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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 II
Annexes

TABLE OF

CONTENTS

Page

Volume I

INTRODUCTION

AND RECOMMENDATIONS

Chapter 1

—

BACKGROUND TO THE ESTABLISHMENT OF
THE GOLD COMMISSION

Chapter 2

—

THE PAST ROLE OF GOLD IN THE U.S.

MONETARY

SYSTEM
111

Chapter 3

—

TYPES OF MONETARY

STANDARDS

Chapter 4

—

EXISTING
GOLDFOR
ARRANGEMENTS
AND
PROPOSALS
CHANGE

135

Staff Appendix:
The Gold
Statistical Compendium

149
185

Market

Volume II
ANNEXES

ANNEX A

—

Supplementary

ANNEX B

Summaries of Statements
to the Commission

ANNEX C

—

Some Implications of Legal
Status

ANNEX D

—

Continuing Audit of the United
States-Owned Gold

531

ANNEX E

—

Contents of the Commission's
Permanent Record

555

and Dissenting

Views

Submitted

Tender

383
523

ANNEX A

Supplementary

and Dissenting

Views

Supplementary

and D i s s e n t i n g

Views

A d d i t i o n a l V i e w s of S e n a t o r C h r i s t o p h e r J .

S u p p l e m e n t a r y V i e w s of M r . Lewis L e h r m a n and
Ronald Paul and q u a l i f i e d e n d o r s e m e n t of M r .
Costamagna.

D i s s e n t i n g V i e w s of C o n g r e s s m e n
C h a l m e r s P. W y l i e .
A p p e n d i x to D i s s e n t i n g
C h a l m e r s P. W y l i e

Additional

Dissenting

Henry

V i e w s of

Dodd.
Congressman
Arthur

S. R e u s s

and

Congressman

V i e w s of C o n g r e s s m a n

Henry S.

Reuss.

5
A d d i t i o n a l Views of Senator C h r i s t o p h e r J, Dodd
The Gold C o m m i s s i o n m a j o r i t y has discharged its responsibility
to "conduct a study to assess and make r e c o m m e n d a t i o n s with regard
to the policy of the U.S. G o v e r n m e n t concerning the role of gold
in the d o m e s t i c and international monetary systems" by rejecting
most p r o p o s a l s to adopt a classical gold standard or otherwise
e n h a n c e the m o n e t a r y role of gold, p a r t i c u l a r l y in a manner that
could lead to adoption of a classical gold standard.
Commission
r e c o r d s indicate that the m o n e t a r y policy i m p l i c a t i o n s of adopting
these p r o p o s a l s range from irrelevant to c a t a s t r o p h i c .
I wish to associate m y s e l f with the views, expressed by
C o n g r e s s m e n Henry S. Reuss and Chalmers P. W y l i e , regarding the
Gold C o m m i s s i o n ' s m a j o r i t y r e c o m m e n d a t i o n that the Treasury Department be authorized to mint a "gold bullion coin" exempt from capital
g a i n s and sales taxation.
Increased speculation in gold, at the
expense of investment in p r o d u c t i v e assets, is clearly contrary to
our economic and financial interests.
Furthermore, the states
would find that, through federal action, they were deprived of an
important source of sales tax revenue at a time when the federal
government is shifting substantial program r e s p o n s i b i l i t i e s and
costs to the states.
On this m a t t e r , I join with the Gold C o m m i s s i o n
m i n o r i t y in opposing T r e a s u r y issue of such gold bullion coins.
W h i l e I have r e s e r v a t i o n s about the Gold C o m m i s s i o n ' s jurisdiction over monetary policy q u e s t i o n s not directly related to the
role of gold, I would note that improved d e f i n i t i o n , m e a s u r e m e n t
and control of the m o n e y supply are important issues which cannot
be separated from the larger goals of long-term price stability and
economic growth.
A c c o r d i n g l y , I urge that C o n g r e s s proceed with
the utmost caution should it consider p r o p o s a l s for m u l t i - c u r r e n c y
systems, whether or not they involve gold.

7
S u p p l e m e n t a r y V i e w s of M r , L e w i s L e h r m a n and C o n g r e s s m a n
and q u a l i f i e d e n d o r s e m e n t of Mr, A r t h u r C o s t a m a g n a

AN ALTERNATIVE COURSE:

MINORITY REPORT
Of
THE UNITED STATES GOLD COMMISSION
to

THE HOUSE OF REPRESENTATIVES and to THE SENATE

March 31, 1982

Ronald

Paul

8
As members of the United States Gold Commission, we all subscribe to
the broad principles outlined in this Report.

Each of us might disagree on

details or might have phrased a sentence or paragraph differently, but such
disagreements are insignificant compared to the overriding importance of
presenting to the Congress an alternative course, a course charted toward a
sound monetary system based on gold.

Lewis Lehrman

Ronald Paul

Qualified

Endorsement

While I generally endorse the broad principles presented in this Report,
I believe their implementation should be delayed until the new fiscal and
monetary programs of the Reagan Administration and the recommendations of the
Gold Commission in its majority report are given the opportunity to succeed
or fail.

Should the programs recommended in the majority report fail to pass

Congress within the next two years, I would endorse the plan for monetary
reform presented

herein.

Arthur Costamagna

TABLE OF CONTENTS

INTRODUCTION

CHAPTER 1

The Present Monetary Crisis

CHAPTER 2

A History of Money and Banking in the
United States before the Twentieth Century

CHAPTER 3

A History of Money and Banking in the
United States during the Twentieth Century

177

CHAPTER 4

The Case for Monetary Freedom

210

CHAPTER 5

Real Money:

223

CHAPTER 6

The Transition to Monetary Freedom

255

CHAPTER 7

The Next Ten Years

2 79

The Case for the Gold Standard

286

APPENDIX

INTRODUCTION

The United States is now in the most serious recession since the
1930 f s.

The most staid and sober magazines and newspapers are writing

openly about the possibility of depression.

Sectors of the economy have

already entered the depression stage; more are threatening to follow.
The number of personal and business failures more than doubled from 1971
to 1981, and the early figures for 1982 indicate that failures are up
fifty percent over 1981.

Interest rates remain near record highs; unemploy-

ment has reached nine percent and is moving upward.

The only sign of

improvement is a slower rate of increase—but still an increase—
in the cost-of-living.

Annualized increases in the Consumer Price Index

are now down near the levels that prompted President Nixon to impose price,
and wage controls in 1971.
How did the economy get into such a poor condition?

Can it be blamed

on the Reagan Administration's new policies, as some would like to do?

is there a more fundamental reason for our present crisis?
It is the conclusion of the signers of this report that there is
a more fundamental reason.

Our present crisis has not developed in the past

year; it has been growing for at least a decade.

When President Nixon

imposed price and wage controls on August 15, 1971, he also, ironically
enough, severed the last link between the dollar and gold.
begun in 1913

The process

with the formation of the Federal Reserve System, accelerated

by President Franklin Roosevelt through a confiscation of privately owned
gold

and a devaluation of the dollar, nearly completed in the 1960 f s by

the withdrawing of silver certificates from circulation and the end of
silver coinage, was finally completed when the international convertibility
of the dollar into gold was ended in 1971.
The entire process is a catalogue of broken promises and outright theft
on the part of the federal government as it sought to substitute a managed,
irredeemable paper money system for a gold standard.

For the past ten years

we have had a monetary system unique in our national history: no

circulating

silver or gold coinage, but a government monopoly of politically-managed
paper money.

The present crisis is a result of this fundamental change in

our monetary arrangements, and it will n o t — i n d e e d c a n n o t — b e ended
permanently unless fundamental reforms are made.
Our ten year experiment with paper money has failed; it is time that
the Congress recognize that failure.

Congress has violated both the

principles of sound economics and the requirements of our supreme law,
the Constitution.
That Constitution forbids that anytning except gold and silver coin
should be made a tender in payment.of d e b t — y e t Congress has made
paper a legal tender.

inconvertible

Economics requires a recognition that there

is no such thing as a free lunch,

but Congress has institutionalized the

money creating powers of the Federal Reserve in its efforts to perform the
miracle of turning stones into bread.
Chanter One of this report presents an economic overview of the last
ten years, a decade of paper money.

Chapters Two and Three detail the

process by which we arrived at our present state.

The fourth chapter presents

the case for monetary freedom; Chapter Five argues the case for a gold
standard, and Chapter Six outlines the specific reforms that will be
needed to correct the blunders of the past.

Finally, Chapter Seven

will offer two views of the next ten years, a decade with gold and a decade
without.
In 1982 Congress faces a crisis and an opportunity.

We hope the

arguments presented here are persuasive, and the Congress acts in a timely
fashion to avert an economic calamity.

For too long the federal government

has been playing with monopoly money; we must move forward to a real
money system, gold.

CHAPTER ONE

THE PRESENT MONETARY CRISIS

In 1784 in the debate over the money issue, Thomas Jefferson said:
"If we determine that a dollar shall be our unit, we must then say with
precision

what a dollar is."

Our founding fathers followed that advice

and in 1792 the dollar was defined as 3 7 1 V ^ grains of silver.

From 1792

until August 15, 1971 the dollar was defined as a precise weight of either
silver or gold.

Since 1971, the dollar has had no definition

(officially

the definition was not legally rejected until 1976); the advice of Thomas
Jefferson has been rejected entirely.

For more than ten years the dollar

has been nothing more than a piece of paper with government ink on it.
More and more Americans have come to recognize this,and a loss of confidence

in the currency has paralleled this recognition.

The monetary

authorities say it is unnecessary to have a precise definition of the dollar, claiming: "A dollar is whatever it will buy."

This being the case,

and the fact that the dollar buys less every day, and approximately onethird of what it bought in 1971, the dollar today is undefinable and its
value is relative.

It should be obvious that this loss of definition of

what the monetary unit is, is directly related to the financial and economic
problems we face today.
If the dollar served as the unit of account for a single South American
nation, such as Chile or Brazil, the significance of this change from a precise definition to no definition would be less.

However, since World War II

the dollar has been the international currency of account, used throughout
the world, and held as a reserve currency by most major western nations.
Even though this was done unwisely,it worked temporarily up until 1971 when

the definition of the dollar was changed.
Until 1971 a "dollar" was V 3 5 of an ounce of gold, and all nations
that held the dollar as a reserve were assured that their dollars could
be redeemed for V 3 5 of an ounce of g o l d — e v e n if American citicens were
denied that same right.

However, the failure of the U.S. government over

many decades (Congress, the Federal Reserve and the Administration) to
issue only dollars that could be redeemed, led to a massive inflation
of the money supply for various political reasons. This forced the United
States to default on its convertibility pledge and the dollar became only
something the government claimed it was.

Residual trust and blind faith

have allowed the dollar to serve since 1971 as money, but with ever increasing difficulty.

Understanding Jefferson's advice about a precise

definition of the dollar, and analysing the problems of the last decade,
during which time we have had no definition of the dollar,
are crucial in our attempt to pave the way for a sound, honest and reliable
monetary system.
From 1792 to 1971 we had an imperfect money and banking system, as will
be shown in Chapters two and three.

But during that time the dollar was always

related to gold in one way or another.

(It may be argued that the exception

was the greenback era during the Civil War, but even then gold circulated
and was used to some degree.)

Even with its obvious imperfections, the gold

dollar worked rather well compared to the past ten years.

Though the Depression

of the 1930's was ushered in by government meddling in the economy and irresponsible money management, the gold dollar per se survived, even though
debased by 41Z. Today the dollar is troubled by a general lack of confidence.
The market is anticipating that a steady depreciation will continue, thus
prompting high interest rates.

The purchasing power of the dollar as compared

to gold has dramatically decreased over the past decade.
analysis,

By historic

it is clear that 1971 was a significant and unique year in

American monetary history.
This being the case, what in particular occurred on August 15, 1971?

was on this day President Nixon "closed the gold window," which meant that
officially the American government would no longer honor its promise to foreign
holders of dollars to redeem those dollars in gold.

It became policy what

was already known through the world, that the American government had created
many more dollars—promises to p a y — t h e n they should have and no longer could
live up to their monetary commitments by redeeming them in gold.
agreement, the Smithsonian agreement, which lasted only
by President Nixon to be

A new

fourteen months, was claimed

"the most significant monetary agreement in the history

of the world," promising it would create jobs, restore financial stability, help
"Significant!1 it was,

the farmers, stimulate exports, and bring prosperity to all.

but in an entirely different way, for it was this agreement that ushered in the
present period of fiat paper money and monetary chaos.

It has brought us the

exact opposite of what was intended.
In his statement in 1971 President Nixon, as many uninformed individuals
do today, blamed "speculation" for our problems and not the real c u l p r i t —
government inflation.

He further stated on that fateful day "that the effect

of this action, in other words, will be to stabilize the dollar."

How can

we expect those who claimed that rejecting a gold-related dollar would
" stabilize the dollar" to advise us now on solving our current financial and
monetary crisis?

We cannot, because they are not capable.

is necessary to look elsewhere for the solution.
Even though the declaration made in August 1971 was of great significance,
overall monetary policy did not change at that particular

time.

This was

essentially an admission of the failure of the Federal Reserve's discretionary monetary policy they had followed in various forms since 1914.
Although previous deflations (particularly 1929 and 1932), and the fact we
were spared

from the physical destruction of World War II, prolonged the life

of the dollar, the inevitable failure of discretionary policy was known by many
for a long time.
When the record of the past ten years is examined, it is clear that
indicting the monetary

arrangements of the past decade is justified.

It is

clear that discretionary monetary policy, without any assistance from gold,
leads to serious economic instability, lack of capital formation, high
interest rates, high price inflation and intolerably high.levels of unemployment.

The climax of this policy came in October 1979 when the Federal Reserve

was forced to change some of its management techniques.
pressure, weakness of the dollar, gold at

Due to international

$600.00 an ounce, and silver over

$25.00 an ounce, the Federal Reserve adopted a policy directed toward concentrating more on money supply than on interest rates.
given a chance at solving the problems

of inflation.

Monetarism was to be
The record from 1979

to the present offers no real hope and in many ways confirms the contention by
many that the only solution will come when we have a redeemable currency.
The money supply since 1971 has been growing at unprecedented rates.
Since inflation _is an increase in
critical importance.

the supply of money and credit, this is of

It tells us what many economic historians knew even

before 1971, that when government is granted an unlimited power to create
money out of thin air as the Federal Reserve has, that power is always
abused.

For various political reasons, excessive money is always created

bringing only trouble to the innocent citizens not receiving the "benefits"
of inflation.

It is

tempting to pursue inflationary policies,since

during

stages

thers.

of inflation special interest groups benefit at the expense of

History shows this temptation has never been resisted and the record

f the money growth of the past decade confirms this to still be the case.

MONEY SUPPLY
(In billions of dollars)

Monetary Base
December 1971

$86.6

December 1981

$169.8

December 1971

$230.4

December 1981

$364.6

December 1971

$230.6

December 1981

$442.1

December 1971

$711.1

December 1981

$1842.2

December 1971

$771.1

December 1981

$2187.1

MIA

M1B

M3"

Bank reserves plus currency held by the public.
^Currency plus demand deposits at commercial banks.
MIA plus checkable deposits at all depository institutions.
^MIB plus savings accounts and small denomination time
deposits at all depository institutions and money market mutual funds,
M2 plus large denomination time deposits and repurchase
agreements at all depository institutions.

All these figures indicate that the money supply in the space of ten
years has more than doubled, as measured by three of the five standard
statistical series produced by the Federal Reserve.

This is all the more

significant, for neither the population nor American productivity increased
by anything approaching that rate over the same period.

Since increases in

productivity and population are traditionally mentioned as reasons for
increasing the money supply, neither of these factors can be used as the excuse
for the massive creation of new money and credit of the Federal Reserve
over the past decade.
203,000,000.

In April 1970, our population was approximately

By April 1980, it was 226, 500, 000, a 12 percent increase.

Using the lowest of the money supply statistics, our money supply increased by
58 percent over the same period.

Using the largest of the money supply

money figures, the money supply increased by 184 percent.

Neither figure

is commensurate with a 12 percent increase in population over the decade.
As for the real growth of the Gross National Product, in 1979, GNP was
$1,107.5 billion; during 1981, it was $1,509.06 billion, an increase of 36
percent.

Again that figure does not even remotely approach the growth of

the money supply over the same decade.
It is safe to say the money supply is growing three to four times faster
than the real economy.

Professor Milton Friedman argues that economic growth

is not always related to monetary growth and that some of the best periods of
economic growth in our history w6re associated with minimal money growth.
This fact is one of the hardest to grasp by sincere economists and politicians,
and yet it is most important in order to understand why commodity money is
superior to paper money.

Duplicating money substitutes can never replace the

benefits of a trustworthy unit of account, one that encourages saving and

prompts low interest rates.

The duplication process does the opposite:

it destroys trust, discourages savings, raises interest rates, slows economic
growth, and does not create wealth.
PRICES
The record for prices since 1971 is not very encouraging.

The standard

measures of price growth are the consumer price index, the producer price
index, and the implicit price deflator prepared by the Departments of Labor
and Commerce.

