1964.
This period of stability, which actually began
. i 1958, was characterized by low monetary growth and, by
historical standards, a low rate of inflation.
Productivity
growth was favorable and significant external shocks were
absent.
These years serve as a benchmark for the succeeding
periods.
2.
1965-1970.
The onset of steadily rising inflation in
this period is generally associated with the financing of the
Vietnam war and expanded Federal social programs.
Both a rise
in the rate of monetary growth and in fiscal deficits may be
observed in columns 1 and 7.
During the period 1965-1970,
both monetary and fiscal policy were generally expansionary
despite two significant attempts to reverse the inflationary
process.
Monetary growth was markedly reduced in 1966 in an
episode commonly designated as "the credit crunch," and in 1969,
a decrease in monetary growth supplemented a 1968 tax increase.
The monetary gold stock declined in every year since 1960
except 1968-69, the declines reflecting the role of the
United States as the world's central banker and the more rapid
rise in U.S. inflation than elsewhere.
3.
1971-1973.
In the belief that the inflation rate was
slow in falling in response to the recession in business
activity in 1970 and as a way of staunching the growing balance
of payments deficits, the Nixon Administration sought a quick
solution by resorting to direct controls on prices and wages
in August 1971.
The policy was in effect for the next three
years.
Initially, wages and prices were frozen for ninety
days.
Subsequently, mandatory wage and price guidelines were
imposed that were gradually relaxed.
The measured inflation rate declined in 1971 and 1972, and
there was satisfaction with the reduction in the inflation
numbers.
Yet, in retrospect, monetary growth was overexpansionary
during these years and the first half of 1973.
Consequently
when the controls were eased in 1973, the pent-up excess
demand quickly restored the inflation rate to its underlying
trend rate.*7 To halt further depletion of its monetary gold
stock, the United States closed the gold window in August 1971,
and in 1973 abandoned the attempt to maintain fixed foreign
exchange rates for the dollar.
4.
1974-1975.
These unusual years were dominated by two
sets of forces:
contractionary money growth and an extraordinary
rise in the real price of energy following the Arab oil embargo
of 1973 (see Chart 1-1 and Table 1-1, col. 5).
Some regard the
energy price rise as retribution for the inflation the United
States exported to the rest of the world in the 1960s.
The supply shock raised the inflation rate well above the
trend rate for several quarters in the two years, substantially
reduced real output growth, and raised the unemployment rate
(Table 1-1, cols. 3 and 6).
31
5.
1976-1978 . As a consequence of the 1974-75 recession, the
unemployment rate rose to a level unprecedented in the post-World
War II period.
In reaction, the money growth rate was accelerated,
and fiscal policy became generally expansionary.
Once the effects
of both the removal of price controls and the external energy
supply shock had worked their way through economic processes, the
inflation rate fell to its trend rate in 1976.
In 1977 and 1978
the inflation rate moved up again.
6.
1979-1980.
A further assault on the inflation problem in
1979 by means of monetary and fiscal restraint was thwarted by a
second rise in the real price of energy.
But in the face of overall
monetary restraint in 1980/ the effect of the energy price rise on
the rate of inflation proved to be temporary.
Why the Setbacks to Success of Anti-Inflation
Policies?
We now examine some of the reasons that explain the lack of
success that has attended efforts since the mid-1960s to achieve
a permanent reduction in the inflation rate.
1.
The Inflation-Unemployment Tradeoff.
Hidden within the brief
sketch of the events of the past two decades is a dilemma in the
implementation of anti-inflation policies —
the so-called tradeoff
between inflation and unemployment.
Empirical evidence lends
support to the view that both monetary and fiscal policy have a
lagged effect on economic activity measured in current prices.
The initial effect of contractionary monetary and fiscal policy is
on the level of real output and the unemployment rate (within one
to three quarters after the policy is in place).
The initial
effect is temporary.
It is attributable to the lag in the adjustment
of wage and price expectations and inflexibility of contracts.
The ultimate effect of contractionary monetary policy is on the
price level and the rate of inflation.
The time that elapses
before the inflation rate is reduced, however, is measured in
several years, not in several quarters.*
Accordingly, attempts to reduce inflation by monetary means
have quickly led to reduced real output growth and increased
unemployment.
These results have occasioned a reversal of the
contractionary policy before it could succeed in significantly
reducing the inflation rate.
The pattern is observable following the reduction in monetary growth in 1969, which initially
led to the recession in real output and rise in unemployment
C o n g r e s s m a n Henry S. Reuss — This analysis is flawed in two
respects.
First, the history of postwar recessions is that inflation
falls rapidly as output and employment fall.
Second, this success
against inflation has not been sustained in subsequent business
expansions.
32
in 1970 (Chart 1-2 and 1-3). The contractionary policy was
then reversed.
A similar sequence occurred in 1974-1975, when
contractionary monetary policy from mid-1973 and 1974 led in
1974-1975 to a dramatic decline in real output and a rise
in unemployment, partly associated with the unexpected energy
supply shock.
The sequel for the next three years was an
increase in monetary growth to levels not reached since 1973.
The evidence thus suggests that a policy of noninflationary
monetary growth before 1980 was never maintained long enough to
reap the benefits of the policy.
The distinction between the
short-run undesirable effects of such a policy and the long-run
desirable effects has apparently not been understood by the
public or political leaders.
The negative effects on output
and employment of monetary restraint have been perceived as
likely to last forever, with no recognition that the benefits
of reduced inflation will then emerge and have a positive effect
on output and employment.
It is not surprising or irrational for the public to view
the cost of a policy of monetary restraint as high and unrelenting
and the benefits dubious.
In the decade and a half before 1980,
they experienced the costs and hardly any benefits of decelerating
money growth.
The experience in some other countries is
different and the public perception of the effects of noninflationary monetary policy is correspondingly different.
There is also no widespread public understanding of the
inflationary long-run effects of rapid money growth.
The public
and many political leaders also fail to recognize the distortions
and disincentives caused over the long run by persistent accelerating inflation.
These produce long-run effects on output and
employment that are largely unrecognized by the public.
Thus the policy of "buying" more output and employment
growth is tempting and politically appealing, for the benefits
are immediate and the costs are postponed and unrecognized.
A
policy of decelerating money growth is not appealing, for the
costs are immediate and the benefits are delayed and not
recognized by most of the public.
Finally, we note that the lag in the response of inflation
to decelerating money growth seems to be getting shorter.
The
reaction time of export, import, and commodity prices has speeded
up since market participants have begun to pay attention to
the monetary growth rate and since the floating of dollar foreign
exchange rates.
2.
Sectoral Effects.
The impact of anti-inflation actions
falls disproportionately on certain sectors.
Reduced provision
of reserves to the banking system restricts the volume of loans
to small business and the accompanying increase in interest
rates restricts housing dependent on mortgage funds.
Shortterm interest rates may rise immediately when money growth
PERCENT
I 9
8
-
7
u>
u>
-
1 I I 1 1 1 1 I
1960
1963
1966
1 I I
1969
I
I 1
1972
I 1 1 I
1975
1978
1981
5
34
decelerates but it takes time until the subsequent decline
in inflation leads to a fall in interest rates.
If the
response is expansion of Federal programs to alleviate the
distress of small business and the mortgage market, antiinflation actions may be nullified.*
Inflation, when not fully anticipated, has significant
distribution effects.
Generally, debtors gain at the expense
of creditors, as do those with incomes indexed to inflation
relative to those on fixed incomes.
Home-owners in particular
have been beneficiaries of inflation.
3.
Inflationary Expectations.
Inflationary expectations
on the part of the private sector have been reinforced by
the evidence of the past 15 years that inflation has only
been temporarily reduced in response to contractionary policy.
Hence, when a new round of contraction in monetary growth
gets under way, the public may regard the new round as only
temporary, as in past episodes, and not reduce their expectations
of further inflation.
The resistance of expectations to
modification prolongs actual inflation by affecting wage
demands and pricing decisions and maintaining upward pressure
on interest rates.
Inflation expectations are believed to be incorporated
rapidly and completely in asset prices that are determined
in auction markets.
A comparison of Charts 1-1 and .1-4
reveals that movements in a long-term interest rate (the
yield on AAA corporate bonds) over the whole period are
closely associated with the trend rate of inflation.
Short-term
interest rates (such as the three-month Treasury bill rate)
are more volatile, reflecting both a negative response to
short-term changes in monetary growth and a positive response
to expected inflation.8
Since the freeing of the gold
market in 1968, the price of gold has also served as a good
barometer of market anticipations of inflation.
As can be
seen in Chart 1-5, its movements are volatile but closely
related to both world and domestic inflation rates.
To the extent that
in long-term contracts,
and product markets, an
tionary monetary growth
expectations of inflation are embedded
both explicitly and implicitly, in labor
attempt to reduce inflation by contracmust impose real hardship, at least
^Congressman Henry S. Reuss —
I am pleased to see acknowledgement
here of the highly discriminatory effect of monetarist anti-inflation
policy, which does indeed fall most heavily on small business, autos,
housing, agriculture, and capital investment.
CHART 1 -4
YIELDS ON SHORT AND LONG TERM SECURITIES
PERCENT
16
= 3 MONTH TREASURY BILL YIELD
= MOODY' S AAA CORPORATE BOND YIELD
14
12
10
CO
Ul
8
I
I
1960
i I I I I I
1963
1966
I I I I I
1969
I I
1972
I I
1975
I liiiliiilmliiil o
1978
1981
36
CHART 1 - 5
THE PRICE OF GOLD AND CHANGES IN THE CPI
= PRICE OF SOLD
1 I 1 I 1 I II
I I I I I I 1 II
PERCENT
16
-
12
8
+
0
1961
1966
1971
1976
1981
37
until contracts can be adjusted.
Yet the extent to which
contracts will be renegotiated depends on whether the parties
expect the policy to be enduring or quickly reversed.*
4.
Structural Changes.
A number of structural changes in
the economy/ independent of, or interacting with/ the rate of
monetary growth contributed to the difficulty of achieving
positive results with anti-inflation actions.
Four such
changes are discussed: (a) declining productivity growth;
(b) rising velocity; (c) persistent Federal budget deficits;
(d) foreign influences on the open economy.
(a) Declining productivity growth.
Growth in output per manhour has declined in the United States (as it has in most
industrialized economies) since the mid-1960s.
Since reduced
productivity growth implies a lower trend real growth rate, a
given rate of monetary growth will be associated with a higher
rate of inflation.
(b) Rising velocity.
Income velocity of circulation of M1B
(the ratio of GNP to the most widely used monetary aggregate)
has been rising on average at slightly over three percent per
year since the late 1950s.
The trend reflects the process of
financial innovation/ that isf the substitution of new types
of payments media for currency and deposits.**
Because of
this development/ a given rate of monetary growth will be
associated/ other things equal, with a more rapid rate of
inflation.
Inflationary expectations will be incorporated
in market interest rates and hence will tend to raise velocity.
Although this phenomenon figures significantly during hyperinflations, the evidence does not suggest that expectations
have been a significant factor affecting velocity during the
past two decades.
C o n g r e s s m a n Henry S. Reuss — This truism leaves unstated
the fact that government policy can help by facilitating the
adjustment of expectations and contracts.
The Administration
has ignored this fact, and so the costs of supertight money have
been unnecessarily high.
**Governor J. Charles Partee — The trend increase in velocity may
also be associated in part with the trend increase in interest
rates, which has made it more costly to hold low or zero yielding
money assets.
38
Persistent Federal budget deficits.*
Budget deficits hamper
anti-inflation policies in two ways.
They may indirectly cause an
increase in monetary growth when the authorities attempt to offset
the high interest rates associated with bond financing of the deficit.
Alternatively, budget deficits may increase velocity when the deficit
is financed by the sale of government securities, in competition
with private borrowers for private sources of funds.
The rise in
market interest rates leads to a rise in velocity and, for a given
rate of monetary growth, a higher inflation rate.
Both effects have
undoubtedly been present in U.S. history.
A controversy exists in
the literature on the relation between budget deficits and monetary
growth.^
One channel emphasized in papers supporting such a link
is the response of the Federal Reserve to increases in interest
rates associated with deficits.
The effect of Federal Reserve procedures before October 1979 was that an increase in monetary growth
would accompany a rise in interest rates.
Table 1-1 shows that the
ratio of the Federal budget deficit to GNP is not closely correlated
with either monetary growth or inflation on an annual basis, or even
However, there is a signifin a comparison of subperiod averages.**
icant correlation both on an annual and a subperiod average basis
beween the ratio of the high employment budget deficit to high
employment GNP and monetary growth and i n f l a t i o n . H i g h e r government
spending by itself, without regard to its effect on budget deficits,
has also been linked to monetary g r o w t h . H
C o n g r e s s m a n Chalmers P. Wylie — Budget deficits require Treasury
security sales.
Large deficits and large debt management sales
take large percentages of personal and corporate savings to clear
the market.
The larger the deficit the smaller the residual savings
remaining to finance private investment, including investment in
plant and equipment.
Without investment in plant and equipment,
productivity slows and inflation rises, inventories are unsold,
and unemployment spreads.
This is a significant part of the problem
in the automotive sector of our economy in Ohio and Michigan.
In addition, the process by which large deficits take large
percentages of personal and corporate savings also brings higher
interest rates as the Treasury prices its securities to clear the
market, to sell.
This leads to the current situation in which
large corporations obtain a higher rate of return on their portfolio
of government securities than they do on the corporate assets
under their management.
In these instances corporate savings are
available but Federal deficits are robbing workers of jobs because
managements can get higher yields from U.S. Treasuries than from
outlays for plant and equipment.
For example, the Bendix Corporation
in Detroit has said that this is what it is doing with its $500
million pool of cash to maximize its corporate rate of return.
(See the Wall Street Journal, January 29, 1982, p. 52.)
**Congressman Henry S. Reuss — The relationship between deficits
and inflation depends on the state of demand? therefore a simple
correlation of the deficit/GNP ratio to inflation and money growth
is not helpful.
39
The connection between bond-financed deficits, rising
velocity, and inflation is also not empirically established.
Since the mid-1950s, years of rapid inflation are not generally
years when financing the Federal budget pre-empted a large
share of total financial f u n d s . 1 2
The subperiod averages
also show the same result.
(d) Foreign influences on the open economy.*
Under the Bretton
Woods system, deficits in the U.S. balance of payments increased
in the 1960s.
Initially, the deficits were regarded as
satisfying a rising world demand for international reserves,
since the dollar served as the world's principal reserve asset.
As the deficits persisted, they were regarded less benignly
as a reflection of excess monetary growth.
Because the
dollar served as the principal reserve asset in the post-World
War II period, there was less pressure on the United States
by her trading partners than might otherwise have been the
case to respond to the persistent balance of payments deficits
by monetary and fiscal restraint.
Moreover, the deficits
served to increase world liquidity and so transmit inflationary pressures to other countries that either voluntarily
or involuntarily fell in step with U.S. inflation rates.
The decline in the U.S. monetary gold stock and in the
gold reserve ratio against Federal Reserve notes by the latter
1960s heightened concern abroad that convertibility of the
dollar into gold was threatened, concern that culminated in
runs on the dollar in 1967 and 1968, the establishment of
che two-tier gold market in 1968, and the abandonment in
August 1971 of the U.S. commitment to convert dollars held
by foreign official agencies into gold.
Thus rather than acting as a constraint on domestic
inflation, the Bretton Woods fixed-exchange rate system did
not do so and also served to transmit U.S. inflation abroad.
Finally, when convertibility domestically and internationally
conflicted with overall domestic policy goals, it was
abandoned.
In 1971 and 1973, the dollar was devalued, and since then,
the exchange rate of the dollar has floated.
Under a floating
exchange rate system, the international economy provides even
less of a constraint on domestic monetary and fiscal policy.
If
a country has a more rapid inflation rate than the rest of the
world, then the exchange rate, which can be viewed as a measure
of the purchasing power of its money relative to that of other
countries, will steadily depreciate.
The U.S. dollar
^Congressman Henry S. Reuss — The discussion which follows
is interesting but not relevant to the purposes of the Gold
Commission.
40
exchange rate has depreciated over the period since 1971 as a
whole but there have been several significant upswings during
the period (Chart 1-6 and Table 1-1, col. 12).
Theoretical arguments have been made that under floating
exchange rates foreign influences can still have effects on
domestic prices and activity, independent of domestic policy.
One view is that the world is characterized by high capital
mobility, and a rise in interest rates in one center is rapidly
transmitted to another so that velocity behavior is similar
internationally.
If high capital mobility were a fact, then
financial assets denominated in different currencies would be
perfect substitutes.
This conclusion breaks down if assets,
that is, securities, are not perfect substitutes internationally
because of risk with respect to exchange rate changes or to
capital controls.
With imperfect asset substitutability, there
may be movements in relative national interest rates insulated
from the rest of the world.
Another view is that independent monetary policy cannot
succeed under floating exchange rates because of currency substitution, that is, an effort to restrict monetary growth domestically will be frustrated by the substitution of currencies issued
by other countries.
The argument is that the effect of reducing
the growth rate of the domestic money stock is to impose a tax on
domestic money holders, causing them to switch into holding
foreign monetary assets including Eurodollars.
Two problems
undermine the argument.
One is conceptual.
The community is
concerned with the real value of its money holdings —
what
these will buy — and receives a flow of real services from its
Thus a policy which reduces the rate of
real money balances.
growth of the nominal money stock and the price level reduces
the inflation tax on domestic real balances, and promotes
holding larger real money balances.
The second problem is
empirical, whether the existence of foreign currency deposits
as a possible substitute has had a significant impact on the
demand for domestic real money balances.
While theoretically
possible, empirical evidence in support of the view is mixed
at b e s t . 1 3
Just as a floating exchange rate makes possible monetary
independence, it can also insulate a country from external real
shocks.
Floating exchange rates cushioned the U.S. economy
against the effects of the rise in oil prices in 1979-1980.
The decline of ten percent in the exchange rate from 1972 to
1973-1975 (bridging the devaluation of the dollar and the
start of flexibility) and again in 1979-1980 was a source of
insulation, since the extent of the decline was greater than
would be explained by the trend rate of inflation.
Nevertheless,
the foreign oil shock did temporarily raise the domestic inflation
rate.
It did so through two channels.
First, to the extent that
the rise in imported oil prices was not fully absorbed by the
exchange rate, it had a direct effect on the domestic price
level.
Second, a depreciating exchange rate itself tends to raise
the domestic price level by raising the price of imports in general.
CHART 1 -6
WEIGHTED AVERAGE EXCHANGE RATE OF THE U.S. DOLLAR
130
120
110
100
90
80
1967
1969
1971
1973
1975
1977
1979
1981
42
The effects on the inflation rate are temporary until expenditure
and production are directed away from the more expensive oil-intensive
sectors of the economy.
5.
Incomes Policies.*
Some observers believe that the reason
anti-inflation policies have not succeeded is that demand restraint
by itself is too costly to pursue.
They argue that incomes policies
that attempt to influence the setting of wages and prices directly
will decrease inflation and increase the growth of output and employment that result from any given degree of demand restraint.
One
such policy that has some support would use the tax system to provide
incentives to firms and workers to slow the rate of inflation.
Different versions of tax-based incomes policy (TIP) exist.
It is
acknowledged that a TIP cannot substitute for demand restraint.
The
policy can only supplement it.
Conclusion
The basic economic problem that has plagued the United States (and
the rest of the world) since the mid-1960s has been the persistence
and acceleration of inflation,** with its associated economic distortions, disincentives and risks. We have reviewed the difficulties
encountered by the U.S. monetary and fiscal authorities over this
period in their successive attempts to pursue anti-inflation policies.
The provision to create the Gold Commission was an expression of dissatisfaction with the unsucessful outcome of these past attempts.***
To determine if greater success is possible in the future, it
is important to advance proposals that can cope with the difficulties
that have attended policymakers' past efforts in dealing with the
problem of inflation.
Our mandate is to conduct a study to assess
To do so, we examine the historical record of
the role of gold.
U.S. experience with gold (Chapter 2), discuss the different forms
of the gold standard and alternative monetary standards (Chapter 3),
and describe a host of proposals, some involving a role for gold,
some not,****
that have been submitted to us as the means for
achieving price stability (Chapter 4).
*Congressman Henry S. Reuss — This is a totally inadequate treatment of a most important topic.
Incomes policies are widely accepted
as necessary within the economics profession and by the Congress (see
the Joint Economic Report).
Certainly incomes policies enjoy vastly
wider support among the American people than does the gold standard.
**Congressman Henry S. Reuss — Stagnation, unemployment, and
declining real living standards since 1973 are also important problems.
***Congressman Henry S. Reuss —
****Congressman Henry S. Reuss —
proposals not related to gold.
Nonsense.
We have no business
Governor Henry C. Wallich wishes to be associated with
Reuss' comment.
describing
Congressman
43
The test of the usefulness of these proposals is the extent
to which they are immune to the kinds of pressures, noted in
this chapter, that have prevented the achievemnt of a stable
price level.
44
Notes to Chapter 1
1.
The definition of inflation as a sustained rise in the price
level has no implications as to its cause.
It merely states
that a rise in the price level that lasted for one day, one
month, one quarter, or one year would not qualify as an
inflation.
A rise over a period of years would.
Sympathizers with the views of the "Austrian" branch of
economics are opposed to the use of the concept of "the
price level."
They hold that it is virtually impossible to
construct a price index that accurately reflects changes in
the value of money.
They see the difficulty as heightened
during an inflationary environment when relative prices
change more than they otherwise would and a price index
fails to capture these effects.
Instead, this group defines
inflation as a rise in the supply of money.
See the writings
of such Austrians as Ludwig Von Mises, The Theory of Money
and Credit, London:
Jonathan Cape, 1952 (reprinted by
the Foundation for Economic Education, 1971); and Murray
Rothbard, Man, Economy and State, Los Angeles:
Nash
Publishing, 1962.
2.
On the limitations and deficiences of the consumer price
index and feasible improvements in it, see Phillip Cagan
and Geoffrey H. Moore, The Consumer Price Index, American
Enterprise Institute Studies in Economic""Policy, 1981.
3.
Statement before the Joint Economic Committee of the
U.S. Congress, in Federal Reserve Builetin, February 1980,
pp. 137 - 43 (quotation on p. 140).
4.
The formula for the technique used
P. = a +
'
b
12
12
A
?
£ 1
m
t-l
is
+
e
Here p, m, refer to the quarterly change in the logarithms.
We adopted a 12-quarter lag because it produced the lowest
standard error of estimate (a measure of the dispersion of
the error term associated with the regression line) of
successive lags, ranging from 4 quarters to 20 quarters.
Other investigators have found a 12-quarter lag also worked
best for the period of the 1970s.
We omit other variables,
such as velocity of circulation, because the regression is
designed to measure the trend or underlying rate of inflation that is to serve as a benchmark.
Additional explanatory
factors can be added as required when the actual inflation
rate deviates from the trend rate.
45
The equation (in logarithms), for the period 1959:1 to
1981:11, relating the quarterly change in the implicit
deflator to a 12-quarter moving average of the quarterly
change in money (defined as Ml for the years 1956 - 1958,
thereafter as M1B) is (t values shown in parentheses):
l n P t - InPt-i
: -.00208 + 1.18871
(-1.335)
(9.682)
R2
SEE
DW
£
=
=
=
=
JL
12
( In m t - In m t - i
)t-l
0.7669
0.0034
2.081
0.407
The t value is a test statistic for the statistical
significance of the regression coefficient.
A value greater
than 2 generally indicates a significant coefficient.
R 2 measures the proportion of the variation of the dependent
variable (the inflation rate) which is explained by variation
of the independent variable (lagged money growth).
DW is the Durbin-Watson Statistic, a test statistic
the presence of serial correlation.
A value close to 2
generally indicates the absence of serial correlation.
for
f (rho) is the first-order serial correlation coefficient.
It measures the correlation between errors in adjacent time
periods.
When £ equals zero, no first-order correlation is
present, while a large value of ^ implies the existence of
such serial correlation.
The equation uses M1B as the measure of the money stock
because it has generally been accepted as the money aggregate
most closely related to nominal income (GNP in current dollars)
and the price level.
Other definitions of money would not
significantly alter the result.
5.
The equation on which the predicted inflation rate is
based was estimated using the Cochrane-Orcutt procedure
—
a method to correct for serial correlation in time series
regression models.
This is a standard statistical technique.
One interpretation of the predicted inflation rate so constructed is that it represents not only monetary influences
but other unspecified influences as well.
An alternative
interpretation is that the Cochrane-Orcutt procedure corrects
for lagged inflation or lagged money growth not represented
in the underlying equation.
There is no basis for choice
between the two interpretations.
If the first interpretation is accepted, omitting the correction for serial
correlation in the estimation of the equation on which the
46
predicted inflation rate is based, the predicted inflation
rate will represent only the influence of money.
Chart
1-A-l repeats Chart 1-2, except that the predicted inflation rate omits the auto-correlation correction.
It does
not appear that the omission of the auto-correlation
correction in generating the predicted inflation rate in
Chart 1-A-l obliterates the general relationship between
actual and predicted inflation rates.
The exceptions remain
in the years 1974-1975 and 1979-1980.
The relationship when the equation is estimated for the
full postwar period will reveal exceptions reflecting disturbances special to the pre-1961 period, such as the impact
of price decontrol after World War II and the Korean War
episode, but these exceptions are fully consistent with the
views expressed by Chairman Volcker in the text quotations.
6.
The concept of the high (or full) employment is designed
to show what the surplus or deficit in the budget would be
if the economy were moving along its potential growth path
free of fluctuation in business activity.
The definition of the balance of payments used in the
table puts changes in international reserves below the line
and focuses on the change in reserves as a product of the
overall balance of payments deficit.
7.
See Michael R. Darby, "Price and Wage Controls:
The
First Two Years," and "Price and Wage Controls:
Further
Evidence," in The Economics of Price and Wage Controls, K.
Brunner and A.H. Meltzer, eds., Carnegie-Rochester Conference
Series on Public Policy, vol. 2, 1976, pp. 235-63? 269-71.
Alan S. Blinder and William J. Newton conclude that "catchup inflation caused by the ending of controls carried the
price level permanently 1 percent above what it would have
been without controls."
See "The 1971-1974 Controls Program
and the Price Level:
An Econometric Post-Mortem," NBER
Working Paper no. 279, September 1978.
8.
The relationship between interest rates and monetary
growth is complex.
In the past, interest rates tended to
move negatively in response to short-term movements in
monetary growth and positively in response to longer-term
movements.
In recent years, however, the negative shortterm response of interest rates has not been regularly
observed.
One interpretation of the change in the pattern
of interest rate behavior is that the market has come to
regard any increase in monetary growth, however shortlived, as betokening a rise in future inflation rates and any
decrease in monetary growth as betokening a subsidence of
inflation.
Hence interest rates recently have at times
moved positively with short-term monetary growth.
9.
R.J. Gordon, "World Inflation and Monetary Accommodation
in Eight Countries," Brookings Papers on Economic Activity
CHART 1 -A-1
ACTUAL AND PREDICTED INFLATION
1/
ANNUALIZED LO0 GROWTH RATES
12
ACTUAL
PREDICTED
1960
1963
1966
-I
1969
WITHOUT FIRST-ORDER AUTOCORRELATION CORRECTION
1972
1975
1978
1981
10
48
(1977:2): 409-68? and W.A. Niskanen, "Deficits, Government
Spending, and Inflation:
What is the Evidence?"
Journal of
Monetary Economics 4 (August 1978):
591-602, dispute the
validity of the link,
W.D. McMillin and T.R. Beard, "The
Short Run Impact of Fiscal Policy on the Money Supply,"
Southern Economic Journal 47 (July 1980):
122-35? and M.J.
Hamburger and B. Zwick, "Deficits, Money and Inflation,"
Jo urn a 1 of Mone t a. ry E conom i c s 7 (Janaury 1981):
141-50,
find a significant impact of deficits on monetary growth.
Philip Cagan holds that the nominal deficit expressed
as a percentage of GNP is overstated in real terms (see
"The Real Federal Deficit and Financial Markets,"
The AEI
Economist.
(November 1981): 1-3). This is so because interest
payments on the Federal debt, which are reflected in the
deficit, include compensation for the depreciation of the
debt in real terms.
Hence the deficit should be reduced by
the product of the federal debt in private hands and the rate
of inflation.
Expressing the deficit minus the decline in
real value of the Federal debt as a percent of GNP reduces
the nominal deficit considerably.
10.
In Table 1-1, we report the ratio of the high employment
budget deficit to high employment GNP constructed by the
Department of Commerce.
The conclusion that there is a
close relation between monetary growth, inflation, and the
ratio is obtained from a new set of estimates of potential
(high employment) GNP, prepared by Jack Tatom.
See his
"Potential Output and the Recent Productivity Decline,"
Federal Reserve Bank of S t . L o u i s Review 84 (January 1982):
16.
L.O. Laney and T.D. Willett, "Presidential Politics,
Budget Deficits, and Monetary Policy in the United States:
1960-1976," Claremont Working Papers (1981), also find a
close link between high employment deficits and U.S. monetary
growth.
11.
R.J. Barro, "Comment from an Unreconstructed Ricardian,"
Journal_of Monetary Economics 4 (August 1978):
569-81.
12.
In the source cited in note 9 above (pp.3-5), Phillip
Cagan adjusts the Federal budget deficit for the expected
repayment of principal, on the assumption that the inflationary premium embedded in interest rates since the 1970s is
equal to the depreciation in the value of the Federal debt
due to inflation.
On the further assumption that debt holders
regard these additional interest payments as a return of
principal rather than as income and therefore not to be consumed, they will reinvest the additional interest to maintain
the principal of debt intact.
The reinvestment will finance,
without crowding out, an amount equal to the depreciation in
real value of the debt.
13.
Marc Miles, "Currency Substitution, Flexible Exchange
Rates, and Monetary Independence," American Economic Review 68
49
(June 1978): 428-36, found evidence that currency substitution
was significant for the Canadian demand for money.
However,
M.D. Bordo and E. Choudri, "Currency Substitution and the
Demand for Money:
Some Evidence for Canada," Journal of Money,
Credit and Banking 14 (February 1982):
forthcoming, find
Miles's model to be misspecified and demonstrate that when the
demand for money is properly specified, the influence of
currency substitution (measured by expected changes in the
exchange rate) is negligible.
Bruce Brittain, "International
Currency Substitution and the Apparent Instability of Velocity
in Some Western European Economies and in the United States,"
J o u r n a l o f Money, Credit and Banking 13 (May 1981):
13 5-55,
found evidence for the significance of currency substitution
for some countries but not for others.
Chapter 2
The Past Role of Gold
in the U.S. Monetary
System*
From 1834 to 1973, with the exception of the years
1862 through 1878 and of an interlude of less than a year's
duration in 1933-34, the United States adhered to some form
of a gold standard.
The purpose of this review is to examine
the operation of the successive types of gold standards in
U.S. experience (including for each type the evidence on the
stability of the price level and of real output), as well as
the intervening episodes of floating exchange rates.
Chronologically, U.S. experience with the gold
may be characterized as follows:
standard
1.
a de facto gold standard in a largely
1834-1861:
bimetallic international monetary system
2.
1862-1878:
3.
1879-1914:
a gold standard without a central bank,
and a fractional reserve banking system, as part of
an expanding international gold standard
4.
1914-1933:
a managed gold standard, under the
Federal Reserve System, v/hich was legally obliged
to maintain minimum gold reserves against its
monetary liabilities, in a short-lived postwar
international gold exchange standard
5.
1933-1934:
a floating dollar in an international
monetary system split between a depreciated sterling
area and a gold bloc clinging to parity
6.
1934-1948:
the interwar and World War II and immediate
post war managed gold standard, in a fragmented international monetary system
the greenback
standard
^Governor Henry C. Wallich —
I dissociate myself from a number
of technical and historic points presented in this chapter.
Congressman Henry S. Reuss -- So do I.
dissenting views."
51
See my
"additional
52
7.
1948-1968:
the Bretton Woods dollar/gold standard
system, with progressive dilution of the gold
restraints on U.S. monetary conduct
8.
1968-1973:
9.
1973-1981:
the United States on an
paper dollar standard
the breakdown of the Bretton Woods
U.S. Experience on the Gold
1.
1834-61 —
a de facto gold
system
inconvertible
Standard
standard
Before 1879, the United States was legally on a bimetallic standard, but from 1834 until the Civil War
suspension of specie payments, de facto it was on the gold
standard.
The Mint ratio established by the Coinage Act
of 1792 made the dollar equivalent to 24.75 grains of fine
gold and to 371.25 grains of fine silver, or a ratio of 15
The Mint ratio at that time matched the market
to 1.1
ratio. Subsequently, a great increase in Mexican and South
American silver output led to a decline in the market value
of silver relative to that of gold or a ratio approximating
15-1/2 to 1. Hence silver was overvalued at the Mint and
relatively little gold was brought there.
Instead, gold was
shipped abroad where the price was higher.
De facto during
the period before 1834, the United States was on a silver
standard.2
On June 28, 1834, the Coinage Act of 1834 changed the
Mint ratio to 16.002 to 1, lessening the gold weight of a
dollar to 23.2 grains of fine gold and leaving unchanged
the silver weight of a dollar.3
Before 1834, 100 ounces
of pure gold or 1500 ounces of pure silver in coin would
After 1834, the debt could be paid with
discharge a debt.
94 ounces of pure gold in coin.
But since silver was
undervalued at the Mint, it was driven from circulation.
Offering 1475.5 ounces of silver was sufficent at the market
ratio to obtain 94 ounces of gold.
The Coinage Act in effect
debased the currency.
Some supporters of the Act were aware
that it would drive silver out of circulation.
It was indeed
their objective to achieve a gold standard and a permanent circulation of gold coins.
Others urged that as the market value
of silver relative to gold had been falling for many years
before 1834, it would continue to do so in the future and
therefore the Mint undervaluation of the metal would soon be
eliminated.
That prediction was w r o n g . 4
53
The Act of 1834 was supplemented in 1837 by a law
changing the proportion of alloy to pure metal in gold to
correspond to that in silver.
It established the ratio of
alloy at one-tenth, changing the quantity of pure gold from
23.2 to 23.22 grains. 5
For each dollar weight in gold, there
is a corresponding price of gold per fine troy ounce of 480
grains (480/23.22 = $20.67).
The Mint ratio between silver
and gold coins became 15.98 to 1 (371.25/23.22).
The gold discoveries in Russia, Australia, and California
from 1848 on produced a fall in the market value of gold,
accentuating the discrepancy between the Mint and the market
ratios.
By 1851, a silver dollar was worth about 104 cents
of a gold coin, so no one would use silver in settlement
of debts.
Silver was used as a commodity, not as money.6
Since subsidiary silver coinage was proportional to the weight
of the dollar piece, it also disappeared from circulation.
By 1850, there was a gold standard without adequate subsidiary
money for retail transactions.
The demonetization of silver
may be dated from the Act of February 21, 1853, rather than
the customary date of 1873.
The Act reduced the number of
grains of pure silver in 100 cents from 371.25 to 345.6,
a reduction of nearly 7 percent which exceeded the difference
between the value of the gold dollar and silver dollar. 7
The market value of the pure silver in subsidiary silver
coins was thus less than the gold dollar (first minted in
1849; before then, only larger denominations had been
coined).8
The face value of subsidiary coins accordingly
was greater than their value in bullion.
The supply of
subsidiary coins was left to the discretion of the Secretary
of the Treasury, and their legal tender limited to a sum
not exceeding five dollars.
The Act also for the first time
imposed a charge for seigniorage, which until then had been
an expense borne by the Government, although subsidiary
coins were not subject to seigniorage.
(The Resumption
Act of 1875 repealed the charge.)9
The overvaluation of gold at the Mint that made the
dollar a gold currency, when the United States was legally
on a bimetallic standard, was reinforced by the gold discoveries after 1848.
In France, also legally on a bimetallic standard from 1803 on, the circulation was almost
exclusively silver since the market ratio was higher than
the Mint ratio of 15-1/2 to 1. When the gold discoveries
after 1848 depressed the value of gold, as in the case of
the United States, the divergence between the Mint and market
ratios served to shift the franc to a gold standard de facto.
Only Great Britain was on a full-fledged gold standard during
the period after 1821, when convertibility was restored after
54
the Napoleonic Wars.
Since Great Britain was the world's
leading trading country and the London money market was the
hub of international capital movements, the gold standard had
international scope despite the limited number of countries
formally adhering to it.
External and internal shocks interacted during the decade
beginning 1834, resulting in a highly unstable performance by
the U.S. economy.
The chief external shock was British in
origin.
British eagerness to invest in the United States in
the early 1830s necessitated a U.S. trade deficit, made possible
by a rise in U.S. prices above those prevailing in Britain.
Thanks to an inflow of specie into U.S. bank reserves, the
money supply expanded, causing U.S. prices to rise.
(It is
not clear that Andrew Jackson's war on the Second Bank of the
United States had any independent consequences for monetary
expansion.)
Ultimately, loss of specie by the Bank of England
led it in 1836 to restrain the capital outflow to the U.S.
It raised the discount rate in July and August, refused to
discount bills of exchange drawn on mercantile houses engaged
in the Anglo-American trade, even at the higher rates, and
as a result, produced financial pressure in the United States
by early 1837 . 1 1
Simultaneously with the early capital outflow from
Britain, a surge in British demand for U.S. raw cotton
triggered a land boom.
Between 1833 and 1836, land sales by
the Federal Government at a constant price sextupled.
News
of the Specie Circular in July 1836, requiring payments to
land agents in specie, concerned the Bank of England because
of the implied rise in the demand for specie in the United
States.
Domestically, the planned distribution to the states
in four equal installments (only three took place) of the
surplus accumulated by the Federal Government from its land
sales, starting January 1, 1837, might also have imposed
a hardship on the banks as funds were transferred from one
institution to a n o t h e r . 1 2
Financial pressure in the United States in early 1837
was aggravated by a fall in the price of cotton, as British
demand declined.
As a result, debts secured by cotton
became frozen, merchants holding such debts went bankrupt,
and banks with such loans in their portfolios suspended
specie payments as an alternative to the repayment of debts
to Britain at a fixed exchange rate.
In effect, the United
States devalued the dollar during the period of suspension
when foreign exchange was available only at a p r e m i u m . 1 3
55
The suspension continued for a year.
In 1838, the
economy revived when Britain resumed capital exports, but
in 1839, loss of specie again prompted the Bank of England
to raise the discount rate.
As in 1837, both the supply of
capital to the United States and the demand for its cotton
fell.
The successor Pennsylvania-chartered Bank of the
United States, which had extended loans on cotton when the
price was high, suspended specie payments in October 1839,
followed by banks in the South and West.
Nine states defaulted on their bonded indebtedness in 1841 and 1842,
shutting off further capital flows from Europe until the
1850s.
Bank failures were widespread, the supply of money
fell sharply, and deflation ruled, 1839-43.
Banking panics also occurred in 1848 and 1857, but only
the latter one was accompanied by restrictions on convertibility and a premium on g o l d .
The gold standard experience of the United States before
the Civil War was dominated by the role of the Bank of
England.
The standard imposed real adjustment costs on
this country.
External shocks produced boom and depression
that further amplified the effects of internal shocks.
Adjustment costs were the price the United States paid for maintaining a fixed exchange rate with sterling.
When the costs
became excessive, specie payments were suspended.
The record of the quarter-century from 1834 on reveals
the magnitude of adjustment costs. Wholesale prices at annual
rates varied as follows
1834-37 (+8 percent); 1837-43 (-7 percent); 1834-47
(+5 percent); 1847-49 (-5 percent); 1849-55 (+5 percent);
1855-61 (-4 percent).
The estimates of real output for the period 1834-59 are
not continuous with the post-Civil War e s t i m a t e s . a n n u a l
rates, they also suggest not much greater stability than in
wholesale prices:
1834-36 (-1 percent); 1836-39 (+6 percent); 1839-40
(-1 percent); 1840-53 (+6 percent); 1853-54 (-4 percent);
1854-59 (+4 percent).
2.
1862-1878 —
the greenback
standard17
Early in 1862, convertibility of Union currency into
gold was suspended as a result of money creation in the
56
North to help finance the Civil War, disturbances in foreign
trade, the general uncertainty arising out of the war, and
the borrowing techniques of the Treasury.
From then until
resumption of specie payments on January 1, 1879, the United
States was legally on a fiduciary standard —
the greenback
standard.
Despite support for inconvertible currency by
many business groups before and during the war, and growing
farm support after the war as agricultural prices fell,
suspension of payments was generally regarded as temporary.
During suspension, greenbacks circulated side by side
with gold, with the price of gold in terms of greenbacks
varying from day to day.
A floating rate of exchange existed
between the two currencies.
The major monetary use of gold
was for foreign transactions.
For foreign payments, gold
was equivalent to foreign exchange, since Great Britain in
particular maintained a gold standard.
Dealers as well as
others having extensive foreign transactions therefore
found it convenient to maintain gold balances as well as
greenback balances.
To accommodate them, New York banks,
and perhaps others as well, had two kinds of deposit accounts:
the usual deposits payable in greenbacks or their equivalent,
and special deposits payable in gold.
The gold deposits were
expressed in "dollars" like the greenback deposits, but the
dollar stood for the physical amount of gold that had corresponded to a dollar before the Civil War and was to again
after 1879.
During the period of suspension, this physical
amount of gold was worth more than a dollar in greenbacks
—
it was worth well over two dollars in greenbacks from mid-1864
to early 1865.
Gold also retained an appreciable, though minor role,
in domestic payments.
Customs duties were payable in gold.
In addition, the Treasury made virtually all interest and
principal payments on its debt in gold at the pre-Civil War
monetary value.
Some private debt instruments required
payment of interest or principal in gold.
Finally, the
West Coast remained largely on a specie basis.
In the rest
of the country, prices were quoted in greenbacks, and gold
offered in payment was valued at its current market premium
in greenbacks.
On the West Coast, by contrast, prices were
quoted in gold, at the pre-war parity, and greenbacks offered
in payment were valued at their current market discount in
gold.
Before the Civil War, the exchange rate between the U.S.
dollar and the British pound varied around $4.86^within a
narrow interval determined by the costs of shipping gold.
From 1862 on, the exchange rate was not so limited and moved
far outside those limits.
It was determined by the demand
for and supply of foreign exchange, and there was no legal
commitments on the part of the United States that prevented
the exchange rate from taking any value that was necessary
to balance international payments.
57
The essential requirement for a return to the prewar
parity was that the exchange rate so determined be within the
initial range determined by the gold points.
Once the Civil War
was over, the most important factor affecting the exchange rate
between the U.S. dollar and the British pound was the movement
of internal prices in the United States relative to prices in
Britain.
A drastic decline in U.S. prices between 1867 and
January 1879 made resumption possible.
The price index fell at
the rate of 5.4 percent per year (see Chart 2-1). Over the same
period, the quantity of money rose at the rate of 1.3 percent
per year.
An exceedingly rapid rise in output was the primary
factor producing the decline in prices.
Specie resumption was a major political objective of the
period and the question whether the government was proceeding
toward this objective too rapidly or too slowly was a major
political issue.
Government action played a minor, if crucial,
supporting role in contributing to successful resumption.
It
may have contributed to the rapid expansion of output through
its policies on sale of public land, land grants to railroads,
and other similar measures which contributed to the expansion of
the West.
But such government action was not of the kind that
anyone at the time or since would have regarded as explicitly
directed toward achieving resumption.
Government action had mixed effects on the mild rate of
growth of the quantity of money outstanding.
On the one hand,
federal and state legislation laid the foundation for the rapid
growth of commercial banking, particularly state banks after
1867, that produced increases in the ratios of deposits to reserves
and deposits to currency.
In addition, the elimination of reserve
requirements against national bank notes in 1874 liberated reserves
that encouraged a rise in the deposit-reserve ratio.
The rise
in the deposit ratios tended to increase the quantity of money
outstanding, and thereby to inhibit price declines and to postpone
the achievement of the prerequisites for successful resumption.
On the other hand, the government did succeed in bringing about
a minor reduction in the stock of high-powered money, mostly
through use of government surpluses and debt refunding operations
to retire Civil War currency issues from 1865 to 1869, and it
thereby helped offset to a limited extent the effect of the
rises in the deposit ratios.
In view of the recurrent political pressures to expand the
greenback issues -- to which the government in fact yielded in
1873-74 following the banking panic of 1873 and the subsequent
business contraction -- and the political difficulty then as now
of obtaining budget surpluses to retire debt, the achievement of
even a minor decline in highpowered money was not a negligible
accomplishment.
The Resumption Act of January 14, 1875, which announced
the intention to resume specie payments at the pre-war parity
un
oo
59
on January 1, 1879/ contained a variety of provisions designed
to appeal to silver advocates (replacement of fractional currency
— a Civil War paper issue — by silver coins); paper money
advocates (removal of existing limits on the aggregate issue
of national bank notes and linking the retirement of greenbacks
— the aggregate outstanding not to fall below $300 million —
to the increase in national banknotes; for every five dollar
increase in national bank notes the Treasury was to retire
four dollars in greenbacks); and gold standard advocates (its main
provisions).
The Act authorized the Secretary of the Treasury
both to use surplus revenue and to sell bonds in order to
accumulate a gold reserve.
At the time, the Act was little
more than the expression of a pious hope and, insofar as it
had any contemporary effect/ it was to heighten the opposition
to resumption.
That opposition was reflected in the free silver movement
that arose in the mid-1870s.
The Monetary Commission that was
formed late in 1876 by a joint resolution of the Congress
presented a year later one majority and two minority reports.
The majority argued against resumption as "not practicable
under the circumstances, until the laws making gold the sole
metallic legal tender are repealed."
Some of the majority
recommended the old silver dollar of 412.5 standard grains
(equivalent to 371.25 grains of fine silver); the rest
recommended a legal relationship between silver and gold of
15.5 to 1 instead of the old relationship of 15.98 to l f achievable
either by reducing the silver content of the silver dollar to
399.9 or by increasing the gold content of the gold
dollar.
They favored the former inflationary effect.
One
minority report rejected silver as unsuitable for a standard
of value but recommended devaluation of the gold dollar by
about 2.6 percent.
The second minority report supported the
principle of silver remonetization only on condition that an
international conference would accept silver as a universal
legal t e n d e r . T h e r e was clearly a range of views on the
proper monetary standard/ with some diehard attitudes toward
resumption at the pre-Civil War parity.
Late in 1877/ the
House passed a bill to repeal the Resumption Act.
The bill
was defeated in the Senate by one vote.
This paper-thin decision
turned out to be politically decisive.
The decline in the quantity of money in the last years
before resumption, which helped foster the particularly rapid
price decline in those years, in part owed something to the
decline in the two deposit ratios associated with bank
suspensions in 1877-78, in part to the influence of the
Resumption Act.
The clause in the Resumption Act requiring
a withdrawal of $4 of greenbacks for every $5 of new national
bank notes was interpreted in a manner that served to contract
total circulation.
The failure to deduct the voluntary
surrender of national bank notes issued by banks retiring
their notes from the gross increase in national bank notes
by other banks effectively reduced outstanding note i s s u e s . 1 9
60
Both before and immediately after resumption, the Treasury
in its refunding operations went to great lengths to avoid the
introduction of even temporary disturbances of any magnitude in
the foreign exchange market.
In 1877-79, the Treasury refunded
about half the average outstanding interest-bearing public debt,
For foreign holders
to take advantage of lower rates of interest.
of securities, calls of old bonds were so timed that one collection
of securities was replaced by another or, if offsetting sales of
new bonds were not possible, surplus from current account was
available to pay for old bonds retired without export of U.S.
gold.
During these years, in fact, the United States was a net
importer of over $5 million in gold, despite a repatriation of
over $300 million of U.S. Government securities by foreigners.
The Resumption Act, and the borrowing and accumulation
a specie reserve under its provisions, had three effects,
working in different directions, on resumption.
of
1.
