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Mr. w a i t e r



Chairman E c c l e s

,is i s the l e t t e r and memo about which
I just tajLK.ea to you over trie telepnone.
Federal Reserve Bank of St. Louis


Sears,Roebuck and Co.
Executive Offices
R.E Wood

November 1 4 , 1938,

Hon. M. S. Eecles, Chairman,
Board of Governors of the
Federal Reserve System,
Washington, D. C.
My dear Governor Eccles:
I am sending you herewith a copy of memorandum submitted by Dean
Phillips whom the Federal Reserve Bank has
been using as a consulting economist.
I really believe there
is a lot in what h e says, and I am inclined to
think that the time is ripe to again have a
free circulation of gold.
Sincerely yours,

Research Department
0, A. Phillips

Mankind has long been wedded to gold, and we are
not so far removed from the gold standard today as
many might believe. We are, indeed, on a kind of de facto
gold standard, since the price of gold has been maintained at $35.00 per ounce, as previously it was at
$20.67 per ounce.

A chief feature of the gold stand-

ard now lacking is freedom of circulation of the yellow
metal and of its proxy, the gold certificate.

The out-

payment of gold by the treasury is now discretionary.
As "the return to the gold standard" would be simple,
legislatively considered, advantages and objections
call at once for examination.

We may consider the

objections first.
One objection states that the yellow metal has
become intrinsically useless under modern banking
conditionsi as it does not circulate but remains idle
in cavernous vaults of central banks or, as in the
United States, in costly sepulchres at Fort Knox.
The answer to this objection is that as long as bank
credit is quantitatively related to the stored metal,
that metal serves as a regulator of bank loans and
investments and of deposit creation and as a determining

- 2 -

factor with reference to interest rates and the price

However, permitting gold to circulate actually

and by certificate would accentuate the importance of
the objective test and measure of value that the metal
It is often contended, in the next place, that the
gold standard should be condemned because its adoption
and operation cause the expenditure of vast amounts of
capital, labor, and management in mining gold, which
is of little or no utility beyond its use in the arts
and industry.

This contention, it should be observed,

must be founded on the assumption that society is
rationally ordered; and it may be readily admitted
that in an all-wise society that functions exclusively
on a rational basis, the gold standard would be a

In our country this objection has com-

paratively little force, although our present monetary
arrangements involve a heavy outlay of capital amd labor
in gold production.

In our society, which can not be

rationally ordered, gold constitutes a tangible magnitude of central and pivotal importance to our monetary
managers, and it is submitted that such a norm or
standard—or anchor—as gold affords is preferable,

even though costly, to a wholly intangible element
or guide.
One of the most seriously stated objections to
restoring gold to the channels of circulation is found
in the fear that gold will be hoarded.

This objection

loses its force, however, when it is borne in mind that
(l) we are now permitting gold to be used in international transactions and that outflow in connection therewith would scarcely be increased under conditions of
gold-use freedom and (2) it would be desirable now as
the upswing of business proceeds to lodge gold, on
even a considerable scale, in the possession of hoarders
in order to "shrink" our present superabundance of the
yellow metal and (3) the de-hoarding of gold is not
difficult legislatively as has been clearly demonstrated
in recent years, should de-hoarding become desirable.
It is further objected that unpredictable changes
in the rate of gold production, where the gold standard
obtains, subject the price level to wide variations.
This objection has little or no force and under our
present conditions, in fact, strongly suggests the
wisdom of removing circulating restrictions on the
yellow metal in the United States, in order that the
availability of gold for circulation might bring into

- * -

existence an additional monetary and price "control,"
namely, a full circulatory exchangeability between
gold and gold certificates on the one hand and Federal
Reserve notes on the other.

This exchangeability

would enable the Federal Reserve banks through a substitution of gold for Federal Reserve notes in circulation to reduce our gold reserves substantially,
and, should inflation threaten, helpfully.
The above analysis of objections to the discretionary character of our present de facto gold
standard has at least faintly suggested certain advantages thereof.

It is an advantage of the unrestricted

gold standard, in addition to those already suggested,
that it provides an objective guide to currency regulation and, when internationally operative, affords tangible
ties between and among currencies, preventing the greed
or unskillful management of some countries from disrupting the monetary systems of others or of all. The
gold standard thus, when widely employed, militates
against selfish and unenlightened currency regulation
and control.
Furthermore, our present de facto gold standard
has considerable merit in serving as an obstacle to
wild inflation,—a virtue that would be still greater

- 5 -

if the standard were unrestricted.

Historically, the

gold standard has served as a serious bar to uncontrolled inflation.

Few countries, history has shown,

have been able to resist the temptation to inflate
their currencies and credit when they have not been
held in check by some such external force as that
inherent in the gold standard.