Although price increases are the consequences of the govern-

ment's increasing the supply of money and credit, most people still refer to
these increases as inflation per se rather than the result of the inflation.
Nevertheless, price increases are measurements of the harm done and are a reflection of the dollar's depreciation.

Since prices are never uniform some

segments of the society suffer from them more than others.
The following price statistics dramatize vividly the sharp depreciation of
the currency over the past ten years.

December 1971

December 1981

Consumer Price Index
(1967=100)

123.1

281.5

Producer Price Index
(1967-100)

115.4

275.3

1971

1981

96.01

193.57

Implicit Price Deflator for GNP
(1972-100)

Retail prices, as measured by the best statistics that
the government has produced, have more than doubled during the decade of
inconvertible paper money.

What one Federal Reserve note .purchased in 1971,

it now requires approximately two and one-half Federal Reserve notes to purchase.

This depreciation in the value of our inconvertible paper currency is

characteristic of all such currencies throughout history.

As long as the

currency remains a fiat currency, one not redeemable in something of real value,
we can expect the money supply to increase at unreasonable rates, depreciating
its value and resulting in persistent
services.

price increases of all goods and

There is no question whatsoever that the problem of rising prices

although existing before 1971 has been made significantly worse since the
closing of the gold window.

INTEREST RATES

Interest rates since 1971 tell the same story.

They have reached heights

never seen before in our history, including the greenback era of the Civil
War.

The prime rate soared to over 21% during the past decade,and higher

rates are bound to occur if sound money is not restored.

The supply and de-

mand for money certainly plays a part in establishing the rate of interest,
but today the inflation premium — t h e premium charged for the anticipation of
further dollar devaluation—is the principal cause of fluctuating high
interest rates.

Since paper money is always depreciated by politicians,

it should be expected that unless a redeemable dollar is once again established,
the problem of high interest rates will not only continue but get worse.
Unfortunately, high interest rates are frequently seen as a cause of inflation
rather than as a result, which prompts many sincere individuals who have been
victimized by these high rates to call for controls on the rates (usury laws)
or for credit allocation.

These policies can only make the problem worse,

since they do not get to the root cause of the high interest rate:

the

inflation of the money supply and depreciation of the currency. Interest
rates are inversely proportional to the trust the people have in the money.

Until the trust is restored in the money (and in the government which
has destroyed the money), high interest rates will continue.

The

record for interest rates for the past ten years is a poor one and must
be seen as a reflection of monetary policy.

INTEREST RATES SINCE 1971

Conventional Home Mortgage Rate
December 1971

7.67%

December 1981

15.98%

Low for decade

7.44%(April 1972)

High for decade

15.98%(December 1981)

Prime Lending Rate
t
December 1971

5.25%

December 1981

15.75%

Low for decade

4.75% (February 1972)

High for decade

21.5% (August 1981)

91-day Treasury Bill Rate
December 1971

4.02%

December 1981

10.93%

Low for decade

3.18% (February 1972)

High for decade

16.3% (May 1981)

Bond Rates AAA Corporate Bonds
December 1971

7.25%

December 1981

14.23%

Low for decade
High for decade

7.08% (December 1972)
15.49% (September 1981)

Public Utilities
November 1971

7.96Z

November 1981

15.5Z

Low for decade

7.48Z (December 1972)

High for decade

16.48Z (September 1981)

State and Local Tax Exempt Bonds
December 1971

5.02Z

December 1981

12.91Z

Low for decade
High for decade

4.99Z (November 1972)
12.92Z (September 1981)

U.S. Government Marketable Securities (All Maturities)
November 1971

5.37Z

November 1981

12.401Z

Low for decade

5.051Z (March 1972)

High for decade

15.83Z (October 1981)

Even with a reduction in the rate of price inflation, interest rates have
remained high.

This reflects the lost confidence in the currency and in the

Congress to deal with the problem.

With deficits soaring and the Federal

Reserve able to create new money at will, the lack of confidence is justified
and understandable.

BANKRUPTCY SINCE 1971
Whenever a businessman complains about the economy and the difficulties
he faces in maintaining a profitable business, he speaks mainly of the
burden of high interest rates.

Currently he sees this expense as the

crippling blow to maintaining a successful business.

It is practically

impossible to maintain a profitable business on borrowed capital costing
more than 20Z.

The interest burden has In turn led to an enormous growth in

the number of personal and business bankruptcies in the past decade.

Many

financial institutions—in particular the Savings and L o a n s — are facing
bankruptcy and are currently being absorbed by larger institutions with the
assistance of tax dollars.

The estimate of the number of Savings and Loans in

danger of failing is well over 1,500.

However, the proposal in Washington to

"save" these institutions involves the same procedure used to "save" New York
City and Chrysler — m o r e inflation associated with a frantic effort to avoid
debt liquidation by deflation.
Although bankruptcies do liquidate debt in a conventional way, large
corporations, cities, states, and financial institutions are "bailed out."
Financial institutions are bailed out by government mandated and regulated
takeovers by "stronger" institutions.
Those allowed to fail have been and will continue to be the smaller companies and
individuals.

The statistics show a rapid increase in personal and

business

bankruptcies since 1971—evidence of unmanageable debt service associated
with high interest rates.

BUSINESS AND PERSONAL BANKRUPTCIES AND FAILURES SINCE 1971
1971

201,352

1981

519,063

These figures can be expected to increase, and they would be even worse if
none were "bailed out" by government programs granting loans and guaranteeing
loans (greater than $800

billion).

These programs may keep the figures

artificially low for a time, but they will obviously contribute to more
inflation at a later day, a weaker economy, and the threat of even more bankruptcies later on.

BONDS AND MORTGAGES
In the decade of the seventies we have seen the virtual destruction of
long term financing in the United States.

A key to a capitalistic economy is

availability of long term borrowing, and without its reestablishment economic
stagnation can be expected.

Long term markets cannot be restored without re-

storing the belief that the dollar will no longer be depreciated.
Home mortgage rates of 17 and 18 percent guarantee that very few people
will qualify for the purchase of a new home.

This is destroying the housing

industry and is a prime contributor to the high unemployment rate we are
now experiencing.
Bonds are no longer the investment of widows and orphans, but have
joined the ranks of speculative in/estraents with investors hoping to catch
minor price swings, make a profit, and then quickly sell.

This is no way to

build a healthy market economy. In 1945, the Standard and Poor T s Index
of bond prices was 121.6 for current 1945 and gold dollars.

By 1981

in current dollars, it was 38, in 1945 dollars it was 9 and in gold dollars
it was 2.4.

It took 3.2 ounces of gold in 1945 to buy the index and .09

ounces in 1981.

The bond market in Britain, which leads us by a few years

in such matters has already been destroyed.
An investment in 1971 in gold would have yielded a 17.8% annual return.
A similar investment in a U.S. bond would have declined 5.2% annually in
real terms.
The message of the dollar's illness came sooner in the bond market than
any place else.

It has moved downward since 1945, but the precipitous drop

occured in the decade since 1971.

Without the reversal of long term bond

markets, true capital formation is impossible.

True savings of the future

will not occur under the conditions existing today, and the only credible
reassurance is a precisely defined and guaranteed monetary unit.

EMPLOYMENT AND REAL INCOME

As one would expect when a nation's currency is depreciated by creating
an excessive amount of it, the real wage of the working man is bound to go
down.

Even though in the early, less detectable, and more modest stages of

inflation, increases in productivity can stay ahead of the depreciation and
give the impression that inflation is beneficial, the results noted in the
1970's were inevitable and predictable.
other time in American history.
period.

Real income suffered more than at any

There was a 13 percent drop over a ten-year

SPENDABLE AVERAGE WEEKLY EARNINGS
(1967 dollars)
December 1971

$95.04

December 1981

83.19

The recession or depression that follows periods of monetary inflation
is the correction that comes as a result of malinvestment due to the false
information of distorted interest rates.

During a correction, as the

economy tries to right itself, a period of unemployment results.

If the

correction is aborted and "corrected" by resumption of more inflation, each
cycle will give us more unemployment.

Since 1945, we can see that each cycle

has gotten worse: higher interest rates, higher prices, and higher unemployment.

Today, we see the unemployment levels higher than any since the

Great Depression.

UNEMPLOYMENT
1971

4.695 million

(5.5%)

December 1981

9.462 million

(8.9%)

Unemployment is now at a critical stage, and even if another

cycle

is entered £nd this rate is temporarily reduced, it is to be expected that
without the adoption of a sound monetary system, unemployment rates will
continually get worse.

PERSONAL SAVINGS RATE

When a currency loses its value by deliberate and steady inflation,
the tendency, as more and more citizens become knowledgeable, is for a lowered
savings rate.

Since the exact rate of depreciation—actual price increase of

goods and services—is unpredictable, it becomes impossible to anticipate
and fully protect the purchasing power of savings by correctly establishing the

inflationary premium on interest rates.

There is a disincentive to save since

price inflation is usually greater than the extra interest earned.
importantly, it is unpredictable.

But more

Many figure it is better to buy something

this year rather than next (when they will actually need it) when the price
will be much higher.

PERSONAL SAVINGS RATE

1971

8.1%

1981

5.3%

Savings are discouraged even further if interest rates paid are artificially
controlled by government regulations.

The shift of funds from the savings

and loans to the money market mutual funds is not much of a mystery. Even though
savings and loans are starved for savings, they have championed the continued
fixing of low interest rates on savings accounts, hoping that this special benefit
will continue.

Although this did help in the early stages of inflation, now

when the spread is 7% to 12% between what savings and loans will pay and the
market rate, we cannot expect that resumption of savings in the
manner will come quickly.
possible.

conventional

Without true savings, capital formation is im-

And without adequate savings, government officials are pressured

to try to create "capital11 by money creation, a policy that will only make
the problem worse.

There will be further depreciation of the currency,

with more monetary inflation, thus increasing even further the disincentive
to save.

Only with the cessation of inflation through reinstitution of a

hard currency will we see a significant increase in true savings.

Economic

growth depends on savings (and other things like low taxes and minimal regulations) not on the growth of the money supply as so many believe today.

30
MONETARISM—NOT THE ANSWER

The obvious failure of the discretionary monetary system has prompted the
popularization of monetarism in recent years.

This is the view that the federal

government should manage the nation's money system and supply, increasing
the number of dollars each year by between 3% and 5%.

The monetarists

share our view that the Federal Reserve's discretionary policy of the last
several decades has been the cause of our inflation.
that the monetarist solution is unworkable.

However, we are confident

Since October of 1979, the Federal

Reserve has directed its attention to regulating the money supply and has
abandoned its traditional intense concentration on manipulation of interest
rates.

Yet we now are witnessing more erratic movement in the money supply

(and interest rates) then ever before.
The excuses given are: "the monetary technicians are at fault;" "the
wrong parameters are bering used;" "the wrong M is being watched;"
wrong people are in charge."
is failing.

"the

The excuses are unlimited as to why monetarism

The explanations are always given by those monetarists who do

not assume the responsibility for making monetarism work.

It is certainly true

that neither here in the United States nor in England has monetarist

policy

followed the textbook description of how monetarism should be implemented.
What the monetarists will not admit nor even consider, however, it that it is
not being followed because it cannot be followed.

They prefer to believe that

it is the shortcomings of the technicians rather than of the monetary

system

itself.
The notion that deficits do not matter so long as they are a certain percent of the gross national product, as claimed by
acceptable.

some of the monetarists, is not

It ignores the fact that total annual borrowing of the federal

government exceeds the annual deficit as the total debt is turned over more
and more rapidly.

A sound monetary system works hand in hand with a balanced

budget, giving the citizens assurance of no possible future plans to
"break the rules" and start inflating again.

Many who downplay the

deficit (some supply-siders, Keynesians, and monetarists) emphasize
ly that

it is not inflationary if the debt is not monetized.

correct-

But they

fail to consider the inflationary pressures created by the real debt; the
on-budget deficit, the off-budget deficit, the guaranteed loans, and the direct
l o a n s — a much larger problem than
deficit.

the conventionally accepted annual federal

The political pressures to monetize the debt are inexorable.

Monetarism ignores man's nature and assumes that if money managers and
politicians are given the power to increase the money supply at a 5% annual
rate, they will not abuse that power.

History shows that governments and the

people in charge will always abuse the " right" to create money if it
is granted to them.
Monetarists cannot agree on the precise definition of money.

Some

prefer the monetary base(bank reserves plus circulating cash), other prefer
M1B (cash plus checking and transfer accounts).

Since M1B is no longer

satisfactory, MIA and M1B have now been dropped and Ml is presently the key
"M" to watch, according to some.
to watch.

Still others believe M2 is the key statistic

Nothing guarantees that if Ml or M2 become difficult to

a new M will not be created.

control

A sound monetary system cannot be this arbitrary.

The theory of monetarism advocates a deliberate and controlled monetary
inflation of 3-5% per year to coincide with economic growth so as to produce
price stability.

If we don't know what the economic growth will be in the

year to c o m e — 2 % or 6 % — w e cannot know how much money to create
produce price stability.

in order to

We cannot wait until after the growth occurs for it

serves no purpose—the money then comes into

the economy too late.

They

fully recognize that money growth as we have had it in the past decade is
injurious to economic growth,but claim that a 5% growth in the money supply

would not be.

The truth is that any inflation—even monetarist

inflation—

is harmful, and that a 4% growth of the money supply cannot produce economic
growth of 4%.

The two are unrelated.

The central purpose of a monetary standard is trust and honesty, not stable
prices.

The reason gold is superior to all forms of paper is that it

provides this truth and honesty, permits and encourage savings, enhances
economic growth, and as a secondary benefit allows prices to adjust freely
in the marketplace (yet long term price stability is achieved more with gold,
than with any other standard).

"Stable" prices cannot be achieved any more

easily through monetary policy than they can through wage and price controls,
that is, they cannot be achieved at all.
Both monetarists and gold standard advocates want to stop the present
inflation.

Monetarism claims that a gradual reduction in the rate of money

growth can get us to where we want to be.

Gradualism has not worked in England

nor in the United States so far, and there is no indication that it will.
Gradualism does not ensure credibility.

Restoring convertibility and defining

the dollar as a precise weight of gold is the only way the psychology of inflation can be broken.

Although the money supply is very important, an ab-

solute relationship of money supply to prices does not exist.

Ultimately,

all prices (and the value of the dollar) are set by the market, not by the
monetary authorities.
Monetarism is similar to a discretionary inflationary policy in that the
government remains as the monopolist fully In charge.

In contrast, with

a fully convertible gold standard, the people are in charge and can call the
government's bluff anytime they choose
for gold.

The unit of account,

"with precision."

by turning in their paper certificates

as Jefferson stated, must be defined

A gold standard does this by defining the unit in a weight

of g o l d — a paper standard provides no definition and the unit of account is

arbitrary and is inevitably depreciated by the money managers.

Trust can never

be restored with a paper currency.

A NEW ATTITUDE

The final severance of our currency's link to gold in 1971 ushered in
a new attitude among Americans unknown previously in our history.
were short periods during wartime

Even though

ther<

when an inflationary psychology existed, it

never persisted for an indefinite period and it has never been as pervasive
as we are experiencing now.

Associated with this inflationary psychology is

a general attitude toward government and life in general.
replaced our traditional optimism.

Pessimism has

Scheming, speculation, and sophisticated

tax avoidance have replaced productive efforts, savings, and planning for the
future.
Trading in currencies can now be more rewarding to banks than the
conventional business of brokering loans from savings.
market has turned into a giant gambling game.

The futures and options

The new markets that have developed

since the dollar lost its precise definition reflect the ingenuity of man.
Now we see futures sold in currencies, betting on the monetary inflation of
various governments.

Instead of buying a bond or treasury bill and holding

it, we now can speculate on a daily and massive basis.
Just this winter, futures and options began to be sold on stock-indexes.
One is able to buy futures on large CD's as well.

Outstanding European rate

futures and GNMA options (GNMA futures started in 1975) will be offered
also.

Billions of dollars are now used in industry for the purpose of

"take-overs" of other industries with no real signs of developing new
industries or re-capitalizing old industries.

The dollar amount involved

in the speculation is into the trillions of dollars from these various ven-

tures.

All this is a result of unsound money.

Ten years ago, most of the

futures and options markets did not exist.
With a sound currency there would be no speculation and trading in U.S.
government bonds.

Speculation would be minimal as compared to today.

Their value would be predictable and betting on their day—to—day value would
be meaningless.
Treasury

Yet in 1980, on the Chicago Board of Trade,far more U.S.

Bond futures contracts than cattle contracts were traded.

The

options market is also growing by leaps and bounds and becoming more
sophisticated and more complex every day.

The frenzy with which the

speculation is growing is literally incomprehensible and immeasurable.
tendency will continue so long as we are operating

with an

This

unsound currency

that is being deliberately depreciated on a regular basis.
The speculation has spilled over into the fiscal arena as well.
1980, $2,107,325,000

were collected by state run lotteries. It is illegal

for most citizens to gamble, but it is legal for governments to operate
lotteries to raise revenues.
In the past decade the definition of money has undergone continuous
change, reflecting the new rules of a fiat monetary system.
Federal Reserve had a single monetary aggregate.
Ml, M2, and M3 were introduced.
new aggregates, M4 and M5.