Insofar as the Act and the specie reserve instilled
confidence in the prospective maintenance of specie payments, it
inhibited either a speculative withdrawal of funds from the
United States or a speculative accumulation of specie, and enhanced
the willingness of foreigners to hold U.S. dollar balances.
Had
there been no Resumption Act, repatriation by foreigners of U.S.
securities in 1876-78 might well have been greater than it was.
More important, by setting a definite exchange rate that was to
be attained and a definite date at which it was to be attained,
the Act offered those speculators with confidence that the
government would in fact succeed in achieving those aims an
incentive to proceed so as to hold it there.
In fact, the monthly
average premium on gold dropped below 2 percent by March 1878
and never thereafter rose above that level.
This effect clearly
favored resumption.
2.
The sale of bonds was an open market operation.
The sale of bonds at home for gold was equivalent to selling
bonds for greenbacks and then using the proceeds to purchase
gold, with the effect of an open market purchase combined with
an equivalent open market sale, the two together leaving
the total monetary base unaffected.
In practice, though gold
was not the legal standard, it was used for monetary purposes
alongside greenbacks.
In consequence, insofar as the gold
purchased came from gold held for monetary purposes by either
the domestic public or the domestic banks, it did, in the first
instance, reduce the reserve basis of the system. However, the
banks and others could always replace gold holdings, if they so
wished, by purchasing gold or its equivalent, sterling, in the
free market at home or abroad and, in fact, that is what happened.
The increase in the Treasury's gold reserves was not appreciably
at the expense of the high-powered money holdings of the public
or the banks. This effect was essentially neutral with respect
to the growth of high-powered money.
61
3.
Since gold was the equivalent of foreign exchange,
the Treasury's purchase of gold constituted an increase in the
demand for foreign exchange.
Insofar as it borrowed abroad
resources that would otherwise not have been available for
loans to this country, it increased the supply correspondingly.
But some of its borrowing abroad must have been at the expense
of other lending to this country (lending was going on even
though the net capital movement from this country was outward);
to that extent, the supply was increased less than the demand
even by foreign borrowing.
Borrowing at home had this effect
to an even greater extent.
By borrowing at home, the Treasury
acquired resources that would have been used in other ways,
some of which might have involved a demand for foreign exchange.
At most, however, only part of the resources would have been
used to purchase foreign exchange, whereas the Treasury used
all of them in this way.
The result of the greater increase
in demand than in supply was to make the greenback price of
sterling higher than it otherwise would have been.
The effect
therefore made resumption more difficult; it required, that
is, a decline in domestic prices sufficient not only to balance
foreign payments on current account at the desired exchange
rate but also to produce a large enough balance of payments
surplus to finance the accumulation of the specie reserve.
Whether the Resumption Act on balance hindered or helped resumption
therefore depends on whether this effect was more or less
important than the effects on confidence and speculation, and
on the growth of high-powered money.
Whatever the conclusion on this score, the cessation of
government borrowing to build up a gold reserve, once resumption
had taken place, removed a source of pressure on the exchange
rate and permitted domestic prices to rise sharply immediately
after resumption, without producing balance-of-payments problems.
3.
1879-1914 —
a gold standard without a central
The success of resumption did not
the monetary standard.
For nearly two
the U.S. financial scene was dominated
had started in the seventies, over the
in the monetary system.
bank20
end uncertainty about
decades thereafter,
by controversy, which
place of silver
The rapid expansion of output in the Western world during
those decades and the adoption of a gold standard over an area
far wider than before added substantially to the demand for
gold for monetary purposes at any given price level in terms
of gold.
That expansion in demand more than offset a contemporary
expansion in supply, as a result both of increased production
of gold and improvement of financial techniques in erecting a
larger superstructure of money on a given base of gold.
The
result was a slow but rather steady downward tendency in product
prices that prolonged and exacerbated the political discontent
initiated by the rapid decline in prices after the end of the
Civil War.
"Greenbackism" and "free silver" became the rallying
62
cries.
The silver forces were strong enough to obtain concessions
that shook confidence in the maintenance of the gold standard, yet
they were not strong enough to obtain the substitution of silver for
gold as the monetary standard.
The monetary history of this period
is therefore one of repeated crises of legislative backing and filling.
The political campaign of 1896 on these issues was conducted
with notorious bitterness involving both class and sectional conflicts.
Fear and smear techniques were used freely on all sides.
The freesilver advocates succeeded in capturing Democratic state conventions
and in maneuvering adoption of a free-silver plank in the Democratic
national convention, which chose William Jennings Bryan as candidate.*
The National Silver party and the people's party —
an agrarian
party — deflected from its extensive reform program by the hope of
victory on the silver issue, also nominated Bryan.
A conservative
Democratic group seceded, held an independent convention, and nominated
its own candidate (John M. Palmer).
The Republic party nominated
McKinley who was persuaded to accept along with the nomination a
platform favoring the gold standard until "international agreement
with the leading commercial nations of the earth . . . can be obtained"
for coining gold and silver at a fixed ratio.
A rump group seceded
from that convention and went over to the Democrats.
The election was won by the Republicans, largely, it has been
claimed, because the farm vote swung to the party as a result of the
rise in price and quantity of farm-product exports during the fall
of 1896.
Once the party was in power, Republican political action
for monetary reform was restrained.
Bryan's strength at the polls,
however, compelled the Republicans to keep a campaign promise to
propose another international conference in Europe to remonetize
silver.
The defeat of the silver inflationists had improved the
United States' bargaining position, but by that time, rising gold
output had snatched from the silver advocates the chance of achieving
an international bimetallic standard.
Not until March 14, 1900,
however, was the Gold Standard Act passed.
It declared the gold dollar
to be the monetary standard of the country and prescribed a reserve
of $150 million in the Treasury for the redemption of paper money.
The defeat of William Jennings Bryan in the Presidential election
of 1896 marks in retrospect the end of the period.
His defeat happened
to follow gold discoveries in South Africa and Alaska and the perfection of the cyanide process for extracting gold.
These developments
produced a rapid expansion of the world's production of gold.
Bryan's
second defeat in the Presidential election of 1900 sealed the doom
*Congressman Henry S. Reuss —
I include at this point an excerpt from
the speech made by William Jennings Bryan at the Democratic convention:
"There are two ideas of government.
There are those who believe
that, if you will only legislate to make the well-to-do prosperous,
their prosperity will leak through on those below.
The Democratic
idea, however, has been that if you legislate to make the masses
prosperous, their prosperity will find its way up through every
class which rests upon them."
63
of silver as a major issue dominating national politics.
The gold
standard had finally triumphed in the United States.
The price reversal, which farmers had sought to achieve with silver, was produced
after 1897 by the p r o d i g i o u s increase in the international supply
of m o n e t a r y gold.
It was sufficiently large to force an upward
price movement over the next two decades despite a continued growth
in world output.
The "money" issue retreated from the center of
p o l i t i c a l controversy.
The gradual rise in prices rendered the gold
standard secure and unquestioned in the United States until World W a r I.
Monetary disturbances during the period from 1879 to 1914
were associated with banking difficulties in 1884, 1890, 1893, and
1907.
Under a fractional reserve banking system, the public's
w i t h d r a w a l of currency from the banks not only reduced the banks'
reserves but also produced a multiple contraction in deposits.
In
some episodes, as in the period 1834-1861, the banks restricted
convertibility of deposits into currency.
As a consequence, currency
sold at a premium, which was equivalent to a depreciation of the
deposit dollar in terms of gold or foreign exchange.
These monetary
disturbances, however, were attributable to the U.S. banking structure
rather than the gold standard system, as was clear from the case
of banking difficulties in 1873.
The need for reform of the
banking structure was widely acknowledged after 1907.
To form a judgment about U.S. experience under the gold standard,
we can examine the behavior of prices and real per capita output
(Charts 2-1 and 2-2), and of the monetary gold stock and the purchasing power of gold (Chart 2-3).
The trend of the wholesale price
index for the period 1834-61 and 1879-1914 was slightly downward, with
a marked degree of variance about the t r e n d . 2 1 Despite a sharp decline
in estimated holdings between 1890 and 1896, the trend of the U.S.
monetary gold stock was positive from 1879 to 1 9 1 4 . 2 2
The trend
of the purchasing power of gold was positive (a falling price level)
from 1879 to 1896, negative (a rising price level) from 1897 to 1914,
reflecting the more rapid growth in U.S. monetary gold than in real
output in the later period.
Deviations from trend in the monetary
gold stock were negatively associated with deviations from trend in
the purchasing power of gold, with some tendency for the purchasing
power deviations to lead the monetary gold stock deviations.
This
would be consistent with a tendency for the price level to revert
towards a long run stable value under the pre-World War I gold standard,
though over the short run inflation or deflation was experienced.
As might be expected, the trend of U.S. real per capita income
was strongly positive from 1879 to 19.14, but with substantial
variance about the t r e n d . 2 3
In sum, c o n t e m p o r a r i e s regarded the pre-World War I gold standard
as a successful commodity standard, international in scope from the
late nineteenth century on.
It provided long-run stability despite
short-term price instability.
Years might elapse before a tendency
to decline or rise in the price level was reversed.
Real output
growth around a rising trend was not steady but the instability was
attributed to special features of the U.S. banking structure.
CHART 2 - 2
U.S. PER CAPITA REAL INCOME IN RELATION TO TREND
1972 DOLLARS
Index Number
Millions of $
15,000
10,000
9,000
8,000
7,000
6,000
1875
66
Relative to Great Britain, the United States was only a small
country in the world economy.
The Bank of England dominated the
world economy, influencing international flows of capital and managing
the gold standard on a narrow gold base, so that the rest of the world
had to keep in step with its actions.
With the monetary systems of
many countries linked together through fixed exchange rates, international payments imbalances led to movements in money supplies,
price levels, the relative prices of exports and imports, incomes
and interest rates.
The extent to which these results were due to relative international peace, relatively free international trade, factor mobility
within and across countries, the concentration of world capital and
money markets in London, and the willingness of gold standard
countries to maintain fixed parities can be judged by comparison
with the absence of these conditions in the post-World War I decades.
24
4.
1914-1933 — a managed gold standard
The Federal Reserve Act was passed in 1913 under peacetime
conditions when it was taken for granted that the gold standard
would prevail.
The Act included a gold standard rule incorporated in
gold reserve requirements for Federal Reserve notes and deposits and
also a "real bills" rule, according to which the criterion for
determining the quantity of money would be linked to "notes, drafts,
and bills of exchange arising out of actual commercial transactions"
(section 13), offered for discount at rates to be established "with a
view of accommodating commerce and businesss" (section 14d).
Both
were regarded as quasi-automatic in their operation.
Taken literally,
the two rules were contradictory.
Maintenance of the gold standard
means that the stock of money must be whatever is necessary to balance
international payments.
The real bills rule sets no effective limit
to the quantity of money.
The Act was no sooner passed than the conditions taken for
granted ceased to hold.
Before the Federal Reserve System began
operations in November 1914, World War I had begun.
Very soon the
belligerents effectively left the gold standard and a flood of gold
started coming to the United States to pay for purchases by the
Allies.
Between September 1917 and June 1919 the United States
controlled gold exports by export licenses and in effect suspended
interconvertibility between paper money and gold.
The gold standard
criterion set a largely ineffective limit on the total quantity of
money.
A worldwide gold standard was re-established for a brief
period in the 1920s, yet the gold standard never again played the
role that the framers of the Act took for granted.
The real bills
criterion fared no better.
Once the United States entered the war,
loans on government securities began to rival commercial paper as
collateral for Reserve Bank rediscounts.
The Reserve System was
authorized to issue notes against rediscounted assets other than
commercial paper, mainly members' 15-day notes secured by government
bonds.
Thus the Federal Reserve System began operations with no
effective legislative criterion for determining the quantity of
money.
67
This conclusion can be documented by comparing the actual course
of events with what would have happened under a fully operative gold
standard.
The wartime experience under a gold standard might not
have differed from what actually occurred:
the large inflow of gold
up to the entry of the United States into the war would have produced
a price rise through 1918 similar to actual experience.
The big
difference would have emerged between the end of the war and 1920
when nearly half of the monetary expansion from 1914 on occurred
because the Federal Reserve subordinated monetary policy to the
alleged necessity for facilitating Treasury funding of the floating
debt plus unwillingness to see a decline in the prices of government
bonds.
The monetary expansion and the accompanying inflation led to
an outflow of gold after the lifting of the embargo despite the great
demand abroad for U.S. exports and despite the departure of most
countries from a fixed parity between their currencies and either
gold or the dollar.
The ensuing decline in the reserve ratio of the
Federal Reserve System finally compelled action to slacken monetary
growth.
The initial action -- a sharp rise in discount rates in
January 1920 — produced a reversal of the gold outflow of May.
The
following action -- a second rise in discount rates in June 1920 to
the highest level in Federal Reserve history until 1973 — was a
deliberate act of policy involving a reaction stronger than was
needed, since a gold inflow had already begun.
It was succeeded by a
heavy gold inflow and a negative rate of monetary growth over the
following year, as both bills discounted by the Federal Reserve and
its portfolio of government securities were sharply reduced.
Wholesale prices were nearly halved by June 1921 from their level in May
1920.
Real output fell precipitously.
The postwar increase in the quantity of money occurred because the
Federal Reserve System did not observe the rules of the gold standard but
exercised discretion.
The subsequent collapse occurred because the
power to manage money was not limited by the requirement to maintain
gold reserve requirements.
Had there been no discretion, neither the
postwar increase, nor the postwar collapse need have occurred.
Other
things equal, the conversion from a wartime to a peacetime economy
would likely have lowered temporarily the level of economic activity,
but the Federal Reserve exacerbated the severity of the contraction.
The price and output movements of the post-World War I years in
this country were part of a worldwide movement.
Throughout most of
the world, for victors, vanquished, and neutral alike, prices rose
sharply before or into 1920 and fell sharply thereafter.
About the
only countries that escaped the price decline were those that were to
experience hyperinflation.
Though many national currencies were not
rigidly tied either to gold or to the dollar, central bank policies
nevertheless produced linkages sufficiently strong to result in common
movements of prices in most national currencies.
Flexible exchange
rates were regarded as a temporary expedient pending return to gold,
and monetary authorities everywhere sought to facilitate such a return
to fixed parities.
The results under managed fiduciary currencies
were therefore similar to those that would have been experienced with
fixed parities.
68
During the balance of the 1920s, the Federal Reserve System did
not permit gold movements to affect the quantity of money outstanding.
Inflows were offset by open market sales of government securities,
outflows, by open market purchases.
Federal Reserve credit after
1923 moved inversely with movements in the gold stock.
The System
achieved stable economic growth with falling wholesale prices, but
this achievement was largely at the expense of economic stability in
Great Britain and the peripheral countries tied to sterling.
Britain's
return to gold in 1925 at a parity that overvalued sterling would
have caused her less difficulty if prices in the United States had
risen instead of fallen thereafter.
The United States would then
have gained less gold or lost some, and the pressure on the pound
v/ould have been eased. When France returned to gold in 1928 at a
parity that undervalued the franc and also did not permit gold inflows
to affect its money stock and prices, the British position was further
undermined.
The monetary standard to which most countries had returned by
1929 was the gold-exchange standard.
They kept their monetary reserves
in the form of balances of other currencies convertible into gold at
fixed prices, notably sterling and dollars, rather than in the form
of gold itself.
Official agencies in such countries, usually the
central banks, often fixed exchange rates directly by standing ready
to buy or sell the national currency at fixed rates in terms of other
currencies, rather than indirectly by standing ready to buy or sell
gold at fixed prices in terms of the national currency.
Since the gold-exchange standard, like the gold standard, involved
fixed exchange rates, it also meant that, so long as the standard was
maintained, prices and incomes in different countries were intimately
connected.
They had to behave so as to preserve a rough equilibrium
in the balance of payments among countries.
The gold-exchange
standard, however, made the international financial system more
vulnerable to disturbances because it raised the ratio of claims to
gold available to meet those claims.
The links by fixed rates of exchange ensured a worldwide decline
in income and prices after 1929.*
As is well known, shocks in one
country's income, employment, and prices, tend to be transmitted to
income, employment, and prices of its trading partners under a fixed
exchange rate system.
The evidence is clear that the United States
was in the van of the movement and not a follower.
If declines
elsewhere were being transmitted to the United States, the transmission
mechanism would be a balance of payments deficit in the United States
as a result of a decline in prices and incomes elsewhere relative to
prices and incomes in the United States.
That decline would lead to
—
a gold outflow from the United States which, in turn, would tend
if the United States followed gold-standard rules —
to lower the
stock of money and thereby income and prices in the United States.
•Congressman Henry S. Reuss — The view expressed here of the events
leading up to the Great Depression is controversial and not shared
by all economists.
69
However, the U.S. gold stock rose during the first two years of the
1929-33 contraction and did not decline, demonstrating that other
countries were being forced to adapt to our monetary policies rather
than the reverse.
The international effects were severe and the transmission rapid,
not only because the gold-exchange standard had rendered the
international financial system more vulnerable to disturbances, but
also because the United States did not follow gold-standard rules.
The Federal Reserve did not permit the inflow of gold to expand the
U.S. money stock.
It not only sterilized it, it went much further.
The U.S. quantity of money moved perversely, going down as the gold
stock went up.
In August 1929, at the start of the business contraction, the U.S. quantity of money was 10.6 times the gold stock;
by August 1931, it was 8.3 times the gold stock.
The result was
that other countries not only had to bear the whole burden of adjustment but also were faced with continued additional disturbances in
the same direction, to which they had to adjust.
The effects first became severe in those countries that had
returned to the gold standard with the smallest actual gold reserves,
and whose financial structure had been most seriously weakened by
World War I — Austria, Germany, Hungary, and Rumania.
To shore up
the financial systems of those countries, international loans, in
which the Reserve System participated, were arranged.
But so long as
either the basic pressure on those countries deriving from deflation
in the United States was not relieved, or the fixed-exchange rate
link which bound them to the U.S. dollar was not severed, such
assistance was at best a temporary palliative.
In country after
country, that is what it proved to be.
As they experienced financial
difficulties, the United States was in turn affected by the reflex
influence of the events it had set in train.
The first major country to cut the link was Britain, after runs
on sterling precipitated by France and the Netherlands.
Britain
abandoned the gold standard in September 1931.
The international
monetary system split in two, one part following Britain to form the
sterling area; the other following the United States, in the gold
bloc.
The trough of the depression in Britain and in other countries
that accompanied Britain in leaving gold was reached in the third
quarter of 1932.
In the two weeks following Britain's departure from gold, central
banks and private holders in a number of foreign countries converted
substantial amounts of their dollar assets in the New York money market
to gold.
The U.S. gold stock declined by the end of October to about
its level in 1929.
The Federal Reserve System, which had not responded
to an internal drain from December 1930 to September 1931 as a series
of runs on banks, bank failures, and shifts from bank deposits to
currency by anxious despositors produced downward pressure on the
U.S. quantity of money, responded vigorously to the external drain.
A sharp rise in discount rates ended the gold drain temporarily but
intensified bank failures and runs on banks.
In 1931, unlike the
situation in 1920, the System's reserve ratio was far above its legal
70
minimum.
The System overreacted
the internal drain.
to the gold outflow and
magnified
The Federal Reserve System justified its passivity in relation
to the internal drain by reason of a shortage of free gold.
The lav/
specified that the System hold against Federal Reserve notes outstanding, the volume of which had increased with the internal drain,
a reserve of 40 percent in gold and additional collateral of 60
percent in either gold or eligible paper (which consisted of commercial, agricultural, or industrial loans, or loans secured by U.S.
government securities rediscounted by member banks; loans to member
banks secured by paper eligible for rediscount or by government
securities; and bankers 1 acceptances, i.e., "bills bought" in Federal
Reserve accounting terminology).
Because the System did not have
enough eligible paper to furnish 60 percent of the collateral for
Federal Reserve notes, part of the gold in excess of minimum requirements had to be pledged for this purpose.
The amount of gold
not needed to meet either minimum gold requirements or collateral
requirements was therefore less than the amount of excess gold
reserves.
The Federal Reserve System asserted that the shortage of
free gold was an important factor preventing the System from engaging
in open market purchases.
Such purchases would have reduced eligible
paper holdings still further by reducing rediscounts and therefore
could have been conducted only to a very limited extent without
eliminating free gold entirely.
Whatever the validity of the Federal
Reserve view, the Glass-Steagall Act of February 27, 1932, disposed
of that problem by permitting government bonds in the Reserve Banks 1
portfolios as well as eligible paper to serve as collateral against
Federal Reserve notes in addition to the 40 percent minimum gold
reserve.
The downward movement of money, income, and prices in the United
States was reversed for a few months in the second quarter of 1932,
when the Federal Reserve undertook a program of open market purchases,
following which there was widespread revival in the real economy in
the summer and fall.
The termination of the program during the summer
was followed in the six months from October 1932 by mounting banking
difficulties, leading to state banking holidays.
By February 1933,
fears of a renewed foreign drain added to the general anxiety.
For
the first time, also, the internal drain partly took the form of a
specific demand for gold coin and gold certificates in place of
Federal Reserve notes or other currency.
The Federal Reserve System
reacted as it had in September 1931/ raising discount rates in
February 1933 in reaction to the external drain but not seeking to
counter either the external or internal drain by extensive open
market purchases.
In the first few days of March, heavy drawings of
gold, both internal and external, reduced the New York Federal Reserve
Bank's reserve percentage below its legal limit. With some reluctance,,
the Federal Reserve Board suspended requirements for thirty days.
On
March 4, the Federal Reserve Banks remained closed as did all the
leading exchanges.
A nationwide banking holiday was proclaimed after
midnight on March 6 by the incoming administration.
All banks were
closed until March 9 and gold redemption, gold shipments abroad or
dealing in foreign exchange were suspended during the bank holiday.
71
The Emergency Banking Act of March 9, 1933, granted the President
emergency powers over banking transactions and over foreign exchange
dealings in gold and currency movements.
The next day, March 10, the
President issued an executive order extending the restrictions on
gold and foreign exchange dealings beyond the banking holiday proper
and, in effect, prohibiting gold payments by banking and nonbanking
inssitutions alike, unless permitted by the Secretary of the Treasury
under license.
These measures were the precursors to a far-reaching
alteration in the legal structure of the monetary standard.
25
5. 1933-1934 — a floating dollar
Despite the effective suspension of gold payments in March
1933, the price of gold or the rate of exchange between the dollar
and currencies that remained rigidly linked to gold, hovered around
"par" for over a month.
The suspension was regarded as part of
the banking emergency and hence expected to be temporary; foreign
exchange transactions were strictly controlled and limited; the
Administration made no official announcement that it proposed to
permit the dollar to depreciate or be devalued; and after some
weeks, several licenses to export gold were granted.
Moreover, the
technical gold position was sufficiently strong so that there was
little doubt the preceding gold parity could have been maintained
if desired; the ratio of the gold stock to the total stock of money
was higher than at any time since 1914.
One important step, unprecedented in the United States, was
taken during this period.
On April 5, an executive order forbade
the "hoarding" of gold and required all holders of gold, including
member banks of the Federal Reserve System, to deliver their holdings
of gold coin, bullion, or certificates to Federal Reserve Banks on
or before May 1 except for rare coins, reasonable amounts for use
in industry and the arts, and a maximum of $100 per person in gold
coin and gold certificates.
The gold coin and gold certificates
were exchanged for other currency or deposits at face value, and
the bullion was paid for at the legal price of $20.67 per fine
ounce.
The "nationalization" of gold outside Federal Reserve Banks
was later completed by order of the Secretary of the Treasury,
dated December 28, 1933, excepting only rare coins and a few other
minor items from the requirement that all gold coin, gold bullion,
and gold certificates be delivered to the Treasurer of the United
States at face value corresponding to the legal price of $20.67 per
fine ounce.
The expiration date for the surrender of gold was
later set for January 17, 1934, when the market price of gold was
in the neighborhood of $33 per fine ounce.
An executive order of April 20, 1933, extending and revising
the gold embargo, and comments by the President at his news conference
the preceding day ended the period of stability in the price of
gold.
The President made it clear that the Administration intended
to permit the dollar to depreciate in terms of foreign currencies
as a means of achieving a rise in domestic prices.
The order
applied the restrictions on foreign exchange transactions not only
to banks licensed under the executive order of March 10, but also to
72
all persons dealing in foreign exchange.
On the same day f the
Thomas amendment to the Agricultural Adjustment Act was offered in
Congress.
The amendment enacted into law on May 12, and explicitly
directed at achieving a price rise through the expansion of the
money stock, contained a provision authorizing the President to
reduce the gold content of the dollar to as low as 50 percent of
its former weight.
The dollar price of gold immediately started
rising, which is to say that so also did the dollar price of foreign
currencies, including those like the French franc that remained on
gold and those like the pound sterling that had gone off gold at an
earlier date.
In the next three months, the market price of gold
rose to $30 an ounce, and thereafter fluctuated erratically between
a low of about $27 and a high of nearly $35 until January 30, 1934,
when the Gold Reserve Act was passed.
During that period, the
United States had a floating exchange rate determined in the market
from day to day, as in the period from 1862 to 1879.
However,
there was considerably greater government intervention in the
market.
On September 8, 1933, an official gold price, to be fixed
daily at the estimated world market figure less shipping and
insurance cost, was established.
The Treasury agreed to buy gold
at that price to give American miners a price as high as they could
have obtained by export in the absence of the export embargo.
Starting in October, the government intervened actively to
raise the price of gold.
The Reconstruction Finance Corporation
was authorized to buy newly mined domestic gold from October 25 on,
and a few days later, through the agency of the Federal Reserve
Banks, to buy gold abroad.
The purchase price was raised almost
daily.
For a time, the large-scale RFC purchases abroad made the
announced price for newly mined domestic gold the effective market
price.
From the end of November, however, until the end of January
1934, the announced price exceeded the market price abroad.
The aim of the gold policy was to raise the prices of farm
products and raw materials.
Most farm products and raw materials
exported by the United States had a world market, hence the decline
in the foreign exchange value of the dollar meant a roughly
proportional rise in the dollar price of such commodities as cotton,
petroleum products, leaf tobacco, wheat, and similar items.
The decline in the foreign exchange value of the dollar was
initially a product of speculative sale of dollars in the expectation
of devaluation — a short-term capital outflow.
The decline was
sustained by shifts in the demand schedules for imports and the
supply schedules of exports produced by the cessation of internal
deflation.
Prices rose in the United States relative to prices in
other countries.
If the exchange value of the dollar had not
fallen, the price rise would have discouraged exports and encouraged
imports.
These forces were subsequently reinforced by U.S. purchase
of gold at home and abroad.
U.S. purchase of gold involved a reduction in the supply of
goods for export, since gold is a potential export good, and hence
a reduction in the demand for dollars by holders of other currencies
73
(to buy the domestically produced gold).
The purchase of foreign
gold involved an increase in the demand for goods for import (namely,
gold) and hence in the supply of dollars offered in exchange for
The combined effect was
foreign currencies (to buy foreign gold).
to create a potential deficit in the U.S. balance of payments at the
former exchange rate.
Given a flexible rate, the potential deficit
was closed by a depreciation of the dollar sufficient to generate,
through an increase in exports or a decline in imports or a movement
of speculative funds, an amount of foreign currencies exceeding the
amount demanded for other purposes by enough to pay for the gold.
These effects depended very little on the fact that gold was
the commodity purchased.
Given a floating exchange rate, essentially
the same effects on the dollar prices of internationally traded
goods would have followed from the same dollar volume of government
purchase of wheat or perfume, or from the economically equivalent
program, adopted after World War II, of building up stockpiles of
foreign-produced strategic goods.
As it was, the use of gold as
the vehicle necessarily meant an accumulation of gold, just as the
use of wheat or perfume would have meant the accumulation of that
commodity.
The choice of gold as the vehicle did have an important effect
on the impact of the program on foreign countries.
In the first
place — and a corresponding effect would be present for any
particular commodity — the program had a special impact on goldproducing countries.
In the second place — and this effect would
be present only for a commodity serving as the basis of a monetary
standard -- it had a special impact on gold-standard countries.
Being committed to sell gold at a fixed price in terms of their own
currency, these countries necessarily experienced pressure on their
gold reserves, which in turn necessitated either abandonment of the
gold standard or internal deflationary pressure.
Those countries
were placed in the position of having to adjust downward their
whole nominal price level.
The device used to achieve a decline in the exchange value of
the dollar — borrowing funds (through the issue of RFC securities)
to purchase gold — was not unprecedented.
The identical device
was employed before 1879 but that time for precisely the opposite
purpose:
to promote a rise in the exchange value of the dollar.
As noted above, the mechanical as opposed to the psychological
effects of the accumulation of a gold reserve rendered resumption
more rather than less difficult.
A major obstacle to using gold as a vehicle for lowering the
exchange value of the dollar and thereby raising prices was the
existence of the so-called gold clause in many government and
private obligations and in private contracts.
That clause, whose
use dated back to the greenback period after the Civil War, required
payment either in gold proper, or in a nominal amount of currency
equal to the value of a specified weight of gold.
It was designed
precisely to protect lenders and others against currency depreciation.
This clause, if honored, would have multiplied the nominal obligations
74
of the federal government and of many private borrowers for interest
and principal of debt by the ratio of the new price of gold to the
old price of gold.
Accordingly, a joint resolution was introduced
in Congress on May 6, and passed on June 5, 1933, abrogating the
gold clause in all public and private contracts, past and future.
In February 1935, the Supreme Court, by a five-to-four decision, in
effect upheld the constitutionality of that resolution.
Not until
the Act of October 28, 1977, was the prohibition against gold
clauses removed, and express allowance for their use provided.
At the outset, the gold policy was one of two mutually inconsistent policies with respect to the monetary standard simultaneously
pursued by President Roosevelt.
The other was the organization of
a World Monetary and Economic Conference which convened in London in
June 1933.
President Hoover had set in train the arrangements for
the convocation of the Conference in May 1932, and it was originally
scheduled to be held in January 1933.
The aim of the Conference
was to achieve cooperative action on international economic problems,
and hopes were high that it would produce an agreement stabilizing
foreign exchange arrangements.
But the Conference was nearly a
complete failure.
One reason was that, while it was in process,
the President apparently decided definitely to adopt the path of
currency depreciation.
He sent a message to the Conference on July
2, 1933, which disassociated the United States from any attempt to
achieve what was described as a "temporary and probably an artificial
stability in foreign exchange on the part of a few large countries"
and was termed a "specious fallacy."
The message was at the time
given much of the public blame for the failure of the Conference.
However, whatever the President might have said and however consistent
U.S. policy might have been, it seems dubious that the economic
preconditions existed for a viable exchange stabilization agreement.
The fundamental difficulties were the probable incompatibility of
the exchange rates of the sterling bloc and of the nations that
still remained on gold, and the unwillingness at the time of the
gold-bloc countries to change their gold parities.
The period of a variable price for gold came to an end on
January 31, 1934, when the President, under the authority of the
Gold Reserve Act passed the day before, reduced the gold content of
the dollar to 13.71 grains and thus specified a buying and selling
price of $35 an ounce for gold (480/13.71 = $35).
He thereby
devalued the gold dollar to 59 percent of its former weight.
Under
the terms of the Act, title to all gold coin and bullion was to be
vested in the United States; all gold coins were to be withdrawn
from circulation and melted into bullion and further gold coinage
was to be discontinued; the Secretary of the Treasury was to control
all holdings and dealings in gold; and the President was authorized
to fix the weight of the gold dollar at any level between 50 and 60
percent of its prior legal weight.
Since the Treasury had formerly valued its own gold holdings
at $20.67 an ounce, and paid only that price for gold it acquired
from private individuals, commercial banks, and the Federal Reserve
System, it realized a large "paper" profit from the revaluation of
75
the dollar; which is to say, the Treasury could print additional
paper money entitled "gold certificates" to a nominal value of
nearly $3 billion without acquiring additional gold and yet conform
to the legal requirement that it hold a specified weight of gold
(now less than before) for each dollar printed.
Those gold
certificates could not be legally held by private individuals, but
they could be held by Federal Reserve Banks.
Accordingly, to
realize its "profits," the Treasury had to turn over gold certificates
to the Federal Reserve System, receiving in return a deposit credit
that it could convert into Fedeal Reserve notes or pay out by check.
Stripped of its legal trappings, the economic effect was identical
with a simple grant of authority to the Treasury to print and put
in circulation nearly $3 billion of fiat currency in addition to
the $3 billion in greenbacks already authorized by the Thomas
Amendment to the Agricultural Adjustment Act.
Of the paper profit, $2 billion was appropriated to a
stabilization fund set up under the control of the Secretary of the
Treasury, who, with the approval of the President, was authorized
to deal in gold, foreign exchange, and such other instruments of
credit as he deemed necessary for the purpose of stabilizing the
exchange value of the dollar.
Of the balance of the paper profit,
$645 million was used for the redemption of national bank notes,
which simply substituted one form of fiduciary currency for another;
$27 million was transferred to the Federal Reserve Banks for making
industrial loans; $2 million was charged off to losses in melting
gold coin; and $141 million remained in the General Fund cash balance.
Thus the interlude during which the United States was not on a
gold standard was concluded.
The type of gold standard on which it
operated thereafter is the subject of the section that follows.
6.
1934 - 1948 —
gold s t a n d a r d ^
the interwar, World War II, and postwar managed
~~
The official price of gold remained fixed at $35 an ounce from
February 1, 1934, until March 31, 1972, when the official price was
altered to $38.
In this sense, the date in 1934 marked the return
to a gold standard.
But the gold standard to which the United
States returned was very different, both domestically and
internationally, from the one it had left less than a year earlier.
The Treasury bought all gold offered to it by domestic producers at
the price of $35 an ounce and sold at this price to licensed domestic
industrial users.
Internationally, the Treasury bought and sold
gold at the fixed price in monetary transactions with foreign
monetary authorities.
The holding of gold coin and bullion was
forbidden to private individuals in the United States, except for
use in industry and the arts and for numismatic holdings, and gold
no longer circulated domestically.
The Federal Reserve continued
to have a gold reserve requirement, but the state of the reserve
was not a direct influence on policy at any time from 1933 until
the threatened depletion of the gold reserve in the period from 1948
to 1968, under the Bretton Woods arrangements.
In 194 5, when the
System was approaching the then existing requirement (40 percent for
76
Federal Reserve notes and 35 percent for Federal Reserve
the law was changed to require a uniform 25 percent.
deposits),
Fixed buying and selling prices for gold were no longer the
main reliance for maintaining rigid exchange rates with other
currencies, even those of countries nominally on gold.
Instead, a
new finance ministry organ was created, the stabilization fund,
with powers to engage in open market purchase and sale of foreign
exchange and gold to influence exchange rates.
During the late
1930s, most of the so-called gold-bloc countries finally left gold,
and nominally floating exchange rates with government intervention
through stabilization funds became the rule.
During the war, many
countries fixed "official" exchange rates but sought to maintain
them by extensive control over foreign exchange transactions,
imitating the devices developed by Hjalmar Schacht for Germany in
the 1930s, rather than by free purchase or sale at fixed prices of
either gold or foreign exchange.
Since then, an even wider variety
of multiple exchange rates came into use.
After 1934, the role of gold in the United States was not that
of the base of the domestic monetary system.
Rather it became a
commodity whose price was officially supported in the same way as
the price of wheat, for example, was under various agricultural
support programs.*
The major difference is that the support price
for agricultural products was paid only to domestic producers, the
gold-support price to foreign monetary authorities as well.
In
addition, the agricultural products accumulated were freely sold at
the support prices to anyone, the gold only to certain foreign
purchasers and to licensed domestic industrial users.
In consequence,
the gold program set a floor under the world price of gold in terms
of dollars.
The substitution in 1934 of a fixed price for gold, rather
than a variable price as under the earlier purchase program in 1933
and early 1934, meant that the number of dollars spent on gold was
no longer under the direct control of U.S. authorities.
Having
fixed the price, they were committed to buy all that was offered by
foreign monetary authorities and domestic producers.
But the
effects of such purchases were the same as under the earlier program.
For the United States, the purchases meant an increase in the dollar
value of other exports relative to the dollar value of imports,
thanks to a rise in prices of internationally traded goods relative
to domestic goods through the combined effect of changes in exchange
*Herbert J. Coyne — Many economists would generally consider gold's
role more distinctive than that of an ordinary commodity in this
period.
Indeed, Dr. Schwartz states in the book she authored with
Milton Friedman, A Monetary History of the United States, 1867-1960
"The link between gold purchases and Treasury
(on p. 473) that:
authorization to create high-powered money is, of course, the main
remnant of the historical role of gold, and still serves to give
gold some special monetary significance."
77
rates and in domestic price levels of the various countries.
For
gold-producing countries, the purchases meant a higher price for
one of their products, hence an expansion in the gold industry
relative to other industries and a rise in income.
For gold-standard
countries, the price fixed for gold in the United States determined
the rate of exchange between their currencies and dollars.
They
either had to adjust their internal price level to that new rate —
in the process presumably disposing of some of their reserves as
measured in ounces of gold — or to change their own fixed price of
gold.
For all gold-standard and gold-producing countries except
the United States and for nongold-standard and nongold-producing
countries, the gold purchases meant a reshuffling of international
trade in response to a decreased U.S. demand for products other
than gold, and an increased demand for such products by goldproducing countries; the program meant an increased supply of
products from the United States and a decreased supply of products
other than gold from gold-producing countries.
Finally, international
trade had to adjust to measures adopted by gold-standard countries
to meet loss of their reserves.
The price fixed for gold initially overvalued the product and
therefore stimulated a rapid increase in production and a rapid
accumulation of government stocks.
Production in the United States
including its possessions rose from less than 2.6 million ounces in
1933 to 6 millon in 1940; in the world from 25 million ounces in
1933 to 41 million in 1940.
The rise in prices of other commodities
and services from 1940 to 1948 lowered the relative price of gold
and reduced U.S. gold output (1948) below its 1933 level, though
world output still exceeded the level of that year.
There was an initial sharp jump in the U.S. gold stock from
January to February 1934 that was accounted for primarily by the
revaluation of gold, but part was produced by the substantial amount
of gold imported, as foreigners took advantage of the higher buying
price that became official on January 31.
Gold was almost immediately
shipped to the United States.
In the six weeks from February 1 to
March 14, more than $0.5 billion of gold (valued at the new price)
was imported.
Once the initial rush of gold imports ended, the
gold stock continued to rise at a fairly steady rate to the end of
1937.
Until France left gold in late 1936, roughly half of U.S.
gold imports came from France.
For the next year, France was a net
importer of gold from the United States rather than a net exporter.
During the last quarter of 1937, a large-scale withdrawal of foreign
short-term balances followed rumors that further devaluation of the
dollar was being considered as a possible counter-cyclical measure.
Withdrawal of European short-term funds from the United States ceased
in July 1938.
These counter movements roughly offset the forces
making for a continued flow of gold to this country, so the total
gold stock remained fairly steady from autumn 1937 to autumn 1938.
Munich then led to a further flight of capital from Europe and a
sudden increase in the rate of gold inflow.
The outbreak of war
simply maintained the rate of the gold inflow.
The intensification
of Britain's war effort after the fall of France in early 1940 and
her attempt to tap American supplies of war material, as she had in
78
World War I, produced a further increase.
Finally, the enactment
of lend-lease in early 1941/ which relieved Britain and her allies
of the necessity of acquiring dollars to finance war purchases,
brought an end to the rapid growth of the gold stock.
In sum, the
gold stock in the Treasury rose from 200 million ounces when the
support price was fixed in early 1934 to 630 million ounces by the
end of 1940, a rise that was 1-3/4 times as much as aggregate world
output during the intervening period.
The gold stock declined
somewhat during the war, but an inflow in 1946-48, arising from the
demand for U.S. goods of war devastated and neutral countries,
brought the stock to nearly an all-time high in 1948 (exceeded only
in 1949).
The rise in the dollar price of currencies of gold-bloc
countries was at first much greater than that of currencies not
linked to gold.
From January 1933 to September 1934 the rise was
70 percent for the currencies of France, Switzerland, Belgium, the
Netherlands, and Italy, and less than 50 percent for the pound
sterling.
The gold-standard currencies therefore appreciated not
only relative to the dollar but also relative to other currencies.
The differential appreciation measured the special impact of our
gold price-support program on the position of the gold-standard
countries.
The fact that they lost gold meant that they bore, as
it were, a larger part of the effect of the expansion of U.S.
exports and contraction of U.S. imports other than gold than other
countries did, and thereby cushioned the initial impact on those
other countries.
Had nothing else intervened, the gold-standard countries would
have had to reduce their internal price levels relative to those of
other countries in order to stay on gold, that is, in order to
render something like the new structure of exchange rates consistent
with no pressure on the balance of payments.
In fact, something
else did intervene, but it intensified rather than eased the problem
of the gold-standard countries.
Gold purchases under the fixed
price-support program coincided with a flight of capital to the
United States from Europe largely induced by political changes:
first, the rise to power of Hitler in Germany which led to a largescale attempt to transfer capital out of Germany; then the increasing
fears of war which led to flight of capital from France, Britain,
and other European countries.
If the United States had continued its floating exchange-rate
policy of 1933 and had fixed no firm price at which it was willing
to buy the world's gold, the capital flight would have produced an
appreciation of the U.S. dollar relative to other currencies, which
would have discouraged exports from the U.S. and encouraged imports
into the U.S.
That outcome would have produced the unfavorable
balance of trade required as the physical side of the capital import
— and incidentally, would have worked against one of the domestic
objectives of New Deal policy, namely, to raise exports relative to
imports as a means of stimulating employment.
If, instead, the
n . s . and other countries involved had all been on a gold standard
. the nineteenth century variety, the attempt to transfer capital to
79
the U.S. would have increased gold reserves in this country, even
without a rise in the dollar price of gold, and decreased gold reserves
abroad; it would have increased proportionately the money stock in
the U.S. and thereby have promoted a rise in domestic prices and
income; and it would have decreased the money stock abroad and thereby
have promoted a fall in prices and income in foreign countries.
These changes would have tended to produce precisely the same shift
in relative prices and the same unfavorable balance of trade as the
appreciation of the dollar under the hypothetical floating exchange
rates would have done.
Since the flight of capital constituted an increased demand for
dollars, its effect on exchange rates and on U.S. trade in commodities
and services other than gold were in precisely the the opposite
direction to those of the gold price-support program and tended to
offset them.
There was simultaneously an increased offer of dollars
for gold on the part of the U.S. Government and and an increased
demand on the part of foreigners for dollars to hold.
By trading
assets held abroad for gold and transferring the gold to the U.S.
Treasury, foreigners could acquire dollars and the Treasury could
acquire gold without in any way affecting the rest of the U.S. balance
of payments.
To the extent that such offsetting occurred, the gold
program did not affect U.S. trade currents and the relative prices
of internationally traded goods in ways referred to earlier.
Since
such changes in trade currents and relative prices tended to reduce
the amount of gold offered for sale to the United States at its
fixed price, the capital inflow meant that this country acquired a
larger amount of gold at $35 an ounce than it otherwise would have.
Hence, while the capital inflow and the gold price-support program
had opposite effects on U.S. exchange rates and on U.S. trade in
commodities and services other than gold, both tended to raise its
gold stock.
For gold-standard countries that were themselves subject
to a capital outflow -- that is, for all the important gold-bloc
countries that had remained on gold after 1933 —
the capital
outflow reinforced rather than offset the effect of the gold pricesupport program.
It required an additional reduction in internal
price levels beyond that called for by the support program.
Exports
had to be still larger relative to imports if they were to finance
the capital outflow without a continued outflow of gold.
The deflation that would have been required by the combined
effect of the U.S. gold price-support program and the capital outflow
was more than the gold-bloc countries were willing to undergo, as
perhaps the effect of either alone might also have been.
Accordingly,
in the fall of 1936, France and Switzerland devalued their currencies
in conjunction with a tripartite agreement between the United States,
France, and Great Britian.
The governments of Belgium and the
Netherlands, which followed suit, and Switzerland also subscribed to
the agreement.27
All these countries set up exchange stabilization funds.
The
Tripartite Agreement of September 25, 1936, provided that stablization fund holdings of foreign currencies would be used to avoid
undesirable fluctuations in exchange rates.
Arrangements for
80
mutual currency support were undertaken, based on daily gold
settlements at prearranged prices.
Each day the authorities of
the six countries would cable each other the prices in terms of
their own currencies at which they would sell and buy gold for the
next twenty-four hours.
Each party would then decide, without
risk of exchange losses, the buying and selling rates for the
currencies of the other participants.
Foreign balances at the end
of each day were convertible into gold at the guaranteed price.
The Agreement was a precursor of the swap arrangements that the
industrialized countries perfected during the Bretton Woods period
of international monetary arrangements.
Under the Agreement, the
U.S. Exchange Stabilization Fund purchased foreign currencies in
New York at rates the foreign funds determined and that day converted
these currencies into gold earmarked to its account abroad or
released to it from foreign earmarked holdings in the United States.
Mainly, however, gold imports into the United States were sold
directly by foreign monetary authorities or private importers to
the U.S. Treasury.
In purchasing gold, as in purchasing agricultural or other
commodities, the U.S. Government can be said to have three sources
of funds:
tax receipts, borrowing, or money creation.
The one
difference is that the support program for other commodities
(excepting silver) carried with it no authorization to create
money, whereas the support program for gold did, thereby automatically providing the financial means for its continuance.
Treasury deposits at Federal Reserve Banks could be increased
through gold purchases by gold certificate credits equal to the
amount of gold purchased times the official price of gold.
Except
for a minor handling charge (1/4 of 1 percent), this was also in
practice the amount the Treasury spent by drawing a check on its
deposits in acquiring gold.
Gold purchases were usually financed
in this way; hence, increases in the gold stockpile produced no
automatic budgetary pressure.
The link between gold purchases
and the Treasury authorization to create high-powered money was
the main remnant of the historical role of gold, and seemed
to give gold some special monetary significance.
The one important
occasion when a different method of finance was used was in 1937,
when the Treasury "sterilized" gold by paying for gold with funds
raised through security i s s u e s . 2 8
It is easier to describe the gold policy of the United States
during the years 1934-1948 than it is to describe the resulting
monetary standard of the United States.
It was not a gold standard
in the sense that the volume of gold or the maintenance of the
nominal value of gold at a fixed price could be said to determine
directly or even at several removes the volume of money.
It was
clearly a fiduciary rather than a commodity standard, but it is
not possible to specify briefly who managed its quantity and on
what principle.
The Federal Reserve System, the Treasury, and still
other agencies supervising the banking system affected the quantity
of money by their actions in accordance with a wide variety of
objectives.
In principle, the Federal Reserve System had the
81
power to make the quantity of money anything that it wished, within
broad limits, but it seldom stated its objectives in these terms.
It sometimes, as when it supported the prices of government securities
from 1942 to 1951, explicitly relinquished its control.
And it clearly
was not unaffected in its actions by gold flows.
So long as the exchange rate between the dollar and other currencies was kept fixed, the
behavior of relative stocks of money in various countries was necessarily close to what would be produced by gold standards yielding the
same exchange rates, even though the mechanism might be quite different.
7. 1948-1968 —
the Bretton Woods dollar/gold
standard
system29
The international monetary system that was designed at the Bretton
Woods Conference in 1944 reflected professional views on the defects
of the arrangements that had prevailed in the 1930s.
Protectionist
trade policies, exchange controls, and competitive currency depreciation
of the pre-World War II period were the cautionary experiences to be
avoided by the postwar world.
Removal of controls on trade and payments
under a system of fixed exchange rates, with adjustment of parities
limited to "fundamental" disequilibrium in the balance of payments,
accordingly were the goals of the system created by the delegates to
the Conference.
The lending facilities of the International Monetary
Fund were to be available to supplement IMF members 1 gold and foreign
exchange reserves to provide them liquidity when in temporary balance
of payments deficit.