The necessity of

redeeming obligations in gold has served as a steady
and strong deterrent to excessive currency issue.
Those who in this country are fearful of inflation may
logically advocate the removal of restrictions from
our present de facto gold standard.
Whatever may be the fate of the gold standard in
other countries, it is apparent that stripping our
de facto standard of its restrictions would be a
factor of some insurance against wild inflation at
home and would provide an additional lever of control
over the very base upon which bank credit rests and
upon which interest rates and general prices in part
Nullifying the discretionary character of the
standard as it now obtains in the United States would
be a circumstance favorable to the reestablishment of
the standard internationally, so that, as in years


- 6gone by, it would become possible to keep the price
levels and interest rates of the leading countries
of the world in tune with one another.
In conclusion, it may well be stated that the
conditions essential to the reestablishment of the
gold standard on an international basis are now far
from fulfillment,—the redistribution of the gold
supply of the world, a settlement or cancellation of
a major portion of international indebtedness, the
breaking down of barriers to international trade, etc.
Yet, the realization of the conditions mentioned may
be of greater importance than the gold standardfitself
even when established upon an international foundation;
if so, efforts thus to restore the fallen standard
on an international basis might focus attention upon
the forces essential in the reconstruction of world
economy and prompt us to advocate the gold standard
with redoubled energy•

DBeceiaber 1, 1938.

General R* E. Wood, President
5@&rs, Roebuck and Company
Chicago, Illinois
My dear General Wood:
I was interested to get your letter of Woveaber 14 suggesting
a return to free circulation of gold and enclosing 8 copy of Dean
Phillips' memorandum on the subject. The memorandum, I am afraid,
fails to convinoe m® of the importance or the wisdom of the move. It
would not contribute to the stability of the international exchanges
nor naould it simplify the problem of avoiding inflation in this country.
I can see nothing that would, be gained in the exchange situation
by permitting gold circulation, and a great deal that would be lost, fhe
gold reserves held by the central authorities are used now exclusively
for settling international balances and thus stabilizing the exchanges.
The larger these reserves, the greater is the security against violent
exchange fluctuations. It is true that at present this country has a
volume of gold reserves thst is greater than any expectations that we
may have of its use on the exchanges. But we are the only country in
that position. To dissipate a gold reserve that may some time assist
in financial reconstruction end to do it for no apparent purpose other
than a gesture toward an outmoded fetish of a past era seems to •* inconceivable.
Dosiesticelly the growth of the gold reserve creates a difficult
problem, but not one that could be solved by permitting gold circulation. The principal difficulty caused domestically by the inflow of
gold is in the ©restion of en unmanageable aaount of member bank reserves. These reserves result from the inflow of gold and, in the
absence of hoarding, would be just as large if gold circulation were
authorized as they are now. Paying out gold into circulation would not
change th® public's need for currency and for every ten dollar gold
piece or gold certificate paid out a ten dollar Federal Reserve note or
silver certificate would be deposited with a Reserve bank. M d this deposit would create the s&me amount of excess reserves as would have been
created by the gold. Nothing would b© gained from the dissipation of the
gold reserve.
There is just one qualification on this statement. Bank reserves
would be diminished, if the gold paid out went, not into circulation, but
into hoards. This would result in passing the cost of carrying the unproductive ift»'iin i iftounthe offt^/nn ties >fct^ie/^jg^rgji, PU&LI&. /TBut th8 public



General R# E. Wood, -


would have to be willing to assume this cost, otherwise the gold would
be re&eposited. I believe that, on t r grounds, there is M reason to
•IJXitt that any considerable airtount of hoarding would take place in this
country: (1) the public lias complete confidence in our currency and
would not seek protection against its depreciation in acquiring gold, and
(2) even if some elements would like to have their funds in gold, as the
most dependable storage of value, they would remember th&t tiie holders of
gold in 1933 were not permitted to benefit by the devaluation of 1934.*
that all holders were ordered to turn their gold into the Treasury at the
old price. In vie» of this experience it is difficult to believe that
mamy people wulci be tempted to hoard gold, in the United States.
Furthermore, gold hoards are mot sm ultimate protection against inflation, because the gold is likely to be tempted out of hoards at a tine
-when, prices and values are rising, that is, at the very time when credit
restraint -would be desirable. Gold hoarding in fact almost elweys aets
against public poliay: it depletes reserres in bad times, when confidence
is low and public jx>liey is to counteract deflation and to encourage expansion, and adds to reserves in boom times when public policy ti to prevent
Whichever way you put it, I cm find no possible public gain from
paying out gold into circulation.
Dean. Phillip* suggestion that paying out gold into circulation
would have a restraining influence on the banking authorities themselves
appears to have no realistic meaning in our z&dexn economy. With our fourteen billion dollar stock of gold it is difficult to take the suggestion
seriously. It originates from recollections of disastrous currency inflations in Europe, which, of course, could not have taken place, if currency
were redeemable in gold. But even tket is putting the eart before the horse;
these inflations were forced on the countries of Europe by war and post-war
developments, and it is inconceivable that gold redemption could have been
reestablished at t time when vest government expenditures were imperative
eat gold reserves very limited.
In our country today the only safeguard against unwise credit end
monetary policies liea in the competence and sense of public responsibility
of the authorities. So legal action through gold circulation or any other
device, could be s substitute for that.

General R. I . food.



These f M M i of siae on the miiwnTimiiliw are In a ratiier frank
M M &
T@la and I t r u s t that you will keep tluiti confidsEtial. I haTe written
as I have beeauise I always find a candid exchange of riews with you


u S. Secies