In 1970 the

In 1971 the concepts of

By 1975 it became necessary to define two

The more chaotic money management became after

the dollar-gold linkage broke down, the more the definition of money was
changed.

After the mid-1970 f s "demand" deposits were virtually impossible to

calculate due to interest-bearing transaction accounts.

This prompted the tem-

porary use of a measurement called M1+ in 1978.
By 1980 a major redefinition of all the monetary aggregates was required.
The turbulent international monetary crisis of 1979 convinced many that
current definitions and money management were totally inadequate.
definitions were introduced:

Ml-A, Ml-B, M2, M3, and L.

Five new

Even this did not

35
suffice.

In 1981 the Fed started publishing a "shift-adjusted" measure

of M1B to account for the new nationwide NOW accounts.

By 1982, this

adjsuted measure of M1B wa6 dropped, and MIA and M1B became Ml.
It's probably safe to predict that new definitions will be invented in
hopes that the impossible task of managing a fiat monetary system will be
miraculously achieved by new measurements.

This problem of measuring monetary

aggregates would not exist under a gold standard, for there would be no
purpose in it.
This decade has taught Americans to accept for the first time over a sustained period of time that their standard of living is more likely to go
down than up.

It is also recognized by many Americans that conditions caused

by inflation and the tax code are achieving a transfer of wealth from the
large middle class and the working poor to both the rich and the welfare poor.
Average people can no longer buy houses, cars are smaller for the shrinking
number who are still able to buy one, most people pump their own gas, and household help and other services are on the wane.

These have all led to a sense of

frustration and anger.
More and more Americans have resorted to the underground economy to
compensate for losses they see as unfair.

Law breakers have replaced law

abiders. Fear of the unknown has prompted a whole subculture of survivalists—
convinced by their own analysis that the government in the forseeable future
will not adopt a sound monetary system.

This group no longer depends on

conventional news services for their information and relies on expensive
newsletters for what is considered accurate information regarding what is
happening

to the monetary system.

It is easy to write them off as speculators,

but compared to "speculating" in five percent per year losses with a government bond, it seems that their existence and their success in a reflection

of our inflationary monetary policy. There is a sincere attempt by a growing
number of Americans to preserve assets that have been earned over a period
of time and whose value is threatened by inflation.

For this reason, tens

of thousands have attended hard money conferences in the past ten years in
the hope that they can learn how to protect themselves from the destructiveness of a government caused inflation.

This is a new phenomenon and is

directly related to the breakdown of the Bretton Woods and Smithsonian
Agreements.

Prior to 1974, the conferences were virtually unheard of.

In 1968 and 1971 a vocal minority decried the abandonment of gold
convertibility and predicted the subsequent events of the 1970's.
throughout the period of the dissolution of the gold standard

A remnant

(1913 to 1971)

steadfastly proclaimed that one day a gold standard would be required to stop
inflation and restore order to monetary policy and to the financial markets.
The number of Americans insisting on a sound currency is multiplying rapidly.
Today's events dramatize the urgent need to lay plans for establishing
a modern gold standard.

A growing number of free market economists defend

the wisdom of the gold standard.

Their voices may not have been heard by

the officials, but their impact has been felt.
The need for something better than we have today is conceded by almost
everyone.
shattered.

The past ten years have taken a heavy toll with general confidence
Most agree that this country and the Western nations appear

hopelessly enmeshed in the problems of persistent inflation, high interest
rates, weak economies, and high unemployment.

No one expects these conditions

to improve without a significant change in monetary policy.

It is our

purpose in this report to offer and to lay out the plans for a sound monetary
system.

CHAPTER TWO

A HISTORY OF MONEY AND BANKING IN THE
UNITED STATES BEFORE THE TWENTIETH CENTURY

As an outpost of Great Britain, colonial America of course used
pounds, pence, and shillings as its money.

British

Great Britain was officially on a

silver standard, with the shilling defined as equal to 86 pure Troy grains of
silver, and with silver as so defined legal tender for all debts (i.e. creditors
were compelled to accept silver at that rate.)

However, Britain also coined

gold, and maintained a bimetallic standard by fixing the gold guinea, weighing
129.4 grains of gold, as equal in value to a certain weight of silver.
way, gold became in effect legal tender as well.

In that

Unfortunately, by establishing

bimetallism, Britain became perpetually subject to the evils known as Gresham's
Law, which states that when government compulsorily overvalues one money and under
values another, the undervalued money will leave the country or disappear into
hoards, while the overvalued money will flood into circulation.
popular catchphrase of Gresham's Law:

Hence, the

"bad money drives out good.11

But the

important point to note is that the triumph of "bad" money is the result, not
of perverse free market competition but of government using the compulsory legal
tender power to privilege one money above another.
In 17th and 18th century Britain, the government maintained a mint ratio
between gold and silver that consistently overvalued gold and undervalued silver
in relation to world market prices, with the resultant disappearance and outflow
of full-bodied silver coins, and an influx of gold, and the maintenance In circulation of only eroded and "lightweight" silver coins.

Attempts to rectify the

fixed bimetallic ratios were always too little and too late.-^
In the sparsely settled American colonies, money, as it always does,
arose in the market as a useful and scarce commodity and began to serve as a
general medium of exchange.

Thus, beaver fur and wampum was used as money

in the North for exchanges with the Indians, and fish and corn also served as
money.

Rice was used as money in South Carolina, and the most widespread use

of commodity money was tobacco, which served as money in Virginia.

The pound-

of-tobacco was the currency unit in Virginia, with ware-house receipts in
tobacco circulating as money backed 100% by the tobacco in the warehouse.
While commodity money continued to serve satisfactorily in rural areas,
as the colonial economy grew, Americans imported gold and silver coins to serve
as monetary media in urban centers and in foreign trade.

English coins were

imported, but so too were gold and silver coins from other European countries.
Among the gold coins circulating in America were the French guinea, the Portugese
"joe," the Spanish doubloon, and Brazilian coins, while silver coins included
French crowns and livres.
It is important to realize that gold and silver are international commodities,
and that therefore, when not prohibited by government decree, foreign coins are
perfectly capable of serving as standard moneys.
national government monopolize the coinage,

There is no need to have a

and indeed foreign gold and silver

coins constituted much of the coinage in the United States until Congress
outlawed the use of foreign coins in 1857.
1

Thus, if a free market is allowed to

In the late 17th and early 18th centuries, the British maintained fixed
mint ratios of from 15.1:1 of silver grains in relation to gold grains, to about
15.5:1. Yet, the world market ratios of weight, set by forces of supply and
demand, was about 14.9:1. Thus, silver was consistently undervalued and gold
overvalued.
In the 18th century, the problem got even worse, for increasing
gold production in Brazil and declining silver production in Peru brought the
market ratio down to 14.1:1 while the mint ratios fixed by the British
government continued to be the same.

prevail in a country, foreign coins will circulate naturally.

Silver and gold

coins will tend to be valued in proportion to their respective weights, and the
ratio between silver and gold will be set by the market in accordance with their
relative supply and demand.

Shilling/Doliar Manipulations

By far the leading specie coin circulating in America was the Spanish silver
dollar, defined as consisting of 387 grains of pure silver.

The dollar was

divided into "pieces of eight," or "bits," each consisting of one - eighth of a
dollar.

Spanish dollars came into the North American colonies through the lucra-

tive trade with the West Indies.

The Spanish silver dollar had been the world's

outstanding coin since the early 16th century, and was spread partially by
dint of the vast silver output of the Spanish colonies in Latin America.

important, however, was the fact that the Spanish dollar, from the sixteenth
down to the nineteenth century, was relatively the most stable and least debased

2
coin in the Western world.
Since the Spanish silver dollar consisted of 387 grains, and the English
shilling consisted of 86 grains of silver, this meant the natural, free-market
ratio between the two coins would be 4 shillings 6 pence per dollar.

The name "dollar" came from the "thaler," the name given to the coin of
similar weight, the "Joachimsthaler" or "Schlicken thaler," issued since the
early 16th century by the Count of Schlick in Joachimsthal in Bohemia. The
Joachimsthalers weigh 451 Troy grains of silver. So successful were these coins
that similar thalers were minted in Burgundy, Holland, France; most successful of
these was the Maria Theresa thaler, which began being minted in 1751, and formed
a considerable portion of American currency after that date. The Spanish "pieces
of eight" adopted the name "dollar" after 1690.

Since 20 shillings make h 1, this meant that the natural ratio between
the two currencies was h 1 = $4.44.

Constant complaints, both by contemporaries and by some later historians,
arose about an alleged "scarcity of money" especially of specie in the colonies,
allegedly justifying numerous colonial paper money schemes to remedy that
"shortage."

In reality, there was no such shortage.

It is true that England,

in a mercantilist attempt to hoard specie, kept minting for its own prerogative
and outlawed minting in the colonies; it also prohibited the export of English
coin to America.

But this did not keep specie from America, for, as we have

seen, Americans were able to import Spanish and other foreign coin, including
English from other countries.

Indeed, a8 we shall see, it was precisely paper

money issues that led, by Gresham's Law, to outflows and disappearance of specie
from the colonies.
In their own mercantilism, the colonial governments early tried to hoard
their own specie by debasing their shilling standards in terms of Spanish dollars.
Whereas their natural weights dictated

a ratio of 4 shillings 6 pence to the

dollar, Massachusetts, in 1642, began a general colonial process of competitive
debasement of shillings.

Massachusetts arbitrarily decreed that the Spanish

dollar be valued at 5 shillings; the idea was to attract an inflow of Spanish
silver dollars into that colony, and to subsidize Massachusetts exports by making
their prices cheaper in terms of dollars.

Soon, Connecticut and other colonies

followed suit, each persistently upping the ante of debasement.
to increase the supply of nominal units

The result was

of account by debasing the shilling,

inflating domestic prices and thereby bringing the temporary export stimulus to
a rapid end.

Finally, the English government brought a halt to this futile

and inflationary practice in 1707.
But the colonial governments had already found another, and far more
inflationary, arrow to their bow:

the invention of government fiat paper money.

41
Government Paper Money

Apart from medieval China, which invented both paper and printing centuries
before the West, the world had never seen government paper money until the
colonial government of Massachuetts emitted a fiat paper issue in 1690.^'^
Massachusetts was accustomed to launching plunder expeditions against the
prosperous French colony in Quebec.

Generally, the expeditions were successful,

and the expedition would return to Boston, sell their booty and pay off the
soldiers with the proceeds.

This time, however, the expedition was beaten back

decisively, and the soldiers returned to Boston in ill humor, grumbling for their
pay.

Discontented soldiers are ripe for mutiny, and so the Massachusetts govern-

ment looked around in concern for a way to pay the soldiers.

It tried to borrow

three to four thousand pounds from Boston merchants, but evidently the Massachusetts credit rating was not of the best.

Finally, Massachusetts decided in

December 1690 to print h 7000 in paper notes, and to use them to pay the soldiers.
Suspecting that the public would not accept irredeemable paper, the government
made a twofold pledge when it issued the notes: that it would redeem them in gold
or silver out of tax revenue in a few years, and that absolutely no further paper
notes would be issued.

Characteristically, however, both parts of the pledge went

Government paper redeemable in gold began in the early 9th century, and
after three centuries the government escalated to irredeemable fiat paper, with
the usual consequence of boom-bust cycles, and runaway inflation. See Gordon
Tullock, "Paper Maney — A Cycle in Cathay," Economic History Review, Vol. IX,
No. 3 (1957), pp. 393-396.
5
The only exception was a curious form of paper money issued five years
earlier in Quebec, to become known as Card Money. The governing intendant
of Quebec, Monsieur Mueles, divided some playing cards into quarters, marked them
with various monetary denominations, and then issued them to pay for wages and
materials sold to the government. He ordered the public to accept the cards as
legal tender, and this particular issue was later redeemed in specie sent from
France.

quickly by the board:

the issue limit disappeared in a few months, and all the

bills continued unredeemed for nearly forty years.

As early as February

1691, the Massachusetts government proclaimed that its issue had fallen
"far short" and so it proceeded to emit h 40,000 of new money to repay all
of its outstanding debt, again pledging falsely that this would be the absolutely final note issue.
But Massachusetts found that the increase in the supply of money, coupled
with a fall in the demand for paper because of growing lack of confidence in
future redemption in specie, led to a rapid depreciation of new money in
relation to specie.

Indeed, in a year after the intial issue, the new paper

pound had depreciated on the market by 40Z against specie.
By 1692, the government moved against this market evaluation by use of
force, making the paper money compulsory legal tender for all debts at par
with specie, and by granting a premium of five percent on all payment of debts
to the government made in paper notes.
effect of Gresham's Law:

This legal tender law had the unwanted

the disappearance of specie circulation in the colony.

In addition, the expanding paper issues drove up prices and hampered exports
from the colony.

In this way, the specie "shortage11 became the creature rather

than the cause of the fiat paper issues.

Thus, in 1690, before the orgy of

paper issues began, h 200,000 of silver money were available in New England; by
1711 however, with Connecticut and Rhode Island having followed suit in paper
money issue, h 240,000 of paper money had been issued in New England but the silver
had almost disappeared from circulation.
Ironically, then, Massachusetts and her sister colonies' issue of paper
created rather than solved any "scarcity of money."

The new paper drove

out the old specie, and the consequent driving up of prices and depreciation of
paper scarcely relieved any alleged

money scarcity among the public.

But

since the paper was issued to finance government expenditures and pay public
debts, the government though not the public benefited from the fiat issue.

43
After Massachusetts had emitted another huge issue of h 500,000 in 1711
to pay for another failed expedition against Quebec, not only was the remainder
of the silver driven from circulation, but despite the legal tender law,
the paper pound depreciated 30% against silver,

Massachusetts pounds,

officially seven shillings to the silver ounce, had now fallen on the market to
nine shillings per ounce.

Depreciation proceeded in this and other colonies

despite fierce governmental attempts to outlaw it, backed by fines, imprisonment
and total confiscation of property for the high crime of not accepting the paper
at par.
Faced with a further "shortage of money" due to the money issues, Massachusetts decided to press on; in 1716, it formed a government "land bank" and
issued h 100,000 in notes to be loaned on real estate in the various counties
of the province.
Prices rose so dramatically that the tide of opiniqn in Massachusetts
began to turn against paper, as writers pointed out that the result of the issues
was a doubling of prices in the past twenty years, depreciation of paper, and
the disappearance of Spanish silver through the operation of Gresham's Law.
From then on, Massachusetts, pressured by the Crown, tried intermittently to
reduce the bills in circulation and return to a specie currency, but was
hampered by its assumed obligations to honor the paper notes at par of its
sister New England colonies.
In 1744, another losing expedition against the French led Massachusetts
to issue an enormous amount of paper money

over the next several years.

From

1744 to 1748, paper money in circulation expanded from h 300,000 to b 2.5
million, and the depreciation of Massachusetts was such that silver had risen
on the market to 60 shillings an ounce, ten times the price at the beginning
of an era of paper money in 1690.

44
By 1740, every

colony but Virginia had followed suit in fiat paper

money issues, and Virginia succumbed in the late 1750 f s in trying to finance
part of the French and Indian War against the French.

Similar consequences,

dramatic inflation, shortage of specie, massive depreciation despite compulsory
par laws, ensued in each colony.

Thus, along with Massachusetts' depreciation

of 11:1 of its notes against specie compared to the original par, Connecticut's
notes had sunk to 9:1 and the Carolina's at 10:1 in 1740, and the paper of
virulently inflationist Rhode Island had sunk to 23:1 against specie.

Even the

least inflated paper, that of Pennsylvania, had suffered an appreciation of
specie to eighty percent over par.
A detailed study of the effects of paper money in New Jersey shows how it
created a boom-bust economy over the colonial period.

When new paper money was

injected into the economy, an inflationary boom would result, to be followed
by a deflationary depression when the paper money supply contracted.^
At the end of King George's War with France in 1748, Parliament began to
pressure the colonies to retire the mass of paper money and return to a specie
currency.

In 1751, Great Britain prohibited all further issues of legal tender

paper in New England, and Ordered a move toward redemption of existing issues
in specie.

Finally, in 1764, Parliament extended the prohibition of new issues

to the remainder of the colonies, and required the gradual retirement of outstanding notes.
Following the lead of Parliament, the New England colonies apart from
Rhode Island decided to resume specie payment and retire their paper notes
rapidly at the current depreciated market rate.

The panicky opponents of specie

resumption and monetary contraction made the usual predictions in such a situation:

® Donald L. Kemmerer, "Paper Money in New Jersey, 1668-1775," New Jersey
Historical Society, Proceedings, Vol. 74 (April, 1956), pp. 107-144.

that the result would be a virtual absence of money in New England and the
consequent ruination of all trade.

Instead, however, after a brief adjustment, the

resumption and retirement led to a far more prosperous trade and production
the harder money and lower prices attracting an inflow of specie.