Under the Bretton Woods Agreement of 1944, the Articles of
Agreement of the International Monetary Fund provided that currency
par values should be expressed in terms of gold or the U.S. dollar
expressed in gold.
IMF members were required to pay 25 percent of
their quota subscriptions in gold, with some discretion allowed to
reduce the gold proportion for countries with a weak reserve position.
Gold subscription payments became a permanent asset of the Fund
available to supplement its lending resources; many types of transactions between the IMF and its members were required to be made in
gold; and members were required to maintain the gold value of IMF
holdings of their currencies.
Thus gold was to play a central role
in virtually all aspects of IMF operations, and of countries 1
international monetary obligations as defined in the IMF Articles.*
As the Bretton Woods system evolved in practice, most countries
maintained the legal par values for their currencies by intervening in
the exchange markets to maintain exchange rates for their currencies at
specified levels in terms of the U.S.
dollar.
Only the United States
met its par value obligations by undertaking freely to buy and sell
gold in official transactions at the official price —
the dollar's
par value.
The entire system of exchange rates was thus linked to
gold through the convertibility undertakings of the United States.
C o n g r e s s m a n Henry S. Reuss -- This interpretation distorts the
meaning of the Bretton Woods system and exaggerates the role of gold in
it.
In fact, the Bretton Woods system was designed to allow exchange
rates to vary in an orderly way, not to fix them.
Its authors,
including Keynes, viewed it as the very antithesis of a gold standard.
82
The establishment of par values for currencies was an important
item on the Fund's agenda.
Canada, France, the Netherlands, the
United Kingdom and the United States declared their par values in
December 1946; Germany and Japan in 1953, shortly after they became
members; and Italy, not until 1960.
Some of these parities were
short-lived.
An abortive attempt at convertibility of sterling
in 1947 ended in September 1949, when the pound was devalued.
The
Netherlands thereupon devalued the guilder, and France, which had
had separate rates for financial and commercial transactions,
unified them, depreciating the franc vis-a-vis sterling.
In private gold markets until 1953, the price of gold was at
a premium, but the IMF rule required monetary authorities to refrain
from selling gold at premium prices.
In March 1954, several months
after the premium had been eliminated, reflecting balance of supply
and demand, the London gold market reopened.
For the rest of the
decade, the price of gold in private markets remained at $35 an
ounce.
With the return of many European currencies to convertibility
in 1958 r the achievement of the Bretton Woods conception of international monetary normalcy seemed only a matter of time.
The outflow of dollars in U.S. official aid, military spending, and private
investment, and economic recovery in Europe and Japan had enabled
foreigners to add to their holdings of dollars and gold.
Apart
from the 1950-51 Korean war upsurge, U.S. prices were generally
stable until the middle of the decade of the '60s, and their rate
of rise generally lower than in the rest of the world.
Money
supplies in the rest of the world (except in the U.K.) grew at a
faster rate than in the U.S. perhaps as a result of the U.S.
contribution to the buildup of other countries' monetary reserves.
The dollar's status as the reserve currency of the international
economy seemed impregnable.
Commercial banks and private firms
could make foreign payments in their convertible currencies without
the approval of central banks.
Tariff and quota restrictions on
commodity trade among the industrialized countries were eased and
foreign trade grew at a rapid rate during the period.
International
transfers of capital grew, with New York at the center of the
flows, and the dollar assumed the role as the vehicle currency in
which the borrowers obtained capital and the investors lent their
savings.
The successful operation of the system depended on foreign
central banks intervening with their own currencies against the
dollar to maintain par values, and the United States standing
ready to buy or sell gold at $35 per ounce in transactions with
foreign monetary authorities.
The U.S. balance of payments accordingly
was determined largely by the exchange parities other countries
established.
In general, other countries desired surpluses that
would add to their dollar reserves, and the system tended to produce
a steadily weakening U.S. balance of payments and growing doubts
about the sustainability of the U.S. gold convertibility commitment.
83
A portent of the troubled future of the system was that 1960
was the first year in which U.S. gold reserves declined below the
level of its total liquid liabilities to all foreign holders of
assets denominated in d o l l a r s (Table 2-1).
Concern over the continuing conversion of dollars into gold
led the Treasury to activate the Exchange Stabilization Fund.
In
its initial operations on March 13, 1961, acting through the Federal
Reserve Bank of New York as its agent, the Fund sold foreign D-marks
to reduce the premium on that currency.30
on February 13 f 1962,
the Bank was also authorized to buy or sell foreign currencies on
behalf of the Federal Open Market C o m m i t t e e in both spot and forward
markets.
For this purpose access to a stock of foreign currencies
in addition to those acquired from the Stabilization Fund was
needed.
The Federal Reserve therefore negotiated a network of
swap facilities with the central banks of other countries.
The
swap provided a specific amount of foreign currency in exchange
for an equivalent dollar credit for the foreign central bank, with
each party protected against loss due to a change in the par
Invested balances of both
value of the other party's currency.
parties earned the same rate of interest, foreign balances in
special U.S. T r e a s u r y certificates, Federal Reserve balances in
interest-earning deposits abroad.
Balances were available for
p a y m e n t s to the other party or for foreign exchange market transactions.
The swap was a credit line, usually for 3-month periods, renewable
at m a t u r i t y .
By drawing on the credit, both parties initially
raised their gross reserves.
The Federal Reserve normally used
the proceeds of a swap to absorb foreign official dollar holdings;
these transactions in effect, provided forward cover to foreign
official dollarholders, reducing their incentive to convert dollars
into gold.
Repayments of short-term swap credits meant a corresponding
decline in gross reserves.
For the U . S . this could entail a
loss of g o l d .
To deter this eventuality, the U.S. began issuing
nonmarketable securities, with m a t u r i t i e s of 15 months to two years,
denominated in the holder's currency, to fund outstanding swap debt.
A further indication of U.S. concern about gold was the prohibition after m i d - 1 9 6 1 on holding of gold outside the U.S. by
U.S. firms and h o u s e h o l d s , and on March 3, 1965, the abolition of
gold reserve requirements against Federal Reserve d e p o s i t s .
A focus of pressure on the U.S. dollar was the London gold
market.
In March 1960, the price rose above $35 an ounce, as
European central banks and private investors bought gold for
dollars.
The Bank of England sold gold to stabilize the price,
but the U.S. Treasury initially was not willing to restore the
Bank's h o l d i n g s .
Hence, when a rise in the price of gold occurred
in October, the Bank did not intervene.
On October 27, with the
price reaching $40 an ounce, the Treasury agreed to sell gold to
the Bank, reserving for the Bank the decision on intervention in
84
Table 2-1
U.S. Monetary Gold Stock and Liquid Liabilities to Foreigners
(millions of dollars)
End
of
Year
(1)
Total
Monetary
Gold Stock3,
(2)
195*+
1955
1956
1957
1958
1959
I960
21,793
21,753
22,058
22,857
20,582
19,507
17.80U
1961
16,91+7
1962
1963
16,057
15,596
196U
15,1+71
1965
1966
13,8o6b
13,235
1967
12,065
1968
10,892
1969
11,859
1970
11,072
1971
10,206
1972
1973
197U
1975
1976
1977
1978
1979
1980
1981
10,l+87d
ll,652e
11,652
11,599
11,598
11,719
11,671
11,172
11,160
11,151
Total Liquid
Liabilities to
All Foreigners0
(3)
12,1»5U
13,521*
15,291
15,825
16,81+5
19,1+28
20,991+
21,027
22,853
22,936
2h ,068
26,361
26,322
28,951
29,002
29,115
29,901+
29,779
33,271
33,119
33,828
33,6ll+
1+1,735
Ul,89U
1+3,291
1+3,21+2
61+,166
61+,223
78,680
87,620
120,325f
127,1+32*"
152,1+68*"
193,977f
2l+l+,577f
268,l+51f
295,627f
3l+3,683f
85
Notes to Table 2-1
Source:
Col. (2):
Treasury Bulletin, December 1965, IFS-1;
July 1975, IFS-1; February 1982, IFS-1.
Col. (3):
Treasury Bulletin, July 1975,
February 1982, IFS-2.
IFS-2;
(a) The Stock includes gold sold to the U.S. by the IMF with
the right of repurchase, and gold deposited by the IMF to mitigate
the impact on the U.S. of foreign purchases for the purpose of
making gold subscriptions to the IMF under quota increases.
(b) The figure excludes $259 million gold subscription to the
IMF in June 1965 for a U.S. quota increase that became effective
February 23, 1966.
(c) The total includes small amounts due to the IMF arising from
gold transactions, amounts due to official institutions, commercial
banks abroad, to other foreigners, and to nonmonetary and regional
organizations.
Nonliquid liabilities to official institutions in
the source begi nning 1962 through 1973 have been deducted.
Years
for which two entries are shown show differences because of changes
in reporting coverage.
Figures on the first line are comparable
with those for the following dates.
(d) Change in par value of the dollar on May 8, 1972, increased
recorded value of the total gold stock by $828 million.
(e) Change in par value of the dollar on October 18 f 1973,
the recorded value of the gold stock by $1,165 million.
increased
(f)
Includes categories of liabilities previously classified
nonliquid.
the
as
86
the market.
European central banks soon after agreed to refrain
from buying gold in the London market for monetary purposes whenever the price rose above $35.20, the U.S. price plus shipping
costs. When the price fell below that level in 1961, the central
banks returned to the market.
However, in October 1961, when the
price again was reacting to heightened demand, an agreement to
create a "gold pool" was reached among the U.S. and seven European
central banks.
Each member undertook to supply an agreed portion
of net gold sales to stabilize the gold market, as the Bank of
England, as agent for the group, determined to be appropriate.
The members of the pool subsequently agreed not to buy gold
individually on the market, but to give the Bank of England the
right to buy on their joint account when gold supply exceeded demand,
the amount purchased to be distributed in proportion to each
country's contribution to the pool.
The pool functioned until a
surge of buying led to the suspension of the arrangement in March
1968.
During the period of the pool's operation, the participants
sold a net total of $2.5 billion of gold on the London market, of
which $1.6 billion was provided by the United States.
A key development for the international monetary system that
was not perceived as such at the time was the acceleration of the
monetary growth rate and the subsequent acceleration of the U.S
inflation rate in the final years of this subperiod.
What was
perceived was the cumulative growth of deficits in the U.S. balance
of payments.
Assets denominated in dollars grew in excess of the
demand for them by the rest of the world.
Their conversion into
gold, by shrinking U.S. gold reserves, threatened one of the basic
underpinnings of the Bretton Woods structure, namely, convertibility
of dollars into gold.
The Bretton Woods system might have been able to survive an
end of gold convertibility.
It could not survive the inflationary
policies of the center country that characterized the decade from
the mid-60s on.
Crisis management by the IMF and the central
banks of the leading industrialized countries became the hallmark
of the international monetary system during the heyday of Bretton
Woods.31
The chief currency under pressure, apart from the
dollar, was sterling.
Persistent or recurring U.K. balance of
payments deficits impaired the credibility of sterling's external
value, already insecure by reason of the size of sterling balances
held worldwide relative to U.K. gold and foreign exchange reserves.
Private agents displayed lack of confidence in the dollar and
sterling by shifting to currencies whose external values were
regarded as stable or likely to appreciate (during this period,
the D-mark and guilder).
Repeated rescue operations to support
the exchange value of sterling were overwhelmed in November 1967.
The main act was the dollar's
Sterling, however, was a sideshow.
performance.
The gold market was the market in which participants expressed
lack of confidence in the dollar-based international monetary
system.
After the devaluation of sterling in November 1967, the
87
vulnerability of the dollar took center stage.
In the winter of
1967-68, a surge of demand for gold threatened both the London gold
pool and the $10 billion statutory backing for Federal Reserve
notes.
On March 12 f 1968, the U.S. gold reserve requirement was
abolished.
Ostensibly, the gold stock was then available for conversion of dollars held by foreign central banks.
On March 17,
however, the London gold market was closed to avoid further U.S.
gold losses.
The members of the gold pool announced that they would
no longer supply gold to the London or any other gold market and
that they no longer felt it necessary to buy gold from the market.
Official transactions between central banks were to be conducted
at the unchanged official price of $35 an ounce, but the gold
price for private transactions was to be determined in the market.
Central banks were still free to buy U.S. Treasury gold for dollars
but some in fact refrained from doing so.
Germany had explicitly
forsworn converting its dollar holdings into gold in May 1967.
One measure the U.S. authorities might have taken was a rise
in the dollar price of gold, thus increasing the value of the
stock and the flow of reserve assets.
If other countries did not
follow suit by adopting a proportional increase in the price of gold
in their currencies, the U.S. in this way might have obtained a
devaluation of the dollar.
Had the price of gold risen, the gold
demands of other countries might have been satisfied without the
rundown in U.S. reserve assets.
Some countries might also have
revalued because of the inflationary consequences of their payments
surplus, given the gold-based increase in their asset holdings.
The U.S., however, resolutely opposed a change in the monetary
price of gold.
Such action would have required an Act of Congress
which would have produced a long and unsettling debate in the two
Houses, during which time the foreign exchange markets would have
been disturbed.
Moreover, there was no assurance that other
countries would not make corresponding changes in their own
par values, and it was feared that confidence in the stability
of the monetary system would be seriously impaired by a change
in the official dollar price of gold.
Given the fixed price
of gold when national price levels were rising, gold became an
undervalued asset with a resulting gold shortage.
The measures adopted to avoid exchange rate changes were
intended in part to limit international transmission of price
changes.32
Surplus countries tried to avoid price increases;
deficit countries, price declines, both as external consequences
of their balance of payments positions.
Intermittently, depending on cyclical conditions, countries in both categories took
steps to right payments imbalances.
Since palliatives to improve the balance of payments proved
ineffective, deficits had to be financed either by drawing down
reserves or seeking external credit or borrowing facilities,
while surpluses obviously increased reserve accumulations.
During
the heyday of the Bretton Woods system, despite the growth of dollar
assets, the adequacy of international liquidity, in the sense of
88
the quantity of international monetary reserves, was widely debated.
Discussions during this period growing out of concern for the
supply of reserves led to the creation of Special Drawing Rights
by the IMF.33
until 1968, international reserves, however,
were limited to gold, convertible foreign exchange, and reserve
positions in the IMF.
Contrary to the expectation of the way the Bretton Woods system
would operate, financing of payments imbalances for the most part
was arranged through credits governments extended on a bilateral
basis and through international borrowing and lending activities
of commercial banks.
Thus, facilities for international borrowing
and lending activities, apart from the IMF drawing facilities,
became an increasingly important part of the system.
Official dollar reserves of the surplus countries were
augmented at times by actions those countries took in the EuroDollars acquired by their central banks and deposited
dollar market.
in the Eurodollar market either directly or through the Bank for
International Settlements would usually be relent to private
borrowers who could resell the dollars to the central banks.
In sum, world reserves grew rapidly during the period.
8.
1968-1973 —
the breakdown of the Bretton Woods
system
The devaluation of sterling in November 1967 was not regarded
as the prelude to changes in the par values of other currencies,
the devaluation of the dollar in terras of gold, the realignment
of exchange rate relationships among the major currencies, and
the substitution of a short-lived regime of central rates for
the par value system — all of which took place between November
1967 and December 1971.
Instead, it was hoped that balance in
the U.S. and U.K. external payments was finally on the point of
achievement, and that the creation of a Special Drawing Rights
Facility in the IMF would provide the basis for future expansion
of official reserves, supplementing dollars, sterling, gold, and
other reserve assets.
The hope was belied.
The pattern of deficits and surpluses
persisted and worsened in 1970 and 1971.
The U.S. current account
surplus dwindled and the U.S. capital account deficit grew dramatically, producing current account surpluses and capital inflows in
other countries.
The allocation of SDRs in 1970-72 provided additions to already massive acquisitions of dollar reserve a s s e t s . 3 4
As in the heyday of the Bretton Woods system, disbelief of
market participants in the pegged external values of currencies
precipitated turbulence in the foreign exchange market.
The persistent outflow of funds from the U.S. overwhelmed
foreign exchange markets in the first few days of May 1971.
On
May 5, seven European countries closed their foreign exchange
markets, and five others on several continents withdrew their
89
support for the dollar and suspended dealings in D-marks f guilders,
and Swiss francs.
On May 9, both Germany and the Netherlands
announced that their currencies would float, since they could
not maintain exchange rates within the established margins.
In March 1971, before the panic of the foreign exchange
market, there was a request from several European countries for
conversion of officially held dollars into gold to enable them
to pay for an increase in their IMF quotas.
The payout reduced the
U.S. gold stock to the lowest level since 1936.
The dollar outflow
meanwhile accelerated, leading, as noted, to the floating of
European currencies.
The imbalance between U.S. gold reserves
and outstanding dollar liabilities and the weakening U.S. balance
of payments position occasioned the changes the U.S. introduced
on August 15, 1971, to achieve a dollar devaluation.
Chief among
them (besides a price and wage freeze, tax increases and federal
government spending cuts) was a 10 percent import surcharge on 50
percent of total U.S. imports.
The convertibility of the dollar
into gold was formally suspended, as was the use of the swap network through which dollars could be exchanged with central banks
for other currencies.
The effect was to oblige other countries
to hold dollars or to trade them for a price determined in the
market and so revaluing their currencies.
Foreign exchange markets
abroad, except in Japan, shut down.
The Japanese initial attempt
to maintain the pegged rate of the yen compelled them to purchase
$4 billion in the two weeks after August 15.
The yen was then
freed to float upward; other currencies floated when exchange
markets were reopened on August 23.
France introduced a dual
exchange market, with trade and government exchange dealings
based on the par value, financial exchange dealings at a
floating rate.
Restoration of a repegged system of exchange
rates, however, remained the goal of the U.S. and its partners.
After much negotiation, a readjustment of currency parities
was arranged at a meeting at the Smithsonian Institution in
Washington on December 17-13, 1971.
In return the U.S. agreed
to withdraw the import surcharge.
The par values of four
currencies were revalued by percentages ranging from 2-3/4
(Belgium, Netherlands) to 7.7 percent (Japan), with the proviso
that 2-1/4 percent margins of fluctuations (replacing the former
1 percent margin) above and below the new so-called "central"
exchange rates were permissible.
The Canadian dollar continued
to float.
The Smithsonian agreement also specified that the
official dollar price of gold would henceforth be $38, a formal
devaluation of the dollar of 7.9 percent.
While the dollar
remained inconvertible, the new official dollar price of gold
implied a depreciation of the gold-value of the dollar rather
than an appreciation of the dollar value of other currencies.
The central rates established at the Smithsonian meeting
crumbled during the nine months following the floating of sterling
in June 1972.
Once again, the disbelief of market participants
in those rates was revealed in the gold and foreign exchange
90
markets.
The London free market price of gold rose with few
reversals.
Money growth and inflation rates continued to
rise in the U.S. and both the balance of trade and the U.S.
balance of payments deficit soared, with a corresponding
surge in dollar holdings of the industrialized European countries
and Japan.
Capital controls were imposed in 1972 by the Netherlands
and Japan before sterling was floated and Germany followed suit
afterwards.
On February 10, 1973, Japan closed its foreign
exchange market and suspended support of the dollar.
New central
values were set in a hurried round of negotiations, although the
lira, yen, Canadian dollar, the U.K. and Irish pounds, and the
Swiss franc all floated.
Again, the official dollar price of
gold was raised (this time to $42.22), leaving unchanged the gold
value of other currencies.
The new central rates did not staunch
the flow of dollars abroad, and a further crisis erupted in
March 1973.
This time the major industrial countries discontinued
pegging their exchange rates to the dollar.
The EEC countries
in the snake, which had been activated in April 1972, plus Sweden
and Norway agreed to a joint float, with Germany revaluing by
3 percent (in terms of SDRs) in relation to the other members.
Canada, Japan and Switzerland floated individually, as did a
handful of other countries.
Though a large group of nonindustrialized countries pegged to the dollar, the dollar
currency area worldwide contracted; smaller groups of countries
pegged to the French franc or to the pound.
In retrospect, it is likely that under an adjustable peg
system, such as the Bretton Woods system turned out to be, whichever currency is at the center ultimately becomes overvalued.
The reason is the asymmetry of action of the nonreserve currency
countries in the system.
An overvalued currency tends to induce
prompt readjustment because weak exports and excessive imports
create pressure for action.
On the other hand, an undervalued
currency tends not to produce pressure for readjustment because
strong exports and weak imports are easy to live with.
On net,
the nonreserve currency countries that demanded action by the
United States to right its balance of payments produced
devaluations of their currencies against the dollar.
9.
1973-1981 —
standard
the United States on an inconvertible
paper
W h e n pegged rates were abandoned in March 1973, it was
initially assumed that floating was a temporary expedient to be
succeeded by a reformed par value system.
The U.S. took the
lead in opposing the return to such a system.
The dispersion
of inflation rates among the industrialized countries and the
higher variability of rates in inflation since the late 1960s
enforced more frequent changes of exchange rates.
Under the
earlier system, changes in par values were delayed until foreign
exchange market crises were provoked.
The lesson since the shift
in March 1973 was that floating provided more flexibility.
The
U.S. view prevailed.
With the suspension of official gold convertibility, and widespread departures from the IMF's par value
91
provisions, negotiations were held to codify, in the form of
amendments to the IMF Articles, the international monetary
arrangements that had evolved in practice.
Under amendments to the IMF Articles agreed in early 1976
and implemented in April 1978, gold was formally removed from its
previous central role in the IMF and IMF par value obligations were
eliminated.
The official IMF gold price was abolished, as were also
par value, gold convertibility, and maintenance of gold value
obligations.
Gold was eliminated as a significant instrument
in IMF transactions with members, and the IMF was empowered to dispose
of its large gold holdings.
Although the amended IMF Articles
do provide for the future possibility of establishing a system
of stable but adjustable par values, such a decision by the Fund
would require an 85 percent affirmative vote by the IMF members,
The provisions
thus giving the United States an effective veto.
in the amended IMF Articles relating to establishment of par
values specify that the common denominator of the system shall
not be gold or a currency.
It was widely believed that the desired stock of reserve
assets would contract in a world of floating exchange rates compared to a world of pegged rates.
In fact, official holdings of
reserve assets have increased in every year since the float.
From 1950 to 1969, on average, world reserves including gold
rose by less than 3 percent per year, the foreign exchange component by 5 percent per year.
From the end of 1969 to the end
of 1972, the average annual rate of increase of foreign currency
reserves was 43 percent.
Since 1973, the average annual rate of
increase has been 15 percent.
The main source of growth of foreign
currency reserves since 1973, as in earlier years, has been in the
form of dollars.
The apparent demand for reserves has increased
even under floating rates.
A significant change in the distribution of foreign exchange
reserves has occurred since October 1973 as a result of the rise
in the price of oil.
Total foreign exchange reserves of industrial
oil-importing countries have increased at a slightly slower pace
than reserves of all countries, which sextupled since 1970, but
the major oil-exporting countries, which in 1970 held only about
8 percent of total world foreign exchange reserves, by the end of
the decade held about one-quarter of the total.
The motivations
of oil-exporting countries for holding foreign-currency denominated
assets are, however, clearly quite different from those of industrial
countries.
Although other currencies have increased their roles as reserve
currencies in recent years, the dollar has continued to serve as the
main reserve currency, accounting for on the order of four-fifths
of the world's official foreign exchange reserves.
To the extent
of intervention, as under pegged rates, the U.S. has settled its
payments deficits in dollars, which foreigners willingly add to
their asset holdings and use in payments to other countries.
(There has been no intervention in foreign exchange markets by the
92
U.S. for a year and it is forseeably nil, so there are no current
payments imbalances.)
The dollar also remains the main official
intervention currency in foreign exchange markets, and serves as
a common vehicle currency in the interbank market for foreign
exchange.
In effect, the world has adopted an inconvertible
dollar standard.
One change in the international reserve profile was the
creation on March 13, 1979, of the European Monetary System
—
replacing the "snake", the European joint float -- by nine
European countries (Belgium, Denmark, France, Germany, Italy,
Luxembourg, and the Netherlands; the U.K. is a member but does not
participate in intervention arrangements).
The center of the system
is the European Currency Unit (a basket of all nine currencies),
issued by the European Monetary Cooperation Fund in an amount
equal to a deposit of 20 percent of gold and dollar reserves of
participating countries, to be used for settlement of intervention
debts.
ECUs, now included in foreign exchange holdings of the
participating countries, do not increase world monetary reserves,
except for revaluation changes.
The ECUs issued value gold on
the basis of either the average market price of the six preceding
months or the average market price on the day before issue,
whichever is lower.
With gold valued at market price, world gold reserves at
the end of 1979 were larger than foreign exchange reserves.
The U.S. and a number of other countries, however, continue
to value their gold assets at the old official price of $42.22
per ounce, despite the abolition of an official IMF price for
gold.
After the float, the U.S. took the position that gold
should be demonetized.
An opposing view was promoted principally
by France.
Developments reflect the extent to which one or the
other dominated international decisions.
At issue was the use
of gold in official transactions at the free market price, and
the substitution of gold for the dollar in inter-central bank
settlements at a fi*ed but higher official price.
The prescription against official transactions in the gold
market that had been adopted in March 1968 was terminated in
November 1973, but the official price of $42.22 posted in
February 1973 was so far below the private market price that
central banks were unwilling to buy and sell gold among themselves at the official price.
The central banks were equally
reluctant to sell gold on the private market in view of the
possible depressive effect of sales on the market price or in
anticipation of the opportunity to sell in the future at a
higher price.
In December 1973, the IMF terminated arrangements made four years earlier, under which it had been prepared
to purchase gold from South Africa.
In June 1974, countries in the Group of Ten agreed that
gold could be used as collateral for inter-central bank loans
93
at a price other than the official gold price, and in September,
Italy obtained a loan from Germany on the pledge of Italian
gold valued at a mutually agreed price.
In December, the U.S.
and France agreed that central banks were at liberty in valuing
gold holdings for balance sheet purposes to use the market price,
which the Bank of France proceeded to do.
Early in 1975, the countries in the Group of Ten and
Switzerland agreed for a two-year period not to increase the
sum of their and the IMF's gold holdings and to contribute
no support to the price of gold in the free market.
In
August 1975 agreement was reached by an IMF committee that35
the official price of gold would be abolished
members would not be obliged
transactions with the Fund
to use gold
in
a part of the Fund's gold holdings would be sold at
auction for the benefit of developing countries and
another part would be returned to member countries
in proportion to their quotas.
The first public auction of part of the Fund's gold holdings was
held in the June 1976.
A four-year sales program was scheduled.
In the first two years, 16 auctions were held approximately every
six weeks, with aggregate sales of 12.5 million ounces.
The
balance of 12.5 million ounces was sold mainly in 24 auction
lots through May 1980, and a small amount in noncompetitive
sales.
Restitution of 25 million ounces to member countries
over a four-year period was completed in December 1979/January 1980.
The U.S. repealed the prohibition against gold holding
by U.S. residents as of December 31, 1974, and Treasury offered
gold at auction to help meet the expected increase in public
demand for gold.
The first auctions were held in January
and June 1975, when the Treasury disposed of 1.3 million ounces.
No auctions were held in 1976 and 1977.
They were resumed in
1978 and 1979, when the Treasury sold 4.0 and 11.8 million ounces,
respectively, motivated both by the desire to reduce the U.S.
balance of payments deficit on current account and by the belief
"that neither gold nor any other commodity provides a suitable base
for monetary arrangements."36
The gold sales were equivalent to open market operations,
in their economic effect, approximating $0.8 billion in 1978
and $3.3 billion in 1979.
Gold sales by the Treasury reduced
the public's deposits and also bank reserves.
The sales
thus initially may have served as a partial offset to
Federal Reserve open market purchases of government securities
that increased the public's deposits and bank reserves.
It
was a partial offset only because the System's portfolio of
government securities showed a net increase of $7.7 billion
94
in 1978 and of $6.9 billion in 1979.
It was an offset
initially only depending on the Treasury's use of the proceeds
of the gold sales.
To the extent that the Treasury used the
proceeds to retire gold certificate credits and thereby
reduced its deposits at the Federal Reserve, the monetary
effects of the gold sales were contractionary.
However, to
the extent that it disbursed the remainder of the funds it
acquired, the Treasury's action restored the public's
deposits and bank reserves, so the contractionary effect on
the money supply of the gold sales was limited.3/
Since 1979, the Treasury has sold no gold bullion.
In
July 1980, however, it began the sale of half-ounce and oneounce gold medallions, in accordance with P.L 95-630, November
10, 1978.
The legislation provided that not less than 1 million
troy ounces of: fine gold per year be struck into medallions
and sold to the public over a five-year period at a price
covering the market value of the gold content plus all costs.
At the end of 1981, U.S. Government gold inventories amounted
to 264.1 million ounces.
Direct official intervention to maintain the open market
price of currencies within narrow limits has not lessened
under floating rates compared with the pegged parity system.
Intervention in some countries is assigned to nationalized
industries that borrow foreign currency in order to buy their
own currency on the foreign exchange market, in Italy and the
U.K. with government provision of insurance against foreign
exchange loss; in France with no such provision.
In Japan
and sometimes France, dollar deposits held by the government
at commercial banks are used for intervention.
Italian and
French commercial banks intervene at the government's behest.
Central bank intervention may thus be conducted by a variety
of institutions at the direction of the monetary authorities.
Intervention by major industrial countries has been
motivated by a number of considerations during the period
since generalized floating began in early 1973.
The United
States has intervened primarily to avoid disorderly market
conditions and at times (notably after October 1978) to
correct severe movements in the dollar's value not related
to fundamental economic conditions.
Since early 1981, U.S.
policy has been to intervene only in case of severe conditions
of market disorder.
Other countries also have, from time to
time, joined in efforts to maintain the value of their
currencies within narrow margins around central values
established in terms of one another.
Such efforts have been
supported by both intervention and other policies.
There was apparently little intervention during the four
months following the float in February 1973.
The progressive
decline in the weighted exchange rate of the dollar between
February and July 1973 vis-a-vis a group of major currencies
led to a decision by the governors of the central banks of
95
the Group of Ten to support the dollar.
In July 1973, the
Federal Reserve began to intervene in the New York exchange
market to avoid "disorderly market conditions."
Intervention
was effected with the Federal Reserve's own small holdings of
foreign currency or by activating the much larger total of
foreign currency resources available through swap agreements.
Concerted exchange intervention was agreed to by the
Federal Reserve, the Bundesbank, and the Swiss National Bank
in May 1974, after several months of dollar depreciation.
The dollar strengthened until September when renewed weakness
developed through March 1975.
The explanation given by the
Board of Governors w a s : 3 8
Contributing to this decline in the dollar's
exchange value was the asymmetry in intervention
policies between countries with weaker currencies
and those with strengthening currencies.
Intervention sales of dollars by countries supporting
weaker currencies exceeded purchases of dollars
by countries resisting the appreciation of their
currencies.
The net effect of these operations
was to add to the market supply of dollars, depressing
the dollar's average exchange rate.
Explicit though limited approval of management of floating
exchange rates was expressed by the IMF in guidelines it
issued in June 1974.39
Acceptance of intervention as desirable
to counter disorderly market conditions was reiterated in a
November 1975 meeting that preceded the revision of the IMF's
Articles of Agreement in 1976.
The dollar showed little weakness in 1976, and the
Federal Reserve intervened to sell dollars on behalf of other
currencies.
In January the Italian lira came under pressure.
The decline in its exchange value weakened the French franc
within the European currency "snake," leading to substantial
French intervention.
Massive intervention to support
sterling, which declined from $2.00 in March to $1.77 in midSeptember, was provided by a $5.3 billion stand-by credit
arranged by the Group of Ten countries, Switzerland, and the
Bank for International Settlements.
Sterling's further
decline later in the year led to an IMF drawing, further
borrowing, and a facility to reduce official sterling balances.
Intervention was also conducted to moderate appreciations of
the D-mark, the Swiss franc, and the yen.
Renewed weakness of the dollar in early 1977 was masked
in part by large intervention purchases of dollars by the
Bank of England and the Bank of Italy undertaken to limit the
appreciation of their currencies and to rebuild their reserve
positions.
The Federal Reserve intervened only occasionally
during the first three quarters but, as the dollar dropped
more sharply, the Federal Reserve increased the scale of
intervention.
In January 1978, the Federal Reserve was joined
96
by the U.S. Treasury Exchange Stabilization
a new swap facility with the Bundesbank.
Fund, which
negotiated
The decline in the weighted average exchange value of
the dollar accelerated in 1978 through the end of O c t o b e r . 4 0
An anti-inflation program announced on October 24 (involving
fiscal restraints, voluntary wage and price standards, and a
reduction in the cost of regulatory actions) did not moderate
the dollar's slide on the exchange market.
On November 1,
the Administration and the Federal Reserve took further
action.
Foreign exchange resources equivalent to $30 billion
were mobilized to finance intervention as needed to support
the dollar in cooperation with Germany, Japan, and Switzerland.
The Federal Reserve raised the discount rate from 8 1/2
percent to 9 1/2 percent, and imposed a 2 percent supplementary
reserve requirement on large time deposits.
During the last
two months of 1978, U.S. exchange market intervention
in support of the dollar totaled $6.7 billion, accompanied by
significant purchases of dollars by Germany, Japan, and
Switzerland.
By mid-June 1979, the dollar's value (measured
on a trade-weighted basis) had risen from its 1978 low by
about ten percent, and U.S authorities had repurchased a
greater sum of foreign currencies that had been sold in the
last two months of 1978.
The dollar then began to weaken,
and U.S. intervention sales of foreign currencies, chiefly Dmarks, resumed.
Gross sales amounted to $9-1/2 billion
equivalent between mid-June and early October.
In addition,
the Federal Reserve raised the discount rate to 11 percent in
September.
On October 6, 1979, the Federal Reserve announced a wideranging set of measures to tighten monetary control (a shift
in operating procedures from control of the Federal Funds
rate to control of bank reserves; an increase in the discount
rate to 12 percent; a marginal reserve requirement on banks'
managed liabilities), and the dollar began to appreciate.
After April 1980, however, the dollar began to decline, a
movement that was reversed in September.
From October 1979
on, the United States intervened frequently, operating on both
sides of the market.
When the dollar was in demand, it acquired
foreign currencies in the market and from correspondents to
repay earlier debt and to build up balances.
The United
States was a buyer from February to March.
From late March
to early April and beyond, it sold D-marks, Swiss francs, and
French francs.
By the end of July, the U.S. was again
accumulating currencies, making net purchases of D-marks and
lesser amounts of Swiss francs and French francs.
By the end
of 1980, the U.S. was intervening in the foreign exchange
markets virtually on a day-to-day basis.
For 1980 as a whole,
U.S. authorities were net buyers of foreign currencies in an
amount of $8.7 billion equivalent.
Shortly after taking office, the Reagan Administration
announced its intention to limit U.S. intervention only to
instances of serious market disorder.
The reason given for
97
the shift in policy was the Administration's view that intervention
is costly and ineffectual —
and may indeed be harmful — and that
the way to restore exchange rate stability is by the creation of
more stable domestic economic conditions.
Many foreign central
banks, while generally in agreement with the basic principles
underlying the Administration's views, continue to employ a more
active intervention policy.
It is doubtful, however, that such
intervention has much effect over time on the exchange value of
their currencies.
The Bretton Woods system broke down in part.because nonreserve currency countries were unwilling as a group to adopt the
inflationary policies the reserve-currency country was pursuing.
To achieve independent monetary policy, the only workable exchange
rate system was floating, and it was hoped that flexible exchange
rates would permit a country to choose its desired long-run trend
rate of monetary growth and of inflation, independent of other
countries 1 choices.
Even when autonomy exists, monetary policy may perform badly.
It is in this context that the movement in a number of countries
during the 1970s toward the improvement of monetary control must
be viewed.
Central banks have typically used short-term interest rates
as the instrument to control monetary growth.
Under non-inflationary
conditions, this conduct produced a procyclical movement in monetary
growth.
Under the gathering inflationary conditions since the
mid-1960s, the inflation premium that became imbedded in interest
rates made the instrument unreliable as an indicator of restriction
or ease.
Reliance on it contributed to a secular rise in the rate
of monetary growth.
Central banks in a number of countries, some
more willingly than others, in the 1970s adopted targets for monetary
growth without necessarily abandoning their desire to hold down
interest rates or exchange rates, so that successful targeting has
not invariably been the result.
If it was hoped that public
announcement of targets for monetary growth would itself reduce
expectations of inflation, the failure time after time to achieve
the targets has diluted any possible effect on the formation of
expectations.
The period since October 6, 1979, when the Federal Reserve
announced a new procedure to improve control of monetary aggregates,
is probably too brief to pronounce judgment on the likelihood
that the System will achieve its objectives of deceleration in
monetary growth.
The inconvertible paper monetary standard
operated at the discretion of monetary authorities is on trial.**
*Congressman Henry S. Reuss -- While I support floating exchange
rate arrangements, I do not subscribe to this analysis.
**Congressman Henry S. Reuss —
that is on trial.
On the contrary,
it is monetarism
98
What is the current role of gold?
IMF members no longer
define the exchange value of their currency in terms of gold
and account for gold at any price consistent with their
domestic laws.
Gold is no longer the numeraire of the
international monetary system.
The introduction of SDRs
(valued in terms of a basket of national currencies, as of
July 1974, rather than in terms of gold) was intended to
supplement the dollar, gold, and other reserve assets in the
international monetary system.*
The market price of gold until 1980 increased more
rapidly after the float than the prices of most other durable
assets.41
The future role of gold in the international
monetary system as a reserve asset and as a determinant of
the world's price level may depend importantly on the
^Herbert J. Coyne — Again, the Friedman-Schwartz book acknowledges
the present monetary role of gold on p. 684 of A Monetary
History of the United States, 1867-1960, in the summary chapter:
"Today gold is primarily a commodity whose price is pegged
rather than the keystone of the world or the U.S. monetary
system.
However, the legacy of history and the use of gold
as a vehicle for fixing exchange rates still give it a monetary
significance possessed by no other commodity subject to
(Emphasis added)
government price-fixing."
In addition, while gold does not have an officially
defined position, this paragraph fails to take into account
the acceptance of gold as the world's most important reserve
asset and its current use in facilitating official transactions.
Further, it is not mentioned that efforts to demonetize gold
have faltered.
In addition, gold has been utilized in the
European Monetary System, gold restituted to member countries
by the IMF was largely kept and not converted into foreign
exchange, and less developed countries have had a tendency
to build their gold stocks.
Central banks in general have
been net buyers of gold for the first time since 1972, and
many central banks are remonetizing gold and using it for
government financing purposes.
As one observer of gold notes,
"The simplest way to acknowledge gold's role is to buy it."
In the Journal of Law and Economics, Joseph Gold, the
former legal counsel of the IMF, comments on gold's present
and future status:
"It is a widespread view among members that gold continues
to be a reserve asset and continues to have monetary functions.
This view persists notwithstanding the change in the legal status
of gold and the absence of its use in official settlements
or in support of currencies."
99
performance of the dollar.
If the performance of the dollar
improves, gold may play a minor role even if its use as a
reserve asset continues.
Failure of the dollar to perform in
a stable fashion in the future leaves open the possibility of
a restoration of a significant role for gold.
Summary
The United States adopted a de facto gold standard in
1834.
Thereafter, it adhered to some form of a gold standard
with only two extended interruptions, once for 17 years in
the 19th century, and again in this century, for 13 years, if
one dates the interruption from 1968, when the two-tier London
gold market was created; for 10 years, if one dates it from 1971
when convertibility of the dollar, even for official transactions, was formally suspended; for 8 years, if one dates it
from 1973, when floating exchange rates were adopted by the
United States and the industrial countries.
The political
objective of returning to the gold standard was achieved in
the 19th century case, despite opposition from silver and
paper money advocates.
Whether that political objective
exists or is currently achievable cannot be determined from a
retrospective view.
In addition to the two extended interruptions in U.S.
adherence to a gold standard, temporary suspension of a few
weeks to a year's duration occurred in 1837, 1839, 1857,
1893, 1907, 1917-19, and 1933.
In all cases but the latter
two, the years in question climaxed periods of economic
expansion in the United States, fostered by external as well
as internal factors.
The pace of the expansions raised U.S.
prices and incomes above those prevailing in the rest of the
gold standard world.
To bring the U.S. price and nominal
income structure into alignment with that of its trading
partners entailed reductions in the U.S. money stock, usually
resulting from a decline in U.S. gold reserves and in capital
imports from abroad.
Prices, output, and employment subsequently
declined, accompanied by bankruptcies of firms and bank
failures.
Suspension of specie payments in the years under
review was a means of mitigating the costs of deflationary
adjustment that maintaining par values of the exchange rate
imposed.
The devaluation implicit in suspension gave the
economy a breathing spell. With Recovery, the former par
value of the exchange rate was restored.
No special comment is needed on the World War I restriction of interconvertibility between paper money and gold and
the free international movement of gold.
The situation in
^Congressman Henry S. Reuss —
I dissent from this
statement.
100
193 3, however, does require comment.
That year was in no
respect similar to the earlier examples of temporary devaluations.
The year 1933 was a year of a business cycle trough
after four years of deflation.
The deliberate reduction in
the gold content of the dollar was arranged to achieve a price
rise of nongold commodities, and the devaluation was never
reversed.
Moreover, the fixed exchange rate gold standard to
which the United States returned in 1934 was the same in name
only to the pre-1933 gold standard.
Before 1914, gold flows in and out of the United States
were an important determinant of the expansion or contraction
of the economy.
Between 1919 and 1933, large outflows of
gold occasioned contractionary actions by the monetary
authorities; small outflows and both large and small inflows
of gold were sterilized.
After 1934, both inflows and outflows were not permitted to determine monetary growth and the
performance of the economy.
When the gold reserve ratios
applicable to Federal Reserve deposits and notes were close
to the minimum legal requirement, the minimum was lowered and
eventually abolished.
Gold became a symbol rather than an
effective constraint on the operation of the monetary authorities .
Charts 2-1 and 2-2 summarize the evidence on the performance
of the economy; Charts 2-3 and 2-4 summarize evidence on the
purchasing power of gold, whether the gold standard was suspended
or in effect.
Trend movements in prices are the most striking feature
of Chart 2-1.
From 1834 to 186.1, a mild downward trend prevailed,
with pronounced cyclical upswings and downswings around the
trend.
The greenback period from 1862 to 1878 shows the sharp
wartime price rise to 1865 followed by a decline of equal
magnitude spread over the years to the close of the period.
That decline persisted during the gold standard period to 1896,
reflecting the disparity between the rate of growth of the
monetary gold stock and the enlarged world demand.
The reversal
of the downward trend from 1896 to 1914 reflects the dramatic
increase in world gold output during that period.
World War I,
like the Civil War period, shows a steep price increase to
1920, followed by the steep price decline from 1920 to 1921,
rough stability during the 1920s, and then the great deflation
of 1929-33 that restored the wholesale price series to its preWorld War I level, and the implicit price deflator to a somewhat
higher point than the pre-World War I level.
The contraction of
1937-38 is apparent in the post-1933 upswing which continues
into and beyond World War II.
The wholesale price series shows
rough stability in the early 1960s, whereas the implicit price
deflator continues an upward movement.
Both series accelerate
after the mid-1960s.
102
Chart 2-2 plots the deviations of real per capita income from
its long-run trend.
The trend has been strongly positive from
There was substantial variance
1870 to 1980, as might be expected.
about the trend before 1914 but far smaller in magnitude than
from 1914-47, reflecting the sharp swings in the three interwar
deep depressions, 1920-21, 1929-33, 1937-38, as well as the wartime
movements.
However, the pre-World War I variance was marginally
greater than the variance of the deviations from trend post-1948.
A comparison of the standard deviations of year-to-year percentage
change in real per capita income also shows little difference
between the pre-World War I gold standard experience and post-World
5.8 percent vs. 5.5 perceut.
Unemployment was
War II experience:
on the average lower in the pre-1914 period than in the post-World
War I period; 6.8 percent vs. 7.5 percent.
But again, excluding
the interwar years, unemployment 1946-80 averaged 4.8 percent,
reflecting the government's commitment to maintaining employment.
Chart 2-3 compares the purchasing power of gold, derived
in index form from the quotient of the price of gold divided
by the wholesale price index, with the U.S. monetary gold
stock.
Under the gold standard, a rise in the purchasing
power of gold ultimately increased the growth of the U.S.
monetary gold stock by raising the rate of world gold output,
and inducing a shift from nonmonetary to monetary use of gold.
Movements in the purchasing power of gold thus preceded longterm movements in the monetary gold stock.
This relationship
underlay the reversion of the price level towards stability
under the gold standard.
Price increases or decreases tended
to be reversed after a run of years.
Persistent inflation
of post-World War II experience, without a force to reverse
the trend, could not have occurred under a fully functioning
gold standard.
The absence of this positive association
after World War II between the purchasing power of gold and
long-term movements in the monetary gold stock reflects the
loosening of the link between the money supply and the gold stock.
Over shorter periods, the relationship under the gold
standard was in the opposite direction.
Changes in the
monetary gold stock, by influencing changes in the money
supply, produced a negative association between the purchasing
power of gold and the gold stock.
Thus an increase in the
^Congressman Henry S. Reuss -- New discoveries were a far
more important source of change in the world gold stock than
changes in demand.
^^Congressman Henry S. Reuss —
Such price stability as the
world achieved under the gold standard was measured over
decades and centuries, not years.
Prom year-to-year price
level changes were as common and as serious as today.
103
gold stock would lead to an increase in the price level, and
for a given nominal price of gold, lower the purchasing power
of gold.
The negative association may be observed during the
gold standard period, changes in the monetary gold stock
leading short-term movements in the purchasing power of gold.
Chart 2-4 compares the exchange value of money, computed
as the reciprocal of the wholesale price index, with the
purchasing power of gold.
The two series are closely related
until 1968, when the two-tier market for gold was introduced.
The direct relationship until 1968 reflected the existence of
a fixed nominal price of gold.
The inverse relationship
thereafter reflects the increase in private demand for gold
as a hedge against inflation and political instability, once
private transactions were determined in the free market.
To conclude:
The gold standard provided long-term but
not short-term price predictability.
Long-term inflation or
deflation under the pre-World War I gold standard would
predictably be reversed as gold output was discouraged or
encouraged by decreases or increases in its purchasing power.
Thus the price level tended to revert toward a long-run stable
value under the gold standard, providing a degree of
predictability with respect to the value of money.
Subsequent
to World War I, the discipline of the gold standard came to be
regarded as an impediment to the management of the economy to
achieve the objectives of growth and high employment.
The
deep depressions of the inter-war years were the measure by
which the economy under a gold constraint was judged to be a
failure.
The loosening of the link to gold after World War I
and its abandonment fifty years later reduced long-term price
predictability.
Belief in long-term price stability eroded
as public perception of the absence of a long-run constraint
on monetary growth took hold.
Although price stability was
generally included among the goals of the post-World War II
era, in fact stability of employment took precedence.
In the
event, by early 1981 r neither goal was in sight.
104
Notes to Chapter 2
1.
Act of April 2, 1792, sec. 9, in National Monetary
Commission Laws of the United States Concerning Money,
Banking, and Loans, 1778-1909 [Laws], Washington:
Government Printing Office, 1910, p.475.
2.
J.L. Laughlin, The History of Bimetallism in the United
States, 4th ed., New York:
Appleton, 1901, pp. 51, 57.
3.
Laws, p. 496.
4.
Laughlin, op. cit. , pp. 64-71.
5.
Act of Janaury 13, 1837, in Laws, p. 502.
6.
Laughlin, op. cit., p. 77.
See also David A Martin,
"1853:
The End ol Bimetallism in the United States,"
Journal of Economic History 33 (December 1973):
825-44.
Laughlin dates the 4 percent premium on silver coins
as of 1853; Martin dates it as of 1851.
7.
Laws, p. 512, The Act of Feb. 21, 1853, states the standard weight of silver in a 50-cent coin as 192 grams,
which is equivalent to 172.8 grams per one-half a fine
troy ounce.