—

In fact,

with Massachusetts on specie and Rhode Island still on depreciated paper, the
result was that Newport, which had been a flourishing center for West Indian
imports for western Massachusetts, lost its trade to Boston and languished in
the doldrums. 7 , 8
In fact, as one student of colonial Massachusetts has pointed out, the
return to specie occasioned remarkably little dislocation, recession, or price
deflation.

Indeed, wheat prices fell by less in Boston than in Philadelphia,

which saw no such return to specie in the early 1750 f s.

Foreign exchange rates,

after the resumption of specie, were highly stable, and "The restored specie

Before Massachusetts went back to specie, it was coinmited to accept
the notes of the other New England colonies at par. This provided an incentive
for Rhode Island to inflate its currency wildly, for this small colony, with
considerable purchases to make in Massachusetts, could make these purchases in
inflated money at par. Thereby Rhode Island could export its inflation to
the larger colony, but make its purchases with the new money before Massachusetts
prices oould rise in response. In short, Rhode Island could expropriate wealth
from Massachusetts and impose the main cost of its inflation on the latter colony.

8
If Rhode Island was the most inflationary of the colonies, Maryland s
monetary expansion was the most bizarre. In 1733, Maryland's public land bank
issued h 70,000 of paper notes, of which h 30,000 was given away in a fixed
amount to each inhabitant of the province. This was done to universalize the
circulation of the new notes, and is probably the closet approximation in history
of Milton Friedman's "helicopter" model, in which a magical helicopter lavishes
new paper money in fixed amounts or proportions to each inhabitant. The result
of the measure, of course, was rapid depreciation of new notes. However, the
inflationary impact of the notes was greatly lessened by tobacco still being
the major money of the new colony. Tobacco was legal tender in Maryland and
the paper was not receivable for all taxes.

system operated after 1750 with remarkable stability during the Seven Years
War and during the dislocation of international payments in the last years

q'
before the Revolution.11
Not being outlawed by government decree, specie remained in circulation
throughout the colonial period, even during the operation of paper money.
Despite the inflation, booms and busts, and shortages of specie caused by
paper issues, the specie system worked well overall:

"Here was a silver

standard...in the absence of institutions of the central government intervening
in the silver market, and in the absence of either a public or private central
bank adjusting domestic credit or managing a reserve of specie or foreign
exchange with which to stabilize exchange rates.

The market...kept exchange

rates remarkably close to the legislated par...What is most remarkable in this
context is the continuity of the specie system through the seventeenth and
eighteenth centuries."^®

Private Bank Notes
In contrast to government paper, private bank notes and deposits,
redeemable in specie, had begun in Western Europe in Venice in the 14th century.
Firms granting credit to consumers and businesses had existed in the ancient
world and in medieval Europe, but these were "money lenders" who loaned out their
own savings. "Banking" in the sense of lending out the savings of others only
began in England with the "scriveners" of the early seventeenth century.

The

scriveners were clerks who wrote contracts and bonds and were therefore in a
position to learn of mercantile transactions and engage in money lending and

^ Roger W. Weiss, "The Colonial Monetary Standard of Massachusetts,"
Economic History Review, Vol. 27 (November, 1974), p. 589.

Ibid., p. 591.

47
borrowing.^
There were, however, no banks of deposit in England until the Civil
War in the mid-17th century.

Merchants had been in the habit of storing their

surplus gold in the King's Mint for safekeeping.

The habit proved to be

unfortunate, for when Charles I needed money in 1638, shortly before the outbreak
of the Civil War, he confiscated the huge sum of h 200,000 of gold, calling it
a "loan" from the owners.

Although the merchants finally got their gold back,

they were understandably shaken by the experience, and foresook the Mint,
depositing their gold instead in the coffers of private goldsmiths, who, like
the Mint, were accustomed to storing the valuable metal.

The warehouse

receipts of the goldsmiths soon came to be used as a surrogate for the gold
By the end of the Civil War, in the 1660 f s, the goldsmiths fell prey

itself.

to the temptation of print pseudo-warehouse receipts not covered by gold and
lend them out; in- this way, fractional-reserve banking came to England.
Very few private banks existed in colonial America, and they were shortlived.

Most prominent was the Massachusetts Land Bank of 1740, issuing notes

and lending them out on real estate.

The Land Bank was launched as an inflationary

alternative to government paper, which the royal governor was attempting to
restrict.

The land bank issued frankly irredeemable notes, and fear of its unsound

During the sixteenth century, before the rise of the scriveners, most
English money-lending was not even conducted by specialized firms, but by
wealthy merchants in the clothing and woollen industries, as outlets for their
surplus capital. See J. Milnes Holden, The History of Negotiable Instruments
in English Law (London: The Athlone Press, 1955), pp. 205-206.
12
Once again, ancient China pioneered in deposit banking, as well as in
fractional-reserve banking. Deposit banking per se began in the 8th century A.D.,
when shops would accept valuables, in return for warehouse receipts, and receive
a fee for keeping them safe. After a while, the deposit receipts of these shops
began to circulate as money. Finally, after two centuries, the shops began to
issue and lend out more receipts than they had on deposit; they had caught on to
fractional reserve banking.
(Tullock, "Paper Money," p. 396.)

48
issue generated a competing private silver Bank, which emitted notes redeemable
in silver.

The Land Bank promptly issued over h 49,000 in irredeemable notes,

which depreciated very rapidly.

In six months 1

time the public was almost

universally refusing to accept the bank's notes, and Land Bank sympathizers
vainly accepting the notes.

The final blow came in 1741, when Parliament, acting

at the request of several Massachusetts merchants and the royal governor,
outlawed both the land and the silver banks.
One intriguing aspect of both the Massachusetts Land Bank and other inflationary colonial schemes is that they were advocated and lobbied for by some of the
wealthiest merchants and land speculators in the respective colonies.

Debtors

benefit from inflation and creditors lose; realizing this fact, older historians
assumed that debtors were largely poor agrarians and creditors were wealthy
merchants and that therefore the former were the main sponsors of inflationary
nostrums.

But, of course, there are no rigid "classes" of debtors and creditors;

indeed, wealthy merchants and land speculators are often the heaviest debtors.
Later historians have demonstrated that members of the latter group were the
major sponsors of inflationary paper money in the colonies.

^ O n the Massachusetts Land Bank, see the illuminating study by George
Athan Billias, ,fThe Massachusetts Land Bankers of 1740," University of Maine
Bulletin, Vol. LXI, No. 17 (April, 1959). On merchant enthusiasm for inflationary
banking in Massachusetts, see Herman J. Belz, "Paper Money in Colonial Massachusetts," Essex Institute, Historical Collections, Vol. 101 (April,1965), pp. 146163; and Belz,"Currency Reform in Colonial Massachusetts, 1749-1750." Essex
Institute, Historical Collections, Vol. 103 (January, 1967), pp. 66-84. On
the forces favoring colonial inflation in general, see Bray Hammond, Banks
and Politics in America
(Princeton University Press, 1957), Ch. 1; Joseph
Dorfman, The Economic Mind in American Civilization, 1606-1865 (New York:
Viking Press, 1946), I, 142.
For an excellent bibliographical essay on colonial money and banking, see
Jeffrey Rogers Hummel, "The Monetary History of America to 1789: A Historiographical Essay," The Journal of Libertarian Studies, Vol. 2, No. 4 (Winter,
1978), pp. 373-389. For a summary of colonial monetary experience, see Murray N.
Rothbard, Conceived in Liberty, Vol. II, "Salutary Neglect:" The American
Colonies in the First Half of the 18th Century (New Rochelle, N.Y.: Arlington
House, 1975), pp. 123-140. A particularly illuminating analysis is in the classic
work by Charles Jesse Bullock, Essays on the Monetary History of the United
States (1900, New York: Greenwood Press, 1969), pp. 1-59. Up-to-date data on
the period is In Roger W. Weiss, "The Issue of Paper Money in the American
Colonies, 1720-1774," Journal of Economic History, Vol. 30 (Dec. 1970), pp.
770-784.

49
Revolutionary War Finance

To finance the Revolutionary War, which broke out in 1775, the Continental Congress early hit on the device of issuing fiat paper money.

The

leader in the drive for paper money was Gouverneur Morris, the highly
conservative young scion of the New York landed aristocracy.

There was no

pledge to redeem the paper, even in the future, but it was supposed to be
retired in seven years by taxes levied pro rata by the separate states.

Thus,

a heavy future tax burden was supposed to be added to the inflation brought
about the the new paper money.

The retirement pledge, however, was soon

forgotten, as Congress, enchanted by this new, seemingly costless form of
revenue, escalated its emissions of fiat paper.

As one historian has phrased

it, "such was the beginning of the 'federal trough', one of America's most
imperishable institutions."^"*
The total money supply of the United States at the beginning of the
Revolution

has been estimated at $12 million.

Congress launched its first paper

issue of $2 million in late June 1775, and before the notes were printed it had
already concluded that another $1 million was needed.

Before the end of the year,

a full $6 million in paper issues were issued or authorized, a dramatic increase
of 50% in the money supply in one year.
The issue of this fiat "continental" paper rapidly escalated over the next
few years.

Congress issued $6 million in 1775, $19 million in 1776, $13 million

in 1777, $64 million in 1778, and $125 million in 1779.

This was a total issue

of over $225 million in five years superimposed upon a pre-existing money supply
of $12 million.

The result was, as could be expected, a rapid price inflation

in terms of the paper notes, and a corollary accelerating depreciation of the paper

Edmund Cody Burnett, The Continental Congress (New York: W.W. Norton,
1964), p. 83.

50
in terms of specie.

Thus, by the end of 1776, the Continentals were

worth $1 to $1.25 in specie; by the fall of the following year, its value had
fallen to 3 to 1; by December, 1778 the value was 6.8 to 1; and by December
1779 to the negligible 42 to 1.

By the spring of 1781, the Continentals were

virtually worthless, exchanging on the market at 168 paper dollars to one dollar
in specie.

This collapse of the Continental currency gave rise to the phrase,

"not worth a Continental."
To top this calamity, the several states issued their own paper money, and
each depreciated at varying rates.

Virginia and the Carolinas led the inflation-

ary move, and by the end of the war, state issues added a total of 210 million
depreciated dollars to the nation's currency.
In an attempt to stem the inflation and depreciation, various states
levied maximum price controls and compulsory par laws.

The result was only to

create shortages and impose hardships on large sections of the public.

Thus,

soldiers were paid in Continentals, but farmers understandably refused to accept
payment in paper money despite legal coercion.

The Continental Army then moved

to "impress" food and other supplies, seizing the supplies and forcing the
farmers and shopkeepers to accept depreciated paper in return.

By 1779, with

Continental paper virtually worthless, the Continental Army stepped up its
impressments, "paying" for them in newly issued paper tickets or "certificates"
issued by the army quartermaster and commissary departments.
suit with their own massive certificate issues.

The states followed

It understandably took little

time for these certificates, federal and state, to depreciate in value to
nothing; by the end of the war, federal certificate issues alone totalled
$200 million.

The one redeeming feature of this monetary calamity is that the federal
and state governments at least allowed these paper issues to sink into worthiessness
without insisting that taxpayers shoulder another grave burden by being forced
to redeem these issues in specie at par, or even to redeem them at all."^
Continentals were not redeemed at all, and state paper was only redeemed at
depreciating rates, some at the greatly depreciated market v a l u e . ^

By the end

of the war, all the wartime state paper had been withdrawn from circulation.
Unfortunately, the same policy was not followed with another important
device that Congress turned to after its Continental paper had become almost
worthless in 1779:

loan certificates.

Technically, loan certificates were

public debt, but they were scarcely genuine loans.

They were simply notes issued

by the government to pay for supplies and accepted by the merchants because the
government would not pay in anything else.
a form of currency, and rapidly depreciated.
had depreciated to 24 to 1 in specie.
loan certificates had been issued.

Hence, the loan certificates became
As early as the end of 1779, they

By the end of the war, $600 million of

Some of the later loan certificate issues

were liquidated at a depreciated rate, but the bulk remained after the war to
become the substantial core of the permanent, peacetime federal debt.

As one historian explained, "Currency and certificates were the 'common
debt' of the Revolution, most of which at war's end had been sunk at its
depreciated value. Public opinion...tended to grade claims against the
government according to their real validity. Paper money had the least status...."
E. James Ferguson, The Power of the Purse: A History of American Public
Finance, 1776-1790 (Chapel Hill, N.C.: University of North Carolina Press,
1961), p. 68.

In Virginia and Georgia, the state paper was redeemed at the highly
depreciated market rate of 1,000 to 1 in specie.

52
The mass of federal and state debt could have depreciated and passed out
of existence by the end of the war, but the process was stopped and reversed
by Robert Morris, wealthy Philadelphia merchant and virtual economic and
financial czar of the Continental Congress in the last years of the war.

Morris,

leader of the nationalist forces in American politics, moved to make the
depreciated federal debt ultimately redeemable in par, and also agitated for
federal assumption of the various state debts.

The reason was twofold; (a) to

confer a vast subsidy on speculators who had purchased the public debt at highly
18
depreciated values, by paying interest and principal at par in specie;

and

(b) to build up the agitation for taxing power in the Congress, which the
Articles of Confederation refused to allow to the federal government.

The

decentralist policy of the states raising taxes or issuing new paper money to
pay off the pro rata federal debt as well as their own, was thwarted by the
adoption of the Constitution, which brought about the victory of the nationalist
program, led by Morris 1 s youthful disciple and former aide, Alexander Hamilton.

The Bank of North America
Robert Morris's nationalist vision was not confined to a strong central
government, the power of the federal government to tax, and a massive public
debt fastened permanently upon the taxpayers.

Shortly after he assumed total

economic power in Congress in the spring of 1781, Morris introduced a bill to
create the first commercial bank, as well as the first central bank, in the
history of the new Republic.

This bank, headed by Morris himself, the Bank of

North America, was not only the first fractional-reserve commercial bank in
the U.S.; it was to be a privately-owned central bank, modelled after the Bank

As Morris candidly put it, this windfall to the public debt speculators at the expense of the taxpayers would cause wealth to flow "into
those hands which coujd render it most productive."
(Ferguson, Power of the
Purse, p. 124.)

of England.

The money system was to be grounded upon specie, but with a

controlled monetary inflation pyramiding an expansion of money and credit upon
a reserve of specie.
The Bank of North America, which quickly received a federal charter and
opened its doors at the beginning of 1782, received the privilege from the
government of its notes being receivable in all duties and taxes to all
governments, at par with specie.

In addition, no other banks were to be

permitted to operate In the country.

In return for its monopoly license to

issue paper money, the bank would graciously lend most of its newly created
money to the federal government to purchase public debt and be reimbursed by
the hapless taxpayer.
Congressional funds.

The Bank of North America was made the depository for all
The first central bank in America rapidly loaned

19
$1.2 million to the Congress, headed also by Robert Morris.
Despite Robert Morris's power and influence, and the monopoly privileges
conferred upon his bank, the market saw that its notes were being inflated
compared with specie.

Despite the nominal redeemability of the Bank of North

America's notes in specie, the market's lack of confidence in the inflated notes
led to their depreciation outside its home base in Philadelphia.

The Bank even

tried to shore up the value of its notes by hiring people to urge redeemers of
its notes not to ruin everything by insisting upon s p e c i e — a move scarcely
calculated to improve ultimate confidence in the bank.

19
When Morris failed to raise the legally required specie capital to
launch the Bank of North America, Morris, in an act tantamount to embezzlement,
simply appropriated specie loaned to the U.S. by France and invested it for
the government in his own Bank. In this way, the bulk of specie capital for
his Bank was appropriated by Morris out of government funds. A multiple of
these funds was then borrowed back from Morris's bank by Morris as government
financier for the pecuniary benefit of Morris as banker; and finally, Morris
channeled most of the money Into war contracts for his friends and business
associates. Murray N. Rothbard, Conceived in Liberty, Vol. IV, The Revolutionary
War, 1775-1784 (New Rochelle, N.Y.: Arlington House, 1979), p. 392.

54
After a year of operation, however, Morris, his political power slipping
after the end of the war, moved quickly to end his Bank's role as a central
bank and to shift it to the status of a private commercial bank chartered by
the state of Pennsylvania.

By the end of 1783, all of the federal government's

stock in the Bank of North America, which had the previous year amounted to
5/8 of its capital, had been sold by Morris into private hands, and all the U.S.
government debt to the bank had been repaid.

The first experiment with a central

on
bank in the United States had ended.
At the end of the Revolutionary War, the contraction of the swollen mass
of paper money, combined with the resumption of imports from Great Britain,
combined to out prices fry more than half in a few brief years.

Vain attempts

by seven state governments, in the mid-1780's, to cure the "shortage of money"
and reinflate prices were a complete failure.

Part of the reason for the state

paper issues was a frantic attempt to pay the wartime public debt, state and
pro rata federal, without resorting to crippling burdens of taxation.

The

increased paper issues merely added to the "shortage" by stimulating the export
of specie and the import of commodities from abroad.
Law was at work.

State paper issues —

Once again, Gresham's

despite compulsory par laws —

depreciated rapidly, and aggravated the shortage of specie.

merely

An historian

discusses what happened to the paper issues of North Carolina:

See Rothbard, The Revolutionary War, pp. 409-410. On the Bank of
North America and on Revolutionary War finance generally, see Curtis P.
Nettels, The Emergence of a National Economy, 1775-1815 (New York; Holt,
Rinehart, and Winston, 1962), pp. 23-34.

55
In 1787-1788 the specie value of the paper had shrunk by more than
50 percent. Coin vanished, and since the paper had practically no
value outside the state, merchants could not use it to pay debts they
owed abroad; hence they suffered severe losses when they had to accept
it at inflated values in the settlement of local debts.
North
Carolina's performance warned merchants anew of the menace of depreciating paper money which they were forced to receive at par from their
debtors but which they could not pass on to their creditors. ^

Neither was the situation helped by the expansion of banking following
the launching of the Bank of North America in 1782.

The Bank of New York and

the Massachusetts Bank (Boston) followed two years later, with each institution
enjoying a monopoly of banking in its region.

Their expansion of bank notes

and deposits helped to drive out specie, and in the following year the expansion
was succeeeded by a contraction of credit, which aggravated the problems of
23

recession.

The United States:

Bimetallic Coinage

Since the Spanish silver dollar was the major coin circulating in North
America during the colonial and Confederation periods, it was generally agreed
that the "dollar" would be the basic currency unit of the new United States
of America. 24

Article I, sction 8 of the new Constitution gave to Congress

Nettels, National Economy, p. 82.

See Hammond, Banks and Politics, pp. 67, 87-88.
23

Nettels, National Economy, pp. 61-62.

As Jefferson put it at the
and the most familiar of all to the
from South to North, has identified
itself a unit already introduced."
of Bimetallism in the United States
1901), p. 11n.

Also see ibid, pp. 77-80, 85.

time: "The unit or dollar is a known coin,
mind of the public. It is already adopted
our currency, and therefore happily offers
Cited in J. Laurence Laughlin, The History
(4th Ed., New York: D. Appleton and Co.,

56
lf

the power

to coin money, regulate the value thereof, and of foreign coin";

the power was exclusive because the state governments were prohibited, in
Article I, section 10, from coining money, emitting paper money, or making
anything but gold and silver coin legal tender in payment of debts.

(Evidently

the Founding Fathers were mindful of the bleak record of colonial and
revolutionary paper issues and provincial juggling of the weights and denominations
of coin.)

In accordance with this power, Congress passed the Coinage Act of

1792 on the recommendation of Secretary of Treasury Alexander Hamilton's
25
Report on the Establishment of a Mint of the year before.
The Coinage Act
States.

established a bimetallic dollar standard for the United

The dollar was defined as both a weight of 371.25 grains of pure

silver and/or

a weight of 24.75 grains of pure gold —

grains of silver to 1 grain of gold.

a fixed ratio of 15

Anyone could bring gold and silver

bullion to the Mint to be coined, and silver and gold coins were both to be
legal tender at this fixed ratio of 15:1.

The basic silver coin was to be the

silver dollar, and the basic gold coin the ten-dollar eagle, containing 247.5
21
grains of pure gold.
The 15:1 fixed bimetallic ratio almost precisely corresponded to the market
gold/silver ration of the early 1790's,

but of course the tragedy of any

25
The text of the Coinage Act of 1792 may be found in Laughlin, History
of Bimetallism, p£. 300-301. Also see ibid, pp. 21-23; Hepburn, History of
Currency, pp. 43-45.

26
The current Spanish silver dollars in use were lighter than the earlier
dollars weighing 387 grains. See Laughlin, History of Bimetallism, pp. 16-18.
27
Golden half-eagles (worth $5) and quarter-eagles (worth $2.50) were also
to b e coined, of corresponding proportional weights, and, for silver coins, halfdollars, quarter-dollars, dimes, and half-dimes of corresponding weights.

Silver had declined in market value from the 14.1:1 ratio of 1760,
largely due to the declining production of gold from Russian mines in this period
and therefore the rising relative value of gold.

bimetallic standard is that the fixed mint ratio must always come a cropper
against inevitably changing market ratios, and that Gresham's Law will then come
inexorably into effect.

Thus, Hamilton's express desire to keep both metals

in circulation in order to increase the supply of money was doomed to failure.

Unfortunately for the bimetallic goal, the 1780 f s saw the beginning of a
steady decline in the ratio of the market values of silver to gold, largely
due to the massive increases over the next three decades of silver production
from the mines of Mexico.

The result was that the market ratio fell to 15.5:1

by the 1790's, and after 1805 fell to approximately 15.75:1.

The latter figure

was enough of a gap between the market and mint ratios to set Gresham's Law
into operation so that by 1810 gold coins began to disappear from the United
States and silver coins to flood in.

For the fixed government ratio now

significantly overvalued silver and undervalued gold, and so it paid people to
bring in silver to exchange for gold, melt the gold coins into bullion and
ship it abroad.

From 1810 until 1834, only silver coin, domestic and foreign,

circulated in the United States. 3 0
Originally, Congress in 1793 provided that all foreign coins circulating
in the United States be legal tender.

Indeed, foreign coins have been estimated

to form 80% of American domestic specie circulation in 1800.

Most of the foreign

See Laughlin, History of Bimetallism, p. 14.

30
For a lucid explanation of the changing silver/gold ratios and how
Gresham's Law operated in this period, see Laughlin, History of Bimetallism,
pp. 10-51. Also see Laughlin, A New Exposition of Money, Credit and Prices
(Chicago: University of Chicago Press, 1931), I, 93-111.

coins were Spanish silver, and while the legal tender privilege was
progressively cancelled for various foreign coins by 1827, Spanish silver
coins continued as legal tender and to predominate in circulation,
Spanish dollars however, soon began to be heavier in weight by 1-5% over their
American equivalents, even though they circulated at face value here, and so
the American mint ratio overvalued American more than Spanish dollars.

As a

result, the Spanish silver dollars were re-exported, leaving American silver
dollars in circulation.

On the other hand, fractional Spanish silver coins

half-dollars, quarter-dollars, dimes, and half dimes —

—

were considerably over-

valued in the U.S., since they circulated at face value and yet were far
lighter weight. Gresham 1 s Law again came into play, and the result was that
American silver fractional coins were exported and disappeared, leaving Spanish
silver fractional coins as the major currency. To make matters still more complicated, American silver dollars, though lighter weight than the Spanish,
circulated equally by name in the West Indies.
dollars were exported to the Caribbean.

As a result, American silver

Thus, by the complex workings of

Gresham 1 s Law, the United States was left, especially after 1820, with no
gold coins and only Spanish fractional silver coin in circulation.

These "Spanish" coins were almost exclusively minted in the
Spanish colonies of Latin America. After the Latin American nations achieved
independence in the 1820 f s, the coins circulated freely in the United
States without being legal tender.

On the complex workings of fractional as against dollar coins
in this period, see the excellent article by David A. Martin, "Bimetallism
in the United States before 1850," Journal of Political Economy, Vol. 76
(May-June 1968), pp.'428-434.

59
The First Bank of the United States
1791-1811

A linchpin of the Hamiltonian financial program was a central bank, the
First Bank of the United States, replacing the abortive Bank of North
America experiment.

Hamilton's Report on a National Bank of December 1790

urged such a bank, to be owned privately with the government owning one-fifth
of the shares.

Hamilton argued that the alleged "scarcity" of specie currency

needed to be overcome by infusions of paper, and the new Bank was to issue
such paper, to be invested in the assumed federal debt and in subsidy to
manufacturers.

The Bank notes were to be legally redeemable in specie on

demand, and its notes were to be kept at par with specie by the federal government's accepting its notes in taxes —

giving it a quasi-legal tender status.

Also, the federal government would confer upon the Bank the prestige of being
depository Tor its public funds.
In accordance with Hamilton's wishes, Congress quickly established the
First Bank of the United States in February 1791.

The charter of the Bank was

for twenty years, and it was assured a monopoly of the privilege of having a
national charter during that period.

In a significant gesture of continuity

with the Bank of North America, the latter f s long-time president and former
partner of Robert Morris, Thomas Willing of Philadelphia, was made president of
the new Bank of the United States.
The Bank of the United States promptly fulfilled its inflationary potential
by issuing millions of dollars in paper money and demand deposits, pyramiding
on top of $2 million in specie.

The Bank of the United States invested

heavily in loans to the United States government.

In addition to $2 million

invested in the assumption of pre-existing long-term debt assumed by the new
federal government, the Bank of the United States engaged in massive temporary

lending to the government, which reached $6.2 million by 17 9 6 . T h e

result

of the outpouring of credit and paper money by the new Bank of the United
States was an inflationary rise in prices.

Thus, wholesale prices rose

from an index of 85 in 1791 to a peak of 146 in 1796, an increase of 72%. 3 4
In addition, speculation boomed in government securities and real estate values
were driven upward. ^

Pyramiding on top of the Bank of the United States

expansion, and aggravating the paper money expansion and the inflation, was a
flood of newly created commercial banks.

Whereas there were only three commer-

cial banks before the founding of the United States, and only four by the
establishment of the Bank of the United States, eight new banks were founded
shortly thereafter, in 1791 and 1792, and ten more by 1796.

Thus, the Bank

Schultz and Caine are severely critical of these operations:
"In
indebting itself heavily to the Bank of the United States, the Federal
Government was obviously misusing its privileges and seriously endangering the
Bank's stability." They also charged that "the Federalists had saddled the
government with a military and interest budget that threatened to topple
the structure of federal finances. Despite the addition of tax after tax
to the revenue system, the Federal Government's receipts through the decade
of the 90's were barely able to cling to the skirts of its expenditures."
William J. Schultz and M.R. Caine, "Federalist Finance," in G.R. Taylor, ed.
Hamilton and the National Debt (Boston: D.C. Heath and Co., 1950), pp. 6-7.

Similar movements occurred in wholesale prices in Philadelphia, Charleston, and the Ohio River Valley. U.S. Department of Commerce, Historical
Statistics of the United States, Colonial Times to 1957 (Washington, 19602.,
pp. 116, 119-121.

Nettels, National Economy, pp. 121-122.

of the United States and its monetary expansion spurred the creation of
eighteen new banks in five years.
The establishment of the Bank of the United States precipitated a grave
constitutional argument, the Jeffersonians arguing that the Constitution gave
the federal government no power to establish a bank.

Hamilton, in turn,

paved the way for virtually unlimited expansion of federal power by maintaining
that the Constitution "implied" a grant of power for carrying out vague national
goals.

The Hamiltonian interpretation won out officially in the decision

of Supreme Court Justice John Marshall in McCulloch vs. Maryland

(1819).

Despite the Jeffersonian hostility to commercial and central banks, the
Democratic-Republicans, under the control of quasi-Federalist moderates rather
than militant Old Republicans, made no move to repeal the charter of the Bank
of the United States before its expiration in 1811 and happily multiplied the
number of state banks and bank credit in the next two decades.^

Thus, in 1800

36
J. Van Fenstermaker, "The Statistics of American Commercial Banking,
1782-1818," Journal of Economic History (Sept. 1965), p. 401.; Van Fenstermaker,
The Development of American Commercial Banking 1782-1837 (Kent, 0: Kent State
University, 1965), pp. 111-183; William M. Gouge, A Short History of Paper
Money and Banking in the United States (1833, New York: Augustus M. Kelley,
1968), p. 42.

Marshall, a disciple of Hamilton, repeated some of Hamilton's arguments
virtually word for word in the decision. See Gerald T. Dunne, Monetary
Decisions of the Supreme Court (New Brunswick, N.J.: Rutgers University Press,
1960), p. 30.

On the quasi-Federalists as opposed to the Old Republicans, on banking
and on other issues, see Richard E. Ellis, The Jeffersonian Crisis: Courts
and Politics in the Young Republic (New York: Oxford University Press, 19 71),
P. 277 and passim.

62
there were 28 state banks; by 1811, the number had escalated to 117, a fourfold increase.

In 1804, there were 64 state banks, of which we have data on

13, or 20% of the banks.

These reporting banks had $0.98 million in specie, as

against notes and demand deposits outstanding of $2.82 million, a reserve
ratio of .35 (or, a notes + deposits pyramiding on top of specie of 2.88:1).
By 1811, 26% of the 117 banks reported a total of $2.57 million; but the
two-and-a-half fold increase in specie was more than matched by an emission of
$10.95 million of notes and deposits, a nearly four-fold increase.

This

constituted a pyramiding of 4.26:1 on top of specie, or a reserve ratio of
these banks of .23.

As for the Bank of the United States, which acted in conjunction with
the federal government and with the state banks, in January 1811 it had specie
assets of $5.01 million, and notes and deposits outstanding of $12.87 million,
a pyramid ratio of 2.57:1, or a reserve ratio of .39.

39
Van Fenstermaker notes that there has been a tendency of historians
to believe that virtually all bank emissions were in the from of notes,
but that actually a large portion was in the form of demand deposits.
Thus, in 1804, bank liabilities were $1.70 million in notes and $1.12 million
in deposits; in 1811 they were $5.68 million and $5.27 respectively.
He
points out that deposits exceeded notes in the large cities such as Boston and
Philadelphia, some times by two or three fold, whereas bank notes were used far
more widely in rural areas for hand-to-hand transactions. Van Fenstermaker,
"Statistics,11 pp. 406-411.

w
Of Bank of the United States liabilities, bank notes totalled $5.04
million and demand deposits $7.83 million. John Jay Knox, A History of Banking
in the United States (New York: Bradford Rhodes & Co., 1900), p.39. There
are no other reports for the Bank of the United States extant except for 1809.
The others were destroyed by fire. John Thorn Holdsworth, The First Bank of the
United States (Washington, D.C.: National Monetary Commission, 1910, pp.
lllff., 138-144.

63
Finally, when the time for rechartering the Bank of the United States
came in 1811 the recharter bill was defeated by one vote each in the House
and Senate.

Recharter was fought for by the Madison Administration aided by

nearly all the Federalists in Congress, but was narrowly defeated by the
bulk of the Democratic-Republicans, including the hard-money Old Republican
forces.

In view of the widely held misconception among historians that Central

Banks serve, and are looked upon, as restraints upon state or private bank
inflation, it is instructive to note that the major forces in favor of recharter were merchants, Chambers of Commerce, and most of the state banks.
Merchants found that the Bank had expended credit at cheap rates, and had
eased the eternal complaint about a "scarcity of money."

Even more suggestive

is the support of the state banks, which hailed the Bank as "advantageous" and
worried about the contraction of credit if the Bank were forced to liquidate.
The Bank of New York, which had been founded by Alexander Hamilton, in fact
lauded the Bank of the United States because it had been able "in case of any
sudden pressure upon the merchants to step forward to their aid in a degree which
the state institutions were unable to do.11 41

The War of 1812 and Its Aftermath

War has generally had grave and fateful consequences for the American
monetary and financial system.

We have seen that the Revolutionary War

occasioned a mass of depreciated fiat paper, worthless Continentals, a huge
public debt, and the beginnings of central banking in the Bank of North America.
The Hamiltonian financial system, and even the Constitution itself, was in large
41
Holdsworth, First Bank, p. 83. Also see ibid., pp. 83-90. Holdsworth, the premier historian of the First Bank of the United States, saw the
over-whelming support by the state banks, but still inconsistently clung to the
myth that the Bank of the United States functioned as a restraint on their
expansion: "The state banks, though their note issues and discounts had been
kept in check by the superior resources and power of the Bank of the United
States, favored the extension of the charter, and memorialized Congress to that
effect."
(italics added.) Ibid., p. 90.

64
shaped by the Federalist desire to fund the federal and state public debt
via federal taxation, and a major reason for the establishment of the First
Bank of the United States was to contribute to the funding of the newly assumed
federal debt.

The Constitutional prohibition against state paper money, and the

implicit rebuff to all fiat paper were certainly influenced by the Revolutionary
War experience.
The War of 1812-15 had

momentous consequences for the monetary system.

enormous expansion in the number of banks and in bank notes and deposits was
spurred by the dictates of war finance.

New England banks were more conservative

than in other regions, and the region was strongly opposed to the war with England,
so little public debt was purchased in New England.

Yet, imported goods, textile

manufactures, and munitions had to be purchased in that region by the federal
government.

The government therefore encouraged the formation of new and

recklessly inflationary banks in the Middle Atlantic, Southern and Western
states, which printed huge quantities of new notes to purchase government bonds.
The federal government thereupon used these notes to purchase manufactured

goods

in New England.
Thus, from 1811 to 1815 the number of banks in the country multiplied
by 117 to 212; in addition there had sprung up 35 private unincorporated banks
which were illegal in most states but were allowed to function under war
conditions.

Specie in the 30 reporting banks, 26% of the total number in

1811, amounted to $2.57 million in 1811; this figure had risen to $5.40 million
in the 98 reporting banks in 1815, or 40% of the total.

Notes and deposits,

on the other hand, were $10.95 million in 1811, and had increased to $31.6
million in 1815 among the reporting banks.
If we make the heroic assumption that we can estimate the money
supply for the country by multiplying by the proportion of un-

reported banks and we then add in the BUS totals for 1811, specie in all banks
would total $14.9 million in 1811 and $13.5 million in 1815, or a 9.4% decrease.
On the other hand, total bank notes and deposits aggregated to $42.2 million
in 1811, and $79.0 million four years later, so that an increase of 87.2%,
pyramided on top of a 9.4% decline in specie.