8.
Laws, p. 508.
9.
Laws, p. 574.
10.
Laughlin, op. cit., pp. 118-20; J.E. Cairnes, Essays
Theoretical and Applied, London:
in Political Economy:
MacMillan, 1873, p. 142.
11.
George Macesich, "Sources of Monetary Disturbances in
the U.S., 18 34-1845," Journal of Economic History 20
(September 1960): pp. 407-34; Peter Temin, The Jacksonian
Economy, New York: Norton, 1969, pp. 28-82, 138-39.
12.
R.H. Timberlake, Jr., The Origins of Central Banking
in the United States, Cambridge: Harvard University
Press, 1978, Ch. 5, "The Specie Circular and Distribution of the Surplus," pp. 50-62; Temin, op. cit.,
pp. 120-136.
13.
Temin, op. cit., 113-20; pp.
14.
Bray Hammond, Banks and Politics in America from the
Revolution to the Civil War, Princeton: Princeton
University Press, 1957, pp. 707-17.
141-47.
105
15.
U.S. Bureau of the Census, Historical Statistics of
the United States, Colonial Times to 1970, Bicentennial
Edition, Part 1, Series E-52, p. 201.
16.
These are unpublished partial estimates of GNP in 1860
prices, constructed by Robert E. Gallman.
The estimates
are partial because they do not include the change in
inventories.
It is for this reason that the annual
rates of change do not show the cyclical movements of
the economy.
Those movements are dominated by change
in inventories.
An alternate real income series, in
1929 prices, is available in Thomas Senior Berry,
Estimated Annual Variations in Gross National Product,
1798 to 1909 (Richmond, Bostwick Press, 1968).
Annual
rates of change of these estimates (shown there in
Table 1, col 3, p. 32) are: 1834-37 (+5); 1837-38 (-1);
1838-56 (+4.6); 1856-57 (-8); 1857-59 (+6).
17.
This section draws heavily on Milton Friedman and Anna
J. Schwartz, A Monetary History of the United States,
1867-1960 [History], Princeton, Princeton University
Press, 1963, pp. 15-88.
18.
Report and Accompanying Documents of the United States
Monetary Commission Organized Under Joint Resolution of
August 15, 1876 [44th Congress, 2d Sess., Senate Report
No 703], Washington, G.P.O., 1877, vol. 1, pp. 1-160.
19.
Timberlake, op. cit., Ch. 8, "The Panic of 1873 and
Resumption," pp. 108-119.
20.
See Friedman and Schwartz, History, pp. 89-188.
21.
Sources of wholesale prices:
1800-1889, U.S. Bureau
of the Census, Historical Statistics, Series E-52,
pp. 202-203, shifted from 1910-14 to 1972 base; 18901970, ibid., Series E-23, p. 199, shifted from 1967
to 1972 base; 1971-1979, U.S. Department of Labor,
Bureau of Labor Statistics, Handbook of Labor Statistics,
December 1980, Bulletin 2070, Table 140, p. 334, shifted
from 1967 to 1972 base; 1980, Survey of Current Business,
August 1981, pp. 5-7, producer prices, all commodities,
shifted to 1972 base.
22.
Source of monetary gold stock:
1875-1878, Phillip Cagan,
Determinants and Effects of Changes in the Stock of Money,
1875-1960, New York, Columbia University Press for NBER,
1965, Table F-7, p. 340; 1879-1913, Friedman and Schwartz,
History, Table 5, col. 1, p. 131, Table 8, col., 1 p. 180;
1914-1941, Board of Governors of the Federal Reserve
System, Banking and Monetary Statistics, 1914-1941, 1943,
p. 536, plus $237 million deducted by the source restored
annually 1914-1933, and 1934-41 figures recalculated at
$20.67 per ounce instead of at $35; Banking and Monetary
106
S t a t i s t i c s , 1914-1941r 1943, p . 536, p l u s $237 m i l l i o n
deducted by the source restored a n n u a l l y 1914-33, and
1934-41 figures recalculated at $20.67 p e r ounce instead
of at $35; Banking and M o n e t a r y S t a t i s t i c s 1 9 4 1 - 1 9 7 0 ,
p . 899, r o P A i m i a h P ^ 1Q7L-1980, Federal Reserve B u l l e t i n ,
Dec. 1976, p. A59; Dec. 1978, p. A55? A u g . 1981, p.
A53, r e c a l c u l a t e d .
Purchasing p o w e r of g o l d :
See
Statistical C o m p e n d i u m b e l o w .
Sources of real per capita income:
Derived from a
nominal income series; p o p u l a t i o n ; and a price d e f l a t o r
implicit in net national p r o d u c t in Milton F r i e d m a n
and Anna J. Schwartz, M o n e t a r y T r e n d s in the United
States and the United K i n g d o m , 1867-1975 (in p r e s s ) ,
Ch. 4, extended 1976-80, in the same way as the figures
w e r e constructed for preceding y e a r s .
The price d e f l a t o r ,
in 1929 p r i c e s in the source, has been shifted to a 1972
base.
The trend line shown on Chart 2-2 w a s derived
as follows:
log y = 6.58 + 0.016687 time,
(316.1)
(52.9)
where y
R*
SEE
D.W.
= real per capita
= .962
= .10
= .342
income.
An alternative series that was discussed at one of
our m e e t i n g s is a Bureau of Labor S t a t i s t i c s series of
real net spendable w e e k l y e a r n i n g s of a Worker w i t h three
dependents.
This series d i v e r g e s m a r k e d l y from 1962
on from a series of real p e r capita d i s p o s a b l e p e r s o n a l
income, showing a p r o g r e s s i v e l y steeper decline that
does not c h a r a c t e r i z e the real per capita d i s p o s a b l e
personal income series (or the real per capita income
series).
As an article by Paul R y s c a v a g e , "Two d i v e r g e n t
m e a s u r e s of p u r c h a s i n g power," M o n t h l y Labor R e v i e w ,
A u g . 1979, p p . 25-30, e x p l a i n s , the real e a r n i n g s
series is a faulty m e a s u r e .
It is constructed from
e s t i m a t e s of average hourly e a r n i n g s and average w e e k l y
hours of both full-time and p a r t - t i m e w o r k e r s .
The
two e s t i m a t e s are m u l t i p l i e d to o b t a i n average w e e k l y
earnings.
From the gross average figure, the BLS
d e d u c t s the social security tax and the Federal income
tax liability applicable to a married w o r k e r with three
dependents.
The C o n s u m e r Price Index is then divided
into the net spendable e a r n i n g s to arrive at real net
spendable e a r n i n g s .
The key problem with the series is the m e a s u r e of
gross average w e e k l y e a r n i n g s .
It includes not only
107
w e e k l y earnings of m e n , the m a j o r i t y of whom work full
time, but also the w e e k l y earnings of women and
teenagers, many of whom work part time.
The earnings
of the latter two classes of w o r k e r s pull down the
o v e r a l l average for p r o d u c t i o n and nonsupervisory
workers.
Since the series of real net spendable weekly earnings of a worker with three dependents is not based on
e a r n i n g s d a t a for a w o r k e r with these characteristics,
it does not provide a reliable measure of his economic
w e l l - b e i n g , as the BLS a c k n o w l e d g e s .
At the Hearings we conducted on N o v e m b e r 13,
Professor Roy Jastram suggested that "the use of real
per capita income as a measure of the comparative
fluctuations in the economy with and without the gold
standard" was m i s l e a d i n g .
S p e c i f i c a l l y , he argued that
unionization of labor and the growth of transfer payments since 1934 tended to diminish declines in real per
capita income thereafter.
Since transfer p a y m e n t s
do not raise aggregate real incomes, it is hard to see
why per capita results would be affected.
Unionization
might have increased instability insofar as it reduced
income for those not covered by unions.
In any event
we reject Professor J a s t r a m ' s suggestion that manufacturing
production is a m o r e even-handed m e a s u r e of the severity
of cyclical movements in both gold standard and post-gold
standard p e r i o d s .
Since manufacturing p r o d u c t i o n has
declined relative to aggregate GNP, it is a statistically
biased measure of economic well-being over the past half
century.
24.
Friedman and
25.
Ibid., pp.
26.
Ibid., pp. 471-76;
27.
Arthur I. B l o o m f i e l d , Capital Imports and the A m e r i c a n
Balance of P a y m e n t s , 1934-39, Chicago:
University of
Chicago Press, 1950, p p . 158-66.
28.
During the first nine m o n t h s of 1937, the Treasury did
not use the cash balances it could create on the basis
of the gold it b o u g h t .
Instead, it paid for the gold
by borrowing from the public and banks.
What the
T r e a s u r y took from the public and the banks by the sale
of securities offset what it paid to the public and the
banks by the purchase of g o l d .
A c c o r d i n g l y , highpowered money did not reflect the growth of the gold
stock.
Schwartz, History, pp.
189-406.
462-71.
508-11;
550-51.
108
The operation was economically identical with the
sterilization actions of the Federal Reserve in the
1920s, when the System sold bonds on the open market to
offset the increase in high-powered money that would
otherwise have arisen from a gold inflow.
The Treasury
program became effective at about the same time the
Federal Reserve was imposing two increases in reserve
requirements on member banks (on March 1 and May 1, 1937;
an earlier increase was imposed in August 1936).
The
sterilization program sharply reinforced the effect
of the rise in reserve requirements in producing monetary
restrictiveness:
the rise in reserve requirements increased the demand for high-powered money; simultaneously
the Treasury's action virtually brought to a halt an increase in high-powered money which had been proceeding
with only minor interruptions since 1933.
A start toward desterilization was made in September 1937, when the Board of Governors of the Federal Reserve
system requested the Treasury to release $300 million
from the inactive gold account.
The Treasury released
the amount requested by the Federal Reserve, but it
continued to sterilize all further gold purchases,
which amounted to $174 million in that m o n t h .
Hence
inactive gold held by the Treasury fell only $126
million in September 1937.
As of January 1, .1938 , the Treasury limited the
addition to the inactive gold account in any one quarter
to the amount by which total gold purchases exceeded
$100 million, and on April 19, 1938, discontinued the
inactive gold account, which then amounted to about
$1.2 billion.
In the first half of 1938, accordingly,
there was a more rapid increase in high-powered money
than in the gold stock.
The Treasury printed gold
certificates corresponding to some of the inactive gold
in the Treasury, deposited the certificates at the
Reserve Banks, and drew on the balances it thus
established to pay government expenses or to redeem
debt.
The operation was essentially an open market
purchase of securities undertaken at Treasury initiative.
Initially, the shift of inactive gold from Treasury
cash to Treasury deposits at the Federal Reserve Banks
had no immediate monetary effect.
Effective desterilization did not occur until more than a year after formal
desterilization.
Only after February 1939 did the sum
of Treasury cash holdings and deposits at Reserve Banks
decline toward the level that had prevailed before the
sterilization program.
29.
This section draws heaviliy on Chapter 2 of The International Transmission of Inflation (in press) by M.R.
Darby, J.R. Lothian, A.E. Gandolfi, A.J. Schwartz, and
A.C. Stockman.
109
30.
See "Treasury and Federal Reserve Foreign Exchange
Operations," in Federal Reserve Bulletin, Sept. 1962,
pp. 1138-53.
31.
Margaret G. de Vries, The International Monetary Fund
1966-1971:
The System Under Stress, Washington, D.C.,
1976, Part Five, "Exchange Rates in Crisis," pp. 432-48.
32.
For a description of the controls that were imposed, see
International Monetary Fund, Annual Report on Exchange
Restrictions, various editions.
33.
Lance Girton argues that the emphasis upon international
liquidity during this period and the subsequent introduction of SDRs stemmed from the application of the realbills doctrine to the international monetary system.
See his "SDR Creation and the Real-Bills doctrine,"
Southern Economic Journal 41 (July 1974); pp. 57-61.
The
real-bills doctrine is the notion that if banks restricted
their advances to the nominal value of trade, the money
supply would have a desirable elasticity.
In fact,
it would become unstable.
The fallacy in the doctrine
is that it sets no effective limit to the quantity
of money.
34.
By the end of the fourth quarter of 1972, the value
of SDRs was slightly over $9.4 billion or 6 percent
of total world international reserves as reported in
International Financial Statistics, July 1974.
35.
IMF, Annual Report, 1975, p. 44.
36.
See Annual Report of the Secretary of the Treasury on
the State of the Finances, 1978, p. 491, Exhibit 60, a
press release on the increase in the amount of gold
sales, announced Aug, 22, 1978 ("The sales will make
an important contribution toward reducing the U.S.
balance of payments deficit on current account") and
Exhibit 61, a statement by Assistant Secretary Bergsten
before the Senate Committee on Banking, Housing and Urban
Affairs in which the quotation in the text appears.
37.
Only $42.22 of the price obtained for every ounce the
Treasury auctioned was applied to the retirement of
gold certificates.
The balance was applied to the
Treasury's General Fund.
38.
Board of Governors of the Federal Reserve System,
Annual Report, 1974, pp. 65-66.
39.
The first guideline stated:
"A member with a floating
exchange rate should intervene on the foreign exchange
market as necessary to prevent or moderate sharp and
disruptive fluctuations from day to day and from week
61st
110
to week in the exchange value of the currency."
A second
guideline encouraged intervention to moderate movements
from month to month and quarter to quarter "where factors
recognized to be temporary are at work."
A third guideline suggested consultation with the Fund if a country
sought to move its exchange rate "to some target zone
of rates."
A fourth guideline dealt with the size of
a country's reserves relative to planned intervention;
a fifth, with avoiding restrictions for balance of
payments purposes; a sixth, with the interests of other
countries than the intervening one.
IMF Annual Report,
1974, pp. 112-116.
40.
The index of weighted average exchange values of the
dollar against the "G-10" contries plus Switzerland
(March 1973=100) declined at an average annual rate
of 9.3 percent between January and November 1978.
From January 1976 to January 1978, it had declined at
a 3.3 percent annual rate.
41.
The price of gold from the end of 1973 to the end of
1980 increased at an average annual rate of
20.7 percent.
By comparison, the total returns on
common stock and on long-term corporate bonds increased
at average annual rates of 7.2 percent and 4.0 percent,
respectively.
(These figures appear in R.G. Ibbotson
and R.A. Sinquefield, "Stocks, bonds, bills and inflation:
Year-to-year historical returns (1926-1974)"; "Simulations of the Future (1976-2000)" in Journal of
Business 49, Jan. 1976, pp. 11-47, and July 1976, p p .
313-338.).
The U.S. CPI over this period increased at
a rate of 7.8 percent per year on average and the London
E c o n o m i s t 1 s world commodity price index increased at a
9.5 percent rate.
Chapter 3
Types of Monetary
Standards
The original meaning of the term monetary standard was that a
particular weight of either gold or silver served as the supreme
form of money with which all lesser forms of money were interconvertible.
The term has since come to be used as meaning a monetary
system, that is, the institutions and practices relating to payments
for the settlement of debts.
In this chapter, we examine the
character of various types of monetary standards, including some
of which we have no examples in modern times.
I.
Alternative
Standards
A monetary standard has two aspects, one domestic and one
international.
The domestic aspect applies to the arrangements
regulating the quantity and growth rate of the internal money
supply.
The international aspect applies to the arrangements by
which the external value of the currency is determined.
These two
aspects are present for any type of monetary standard.
It is
possible to adopt a purely domestic monetary standard with the
external value of a country's currency floating with respect to
other currencies.
On the other hand, a country could choose
arrangements that fixed the external value of its currency with
respect to other currencies.
Whether or not the international
aspect would govern the domestic aspect depends on the design of a
given monetary system.
The two broad divisions of monetary standards are commodity
and paper standards.
Commodity standards may be based on metals,
other commodities, or baskets of commodities including metals.
Metallic commodity standards have usually been based on silver or
gold or a combination of both known as bimetallism.1
We limit
our examination of metallic standards to variants of the gold
standard before turning to the examination of other commodity
standards and of paper standards, commenting first on domestic and
then international aspects of each.
Finally, we consider the
strengths and weaknesses of the gold standard variants as a group,
of other commodity standards, and of paper standards.
Ill
112
A.
Variants of the Gold
Standard
The basic argument that is offered in support of all
variants of a gold standard is that gold has intrinsic value
and therefore serves as a standard of value for all other
goods.*
In addition, supporters view gold as a store of
value because new production adds only a small fraction to
the stock accumulated over centuries, hence prices denominated
in terms of gold will not vary greatly from year to year.
If
other forms of money exist, for example, government-issued or
bank-issued paper currency and bank deposits, then convertibility into gold at a fixed price would assure that, even if
inflationary policies were adopted, the monetary authorities
would be compelled to abandon such policies.
An increase in
government paper currency would tend to raise prices in terms
of paper currency, would reduce the purchasing power of paper
currency, and induce money holders to convert their paper
dollars to gold, putting pressure on the government's gold
holdings.
At the same time, with gold as a country's reserve
asset, adjustment to balance of payments deficits and surpluses
would be automatic.
Thus an increase in the domestic money
supply by ultimately raising the price level would raise the
price of exports relative to the price of imports, leading to
In addition,
a balance of payments deficit and a gold outflow.
the increase in the money supply would lower domestic interest
rates relative to those abroad, inducing a capital outflow
and a further gold outflow.
Another attribute claimed for gold standards is that the
rate of increase in the gold money supply would vary automatically with the profitability of producing gold, and hence
assure a stable money supply and stable prices at least in
the long run.
Thus, a rapid increase in the output of gold,
due to gold discoveries or technological improvements in gold
mining, would raise the prices of all other goods in terms of
gold, making them more profitable to produce than gold, and
ultimately leading to a reduction in gold output.
Moreover,
the initial reduction in the purchasing power of gold would
lead to a shift in the demand for gold from monetary to nonmonetary use, thus reinforcing the output effects.
Conversely,
a decline in prices of goods and services, due to technological
improvements in the nongold sector, would increase the profitability of gold production, encouraging increased gold output,
which would ultimately tend to raise the price level.
The
initial increase in
the purchasing power of gold would also
lead to a shift in the demand for gold from nonmonetary to
monetary use, thus reinforcing the output effects.
Long-run
price stability would be the result.
^Congressman Henry S. Reuss —
purely mystical.
This view is, of
course,
113
Gold standards vary depending on the presence or absence
of the following elements:
1.
a national money
a.
present
b.
absent
unit
2.
nongold national money issued by either the government
or by a fractional-reserve commercial banking system
3.
a central
bank
a.
with gold reserves only
b.
with mainly foreign exchange
reserves
4.
convertibility of nongold money
bars
into gold coin or gold
5.
classes of holders for whom nongold money is convertible
la.
100 percent gold coin standard with national money
Under such a standard, the national unit is defined as a
specific weight of gold which thus sets the price of an ounce
of gold in terms of that unit.
There are 480 grains of gold
in a fine troy ounce.
Dividing 480 grains by the weight of
the national -unit in gold yields the price.
Defining a
dollar, for example, as 11.368 grains of gold sets the price
of an ounce of gold at $42.22+.
Under a 100 per cent gold
coin standard, gold would be money, but prices would be
expressed in terms of the national unit — dollars, pounds,
marks, or francs.
Banks would exist to issue warehouse
receipts for gold in the national money unit and would hold
100 percent reserves.
Terms of loans by the banking system
and others would be expressed in the national money unit.
Exports or imports of gold coin would be unlimited and free
of taxes and restrictions.
The supply of money and the prices of goods in terms of
that money would be determined in the market by the demand
for gold for monetary and nonmonetary uses 2 and by the supply
of gold, which would be governed by the opportunity cost of
producing gold.
The demand for gold for nonmonetary use
would be governed by the relative price of monetary gold and
all other commodities.
The demand for monetary gold would be
governed by (a) total wealth available to hold in asset form;
(b) the total amount of goods and services produced; (c) the
average price of those goods and services; (d) the return on holding
monetary gold relative to the return available on alternative
assets; and (e) the tastes and preferences of holders of money.
114
In this system, the market would be free to choose
of money other than gold and warehouse receipts.
forms
Government intervention in the monetary system would be
limited to its undertaking to buy gold from the public at a
fixed price and converting it into coin, and to sell gold to
the public at a slightly higher fixed price, if it so chose,
the difference between the two prices representing brassage
—
the government production fee to cover cost of coin manufacture.
The determination of the external value of a national
currency under a 100 percent gold coin standard may be
explained with an example drawn from a variant of the gold
standard to be discussed below.
The principle is the same
for all variants based on a national monetary unit.
The external value of the currency is fixed in terms of
gold.
For example, consider the reason the external value of
pound sterling in terms of a dollar was $4.8665 before World
War I and from 1925 to 1931.
The dollar was defined as 23.22
grains of fine gold and a pound sterling as 113.0016 grains
of fine gold, hence 4.8665 was the multiple of the weight of
gold in a pound sterling compared with the weight of gold in
This was a fixed exchange rate because the gold
a dollar.
weight of each currency was fixed or, equivalently, the price
If the United States had adopted
of gold per ounce was fixed.
one dollar price of gold and the British a different dollar
price, obviously, the equivalence between the exchange rate
and the respective weights defining each currency would have
disappeared.
A variable price of gold among countries would
have meant variable weights of gold represented by each
currency.
The link between currencies is gold at a fixed price.
Imbalances in international payments might be settled by
claims on the national currencies of other countries which
had fixed gold equivalents, financed in the example cited
mainly by the use of bills of exchange.
If the demand for
and supply of a national currency did not balance, gold flows
would be activated.
Thus whenever the dollar price of a
British pound at the official or par exchange rate of $4.86
deviated by more than one or two percent above or below par
(these limits, referred to as the gold points, represented
the cost of transferring — packing, shipping, and insuring
-- gold between the two countries), it paid either to convert
U.S. dollars into gold and transfer it abroad, or else to
convert British pounds into gold and transfer it here.
If
U.S. demand increased, for example, for cheaper British goods,
this raised the dollar price of the pound (that is, bills of
exchange).
Once the dollar price of the pound reached $4.92,
referred to as the U.S. gold export point, it paid to convert
U.S. dollars into gold, ship the gold to England and purchase
pounds at $4.86.
Conversely, at the U.S. gold import point,
115
which m i g h t have been as high as $4.83, it paid to convert
pounds sterling into g o l d , ship the gold to the U.S., and
purchase d o l l a r s .
Gold shipments in either direction would
then act to restore the price of foreign exchange to p a r i t y .
Thus it is not only gold flows from new gold output but
inflows or outflows related to m o v e m e n t s in the balance of
p a y m e n t s that affect the size of the domestic m o n e y supply.
A reduction in a country's domestic money and ultimately in
its price level enhance the country's appeal as a source of
goods and services to foreigners and reduce domestic demand
for foreign goods and s e r v i c e s .
An increase in a country's
domestic money and ultimately in its price level diminish
that country's appeal as a source of goods and services to
foreigners and increase domestic demand for foreign goods and
services.
Thanks to this automatic adjustment process, the
duration and size of imbalances of international p a y m e n t s
would tend to be s e l f - l i m i t i n g .
Gold flows serve to equalize
price m o v e m e n t s across c o u n t r i e s .
Economists debate the details of the process just
described.3
Some argue that gold flows under the gold standard
before 1914 were minimal and that prices worldwide adjusted
rapidly.
There was one world price level and the external
adjustment process posed no g r e a t e r problem than interregional
adjustment of prices within a c o u n t r y .
These are refinements
that need not detain us.
lb.
Gold
standard
without national
money
The key feature of such a standard is that the role of
government would be limited to assuring the weight and fineness
of coins minted by the private s e c t o r .
No national m o n e y
unit would exist —
no d o l l a r s , pounds, m a r k s , or francs.
Coins of different w e i g h t s would circulate and prices would
be denominated in w e i g h t s of gold.
Banks might exist to
issue warehouse receipts for gold with a cover of 100 percent
reserves.
Borrowing and lending, limited to the private
sector, would be c o n d u c t e d , the debt instruments denominated
in weights of g o l d .
Settlement of international p a y m e n t s
would rarely be m a d e in w e i g h t s of g o l d .
Instead, international
capital flows would occur in the form of interest-bearing
debt instruments, denominated in weights of g o l d , or the
transfer of o w n e r s h i p of equities to foreign holders.
The p r o p o n e n t s of the conception of the gold standard
here sketched regard it as superior to any other form of
m o n e t a r y standard because it eliminates m o n e y creation by
both government and banks.
In their view the record of
g o v e r n m e n t and banks shows them to have overissued the
currency.
In a real gold standard, such as the one d e s c r i b e d ,
the quantity of gold available for m o n e t a r y use would determine
the level of p r i c e s .
If the demand for gold exceeded the
supply, prices, expressed in w e i g h t s of gold, would fall.
116
In the idealized arrangement that is proposed, the
market might choose forms of money other than gold and warehouse recipts, including promises to pay gold on demand or
at a future date.
Private contracts would specify payment
in whatever form was mutually agreeable, including the use
of technological means for electronic transfer of funds that
could significantly economize the means of making payments
with physical gold or the need to hold gold in physical
possession.
Introducing de novo a real gold standard would clearly
change the character of the existing political and financial
system.*
2.
Gold standard with nongold money issued by either the
government or a fractional-reserve commercial banking system
The earliest departure from the idealized 100 percent
gold coin standard was the creation of substitutes for gold.
The motive for substitution was a reduction in the real
resources employed in mining gold.
Paper money substitutes
may be produced with much smaller real resources.
Such
substitutes included fiat currency issues by governments
and commercial bank issues of notes and deposits, with gold
reserves of the government and banks equal to a fraction only
of their monetary liabilities.
The incentive to limit the
size of the fraction of gold reserves was strengthened during
trend periods when the supply of gold did not keep pace with
the demand for it for monetary and nonmonetary uses.
Fractional gold reserves were held as an earnest of the
issuers' readiness to convert nongold money into gold at the
pleasure of the holder, at a fixed price of gold, not a
changing market price of gold.
In this system, domestic
disturbances, such as banking panics, could affect the size
of the country's gold reserves.
Public alarm about the
adequacy of the gold reserve ratio could trigger an internal
drain of gold, when holders chose to shift from bank notes or
bank deposits to gold.
In the aftermath of such episodes,
an increase in the gold reserve ratio was produced usually by
a contraction of the issuers' monetary liabilities.
A fractional reserve gold standard accentuated the
effects of gold flows on the quantity of money.
A one-dollar
gold inflow, depending on the size of the reserve ratio,
might increase the domestic quantity of money as much as $8
or $10; a one-dollar gold outflow might reduce the quantity
of domestic money by as much as $8 or $10, with parallel
effects on domestic spending and prices.
^Congressman Henry S. Reuss — Why does the Commission Report
treat this eccentric idea with such mild and noncommital language?
117
However, as noted above, international capital flows
alleviated to some extent either the size of gold flows or
their consequences.
Short-term capital flows served to reduce
and smooth the immediate flows of gold that would otherwise
have been required to settle payments imbalances.
Long-term
capital flows enabled developing countries to borrow real
resources from developed countries by running a persistent
excess of imports of goods and services over exports of goods
and services without entailing gold flows.
In the event of a
rise in the domestic quantity of money, in the short-run,
interest rates would tend to decline, inducing investors to
shift funds to foreign money markets.
The size of the change
in export prices relative to import prices that would otherwise have occurred would be reduced by the resulting gold
outflow.
In a fractional-reserve banking system and a gold standard
with a national money unit, domestic and international
convertibility of claims on the monetary authorities was the
mechanism to insure that nongold money growth was held in
check.
3a. Gold standard with a central bank holding gold
only
reserves
Central banks in Europe predated the gold standard.
Their behavior did not always serve the discipline the gold
standard imposes. They did not necessarily respond to a loss
of gold due to balance of payments deficits by actions to
reduce the domestic quantity of money outstanding, or to a
gain of gold due to balance of payments surpluses by actions
to increase the domestic quantity of money outstanding.
Scholars continue to debate the extent to which such
behavior by the Bank of England and other central banks
characterized the period before 1914. After World War I,
the issue is not in doubt:
central banks, including the
Federal Reserve System, frequently chose not to permit gold
flows either to expand or contract the domestic quantity of
money, or to do so to a lesser degree than full adjustment
would have required.
The gold standard was not automatic but
managed.
3b. Gold standard with a central bank holding mainly
exchange reserves
foreign
Central banks also learned to economize on gold holdings
by using other currencies as reserve assets, principally
sterling before 1914, increasingly dollars thereafter.
A
country that held all or a large part of its monetary reserves
in the form of foreign exchange, that is, claims on a country
118
that is on a gold standard, was said to be on a gold exchange
standard.
Gold holdings are non-earning assets.
For that
reason the gold
exchange standard has appeal since foreign
exchange, in the form of deposits at foreign banks or foreign
treasury bills, provides earning assets.
Of course, a country
holding foreign exchange reserves in a currency that devalues
sustains losses. 4
The gold standard before World War I was often described
as a sterling/gold exchange system and, under the Bretton Woods
system after World War II, as a dollar/gold exchange system.
Both were fixed exchange rate systems in conception, but the
Bretton Woods system became an adjustable pegged exchange
rate system.
The par value of each national currency was expressed
either in terms of gold or in terms of the U.S. dollar of
13.71 grains of fine gold, each established in agreement with
the International Monetary Fund.
Members of the IMF were
responsible for maintaining the par value of their currencies,
with the United States alone undertaking the free purchase
and sale of gold at the fixed price of $35 per ounce.
Other
countries bought and sold their currencies for dollars to
maintain their par values within agreed limits.
Settlement
of international payments imbalances took place mainly by
transfers of reserve assets in the chief money markets.
Convertibility of many European currencies was first
achieved under the Bretton Woods system in 1958.
For only a
few years thereafter can the system be said to have performed
fairly effectively.
From the mid-1960s on, it was characterized
by repeated foreign exchange crises as market participants
anticipated that existing par values were unsustainable and
shifted funds from a weak currency to a strong currency,
exacerbating the external position for both currencies.
Countries with undervalued currencies resisted revaluation
and countries with overvalued currencies resisted devaluation.
The system of fixed but adjustable pegged exchange rates
collapsed under the pressure of persistent deficits in the
reserve center country's balance of payments and undervalued
currencies in surplus countries.
The U.S. money supply grew
at rates independent of the country's balance of payments
position, contrary to the case under an international gold
standard.
Dollar reserve accumulations abroad, unless
sterilized by monetary authorities, expanded the monetary
bases of our trading partners.
According to them, the United
States exported inflation to the rest of the world through
its balance of payments deficits.
119
4.
Gold standard with convertibility of nongold money
gold coin or gold bars
into
In the gold coin standard with a national money unit and
nongold substitutes, such as existed in a number of countries
before 1914, gold coin circulated — usually a minor fraction
of aggregate domestic money — and nongold money was redeemable
in coin.
Again, as a way of economizing on the use of gold,
many countries ceased to coin gold after 1914 (the United
States, not until 1933).
Thus free coinage, circulation of
gold coins, and the legal tender status of gold coins
terminated.
The aim was to concentrate all of a country's
gold holdings into reserves available for international
payments.
Nongold money became convertible into heavy gold
bars.
Such a gold standard is known as a gold bullion
standard.
5.
Gold standard with classes of holders for whom
money is convertible
nongold
Under a gold coin standard with a national money unit
and nongold substitutes, all holders of nongold money
—
domestic and foreign — could convert it into gold coin.
Under a gold bullion standard, convertibility could exist
for both classes of holders.
Under the Bretton Woods dollar/
gold exchange standard, convertibility in the United States
was limited to foreign official institution dollar assets.
Foreign institutions willingly held dollars for the purpose
of intervention so long as they were confident that they
could obtain gold from the United States for dollars at their
initiative.
A gentleman's agreement among central banks in
certain industrial countries not to present dollar balances
for convertibility into gold for a time staved off the
denouement.
The chronic deficits in the U.S. balance of
payments and the unwanted accumulations of dollars by foreigners
which threatened to drain all U.S. gold finally led to formal
inconvertibility for all holders in 1971.
B.
Variants of Other Commodity
Standards
Economists have long argued that a commodity standard
with a bundle of commodities is superior to a single commodity
standard like the gold standard. 5
The reason is that such a
scheme could mitigate the price level instability produced by
basing the standard on one commodity like gold, because of
unexpected changes in its demand and supply.
Technologically
induced changes in relative costs of production of some of
the bundle would be offset in the rest of the bundle.
The usual prescription for the bundle of commodities is
that it would include standardized staples like metals and
manufactured commodities that are traded in broad markets.
120
The precise composition varies with the author of the plan
for a commodity standard.
In support of such a standard, it
has been argued that possible monetization of the bundle of
commodities would provide producers with a floor to their
incomes, while convertibility into currency would impose a
ceiling on the market prices of the bundle.
If nonmonetary stocks of the commodities available for
use as monetary stocks were small, the quantity of money
would change primarily through additional current output or
withdrawals for current use.
Since the commodity industries
represented in the bundle would have a fairly elastic current
output, any decline in other prices would induce a substantial
increase in their output, adding to the stock of money and
current income.
Opposite effects would occur with any rise
in other prices.
Changes in the quantity of money would
affect the volume of real assets held by the public and the
fraction of total assets held as money, causing the community
to alter their expenditures in a countercyclical fashion.
Thus, commodity currency could have substantial countercyclical
effects.
Plans for a commodity standard differ on the role of
government and the provision for a reserve.
The government's
role could be limited to the announcement that the monetary
unit is defined as specified amounts of each of the bundle of
commodities.
The private sector would then issue financial
instruments denominated in the unit.
The government would
have no role as an issuer of currency.
Some plans envisage
no government reserves of the bundle of commodities.
Instead,
the private sector would hold reserves in order to redeem the
financial instruments —
say, warehouse receipts for the
bundle —
issued by it.
Storage costs presumably would be
passed on in some form to the public.
Again, fractional
reserve holding might well be development of a commodity
standard, given the incentive to reduce resource costs of
holding 100% reserves.
Private individuals would use the warehouse receipts to
obtain from the issuers commodities covered by the standard
and sell to the issuers for warehouse receipts commodities
covered by the standard.
A deflationary tendency would
encourage production of the commodity bundle that would be
exchanged for newly issued warehouse receipts at the fixed
price, thus countering the initial tendency.
An inflationary
tendency would lead private individuals to redeem the warehouse
receipts in commodity bundles, thus countering that tendency.
In this way, self-interested actions by individuals in the
economy would maintain the stability of the price level and
so preclude deviations in the price level over the long run.
If a commodity standard were adopted internationally, it
could provide an international currency with fixed exchange
rates.
121
C.
Paper
Standards
Under a paper money standard, it is essential to anchor
the system to a nominal fiat reserve -- what economists call
"outside" money, provided by a central bank, another governmental agency or even a nongovernmental agency.
In our
paper money system, the monetary base of the Federal Reserve
System serves as outside money.
First, we examine current
monetary arrangements and then, by contrast, arrangements
that would prevail under a radical restructuring of the
monetary system.
1.
Current Monetary
Arrangements
Our current monetary arrangements rely on the discretion
of the Board of Governors of the Federal Reserve System.
To
insulate the Board from short-run political pressures, safeguards are provided by the staggered 14-year terms of the
governors, the decentralization and somewhat autonomous
regional Reserve Banks, and the independence from Congressional
appropriations.
Congress has no direct supervisory
authority over either the Board or the Reserve Banks, although
the chairman and other members of the Board testify frequently
before various Congressional committees.
Twice a year, as
required by the Full Employment and Balanced Growth Act of
1978, the Board submits a written report to Congress on the
state of the economy and the course of monetary policy and
consults with the Congress on its report.
It is the responsibility of the Federal Reserve Banks to
provide without limit the amount of paper currency that the
public demands.
A limit on the quantity of paper money that
the Federal Reserve could issue existed before 1968 when it
was required by law to keep a 25 percent gold backing for
each dollar it issued.
Instead of controlling the amount of
currency in circulation —
it now constitutes about one-fourth
of the money supply aggregate Ml, defined as the sum of
currency, travelers checks, and all transaction deposits -the Federal Reserve attempts to control the money supply.
Although reserve requirements on transaction deposits
provide an essential institutional setting, the most important
discretionary tool the Federal Reserve possesses for monetary
control is its portfolio of government securities.
It is
through increasing and decreasing its holdings of government
securities that the
Federal Reserve is able to effect changes
in the reserve positions of banks and other depository
institutions.
When the Federal Reserve buys government
securities, it pays for them by adding to the reserves of
depository institutions.
Federal Reserve sales of government
securities reduce reserves.
Institutions expand their lending
activities, and hence increase transaction deposits, when
their reserves increase.
The opposite effects occur when
122
their reserves decrease.
Changes in its portfolio thus enable
the Federal Reserve to control/ over a period long enough
for the depository institutions to react, the amount of transactions deposits they create.
Currently, the dollar's foreign exchange value is
determined by changing supply and demand in the foreign
exchange market, whether because flows of goods and services
to and from other countries vary, or because of long-term or
short-term capital movements, changes in relative interest
rates or expected price behavior, or of interventions by
monetary authorities to influence the foreign exchange rate
of their currencies vis-a-vis the dollar.
2.
Proposals for Significant
Change*
Proposals for significant change in current monetary
arrangements, while maintaining a paper standard, derive from
concern over the record of monetary instability associated
with the operation of paper money standards.
Proposals for
reform range from the introduction of 100% reserve requirements
for banks of issue, to rules limiting the discretion of the
Federal Reserve System in creating reserves for the banking
system, to proposals by F.A. Hayek and others calling for the
free private production of money and currency competition
among issuers of money.6
Advocates of basing monetary policy
on a rule, such as requiring the Federal Reserve to increase
the money supply at a fixed rate over time, contend that such
a policy would promote price stability and dampen cyclical
changes in the economy.
For them, discretion is politically
dangerous and economically objectionable.
Suggestions for improving the performance of our paper
standard include introducing 100% reserve requirements for
banks, payment of interest on bank reserves, and payment of
interest on demand deposits.
The advantage of a
100% reserve
requirement is that it would reduce monetary instability by
eliminating fluctuations in the banks' reserve-deposit ratio
and the public's currency-deposit ratio that currently
introduce some slippage between the Federal Reserve's provision
of reserves and the change in deposits the banks create.
By
paying a market rate of interest to banks on their reserves,
the incentive to evade the requirement would be largely
eliminated.
Moreover, by paying interest on demand deposits,
individuals would hold the optimum quantity of money in their
^Congressman Henry S. Reuss — The final draft circulated to
Commission members for comment referred to these proposals, more
honestly, as "radical proposals."
123
circumstances.
If interest is not paid on deposits, individuals
must take into account the return they could earn on interestbearing assets, reducing cash holdings by employing, say,
more bookkeeping services to compensate for the loss of not
holding the alternative asset.
Since money is costless to
produce, holding smaller than optimum balances is a wasteful
use of real resources.
In the schemes for free competition in money, private
issuers would be free to produce as much of their money as
they wished and users of money would be free to choose whichever currency suited them best, presumably one with stable
buying power.
Currency competition would be compatible with
any exchange rate regime, either flexible or fixed.
One such proposal urges the United States to adopt
parallel currencies:
dollars and gold.
The supply of dollars
and hence the price level in terms of dollars would be
determined by the Federal Reserve (by discretionary monetary
policy), the supply of gold used as money and hence the price
The relative
level in terms of gold by the free market.
price of the two currencies (their exchange rates) would vary
depending on conditions in the gold market, the monetary
policy actions taken by the Federal Reserve, and the public's
taste for the two currencies.
According to this scheme, were
the cross-elasticity of demand between the two currencies
high, then a fall in the price of the dollar (that is, an
increase in the expected rate of change of the gold price)
would lead to a massive shift out of dollars into gold.
In
some respects, the experience of California in the greenback
period (1862-78) was an example of this scheme:
gold and
greenbacks circulated freely at flexible rates and were both
used as exchange media.
In addition, proponents of such a
scheme argue that shifts from gold to dollars and from dollars
to gold would act as a signal to the Federal Reserve to
intervene, decreasing monetary growth when the public shifted
away from dollars into gold, and increasing monetary growth
when the public shifted away from gold into dollars. 7
The
advocates of free currency competition regard it as needed to
achieve price level stability, as leading to optimum currency
areas, and eventually to currency unification, as users of
money choose the most useful money.8
II.
Strengths and Weaknesses of Alternative
Standards
We prefix an evaluation of the strengths and weaknesses
of the three types of monetary standards we have described by
the tabular presentation in Table 3-1.
It lists seven criteria
of desirable attributes of a monetary standard:
a.
flexibility, that is, the ability to accommodate
economic growth as well as financial innovation
real
124
b.
resistance to domestic and foreign shocks both of a
monetary and nonmonetary character
c.
freedom from political
d.
magnitude of associated
e.
provision of long-run price predictability, in the sense
of mean reversion of the price level, that is, the price
level would ultimately return to its initial value
f.
provision of long-run price stability, in the sense that
the price level would neither rise nor fall over substantial periods
g.
provision of short-run economic stability, that
stability of prices and real output
manipulation
resource
costs
is,
A check in a column of the table indicates that the
standard satisfies the criterion, an x indicates that it does
not, and a question mark indicates that the effects are
uncertain.*
A.
Gold Standard
Variants
1.
The pure gold coin standard:
a 100% gold coin standard
(a) with national money and (b) without national money
Since we have no empirical basis on which to form a
judgment with respect to the qualities of a 100% gold
standard with or without a national money unit, our evaluation
is based on theoretical considerations.
Both standards, in common with all commodity standards,
would be free from political manipulation but, on the other
These
hand, would exhibit a number of negative features.
include high real resource costs of their establishment and
operation; inability to accommodate real growth if technological
progress in gold mining and new mine discoveries do not keep
pace with the growth of the rest of the economy; long-term
inflationary or deflationary movements of the price level,
depending on the rate of growth of the monetary gold stock
relative to the demand for gold; susceptibility to shocks
^Congressman Henry S. Reuss — I do not endorse the unfavorable
comparison made here of current monetary arrangements with
radical alternatives, gold-based and otherwise.
Our economic
difficulties stem from a range of policy and structural
defects which would exist under any monetary standard.
Table 3-1
Criteria for Evaluating Alternative Monetary Standard3,
Flexibility
Resistance
to
Shocks
Freedom
from
Manipulation
LowResource
Costs
Long-run Price
Predictability
1. Pure variants
X
X
/
X
/
?
X
2. Classical
variants
X
X
X
/
?
X
•
X
/
X
/
/
?
1. Current
•
/
X
•
X
X
?
2. Competing
monies variant
?
/
/
•
?
?
?
Monetary
Standard
Long-run Price
Stability
Short-run Economic
Stability
A. Gold
B. Commodity
b
C • Paper
Check means standard satisfies condition, X means it does not;
question mark indicates effects are uncertain
Resource costs were reduced in variants of the classical gold standard,
particularly so for countries on the gold exchange standard
126
from both home and foreign changing conditions of supply and
d e m a n d , each of which in turn could produce s h o r t - t e r m e c o n o m i c
instability.
If the standard with or w i t h o u t a national m o n e y unit
literally were limited to or based on the existing gold stock
in a country plus annual additions from gold o u t p u t , longterm inflationary or d e f l a t i o n a r y m o v e m e n t s of the price level
would be p o s s i b l e , depending on the rate of g r o w t h of the
m o n e t a r y gold stock relative to the demand for g o l d .
These
m o v e m e n t s impose costs on the e c o n o m y .
It m a t t e r s little if
a loan contract is denominated in a weight of gold rather
than a nominal d o l l a r amount if the c o n d i t i o n s ruling when
the contract is entered into have changed when the terms of
the contract have to be fulfilled.
Lenders or b o r r o w e r s can
be h a r m e d , depending on whether inflationary or d e f l a t i o n a r y
forces p r e v a i l .
Foresight with respect to future long-term
changes in demand for or supply of gold exceeds investor
capacity to e n c o m p a s s in a loan contract.
This aspect of a
gold standard cannot be n e g l e c t e d .
One o t h e r aspect of a gold standard with or w i t h o u t
national m o n e y is that the traditional view that gold p r o d u c t i o n
v a r i e s p o s i t i v e l y in response to changes in its real price does
not appear to be true c u r r e n t l y ^ (see C h a p t e r 4).
On the
supply side, South A f r i c a n m i n e s produce less when the price
is high because they can w o r k poorer ores, and c u r r e n t l y an
increase in the real price of gold does not shift gold from
n o n m o n e t a r y to m o n e t a r y stocks.
If the price of gold were
fixed and inflationary e x p e c t a t i o n s v a n i s h e d , it is c o n c e i v a b l e ,
h o w e v e r , that the responses on the supply and demand sides
might change.
A n o t h e r feature of the two theoretical v a r i a n t s invites
comment —
the feature that allows for possible introduction
by the m a r k e t of fiduciary m o n i e s by issuers who p r o m i s e to
pay gold by weight or in coin of the realm on r e d e m p t i o n .
If
such m o n i e s were not always r e d e e m a b l e , as the issuer p r o m i s e d ,
it is likely that g o v e r n m e n t would become involved in the
m o n e y c r e a t i o n p r o c e s s if only to enforce c o n t r a c t s and to
prevent fraud.
M o r e o v e r , when an issuer fails to fulfill his
promise to those w h o entered into a contract with him, thirdparty effects also o c c u r -- the holder of the m o n i e s will
default on p a y m e n t s owed by him to third p a r t i e s .
For this
reason, g o v e r n m e n t is likely to be drawn into the money
creation p r o c e s s in order to set limits on the size of the
fiduciary issue and otherwise regulate promises to pay g o l d .
The rationale for a gold standard w i t h o u t national m o n e y as
free from g o v e r n m e n t intervention is weakened by the feature
in q u e s t i o n .
It undermines the case for a 100% gold coin
standard.
This feature also has a bearing on the claim made that
high resource costs are a positive value of gold s t a n d a r d s .
127
If this were so, they should not occasion the introduction
of substitutes for gold in circulation and in reserves.
To
suggest that markets might introduce such substitutes in the
idealized gold standards belies the claim made for the
beneficence of high resource costs.
The market will seek
means to achieve at lower resource costs what the gold
standard is designed to achieve at much higher resource costs.
2.
Variants of the
classical_gold_standa.rd
We can summarize the strengths of the gold standard
variants of historic experience, and we can then inquire why,
given these advantages, the United States and the rest of the
world retreated from them.
We note the following advantages conferred by a gold
standard.
One:
A gold standard promotes long-term domestic
and international price predictability.
This condition
provides incentives to private market agents to make longterm contracts which are vital for the efficient operation of
In addition, such long-term price
a market economy.
predictability minimizes confusion between relative and price
level movements, so that economic agents do not experience
false signals with regard to real economic decisions.
Two:
Government intervention in the determination of the price
level and overall level of economic activity is limited under
a fully functioning gold standard.
Three:
Fixed exchange
rates create the efficiencies of a stable international money
that integrates the world's commodity and capital markets.
The short explanation of the world's retreat from a gold
standard, given its advantages, is that, whether advisedly
or not, the world came to prize goals other than those of
the gold standard.
All gold standard countries confront
destabilizing conditions on the supply side, due to gold
discoveries, and on the demand side, due to the spread of
the gold standard when additional countries adopt it.
Improving
the real performance of the economy was given pride of place.
To achieve the improvement, the task was assigned to government
management of monetary and fiscal policy, rather than to
private sector initiatives.
Only the role of fixed exchange
rates carried over to the postwar world but fundamentally
divorced from the gold standard restraints.
Under Bretton
Woods, there was no provision that the internal supply of a
country's currency was to be governed by its gold holdings,
as was the case under the gold standard, nor was there a
requirement that a country had to undergo deflation or inflation
domestically to balance its external accounts.
This dilution
of gold standard discipline is an example of its institutional
vulnerability.
The gold standard was abandoned for shorter
or longer periods whenever adherence to it was deemed costly.
128
The goal of stabilizing the real performance of the economy
in the postwar period seemed incompatible with the gold standard.