If we factor in the Bank of the

United States, then, the bank pyramid ratio was 3.70:1 and the reserve ratio
.27 in 1811; while the pyramid ratio four years later was 5.85:1 and the
reserve ratio .17.
But the aggregates scarcely tell the whole story since, as we have seen,
the expansion took place solely outside of New England, while New England
banks continued on their relatively sound basis and did not inflate their credit.
The record expansion of the number of banks was In Pennsylvania, which incorporated no less than 41 new banks in the month of March, 1814, contrasting
to only four banks which had existed in that s t a t e — a l l in Philadelphia—until
that date.

It is

instructive to compare the pyramid

various reporting states in 1815:

ratios of banks in

only 1.96:1 in Massachusetts, 2.7:1 in New

Hampshire, and 2.42:1 in Rhode Island, as contrasted to 19.2:1 in Pennsylvania,
42
18.46:1 in South Carolina, and 18.73:1 in Virginia.
This monetary situation meant that the United States government was paying
for New England manufactured goods with a mass of inflated bank paper outside
the region.

Soon, as the New England banks called upon the other banks to redeem

their notes in specie, the mass of inflating banks faced imminent insolvency.
It was at this point that a fateful decision was made by the U.S. government
42
Van Fenstermaker, "Statistics," p.408, and pp. 401-409. For the list
of individual incorporated banks, see Van Fenstermaker, "Development,"
pp. 112-183, with Pennsylvania on pp. 169-173.

and concurred in by the governments of the states outside New England.

the banks all faced failure, the governments, in August 1814, permitted all
of them to suspend specie payments—that is to stop all redemption of notes
and deposits in gold or silver—and yet to continue in operation.

In short,

in one of the most flagrant violations of property rights in American history,
the banks were permitted to

waive

their contractual obligations to pay in

specie while they themselves could expand their loans and operations and force
their own debtors to repay their loans as usual.
Indeed, the number of banks, and bank credit, expanded rapidly during
1815 as a result of this governmental carte blanche.

It was precisely

during 1815 when virtually all the private banks sprang up, the number of
banks increasing in one year from 208 to 246.

Reporting banks increased

their

pyramid ratios from 3.17:1 in 1814 to 5.85:1 the following year, a drop of
reserve ratios from .32 to .17.

Thus, if we measure bank expansion by pyramiding

and reserve ratios, we see that a major inflationary impetus during the War
of 1812 came during the year 1815 after specie payments had been suspended

through-

out the country by government action.
Historians dedicated to the notion that central banks restrain state or
private bank inflation have placed the blame for the multiplicity of banks and
bank credit inflation during the War of 1812 on the absence of a central bank.
But, as we have seen, both the number of banks and bank credit grew apace during
the period of the First BUS, pyramiding on top of the latter f s expansion, and
would continue to do so under the Second Bank, and, for that matter, the
Federal Reserve System in later years.

And the federal government, not the

state banks themselves, is largely to blame for
to monetize the war debt.

encouraging new, inflated banks

Then, in particular, it allowed them to suspend

specie payment in August 1814, and to continue that suspension for two years
after the war was over, until February 1817.

Thus, for two and a half years

banks were permitted to operate and expand while issuing what was tantamount
to fiat paper and bank deposits.
Another neglected responsibility of the U.S. government for the wartime
inflation was its massive issue of treasury notes to help finance the war effort.
While this treasury paper was interest-bearing and was redeemable in specie in
one year, the cumulative amount outstanding functioned as money, as they were
used in transactions among the public and were also employed as reserves or
"high-powered money" by the expanding banks.

The fact that the government

received the treasury notes in all debts and taxes gave the notes a quasi-legal
tender status.

Most of the treasury notes were issued in 1814 and 1815, when

their outstanding total reached $10.65 million and $15.46 million respectively.
Not only did the treasury notes fuel the bank inflation, but their quasi-legal
tender status brought Gresham's Law into operation and specie flowed out of the
banks and public circulation outside of New England, and into New England and
43
out of the country.
The expansion of bank money and treasury notes during the War drove up
pric es in the United States.

Wholesale price increases from 1811 to 1815 aver-

aged 35%, with different cities experiencing a price inflation ranging from
28% to 55%. Since foreign trade was cut off by the war, prices of imported
44
commodities rose far more, averaging 70%.
But more important than this
43
For a perceptive discussion of the nature and consequences of treasury
note issue in this period, see Richard H. Timberlake, Jr., The Origins of Central
Banking in the United States (Cambridge: Harvard University Press, 1978), pp. 13-18.
The Gresham Law effect probably accounts for the startling decline of specie
held by the reporting banks, from $9.3 million to $5.4 million, from 1814 to
1815. Van Fenstermaker, "Statistics," p. 405.
44
Historical Statistics, pp. 115-124; Murray N. Rothbard, The Panic of
1819: Reactions and Policies (New York: Columbia University Press, 1962), p. 4.

68
inflation, and at least as improtant as the wreckage of the monetary system
during and after the war, was the precedent that the two-and-a-half year
long suspension of specie payment set for the banking system for the future.
From then on, every time there was a banking crisis brought on by inflationary
expansion and demands for

redemption in specie,

state and federal governments

looked the other way and permitted general suspension of specie payments while
bank operations continued to flourish.

It thus became clear to the banks

that, in a general crisis,they would not be required to meet the ordinary
obligations of contract law or of respect for property rights, and so their
inflationary expansion was permanently encouraged by this massive failure
of government to fulfill its obligation to enforce contract and defend the rights
of "property.
Suspensions of specie payments informally or officially permeated the economy
outside of New England during the Panic of 1819, occurred everywhere outside
of New England in 1837, and in all states south and west of New Jersey in 1839.
A general suspension of specie payments occurred throughout the cor.ntry once
45
again in the panic of 1857.
It is important to realize, then, in evaluating the American banking system
before the Civil War, that even in the later years when there was no central
bank, the system was not "free11 in any proper economic sense.

"Free" banking

can only refer to a system in which banks are treated as any other business, and
that therefore failure to obey contractual obligations—in this case, prompt
redemption of notes and deposits in specie—must incur Immediate insolvency
and liquidation.

Burdened by the tradition of allowing general suspensions

^ O n the suspensions of specie payments, and on their importance before
the Civil War, see Vera C. Smith, The Rationale of Central Banking (London:
P.S. King & Son, 1936), pp. 38-46. Also see Dunne, Monetary Decisions, p. 26.

69
that arose in the United States in 1814, the Pre-Civil War banking system,
despite strong elements of competition when not saddled with a central
bank, must rather be termed in the phrase of one economist, as "Decentralization
46

without

Freedom.

From the 1814-17 experience on, the notes of state banks circulated at
varying rates of depreciation, depending on public expectations of how long
they would be able to keep redeeming their obligations in specie.

These ex-

pectations, in turn, were heavily influenced by the amount of notes and deposits
issued by the bank as compared to the amount of specie held in its vaults.
In that era of poor communications and high transportation cost, the tendency
for a bank note was to depreciate in proportion to its distance from the home
office.

One effective if time-consuming method of enforcing redemption on

nominally specie-paying banks was the emergence of a class of professional
"money brokers."

These brokers would buy up a mass of depreciated notes of

nominally specie-paying banks, and then travel to the home office of the
bank to demand redemption in specie.

Merchants, money brokers, bankers and

the general public were aided in evaluating the various state bank notes by
46
Smith, Rationale, p. 36. Smith properly defines "free banking" as "a
regime where note-issuing banks are allowed to set up in the same way as any
other type of business enterprise, so long as they comply with the general
company law. The requirement for their establishment is not special conditional
authorization from a government authority, but the ability to raise sufficient
capital, and public confidence, to gain acceptance for their notes and ensure
the profitability of the undertaking. Under such a system all banks would not
only be allowed the same rights, but would also be subjected to the same reIf they failed to meet their obsponsibilities as other business enterprises.
ligations they would be declared bankrupt and put into liquidation, and their
assets used to meet the claims of their creditors, in which case the shareholders
would lose the whole or part of their capital, and the penalty for failure would
by paid, at least for the most part, by those responsible for the policy
of the bank. r Notes issued under this system would be 'promises to pay,' and such
obligations must be met on demand in the generally accepted medium which we will
assume to be gold. No bank would have the right to call on the government or on
any other institution for special help in time of need....A general abandonment
of the gold standard in inconceivable under these conditions, and with a strict
interpretation of the bankruptcy laws any bank suspending payments would at once
be put into the hands of a receiver." Ibid., pp. 148-149.

the development of monthly journals known as "bank note detectors."

These

"detectors" were published by money brokers and periodically evaluated the
47
market rate of various bank notes in relation to specie.
"Wildcat" banks were so named because in that age of poor

transportation,

banks hoping to inflate and not have to worry about redemption attempted to
locate in "wildcat" country where money brokers would find it difficult to travel.
It should be noted that, if it were not for periodic suspension, there would
have been no room for wildcat banks or for varying degrees of lack of confidence in the genuineness of specie redemption at any given time.
It can be imagined that the advent of the money broker was not precisely
welcomed in the town of an errant bank, and it was easy for the townspeople
to blame the resulting collapse of bank credit on the sinister stranger rather
than on the friendly neighborhood banker.

During the panic of 1819, when banks

collapsed after an inflationary boom up till. 1817, obstacles and intimidation
were often the lot of those who attempted to press the banks to fulfill their
contractual obligation to pay in specie.
Thus, Maryland and Pennsylvania, during the panic of 1819, engaged in almost
bizarre inconsistency in this area.

Maryland, on February 15, 1819, enacted a

law "to compel...banks to pay specie for their notes, or forfeit their charters."
Yet, two days after this seemingly tough action, it passed another law relieving
banks of any obligation to redeem notes held by money brokers, the major force
ensuring the people of this state from the evil arising from the demands made
on the banks of this state for gold and silver by brokers."
followed suit a month later.

Pennsylvania

In this way, these states could claim to maintain

^ 7 See Richard H. Timberlake, Jr., Money, Banking and Central Banking
York: Harper & Row, 1965), p. 94.

(New

71
the virtue of enforcing contract and property rights while moving to prevent
the most effective method of ensuring such enforcement.
During the 1814-1817 general suspension, note-holders who sued for specie
payment seldom gained satisfaction in the courts.

Thus, Isaac Bronson, a

prominent Connecticut banker in a specie-paying region, sued various New York
banks for payment of notes in specie.

He failed to get satisfaction, and for

his pains received only abuse in the New York press as an agent of "misery and

The banks south of Virginia largely went off specie payment during the
panic of 1819, and in Georgia at least general suspension continued almost
continuously down to the 1830s.

One customer complained during 1819 that in

order to collect in specie from the largely state-owned Bank of Darien, Georgia,
he was forced to swear before a justice of the peace in the bank, that each
and every note he presented to the Bank was his own and that he was not a money
broker or an agent for anyone else; he was forced to swear to the oath in the
presence of at least five bank directors and the bank's cashier; and he was
forced to pay a fee of $1.36 on each note in order to acquire specie on
demand.

Two years later, when a note-holder demanded $30,000 in specie at the

Planters' Bank of Georgia, he was told he would be paid in pennies only, while
another customer was forced to accept pennies handed out to him

at the rate

of $60 a d a y . ^
Hammond, Banks and Politics, pp. 179-180. Even before the suspension,
in 1808, a Bostonian named Hireh Durkee who attempted to demand specie for
$9,000 in notes of the state-owned Vermont State Bank, was met by an indictment for an attempt by this "evil-disposed person" to "realize a filthy gain"
at the expense of the resources of the state of Vermont and the ability of
"good citizens thereof to obtain money." Ibid., p. 179. Also see Gouge,
Short History, p. 84.
49
Gouge, Short History, pp. 141-142. Secretary of the Treasury William H.
Crawford, a Georgia politician, tried in vain to save the Bank of Darien from
failure by depositing Treasury funds there during the panic. Rothbard, The Panic
of 1819, p.62.

72
During the panic, North Carolina and Maryland in particular moved
against the money brokers in a vain attempt to prop up the depreciated notes
of their states 1 banks.

In North Carolina, banks were not penalized by

the legislature for suspending specie payments to "brokers," while maintaining
them to others.

Backed by government, the three leading banks of the state met

and agreed, in June 1819, not to pay specie to brokers or their agents.
notes immediately fell to a 15Z discount outside the state.
banks continued to require—Ignoring the inconsistency—
pay them at par in specie.

Their

However, the

that their own debtors

Maryland, during the same year, moved to require

a license of $500 per year for money brokers, in addition to an enormous
$20,000 bond to establish the business.
Maryland tried to bolster the defense of banks and the attack on brokers
by passing a compulsory par law in 1819, prohibiting the exchange of specie for
Maryland bank notes at less than par.

The law was readily evaded, however, the

penalty merely adding to the discount as compensation for the added risk.
Specie, furthermore was driven out of the state by the operation of Gresham's
Law. ^
In Kentucky, Tennessee, and Missouri, stay laws were passed requiring
creditors to accept depreciated and inconvertible bank paper in payment of debts,
else suffer a stay of execution of the debt.
status was conferred on the p a p e r . ^
5 0 r othbard, Panic of 1 8 1 9 ,
passed by Ohio and Delaware.

In this way,

quasi-legal tender

Many states permitted banks to suspend

pp. 6 4 - 6 8 .

Other compulsory par laws were

rhe most extreme proposal was that of Tennessee politician Felix Grundy s
scheme, never adopted, to compel creditors to accept bank notes of the state
bank or forfeit the debt: that would have conferred full legal tender status
on the bank. Rothbard, Panic of 1819, p. 91; Joseph H. Parks, "Felix Grundy
and the Depression of 1819 in Tennessee," Publications of the East Tennessee
Historical Society, Vol. X (1938), p. 22.

specie payment, and four Western states—Tennessee, Kentucky, Missouri, and
Illinois—established

state-owned banks to try to overcome the depression by

issuing large issues of inconvertible paper money.

In all states trying to prop

up inconvertible bank paper, a quasi-legal tender status was also conferred on
the paper by agreeing to receive the notes in taxes or debts due to the state.
The result of all the inconvertible paper schemes was rapid and massive depreciation, disappearance of specie, succeeded by speedy liquidation of the new
52
state-owned banks.
An amusing footnote on the problem of banks being protected against their
contractual obligations to pay in specie occurred In the course of correspondence
between one of the earliest economists in America, the young Philadelphia State
Senator Condy Raguet, and the eminent English economist David Ricardo.

Ricardo

had evidently been bewildered by Raguet*s statement that banks technically required to pay in specie were often not called upon to do so.

On April 18, 1821,

Raguet replied, explaining the power of banks in the United States:
You state in your letter that you find it difficult to comprehend, why persons who had a right to demand coin from the
Banks in payment of their notes, so long forebore to exercise it.
This no doubt appears paradoxical to one who resides in a country
to protect a bank, but
where an act of parliament was necessary
the difficulty is easily solved. The whole of our population are
either stockholders of banks or in debt to them. It is not the
interest of the first to press the banks and the rest are afraid.
This is the whole secret. An independent man who was neither a
stockholder or debtor, who would have ventured to compel the
banks to do iustice, would have been persecuted as an enemy of
society..••
52
Only New England, New York, New Jersey, Virginia, Mississippi, and
Louisiana were comparatively untouched by the inconvertible paper contagion,
either in the form of suspended specie banks continuing in operation or new
state-owned banks emitting more paper. For an analysis of the events and controversies in each state, see Rothbard, Panic of 1819, pp. 57-111.
53
Raguet to Ricardo, April 18, 1821, in David Ricardo, Minor Papers on
the Currency Question, 1809-23, J. Hollander, ed. (Baltimore: John Hopkins
Press, 1932), pp. 199-201; Rothbard, Panic of 1819, pp. 10-11. Also see
Hammond, Banks and Politics, p. 242.

74
The Second Bank of the United States, 1816-1833

The United States emerged from the War of 1812 in a chaotic monetary
state, with banks multiplying and inflating ad lib, checked only by the varying
rates of depreciation of their notes.

With banks freed from redeeming their

obligations in specie, the number of incorporated banks increased during 1816,
54
from 212 to 232.

Clearly, the nation could not continue indefinitely with

the issue of fiat money in the hands of discordant sets of individual banks.
It was apparent that there were two ways out of the problem:

one, was the

hard-money path, advocated by the Old Republicans and, for their own purposes,
the Federalists.

The federal and state governments would have sternly compelled

the rollicking banks to redeem promptly in specie, and, when most of the banks
outside of New England could not, to force them to liquidate.

In that way,

the mass of depreciated and inflated notes and deposits would have been swiftly
liquidated, and specie would have poured back out of hoards and into the
country to supply a circulating medium.

The inflationary experience would

have been over.
Instead, the Democratic-Republican establishment in 1816 turned to the
old Federalist path:

a new central bank, a Second Bank of the United States.

Modelled closely after the First Bank, the Second Bank, a private corporation
with one-fifth of the shares owned by the federal government, was to create
a national paper currency, purchase a large chunk

of the public debt, and

New note issue series by banks reached a heavy peak in 1815 and 1816
in New York and Pennsylvania. D.C. Wismar, Pennsylvania Descriptive List of
Obsolete State Bank Notes, 1782-1866 (Frederick, Md.: J.W. Stovell Printing
Co., 1933); and idem, New York Descriptive List of Obsolete Paper Money
(Frederick, Md.: J.W. Stovell Printing Co., 1931).

75
receive deposits of Treasury funds.

The BUS notes and deposits were to be

redeemable in specie, and they were given quasi-legal tender status by the
federal government's receiving them in payment of taxes.
That the purpose of establishing the BUS was to support the state
banks in their inflationary course rather than crack down on them is seen
by the shameful deal that the BUS made with the state banks as soon as it
opened its doors in January, 1817.

At the same time it was establishing the

BUS in April 1816, Congress passed the resolution of Daniel Webster, at that
time a Federalist champion of hard money, requiring that after February 20,
1817, the United States should accept in payments for debts or taxes only
specie, Treasury notes, BUS notes, or state bank notes redeemable in specie
on demand.

In short, no irredeemable state bank notes would be accepted after

that date.

Instead of using the opportunity to compel the banks to redeem,

however, the BUS, in a meeting with representatives from the leading urban
banks excluding Boston, agreed to issue $6 million worth of credit in New
York, Philadelphia, Baltimore, and Virginia before insisting on specie payments from debts due to it from the state banks.

In return for that agreed-

upon massive inflation, the state banks graciously consented to resume specie
55
payments.

Moreover, the BUS and the state banks agreed to mutually support

each other in any emergency, which of course meant in practice that the far
stronger BUS was committed to the propping up of the weaker state banks.
The BUS was pushed through Congress by the Madison Administration and
particularly by Secretary of the Treasury Alexander J. Dallas, whose appointment
55on the establishment of the BUS and on the deal with the state banks,
see Ralph C.H. Catterall, The Second Bank of the United States (Chicago:
University of Chicago Press, 1902), pp.9-26,479-490. Also see Hammond,
Banks and Politics, pp. 230-248; David R. Dewey, The Second United States
Bank (Washington, D.C.: National Monetary Commission, 1910), pp. 148-176.

76
was lobbied for, for that purpose.

Dallas, a wealthy Philadelphia lawyer

•was a close friend, counsel, and financial associate of Philadelphia merchant and banker, Stephen Girard, reputedly one of the two wealthiest men in
the country.

Toward the end of its term, Girard was the largest stockholder

of the First BUS, and during the War of 1812 Girard became a very heavy investor
in the war debt of the federal government.

Both as a prospective large stock-

holder and as a way to unload his public debt, Girard began to agitate for a
new BUS.

Dallas's appointment as Secretary of Treasury in 1814 was successfully

engineered by Dallas and his close friend, wealthy New York merchant and fur
trader John Jacob Astor, also a heavy investor in the war debt.
was established, Stpehen Girard purchased

When the BUS

the $3 million of the $28 million

that remained unsubscribed, and he and Dallas managed to secure for the post
of president of the new bank their good friend William Jones, former Philadelphia
56

merchant.
Much of the opposition to the founding of the BUS seems keenly prophetic.
Thus, Senator William H. Wells, Federalist from Delaware, in arguing against
the Bank bill, said that it was "ostensibly for the purpose of correcting the
diseased state of our paper currency by restraining and curtailing the overissue of bank paper, and yet it came prepared to inflict upon us the same evil,
being itself nothing more than simply a paper-making machine.""^

In fact, the

result of the deal with the state banks was that their resumption of specie
payments after 1817 was more nominal than real, thereby setting the stage for
the Girard-Dallas connection, see Hammond, Banks and Politics,
pp. 231-246, 252; Philip H. Burch, Jr., Elites in American History, Vol. I
She Federalist Years to the Civil War (New York: Holmes & Meier, 1981), pp. 88,
97, 116-117, 119-121; Kenneth L. Brown, "Stephen Girard, Promoter of the
Second Bank of the United States." Journal of Economic History (November 1942),
pp. 125-132.
"^Annals of Congress, 14 cong, 1 sess., April 1, 1816, pp. 267-270. Also
see ibid., pp. 1066, 1091, lllOff. Cited in Murray N. Rothbard, The Case for
a 100 Percent Gold Dollar (Washington, D.C.: Libertarian Review Press, 1974),
p. 18n.Also see Gouge, SKort History, pp. 79-83.

77
the widespread suspensions of the 1819-21 depression.

As Bray

Hammond

writes:
...specie payments were resumed, with substantial shortcomings.
Apparently the situation was better than it had been, and a pretense was maintained of its being better than it was. But redemption was not certain and universal; there was still a premium
on specie and still a discount on bank notes, with considerable
variation in both from place to place. Three years later, February 1820, Secretary [of the Treasury] Crawford reported to Congress that during the greater part of the time that had elapsed
since the resumption of specie payments, the convertibility of
bank notes into specie had been nominal rather than real in the
largest portion of the Union.^8
One problem is that the BUS lacked the courage to insist on payment of
their notes form the state banks.

As a result, state banks had large balances

piled up against them at the BUS,

totalling over $2.4 million during 1817

and 1818, remaining on the books as virtual interest-free loans.

As Catterall

points out, "so many influential people were interested in the [state banks]
as stockholders that it was not advisable to give offense by demanding payment in specie, and borrowers were anxious to keep the banks in the humor to
lend."

When the BUS did try to collect on state bank notes in specie,

President Jones reported, "the banks, our debtors, plead inability, require
unreasonable indulgence, or treat our reiterated claims and expostulations
with settled

indifference."

From its inception, the Second BUS launched a spectacular inflation of
money and credit.

Lax about insisting on the required payment of its capital

in specie, the Bank failed to raise the $7 million legally supposed to have
been subscribed in specie; instead, during 1817 and 1818, its specie held
never rose above $2.5 million.

At the peak of its initial expansion, in July

Hammond, Banks and Politics, p. 248. Also see Condy Raguet, A Treatise
on Currency and Banking (2nd Ed., 1840, New York: Augustus M. Kelley, 1967),
pp. 302-303; Catterall, Second Bank, pp. 37-39; Walter Buckingham Smith,
Economic Aspects of the Second Bank of the United States (Cambridge: Harvard
University Press, 1953), p. 104.

Catterall, Second Bank,p. 36.

78
1818, BUS specie totalled $2.36 million and its aggregate notes and deposits
totalled $21.8 million.

Thus, in a scant year-and-a-half of operation, the

BUS had added a net of $19.2 million to the nation's money supply, for a
pyramid ratio of 9.24, or a reserve ratio of .11.
Outright fraud abounded at the BUS, especially at the Philadelphia and
Baltimore branches, particularly

the latter,

it is no accident that three-

60
fifths of all of the BUS loans were made at these two branches.

Also,

the BUS attempt to provide a uniform currency throughout the nation foundered
on the fact that the western and southern branches could inflate credit and
bank notes, and that the inflated notes would wend their way to the more conservative branches in New York and Boston, which would be obligated to redeem
the inflated notes at par.

In this way, the conservative branches were

stripped of specie while the western branches could continue to inflate
unchecked.^ ^
The expansionary operations of the BUS, coupled with its laxity toward insisting on specie payment by the state banks, impelled a further inflationary
expansion of state banks on top of the spectacular enlargement of the central
bank.

Thus, the number of Incorporated state banks rose from 232 in 1816 to

338 in 1818.
session.

Kentucky alone chartered 40 new banks in the 1817-18 legislative

The estimated total money supply in the nation rose from $67.3

million in 1816 to $94.7 million in 1818, a rise of 40.7% in two years.

Most

^ O n the expansion and fraud at the BUS, see Catterall, Second Bank,pp. 28-50,
503. The main culprits were James A. Buchanan, president of the Baltimore
mercantile firm of Smith & Buchanan, and the Baltimore BUS cashier James W.
McCulloch, who was simply an impoverished clerk at the mercantile house.
Smith,
an ex-Federalist, was a Senator from Maryland and a powerful member of the
national Democrat-Republican establishment.
a result of the contractionary influence on the Boston branch of
the BUS, the notes of the Massachusetts banks actually declined in this
period, from $1 million in June 1815 to $850,000 in June 1818.
See
Rothbard, Panic of 1819, p. 8.

79
62
of this increase was supplied by the BUS.
The huge expanison of money and credit impelled a full-scale inflationary
boom throughout the country.

Import prices had fallen in 1815, with the re-

newal of foreign trade after the war, but domestic prices were another story.
Thus, the index of export staples in Charleston rose from 102 in 1815 to 160
in 1818; the prices of Louisiana staples at New Orleans rose from 178 to 224
in the same period.

Other parts of the economy boomed; exports rose from

$81 million in 1815 to a peak of $116 million in 1818.

Prices rose greatly in

real estate, land, farm improvement projects, and slaves, much of it fueled
by the use of bank credit for speculation in urban and rural real estate.

There

was a boom in turnpike construction, furthered by vast federal expenditures on
turnpikes.

Freight rates rose on steamboats, and shipbuilding shared in the

general prosperity.

Also, general boom conditions expanded stock trading so

rapidly that traders, who had been buying and selling stocks on the curbs
on Wall Street for nearly a century,

found it necessary to open the first in-

door stock exchange in the country, the New York Stock Exchange, in March 1817.
63
Also, investment banking began in the United States buring this boom period.
Starting in July, 1818, the government and the BUS began to see what
dire straits they were in; the enormous inflation of money and credit,
aggravated by the massive fraud, had put the BUS in real danger of going under
62

Total notes and deposits of 39% of the nation s reporting state banks
was $26.3 million in 1816, while 38% of the banks had total notes and deposits
of $27.7 million two years later.
Converting this pro rata to 100% of the
banks, gives an estimated $67.3 million in 1816, and $72.9 million in 1818.
Add to the latter figure $21.8 million for BUS notes and deposits, and this
yields $94.7 million in 1818, or a 40.7% increase. Adapted from tables in
Van Fenstermaker, "Statistics," pp. 401, 405, 406.
Rothbard, Panic of 1819, p. 6-10; Historical Statistics, pp. 120, 122,
563. Also see George Rogers Taylor, The Transportation Revolution, 1815-1860
(New York: Rinehart & Co., 1951), pp. 334-336.

80
and illegally failing to sustain specie payments.

Over the next year, the

BUS began a series of heroic contractions, forced curtailment of loans,
contractions of credit in the south and west, refusal to provide uniform
national currency by redeeming its shaky branch notes at par, and seriously
enforcing the requirement that its debtor banks redeem in specie.
it purchased millions of dollars of specie from abroad.

In addition,

These heroic actions,

along with the ouster of President William Jones, managed to save the BUS,
but the massive contraction of money and credit swiftly brought the United
States its first widespread economic and financial depression.

The first

nationwide "boom-bust1' cycle had arrived in the United States, impelled
by rapid and massive inflation, quickly succeeded by contraction
credit.

of money and

Banks failed, and private banks curtailed their credits and liabilities

and suspended specie payments in most parts of the country.
Contraction of money and credit by the BUS was almost unbelievable,
total notes and deposits falling from $21.9 million in June 1818 to $11.5 million only
a year later.

The money supply contributed by the BUS was thereby contracted

by no less than 47.2% in one year.

The number of incorporated banks at

first remained the same, and then fell rapidly from 1819 to 1822, falling
from 341 in mid-1819 to 267 three years later.

Total notes and deposits of

state banks fell from an estimated $72.0 million in mid-1818 to $62.7 million
a year later, a drop of 14.0% in one year.

If we add in the fact that the

U.S. Treasury contracted total treasury notes from $8.81 million to zero during
this period, we get the following estimated total money supply:

in 1818, $103.5
64

million; in 1819, $74.2 million, a contraction in one year of 28.3%
64
These estimates are adapted from the tables in Van Fenstermaker,
"Statistics, " pp. 401-406; Van Fenstermaker, Development, pp. 66-68. The
data for 38% of incorporated banks in 1818, and for 54% in 1819, are converted pro rata to 100% figures. BUS figures are in Catterall, Second Bank,
p. 502. On the contraction by the BUS see ibid., pp. 51-72.

81
The result of the contraction was a massive rash of defaults, bankruptcies of business and manufactures, and liquidation of unsound investments
during the boom.

There was a vast drop In real estate values and rents, and in

the prices of freight rates and of slaves.

Public land sales dropped greatly

as a result of the contraction: declining from $13.6 million in 1818, to
65
$1.7 million in 1820.

Prices in general plummeted: the index of export

staples fell from 158 in November 1818 to 77 in June 1819, an annualized drop
of 87.9% during those seven months.

South Carolina export staples dropped

from 160 to 96 from 1818 to 1819, and commodity prices in New Orleans dropped
from 200 in 1818 to 119 two years later.
Falling money incomes led to a precipitous drop in imports, which fell
from $122 million in 1818 to $87 million the year later.

Imports from Great

Britain fell from $43 million in 1818 to $14 million in 1820, and cotton and
woolen imports from Britain fell from over $14 million each in the former year
to about $5 million in the latter.
The great fall in prices aggravated the burden of money debts, reinforced
by the contraction of credit.

Bankruptices abounded, and one observer estimated

that $100 million of mercantile debts to Europe were liquidated by bankruptcy
during the crisis.

Western areas, shorn of money by the collapse of the previously 4

swollen paper and debt, often returned to barter conditions, and grain and

whiskey were used as media of exchange.
In the dramatic summing up of the hard-money economist and historian
William Gouge, by its precipitous and dramatic contraction "the Bank was saved,
65
On Treasury note contraction in this period, see Timberlake, Origins,
pp. 21-26.

See Rothbard, Panic of 1819, pp. 11-16.

and the people were ruined."

The Jacksonian Movement and the Bank War

Out of the bitter experiences of the Panic of 1819 emerged the beginnings of the Jacksonian movement, dedicated to hard money, the eradication
of fractional-reserve banking in general, and of the Bank of the United States
in particular.

Andrew Jackson himself, Senator Thomas Hart ("Old Bullion")

Benton of Missouri, future President James K. Polk of Tennessee, Jacksonian
economists Amos Kendall of Kentucky and Condy Raguet of Philadelphia, were
all converted to hard money and 100% reserve banking by the experience of

68
the Panic of 1819.

The Jacksonians adopted, or in some cases pioneered in,

the Currency School analysis which pinned the blame for boom-bust cycles on
inflationary expansions followed by contractions of bank credit.

Far from

being the ignorant bumpkins that most historians have depicted, the Jacksonians
were steeped in the knowledge of sound economics, particularly of th£ Ricardian
Currency School.
Indeed, no movement in American politics has been as flagrantly misunderstood by historians as the Jacksonians.

Ther were emphatically not, as historians

until recently have depicted, either "ignorant anti-capitalist agrarians," or
"representatives of the rising entrepreneurial class," or "tools of the inflationary state banks," or embodiments of an early proletarian anti-capitalist
movement or a non-ideological power group or "electoral machine."
Jacksonians were libertarians, plain and simple.

The

Their program and ideology

were libertarian; they strongly favored free enterprise and free markets, but
^ G o u g e , Short History, p. 110.
fSft
Rothbard, Panic of 1819, p. 188.

83
they just as strongly opposed special subsidies and monopoly privileges
conveyed by government to business or to any other group.

They favored

absolutely minimal government, certainly at the federal level, but also at the
state level.
the

They believed that government should be confined to upholding

rights of private property.

In the monetary sphere, this meant the separation

of government from the banking system, and a shift from inflationary paper money
and fractional-reserve banking to pure specie and banks confined to 100%
reserves.
In order to put this program into effect, however, the Jacksonians
faced the grueling task of creating a new party out of what had become a
one-party system after the War of 1812, in which the Democrat-Republicans had
ended up adopting the Federalist program, including the reestablishing of the
Bank of the United States.

The new party, the Democratic Party, was largely

forged in the mid-1820 , s by New York political leader, Martin Van Buren,
newly converted by the aging Thomas Jefferson to the laissez-faire cause.
Van Buren cemented an alliance with Thomas Hart Benton of Missouri and the
Old Republicans of Virginia, but he needed a charismatic leader to take the
Presidency away from Adams and what was becoming known as the National
Republican Party.

He found that leader in Andrew Jackson, who was elected

President under the new Democratic banner in 1828.
The Jacksonians eventually managed to put into effect various parts of
their free-market and minimal government economic program, including a drastic
lowering of tariffs, and for the first and probably the last time in American
history, paying off the federal debt.
the issue of money and banking.

But their major concentration was on

Here they had a coherent program, which

they proceeded to install in rapidly succeeding stages.

84
The first important step was to abolish central banking, in the Jacksonian
view the major inflationary culprit. The object was not to eliminate the
BUS in order to free the state banks for inflationary expansion, but on the
contrary to eliminate the major source of inflation before proceeding, on the
state level, to get rid of fractional reserve banking.

The BUS charter was up

for renewal in 1836, but Jackson denounced the Bank in his first annual message,
69
in 1829.