A fully functioning gold standard requires short-term adjustment
of the domestic economy to correct balance of payments disequilibria.
Such adjustments entail short-term price instability and short-term
output instability, which means fluctuating employment.
In addition,
fixed exchange rates transmit real disturbances in one country to
the rest of the world.
A timely example is the size of adjustment
costs that would have occurred, had the world been on fixed exchange
rates from 1974 on.
The increase in the price of oil led to a
redistribution of international monetary reserves from oil-importing
to oil-producing nations.
Under fixed exchange rates, the domestic
price level in oil-importing countries would have been subject to
a massive deflation.
More generally, under fixed exchange rates,
a boom in one country will lead to an increase in demand by its
residents for goods and services in the rest of the world.
The
opposite will happen in the case of a recession.
For these reasons the value of external stability in maintaining
a fixed rate of exchange between the domestic money and foreign
monies came to be regarded as purchased at the cost of instability
in the domestic money supply, domestic spending, prices and employment.
The simple rule for governments to maintain a fixed price
of gold was overthrown in the 1970s, but the seeds of the downfall
of that rule were sown earlier in postwar years as country after
country opted for monetary independence, full employment and economic
growth.
Countries rejected the restraints that the operation of a
fixed exchange rate imposed on the pursuit of these widely supp' ;ec
national objectives.
In the United States, where the share of
international trade was a minor factor in aggregate national income,
the view prevailed that the domestic economy should not be hostage
to the balance of payments.
Maintenance of the price of gold was
not an objective of either the Employment Act of 1946 or the
Humphrey-Hawkins Full Employment and Balanced Growth Act of 1978.
B.
Variants of 0ther Commodity
Standards
The proposed commodity standards have no empirical counterparts,
so we compare their strengths and weaknesses with the gold standard
and paper money standards.
Technically, commodity standards appear to be superior to a
gold standard because nonmonetary production of commodities that
might be included in the bundle is a larger fraction of aggregate
output than is nonmonetary production of gold.
The broader base
might therefore provide a more stable price level under a commodity
standard, but it is not obvious that that would be the case.
Had
prices of commodities been expressed in terms of a currency unit
consisting of a bundle of commodities rather than in terms of
gold, the general price level probably would have fluctuated as
much as it actually did, say, from 1800 to 1950.
In addition,
changes in the relative cost of the commodities in the bundle,
just as changes in the cost of gold, would contribute to price
129
instability.
Commodity currency, however, would offer greater
countercyclical effects on income and thus on the money supply
than would a gold-based currency.
In other respects, the two standards are similar under 100%
reserve or fractional reserve arrangements and both can serve as
international currencies.
The one respect in which a gold standard is
superior to commodity standards is that gold commands clearly broad
support by many people and European central bank governors as the most
trusted money.
Commodity standards have no such emotional appeal.
Holding stocks of gold may be acceptable to the public.
Holding stocks
of useful goods would probably not be understood or countenanced.
To the extent that a commodity standard with 100% reserves
operated in a fully automatic fashion, it would be preferable to
a paper money standard with discretionary control of the money
supply.10
The commodity standard would be separate from the
government budget and less subject to overissue.
However, it
would still be subject to instability reflecting changing relative
prices and the risk of deliberate manipulation by countries having
monopoly power over one or more commodities in the bundle.
For
example, if one of the countries on a commodity standard failed to
adhere to it, say, by impeding the free movement of the commodities
in the bundle among the countries adhering to the standard, the
policies of the destabilizing country would have damaging effects
on the others.
Restrictions on international trade would likely
be introduced generally.
In addition, if a significant change
occurred in either the supply of or demand for one commodity in
the bundle which is produced primarily in one country, that could
lead to instability, were that country to exercise its monopoly power.
With fractional reserves, there is no clear advantage of a
commodity standard over a paper money standard unless adherence to
rules were scrupulously observed under the former but not the
latter standard.
Under the commodity standard, shifts from monetary
to nonmonetary stocks of commodities in the bundle change the
supply of money.
It is an advantage that no such shifts occur
under a paper money standard.
The final assessment is that commodity standards are more
complex and entail greater resource costs than would exist under a
properly managed paper standard.
C.
Paper
Standards
Paper money is valued only because others will accept it in
exchange for valuable goods and services, and not because of any
The chief advantage of all paper standards,
intrinsic value.*
^Congressman Henry S. Reuss — The concept of "intrinsic value"
is nonsensical.
Paper money is valued because it represents a
convenient and reliable store of value and liquidity, and it retains
that value so long as the society and government which support it
command the confidence of their citizenry.
130
including the present one, is that they exact minimum costs in the
form of resources used to produce the money supply, and they are
sufficiently flexible to accommodate economic growth.
Moreover,
if accompanied by flexible exchange rates, they can insulate the
economy from external shocks.
1.
Current Monetary
Arrangements
For some observers, the discretionary character of the paper
standard is an advantage.
Monetary authorities have a choice of
policy goals and are free to determine how to use their powers to
attain them.
As problems change, their goals may change.
Other observers view the historical record of our fractional
reserve managed paper money system as one of considerable instability
both in the short run and the long run and have advocated a number
of proposals designed to reduce:
instability associated with fractional reserve
(100% reserve proposal);
instability associated with discretionary
(monetary growth rules);and
banking
policy
inefficiencies associated with the costlessness of
producing paper money balances (paying interest on bank
demand deposits).
2.
Proposals for Competing
Monies
Finally, we evaluate the case for competing monies.
Its
principal appeal lies in its reliance on the impersonal forces of
the market rather than the monopoly power of government.
However,
unless brand names can be attached to competing private monies,
that is, unless the public can be guaranteed that private money
issuers will not overissue for private gain, it seems likely that
government regulation will be n e c e s s a r y . H
With respect to the proposal for a parallel currency, the
extent to which it would contribute to price stability depends on
the reason shifts would occur between dollars and gold.
If a
shift occurred because of overissue of dollars, Federal Reserve
actions to reduce the money supply would be desirable.
However,
if a shift reflected a change in the public's taste for gold and
dollars unrelated to price behavior, or to a shock in the gold
market, then such actions would be undesirable.
The question then
arises, how would the Federal Reserve know the source of a shift?
U.S. experience under the greenback standard is not comparable
to the proposal for a parallel currency.
In the greenback era, the
price of gold was fixed by Great Britain. What varied was the
dollar price of gold, reflecting a changing value of the dollar.
The country had a dual currency system because dollars were used for
domestic purposes, gold for international transactions (with the
131
exception of California, where gold was also used for domestic
transactions).
The fact that the rest of the world was on a gold
standard maintained by the British ensured that the U.S. arrangement
would be temporary, lasting only until the U.S. price level in
terms of dollars fell enough to make resumption of payments in
gold possible at the prewar parity.
Hence market participants 1
relative holdings of gold and dollars would reflect expectations
on the timing and pattern of resumption rather than the free market
factors stressed by proponents of this proposal.
Finally, the optimum currency area (the maximum geographical
area over which one money can provide price stability) may be so
great that only the governments of very large economies can effectively
provide the money s u p p l y . 1 2
Even those sympathetic to the proposed
change may conclude that currency competition will ultimately
self-destruct, since one currency will outcompete all others.
The
money industry is a declining cost industry that is a natural
monopoly, which at some stage would be n a t i o n a l i z e d . 1 3
III.
Conclusion
Each of the standards has advantages and disadvantages.
Existing and historical standards were adopted (evolved) as a
response to different economic and social priorities of the period
as well as in response to the purely economic considerations of
the resource costs involved.
Thus the classical gold standard
prevailed in a world characterized by free markets, free mobility
of labor and capital, and distrust of government intervention in
business affairs.
In that environment, in which national economic
growth and high employment were not given the weight assigned to
them today, the automatic working of the gold standard was preferred
to the "evils of managed money."
Hence it is difficult to make
the case for one standard over another divorced from the prevailing
concerns of the time. Nevertheless, on the grounds of the criteria
listed in this chapter, the gold standard may not be the standard
best suited to current problems, as is reflected in the recommendations advanced by the Commission.*
C o n g r e s s m a n Henry S. Reuss —
Amen.
132
Notes
to C h a p t e r
3
1.
The great English economist Alfred Marshall also proposed a
combination of silver and gold that he designated symmetalism.
He argued that a bimetallic standard would inevitably degenerate
into a single standard of either gold or silver, one metal tending
to drive the other out of circulation.
Symmetalism was a plan
to make a composite bar of fixed proportions of gold of given
weight with a weight of silver, say, twenty times greater, the
government undertaking to buy or sell on demand the composite
bar for a fixed amount of currency.
Neither metal separately
would be convertible into currency at a fixed rate nor would
currency be convertible at a fixed rate into either metal.
See Memorials of Alfred Marshall, ed. A.C. Pigou, Macmillan:
London, 1925, pp.204-06."
2.
This assumes that it is costless to shift from nonmonetary to
monetary use of gold.
The cost was either borne by the Mint or
paid by the public when gold coins circulated in the past.
3.
See, for example, D.N. McCloskey and J.R. Zecher, "How the Gold
Standard Worked, 1880-1913 ," in J.A. Frenkel and H.G. Johnson,
eds., The Monetary Approach to the Balance of Payments, Toronto:
University of Toronto Press, 1976.
4.
As happened when sterling was devalued
5.
A survey of the pre-1950 literature on commodity standards may
be found in Milton Friedman, "Commodity-Reserve Currency," in
his Essays in Positive Economics, Chicago: University of Chicago
Press, 1953, pp. 204-50.
See also Robert Hall, "The Government
and the Monetary Unit," unpublished paper #159 of the National
Bureau of Economic Research Inflation Project.
6.
See his Choice in Currency, A Way to Stop Inflation, The Institute
of Economic Affairs, Occasional Paper 48, London, February 1976;
Denationalisation of Money, An Analysis of the Theory and Practice_
of Concurrent Currencies, The Institute of Economic Affairs,
Hobart Paper Special, No. 70, London, October 1976.
7.
See Joe Cobb, U.S. Choice in Currency Commission, "Rahn Proposal
for Capital Gains Treatment of Gold Coins," (February 10, 1982).
8.
There is some historical precedent for competing monies.
Such a
system was quite successful in late eighteenth and early nineteenth
century Scotland and in the antebellum United States (except for
wildcat banks).
See Lawrence White, "Free Banking in Scotland
Prior to 1844," Unpublished Ph.D. dissertation (November 1981),
and Hugh Rockoff, "The Free Banking Era:
A Re-examination,"
Journal of Money, Credit and Banking 6 (May 1974): 141-68.
9.
This discussion does not incorporate gold producers' expectations
about movements of the gold prices, nor does it incorporate
asset-holders' expectations.
For a discussion of the traditional
in 1949 and
1967.
133
view, see Jurg Niehans, The Theory of Money (Johns Hopkins
University Press, 1978), pp. 140-58; and Robert J. Barro,
"Money and the Price Level under the Gold Standard,"
Economic Journal 89 (March 1979): 13-33.
10. This assumes, however, that the government does not have
better access to superior information than the public has.
11. See Benjamin Klein, "The Competitive Supply of Money,"
Journal of Money, Credit and Banking 6 (November 1974):
423-53.
12. Indeed, many countries in Latin America and the Caribbean
have tied their currency units to the dollar.
See Michael
Connolly, "Optimum Currency Pegs for Latin America," Journal
of Money, Credit and Banking 14 (Forthcoming).
13.
See Roland Vaubel, "Free Currency Competition,"
Weltwirtschaftliches Archiv 113, 1977, no. 3, pp. 435-61.
Chapter 4
Existing Gold Arrangements and Proposals for Change
We begin this chapter with a review of the prevailing set of
gold arrangements in the United States.
They serve as a benchmark
from which we evaluate proposals for change suggested by members
of the Commission, witnesses who testified at the hearings we
conducted, and interested citizens.
A Staff Appendix reports
findings on the operation of the gold market as it functioned
when the price of gold was pegged by governments and as it has
f unc tioned since 1968 when the price of gold was freed to fluctuate
in response to changes in demand and supply.
The Appendix includes
a discussion of the allocation of the stock of gold between monetary
and nonmonetary uses, the determinants of demand and supply, and
approaches to the determination of the equilibrium price of gold.
The Appendix also presents the record of gold production over past
centuries and its relation to trend movements in commodity prices.
The chapter concludes with a statistical compendium of time series
relating to world and U.S. output and stocks of gold, industrial
and investment demand for gold, and the changing nominal and real
price of gold.
I.
Existing Gold
Arrangements
We distinguish the effects of current gold arrangements on
operations of the Treasury Department, the Federal Reserve System,
and private citizens, and on the conduct of international transactions.
Treasury
The Treasury Department holds most of the United States' monetary
gold stock in depositories located in Fort Knox, Kentucky and West
Point, New York; U.S. Assay Offices in New York and San Francisco;
and the Denver and Philadelphia Mints.
The Federal Reserve Bank
of New York is custodian of the remainder of the gold stock.
In
total, the stock amounts to 264 million ounces.
The Treasury
values the stock at $42.22 per ounce, the last official price set
in 1973.
No official price exists today.
The Treasury could
choose to revalue the gold stock, for example, at changing market
prices without legislative approval, but such action would have no
economic consequences, because, as noted below, the Treasury's
gold-certificate issue is limited by law.
135
136
The Secretary of the Treasury is authorized by 31 U.S.C.
Sec. 405b and 449 to issue gold certificates against any gold
held by the Treasury.
Public Law 94-564, Sec. 8, retains, as the
legal value at which gold certificates may be issued, the last
par value of the dollar of $42.22 per fine troy ounce.
Gold
certificates have been issued to the Federal Reserve System,
pursuant to the foregoing authority, to the full extent of the
gold held by the Treasury.
The Treasury currently mints no U.S. gold coins.
Indeed, 31
U.S.C. Sec. 315b prohibits the minting of U.S. gold coins for
domestic circulation.
However, Public Law 95-630 provides that
the Treasury during each of five calendar years shall strike and
sell to the general public gold medallions containing not less
than one million ounces of gold.
The medallions are to be sold
at prices covering the market value of the gold content plus all
costs.
The first sales of medallions were made in July 1980.
Currently, the Treasury has no policy of actively buying or
selling gold, but the Secretary of the Treasury has the authority,
pursuant to 31 U.S.C. 733 and 734, to sell gold, and with the
approval of the President, to purchase gold, at home or abroad,
in such amounts and manner and at such rates as he deems to be
in the public interest.
The Secretary of the Treasury, with the
approval of the President, also is authorized to deal in gold
and foreign exchange for the account of the Exchange Stabilization
Fund (ESF) that was created by section 10 of the Gold Reserve
Act of 1934 (31 U.S.C. 822a), in accordance with the terms of
that provision of law, as amended. ESF assets have not, however,
included gold since December 1974.
The stabilization fund currently
has appropriated capital of $200 million.
Federal Reserve
System
Currently, gold serves neither as currency nor as backing
for U.S. currency.
Pulic Law 90-269 amended the Federal Reserve
Act so as to eliminate the requirement that the Federal Reserve
Banks maintain reserves in gold certificates of not less than 25
percent against Federal Reserve notes in circulation.
In addition,
this Act eliminated the gold reserve requirement for U.S. notes
and Treasury notes of 1890.
Reserves now consist of the accounts
of depository institutions at Federal Reserve Banks and their
holdings of vault cash.
The Federal Reserve System holds as an asset gold certificates
issued by the Treasury against its gold holdings valued at $42.22
per fine troy ounce of gold.
The certificates are a liability
of the United States Treasury and as such represent a Federal
Reserve claim on the Treasury.
Private
Citizens
In December 1973, U.S. citizens were permitted
to own
137
gold coins minted up to 1959 (before that date, up to 1934), and
as of December 31, 1974, to own bullion gold.
As of the latter
date, they have been free to purchase, hold, sell or otherwise
deal in gold in the United States and to hold gold certificates.
They are also free to manufacture and sell gold medallions and
"coins."
Private citizens are free to include gold clauses in
private contracts entered into on or after October 28, 1977, the
date of enactment of P.L. 95-147.
Sec. 4(c) of that provision of
law continued in effect, however, the Gold Clause Resolution of
June 5, 1933, as to obligations entered into prior to October 28,
1977.
That Resolution made unenforceable, at other than their
dollar face value, gold clauses in obligations.
International
Transactions
The United States is barred, by its obligations under
the Articles of Agreement of the International Monetary Fund,
accepted by the United States (pursuant to section 24 of the Bretton
Woods Agreement Act, as amended) from adopting an exchange arrangement
by which the external value of the dollar is established and maintained
in terms of gold.
Accordingly, gold does not determine the value
of the dollar in terms of other currencies, and it does not serve
as an international means of payment.
II.
Proposed Changes in Gold
Arrangements
We classify the changes in current gold arrangements that
have been proposed and brought to our attention in five groups:
A.
A domestic gold standard with a fixed price of gold
B.
An international gold standard with a fixed price of
gold
C.
Increased use of gold in domestic Federal Reserve and
Treasury operations, but not a return to a gold standard
D.
Increased use of gold in international monetary
ments, but not a return to a gold standard
E.
Decreased
role of gold as a potential policy
arrange-
instrument.
We examine the main elements of the proposed changes and
evaluate the advantages or disadvantages of each group.
A.
A domestic gold standard with a fixed price of gold*
C o n g r e s s m a n Henry S. Reuss — This section completely misstates
the issue.
The major difficulties with a domestic gold standard
are, first, that it would place control of U.S. monetary policy in
the unfriendly hands of the Soviet Union and South Africa and,
second, that it would contribute nothing to the control of inflation.
The technical issues mentioned below, though insoluble, are secondary.
138
Proposals
To achieve long-run price stability,* advocates of a restoration
of a domestic gold standard recommend that the Government establish
a new official fixed price of gold (that is, define the weight of
gold in a dollar) and maintain it by buying and selling gold freely
at that price.
The Government would also determine a ratio, or
upper and lower bounds of a ratio, between the monetary gold stock
and Federal Reserve note circulation, or the monetary base, that
the Federal Reserve System would be required to observe, reducing
its monetary liabilities when the reserve ratio declined, expanding
Legal tender gold coins, denominated in dollars,
them when it rose.
would be issued to serve as hand-to-hand currency and as legal
reserves for commercial and other bank deposits.
No restrictions
would apply to ownership of gold coin or bullion.
Nongold currency
would be convertible into gold on demand by holders.
To implement a restoration of a domestic gold standard in the
United States requires the solution of a series of interlocking
problems.
Evaluation
1.
The basic problem has been designated the re-entry problem:
how to determine the "right" fixed price at which to resume.
In
the past, when a country reinstituted the gold standard, there was
an old official price that was once again restored or that served
as the base for revaluation or devaluation.
There is no comparable
old price today.
The last official price of an ounce of gold,
$42.22, is so out of line with current market prices that it provides
no guidance.
The risk involved in choosing the wrong price is great.
An incorrect price might lead to a huge inflow of gold and inflation
if it were too high, a huge outflow and economic contraction if it
were too low.
At least three concrete proposals to solve the
problem exist:
re-entry
(a) Arthur Laffer proposes that an announcement be made
by the Government that some months hence a dollar unit of
the monetary base of the Federal Reserve System will be linked
to a fixed quantity of gold at that day's average transaction
price in the London gold market.1
That would become the
official price of gold in terms of dollars henceforth.
If
it turns out that the price so chosen is too high or too low,
the proposal goes on to recommend suspension of convertibility.
The procedure is then repeated, with a new announcement that
convertibility will be reinstated at a future date at the
^Congressman Henry S. Reuss -- Whether this is the unsullied
motive of every speculator who has flocked to the gold standard
is open to question.
139
price then prevailing in the market.
The proposal opens up
the possibility for instability as speculators bid up the price
Then
of gold before the end of the first announcement period.
if convertibility is suspended because the price turns out to be
too high, speculators will unload gold and the price of gold might
fall too low before the end of the second announcement period.
Moreover, prospects for suspension of convertibility would introduce
instability and undermine confidence in the system.
A conjecture on how gold holders might react to the announcement
by the United States that it will go back to the gold standard at
a future date indicates possibly conflicting market reactions.
The prospect of a fixed price for gold might signify, to those
who hold gold in the expectation that it will appreciate, the
urgency of selling gold even before the price is fixed, if they
foresee a low fixing price.
That might lead to a reduction in the
market price at the time of fixing.
Further sales by such holders
once the price had been fixed, if the belief were to prevail that
the price would be maintained indefinitely, would compel the United
States to buy gold to prevent a decline in the fixed price.
If
such sales by those holding gold in the expectation that it would
appreciate did not take place, once the intention to fix the price
of gold had been announced, it would suggest market skepticism
that the price, when picked, would be "right."
On the other hand, the prospect of a fixed price of gold for
those who hold it to diversify their portfolios and as a hedge
against contingencies might encourage them to increase their holdings
in the belief that the price would be maintained.
(b) An alternative proposal to determine the re-entry price
has been made by Robert A l i b e r . 2
Start with the price of gold,
when price stability was last known in the United States, say,
1961.
Adjust the dollar price of gold in 1961, $35 per ounce, by
the decline in the purchasing power of the dollar in the two
subsequent decades.
In addition, adjust for changes in the real
(relative) price of gold that have occurred since 1961.
The proposal,
however, is defective as a way of determining the appropriate
re-entry price.
It ignores the parameters of the gold demand and
supply functions, which would need to be estimated before a return
to a gold standard were contemplated.
(c) One approach to the problem of the price at which to
reinstitute the gold standard seizes on the opportunity the selection
offers to adopt simultaneously a 100% gold reserve against the
money supply.
The price of an ounce of gold is to be determined,
under this scheme, by dividing a money aggregate, such as the Ml
measure of the U.S. money supply, by the number of ounces of gold
held by the Treasury.
One such calculation yielded a price of
$1500 per ounce.
A variant of this approach divides the world
dollar GNP by the world stock of monetary gold, yielding a price
of $3500 per ounce. We set aside questions about justification
140
for the proposed approach, and comment only on the inescapable
consequence of adopting either variant.
It is clear that a massive
inflation would result as the price level adjusted to the higher
price of gold.
2.
Even if the fixed price turned out to be "right," a second
problem is that a return to a gold standard must be accompanied by
a strategy to assure adequate monetary growth.
That would depend
on an adequate supply of gold. World gold reserves above and
below ground may seem more than adequate, quoted in billions of
ounces, but the flow supply cannot be ignored.
The evidence is
that gold production responds sluggishly to changes in market
price and, since the 1960s, has responded perversely (see the
Staff Appendix below).
Some observers regard the fact that the
bulk of current world gold output is produced by South Africa and
the Soviet Union as a harbinger of instability in future gold
output.
3. A third problem is the potential for shocks in the gold
market at home or abroad.
On the demand side, they might arise
from changes in the demand for gold for hoarding, and on the supply
side, from gold discoveries.
Such potential shocks would make it
difficult for one country alone to return to the gold standard
because it would bear unilaterally the adjustment costs imposed by
the shocks.
In the discussion of the gold market in the Appendix, possible
solutions to some of the foregoing problems are examined.
Additional
problems, however, affect the feasibility of a return to a gold
standard.
4.
Under a domestic gold standard with convertibility between
gold and the dollar available only to residents of the United
States, the problem of how to enforce the limitation of convertibility
appears intractable.
Residents might be required to declare under
oath that they were acting for themselves or for other residents,
but not for foreigners, when demanding gold or supplying gold at
the gold window.
Alternatively, gold imports and exports might be
embargoed.
Opportunities for profitable violation would arise
with discrepancies between the U.S. fixed price and the world market
price of gold.
In both cases, an enforcement army of inspectors
would appear to be needed.
5. A fifth problem concerns international aspects of a unilateral
return to a gold standard by the United States.
The objective
would be to preserve flexible exchange rates while domestic monetary
growth would be constrained by a gold reserve requirement.
However,
it is not obvious how this arrangement would function.
Under such
an arrangement, a shift from a foreign currency into gold by an
American investor would impose the whole burden of adjustment on
the foreign currency-dollar exchange rate, since the dollar price
of gold would not change.
Assuming significant portfolio shifts by
Americans between foreign currencies and gold, and all other things
141
equal, exchange rates would tend to become more variable than they
are under the present floating system.
In addition, the reduction
in the gold reserve would lead to a contraction of the monetary
base.
The rest of the world, of course, could peg to the dollar,
as some countries do now.
Could foreign countries obtain gold
from or sell gold to the United States?
How would such gold transactions affect domestic monetary policy?
6. Advocates of the gold standard claim that its restoration
and possibly even the announcement of a decision to restore it
— would immediately reduce both the inflation rate and the level
of interest rates, and would eliminate inflationary expectations.
No transitional costs are mentioned.
However, contracts in the
credit and labor markets and final products markets reflect the
existing inflationary cost and price structure.
Advocates do not
explain how the adjustment of the existing cost and price structure
to what they describe as a new noninflationary gold standard can
be achieved without bankruptcy and loss of employment.
It is this
consideration that motivates some who argue that it is premature
to advocate a return to the gold standard before price stability
has been attained.*
B.
An international gold standard with a fixed price of gold
Proposals
Under this proposal, the United States would maintain fixed
exchange rates with other countries based on the fixed price of
gold it chose and the definition of the gold content of the dollar
and other national money units.
Such a standard could be achieved
either by international agreement or by evolution —
the United
States could be the first to reinstitute the fixed price of gold
and other countries, persuaded by U.S. success in stabilizing the
domestic price level, might follow suit.
International payments
imbalances would be settled by gold flows or by flows of dollars
The
or dollar assets convertible into gold at the fixed price.
monetary base and the money supply would vary with gold flows.
Problems in implementing an international gold standard in
some respects are similar to those presented in implementing a
domestic gold standard.
Evaluation
1. The key problem again is choosing the right price
for gold at which to fix the exchange rate.**
In 1925, Great
C o n g r e s s m a n Henry S. Reuss — In other words, this claim by
the gold bloc is completely unfounded.
**Congressman Henry S. Reuss —
This problem, though virtually
insoluble, is not the key problem.
The key problem is that the gold
standard would not work and could not be sustained if even technical
issues of implementation could be resolved.
142
Britain returned to the gold standard at an unrealistically high
gold price for the pound.
In 1947, it repeated that mistake.
In
the first instance, it struggled for six years in a vain attempt
to deflate the economy to make the gold price viable in the face
of gold outflows.
The pound was then freed to float.
In the
second instance, it gave up the attempt after two years and devalued.
In 1928, France returned to the gold standard at an unrealistically
low gold price for the franc.
Gold inflows into France (and U.S.
sterilization of its gold inflow) destabilized the system.
2. The preceding examples indicate a problem that could
arise were the United States to choose the gold price for the
dollar independent of other countries 1 decisions.
As in the BritishFrench exchange rate decisions in the 1920s, unilateral actions
could produce unsustainable relationships.
3. A multilateral return to the gold standard would require
international agreement and amendment of the IMF rules.
Yet there
is no evidence that our trading partners have an interest in reinstating the gold standard.
The views they have expressed, in
fact, are negative with respect to the desirability or feasibility
of a return to the gold standard.
4. All the problems associated with fixed exchange rates would
have to be dealt with again.
Is the United States, with a relatively
closed economy, well advised to seek fixed exchange rates that throw
the whole burden for adjusting international payments imbalances on
the domestic money supply, incomes, and employment?
5. Assuming that the profits of gold revaluation could be
sterilized in the United States, would that also be true of the rest
of the world?
If not, would the United States not be open to the
transmission of inflation from foreign economies that chose to
monetize the profits of revaluation?
6. Restoring an international gold standard implies restoring
convertibility to dollar claims of foreign governments and central
banks, not to mention private institutions and individuals.
Such
claims could be exercised and affect the monetary base with no
relation to ongoing balance of payments flows.
C.
Increased use of gold in Federal Reserve and Treasury
but not a return to a gold standard.
operations,
Proposals
Two types of changes in gold arrangements, considered in this
group, both based on a variable price of gold, differ in their
advocates 1 view of discretionary Federal Reserve policymaking.
One
type would reduce or even eliminate the Federal Reserve's discretion.
The other type would enhance it. Neither type involves a return to
a gold standard but either, if adopted, would make a significant
change in current gold arrangments.
143
Three proposals of the first type differ broadly in content.
One proposal is that gold coins, by weight, be issued
and allowed to circulate as a parallel currency, their price
to be determined by market forces.
Some proponents have urged
Treasury issue of official coins; others have promoted issues
by private mints.
Some favor exemption of the coins from
capital gains and sales taxes.
The underlying conception is
that paper money holders could exercise the option to convert
paper to gold coins and the pace of such conversions would be
a signal to the Federal Reserve whether its policies were
overly expansionary.
Exemption from capital gains taxes
would, however, make the coins differentially attractive and
confuse the "signals" given to the Federal Reserve.
Another proposal advocates Treasury issue of gold-backed
notes or bonds.
The argument supporting the proposal is that
the more stable purchasing power of gold than of the dollar
would permit the market yield on such gold-backed issues to
be lower than current market yields on dollar notes or bonds.
Thus, using these instruments would hold the national debt
below what it would otherwise be, and restrain the incentive
for monetary and fiscal authorities to use the inflation tax
as a way of reducing deficits.
Moreover, gold-backed bonds,
by competing with dollar-backed bonds, would limit the Federal
Reserve's ability to use open market operations to expand the
money supply.
Proposals differ with respect to the redemption
of the issue: some specify redemption at the price of gold at
date of issue, others at date of redemption, others offer the
option of redemption in dollars rather than gold.
Some propose
—
a coupon of 2 or 3 percent; others a coupon of 8 percent
still much lower than current yields on Treasury dollar issues.
The third proposal to limit Federal Reserve discretion is
based on a different approach.
It would limit the growth in
Ml by tying the maximum allowable growth of currency in every
12-month period to the increase in that period in the value
of the Federal Reserve's gold certificates.
The value of the
gold certificates presently is established by statute of the
last official price of gold which, as noted in section I above,
was $42.22 an ounce.
The proposal is that the official price
would be increased percentagewise in each period by enough
(1) to offset a predetermined increase in the certificate
requirement, starting at 9 percent in 1981, plus (2) the
maximum desired growth in Ml beginning in 1982, plus (3) an
adjustment for changes in the ratio of checking deposits to
currency.
The proposal recommends a 33 percent yearly increase in the certificate requirement as from 9 to 12 percent,
12 to 16 percent, and so on.
The purpose of the increase is
to raise the official price at which gold certificates can be
issued to the market price of gold in about eight years.
Capital gains accruing to the Treasury from raising the price
would be used to retire Federal Reserve holdings of Treasury
debt, leaving the monetary base unchanged by the action.
Gold coins would not be convertible at fixed prices, but they
144
could circulate as coins by weight, as under the preceding
proposal.
A proposal of the second type would allow the price of gold
to fluctuate with market forces but would establish upper and lower
bounds to the ratio between the value of the gold stock and the
monetary base (the gold cover).
If the gold cover reached either
the upper or lower limit, the Federal Reserve would intervene by
conducting open market operations either in gold or government
securities.
The proposal assumes flexible foreign exchange rates
for the dollar.
Evaluation
1.
The issue of gold coins by weight probably would have
only marginal consequences for Federal Reserve operations.
Whether
gold coins are successfully used as money will depend on the market
test.
Given the past variability in the price of gold, the short-run
variability of goods priced in terms of gold coins may be much
larger than that of goods priced in terms of dollars.
That would
make the use of gold coins as a medium of exchange unlikely.
No limit is proposed on Treasury issue of the gold coins.
The possibility therefore exists that the Treasury's gold stock
might be transferred to the public in this manner, should their
unlimited use spread.
It is assumed that only U.S. residents will
acquire the coins in small quantities.
But what if foreign sources
ordered large quantities on a given day?
Such an order, placed in
the gold market, would raise the price.
That consequence will not
follow at the Treasury sales window.
If no quantity limit is imposed on the issue of gold coins by
the Treasury, setting a seignorage fee well in excess of the cost
of minting would limit sales by reason of the high price.
One
suggestion along these lines is that the Treasury issue a one-ounce
$1000 legal tender coin.
If as many as 25 million of such coins
were issued, they would earn the Treasury approximately $15 billion
in seignorage at current market prices.
The payment in dollars
for the coins would reduce the money supply as currently measured,
provided the Treasury refrained from adding the seignorage to its
general funds and the Federal Reserve took no offsetting action.
It is alledged that a $1000 one-ounce coin would fluctuate less in
value than a bullion coin would, and that holders could use it in
transactions or to diversify their portfolios.*
Some proponents of an issue of gold coins believe that
legal tender status would enhance the monetary attributes of
the coins, but others object to the compulsory aspect of
*Mr. Herbert J. Coyne — The coin should have a face value of $100.00
or $200.00 or else denominated by fine weight of gold.
In addition,
because selling the coin in the manner proposed above would result
in the depletion of U.S. gold reserves, it should be specified
that gold used for coin mintage should be covered by bullion purchases in the market.
145
legal tender status with respect
to the payment of
taxes.
The exemption of gold coins from capital gains and sales
taxes, when other forms of gold holding were not so favored,
would encourage a shift in composition of portfolios that
includes gold to coins, and the addition of gold coins to
some portfolios that had not previously included gold.*
2. The problem raised by an issue of gold backed-notes
or bonds is that it offers gold holders an opportunity to
acquire gold without incurring the cost of storage and
insurance.
A Treasury issue of gold-backed bonds, paying a
low rate of interest, would permit speculation on gold with
the additional inducement of the coupon.
The purchase of
such an instrument would indicate an expectation that the
market price of gold would rise.
The Treasury would be
betting against the market, with the possibility of Treasury
losses.
However, the existence and growing use of a futures
market serve to make many of the foregoing problems inconsequential.
Gold can now be held under futures contracts
without explicit storage and insurance costs.
Such costs
are implicit in the price at which gold is bought forward.
Such costs would also be implicit in gold-backed Treaury
securities.
Speculation in gold is permitted and will
continue to be permitted whether or not gold-backed securities are issued.
A coupon on a gold-backed bond would only
mean that it would sell at a higher price than a zero-coupon
gold-backed bond or another non-interest bearing way of
holding gold.
There would therefore be no net inducement
to speculate on Treasury gold-backed securities.
3. The proposal to link the growth of currency issues,
to the predetermined change per year in the price of gold
is a monetary growth rule in disguise.
The same objective
could be accomplished without the use of gold.**
4. The problem with the proposal to use the price of
gold as an indicator for discretionary monetary policy is
that it fails to distinguish the source of movements in
the price of gold.
Movements in the price of gold might
reflect market reactions to monetary policy, but equally
they might reflect changing real forces in the gold market.
* Congressman Henry S. Reuss -- This shift would come at
the expense of common stocks and other productive capital
investments which the Nation requires.
**Congressman Henry S. Reuss — This is true.
Also, all
the objections to money growth rules which years of experience
in the United States and United Kingdeom have taught us would apply.
146
An argument made for open market operations in gold
is that it offers the central bank the option of using an
instrument that will have its initial impact on the price
of gold rather than on interest rates.
Thus f if the central
bank were concerned about producing a change in interest
rates, yet desired to affect the growth rate of the money
supply, it could conduct appropriate gold operations, in
preference to operations in government securities.
The
duration of the differential effect on interest rates of
gold rather than government securities operations is not
addressed by the argument.
It seems dubious that the
differential effect, assuming it can be detected, will
persist for longer than the briefest interval — say, a
day.*
Gold operations, like government securities operations, affect bank reserves.
It is the banks' response
to the change in their reserves that affects credit markets.
In addition, open market operations in gold would not
be as effective as those in government securities because
gold is not as close a substitute as government securities
are for financial assets financing real production and
consumption.
D.
Increased use of gold in international monetary
arrangements, but not a return to a gold standard
Proposals
The proposals considered here do not involve a major
change in existing monetary arrangements.
One proposal advocates revaluing the U.S. monetary gold
stock at prices closer to current market prices and using the
gold stock for intervention purposes in the foreign exchange
market and to settle international payments imbalances.
A proposal of a different sort would be to initiate
action aimed at a renewed restitution to member countries of
their IMF gold contributions.
Evaluation
No revaluation of the gold stock is needed to permit
sales of U.S. gold for foreign currencies.
Given current
*Mr.
Herbert J. Coyne — Without further study, it is inappropriate for the judgment to be made that the differential
effect of using gold for open market operations would only
persist for one day.
I believe this as yet unexplored
technique could have a much more significant differential
effect and be a useful addition to the Federal Reserve's
operational instruments.
147
foreign-exchange-market practices, it is difficult to
envisage the mechanics of such an operation.
A proposal
to use gold for settlement purposes in a floating-exchange
rate system is also inappropriate.
A variant proposal is that agreements with foreign
central banks be negotiated to accept gold at a marketrelated price.*
However, foreign governments and the U.S.
Treasury can already buy and sell gold at market-related
prices, either in the market or bilaterally.
It is therefore
unclear what is to be negotiated.
The proposal to use gold as an intervention vehicle
endorses intervention when such a policy may not be in the
national interest.
If intervention is a policy of choice,
gold is clearly not needed to achieve it.
To institute restitution of IMF gold to member countries
in proportion to their quotas would require a high majority vote
of the IMF membership.
If gold is regarded as a valuable
asset to be held against emergencies by the United States,
the same consideration should apply to the international
gold reserve.
E.
Decreased
role of gold as a potential policy
instrument
There is essentially only one proposal in this group,
namely the Treasury should sell the gold stock over a period
of years and use the proceeds either to retire Federal debt,
reduce taxes, or finance the current deficit.
A program of
auction sales could be directed to such a goal, but it would
require avoidance of speculation by the market on the timing
and magnitude of gold sales.
However, such sales would reduce
insurance against contingencies.
The existence of a monetary
gold stock leaves open the possiblity of a return to some
form of a gold standard, were the monetary and fiscal
authorities to engage in massive overissue.
The gold stock
serves as a reminder to the authorities that there is an
option other than money creation at their discretion.
In addition,
the possibility of a future return to a gold standard probably
has psychological value to some citizens.
*Herbert J. Coyne — The idea is not clearly presented or examined
here.
The purpose of an official agreement between central
banks on gold transactions would be to facilitate the use of
gold reserves by central banks and international monetary
authorities at a market-related price to settle balance of
payments surpluses or deficits.
Gold could be exchanged for
foreign currencies when countries are experiencing deficits
or surplus currencies exchanged for gold.
It should be noted that gold is currently used for this
purpose by various central banks.
An international code of
conduct would only formalize these ongoing transact ions.
148
Notes to Chapter 4
Arthur B. Laffer, Reinstatement of the Dollar;
The
Blueprint
(A.B. Laffer Associates, February 29, 1980
See note 18 of the Appendix to this
chapter.
Staff Appendix:
This Appendix
A.
B.
C.
The Gold
Market
is organized as follows:
H.
Introduction
History of the gold market before 1968
Changes in location and operation of gold markets
since 1968
Components of the demand for gold
Components of the supply of gold
Approaches to determination of equilibrium price of gold
Record of gold production in past centuries and its
relation to trend movements in commodity prices
Summary
A.
Introduction
D.
E.
F.
G.
Gold is a commodity.
Like any other commodity, it will
be produced only if the price at which it can be sold will
exceed the costs of production, including the return on
capital investment, wage costs, and prices of other inputs.
In the private market that has operated since 1968, the
price of gold fluctuates, like the prices of other worldtraded corammodities, to balance supply and demand.
In the
short run, the price may be volatile.
In the long run, the
price must be high enough to yield a return to producers that
is competitive with other uses of their capital.
Similarly,
no commercial user will buy gold unless its price is competitive with that of substitutes and the product in which it is
embedded can be sold at a profit.
Investors will choose to
hold gold only if it is expected to yield a return measured
in purchasing power that is equal at the margin to the
expected real return on other investment opportunities.
B.
History of the gold market before
1968
Over the centuries, gold mined in many countries around
the world has found its way to central distribution points
where users have been able to acquire it. The distribution
centers until 1968 were usually dominated by governments
but private sector demand was accommodated in those markets
from new output, recycled material, or from existing official
stocks.
In the United States, the main government
149
institutions
150
dealing with the gold market have been the mints and assay
offices, which purchased newly mined gold, assayed it and
imports of foreign gold, and sold gold on demand to domestic
or foreign buyers before 1933.
In addition, private gold
refiners and processors converted gold material into gold
bars or processed gold for the trade.
There were no significant direct dealings between gold producers and industrial
users.
Before 1933, commercial banks and Federal Reserve
Banks were also gold buyers and sellers.
Thereafter, purchase
of gold was confined to government agencies other than the
Federal Reserve.
Beginning in 1933, the Treasury Department
or refiners licensed by it sold bar gold or refined gold to
licensed users.
The world's principal gold market before World War I was
in London.1
Four bullion brokers were in business there
long before the adoption of the international gold standard.
One of them, N.M. Rothschild and Son, was agent for many South
African gold mines, having earlier financed the industry.
Once a week the brokers met to fix the price of gold and
silver.
The adoption of the gold standard restricted their
business, since the Bank of England's (more or less) fixed
buying and selling prices of gold limited fluctuations in
the price.
Nevertheless, the brokers continued to "fix" the
price and arrange the matching of bids and offers.
A fifth
bullion broker began operations in 1853.
During World War I, there was no international gold
market.
European continental gold, Australian gold, and United
States gold were all embargoed.
All gold from the Union of
South Africa had to be sold to the Bank of England at the
statutory price.
Purchasers of gold did not have access to
the world's supplies but were limited to supplies available
in their own countries.
From 1919 until Britain's return to the gold standard in
1925, the brokers once more resumed the distribution of newly
mined gold.
During this period, licenses were required for
the export from London of newly produced South African gold,
and South African gold was sold to the highest bidder through
London agents.
The demand was channeled through bids the
bullion brokers made on behalf of clients, with no upper
limit to the price until April 1925.
In 1925, South African gold shipments to London were
temporarily suspended when the mines began to bring their
output to the Pretoria mint for coinage, a more profitable
course for them than sending it to London.
To allow the
London bullion market to function as the distributor of
South African gold throughout the world, the South African
Reserve Bank undertook to buy gold from the producers and
sell it in London through N.M. Rothschild as their agents.
The Reserve Bank thus became the principal buyer of gold
produced in South Africa.
151
The relative importance of the London bullion market
in the world distribution of gold declined in the interwar
period.
Before World War I, the gold was distributed to new
and rapidly developing countries because of their regular borrowings in London.
After the war, the burden of satisfying
international demands for gold was shared with the London
bullion market by the American banking system.
From the
time Britain left gold in 1931 until World War II, the
bullion brokers operated as they had from 1919 to 1925.
World War II closed the London gold market again.
After the war, South African and other Commonwealth
gold producers began selling gold on other free markets,
notably in Zurich, either for dollars or transferable sterling, and at premium prices in excess of the $35 per ounce
price of gold that the Bretton Woods Conference had adopted
as the par value.
Other centers thus gained business
mainly of private transactors at London's expense.
The
Bank of England argued that opening the London gold market
would secure a larger share of new gold for central banks.
Accordingly, the London gold market was reopened in 1954.
By 1956, 85 percent of the new gold coming on the gold
market was handled there.
The London market was the only two-way free market for
gold of any size in the world economy, serving as a market
not only for suppliers but for users as well.
This distinguished it from markets elsewhere, such as Hong Kong, Macao,
Beirut, Bombay, where local demands for gold predominated.
The market in Paris, in contrast to London, was a monopoly of the Banque de France, which sold gold when it was
profitable to do so.
France prohibits the import and export
of gold by its inhabitants, so the market is local.
Rivaling London were the markets in Switzerland (Geneva
and principally Zurich).
Since the Swiss constitution required
the central bank to maintain a certain level of gold reserves,
the Swiss National Bank therefore tended to be a buyer rather
than a market manager like the Bank of England or the Banque
de France.
In addition, commercial banks and Swiss nationals
also held gold in their portfolios.
Swiss laws permitted
foreigners to trade freely and openly in gold without fear
of disclosure.
Zurich was largely a secondary market trading
private customers' gold.
What the Swiss market lacked was
a major international foreign currency market comparable to
London's.
The relevance of the exchange market to the gold
market was that arbitrage between the gold and foreign
exchange market was thereby encouraged.
The preeminent role of the London gold market until
1968 was further confirmed by the Gold Pool arrangement
instituted in 1961, for which the Bank of England acted as
152
agent for eight major countries to stabilize gold prices
in the London market at the official price.
With prices
stabilized there through purchases and sales by the gold
pool, it was unnecessary to intervene in other gold markets.
C.
Changes
in location and operation of gold markets since
1968
After March 17, 1968, when the governments that had
constituted the London Gold Pool agreed to terminate all
gold dealings with the private market either as buyer or
seller, the U.S. Treasury amended existing gold regulations
to permit domestic producers to sell and export gold freely
to foreign buyers as well as to authorized domestic users.
Authorized domestic users were permitted to import gold or
purchase it from domestic producers within the limits of
their licenses.
Private traders in gold could apply for
licenses to acquire gold in any market for sale to U.S.
industrial users, but all transactions with foreign monetary
authorities were prohibited.2
With the demise of the Gold Pool, the London gold
market remained closed from March 18 until April 1 "in
deference to the strongly held views of some signatories
of the Washington agreement [to establish the two-tier
market] that the inauguration of the two-tier gold system
would otherwise be prejudiced." 3
Until March 17, South
African gold had been sold in London directly to the Bank
of England or through the London bullion brokers under
the Bank's supervision.
During the two weeks that the
London gold market was closed, three Swiss banks formed
a pool to buy from the South African Reserve Bank and
sell all South African gold output at negotiated prices.
Title to the gold was transfered to the Swiss banks but
delivery of the gold continued to be made in London.
Zurich thus became a primary market.
On April 1, 1968, the London gold market was reopened.
Two fixings daily at 10:30 a.m. and 3 p.m. (instead of a
morning fixing only) were instituted and spot prices were
fixed in U.S. dollars instead of sterling as before.
In
1972, the South Africans resumed sales of part of their
gold output to London dealers, dividing it between the
Swiss pool banks and the London dealers.
(The sale of South
African krugerrands is conducted in a market separate from
the bullion market.)
Soviet gold is usually sold in the
Zurich market through the local Soviet bank.
Other gold markets that were once prominent, like
Beirut, have declined and been supplanted by new markets
(Bahrain and Dubai) in the Persian Gulf.
The Middle East
obtains some of its gold in Zurich in addition to the Persian
Gulf sources.
Hong Kong and Singapore are the significant
centers for gold purchases in the Far East.
153
The gold markets so far discussed have been spot markets
where transfers of physical gold have taken place.
New types
of gold markets have recently emerged, in which trading in
gold futures contracts proceeds much as futures trading in
other commodities.
Initially established in Winnipeg in 1972, gold futures
contracts developed spectacular growth when such trading was
approved on U.S. commodity exchanges in 1974 by the Commodity
Futures Trading Commission.
From 7,000 contracts in 1974,
the number grew to 11 million in 1980. Of the five commodity
exchanges, the New York Commodity Futures Exchange (COMEX)
and the International Monetary Market (IMM) are the industry
leaders.
The main explanation for the success of the futures
market is that gold futures contracts provide a hedge against
price risk for producers and industrial users.
A movement toward a world market for trading futures is
under way, to provide a 24-hour-a-day spot and futures gold
price reading.
An exchange trading gold futures denominated
in British pounds sterling is scheduled, as of this writing,
to begin operations in April 1982; a Tokyo exchange was
scheduled to open in March 1982.
Futures trading in Singapore
and Hong Kong dates from 1980.
A market in futures is also
open in Sydney, Australia.
However, the volume in New York
and Chicago far surpasses that in other locations.
An international continuous market is envisaged, since trading hours
in New York and Chicago are midnight hours in Hong Kong and
Singapore, while London's business day is about to end before
trading begins in North America.
Futures are contracts for delivery of a commodity at a
specified time, price and place.
Options confer the right,
but not the obligation, to buy or sell commodities or
commodity futures or other instruments.
Since April 1981,
the European Options Exchange of Amsterdam has listed gold
options.
The Montreal Stock Exchange established a joint
gold options market with the European Options Exchange in
February 1982.
D.
la.
Components of the demand
for gold
Three Categories of Demand
In principal, the demand for gold may be classified in
three broad categories, which are not, however, easily distinguishable in practice:
(1) the nonmonetary demand for
industrial fabrication; (2) the monetary demand for reserves
by commercial or central banks and, when coins circulated for
transactions use before 1933 in the United States, for coin by
the private sector; (3) investment demand by the private
sector.
154
Demand for gold for industrial fabrication comprises
The principal one through the ages has
a variety of uses.
been the manufacture of jewelry.
Of long-standing also has
been the use of gold in dentistry.
The decorative arts also
have a long history of the application of gold in techniques
that were known to ancient civilizations.
Gold leaf, laminated
gold, gilding, gold plating and vermeil have made use of gold.
The current industrial uses of gold include electronics,
rayon and synthetic thread production, window glass using
gold, alloys for brazing and soldering, catalysts,
television selector production, and medical use (gold
therapy of rheumatoid arthritis).
Two other uses of gold
—
in medals, medallions, and facsimilies of official, i.e.,
fake coins as well as official coins, are sometimes
included in industrial demand and sometimes in investment
demand.
Investment demand is estimated as the residual
obtained by subtracting total enumerated consumption from
total supply.
One problem with the classification scheme is that
jewelry is included in industrial demand, yet for many
holders, especially those in developing countries, jewelry
represents a form of investment.
Even if impeccable data
on the components of the demand for gold were available
and, as will presently be shown, that is not the case, the
mixed industrial-investment characteristic of the jewelry
component complicates the interpretation of the quantitative
importance of the determinants of industrial demand for gold.
A special feature of the gold market is that there is
a vast stock of gold from past production, the cumulative
total currently estimated at between 2.8 and at least 3
billion ounces, of which 300 million ounces may have been
lost through the ages.
The above-ground stocks of gold have
accumulated over the centuries since gold is virtually indestructible.
Of these stocks, the largest fraction is held
by governments.
The balance is held by commercial and
industrial users, by investors, and as decorative, religious,
and collectors (museum) items.
In the main, transfers from
existing investment stocks to industrial users have been
limited.
Recycled scrap gold and the annual flow of gold
output to the market tend to be the main sources to satisfy
the demand of industrial users.
lb.
Statistics on Demand
for Gold, by Categories
The reported statistics for each of the three categories
of demand for gold are estimates.
Even for the second
category, for which records of the banks and the mints exist,
the sources of the statistics are not in full agreement.
For the first category —
industrial demand —
the degree
of estimation is greater and, in any one source, coverage
155
may vary from year to year.
Again, the estimates shown in
different sources are not in full agreement.
Given the
margin of error associated with the estimates of the first
two categories, the residual investment demand obviously
cannot be estimated with any greater accuracy.
2a.
Estimates of World Demand
for Gold, by Categories
One estimate over extended periods from 1835 to 1952
allocates the distribution of gold output among monetary
demand, the industrial arts, and absorption by India, China,
and Egypt.
The percentages of output are as follows:4
Period
1835-1889
1890-1929
1930-1952
Monetary
50
58
90
Industrial
35
24
11
Eastern Absorption
15
18
-1
The significance of the separate classification of Eastern
absorption (absorption of gold by India and, of lesser
significance, Egypt and China) was that in the nineteenth
and early twentieth centuries, the Indian masses invested
much of their accumulated savings by purchasing precious
metals, usually in fabricated form. When the price of gold
rose after 1933, they sold off large quantities of their
gold.
Indian bullion dealers melted their clients' gold
trinkets, and sent them to the Mint in Bombay to be refined,
assayed and molded into bars, which were exported.
Silver
has since supplemented gold in Eastern absorption.
Beginning in 1893, the Director of the U.S. Bureau of
the Mint presented annual estimates of world consumption of
gold in the arts and industries.
These estimates were
obtained by correspondence with the leading countries of
the world, and initially showed consumption of gold in
British India separately.
Because of incomplete coverage,
the estimates are clearly not comprehensive for the world.
The League of Nations gave annual estimates from 1915
of the change in central bank reserves (omitting 1918-22,
when Russia's reserve was not reported) and industrial consumption, annually, 1922-38.
For 1931-38, the amounts of
gold released by the East are given.
During the 1920s, the
monetary demand averaged twice the industrial demand (with
the exception of 1925) and during the 1930s, industrial demand
dwindled and monetary demand absorbed nearly all annual output plus the release of Eastern g o l d . 5
Since 1950, more
reliable estimates have become available.
Only in 1954-55
and 1957-58, did the gold purchases by official Western
monetary authorities top one-half of the annual supply of
gold.
In the 1960s, in 3 years, there were no official
purchases, with a low of under 7 percent of total supply
and a high of 42 percent.
In only 2 years of the 1970s
were there any official purchases, ranging only from 10 to
156
under 15 percent of the total supply.
The world monetary gold
stock peaked at about 1.2 billion ounces in the 1960s.
Although
the gold reserves of central banks of industrial countries has
fallen since then, as monetary authorities reduced official
reserves, for the world as a whole, the monetary gold stock was
only marginally lower in 1980.
Industrial including jewelry demand for gold, which has
been negligible until the 1950s, then rose progressively as the
real price declined.
By the late 1960s, industrial demand equaled
total gold output.
Industrial demand absorbed 92 percent of the supply in 1971
-- the peak year for industrial demand since 1950 — and fell as
low as 38 percent in one year only -- 1974.
In 9 years, industrial
demand accounted for between 40 and 50 percent of the annual
supply; in 7 years, for between 50 and 60 percent; in 6 years
for between 60 and 70 percent; in 4 years for between 70 and 80
percent; in 3 years for between 80 and 90 percent.
Coin, medallion, and net private bullion purchases first
became significant as a percent of total supply in 1967-68, then
dwindled in 1969-72.
Since then, they have ranged from 20 to 62
percent of annual total gold supply.
2b.
Estimates of Demand
for Gold
in the United States, by Categories
The Director of the Bureau of the Mint gave annual estimates
in dollar amounts of the absorption of gold by U.S. industrial
users from 1880 through 1967; since then, the estimates are in
We give the series in troy ounces throughout in
troy ounces.
the Statistical Compendium.
We express the annual industrial
consumption and the change in the U.S. monetary gold stock (gold
and bullion held by the Treasury and commercial banks and the
public before 1914 through 1933; from 1914 through 1933, held
also by the Federal Reserve Banks), each as a percent of U.S.
annual gold production.
We also give the annual net gold export
or import data.
3.
Determinants of World Demand for Gold:
Industrial
Demand
Table 4-1 shows annual estimates of the components of world
gold demand from 1950 to 1980, in millions of troy ounces.
Before the price of gold in the private gold market was freed to
deviate from the official price in 1968, estimates of the breakdown
of industrial and jewelry demand are not available:
only a
combined aggregate estimate exists.
The table otherwise shows
only net purchases in each category listed.
Blanks in a column
indicate that there were net sales in those years that added to
supply and hence are included in the companion table for the
annual world gold supply.
What factors determine the world demand for gold?
First,
we consider industrial demand, and then asset demand.
Of two
Table
h-1
C o m p o n e n t s of A n n u a l World Gold D e m a n d ,
(million of fine troy o u n c e s )
Industrial Demand
Source
Elecof
tronics
Dentistry
Other
Year
Demand
(2)
(1)
(3)
J e w e l r y Demand
Developed
Developing
Countries
(k)
(5)
1950
1951
1952
1953
195*+
1955
1956
(l)+(2)+(3)
+(U)+(5)
(6)
Coin
and
Medallionsa
(7)
1959
I960
1961
1962
1963
196U
3.1
3.2
12.5
13.0
1.0
1967
1968
2.6
3.2
3.0
2.8
1969
1970
1971
1972
2.0
1.9
1.9
2.0
2.1
2.1
1.8
2.0
3.1+
l+.l
3.0
2.2
2.U
1973
197^
1975
1976
1977
1978
2.5
2.8
3.0
2.6
1979
1980
S o u r c e , by Column;
(l)-(5)»
(6)-(l0):
1.9
2.0
2.0
2.2
2.1+
1968-70:
1971-72:
1973-80:
2.3
2.2
2.5
2.6
1.9
2.1
2.1
2.9
2.8
2.0
2.5
2.1+
2.1
A.
B.
C.
29.3
29.2
17.8
22.6
13.8
15.1
17.1+
19.0
17.7
8.7
1U.9
13.3
6.0
39.5
1+0.5
31.9
15.U
from metric
tons to
fine
55.9
5U.7
52.1+
1+2.2
85.0
60.0
1+2.0
52.0
6.3
2.1
0.1
19.8
0.9
0.5
0.1
2.9
7.6
1+1+.7
1+8.1
1+1+.8
1+2.2
36.0
1+6.1+
52.6
56.1
k.9
17.2
16.8
1+.1+
1.9
6.9
1+.8
12.8
55.1
38.1+
l.k
9.h
J. Aron & C o m p a n y , S t a t i s t i c a l H a n d b o o k for t h e S y m p o s i u m on Gold
J, A r o n & C o m p a n y , G o l d S t a t i s t i c s and A n a l y s i s ( N o v e m b e r 1 9 7 8 )
C o n s o l i d a t e d Gold Fields L i m i t e d , G o l d 1979 (June 1 9 7 9 )
Source C , p . 16 (converted
Source B , p. 3 6 .
Source A , p . 13.
k
1+3.5
39.2
1+5.2
1+3.0
10.5
23.1+
20.2
1+6.9
9.5
8.7
7.5
6.2
10.8
10.il
6.2
Ik.9
36.7
38.
8.1*
10.1
2.6
15.9
22.9
37.0
6.6
32.5
32.1
13.9
19.7
19.U
21.5
2.5
3.1+
3.3
2.1+
2.9
2h.3
23.7
2k.2
2b.k
32.1
7.5
6.5
12.9
19.1
19.0
17.2
1+1.3
39.9
25.2
8.9
Total
Demand
(6)+(7)+(8)
+(9)+(l0)
(11)
9.2
5.8
1+1.1
16.3
(10)
(9)
3.2
3.5
2.3
3.2
3b.2
10.2
37.5
38.0
35.8
36.3
Net P u r c h a s e s by
Centrally
Offical
Planned
Western
Agencies
Economies
k.7
32.5
31*.5
36.0
1965
1966
Net
Private
Bullion
Purchases
(8)
12.0
13.0
13.0
13.5
15.0
17.0
19.0
22.0
25.0
28.0
30.0
1957
1958
Note:
J eve 1 ry
and
Industrial
Demand
1950-1980
(October
198l)
ounces).
Source A, p . 1 3 .
Arithmetic errors in S o u r c e A , p . 1 3 , h a v e b e e n c o r r e c t e d .
D a t a revisions in early 1 9 8 2 b e c a m e a v a i l a b l e to us t o o late for u s e in the e c o n o m e t r i c
table.
A revised v e r s i o n of T a b l e 1+-1 a p p e a r s in t h e S t a t i s t i c a l C o m p e n d i u m .
analysis b a s e d
on
this
158
possible approaches, one analyzes the disaggregated data, the
other, the aggregate data.
The disaggregated approach estimates
demand functions for each of the components of industrial demand
and f i n addition, breaks it down by regions of the world.
The
advantage of this approach is that it can isolate the possible
influence of changes in the composition of demand which may
affect aggregate demand.
One example is the growth of gold use
in electronics and relative decline in its use in dentistry.
Another is the higher income elasticity in developing countries
than in developed countries.
The chief disadvantage of the
disaggregated approach is the existence of measurement problems
with respect to some of the components.
The alternative approach, summing all possible industrial
uses of gold, isolates the key economic determinants of the
demand.
These include the real price of gold (the market price
deflated by a worldwide price index), the real price of close
substitutes (for example, silver), and world real income.
The
effects of the real price of gold on the quantity demanded would
be expected to be negative — a higher real price would reduce
the quantity demanded, other things equal.
The effect of the
real price of close substitutes on the quantity of gold demanded
would be expected to be positive — a higher real price of a
close substitute would increase the quantity of gold demanded, a
lower real price of a close substitute would reduce the quantity
of gold demanded.
Likewise, world real income would be expected
to exert a positive effect on the quantity of gold demanded.
An econometric estimate of aggregate world industrial demand
for gold for 1950-80 reveals both real income and the real price
of gold to be the key statistically significant determinants of
demand, with signs in accordance with theoretical expectations
(see Appendix Table 4-A1, part 1).
However, the real price of
silver as a measure of close substitutes for gold was found to
be statistically insignificant.
We used U.S. real income as a
proxy for world real income, in the absence of a world real
income series before 1960.
In the regressions, the income effect
overpowers the price effect.
Continued growth of real income at
the rate of 3 to 4 percent per year would be associated, other
things equal, with a 5 to 7 percent increase in the demand for
gold for industrial purposes.
In addition, a one percent rise
in the real price of gold would lead to a three-quarters of 1
percent decline in the quantity demanded.
We also estimated aggregate world industrial demand for
gold over the period 1969-80, using two measures of world real
income, in addition to U.S. real income (see Appendix Table
4-A1, part 2).
The results, using all three measures of income,
are similar.
Both income and price elasticities are higher than
over the longer period, suggesting that continued growth of real
income at the rate of 3 to 4 percent per year would be associated,
other things equal, with a 9 to 12 percent increase in the demand
for gold for industrial p u r p o s e s , 6 while a one percent rise in
159
the real price of gold would lead to a corresponding decline in
the quantity demanded.?
We caution again that the results may
be contaminated by the presence of investment motives for
absorbing gold in the data for industrial demand.
4.
Determinants of World Demand for Gold:
Asset
Demand
Asset demand for gold by the private sector is motivated by
regard for gold as a hedge against inflation and against political
uncertainty.
To be an effective hedge against inflation, gold
must appreciate over the period during which it is held at a
rate at least as great as the sum of the real rate of interest
and the rate of inflation.
If the real rate of interest rises,
other things equal, holders will tend to divest themselves of
gold.
If the expected rate of inflation rises, other things
equal, investors will wish to increase their holdings of gold as
an asset.
If the market rate of interest rises, the demand
for gold will rise only commensurate with the extent to which
inflationary expectations are fully incorporated in the nominal
interest rate.
In the case of an increase in political uncertainty, other
things equal, the demand for gold should rise.
The determinants of the world net asset demand for gold
(private purchases less sales of g o l d ) 8 should depend positively
on the world's wealth or real income, negatively on the real
rate of interest, and positively on expectations of inflation.
In regressions using annual data over the period 1969 to 1980,
we found limited support in most cases for our theoretical
specification.
Only one regression confirmed expectations
[Appendix Table 4-A2, eq. (8)].
In that regresion, the real
rate of interest, measured by the Eurodollar rate minus the
rate of change of the world consumer price index; the actual
rate of inflation, based on the latter series; and world real
income, all had the postulated signs and were statistically
significant.
Moreover, these variables explained over 80 percent
of the variation in net asset demand.
Other equations, also
reported in Appendix Table 4-A2, using other measures of the
variables, were less successful.
A quarterly estimate of the asset demand from 1968 II
through 1974 IV reported in the literature explained much of the
variation of that series.9
E.
Components of the Supply of Gold
1
Gold
•
Production
Gold was mined in ancient times, but the earliest
quantitative estimates available of gold output date from
the discovery of America.
Between 1493 and 1980, the estimates
of gold mined ranges between 2.8 and at least 3 billion
160
ounces, about two-thirds of which was mined
years.
in the past
50
Between 1493 and 1848/ the year of the California gold
discoveries, total gold mined is estimated at in the range
of less than 40 million to less than 150 million ounces,
of which the United States produced less than 2 million
ounces.
Most of the gold produced by that date was held
by individuals as jewelry or coins, not in government
monetary reserves.
The world monetary gold stock in 1848
was about 50 million ounces.
From 1850 to 1933, total gold mined is estimated at
900 million ounces, of which the United States produced
one-third.
Most of this output was coined, 350 million
ounces by Great Britain, 220 million ounces by the United
States, 150 million ounces by the rest of the world, the
total not necessarily in circulation.
By 1933 the world
monetary gold stock amounted to 580 million ounces, having
increased at a considerably faster rate than total gold
mined.
Except in the decades of the 1870s, 1880s, and 1920s,
until 1933 the official price of gold was generally at a
premium over production costs encouraging an expansion of
gold output and discouraging commercial use.
The increase
in the official price of gold in 1934 accounted for the huge
rise in gold output thereafter until the 1960s, when the
decline in the real price of gold eroded the incentive to
increase output.
World gold production peaked in 1970.
Until recent decades,
in the short run, a rise in the real price of gold would lead to
an increase in output and ultimately to the possibility of gold
discoveries.
The reversal of the foregoing relationship in recent
years is attributable to two factors.
Before World War I, gold
mining was an extensive industry, which means that exhaustion of
easily minable gold led to a shift to new sites.
Gold mining
subsequently became more intensive, involving large amounts of
fixed capital, so that a change in output reflected shifts among
grades of ore at a given site.
In addition to the change in the
nature of the process of gold mining, institutional change also
played a role in producing a difference between pre-World War I
and more recent gold mining.
That institutional change was the
subsidization by governments of gold-producing countries of the
mining of lower-grade ore.
Because of the structural and policy
changes, the relation of the real price of gold and gold output has
been reversed.
This may account for the decline in world gold production since 1970.
The decline may also be responding to the
earlier decline in the real price of gold and the depletion of
existing reserves.
2.
Changes in the Major Producing
Areas
Fewer than a dozen countries have accounted
for the bulk of the
161
gold mined in each century for which estimates exist.
South America's
share of total world gold output rose from 36 percent in the 16th
century to a peak of 80 percent in the 18th century, and then rapidly
dwindled in the 19th and 20th centuries; currently it amounts to
about 2 percent of total output.
The output of European gold mines
declined from 21 percent of the world output in the 16th century to
A major discovery
6 percent in the first decade of the 19th century.
in Russia in 1814 restored the share of Europe's output by 1840 to
the level in the 16th century, following which the relative importance
of the continent's contribution declined to 1 percent by 1925.
Soviet
output since then has accounted for a rise in the continent's contribution to 21 percent in 1980.
U.S. discoveries in 1848, and
Australian discoveries in 185.1 raised the combined shares of the two
areas to 80 percent of total world output by 1855, with a gradual
decline thereafter to 56 percent by 1895.
A major discovery in Canada
in 1896 restored the North American plus Australian share of the total
to 58 percent in 1905.
The decline in the following decades reduced
the combined share to less than 10 percent in 1980.
Gold output of
South Africa made a significant contribution from the beginning of
the 20th century, rising consistently except in the decade of the
1930s until it accounted for two-thirds of total output by 1970.
Since then it has declined to about 55 percent in 1980.
There are thus fluctuations not only in the average annual
aggregate output of gold but also in the geographical sources of
increments to the gold stock.
The current nine leading gold-producing countries accounting
for 91.4 percent of total gold output in 1980, and their shares were
as follows:
Country
Republic of South Africa
U.S.S.R.
Canada
Brazil
U.S.A.
Philippines
Australia
Ghana
Zimbabwe
Note:
Share of Total Gold Output
( in percent)
in 1980
55.6
21.3
4.1
2.8
2.4
1.8
1.4
1.0
0.9
Revised figures for 1980 lower the percentage for South
Africa to 51.7 and raise the U.S.S.R. percentage to 23.8.
The Republic of South Africa and the U.S.S.R., the major gold
producing countries, are regarded by some observers as politically
unreliable sources of gold.
U.S. new gold output declined from 1.7 million ounces in 1970 to
0.95 million ounces in 1980.
Supply to consumers and investors was
162
supplemented in that year by private refiners' recovery of secondary
gold from scrap, amounting to 2.2 million ounces, and by commercial
imports, amounting to 4.5 million ounces.
3.
World Gold
Reserves
As with any exhaustible resource, the estimate of underground
gold reserves is based on current economic minability.
Other identified deposits that are known are not currently economic to mine.
It
is also always possible that undiscovered gold may remain to be found.
The best estimate of unmined economically minable world gold
reserves is that it approximates 1 billion ounces — compared to 1.8
billion ounces that have been mined over the past 50 years.
Half of
the 1 billion ounces is in South Africa, half of the other half in
the U.S.S.R.
Other identified unmined deposits not economically
minable currently total about 0.9 billion ounces.
These estimates
are subject to upward revision.
It may be that the rise in the price
of gold since 1973 has not yet been reflected in the calculation of
demonstrated and inferred reserves, which depend on detailed information about hundreds of deposits.
Since South African reserves are so large a fraction of total
world reserves, it is important to examine key aspects of the estimation of that country's reserves.
In 1970, it was widely believed that
its gold mining industry could not survive, given rising costs of
production and a falling real price of gold.
Since then, the increase
in the price of gold led by 1980 to a ten-fold increase in capital
spending on producing mines plus additional amounts for the development of new mines not yet in production.
While milling capacity of
the industry expanded over the decade, there was no corresponding
increase in the output of gold.
In fact, annual output fell steadily
from 32.1 million ounces to 21.7 million ounces.
The reason is that
the average grade of ore milled by gold mines fell from 13.3 grams
per ton in 1970 to 7.3 grams per ton in 1980.
There is little expectation that the level of production will rise in the 1980s, barring
a dramatic change in the relationship between the price of gold and
costs of production.
The rise in costs has been associated with a
substantial increase in the industry's wage bill and improvements in
the living quarters for black workers, which are planned to continue.
High capital costs also confront the industry.
They deter expansion
of existing mines mining lower grade ore, and also the reopening of
mines that were uneconomic when the gold price was fixed.
Gold mining in South Africa is a labor-intensive industry.
Mechanization of the gold fields is impractical because of the depth
at which mining has to be carried out, the hardness of the rock that
has to be excavated to develop access tunnels, the high temperatures
of the rock, and the narrowness of the orebody.
Most of the people
employed are black workers whose families remain in tribal homelands.
Movement of blacks into skilled work is opposed by many white trade
union members, posing an obvious labor problem for the industry.
163
The calculation of South African ore reserves depends critically
on the concept of pay limit, which is the minimum quantity of metal
in the mineralized rock sufficient to yield the revenue to cover
costs of mining, processing, and marketing gold.
The reserves usually
include ore available for extraction within a year.
All gold mines
in South Africa lease mines from the State subject to the restriction
that the company must mine to the average value of its published ore
reserves.
When the price of gold was fixed, the pay limit rose as
mining costs increased; since the 1970s, the pay limit has declined
when the price of gold has risen and risen when it declined.
In some
mines, a relatively minor change in the pay limit can make significant tonnages of low grade ore payable or unpayable, with large
effects on the total ore reserve.
Whereas pay limits formerly were
reviewed once or twice a year, the practice now is to review them
monthly.
The objective is to limit the number of places that have to
be stopped before they have been worked out, so that grade control
can be achieved as working places are exhausted.
Projections by industry sources of South African gold output,
assuming a current gold price of $305 rising to $407 by 1984, then
rising at the same rate as costs until 2000, or alternatively, a
current price of $450, rising to $554 in 1984 and then remaining
constant in real terms until 2000, are broadly similar:
annual gold
output totals 22.5 million ounces until 1987 and then gradually
declines to 11.25 million ounces by 2000.
One other determinant of South African gold output must be
mentioned.
A state assistance program was introduced in 1968 to
subsidize gold mines that were no longer profitable, thus enabling
marginal mines to remain in operation.
If the price of gold should
decline, the amount of state assistance, which was negligible in
1980, could again rise.
The State's motive in providing assistance
was to obtain foreign exchange from sales of gold output and incidentally to avoid capital costs of re-opening mines at a later date
when their operation might again become economic.
While information relating to South African gold mining is very
fully reported, figures neither for annual output nor for reserves of
gold are published by the U.S.S.R.
Publication of statistics of gold
output was prohibited by the Soviet government in 1926, data about
geological deposits were discontinued in 1934, and the gold reserves
of the State Bank have been secret since 1935.
A series of Western
estimates, using a variety of methodologies, have been subject to
substantial revision from time to time.
An early estimate was based on an announcement in a Five Year
Plan that prospecting had raised known deposits from 79.4 million
ounces in 1926 to 111.5 million ounces in 1934.
The Gold Mining
Administration Director at that time predicted that Soviet gold production would surpass that of the South African Rand (the principal
South African mining district) and lead the world.
The prediction
was empty but encouraged Western estimates of Soviet output of 18.3
million ounces and monetary reserves ranging as large as 272 million
ounces.
164
A 1960 revision by the CIA of those estimates, as reported by
Consolidated Gold Fields Ltd., reduced the estimate of annual output
to a range of 4.3 million ounces to 4.9 million ounces and of monetary
Western observers thereafter used the
reserves to 56 million ounces.
CIA figures which were reputedly based on a Party document a Soviet
defector provided.
Consolidated Gold Fields Ltd. made an effort subsequently to produce its own estimates, initially by translating and collating Soviet
press reports and technical papers available in the West.
The Soviet
sources gave percentage estimates of the extent to which targets had
been met in individual gold producing areas and the rate of growth of
output and additions to ore reserves.
No targets or production
figures were given by the sources.
In 1974, the company adopted a
different approach to estimating Soviet gold production, based on
information about the type and size of equipment and processes that
were being used in mining and extracting gold.
Relying on comparison
with similar workings elsewhere, the gold content of the material
treated was estimated from the nature of each operation and the
Between the first
numbers, types and sizes of machines being used.
and second study, substantial upward revision of the estimates resulted from a re-examination of publications on reef mining.
More
attention had been placed on alluvial mining in the company's first
study because the Soviet press and radio publicized developments
there rather than in reef mining, which presumably contributed more
to aggregate gold output than previously had been assumed.
The
second approach yielded an overestimate because it assumed that
Soviet production was as efficient as in the West.
Currently, Consolidated Gold Fields Ltd. has under way a third
study using satellite photographs in addition to the earlier techniques.
At this stage, the company estimates that Soviet annual output
is in the range of 9 to 11 million ounces.
A revision of estimated
Soviet Soviet output has raised the annual figures the company reports.
The estimate it gives for 1980 is 10 million ounces.
The company
assumes that sales to the West by the communist bloc of 12.9 to
13.2 million ounces per year in 1976-78 required drawing down
stocks.
Communist bloc sales include, in addition to sales by
the Soviets, smaller amounts by the People's Republic of China and
North Korea.
The decline in sales to the West by the bloc in
1978-80 was attributed to the availability of an alternative source
of foreign exchange — oil and gas sales — as well as the availability of commercial and official credit from the West, which
reduced the need to market gold abroad.
Increased gold sales
since reportedly reflect an increase in demand for foreign exchange
which the alternative sources have not supplied.
What is currently known or assumed about world gold reserves
therefore suggests that gold output until the end of the century will
at best offset some portion of the declining trend that existed from
1970 to 1975.
165
4.
Components of the World Gold
Supply
The supply of gold does not depend solely on new gold mined,
although for the world as a whole the production of market economies
is the principal component.
Most gold producers in this sector sell
all their annual output, but some may market more or less than current
output.
South Africa was reluctant to sell its output in 1976-77 when
the price of gold declined, although it had a large balance of payments deficit.
Instead of selling gold, it arranged a swap of 8.0
million ounces or so of gold for foreign currency, with the option to
repurchase the gold at the swap price plus interest.
In 1979, it
exercised the option and bought 3.9 million ounces of the swap total,
selling most of it at the then higher prices, and adding the remainder
In other years since 1960, South African gold
to its gold reserves.
sales have been more or less than current output, depending on the
market price of gold, the price of diamonds and other minerals the
country exports, and its balance of payments.
Canada has sold gold on occasion in excess of current output to
reduce the size of its gold reserves.
Australia from time to time
requires producers to sell part or all of their output to the central
bank.
On the whole, gold production in market economies flows to
supply the markets of the world.
The supply components other than the output of market economies
are intermittent, fluctuating from year to year when present, and
absent altogether in other years.
These components include:
a) the flow from centrally planned
b) sales by official monetary
economies;
institutions;
c) sales of private jewelry hoards by residents of developing
countries; and
d) sales of private bullion
hoards.
a) As noted, the flow of gold to the market from the communist
bloc has fluctuated with its need for foreign exchange.
There were
no sales in the five years 1966-70, when the bloc was a net purchaser.
Sales are estimated to have ranged from 13 million ounces per year in
1976-78, as noted above, to 1.7 million ounces in 1971.
The bloc is
believed to have sold 2.9 million ounces in 1980, and an estimated
7.2 or more million ounces in 1981.
b) Net sales by official institutions since 1950 were limited
the years 1966-68, 1971, 1973-79.
They ranged in size from 0.2
million ounces in 1973 to 45.1 million ounces in 1967.
c) Jewelry sales by residents of developing countries amounted
to 1.7 million ounces in 1974 and 4.2 million ounces in 1980.
In
other years since 1950, developing countries absorbed gold jewelry.
to
166
d) Dishoarding of private bullion holdings since 1950 contributed
to the supply of gold only in the years 1969-72, when it ranged from
0.1 million ounces to 11.0 million ounces.
Table 4-2 lists the components of the world gold supply annually
from 1950 to 1980 and compares the total with the corresponding annual
world output.
The movements in supply are more erratic than those in
gold output.
5.
Determinants of Market Economy Gold
Production
An econometric estimate of the determinants of the gold production of market economies for 1950-80 was obtained by a regression
on current and lagged values of gold and a time trend as a proxy for
technical p r o g r e s s . A s expected, the real price affects market
economy production negatively and with a one-year l a g . H
In
addition, regressions covering the period 1969-80 gave results similar
to those for the longer p e r i o d . ^ 2
All the results are reported in
Appendix Table 4-A3.
F.
Determining
the equilibrium price of gold
Except during periods when the U.S. did not adhere to the gold
standard, the price of gold has been fixed by the government.
The
most recent such period of non-adherence may be dated from 1968, when
the two-tier gold market came into being, with the termination of the
London Gold Pool's efforts to hold the price of gold in private
transactions at the official price.
Since then, it may be said that
the price of gold at any moment is determined in a free market by
the interaction of total demand for and supply of gold.
Because gold is held for asset as well as industrial purposes,
and because the existing stock of gold is very large relative to
changes in the stock, it is important to distinguish between the stock
and the flow markets for gold.
It has been generally agreed that, in
the case of the gold market, in the short run at least, conditions in
the stock (asset) market dominate those in the flow market.
Thus the
determinants of net asset demand would be the key factors affecting
the price in the absence of any significant sales from official
sources or from the communist bloc.
Indeed, evidence by Peter
A b k e n , 1 3 the International Gold Corporation (see note 7), and Otani
and Lipschitz (see note 7) suggests that monthly and quarterly variations in the price of gold are largely explained by conditions in the
asset market.
However, in the long run, conditions in the market for
current gold output are the key determinants of the p r i c e . i n
addition to the determinants of industrial demand, the key consideration of the flow supply side is market production of gold.
Evidence
that it responds negatively to variations in the real price of gold
has just been discussed.
This relationship reflects the special conditions in the South African gold industry.
However, international
production has expanded in the past as a result of technological
innovation and new discoveries.
Table U-2
Annual World Gold Supply and Gold Output,
(millions of fine troy ounces)
\\>ource
\of
\ Supply
YeaX
1950
1951
1952
1953
195*4
1955
1956
1957
1958
1959
Production
in Market
Economies
(1)
23.7
2*4.2
2*4.2
25.5
26.8
27.8
1961
1962
1963
Annual
Total Supply
(l)+(2)+(3)
(5)
(7)
23.7
27.U
27.9
27.8
2U.2
2.2
2.2
2.2
26.li
U.U
32.1
3.5
32.5
U.3
l.U
0.3
32.1
8.6
2.8
33.5
3*4.7
37.3
8.6
U3.5
39.2
U5.2
U3.0
55.9
5U.7
52.u
U2.2
85.0
60.0
U2.0
52.0
UU.7
UO.O
5.7
5.7
15.7
12.9
Uo.l
U0.3
197l*
32.8
1975
1976
1977
1978
1979
30.9
31.3
31.1
31.3
1.6
1.8
11. U
1.2
*4l.O
39.9
1969
1970
1971
1972
1973
1.9
19.9
1.7
11.1
0.2
I4O.9
39.7
37.8
35.8
1.7
3.1
6.8
8.8
7.1
*4.8
3.5
0.2
0.6
13.2
0.3
1.9
12.9
8.6
31.2
13.2
6.14
30.7
2.9
11.6
17.5
38.U
l»8.l
M.8
U2.2
36.0
I46.i1
52.6
1.7
U.8
An updated
version of this table, appears in the Statistical
Compendium.
29.1
30. U
31.5
32.6
33.7
36.2
37.8
39.3
Ul.7
U3.3
UU.9
U6.5
U6.9
U6.0
U6.5
U7.1
1*8.1
U7.1
U5.9
UU.l
Ul.5
39.5
U0.6
U0.7
56.1
Ul.2
55.1
38.1*
U2.8
U2.6
Source, by Column:
J. Aron & Company, Statistical Handbook for the Symposium on Gold
(l)-(3) and (5):
p.13.
(U):
p.33.
(7):
p.19.
Note:
Annual
World
Output
(6)
32.1
1968
1980
Dishoarding
of Private
Bullion
Holdings
36.7
I4I.O
1965
1966
1967
Jewelry
Sales by
Developing
Countries
(U)
2.2
38.6
196*4
Net
Official
Sales
(3)
6.3
29.0
29.9
1960
Flow from
Centrally
Planned
Economies
(2)
1950-1980
(October
1981)
168
If the equations for the industrial demand for gold and for the
gold output of market economies are solved for the real price of
gold, this yields a reduced-form e q u a t i o n ^ 5 where the real price of
gold is determined by the exogenous (independent) variables of the
flow demand and supply equations:
world real income/ the time trend
as a proxy for technical advance/ the real price of silver/ and the
real price of gold lagged by one year.
Such a reduced-form equation
explains up to 93 percent of the annual variation in the real price
of gold.
Adding a market interest rate and f in turn f the annual
percentage change in the price level or, lagged money growth as a
proxy for price expectations/ to account for factors affecting the net
asset demand for gold/ adds 4 percent to the explanation of price
variations^® (see Appendix Table 4-A4.)l?
One way to arrive at an equilibrium price of gold is to follow
the approach of Robert Aliber.^-8
He takes the price of $35 per ounce
in 1961/ a year when the United States had virtual price stability/
as an initial equilibrium price.
Assuming no other factors affected
the real price/ the nominal price of gold should have increased to the
same extent as the increase in the U.S. price level since 1961 plus
a return equal to the real rate of interest.
The U.S. CPI tripled
between 1961 and 1980/ hence the nominal price of gold should have
been $105 in 1980.
Using the world CPI change, the price should have
been $ 1 5 5 . 1 9
However, as the discussion above indicates/ other factors would
have affected the real price of gold in addition to the increase in
the general price level.
If world real income elasticity of demand
for gold is taken to be 1.85 (based on the results for 1950-80 reported in Appendix Table 4-A1 Part 1)/ and the increase in world
income approximated 83 percent (based on an index of world real GNP),
the demand for gold would have increased by 154 percent over the
period 1961-80.20
Over the same period/ the total world gold stock
increased by 35 percent.21
Thus the excess demand for gold amounted
to about 120 percent.
If we take the price elasticity of demand for
gold to be -1*2, an<3 price elasticity of supply to be close to zerO/23
then the real price would have increased (other things equal) by about
120 percent since 1961.
On this calculation/ the equilibrium price
of gold in 1980 would have been between $230 and $ 3 4 0 . 2 4
This exercise assumes that factors affecting the net asset demand for gold are
transitory, and would vanish once price stability under a gold
standard is restored.
Assume that at a price per ounce of gold, within the calculated
range of $230 to $340/ the gold standard was restored.
In the current
free market/ a monetary demand essentially does not exist.
The price
calculation reported here was based on equating the nonmonetary demand
for and the supply of gold.
Under a gold standard/ the government
sets the price and must satisfy all demands for gold at that price.
Under a reinstituted gold standard/ a monetary demand for gold would
recur.
Only after the monetary demand for gold had been accommodated/
would the nonmonetary demand for gold be satisfied.
Thus the asset
demand relationship in the foregoing econometric exercise would no
169
longer be relevant.
The supply equation, however, would presumably
be unaffected by a return to the gold standard.
The question then
resolves itself into the adequacy of the supply relative to the
putative prospective monetary and nonmonetary demand for g o l d .
G.
Record of gold production in past centuries and
trend movements in commodity prices
its relation to
The rate of growth of world gold output over the centuries has
waxed and waned.
Chart 4-1 plots world yearly output of gold from
1800 to 1980.
Table 4-3 compares average annual rates of growth of
world output of gold (in millions of fine ounces), for subperiods
since 1849, with corresponding average annual rates of change of
available measures of the U.S. price level.
The table leaves no doubt that gold production has not increased
at a constant annual rate from subperiod to subperiod.
Averaging
over periods of high and low growth rates of gold production obviously
yields a smoother picture.
Similarly, averaging over periods of a
falling price level matching low growth rates of gold production and
periods of a rising price level matching periods of high rates of gold
production yields a smoother picture of price change.
But for contemporaries each period was distinct and exacted first the costs of
deflation and then the costs of inflation.
The growth rate of gold
output has not been stable over time.
Three subperiods since 1934 invite comment. Annual rates of
growth of gold output more than doubled in the closing years of the
interwar period, 1934-40.
The doubling was a response to the sharp
increase in the profitability of gold mining that the U.S. increase
in the official price from $20.67 to $35 an ounce produced.
At first
glance, the 0.66 average annual rate of increase in the U.S. price
level from 1934 to 1940 may not appear to reflect the surge in gold
output.
However, a comparison of the change in the average annual
rate of increase in the U.S. price level from the 1920-33 to the 193440 subperiod (+4.6 percent per year) with the corresponding change in
the rate of change of gold output (+3.6 percent per year) shows a
close relationship between the two variables.
After 1950, the rate
of change of the U.S. price level in the two subperiods that are distinguished no longer tracks the rate of change of gold output.
Post-World War II inflation experience was fueled by means other than
rising gold output, which accounted for inflations before 1914 that
were clearly less virulent than the postwar episode.
H.
Summary
The rate of growth of gold output is not constant over time.
After World War II, output grew at about 3 percent per year until
The most
1970, and has since declined at about 1.5 percent per year.
important gold producer among market economies is South Africa.
Factors that would operate to continue the downward trend in South
African output include a government mandated shift to lower-grade ores
CHART 4-1
WORLD GOLD PRODUCTION 1800 - 1980
MILLIONS OF FINE TROY OUNCES
50.0
-I
25.0
-
10.0
-
5.0
-
2.0
1.0
0.3
1800
1 8 3 0
1860
1 8 9 0
1 9 2 0
1 9 5 0
1 9 8 0
o
171
Table U-3
Comparison of Average Annual Rates of Change of World Gold Output and oi'
Various Measures of the U.S. Price Level, by Subperiods,
I8U9-198O
World Gold Output
Average Annual Rates
of Change (in percent)
Period
Period
U.S . Price Level
Average Annual Rates of
Change (in percent)
181*9-1870
6.2
181*9-1870
1871-1889
-0.3
1869-1896
1890-1913
6.0
1896-1913
1.97
1920-1933
3.1+
1920-1933
-3.90
193U-I9U0
7.0
193U-19I+0
0.66
1950-1968
2.7
1950-1968
2.61+ (GNP price deflator)
1969-1980
-1.6
1969-1980
6.50
Source:
2.37 Wholesale Prices
-2.11 (NNP price deflator)
"
For gold output, see the Statistical Compendium, Table 1, below.
For wholesale prices, 18^9-70, see U.S. Bureau of the Census,
Historical Statistics of the United States, Colonial Times to 1970,
Bicentennial Edition, Part 1, Series F-2, pp. 202-203.
For the deflator implicit in net national product, 1869-19^0, see M.
Friedman and A.J. Schwartz, Monetary Trends in the United States and
United Kingdom, 1867-197?> Ch. U, appendix of basic annual data (in
press).
For the deflator implicit in GNP, 1950-80, see Economic Report of the
President (transmitted to the Congress February 1982), Table B-3, p.
236.
Note:
Rates of change assume continuous compounding, that is, they are the
difference between the natural logarithms of the variable at the terminal and initial dates divided by the number of years separating those
dates.
172
when the average gold price rises, inflation effects on labor and
capital costs, shortages of skilled labor and labor unrest, as well as
the high costs associated with deep mining.
Offsetting these factors
are the possibility of discovery of new gold fields and uranium revenues, since the mineral is found in one-sixth of South African gold
mines.
Gold output in the United States and Canada, including byproduct gold production mainly from copper mining, has also displayed
a negative postwar trend, although a rise in gold prices has
encouraged reopening of mines and exploration.
Brazil has become a
recent gold producer, although its output is not consequential.
Among
Communist countries, the U.S.S.R. is the leader, estimated to produce
about one-fifth of the world's output, although its sales are not
geared to production but to balance of payments needs.
For the long
run, little increase in annual world gold production is in prospect.
Advocates of a return to the gold standard tend to dismiss concern with the prospective rate of growth of world gold output.
Yet
the amount of gold available for annual additions to the stock of
monetary gold is a crucial factor in determining the trend of the
price level under a gold standard.
If the annual rate at which the
monetary gold stock increases is below the rate of population growth
and real income growth, the consequence is a declining trend in the
price level.
This conclusion follows from extensive studies of the per capita
demand for money that have shown it to be determined by per capita
real income and an interest rate representing the yield on an asset
alternative to holding money.
If the supply of monetary reserves will
not match the growth in demand for money, the price level will fall.
It was not by coincidence that the negative rate of gold output growth
from 1871 to 1889 was associated with a declining price level in the
United States and worldwide until 1896.
The decline in the price
level was the consequence of the decline in the rate of gold output
growth concomitant with a rising world demand for gold.
Similarly,
the decline in the price level during the 1920s was a consequence of
the fall in the rate of gold output during that decade.
In each
case, the declining rate of gold output was a response to an earlier
decline in the real price of gold.
A declining trend in prices may seem a desirable development
after decades of a rising price level.
However, such a change would
impose two kinds of adjustment costs upon the economy:
(1) transition
costs in moving from an inflationary to a deflationary environment;
(2) continuing costs of a deflation, assuming continuance of a gold
standard.
The costs might be regarded as tolerable if they affected
all markets proportionally, so borrowers and lenders, workers and
employers, retired and active labor force participants, urban and
rural families, were all equally burdened.
No more than the costs
of inflation, however, will the costs of deflation be so distributed.
173
Notes to Chapter 4
1.
W.A. Brown, Jr., The International Gold Standard
NBER, 1940, 2 vols., pp. 627-37.
2.
Annual Report of the Secretary of the Treasury 1968, pp. 467-70.
3.
Bank of England, Quarterly Bulletin, June 1968, p. 109.
4.
W.J. Buisschau, "Some Notes on Gold Production and Stocks," in
National Industrial Conference Board Special Studies no. 43,
Shall We Return to a Gold Standard - Now?
1954, p. 163.
5.
International Currency Experience:
Lessons of the Inter-War
Period, League of Nations, 1944, p. 233. Where they overlap,
the League of Nations annual estimates do not agree with the
annual estimates in the source cited in note 4 for the period
1930-1952.
In many years, the sum of the change in central
bank reserves and industrial consumption does not equal the
gold supply.
6.
U.S. real income grew at an average annual rate of 2.74 percent
from 1969 to 1980; real income of 7 industrial countries increased
at an average annual rate of 3.22 percent, and world real income
by an average rate of 3.76 percent.
For sources, see Table 4A1,
part 2.
7.
The estimates of the determinants of industrial demand for gold
reported here were obtained from ordinary least squares regressions.
We also used the two-stage least squares procedure,
as a check on possible identification problems, and the results
were not significantly different from those for OLS regressions.
A recent study using annual data over the period 1970-80 reported
the real price elasticity as -1.2 and the real income elasticity
as 2.9 (International Gold Corporation Limited, A Gold Pricing
Model (August 1981:
p. 5.) The results are similar to those
reported in our Appendix Table 4-A2. A quarterly study of the
period 1968-74 reported a price elasticity of -0.7 and an
income elasticity of 0.6 (L. Lipschitz and I. Otani, "A Simple
Model of the Private Gold Market, 1968-74: An Exploratory Econometric Exercise," IMF Staff Papers 24 (March 1977): pp. 32-63.)
8.
We added the constant $20 billion (the amount required to make
negative changes positive) to the net asset demand series to allow
us to make the log transformation.
This procedure does not introduce significant bias in our estimates.
Net asset demand is
defined as Table 4-1, col. 8, minus Table 4-2, col. 5, for a
definition excluding coins and medallions.
Including coins and
medallions, the definition is the sum of Table 4-1, cols. 7 and
8, minus Table 4-2, col. 5. Regression results including coins
and medallions were superior to those excluding them.
Our net
asset demand equation is a reduced form that we believe captures
Reinterpreted,
174
the essential factors that determine
for gold.
9.
the flow net asset
demand
Lipschitz and Otani (note 7, above) found hoarding demand for gold
to be significant functions of Eurodollar and Euromark interest
rates f expected inflation, and wealth over the period 1968-74.
10.
The results were similar for the period 1951-80, using the world
CPI as the deflator (available only since 1950); for 1950-80, we
used the U.S. wholesale price index as the deflator.
See
Appendix Table A3.
11.
The real price lagged two and three years did not improve the
results nor did omitting the time trend (Appendix Table A3).
One
possible explanation for the negative coefficient on the real
price is that it reflects producers' expectations about the
behavior of the future price of gold. When gold prices are high,
they may be expected to decline, so producers reduce output in
anticipation of the price decline.
See Stephen W . Salant, "The
Vulnerability of Price Stabilization Schemes to Speculative
Attack," Journal of Political Economy (forthcoming).
12.
The estimate of price elasticity of gold output reported by
Lipschitz and Otani for the period 1968-74 is -0.11, similar
our result.
to
13.
"The Economics of Gold Price Movements," Federal Reserve Bank of
Richmond, Economic Review (March/April 1980):
pp.3-13.
14.
However, this statement neglects the condition for the optimal
depletion of an exhaustible resource.
In that case, in a
competitive market, Notelling's rule that the price of the resource should rise by the market rate of interest would be of
paramount importance.
See Stephen W . Salant and Dale W .
Henderson, "Market Anticipations of Government Policies and the
Price of Gold," Journal of Political Economy 86 (August 1978):
pp. 627-48.
15.
An equation system is said to be complete when it has as many
endogenous (dependent) variables as equations (in our example,
two: one for the demand for gold, the other for the supply of
gold), and when it can be solved for these variables.
The
solution is called the reduced form of the system.
The reduced
form is convenient for calculating the effect of a change in
exogenous (independent) variables on an endogenous variable.
16.
In the equations in Appendix Table A4, we deflate the prices of
gold and silver by the U.S. and world CPI.
To be consistent,
we use the two series as measures of price change.
Results were
similar in regressions using the U.S. wholesale price index as
the measure of annual price change.
17.
The study by the International Gold Corporation (see note 7,
above), using monthly data, explains most of the variation in the
175
price of gold with measures of the real rate of interest, lagged
world money growth, and a measure of world political tension.
However, the reported results do not include Durbin-Watson
statistics, suggesting that they may be marred by autocorrelation, as are many of those reported here.
18.
See his statement before the Commission, November 12, 1981.
For
a more comprehensive treatment of his approach, see his paper,
11
Inflationary Expectations and the Price of Gold," presented to
the World Conference on Gold, Rome, February 5, 1982.
19.
The world CPI, available
times over 1961-80.
20.
If we use the income elasticities of the past decade, reported
in Appendix Table A1, part 2, and those reported in the International Gold Corporation study (an average of 3.22 in Table Al,
part 2, and 2.9 in the latter study), the income elasticity
would be closer to 3.
Such an estimate would raise the increase
in gold demand to 213 percent.
21.
Based on U.S. data.
22.
Based on the results shown in the Appendix tables and other
sources cited.
23.
The assumption here is that the price elasticity in the gold
output equations in Appendix Table A3 can be taken as a proxy
for the price elasticity of the short-run supply curve.
24.
Using the income elasticity from the recent period would raise
the price to $330 and $490.
The higher income elasticity estimates, however, must be viewed with caution.
Some of the net
asset demand for gold that has emerged since 1969 may be captured
by the income effect.
25.
On the importance of knowing not only the parameters of the nonmonetary demand for gold but also of the money-market monetary
demand fojtr gold, in evaluating the outcome of a return to the
gold standard, see Robert P. Flood and Peter M. Garber, "Gold
Monetization and Gold Discipline," Board of Governors of the
Federal Reserve System, International Finance Discussion Papers,
Number 190 (September 1981).
in IMF, IFS Yearbook,
increased
4.4
For an analysis of the same issues from an alternative approach,
see William Fellner, "Gold and the Uneasy Case for Responsibly
Managed Fiat Money, in Essays in Contemporary Economic Problems:
Demand, Productivity, and Population, 1981-1982 edition, ed.
William Fellner, American Enterprise Institute, pp. 97-121.
Appendix Table 4-Al, Part 1
Annual World Industrial Demand for Gold, 1950-19^0
D
log Q.
= flo + B1
in
P
log (_g) +
P
P
Bp log (_s) +
B3
log y + e
P
Coefficients of Independent Variables
Equation No.
(Technique)
Constant
(Bq)
1.
(C-0)
-22.U78
(-6.187)*
2.
(C-0)
-11.307
(-3.U6M*
(t-values in parentheses)
Real Price of Gold Real Price of Silver Real Income (B3)
(B X )
(B2)
WI
CTT
¥FI
UPTT
U.S.
R2
-0.779
(-5.075)*
-0.273
(1.863)
-0.71*4
(-3.605)
-0.122
(-0.570)
Sources:
.101
l.Tlfc
.715
1.399
(5.639)*
.895
.1^0
1.937
.563
Table U-l.
Price of gold (log P g ): London Price and J. Aron.
Price of silver (log Po): London Price and J. Aron.
Wholesale price index (WPl): U.S. Bureau of Labor Statistics.
Consumer price index (CPl): World price index (IMF).
Real income (U.S.): Department of Commerce, B u r M u of Economic Analysis.
Note:
See Chapter 1, note U, for definitions of statistical measures.
p
.9^5
C-0 = Cochrane Orcutt
Industrial demand (log Q? ,):
md
DW
2.317
(7.950)*
*Statistically significant at the 5 percent level.
Technique:
SEE
Appendix Table h-Al, Part 2
Annual World Industrial Demand for Gold, 1969-1980
log Q? nd = Bq
+ B1
log (^g) + B2
log (^s) + B3
log y + e
Coefficients of Independent Variables
Real
Real
Equation
No.
Price
(Bo)
WPI
(-U.095)*
(OLS)
(OLS)
(-3.2U3)*
3.
(c-o)
-Hi.636
k.
(OLS)
-7.857 ^
(-3.63U)*
5.
(OLS)
(-2.775)*
6.
-32.U9U
(c-o)
(-8.593)*
(-8.655)*
Price
of
Silver
WPI
0.228
Countries
-1.053
3.895
(9.927)
0.086
(0.1*15)
3.590
(6.350)*
0.066
-1.268
(0.296)
(-5.030)*
-0.969
(-7.1*78)*
DW
.9^1
.125
2.32
.862
.136
2.09
.929
.101
2.56
.906
.113
2.23
3.071+
.890
.122.
2.05
.91+1
.093
2.63
(5.783)*
-0.125
3.1U2
(-0.859)
(10.199)*
OLS = Ordinary least squares
C-0 = Cochrane Orcutt
Sources:
Industrial demand (log Qind):
Price of gold (log Pg):
Table 1+-1.
London Price and J. Aron.
Price of silver (log Ps):
London Price and J. Aron.
Wholesale price index (WPl):
Consumer price index (CPl):
U.S. Bureau of Labor Statistics.
World price index (IMF).
Real income (7 major industrial countries):
Real income (world):
Real income (U.S.):
Citibank, based on GDP of U.S.A., Canada, U.K., Japan, France, Germany, Italy.
IMF.
Department of Commerce, Bureau of Economic Analysis.
-0.39
M
Statistically significant at the 5 percent level.
Technique:
p
(5.625)*
-0.009
-1.301
SEE
U.S.
(-0.557)
(-5.5310*
-5.510
World
3.855
(0.880)
(-7.266)*
(B3)
U.518
(6.261)
0.216
-1.U62
(-5.29M*
Income
f MaJ o r
Industrial
CPI
(1.013)
(-5.876)*
-8.268
2.
Real
(B2)
CPI
-1.1+95
-11.319
1.
Gold
(Bi)
Constant
(Technique)
of
-0.1*2
Appendix Table U-A2
Annual World Net Asset Demand for Gold, 1969-1980
log NA D = Bq + B! log R +
B2
log (R - P) +
B3
log (R - P*) + Bl*
P +
B5
P*
+ B5
M ^
+ &[
log y + e
Coefficients of Independent Variables
(t-values in parentheses)
Equation No. Constant
(Technique)
(Bo)
1.
(OLS)
2.
(OLS)
3.
(OLS)
1*.
(OLS)
5.
(OLS)
6.
(OLS)
7.
(OLS)
8.
(C-0)
9.
(OLS)
10.
(OLS)
11.
(OLS)
12.
(OLS)
-5.2U9
(-1.102)
-2.577
(-O.5U5)
-5.523
(-1.1*68)
-2.906
(-0.978)
-6.652
(-1.606)
-6.623
(-1.5U2)
-5.568
(-1.180)
-1.372
(-O.65U)
-7.U0U
(-1.M1)
-2.1*3**
(-0.689)
-8.955 ,
(-2.572)
-5.1*1*2
(-1.599)
Nominal
Interest
Rate
(El)
yu-a ay- EuroTreasury dollar
bill rate
rate
Real
Interest
Rate
)
yU-day
EuroTreasury dollar
bill rate
rate
Expected Real
Interest Rate
(B3 )
Hiiro90-day
Treasury dollar
bill rate
rate
-0.281
(-0.1*65)
Actual Rate
of Price
Change
(BO
U.S. world
CPI
CPI
Expected Rate
of Price
Change
Lagged Long-Term
Monetary Growth Rate
(B6)
U.S.
CPI
R2
-0.025
(-0.085)
0.053
(1.336)
-0.088
(-0.262)
-0.052
(1.1*28)
0.127
(0.568)
0.085
(2.81*5)*
-0.082
(-0.165)
7.U50
(0.372)
U.391*
(0.206)
0.023
(0.01*9)
0.190
(0.1*27)
-0.190
*
(-3.U88)
0.061
(3.1*78)*
0.032
(0.719)
-0.127
(-0.56U)
0.063
(0.396)
-0.377
(-2.039)*
-0.271
(2.00)*
(b t )
World
CPI
0.01*96
(0.666)
0.055
(0.297)
Industrial
Real Income
0.098
(2.157)*
20.278
(l .1*6U)
17.099
(I.29U)
1.893
(1.810)
1.183
(1.103)
1.871
(2.129)*
1.115
(1.595)
2.097
(2.103)*
2.086
(2.01*3)*
I.898
(1.792)*
0.892
(1.866)*
2.27I*
(1.919)*
1.0U1
(1.21*6)
2.1*07
(2.939)*
1.697
(2.01*7)*
SEE
DW
.372
.302
1.89
.1*63
.279
2.18
.1*72
.277
1.73
.671*
.218
2.37
.31*9
.307
1.82
.31*7
.308
1.75
.363
.301*
1.87
.801*
.171
1.90
.1*88
.223
1.79
.667
.220
2.1*1
.570
.250
2.37
.561
.251
2.30
p
-0.57
179
Notes to Appendix Table U-A2
* Statistically significant at the 5 percent level.
Technique: OLS = Ordinary least squares
C-0 = Cochrane Orcutt
A
Expected U.S. annual rate of price change (P)
^
"was obtained by regressing
the rate of change in U.S. CPI on a measure of the long-term rate of change
A
of money — a 3-year moving average of M1B — lagged one year (M^-i):
(1.) P* = -0.125 + 3.30
(-U.2)*
R2
SEE
D.W.
p
(1.9M*
= .875
= .010
= 1.80
= 0.363
Expected world annual rate of price change was obtained by regressing the
rate of change in world CPI on the U.S. money variable, as in equation (l)
above:
A
(2.) P* =
0.0U3
( - 0 . 8 1 )
+ 2.U83 Mt-1
( 3 . I T ) *
R2
=
.755
SEE
=
.016
D.W. =
p
=
1.68
0.677
For industrial countries covered by real income measure, see Table U-Al,
part 2.
Appendix Table U-A3, Part 1
log Q s = Bq
Annual Market Economy Gold Production, 1950-1980
P
P
+ Bx log (
(t) + B2 log ( g)(t-l)+ B3 Time +e
P
P
Coefficients of Independent Variables
(t values in parentheses)
Equation No.
(Technique)
Constant (BQ)
Real price of Gold (B^)
U.S. WP1
-0.07U
(-1.886)**
(C-0)
U.285
(13.H98)*
2.
(C-0)
U.U06
(lU.OOU)*
3.
(C-0)
U.U2T
(12.853)*
-0.036
(-0.79^)
U.
(C-0)
U.038
(23.077)*
-0.09U
(-2.880)*
5.
(C-0)
1+.1U8
(22.013)*
6.
(C-0)
U.203
(21.719)*
1.
Sources:
Real Price of Gold Lagged (B2)
U.S. WP1
Market e c o n o m y gold production (qS): Table U - 2 , col. 1 .
See notes to Appendix Table U-Al for sources of other data.
* Statistically significant at 5 percent level.
** Statistically significant at 10 percent level.
R2
SEE
DW
P
-0.011
.96U
.033
0.65
0.936
(-0.93*0
-0.012
(-1.02U)
.967
.032
0.81*1
0.937
(-2.369)*
-0.081
(-1.569)
-0.010
(-0.7^0)
.966
.032
0.760
0.9^0
.96^
.033
O.6U5
0.933
-0.126
(-3.258)*
.966
.032
O.856
0.931+
-0.089
(-1.750)**
.967
.032
0.7^1
0.935
-O.IOU
-0.0UT
(-1.129)
(B 3 )
Time
Appendix Table U-A3, Part 2
log Q s
Equation No.
(Technique)
1.
(C-0)
Annual Market- Economy Gold Production, 1951-1980
p
p
= Bq + Bi
log (_g) (t) + B2 log (_g)(t-l) + B3
P
P
Time + e
Coefficients of Independent Variables
(t values in parentheses)
Real Price of Gold (B X )
Real Price of Gold Lagged (BG)
(B 3 )
U.S. WPI
Time
R2
SEE
DW
P
-0.01U
.968
.030
0.711
0.923
.96U
.032
0.853
0.923
.969
.029
0.962
0.923
.967
.030
0.908
0.930
.965
.029
0.827
0.921
.967
.030
0.876
0.92U
.966
.030
O.658
0.909
.959
.03U
0.8U3
0.907
.967
.030
O.96U
0.911
.962
.032
0.871
0.909
.969
.029
0.790
0.911
.963
.032
0.828
0.909
Constant (BQ)
U.359
^
(18.U07)*
World CPI
U.S. WPI
World CPI
-0.077
(-1.U66)
(-2.193)*
U.325
-0.036
(c-0)
(17.630)*
(-1.200)
2.
(C-0)
(19.139)*
2a.
(C-0)
(17.8U9)*
3.
(C-0)
U.392
-0.0U5
-0.073
-0.010
(19.529)*
(-1.095)
(-1.5UD
(-1.063)
3a.
(C-0)
U.U 1 7
-0.022
(18.162)*
(-0.750)
la.
h.
(C-0)
Ua.
U.U25
-0.020
(-2.1U9)*
U.UU6
U.06U
(27.558)*
-0.01U
-0.101
(-1.560)
(-2.50U)*
-0.06U
(-2.0U6)*
-0.059
(-1.779)**
-0.10U
3.87U
-0.065
(27.39U)*
5.
(C-0)
(25.U1U)*
5a.
(C-0)
3.959
-0.090
(27.365)*
(-2.82U)
6.
(C-0)
U.208
-0.058
(25.767)*
(-1.51U)
6a.
(C-0)
U.068
-0.092
(25.207)*
(-1.U19)
(-2.252)*
U.152
-0.131
(-3.669)*
-0.083
(-1.777)**
See notes to Appendix Table U-A3, Part 1.
-0.017
(-1.796)**
(-3.503)*
(C-0)
Source:
-0.021
(-2.269)*
-0.072
(-2.133)*
Appendix Table U-A3, Part 3
Annual Market Econoiqy Gold Production, I969-I98O
log
QS
=
Bq
+
Bj.
1 O
6
(Ie)
^
+
L O
S
P
(jBt)
Coefficients of Independent Variables
(t values in parentheses)
Real Price of Gold Lagged (B2)
Real Price of Gold (BX)
Equation No.
(Technique)
+
B
3
T I M E
(B 3 )
U.S. WPI
World CPI
U.S. WPI
World CPI
Time
R2
SEE
DW
P
.920
.031
0.706
0.872
.922
.031
0.718
0.872
.937
.028
1.520
0.850
.938
.028
1.510
0.81*7
.932
.029
1.2U0
0.866
.931*
.028
1.21*0
0.866
.927
.030
0.70U
0.852
.930
.029
0.71H
0.857
.91+3
.026
1.1*80
0.835
.9^5
.026
1.510
0.81*5
.932
.029
1.21*0
0.865
.91+1
.027
1.210
0.81*1
3.565
-0.06U
0.010
(11.37*0*
(-1.517)
(0.388)
la.
(C-0)
3.568
-0.062
0.088
(11.511)*
(-1.609)
(0.329)
2.
(C-0)
2a.
(C-0)
3.
(C-0)
3a.
(C-0)
1*.
(C-0)
Ha.
(C-0)
5.
(C-0)
5a.
0.00U
-0.09H
3.787
(0.209)
(-2.227)*
(15.5U8)*
-0.088
3.786
(16.2H0)*
(-2.288)*
0.0001
(0.020)
3.730
-0.030
-0.078
0.01H
(13.083)*
(-0.675)
(-1.578)
(0.569)
3.722
-0.030
-0.071
0.010
(13.279)*
(-0.718)
(-1.580)
(0.H38)
3.683
(19.812)*
-0.057
(1.707)
3.666
-0.057
(21.077)*
(-1.788)
3.836
-0.093
(21.701)*
(-2.572)*
-0.088
3.791
(-2.606)*
(C-0)
(23.368)*
6.
(C-0)
3.729
-0.030
-0.078
0.01H
(13.083)*
(-0.675)
(-1.578)
(0.569)
6a.
(C-0)
Source:
E
Constant (Bq)
(C-0)
1.
+
P
3.837
-0.02U
-0.071
(21.1*1*1)*
(-O.658)
(-1.663)
See notes to Appendix Table U-A3, Part 1.
Appendix Table h-Ah
Reduced-Form Equations for the Annual Real Price of Gold, 1969-1980
p
log _g = Bq
P
+ Bi
log y + B2
p
p
_s + B3 log _g
P
P
(t-l)
+
Bl^
Time
*
A
+ B5 log R + B ^ P + B y M + e
Coefficients of Independent Variable
(t-values in parentheses)
Equation No.
(Technique)
1.
7
Industrial
Countries
Real
Income
Constant (Bq)
(B
X
)
Real Price
of Silver
Real Price
of Gold Lagged
(B3)
(Bg)
a
Time
Nominal Interest Rate
Euro90-Day Treasury
dollar rate
Bill Rate
(BK)
(C-0)
-5.881
(-0.1*1*5)
1.920
(0.6U0)
0.8Ul
(3.912)*
(-0.23U)
2.
(C-0)
-7.1*80
(-0.578)
2.1*33
(0.832)
0.790 b
(3.970)*
-0.0U6
(-0.1*1*0)
?c-o)
mil)
1*.
(C-0)
-3U.090.,
5.
-1*3.501
(C-0)
( - 6 . 1 9 M *
6 .
-23.211
(c-0)
(-2.702)
(-1.1*10)
T.
(c-0)
-1*0.021*
8.
-35.897
(c-o)
(-U.307)
(-I4.H9U)*
,0.700%
10.550
(6.2UU)*
(?:§!§>
0.630t>
(3.555)*
0.769b
(1.616)
9.33U
(U .107)
8.1*15
(U.H26)*
0.522 a
(1.120)
O.U31b
(1.037)
0.250 a
(1.569)
-0.076 b
:-0.185)
1
0.531 a
(2.828)*
0.1*03b
(1.9U1)**
-0.33U - 0 . 8 6 1 *
(-U.653)* [-3.339)*
<
-0.18U
(-1.306)
-0.215
(-0.569)
-0.381*
-0.293
(-2.965)* <
[-1.169)
-0.261
(-3.1*73)*
-0.328
(-1.209)
°
Deflated by the world consumer price index.
Durbin-Watson h statistic, a measure of autocorrelation in the presence of a lagged dependent variable.
**
Statistically significant at the 5 percent level.
Statistically significant at the 10 percent level.
.169
1.81*
0 . 1 6 9
.902
.161*
1.86
0.318
.931
.167
-0.27 h -0.180
.91^
.151*
-0.29 h -0.330
.971*
.103
-2.33 h -0.739
.920
.11*8
-2.68 h -0.51*1
22.297
(2.088)**
.961*
.122
-2.3l*
-0.652
2H.226
(2.368)**
.951
.116
-2.73
-0.667
11.365
(2.872)*
h
*
.930
-0.262. „
Deflated by the UjS. consumer price index.
See Appendix Tables U-Al to U-A3.
DW
p
(-2.052)**
a
Source:
SEE
a-Mh-
0.700 a
(2.203)**
6.068
(1.683)
(B6)
Long-term
Monetary Growth
Rate
(B T )
R2
-0.026
(3.573)*
8.081 ,
(2.92U)*
(B5)
Rate of Price Change
U.S.
World
CPI
CPI
5.671
(1.299)
A value less than one indicates the presence of autocorrelation.
S T A T I S T I C A L
C O M P E N D I U M
STATISTICAL TABLES RELATING TO GOLD PRODUCTION, STOCKS, SUPPLY AND DEMAND,
AND THE NOMINAL AND REAL PRICE OF GOLD
185
186
CONTENTS
GOLD PRODUCTION
SC-1
Geographical Sources of World Gold Output, by Producing Countries,
by Decades, l801-1980,by regions, subperiods, 1^93-1980
SC-2
Annual Estimates of World Gold Production, 1800-1980
SC-3
Concentration of World Gold Production Among Top Four Producing
Countries, by Decades, 1801-1980
SC-U
Share of World Gold Output of Nine Leading Gold Producing
Countries, annually, I968-I98O
SC-5
Annual Estimates of U.S. Gold Production, 1835-1980
GOLD STOCKS
SC-6
Annual Estimates of the World's Total Gold Stock, 1800-1980.
SC-7
World Monetary and Nonmonetary Gold Stock
SC-8
Estimated Gold Foldings of Central Banks and Governments,
Annually, 1913-1980
SC-9
U.S. Monetary Gold Stock, Annually, 1860-191**
SC-10
U.S. Monetary Gold Stock , A n n u a l l y ,
Annually, 1807-191^
1914-1980
GOLD SUPPLY AND DEMAND
SC-11
Tvo Estimates of World Gold Supply; Change in Official Gold
Reserves; and Gold Absorption in Manufactures and the Arts.
Annually, 191^-1938, 1930-1952
SC-12
Components of Annual World Gold Demand, 1950-1980
SC-13
Annual World Gold Supply and Gold Output, 1950-1980
SC-lU
U.S. Excess of Gold Exports or Imports; Change in U.S. Monetary
Gold Stock, and Gold Used in U.S. Manufactures and Arts, Annually,
1880-1980
SC-15
Change in U.S. Monetary Gold Stock and Gold Used in U.S.
Manufactures and Arts and Percent of U.S. Godl Output, Annually,
1880-1980
NOMINAL AND REAL PRICE OF GOLD
SC-l6
Price of Gold Per Ounce in Nominal U.S. Dollars and in 19&7 U.S.
Dollars, Annually, 1800-1980
SC-17
London Prices of Gold, Monthly, 1968-1981
187
GOLD PRODUCTION
Table SC-1
Geographical Sources of World Gold Output, by Regions,
Subperiods, 1^93-1980
(in percent)
Period
11+93-1600
1601-1700
1X01-1800
1801-1850
1851-1900
1901-1925
1926-1950
1951-1980
Source:
Europe
20.7
11.1
5.8
33.9
16.7
5.14
13.3
L U . 8
North
America
South
America
3.1+
U . 3
5.0
21.2
36.1
28.2
2 U . 7
12.9
See notes to Table SC-2.
35.7
61.7
80.0
38.3
5.6
3.2
3.9
2.1
Africa
35.5
22.3
8.9
5.3
7.1
1+2.5
1+9.6
63.1+
Asia
Australia
and
New Zealand
-
-
-
-
-
3.1
6.8
6.1+
3.1
-
31.2
13.1
2.1
2.2
Othei
1+.7
0.6
0.3
1.3
0.3
0.8
0.0
1.5
188
Table SC-2
Annual Estimates of World Gold Production, I8OO-I98O
(millions of fine ounces)
1800
1801
1802
1803
180U
1805
1806
1807
1808
1809
0.701
0.700
0.662
0.638
0.620
0.609
0.578
0.551
0.521
0.1*96
181*0
181*1
181*2
181*3
181*1*
181*5
181*6
181*7
181*8
181*9
0.750
0.768
0.81*0
0.921*
1.022
1.132
1.395
1.711*
2.097
3.315
1810
1811
1812
1813
181U
1815
1816
1817
1818
1819
0.1*76
0.356
0.369
0.371
0.368
0.361
0.37**
0.385
0.399
0.1411
1850
1851
1852
1853
1851*
1855
1856
1857
1858
1859
3.910
l* .886
5.851
6.965
7.118
7.269
6.581
6.576
6.572
6.1*37
1820
1821
1822
1823
182U
1825
1826
1827
1828
1829
0.1*19
0.1*17
0.1*21*
0.1*32
0.1*39
0.1*1*7
0.1*62
0.1*78
0.1*9!*
0.537
i860
1861
1862
1863
1861*
1865
1866
1867
1868
1869
6.305
6.103
5.968
5.835
5.876
5.916
6.151
6.225
6.300
6.31*2
1830
1831
1832
1833
183I*
1835
1836
1837
1838
1839
0.556
0.566
0.586
0.597
0.600
0.612
0.660
0.701*
0.736
0.758
1870
1871
1872
1873
1871*
1875
1876
1877
1878
1879
6.381*
6.391
5.798
5.501*
5.360
5.31*1
5.1+30
6.001
5.987
5.1*16
189
Table SC-2 (concluded)
1880
1881
1882
13814
1885
1886
1887
1888
1889
1890
1891
1892
1893
I89U
1895
1896
1897
1898
1899
1900
1901
1902
1903
1901+
1905
1906
1907
1908
1909
5.31+9
5.061+
1+.886
1+.'7U6
5.015
5.102
1+.91+5
5.256
5.509
6.01+8
1930
1931
1932
1933
1931+
1935
1936
1937
1938
1939
20.836
22.330
21+.151
25.367
27.372
29.999
32.931
35.118
37.703
38.929
5.815
6.300
7.060
7.51+1+
8.657
9.578
9.717
11.397
13.921
15.073
191+0
19l*l
191+2
191*3
191+1*
191*5
191+6
191+7
191+9
1+1.770
1+0.119
35.209
28.052
25.1+10
21+.378
21+.902
25.1+01
26.399
27.563
12.1+21
12.692
1950
1951
1952
1953
1951+
1955
1956
1957
1958
1959
27.237
26.583
27.335
27.287
28.653
29.901
30.971+
32.35^
33.1+16
35.832
i960
1969
37.51*9
38.981+
1+1.860
1+3.1+32
1+5.171
1+6.525
1+6.900
1*5.999
1+6.1+65
1+7.070
1970
1971
1972
1973
1971+
1975
1976
1977
1978
1979
1+8.590
1*7.595
1+6.305
1+1+.507
I+I.9I+9
39-9^6
1+1.771+
1+1.91*1
1*2.300
1*2.253
1980
I+I.9I+8
1I+.I+9I+
15.931+
16.902
18.1+88
19.531+
20.01+0
21.1+81+
22.091+
1910
1911
1912
1913
1911+
1915
1916
1917
1918
1919
21.320
22.718
22.035
20.297
18.568
17.667
1920
1921
1922
1923
1921+
1925
1926
1927
1928
1929
16.335
16.001+
15.1*67
17.802
19.033
19.026
19.31*9
19.398
19.756
19.500
22.11+7
22.1+67
22.670
22.307
19I+8
1961
1962
1963
1961*
1965
1966
1967
1968
190
Table SC-2
Sources:
1800-1925:
9338-39*
Congressional Record - Senate, July U, 1952, pp.
The source gives annual estimates beginning 1871.
For
the century, 1701-1800, for decades, 1801-50, and for quinquennia, 1851-70, estimates of aggregate output for each period are
given.
We interpolated along a logarithmic straight line between
the mean value for each period centered at the midpoint:
1750-1805; 1806-1815; 1816-1825; 1826-1835; I836-I8U5; 18U6-1852;
1852.5-1857.5; 1857.5-1862.5; 1862.5-1867.5; 1867.5-1870.
If the
sum of the interpolated figures did not equal the reported estimated total, we distributed the difference yearly over each time
span.
I926-U9:
Annual Reports of the Director of the Mint.
1950-80:
J. Aron & Company, Gold Statistics and Analysis
(December 198l-January 1982), p. 21.
Note:
Before 1850 and for less developed countries, the estimates are
subject to substantial measurement error.
Chile, the identical total output —
For example, for
385,809 fine ounces —
given for the 1821-30 and 1831-^0 decades.
is
In addition, in some
countries, to avoid government taxes or regulation, gold was probably sold without proper accounting of the output.
Table
Concentration
Decade
Average
Annual
W o r l d Gold
Production
(mi 11 ions of
fine o u n c e s )
Top
Four
Countriesa
Brazil
0.585
71.9
20.6
1801-10
21-30
0 Ji69
31-1*0
0.657
1.712
6.1+56
6.110
Ul-50
51-60
61-70
71-80
81-90
91-1900
51-60
Source:
Note:
73.3
83. U
93.7
90.8
31 . M l
U5.030
61-70
71-80
&Total
66.0
68. k
5.650
5.239
10.161
18.381
20.639
20.551*
31.567
28.576
1901-10
11-20
21-30
31-1*0
Ul-50
1*2.592
nay
not
add
to sum o f
See Table
Gold
Production Among Top Four
by Decades, 1801-1980
Percent
0.382
11-20
of W o r l d
1U.8
15.1
11*.7
Chile
Colombia
17.1
16.9
8.2
1*.5
2U.5
25.3
22.0
SC-3
Mexico
of T o t a l
AustriaHungary
World
Producing
Output
Russia
Produced
U.S.A.
16.2
8.0
6.U
1.7
New
Zealand
China
Canada
South
Africa
30.2
1*1.3
37.5
33.8
30.2
2l*.U
7U.1
6.8
7U.7
68.0
U.7
23.0
19.2
73.5
76.2
12.9
12.1
11.5
7.6
80.7
88.0
85.6
11.5
12.1
5.8
3.6
20.5
2.7
10.9
figures b e c a u s e
Australia
23.2
31*.5
1*2.3
12.8
lU.2
21.5
20.T
11.6
country
by:
9.7
9.0
87.6
78. U
61.1
four
Countries,
of r o u n d i n g
37.9
30.3
25.8
22.6
21.3
18.2
8.5
2.9
8.3
vr>
M
6.5
U.R
3.7
26.0
1*2.2
7 .0
12 .1
13 .1
lU.1
7 .6
1.# p
1*6.3
37.0
1*3.1*
1*9.3
6U.7
58.2
differences.
SC-2.
A t a b l e for 1 8 0 1 - 1 9 3 0 , s i m i l a r to t h i s o n e , is g i v e n in Hugh R o c k o f f , " S o m e E v i d e n c e on t h e R e a l P r i c e o f G o l d , Its Cost o f P r o d u c t i o n ,
and C o m m o d i t y P r i c e s , " p r e s e n t e d at a N a t i o n a l B u r e a u of E c o n o m i c R e s e a r c h c o n f e r e n c e on t h e c l a s s i c a l gold s t a n d a r d , M a r c h 1 9 8 2 .
According
t o R o c k o f f , gold supply h a s been p o t e n t i a l l y v u l n e r a b l e to p o l i t i c a l s h o c k s b e c a u s e of the c o n c e n t r a t i o n of o u t p u t .
Government policies,
o r s t r u g g l e s for p o w e r , w h i c h influenced supply in o n e c o u n t r y , c o u l d i n f l u e n c e t h e w o r l d ' s s u p p l y .
Table SC-U
Share of World Gold Output of Nine Leading Producing Countries
Annually, I968-I98O
(in percent)
South
Africa
1968
1969
1970
1971
1972
1973
197^
U.S.S.R.
Canada
U.S.A.
Australia
Ghana
Philippines
RhodesiaZimbabwe
Brazil
Sum of
9 Countries
67.5
12.8
5.8
3.2
1.1
1.1
O.U
95.2
13.U
5.5
3.7
1.7
1.6
1.6
67.1
1.5
1.2
1.0
0.U
95.U
67.7
13.7
lU.U
5.1
U.8
3.7
3.2
1.3
l.U
1.5
1.3
l.U
1.0
O.U
95.6
1.1
0.3
95.7
9U.7
93.8
67.5
65.2
63.5
60.8
15.U
16. U
18.2
U.6
3.2
1.7
U.5
U.2
2.7
2.8
1.3
1.3
U.3
2.7
l.U
2.7
2.8
1.3
1.6
1.5
1.6
1.3
1.1
O.U
1.7
1.3
0.5
1.5
l.U
l.U
1.9
2.0
1.3
1.3
1.5
0.6
92.1
1.2
l.U
1.5
l.U
0.7
0.8
91.3
1.0
0.9
2.8
1.3
1975
1976
59.6
1977
1978
57.5
58.0
20.1
U.3
U.U
20.5
U.U
2.6
1.7
1.0
1979
1980
58.0
20.9
U.O
2.U
1.2
1.5
l.U
55.6
21.3
U.l
2.U
1.5
l.U
1.0
1.8
58.5
19.5
19.6
1.6
0.9
0.5
92.6
O.U
92.2
91.9
91.u
91.u
Detail may not add to total because of rounding differences.
Source:
Consolidated Gold Fields Limited, Gold, 1979, 1980, and 1981 editions, Tfcble 2, output of non communist countries, converted
from metric tons to ounces; J. Aron, Symposium on Gold (September 198l), p. 19, for Soviet Union output in ounces.
193
Table SC - 11
Annual Estimates of U.S. Gold Production, 1835-1980
(thousands of fine ounces)
1835
1836
1837
1838
1839
39
26
16
181*0
18U1
18U2
181*3
2k
2h
23
181*5
18U6
18U7
181*8
181*9
30
U3
58
55
1*9
55
1*3
l*8U
1,935
1850
1851
1852
1853
185I4
1855
1856
1857
1858
1859
2,U19
2,661
2,903
3,H*1*
2,903
2,66l
2,661
2,661
2,1*19
2,1+19
i860
1861
1862
1863
186^
1865
1866
1867
1868
1869
2,225
2,080
1,896
1,935
2,230
2,575
2,588
2,502
2,322
2,395
1870
1871
1872
1873
2,1*19
2,101*
1,7U2
1,71*2
1,620
1,619
1,932
2,269
2,1*77
1,882
l&hh
lQlh
1875
1876
1877
1878
1879
1880
1881
1882
1883
1881*
1885
1886
1887
1888
1889
1,1*72
1,679
1,572
1,1*51
1,1*90
1,538
1,687
1,603
1,60U
1,595
1890
1891
1892
1893
I89I*
1895
1896
1897
1898
1899
1,598
1,605
1,597
1,739
1,911
2,255
2,568
2,775
3,118
3,1*37
1900
1901
1902
1903
1901*
1905
1906
1907
1908
1909
3,830
3,806
3,870
3,560
3,892
1* ,266
^,565
1* ,372
1* ,561
1* ,810
1910
1911
1912
1913
1911*
1915
1916
1917
1918
1919
1* ,650
1*,678
U,l*98
1*,266
1* ,520
l*,82l*
U,l*06
3,981
3,258
2,878
1920
1921
1922
1923
1921*
1925
1926
2,1*1!*
2,361
2,289
2,1*26
2,1*1*6
2,320
2,239
194
Table SC-5 (concluded)
1927
1923
1929
1930
1931
1932
1933
1931+
1935
1936
1937
1938
1939
2,117
2,H*5
2,057
2,100
2 ,2lU
2,219
2,277
2,71+2
3,163
3,760
1+ ,112
l+,2l+5
1+,621
191+0
19I+I
191+2
19^3
191+1+
19^5
19U6
191+7
19I+8
19^9
l+,583
1,381
1,022
195
1,1+62
2,165
2,025
1,922
1950
1951
1952
1953
2,39U
1,981
1,893
1,958
l+,863
1+ ,832
1951+
1955
1956
1957
1958
1959
1,837
1,880
1,827
1,79U
1,739
1,603
I960
1961
1962
1963
1961+
1965
1966
1967
1968
1969
1,667
1,51*8
1,51*3
1,1*51*
1,U56
1,705
1,803
1,581+
1,1+78
1,733
1970
1971
1972
1973
1971+
1975
1976
1977
1978
1979
1,71+7
1,1+95
1,1+50
1,176
1,127
1,052
1,01+8
1,100
999
970
1980
951
Sources
1835-18UU:
U.S. Bureau of Mines, Economic Paper No. 6,
•R. H. Ridgway, "Summarized Data of Gold
Production," 1929, p. lU.
18U5-1870:
Annual Report of the Director of the Mint,
1907, p. 13.
This source shows total gold output from 1792 to 183^
as 677,000 fine ounces and from I83U to l8kk as 363,000
fine ounces.
1871-1925:
Congressional Record, July U, 1952, p. 933^.
I926-I9U9:
Annual R e a r ' s of the Director of the Mint,
various issues.
1950-1980:
J. Aron and Company, Symposium on Gold,
1981, p. 19.
195
GOLD STOCKS
Table SC-6
Annual Estimates of the World's Total Gold Stock, IPOO-I98O
(millions, of fine ounces)
1800
1801
1802
1803
180U
1805
1806
1807
1808
1809
113.02
113.72
111*.39
115.02
115.61*
116.25
-116.83
117.38,
117.90
118.1+0
181*0
181*1
181*2
181*3
181*1+
181*5
181*6
181*7
181*8
181*9
133.91+
131+.71
135.55
136.1+7
137.50
138.63
11+0.02
11*1.71*
11*3.83
11*7.15
1810
1811
1812
1813
18H*
1815
1816
1817
1818
1819
118.87
119.23
119.60
119.97
120.31+
120.70
121.07
121.1*6
121.86
122.27
1850
1851
1852
1853
1851*
1855
1856
1857
1858
1859
151.06
155.95
161.80
168.76
175.88
183.15
189.73
196.30
202.88
209.31
1820
1821
1822
1823
1821*
1825
1826
1827
1828
1829
122.69
123.11
123.53
123.96
121+.1+0
121*. 85
125.31
125.79
126.28
126.82
i860
1861
1862
1863
1861*
1865
1866
1867
1868
1869
215.62
221.72
227.69
233.52
239.1*0
21*5.32
251.1+7
257.69
263.99
270.33
1830
1831
1832
1833
1831*
1835
1836
1837
1838
1839
127.37
127.91*
128.53
129.12
129.72
130.33
130.99
131.70
132.1*3
133.19
1870
1871
1872
1873
1871*
1875
1876
1877
1878
1879
276.72
283.ll
288.91
29I+.U1
299.77
305.11
310.51*
316.51+
322.53
327.95
196
Table
1-6 (concluded)
1880
1881
1882
1883
1881+
1885
1886
1887
1888
1889
333.30
338.36
31*3.25
31+7.99
353.01
358.11
363.05
368.31
373.82
379.87
1930
1931
1932
1933
1931*
1935
1936
1937
1938
1939
1,061+.1*6
1,086.79
1,110.91*
1,136.31
1890
1891
1892
1893
1891+
1895
1896
1897
1898
1899
385.68
391.98
399.01+
1*06.59
1*15.21*
U3U.U8
1+1*5.87
1*59.80
VrU.87
19l*0
191*1
191+2
191*3
191*1*
191*5
191*6
191*7
191*8
191*9
1,380.13
1,1*20.25
1,1*55.1+6
1,1+83.51
1,508.92
1,533.30
1,558.20
1,583.60
1,610.00
1,637.57
1900
1901
1902
1903
190U
1905
1906
1907
1908
1909
1*87.29
lt99.98
511*.H8
530.1*1
5^7.31
565.80
585.33
605.37
626.86
61*9.76
1950
1951
1952
1953
1951+
1955
1956
1957
1958
1959
1,665.82
1910
1911
1912
1913
191k
1915
1916
1917
1918
1919
671.91
691*. 38
717.05
739.35
760.67
783.39
805.1*3
825.72
81*1*.29
861.96
i960
1961
1,980.21+
1920
1921
1922
1923
192U
1925
1926
1927
1928
1929
878.29
89!*. 30
909.76
927.57
91*6.60
965.62
981*. 97
1,001*.37
1,021*.13
1,01*3.63
h2k.f6
1,163.68
1,193.68
l,226.6l
1,261.73
1,299.1+3
1,338.36
1,693.20
1,721.11
1,71+8.88
1,778.01
1,808.1+5
1,839.91
1,872.55
1,906.23
1,91+2.1*3
1967
1968
1969
2,019.53
2,061.20
2,101*.1*7
2,11+9.36
2,195.89
2,21*2.79
2,288.79
2,335.33
2,382.1*0
1970
1971
1972
1973
1971*
1975
1976
1977
1978
1979
2,1*30.51*
2,1*77.68
2,523.51*
2,567.59
2,609.09
2,61*8.59
2,689.19
2,729.88
2,771.13
2,813.89
1980
2,856.1*6
1962
1963
196U
1965
1966
197
Table SC -
Source:
11
Figure for 1800 is cumulated total of world gold production,
11+93-1800 in Congressional Record - Senate, July U, 1952,
p. 9338.
SC - 2.
Thereafter, cumulated annual additions from Table
198
Table SC-T
World Monetary and Nonmonetary Gold Stock,a
Annually, 180T-191U
(millions of fine ounces)
End of
Year
World Gold Stock
Monetary
Nonmonetary
1807
1808
1809
37. 81*
-38.12
38.1*0
79.5U
79.78
80.00
1810
1811
1812
1813
181U
1815
1816
1817
1818
1819
38.69
38.99
39.28
39.59
39.87
1*0.18
1*0.1*8
1*0.79
1*1.10
1*1.1*1
80.18
80.21*
80.32
80.38
80.1*7
80.52
80.59
80.67
80.76
80.86
1820
1821
1822
1823
182*4
1825
1826
1827
1828
1829
1*1.71
1*2.05
1*2.35
1*2.66
1*2.99
1*3.33
1*3.65
1*3.98
1*1*.32
1*1*.65
80.98
81.06
81.18
81.30
81.1*1
81.52
81.66
8l.8l
81.96
82.17
1°3C
1831
1832
1833
1835
1836
1837
1838
1839
1*1*.98
1*5.31
1*5.66
1*5.99
1*6.35
1*6.35
1*6.35
1*6.35
1*6.35
1*6.35
82.39
32.7 2
82.87
83.13
83.37
83.98
8U.6U
85.35
86.08
86.81*
18U0
181*1
181*2
I8U3
18UU
U6.59
1*6.82
1*7.06
1*7.30
1*7.53
87.35
87.89
88.1*9
89.17
89.97
l83h
a
End of
Year
World Gold Stock
Monetary Nonmonetary
181*5
18U6
181*7
18U8
181*9
1*8.00
1*8.1*8
^8.95
1*9.66
52.02
90.63
91.51*
92.79
9^.17
95.13
1850
1851
1852
1853
1851*
1855
1856
1857
1858
1859
5^.39
57.1*6
63.38
69.52
71*. 73
79.93
85.37
90.33
91*.83
98.61
96.67
98.1*9
98.1*2
99.21*
101.15
103.22
10l*.36
105.97
108.05
110.70
i860
1861
1862
1863
186U
1865
1866
1867
1868
1869
102.39
105.70
IO8.5I*
110.67
112.56
115.87
119.66
122.73
125.5"
128.U1
113.23
116.02
119.15
122.85
126.81*
129.1*5
131.81
13^.96
138.1*2
lUl.92
1870
1871
1872
1873
187U
1875
1876
1877
1878
1879
131.1*8
131*.32
136.1*5
138.58
11*0. U7
11*0.12
1U1*.25
11*6.85
11*9.93
151.11
1U5.2U
11*8.79
152.1*6
155.83
159.30
l61* . 9 9
166.29
169.69
172.60
176.81*
1880
1881
1882
152.05
153.1*7
151*.1*2
181.25
181* . 8 9
188.83
End of
Year
World Gold Stock
Monetary Nonmonetary
1883
1881*
1885
1886
1887
1888
1889
155.37
156.55
158.1*1*
161.01*
162.93
165.77
168.13
192.62
196.1*6
199.67
202.02
205.38
208.05
211.71*
1890
1891
1892
1893
1891+
1895
1896
1897
1898
1899
170.26
173.31*
178.07
183.03
189.65
195.57
201.1*8
208.57
217.79
226.51*
215.1+2
218.61*
220.97
223.56
225.59
229.19
233.00
237.31
21*2.01
21*8.33
1900
1901
1902
1903
190U
1905
1906
1907
1908
1909
233.88
21*1.68
21*9.72
258.1*7
267.69
280.93
291.10
302.22
318.30
331.07
253.1*1
258.30
261*.76
271.91*
279.62
281*.87
29^.2U
303.16
308.56
317.86
1910
1911
1912
1913
1911*.
31*1.95
352.11
361.31*
373.1*0
389.1*8
329.15
31*1.1*6
35^.90
3U2.81*370.38
Monetary gold stock includes both official gold reserves and bank and nonbank holdings of gold coin.
Source: League of Nations, Interim Report of the Gold Delegation of the Financial Committee (Geneva, 1930),
Table B, pp. 82-8U (converted from £'s to ounces by dividing by 8U/11.5 shillings per fine ounce).
199
Table SC - 11
Estimated Gold Holdings of Central Banks and Governments, Annually, 1913-1980
(millions of fine ounces)
End
of
Year
Gold Held by
Central Banks and Governments
incl. International Organizations
F.R.
IMF
estimates
estimates
(1)
(2)
1913
1911*
1915
1916
1917
1918
1919
222.0
258.6
302.0
320.8
31*5.8
329.8
329.2
1920
1921
1922
1923
192k
1925
1926
1927
1928
1929
351.0
389.2
1*07.2
1*18.6
1*31*.3
1*35.3
1*1*6.7
1*61*.1
1*86.6
500.1
1930
1931
1932
1933
193k
1935
1936
1937
1938
1939
529.5
51+7.9
577.3
I9I+0
19^1
19^2
19^3
191*8
19U9
1950
1951
1952
1953
1951*
1955
1956
1957
1958
1959
1,008.7
1,016.1
1,022.7
1,035.7
1,051*.7
1,073.9
1,087.9
1,107.6
1,126.9
1,11*8.1*
996.2
1,001*. k
1,012.3
1,02U.U
1,01*3.5
1,062.0
1,082.8
1,101.0
1,121.3
1,11*8.8
i960
1,158.1
1,171*. 9
1,185.0
1,208.6
1,229.0
1,235.1
1,231*.9
1,188.6
1,168.9
1,171.7
1,151*.5
1,171.5
1,183.1
1,216.1*
1,226.8
1,21+8.8
1,21*2.9
l,20l*.2
1,173.6
1,180.3
1,179.3
1,183.1
1,172.6
1,178.3
1,179.5
1,178.2
1,177.0
1,167.0
1,158.0
1,150.1
1,130.9
1961
1962
1963
1961*
1965
19 66
1967
1968
1969
580.8
1970
1971
1972
1973
1971*
1975
1976
1977
1978
1979
621*.6
619.7
637.7
666.5
711*. 9
720.8
813.8
83I*.1*
1980
191+1*
19>*5
191*6
191*7
End
of
Year
951.0
960.5
973.7.
986.1*
999.1*
970.0
981*.7
Gold Held by
Central Banks and Governments
incl. International Organizations
F.R.
IMF
estimates
estimates
(1)
(2)
l,13l+.5
200
Notes to Table SC-10
Sources:
Col. 1:
Banking and Monetary Statistics, 191^-19^1» Board of Governors of
the Federal Reserve System pp. 5UU-U6; Banking and Monetary
Statistics, 19^1-1970» Board of Governors of the Federal Reserve
System, pp. 913-22. Dollar figures in the source converted to
ounces. For 193^-Ul, only individual country figures are given
(see below). Total figures are ours.
Notes in the source on the series for 1913-1+1 follow.
,T
The figures represent physical gold, in the form of coin or bullion,
held either at home or abroad by central banks and governments. They do
not include gold in circulation or in hoards — that is, gold held by ordinary commercial banks, business concerns, and private individuals. The
principal reason for excluding such gold is that satisfactory figures are
not available; but it is also considered that gold in the hands of central
authorities represents in general the effective gold reserves of the world
and should be stated separately, even if accurate figures for other types
of gold holdings could be shown. Where countries have not had institutions
performing all the recognized central banking functions during the entire
period covered by the tables, the gold reserves of government-owned banks
or of banks having issue privileges in the countries concerned have been
shown in the tables in order to make the compilation as representative as
possible. Hence the institutions....are not all central banks in the
strict sense.
"Total figures for the gold reserves of central banks and governments
are not shown ... after January 193^. Those that are shown are incomplete
and not fully comparable. On particular report dates gold reserves may
have existed for some countries not included in the table for that date, or
there may have been unreported holdings in countries for which figures are
included.
"In recent years, the compilation of comprehensive figures for official
gold holdings has become increasingly difficult, there has been a tendency
toward official secrecy regarding gold reserves which was strengthened by
the outbreak of war. One important gold-holding country, the U.S.S.R., has
not disclosed its holdings since September 1935, while the last report for
Italy was on December 31, 19^0, and for Japan on march 22, 19^1. In addition, during the war period a number of smaller central banks in countries
occupied by the enemy have gone into liquidation or have ceased reporting.
"Further, many central banks have reported figures which fail to
disclose the full extent of their countries' official gold reserves. In
some cases, notably that of Germany in recent years, the central bank shows
only part of its gold holdings as a separate item. In other countries gold
has been transferred to - or has been independently accumulated by - special government agencies, the existence of which is known but which operate
in a greater or less degree of secrecy. These government funds, created in
most cases for the purpose of stabilizing the exchange value of their
respective currencies, were initiated on a large scale with the establish-
201
Notes to Table SC-8 (continued)
ment of the British Exchange Equalization Account in 1932, and have reached
their greatest development in this agency, which since September 1939 has
held virtually the whole of the United Kingdom's gold reserves.
"Since 1932, when the British Account was established and when regular
reports ceased on the large Russian gold holdings, and especially since
September 1935, when all Russian reports were discontinued, aggregates of
the regularly reported figures have become progressively less representative of the total central gold reserves of the world. Such situations
have generally been met in the past by carrying reported figures forward
from month to month, in cases considered appropriate, to fill gaps in the
statistics for individual countries. Additional defects which have developed in the reported figures during 19^0 and 19^1 have prompted the decision to omit total figures for recent years from the present tables; for
the sake of convenience in presenting the tables, this has been done
beginning with February 193*+. As a corollary, the practice of covering
gaps between reports by carrying forward from month to month the last
reported figure for individual countries was discontinued at the same time.
"Many government funds have never reported their gold holdings, but in
recent years the three leading exchange funds - the British Exchange
1 ization Account, the United States Exchange Stabilization Fund
special A/c No. l), and the French Exchange Stabilization Fund - have rendered certain reports on a delayed basis; the French fund reported monthly,
and the others at quarterly or semiannual intervals. The British and
French funds discontinued this practice following the outbreak of war in
September 1939? although three special reports on British gold holdings
have been published during the war period by the United States Treasury in
connection with Congressional hearings on Lend-Lease legislation.... None
of this information has been incorporated in [the table].
"Further light has been cast from time to time upon the operations of
certain exchange funds by announcements of gold transfers between them and
their respective central banks; such transfers usually are reflected in
abrupt changes in the reported figures for the countries concerned....
...."In the case of most of the countries included .... the year end
figures are as of December 31 during the entire period. There [are]....
exceptions to this rule, most of which are due to the practice of some
central banking institutions of consistently reporting on the same day of
the week, with the result that the calendar date of their year end report
differs from one year to the next, and falls on December 31 only by chance.
"Scope and sources of data for individual countries.... Under war conditions, some difficulty has been experienced in obtaining direct reports
on gold reserves, especially from certain European countries. In a few
cases where the source of the figures is given as Tcurrent balance sheet,1
the information has actually been drawn from reliable indirect reports on
balance sheets, such as those published by the League of Nations, the Bank
for International Settlements, and the Swiss National Bank."
202
Notes to Table SC-8 (concluded)
Notes in the source on the series for 19^5-70 follow:
"[The] table... shows quarterly data for gold reserves of 60 countries
and one international and two regional organizations, as well as world
totals. During World War II it was difficult to obtain reliable information on gold reserves, since many countries did not disclose their .official
holdings and a number of others reported figures that failed to disclose
the full extent of their holdings. Therefore, no attempt has been made to
show holdings before December 19^5*
"In most foreign countries the central bank or bank of issue holds the
country's gold reserves, but in several both the central bank and an
exchange stabilization fund or similar governmental authority hold the
reserves. In others - Canada and the United Kingdom, for example - such
authorities hold all of the gold reserves.
"The source of the gold reserve figures for most countries and for the
Bank for International Settlements (BIS) has been either the balance sheet
or the statistical bulletin of the central bank. Figures for the IMF and
several countries have been obtained from the Fund's monthly bulletin,
International Financial Statistics. Although most figures given are f ~
the end of the month, figures for several countries, particularly Asian
countries that do not issue end-of-month reports, refer to the last report
date of the month.
"Gold reserves have been reported in three ways - in the currency of
the country, in weight units, or in U.S. dollars. Reserves reported in
foreign currencies have been converted into dollars at rates that result in
a valuation of $35 per fine ounce, the rate that vas in effect during the
period covered by this section. Where gold reserves have been reported in
weight units, the conversions have been made at the rate of $35 per fine
ounce.
"The figures for estimated world gold reserves represent reported
holdings of central banks and governments and of regional and international
organizations; unpublished holdings of various central banks and
governments; and estimated official holdings of countries from which no
reports have been received. The figures do not include amounts for the
U.S.S.R., other Eastern European countries, and the People's Republic of
China.
"The figures for the most part represent physical gold, in the form of
coin or bullion, held either at home or abroad. A number of countries have
gold deposited with the BIS, and they include these deposits as part of
their gold reserves. To avoid overstating world reserves, therefore, the
figures included in Table lh.3 for the BIS represent the Bank's gold assets
net of gold deposit liabilities."
Column 2:
IMF, International Financial Statistics data tape.
Differences between columns 1 and 2 appear to reflect differences in coverage of small countries as well as of estimates of their gold holdings.
203
Table SC - 11
U.S. Monetary Gold Stock, Annually, 1860-191U
(millions of fine ounces)
June 30
U.S. Monetary Gold Stock
Outside
in Treasury
Treasury
excluding
Cover for
in and
including
Outside
Gold
Gold
Treasury
Certificates
Certificates
(2)
(3)
(1)
i860
1861
1862
1863
10.03
12.89
n. a.
n.a.
, Q2
lP>6k
0
I066
7.19
5.82
1867
1868
3.9^
1869
k.k6
1870
1871
1872
1873
5.1+8
k.k3
k.3 6
U.98
im
k.69
k.lk
1875
1876
1877
1878
3.97
U.79
5.3U
5.30
Dec. 31
1878
1879
1880
1881
1882
1883
188U
1885
1886
1887
1888
1889
5.69
9.21
13.83
17.15
18.99
19.87
21.02
22.50
22.71
2U.00
2U.23
2U.13
0.32
0.15
n.a.
n.a.
0.80
1.95
2.26
1+.57
3.80
3.91
3.69
3.55
2.18
1.8k
2.39
1.89
1.50.
2.76
5.01
5.52
7.07
7.27
8.10
6.39
7.52
6.85
7.16
8.27
10.09
9.86
9.23
10.35
13.06
13.69
12.58
9.82
9.1k
8.08
9.00
7.71+
8.37
9.IT
7.91
7.16
6.53"
7.13
5.86
6.29
8.10
10.31
11.21
16.28'
21.10
25.25
25.38
27.39
27.87
29.66
30.98
3^.09
3^.09
33.36
Dec. 31
-
1890
1891
1892
1893
189^
1895
1896
1897
1898
1899
1900
1901
1902
1903
190U
1905
1906
1907
1908
1909
1910
1911
1912
1913
191b
U.S. Monetary Gold Stock
Outside
in Treasury
Treasury
excluding
including
Cover for
in and
Gold
Gold
Outside
Certificates
Treasury
Certificates
(2)
(3)
(1)
26.85
26.90
26.SU
28.35
26.07
25.87
26.88
28.26
3^.01
37.69
1+1.70
kk.19
1*7.22
50.75
51+.01
51*.92
61.59
65.57
68.75
67.51+
70.38
73.59
76.38
80.07
75.11
7.21
6.33
5.87
3.91
1+.17
3.06
6.6k
7.78
11.93
11.1+6
11.93
12.71
13.10
12.85
11.11
13.78
15.19
12.06
11.26
11.71
12.29
13.35
lfc.50
12.70
12.75
3U.06
33.23
31.51
32.26
30.2k
28.93
33.52
36.01+
1+5.9^
1+9.15
53.63
56.90
60.32
63.60
65.12
68.70
76.78
77.63
80.01
79.25
82.67
86.9I4
90.88
92.77
87.86a
204
Notes to Table SC-10
Note:
Dollar figures in sources have been converted to nillions of fine
ounces of gold.
a
The dollar figure for which the ounce equivalent is shown is
$1,815,976,319. The dollar for 1915 in Table SC-10 is $1,526 million. The
major reason for the difference is that $287 million was deducted by the
Federal in each year 1915-33 because that amount was not turned into the
Treasury in 1935, when gold holdings outside the Treasury was prohibited.
The gold that was not returned was assumed to be lost gold. Even if $287
million is added to the $1,526, there remains a discrepancy of approximately $3 million between the Federal Reserve figure reported in Table SC-10
and li.e Treasury figure shown here. The Treasury ounce estimate is about
IU5 thousand higher than the Federal Reserve with the assumed lost gold
restored to the stock estimates.
(l) June 1860-June 1878: Annual Report of the Secretary of the Treasury
on the State of the Finances (A.R. Treasury), 1928, p. 555.
Dec. 1878-Dec. 1879: A.R. Treasury, 1696, pp. 125-27 and 1 ? : - ^ .
Dec. 1898-Dec. 1902: A.R. Treasury, 1903, pp. 206 and 212.
Dec. 1903-Dec. 1908: A.R. Treasury, 1909, pp. 189-93, 205-08.
Dec. 1909: A.R. Treasury, 1910, pp. 185 and 192.
Dec. 1910-Dec. 1915: A.R. Treasury, 1915, pp. 303-06 and 3l6-l8.
June 1860-June 1878:
Dec. 1878-Dec. 1897:
Dec.
Dec.
Dec.
Dec.
Col. 3 minus Col. 1.
A.R. Treasury, 1898, pp. 59-61 ( "Net gold in
Treasury").
1898-Dec. 1902: A.R. Treasury, 1903, p. 173.
1903-Dec. 1908: A.R. Treasury, 1909, pp. 189-93, 205-08.
1909: A.R. Treasury, 1910, pp. 185 and 192.
I910-Deco 1915: A.R. Treasury, 1915, pp. 302-06 and 316-18.
June 1860-June lP?8: A.R.
Dec. 1878-Dec. 1897: A.R.
Dec. 1895-Dec. 1902: A.R.
Dec. 1903-Dec. 1908: A.R.
Dec. 1909: A.R. Treasury,
Dec. 1910-Dec. 191^: A.R.
Treasury, 1928, p. 552.
Treasury, 1898, pp. 109-11.
Treasury, 1903, pp. 216 and 220.
Treasury, 1909, pp. 189-93, 205-08.
1910, pp. 185 and 192.
Treasury, 1915, pp. 302-06 and 316-18.
205
Table SC - 11
U.S. Monetary Gold Stock, A n n u a l l y , 1914-1980
(millions of fine ounces)
End
of
Year
1911+
1915
1916
1917
1918
1919
1920
1921
1922
1923
192*4
1925
1926
1927
1928
1929
1930
1931
1932
1933
U.S. Monetary Gold Stock
inside
outside
in
and
Treasury
Treasury
outside
and
and
Treasury
Federal
Federal
and
Reserve
Reseve
Federal
Banks
Banks
Reserve
including
excluding
Banks
gold certificates
m circulation
(3)
(2)
(1)
1+9.1+2
61.35
76.lit
50.02
29.90
22.99
19.68
15.90
21.26
3^ .22
53.15
59.98
58.71
57.51
53.16
1+7.25
58.00
1+8.31
37.85
11.51
193U
1935
1936
1937
1938
1939
19^0
19U1
19*+2
19^3
19I+I+
19^5
19^6
19I+7
19^8
19U9
21+.1+1
36.62
1+7.52
88.73
109.09
107.97
107.99
11+7.28
151+.91+
157.22
150.62
138.96
11+1+.72
11+0.1+6
133.29
11+6.12
150.32
153.58
166.60
183.79
73.83
97.97
123.66
138.75
138.99
130.96
127.67
163.18
176.20
191.1+1+
203.77
198.91+
203.1+3
197.97
186.1+5
193.37
208.32
201.89
20U.1+5
195.30
235.37
289.29
321.61+
36U.58
UlU.62
501+.10
628.1+1
650.31+
61+9.69
628.03
589.1*6
573.80
591.60
653.37
697.11
701.80
End
of
Year
1950
1951
1952
1953
1951+
1955
1956
1957
1958
1959
i960
1961
1962
1963
1961+
1965
1966
19^
1968
1969
1970
1971
1972
1973
197U
1975
1976
1977
1978
1979
1980
U.S. Monetary Gold Stock
inside
outside
in
and
Treasury
Treasury
outside
and
and
Treasury
Federal
Federal
and
Reserve
Reserve
Federal
Banks
Banks
Reserve
including
excluding
Banks
gold .cert ifi.cates
Til circulLation
(2)
(1)
652.OO
653.51
66I+.3I+
631.17
622.66
621.51
630.23
653.06
588.06
557.31+
508.69
1+81+ .20
1+58.27
1+1+5.60
1+1+2.03
39!+.1+6
378.ll+
31+1+.71
311.20
338.83
316.31+
291.60
275.97
275.97
275.97
271+.71
271+.68
277.55
276.1+1
261+.60
261+.32
206
Notes to Table SC-10
Dollar figures in sources converted to ounces. For the discontinuity
between the 191^ figure in col. 3 in this table and the corresponding
figure in Table SC-9, see note a in the notes to the latter table. Only
col. 3 is shown here from 193^ on, when gold was transferred to the
Treasury by former holders.
Although the right to hold gold was restored to U.S. residents
beginning 1975, no record is available of the amounts held outside the
Treasury.
Source, by Column:
1.
Banking and Monetary Statistics, 191^-19^1» Board of Governors of
the Federal Reserve System, pp. U09-12, sums of gold coin and gold
certificates
2.
Ibid., p. 536, less cover for gold certificates includes col. 1
3.
1 9 1 ^ 1 : Ibid., p.
I9U2-TO: Banking and Monetary Statistics, 19**1-1970, Board of
Governors of the Federal Reserve System, p. 899
1971-80: IMF, International Financial Statistics data tape
207
GOLD SUPPLY AND DEMAND
Table SC - 11
Two Estimates of World Gold Supply; Change in Official Gold Reserves; and
Gold Absorption in Manufactures and the Arts, Annually
191^-1938, 1930-1952
(millions of fine ounces)
PART 1
Calendar
Year
World
Output
Eastern Absorption (-)
or Dishoarding (+)
(1)
1911+
15
16
IT
18
19
1920
21
22
23
2b
25
26
27
28
29
1930
31
32
33
3*+
35
36
37
38
Change in
Official Gold
Reserves
( 3 )
Industrial
Consumption:
Absorption (-)
or Release (+)
(10
21.67
22.8b
22.01
20.37
18.58
17.32
16.11
15.97
15.1+8
17.85
18.63
18.58
19.11
19.06
18.87
19.21
20.90
22.30
2U.09
25.^0
27.58
30.21+
33.28
35.32
31.1b
+1*3.35
+18.82
+25.01
+11.32
+15.72
+ 1.02
+11.1+2
+17.1+2
+22.1+5
+13.50
+29.1+1
+18.31+
+29.51
+ 2.08
+51.96
- 2.90
+31+.35
+38.70
+1+3.5l+
7.06
10.8U
7.35
7.35
U.93
3.93
1.9b
1.6b
7.55
7.1+0
7.06
7.35
6.87
6.00
' 5.76
1+.93
3.05
1.71+
1.9!+
1.09
2.37
2.23
2.27
1.1+5
PART 2
1930
31
32
33
3l+
35
36
37
38
39
20.9
22. U
2b.3
25.3
27.3
29.6
33.1
35.0
37.1+
38.1
-3.1
7.2
11.7
T.U
7.2
5.0
3.6
1.9
1.7
2.3
15.1+
28.6
38.0
31+.7
36.5
35.6
36.7
36.9
39.1
1+0.1+
-2.1+
-1.0
2.0
2.0
2.0
1.0
0
0
0
0
208
PART 2 (continued)
Calendar
Year
19*+0
1+1
1+2
1+3
1+1+
1+5
1+6
1+7
1+8
1+9
1950
51
52
World
Output
Eastern Absorption (-)
or Dishoarding (+)
Change in
Official Gold
Reserves
(1)
(2)
(3)
1+0.1
26.0
2.2
0.1
-0.9
-1.6
-2.2
-3.0
-3.5
-U.5
-5.5
-1+.5
-1+.2
-6.0
26. h
-6.0
1+1.3
37.1+
30.8
20.7
16.7
13.9
8.5
5.0
5.9
5.8
8.6
12.8
9.2
39.3
31+.1+
26.7
21+.3
23.2
23.5
21+.0
25.0
25.9
26.6
Industrial
Consumption:
Absorption (-)
or Release (+)
(1+)
-1.0
-2.0
-2.7
-U.lt
-5.1+
-6.3
-11.5
-1U.5
-13.6
-15.6
-13.8
- 7.2
-11.2
209
Table SC - 11
Note:
For Parts 1 and 2, dollar figures in the sources have been converted
to ounces.
Part 1
Source:
International Currency Experience, League of Nations, 1 9 ^ , p.
233. Notes to the table in the source, cite the U.S. Bureau of the
Mint for col. 1 (including U.S.S.R. output) and col.U (including
not only new gold but scrap and coin used in the arts); Baull for
International Settlements for col.2; Federal Reserve Bulletin,
September 19^0, for trhe levels from which col.3 is computed (no
change in computed for 1918-22 because U.S.S.R. T s reserves are not
reported) .
Part 2
Source:
W.J. Busschau, "Some Notes on Gold Production and Stocks" in
National Industrial Conference Board Special Studies no. U3, Shall
We Return to a Gold Standard - Now? 195^, pp. I6I+-65. The source
cites Union Corporation annual reports as the compiler of the
monetary gold stock in col. 3. Industrial consumption is
described as including a "quantity of gold hoarded in various
parts of the world in processed or semiprocessed form, of which in
1951 between 7 million and 8 million and in 1952 slightly more
than U million are estimated to have been held for hoarding in
various parts of the Western World."
Table SC - 1?
Components of Annual World Gold Demand, 1950-3980
(million of fine troy ounces)
Industrial Demand
\ Source
Elec\ o f
Dentistry
tronics
Other
Year \ Demand
(2)
(1)
(3)
1950
1QS1
1<W
10S3
1QC>J|
1955
1
1Q57
1958
1959
i960
1061
l'»62
1963
196h
1965
1966
1067
1968
1969
1970
1971
1Q72
1973
197*4
1975
1976
1977
1Q78
1979
1980
2.6
3.2
3.0
2.8
2.0
3.U
U.l
3.0
2.2
2.U
2.5
2.8
3.0
2.6
Source, by Column;
(l)-(5), 1968-70
1971-72
1973-80
(6)-(10):
Note:
1.9
2.0
2.0
2.2
2.1*
2.3
2.2
1.9
2.1
2.1
2.5
1.9
1.9
2.0
2.1
2.1
1.8
2.0
2.5
2.6
2.9
2.8
2.0
A.
B.
C.
2.U
2.1
Jewelry Demand
Developed
Developing
Countries
(»*)
(5)
29.3
29.2
3*4.2
17.8
22.6
13.8
8.9
10.2
15.1
17.ii
19.0
17.7
8.7
16.3
9.U
2.9
6.6
1U.9
1U.9
13.3
6.0
Jevelry
and
Industrial
Demand
(1) + ( 2 W 3 )
+(l*)+(5)
(6)
12.0
13.0
13.0
12.5
13.0
13.5
15.0
17.0
19.0
22.0
25.0
28.0
30.0
32.5
3U.5
36.0
37.5
38.0
35.8
36.3
1*1.1
M.3
39.9
25.2
lU.2
22.9
37.0
39.5
1*0.5
31.9
10.6
Coin
and
Medallions a
(7)
Net
Private
Bullion
Purchases
(8)
Net Purchases by
Centrally
Offical
Planned
Western
Economies
Agencies
(10)
(9)
9.2
7.5
6.5
12.9
19.1
19.0
13.9
19.7
19.1*
21.5
8.1*
17.2
10.5
23.1*
20.2
6.3
3.1
3.2
l*.7
1.0
3.2
5.8
2.5
10.1
2.6
1*6.8
19.7
3.5
2.3
3.2
3.1*
3.3
2.1*
17.2
9.U
16.9
8.8
7.5
6.2
10.8
10. h
6.3
2.1
0.1
0.9
0.5
0.1
2.9
7.6
h.9
214.3
23.7
2h. 2
26.li
32.1
32.5
32.1
36.7
38.U
1*3.5
39.2
1*5.2
1*3.0
55.9
5**.7
52. U
1*2.2
81*.9
59.9
1*2.0
52.0
1*1*. 7
1*8.1 '
Mi.8
1*0.5
36.0
U6.3
52.6
56.0
1* .3
1.8
6.9
1*.7
12.3
8.8
J. Aron ft Company, Gold Statistics and Analysis (December 1981/January
J. Aron & Company, Gold Statistics and Analysis (November 1978)
Consolidated Gold Fields Limited, Gold 1979 (June 1979)
Total
Demand
(6)+(7)+(8)
+(9)+(l0)
(11)
51*.6
7.1*
33.1
1982)
Source C, p, 16 (converted from metric tons to fine ounces).
Source B, p. 36.
Source A, p, 13.
Source A, p.11.
This table shows the latest revisions of data given in Tkble U-l, not available to us in time to base the econometric
work we report on the revisions.
211
T a b l e SC - 11
A n n u a l W o r l d Gold Supply and Gold O u t p u t ,
(millions of fine troy o u n c e s )
Flow
Vkmrce
\ o f
\Supply
Year\
Production
in Market
Economies
(1)
1950
2b.2
25.5
26.8
27.8
29.0
195^
1955
1956
1957
1958
29.9
32.1
1959
i960
33.5
3U.7
37.3
38.6
1961
1962
1963
1961+
bO.O
1965
1966
1+1.0
1967
1968
39.8
1+0.0
1969
19^0
1+0.3
Jewelry
S a l e s by
Developing
Countries
(3)
(1+)
Dishoarding
of P r i v a t e
Bullion
Holdings
(5)
2.2
2.2
2.2
1+.1+
3.5
1+.3
7.1+
6.3
8.6
0.3
2.2
2.8
5.7
8.6
1.9
5.7
15.7
12.9
11.1+
1.6
1.8
1.2
1+5.1
19.9
l.T
11.1
0.2
b0.9
39.7
37.8
35.8
32.8
1973
197^
1975
1976
1.7
6.8
8.8
7.1
1+.8
13.2
30.9
31.2
31.0
1977
1978
12.9
13.2
6.1+
31.1
30.7
30.2
1979
1980
S o u r c e , "by Column:
and
( M :
p.36.
(7):
p.22.
( 5 ) :
This t a b l e
3.1
3.5
0.2
0.6
1.7
0.3
1.9
8.7
11.7
17.5
& Company, Gold
latest
revisions
32.1
32.5
32.1
36.7
38. h
U3.5
39.2
1+5.2
1+3.0
55.9
51+.7
52.1+
1+2.2
8U. 9
59.9
1+2.0
52.0
1+U.7
1+8.1
bk.8
1+2.2
36.0
37.9
S t a t i s t i c s and A n a l y s i s
(December 1 9 8 1 / J a n u a r y
p.ll.
shows t h e
(l)+(2)+(3)
+ (l») + (5)
(6)
1+6.3
52.6
56.0
51+.6
1+.8
2.9
J. A r o n
Annual
Total Supply
2U.3
23.7
2b.2
26.k
bl.O
1971
1972
Note:
Net
Official
Sales
2U.3
23.7
2U.2
1951
1952
1953
(l)-(3)
from
Centrally
Planned
Economies
(2)
1950-1980
of data given
in T a b l e 1+-2.
Annual
World
Output
(7)
27.2
26.6
27.3
27.3
28.7
29.9
31.0
32.1+
33.1+
35.8
37.5
39.0
1+1.9
1+3.U
1+5.2
1+6.5
1+6.9
1*6.0
l>6.=
1+7.1
1+8.6
1+7.6
1+6.3
1+1+.5
1+1.9
39.9
1+1.8
1+1.9
1+2.3
1+2.3
1+1.9
1982)
212
Table SC - lk
U.S. Excess of Gold Exports or Imports; Change in U.S. Monetary Gold Stock,
and Gold Used in U.S. Manufactures and Arts
Annually, 1880-1980
(millions of fine troy ounces)
Fiscal
years
ending
June 30
Excess of
Gold Exports(+)
or Imports (-)
Calendar
Years
(1)
1880
81
82
83
81+
85
86
87
88
89
1890
91
92
93
91+
95
96
97
98
99
1900
01
02
03
01+
05
06
07
08
09
1910
11
12
13
lit
15
July 1 Dec.31,1915
(2)
3.7
1+.7
0.1
0.3
0.9
0.9
1.1
1.6
1.3
2.1+
0.2
3.3
0
1+.2
0.2
1.5
3.8
2.2
5.1
2.5
0.1
0.6
0.1
0.1
1880
81
82
83
81+
85
86
87
88
89
- 0.9
+ 1.9
01+
+
+
+
+
+
+
+
+
+
+
+
+
-
2.8
3.1
3.7
2.3
3.7
2.5
+ 0.1+
+ 0.1+
+ 2.2
- 1.3
-13. 7
Change in
U.S. Monetary
Gold Stock
1890
91
92
93
91+
95
96
97
98
99
1900
01
02
03
05
06
07
08
09
1910
11
12
13
11+
15
1+.8
l+.l
0.1
2.0
0.5
1.8
1.3
3.1
- 0.8
0.8
- 0.8
- 1.7
0.8
- 2.0
- 1.3
1+.6
2.5
9.9
3.2
1+.5
3.3
3.1+
3.3
1.5
3.6
8.1
0.8
2.1+
- 0.8
3.1+
1+.3
3.9
1.9
- I+.9
21+.1
Gold Used in
U.S. Manufactures
and Arts
(3)
0.5
0.5
0.5
0.7
0.7
0.6
0.7
0.7
0.8
0.8
0.9
1.0
0.9
0.7
0.6
0.7
0.6
0.7
0.8
1.0
1.1
1.1
1.3
l.U
1.1+
1.6
1.9
2.0
1.5
1.8
2.0
2.0
2.1
2.2
1.7
1.7
213
Table SC - lh
Calendar
Years
Excess of
Gold Exports(+)
or Imports (-)
(i)
1916
17
18
19
1920
21
22
23
2k
25
26
27
28
29
1930
31
32
33
31*
35
36
37
38
39
19^0
1+1
1+2
1+3
1+1+
1+5
1+6
1+7
1+8
1+9
1950
51
52
53
51+
55
56
57
58
59
-25.6
- 8.7
- 1.0
+II4.I
- 1+.6
-32.3
-11.5
-1U.2
-12.5
+ 6.5
- 1+.7
- 0.3
+19.0
- 8.5
-13.5
- 7.0
+21.6
+ 8.1+
-33.1+
-1+9.7
-31.9
-1+5.3
-56.1+
-102.1
-135.5
-28.1
- 9.0
- 2.0
-21+.1
+ 3.0
- 6.1
-56.2
-1+8.0
-19.6
+10.6
+15.7
-79.5
- 0.1
- 0.5
- 2.8
- 3.0
- 3.0
- 7.1+
- 8.6
(continued)
Change in
U.S. Monetary
Gold Stock
Gold Used in
U.S. Manufactures
and Arts
(2)
(3)
25.7
15.1
0.2
- 8.0
- 3.3
35.5
13.0
15.2
12.1+
- 1+.8
1+.5
- 5.5
-11.5
6.9
15.0
- 6.5
2.6
- 9.2
120.1
53.9
32.1+
1+2.9
50.0
89.5
121+.3
21.9
- 0.6
-21.7
-38.6
-15.7
17.8
61.8
1+3.7
1+.7
-1+9.8
1.5
10.8
33.2
- 8.5
- 1.2
8.7
22.8
-65.0
-30.7
2.1+
2.1+
2.6
3.7
3.9
2.3
2.7
3.2
3.1
3.0
3.0
2.7
2.7
2.7
2.1
1.1+
1.0
0.8
0.1+
0.7
0.9
1.1
0.9
1.1
1.2
1.9
2.2
2.8
3.5
1+.0
5.7
2.8
2.6
1+.3
3.8
3.0
3.6
3.5
2.2
2.0
2.2
2.2
2.6
3.2
214
Table SC-16 (concluded)
Calendar
Years
Excess of
Gold Exports(+)
or Imports (-)
(i)
i960
61
62
63
6k
65
66
67
68
69
1970
71
72
7
3
75
76
77
78
79
80
Note: —
- 9.5
+20.5
+ 6.6
+ U.6
+10.9
+33.8
+11.9
+27.8
+17.5
- 6.U
- 5.6
- 5.0
- 5.7
- 5.0
- 7.3
- 2.2
- 6.0
- 9.5
- 8.6
+ k.8
- 5.6
indicates less than
Change in
U.S. Monetary
Gold Stock
(2)
-1+8.6
-2U.5
-25.k
-13.2
- 3.6
-1+7.6
-16.3
-33.
-33.5
27.6
-22.5
-2b. J
-15.6
0
0
- 1.3
2.9
- 1.1
-11.8
,000 ounces.
Gold Used in
U.S. Manufactures
and Arts
(3)
3.7
3.9
U.5
U.3
5.9
6.6
7.8
6.5
6.6
7.1
6.0
6.9
7.3
6.7
U.7
h.o
1+.6
fc.9
U.7
U.7
3.2
215
Table SC - Ik
Source "by Colunn
1880 - 1970: Historical Statistics of the United States, Colonial
Times to 1970, Bicentennial Edition, Part 2, Washington, D.C., 1975
Series 197 and 198, pp. 88U-85, converted from dollars to ounces.
A note in the source states that prior to 1895, figures relate to coin
and bullion only, thereafter to ore also. 1971-1980: U.S. Treasury
and Department of Commerce.
First differences of col. 3, Tables SC - 9 and SC - 10.
Annual Reports of the Director of the Bureau of the Mint.
before "1967" converted to ounces.
Dollar amounts
216
Table SC - 11
Change in U.S. Monetary Gold Stock and Gold Used in U.S. Manufactures
and Arts as Percent of U.S. Gold Output, Annually, l880-19 p O
Calendar
Years
Change in Gold Stock
(1)
1880
81
82
83
8k
85
86
87
88
89
1890
91
92
93
91+
95
96
97
98
99
1900
01
02
03
ou
05
06
07
08
09
1910
11
12
13
lit
15
16
17
18
19
327.5
21*6.8
8.7
138.2
32.5
116.0
78.7
19U.O
- 0.3
-1*5.7
UU.lt
-51. U
-107.6
1+3.3
-105.8
- 58.3
179.0
90.8
317.3
93.6
116.9
86.0
88. h
92.1
38.9
83.9
192.8
19.u
52.U
- 1.3
73.6
91.2
87.7
l+l+.l
-107.3
500.5
582.7
379. u
7.3
-278.7
Gold Used in Manufactures
as percent of U.S. gold output
(2)
33.2
30.1+
32. h
51.5
1+7.1
37.2
1+1.7
1+1+.7
U9.8
50.7
53.7
59.3
58.5
1+3.0
32.0
33.1
25.2
21+.2
21+.2
27.9
28.0
29.1
3U.6
39.5
35.6
37.7
U1.5
U5.1
33.1+
37.9
1»3.5
1+2.2
1*7.3
52.0
38.7
36.2
5U.9
61.3
78.7
128.0
217
Table SC-16 (concluded)
Calendar
Years
Change in Gold Stock
(1)
1920
21
22
23
2k
25
26
27
28
29
1930
31
32
33
3h
35
36
37
38
39
19^0
1+1
1+2
1+3
1+1+
1+5
ue
k^
1+8
1+9
1950
51
52
53
5U
55
56
57
58
59
I960
61
62
63
6k
65
-137.1
1505.3
567.5
628.1+
505.6
-208.8
200.1
-257.8
-536.6
335-1
713.2
-291.5
115.3
-U0U.5
1+379.0
170U.7
860.6
101+1+.0
1178.9
1936.5
2556.1+
k53.k
-18.1
-1568. h
-371k.0
-8030.7
1217.5
2853.1
2160.0
2UU.0
-2080.2
76.2
572.1
-I69I+.I
-U63.3
-61.2
1+77.3
1272.6
-3737.8
-1916.1+
-2918.1+
-1582.0
-161+8.1
-905.8
-21+5.2
-2790.0
Gold Used in Manufactures
as percent of U.S. gold output
(2)
159.8
99.3
119.7
133.1+
128.2
127.7
136.1
129.9
127.6
132.8
98.3
63.7
1+3.8
36.1
ll* .8
23.1+
25.1
27.5
20.3
21+.0
21+.2
1+0.2
60.1+
200.1+
31+3.8
2050.3
390.2
129.5
127.2
221.1+
160.6
151.1+
192.0
178.6
121.7
101+.5
119.6
125.0
11+9.7
198.1
222.0
252.8
290.7
292.5
1+01+.3
381+. 2
218
Table SC-16 (concluded)
Calendar
Years
Change in Gold Stock
(1)
Gold Used in Manufactures
as percent of U.S. gold output
(2)
6 6
- 9 0 5 . 2
1+31.2
6 7
- 2 1 1 0 . 5
1+08.3
6 8
- 2 2 6 7 . 3
1+1+6.8
6 9
1 5 9 ^ . 3
1+10.2
1 9 7 0
- 1 2 8 7 . 3
31+1.9
7 1
-I65U.8
1+63.7
7 2
- 1 0 7 7 . 9
502.1+
7 3
0
5 7 2 . 2
7b
0
7 5
1+12.7
-119.8
3 7 9 . 6
7 6
-
7 7
2 6 0 . 9
1+1+1.7
7 8
- L L L + . L
1+71+.3
7 9
- 1 2 1 7 . 5
1+81.6
1 9 8 0
-
2 . 9
2 . 1
1+1+3.5
3 3 8 . 1
219
NOMINAL AND REAL PRICE OF GOLD
Table SC-16
Official or Market Price of Gold per Ounce in Nominal U.S. Dollars and in
1967 U.S. Dollars, Annually, 1800-1980
Price of Gold
Per Ounce
in U.S. Dollars
(1)
Wholesale
Price Index
1967 = 100
(2)
Real
Price oi
Gold
(1) * (2
(3)
Official Price
1800
1801
1802
1803
180U
1805
1806
19.39
1+5.6
50.2
1+2.52
38.63
1+1.1+
1+6.81+
1+1.7
1+1+.6
1+9-9
1+7.1+
1+6.50
1^3.1+8
1807
1+6.0
1808
1809
1810
1811
1812
1813
1+0.7
1+6.0
1+6.3
1+1+.6
1+6.3
57.3
61+.1+
lSlh
60.1
1815
1816
1817
1818
1819
1820
1821
1822
1823
53.1+
53.1+
52.0
1+1+ .2
37.5
37.5
37.5
36.1+
31+.7
36.1+
35.0
31+.7
31+.3
31+.0
32.2
182U
1825
1826
1827
1828
1829
1830
(continued)
38.86
1+0.91
1+2.15
1+7.61+
1+2.15
1+1.88
1+3.1+8
1+1.88
33.81+
30.11
32.26
36.31
36.31
37.29
1+3.87
51.71
51.71
51.71
53.27
55.88
53.27
55.1+0
55.88
56.53
57.03
60.22
220
Table SC-16 continued)
Price of Gold
Per Ounce
in U.S. Dollars
(1)
1831
1832
1833
183U
1835
1836
1837
1838
1839
181*0
181*1
181*2
181*3
181*1*
181*5
181*6
181*7
181+8
18U9
1850
1851
1852
1853
185I*
1855
1856
185'7
1858
1859
i860
1861
1862
1863
1861*
1865
1866
1867
1868
1869
1870
Wholesale
Price Index
1967 = 100
(2)
33.2
33.6
33.6
31.8
35.>*
1+0.3
1*0.7
38.9
39.6
33.6
32.5
29.0
19.29
It
»»
20.05
20.69
»»
20.67
it
it
it
tt
tt
tt
tt
tt
tt
tt
tt
26.5
27.2
29.1*
29.1*
31.8
29.0
29.0
29.7
29.1*
31.1
3U.3
38.2
36.2
37.1
39-3
32.9
31+.0
32.9
31.5
11
tt
tt
it
it
11
it
it
tt
11
tt
11
it
Market Price
23.1*2
30.01
1*1.96
32.1*5
29.12
28.57
28.38
27.1*9
23.^5
36.8
1*7.0
68.3
65. h
61.5
57.3
55-9
53.1*
1*7.7
(continued)
Real
Price of
Gold
(1) * (2)
(3)
60.22
57.71
57.71
63.05
58.1*5
51.3U
50.79
53.11*
52.20
61.52
63.60
71.28
78.00
75.99
70.31
70.31
65.OO
71.28
71.28
65.60
70.31
66.1*6
60.26
51*.11
57.10
55.71
52.60
62.83
60.79
62.83
65.62
63.61*
63.85
61.1*3
1*9.62
1*7.35
1*9.86
51.66
51.1*8
1*9.79
221
Table SC-16
Price of Gold
Per Ounce
in U.S. Dollars
(continued)
Wholesale
Price Index
1967 = 100
( 2 )
( 1 )
1871
1872
1873
1871+
1875
1876
1877
1878
Real
Price of
Gold
( 1 )
( 2 )
( 3 )
2 3 . 0 9
1+6.0
5 0 . 2 0
2 3 . 2 3
1+8.1
1+8.30
50.01+
2 3 . 5 2
1+7.0
2 2 . 9 9
1+1+.6
5 1 . 5 5
2 3 . 7 5
1+1.7
5 6 . 9 5
2 3 . 0 5
3 8 . 9
5 9 . 2 5
2 1 . 6 6
3 7 . 5
5 7 . 7 6
20.81;
3 2 . 2
61+.72
3 1 . 8
6 5 . 0 0
35.1*
5 8 . 3 9
36.1+
5 6 . 7 9
3 8 . 2
5 1 + . H
Official Price
1879
1880
1881
1882
1883
1881+
1885
1886
1887
1888
1889
1890
1891
1892
1893
1891+
1895
1896
isy
1898
1899
1900
1901
1902
1903
1901+
1905
1906
1907
1908
1909
1910
2 0 . 6 7
t?
it
it
tt
tt
tt
tt
tt
tt
tt
?t
3 5 . 7
5 7 . 9 0
3 2 . 9
6 2 . 8 3
3 0 . 1
6 8 . 6 7
2 9 . 0
7 1 . 2 8
3 0 . 1
6 8 . 6 7
30.1+
6 7 . 9 9
2 8 . 6
7 2 . 2 7
29.0
28.8
26.9
27.6
tt
tt
t»
tt
tt
tt
tt
tt
tt
tt
tt
11
11
11
it
tt
11
tt
it
tt
(continued)
7 1 . 2 8
7 1 . 7 7
76.81+
71+.89
21+.7
8 3 . 6 8
2 5 . 2
82.02
21+.0
8 6 . 1 3
21+.0
8 6 . 1 3
2 5 . 0
8 2 . 6 8
26.9
28.9
7 1 . 5 2
2 8 . 5
7 2 . 5 3
30.1+
6 7 . 9 9
76.81+
3 0 . 8
67.ll
3 0 . 8
6 7 . 1 1
3 1 . 0
6 6 . 6 8
3 1 . 9
61+.80
3 3 . 6
6 1 . 5 2
3 2 . 5
6 3 . 6 0
31+.9
5 9 . 2 3
3 6 . 3
56.91+
222
Table SC-16 (continued)
Price of Gold
Per Ounce
in U.S. Dollars
Wholesale
Price Index
1967 = 100
( 2 )
( 1 )
1911
1912
1913
191U
1 9 1 5
1916
1 9 1 7
1 9 1 8
1 9 1 9
1920
1 9 2 1
1 9 2 2
1 9 2 3
192U
1 9 2 5
1 9 2 6
1 9 2 7
1 9 2 8
1 9 2 9
1 9 3 0
1 9 3 1
1 9 3 2
2 0 . 6 7
t»
•»
it
it
tt
it
tt
tt
11
tt
tt
tt
tt
11
11
tt
11
it
11
tt
Real
Price of
Gold
( 1 )
*
( 2 )
( 3 )
3 3 . 5
6 1 . 7 0
3 7 . 7
5 7 . 9 0
36.0
57.1+2
3 5 . 1
5 8 . 8 9
3 5 - 9
5 7 . 5 8
1*1*.1
1*6.87
60.6
67.8
3 U . 1 1
7 1 . 5
2 8 . 9 1
7 9 . 7
2 5 . 9 3
50.1*
1*1.01
1+9.9
1*1.1*2
5 1 . 9
3 9 . 8 3
30.1*9
5 0 . 6
1*0.85
53.1*
3 8 . 7 1
5 1 . 6
1*0.06
1*9.3
1*1.93
50.0
1+1.31+
1*9.1
1*2.10
1*1*.6
1+6.35
3 7 . 6
51+.97
3 3 . 6
6 1 . 5 2
Average of Market
and Official Prices
1 9 3 3
26.1+1+
31+.0
7 7 . 7 6
1931+
31+.91+
3 8 . 6
9 0 . 5 2
1+1.3
81+.75
1+1.7
8 3 . 9 3
1*1+.
7 8 . 6 5
Official Price
1935
1 9 3 6
1 9 3 7
1 9 3 8
1 9 3 9
191+0
191*1
191+2
191*3
191+1+
191+5
191+6
191+7
191+8
191+9
1 9 5 0
3 5 . 0 0
ft
It
tt
tt
tt
tt
tt
tt
tt
tt
tt
tt
tt
tt
5
1+0.5
86.1+2
3 9 . 8
87.91+
1+0.5
86.1+2
1+5.1
7 7 . 6 1
5 0 . 9
68.76
5 3 . 6
6 5 . 3 0
5 3 . 6
6 5 . 3 0
5I+.6
61+.10
6 2 . 3
56.18
7 6 . 5
1+5.75
8 2 . 8
1+2.27
7 8 . 7
1+1*.1+7
81.8
tt
(continued!
1+2.79
223
Table SC-16
1951
1952
1953
1951+
1955
1956
1957
1958
1959
1960
1961
1962
1963
1961+
1965
1966
1967
(concluded)
Price of Gold
Per Ounce
in U.S. Dollars
(1)
Wholesale
Price Index
1967 = 1 0 0
(2)
Real
Price of
Gold
(l) * (2)
(3)
35.00
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
"
91.1
88.6
87.U
87.6
87.8
90.7
93.3
9I+.6
9*+.8
9^.9
9^.5
9I+.8
91+.5
9!+.7
96.6
99.8
100.0
38.1+2
39.50
1+0.05
39.95
39.86
38.59
37.51
37.00
36.92
36.88
37.01+
36.92
37.01+
36.96
36.23
35.07
35.00
102.5
37.70
106.5
110.1+
113.9
119.1
131+.7
160.1
17H.9
183.0
19I+.2
209.3
235.6
268.6
38.61
32.55
35.83
1+8.83
72.25
99.1+8
92.00
68.22
76.27
92.38
130.65
228.1+1+
Average of Official
and Market Prices
1968
38.6b
Market Price
1969
1970
1971
1972
1973
1971+
1975
1976
1977
1978
1979
1980
1+1.12
35.91*
1+0.81
58.16
97.32
159.26
160.90
121+.81+
11+8.11
193.36
307.82
613.67
224
c
1.
c'1 r o P
by Co]
U T
2,
1 7 0 2 , which
t r a i n s cf fine
per
ounce,
1F 00-1 0 ? ? : C o i n a r e
Act of A p r i l
r c l d d o l l a r at 2 ^ . 7 5
^PO/2^.7? eauals
set v e i r h t
rcld.
cf
C o i n a r e P e t o f J u n e 2P , 1 P ? * , v / b i c h s e t v ; e i r b t
of
r o l d d o l l a r at 2 ? . 2 t r a i n s of f i n e
Fold.
iJPO/2^.2 eauals £ 2 0 . p e r
ounce.
For
average of
for the f i r s t h a l f of
and
of
. 6Q f o r the second h a l f of the y e a r
is
20 , 05 .
C o i n a r e Act of J a n u a r y
s e t w e i r b t cf r o l d d o l l a r at 2 ? . 2 2
Fold.
^ p 0 / 2 ? . 22 e a u a l s ^PO.P7 ner
1P^7-1PM;
lPf2-1
p
7P;
T
*20.67 tines
Mitchell, Gol
Greenback sta
Press,
1°0V,
;
t h e n r e r i u r 1 on r o l d ,
d,
Prices,
and Wares
ndard,
U n i v e r s i t y of
r.
, 1P?7, w h i c h
r r a i n s of
fine
ounce.
ir Ueslev
C.
Tender t h e
California
Pv e r a r e of r o n t b l v
firures
i r G . F . VTarren and
D
F.£.
Pearson,
Vor'ld P r i c e s and t h e
uildinr
7
Industry,
John T i l e v ,
1Q?7, r.
1 9.
F o r 1o:3iJ, a v e r a r e of J a n u a r y f i r u r e
in source
for
1 0 "
and of
for other ronths,
the n r i c e
derived
f r o r t h e G o l d P e s e r v e Act c f
January
v : h i c h s e t w e i g h t of c-cld d o l l a r at
1'3.r71
n
rrairp
cf f i e
crold.
l o ^ . i o ^ o
;
flpnij?.]
fc-ranv
averare?
of
rcrthlv
Gc] d s t a t i s t i c s
1 Q7H-Janusrv
1
n r
0,
r.
figures
and
•
ir
J.
Aror
*
a r M y s i s , Pecer^er
1
°
f
»
the
p M
r r i c e s ruoted a r e a v e r a r e ? o f t h e A . r . a n d
. .
Iondon price
f i x i r r s ;
for 1Q70-107^,
p . m .
fixinrs
only;
for 107^-1070,
snot COrFX
rrices.
1 op0;
Annual averare cf d a i l v
firures
in
Incorporated
datatare.
The p r i c e s
London p r i c e
fixinrs.
fata
resources
ouoted
are
225
^^VI^CB
(ror * i^'ie^
1P00-1P00 :
U.S. bureau of the Census, Historical statistics
of the United States, Colonial Times to 1970,
Ficertennial Edition, Part 1, Series F-52,
PD. 202-20?, shifted fror 1 Q 1 0 - U to 1°67 base.
18°0-1°60 :
ibid . , Series F - 2 ? ,
107i«i07n :
U.S. Teoartrent of Labor, Fureau of Labor
Statistics, Handbook of Labor Statistics,
Pecerber 1QP0 f Bulletin ?070, Table 1*0,
d . 1??.
d.
1°P0:
Survey of Current Pusiness, £upust
producer prices, all corrodities.
1°?1 f
p. S-7,
226
Table SC - IT
London Prices of Gold, Monthly, 1968 - 1981
(dollars per fine troy ounce)
January
February
March
April
May
June
July
August
September
October
November
December
January
February
March
April
May
June
July
August
September
October
November
December
Source:
Note:
1968
1969
1970
1971
1972
35.200
35.200
35.200
37.900
l»0.700
1+2.300
1+2.600
1+3.200
1+3.300
1+3.1+60
1+1.1+35
1+1.759
31+.91+2
31+.991+
37.871+
38.71+1+
38.871
39.011+
1+5.751
1+8.263
1+8.327
1+9.030
51+.618
U L . 1 0 0
1+0.873
1+0.1+1+1
37.1+01+
35.170
35.086
35.619
35.950
35.1+35
35.321
35.380
36.193
37.518
37.1+1+0
37.1+35
1975
1976
1977
1+1.100
39.500
39.200
1+0.200
39.200
39.800
176.268
179.590
178.158
169.8U3
167.390
16U.238
165.165
162.998
1UU.593
1U2.757
1U2.565
139.303
1+1.088
131.1+88
131.070
132.578
127.9^0
126.935
125.709
117.755
109.929
111+.11+5
116.11+3
130.1+61+
133.878
132.261+
136.299
11+8.228
11+9.166
11+6.605
11+0.778
11+3.393
11+1+.950
11+9.521+
158.860
162.100
160.1+50
1+0.516
1+0.102
1+0.952
1+2.728
1+2.022
62.092
65.665
67.031+
65.1+65
1973
65.139
7I+.198
81+. 372
90.1+96
101.959
120.119
120.166
106.761
1+2.501+
1+2.858
1+3.1+81+
61+.861+
62.912
63.909
102.970
100.077
91+.916
106.719
1978
1979
1980
173.179
178.155
183.662
175.275
176.307
183.752
188.726
206.300
212.076
227.393
206.073
207.831+
227.270
21+5.670
21+2.01+8
239.161
257.617
279.067
291+.736
300.818
355.115
391.657
391.993
1+55.081+
675.309
665.321
553.581
517.1+10
513.820
600.717
61+1+.283
627.11+8
673.625
661.11+8
623.1+63
59U.921
197U
129.191
150.233
168.1+21
172.235
163.268
15I+.IOO
11+2.978
15l+.638
151.762
158.776
181.655
183.850
1981
557.388
1+99.763
1+98.761
1+95.800
1+79.697
I+6I+.76I
1+09.281+
1+10.158
1+1+3.580
1+37.755
1+13.369
J. Aron & Company, Gold Statistics and Analysis tDec. 198l/Jan. 1982),
p. 81.
Average afternoon prices set by London bullion dealers.
@FedFRASER