The imperious Nicholas Biddle,

a showdown with Jackson before his
renewal early, in 1831.

head of the BUS, decided to precipitate

reelection effort, and so Biddle filed for

The host of National Republicans and non-Jacksonian

Democrats proceeded to pass the recharter bill, but Jackson, in a dramatic
message, vetoed the bill, and Congress failed to pass it over his veto.
Triumphantly reelected on the Bank issue in 1832, President Jackson lost
no time in disestablishing the BUS as a central bank.

The critical action

came in 1833, when Jackson removed the public Treasury deposits from the BUS and
placed them in a number of state banks (soon labelled as "pet banks") throughout
the country.

The original number of pet banks was seven, but the Jacksonians

were not interested in creating a privileged bank oligarchy to replace the
previous monopoly; and so the number of pet banks had increased to 91 by the
end of 1 8 3 6 . ^

In that year, Biddle managed to secure a Pennsylvania charter

for his Bank, and the new United States Bank of Pennsylvania functioned as a
much reduced but still influential state bank for a few years thereafter.
Orthodox historians have long maintained that, by his reckless act of
69

Biddle continued the chain of control over both BUS's by the Philadelphia
financial elite, from Robert Morris and William Bingham, to Stephen Girard and
William Jones. See Burch, Elites, p. 147. Also see Thomas P. Govan, Nicholas
Biddle: Nationalist and Public Banker, 1786-1844 (Chicago: University of
Chicago Press, 1959), pp. 45, 74-75, 79.
^ H a m m o n d , Banks and Politics, p. 420.

85
destroying the BUS and shifting government funds to the numerous pet banks,
Andrew Jackson freed the state banks from the restraints imposed on them by
a central bank.

Thus the banks were supposedly allowed to pyramid notes and

deposits rashly on top of existing specie, and precipitate a wild inflation that
was later succeeded by two bank panics and a disastrous deflation.

71
Recent historians, however, have totally reversed this conventional picture.
In the first place, the record of bank inflation under the regime of the BUS
was scarcely ideal.

From the depth of the post-1819 depression in January 1820

to January 1823, under the regime of the conservative Langdon Cheves, the
BUS increased its notes and deposits at an annual rate of 5.9%.
total money supply remained about the same in that period.

The nation's

Under the far

more inflationist regime of Nicholas Biddle, however, BUS notes and deposits
rose, from January 1823, from $12 million to $42.1 million, an annual rate increase of 27.9%.

As a consequence of this base of the banking pyramid inflating

so sharply, the total money supply during this period vaulted from $81 million
to $155 million, an annual increase of 10.2%.

It is clear that the driving

force for monetary expansion was the BUS, which acted as an inflationary
rather than restraining force

upon the state banks.

Looking at the figures

another way, the 1823 data represented a pyramid ratio of money liabilities to
specie orf 3.86:1 on the part of the BUS, and 4:1 of the banking system as a whole,
or respective reserve ratios of .26 and .25.

By 1832, in contrast, the

BUS reserve ratio had fallen to .17 and the country as a whole to .15.

Both

sets of institutions had inflated almost precisely proportionately on top of
^ F o r an excellent bibliographical essay and critique of historical
interpretations of Jacksonism and the Bank War, see Jefferey Rogers Hummel,
"The Jacksonians, Banking, and„ Economic Theory: A Reinterpretation," The
Journal of Libertarian Studies, Vol. 2 (Summer 1978), pp.
151-165.

86
.

specie.

The fact that wholesale prices remained about the same over this period
is no indication that the monetary inflation was not improper and dangerous.
As "Austrian" business cycle theory has pointed out, any bank credit

inflation

sets up conditions for boom-and-bust; there is no need for prices actually to
rise.

The reason that prices did not rise was that the increased production

of goods and services sufficed to offset the monetary expansion during this
period.

But similar conditions of the 1920s precipitated the great crash of

1929, an event which shocked most economists, who had adopted the proto-monetarist
position of Irving Fisher and other economists of the day that a stable wholesale
price level cannot, by definition, be inflationary.

In reality, the unhampered

free market economy will usually increase the supply of goods and services, and
thereby bring about a gently falling price level, as happened in most of the 19th
century except during wartime.
What, then, of the consequences of Jackson's removal of the deposits?
What of the fact that wholesale prices rose from 84 in April 1934, to 131 in
February 1837, a remarkable increase of 52% in a little less than three years?
Wasn't that boom due to the abolition of central banking?
An excellent reversal of the orthodox explanation of the boom of the
73
1830s, and indeed of the ensuing panic, has been provided by Professor Temin.
First, he points out that the price inflation really began earlier, when wholesale prices reached a trough of 82 in July 1930 and then rose by 20.7% in three
years to reach 99 in the fall of 1833. The reason for the price rise is simple:
72
For the BUS data, see Catterall, Second Bank, p. 503; for total money
supply, see Peter Temin, The Jacksonian Economy (New York: W.W. Norton, 1969), p.71.
73
i
Temin, Jacksonian Economy, passim. Also' see Hugh Rockoff, "Money, Prices,
and Banks in the Jacksonian Era," in R. Fogel and S. Engerman, eds., The
Reinterpretation of American Economic History (New York: Harper & Row, 1971),
pp. 448-458.

87
the total money supply had risen from $109 million in 1830 to $159 million
in 1833, an increase of 45.9% or an annual rise of 15.3%.

Breaking the figures

down further, the total money supply had risen from $109 million in 1830 to $155
million a year and a half later, a spectacular expansion of 35%.

Unquestionably,

this monetary expansion was spurred by the still flourishing BUS, which increased
its notes and deposits from January 1830 to January 1832, from a total of
$29 million to $42.1 million, a rise of 45.2%.
Thus, the price and money inflation in the first few years of the 1830s
were, again, sparked by the expanison of the still dominant central bank.
what of the notable inflation after 1833?

But

There is no doubt that the cause of

the price inflation was the remarkable monetary inflation during the same period.
For the total money supply rose from $150 million at the beginning of 1833 to
$267 million at the beginning of 1837, an astonishing rise of 84%, or 21% per
annum.
But, as Temin points out, this monetary inflation was not caused by the
liberated state banks expanding to a fare-thee-well. If it were true that the
state banks used their freedom and their new federal government deposits to
pyramid wildly on the top of specie, then their pyramid ratio would have risen
a great deal, or, conversely, their reserve ratio of specie to notes and
deposits would have fallen sharply.

Yet the banks' reserve ratio was

.16

at the beginning of 1833, and was still .16 at the beginning of 1837.

During

the intervening years, the reserve ratio was never below this figure.

But

this means that the state banks did no more pyramiding after the demise of the
74
BUS as a central bank than they had done before.

Temin, Jacksonian Economy, pp. 68-74.

88
Conventional historians, believing that the BUS

must have restrained

the expansion of state banks, naturally assumed that they were hostile to the
central bank.

But now Jean Wilburn has discovered that the state banks

overwhelmingly supported the BUS:
We have found that Nicholas Biddle was correct when he said,
"state banks in the main are friendly." Specifically, only in
Georgia, Connecticut, and New York was there positive evidence
of hostility. A majority of state banks in some states of the South,
such as North Carolina and Alabama, gave strong support to the Bank
as did both the Southwest States of Louisiana and Mississippi.
Since Virginia gave some support, we can claim that state banks in the
South and Southwest for the most part supported the Bank. New
England, contrary to expectations, showed the banks of Vermont and
New Hampshire behind the Bank, but support of Massachusetts was
both qualitatively and quantitatively weak. The banks of the
Middle states all supported the Second Bank except for those of New
York. 7 5
What, then, was the cause of the enormous monetary expansion of the
1830s?

It was a tremendous and unusual expansion of the stock of specie

in the nation 1 s banks.

The supply of specie in the country had remained

virtually constant at about $32 million, from the beginning of 1823 until the
beginning of 1833.

But the proportion of specie to bank notes held by the pub-

lic as money dropped during this period from 23% to 5%, so that more specie
flowed from the public into the banks to fuel the relatively moderate monetary
expansion of the 1820s.

But, starting at the beginning of 1833, the total

specie in the country rose swiftly from $31 million to $73 million at the
beginning of 1837, for a rise of 141.9% or 35.5% per annum.

Hence, even though

increasing distrust of banks led the public to withdraw some specie from them,
so that the public now held 13% of its money in specie instead of 5%, the banks

Jean Alexander Wilburn, Biddle's Bank: The Crucial Years (New York:
Columbia University Press, 1970), pp. 118-119. Quoted in Hummel, "Jacksonians,"
p. 155.

89
were able to increase their notes and deposits at precisely the same rate
as the expansion of specie flowing into their coffers.
Thus, the Jackson Administration is absolved from blame for the
1833-37 inflation.

In a sense, the state banks are as well; certainly,

they scarcely acted as being "freed" by the demise of the BUS.

Instead, they

simply increased their money issues proportionately with the huge increase of
specie.

Of course, the basic fractional reserve banking system is scarcely

absolved from responsibility, since otherwise the monetary expansion in ab76
solute terms would not have been as great.
The enormous increase in specie was the result of two factors: first and
foremost, a large influx of silver coin from Mexico, and secondly, the sharp
cut in the usual export of silver to the Orient.

The latter was due to the

substantial increases in China's purchase of opium instead of silver from
abroad.

The influx of silver was the result of paper money inflation by

the Mexican government, which drove Mexican silver coins into the United
States, where they circulated as legal tender.

The influx of Mexican coin has

been attributed to a possible increase in the productivity of the Mexican
mines, but this makes little sense, since the inflow stopped permamently as
soon as 1837.

The actual cause was an inflation of the Mexican currency by the

Santa Anna regime, which financed its deficits during this period by minting
highly debased copper coins.

Since the debased copper grossly overvalued

copper and undervalued gold and silver, both of the latter metals proceeded to
flow rapidly out of Mexico until they virtually disappeared.

Silver, of course,

and not gold, was flowing into the United States during this period.

Indeed,

76
Moreover, if the Jacksonians had been able to move more rapidly in
returning the banking system to a 100% specie basis, they could have used the
increase in specie to ease the monetary contraction required by a return to a
pure specie money.

90
the Mexican government was forced to rescind its actions in 1837 by shifting
the copper coinage to its proper ratio.
77

The influx of Mexican silver into the

U.S. promptly ceased.
A bank credit inflation of the magnitude of the 1830s is bound to run
into shoals that cause the banks to stop the

expansion and begin to contract.

As the banks expand, and prices rise, specie is bound to flow out of the country
and into the hands of the domestic public, and the pressure on the banks to
redeem in specie will intensify, forcing cessation of the boom and even monetary
contraction.

In a sense, the immediate precipating cause is of minor importance.

Even so, the Jackson Administration has been unfairly blamed for precipitating the
Panic of 1837 by issuing the Specie Circular in 1836.
In 1836, the Jackson Administration decided to stop the enormous speculation
in Western public lands that had been fueled, during the past two years, by
the inflation of bank credit.

Hence, Jackson decreed that public land payments

would have to be made in specie.

This had the healthy effect of stopping

public land speculation, but recent studies have shown that the Specie Circular
78
had very little impact in putting pressure on the banks to pay specie.

From

the point of view of the Jacksonian program, however, it was important as moving
^ M e x i c o was pinpointed as the source of the inflow of specie by Temin,
Jacksonian Economy, p. 80, while the disclosure of the cause in Mexican copper
inflation came in Rockoff, "Money, Prices, and Banks," p. 454.
78
Public land sales by the federal government, which had been going steadily
at approximately $4-6 million per year, suddenly spurted upward in 1835 and 1836,
to $16.2 million and $24-9 million respectively. The latter was the largest sale
of public lands in American history, and the 1835 figure was the second largest.
Temin, Jacksonian Economy, p. 124. The first demonstration of the negligible
impact of the Specie Circular on the position of the banks was Richard H.
Timberlake, Jr., "The Specie Circular and Distribution of the Surplus,"
Journal
of Political Economy, VoL 68 (April 1960), pp. 109-117. reprinted in Timberlake,
Origins, pp. 50-62. Timberlake defended his thesis in idem, "The Specie Circular
and the Sale of Public Lands: A Comment," Journal of Economic History, Vol. 25
(September, 1965), pp. 414-416.

91
toward putting the U.S. government finances on a purely specie basis.
Another measure advancing the Jacksonian program was also taken in 1836.
Jackson, embarrassed at the government having amassed a huge budget surplus
during his eight years in office, ordered the Treasury to distribute the surplus
proportionately to the states.
payable in specie.

The distribution was made in notes presumably

But again, Temin has shown that the distribution had little

impact on movements of specie between banks and therefore in exerting contractionist
79
pressure upon them.
What, then, was the precipitating factor in triggering the Panic of 1837?
Temin plausibly argues that the Bank of England, worried about inflation in
Britain, and the consequent outflow of gold, tightened the money supply and
raised interest rates in the latter half of 1836.

As a result, credit contraction

severely restricted the American cotton export trade in London, exports declined,
cotton prices fell, capital flowed into England, and contractionist pressure was
put upon American trade and the American banks.

Banks throughout the United

States—including the BUS—promptly suspended specie payments in May 1837, their
notes depreciated at varying rates, and interregional trade within the country was
crippled.
While banks were able to evade specie payments and continue operations, they
were still obliged to contract credit in order to go back on specie eventually,
since they could not hope to be creating fiat money indefinitely and be allowed
to remain in business.

Finally, the New York banks were compelled by law to resume

paying their contractual obligations, and the other banks followed in the fall
of 1838.

During the year 1837, the money supply fell from $276 million to

$232 million, a large drop of 15.6% in one year.

Total specie in the country con-

tinued to increase in 1837, up to $88 million, but increased public distrust
of the banks (reflected in an increased proportion of money held as specie
79

Temin, Jacksonian Economy, pp. 128-136.

92
from 13 to 23%), put enough pressure upon the banks to force the contraction.
banks' reserve ratio rose from .16 to .20.

In response to the monetary

The

contraction,

wholesale prices fell precipitately, by over 30% in seven months, declining from
131 in February 1837 to 98 in September of that year.
In 1838, the economy revived.

Britain resumed easy credit that year,

cotton prices rose, and a short-lived boomlet began.

Public confidence in the

banks unwisely returned as they resumed specie payment, and as a result, the
money supply rose slightly during the year, and prices rose by 25%, increasing
from 98 in September 1837 to 125 in February 1839.
Leading the boom of 1838 were state governments, who, finding themselves
with the unexpected* windfall of a distributed surplus from the federal government,
proceeded to spend the money

wildly and borrow even more extravagantly on public

works and other uneconomic forms of "investment."

But the state governments

engaged in rashly optimistic plans that their public works would be financed
heavily from Britain and other countries, and the cotton boom on which these hopes
depended again collapsed in 1839.

The states had to abandon their projects

en masse. Cotton prices declined and severe contractionist pressure was put on
trade.

Furthermore, the Philadelphia-based BUS had heavily invested in cotton

speculation, and the falling price of cotton forced the BUS, once again, to suspend
payments in October, 1839.

This touched off a wave of general bank suspensions to

the South and West, but this time the banks of New York and New England continued
to redeem their obligations in specie.

Finally, the Bank of the United States,

having for the last time played a leading role in generating a recession and
monetary crisis, was forced to close its doors two years later.
There ensued, with the crisis of 1839, four years of massive monetary and
price deflation.

Unsound banks were finally eliminated, unsound investments generated

in the boom were liquidated.

The number of banks, during these four years, fell

93
by 23%.

The money supply fell from $240 million at the beginning of 1839

to $158 million in 1843, a seemingly cataclysmic drop of 34%, or 8.5% per annum.
Prices fell even further, from 125 in February 1839 to 67 in March 1843,
a tremendous drop of 42%, or 10.5% per year.
During the boom, as we have indicated, state governments went heavily into
debt, issuing bonds to pay for wasteful public works.

In 1820, the total indebted-

ness of American states was a modest $12.8 million; by 1830, it rose to $26.5 million.

But then, it started to escalate, reaching $66.5 million in 1835 and

skyrocketing to $170 million by 1839.

The collapse of money, credit banking

prices after 1839 brought these state debts into jeopardy.
Whigs, taking a leaf from their forbears

, and

At this point, the

the Federalists, agitated for the

80
federal government to bail out the states and assume their debts.

After the

crisis of 1839 arrived, some of the southern and western states were clearly
in danger of default, their plight made worse by the fact that the bulk of the
debt was held by British and Dutch capitalists,

and that specie would have to

be sent abroad to meet the heavy interest payments.

The Whigs pressed further

for federal assumption of the debt, the federal government to issue $200 million
worth of bonds in payment.

Furthermore, British bankers put severe pressure on

the United States to assume the state debts if it expected to float further
loans abroad.
The American people, however, spurned federal aid, including even the citizens
of the states in difficulty, and the advent of the Polk Administration ended any
prospects for federal assumption.

The British noted in wonder that the average

American was far more concerned about his personal debts to other individuals
and banks than about the debts of his state.

In fact, the people were quite

80
See Reginald C. McGrane, Foreign Bondholders and American State Debts
(New York: Macmillan, 1935), pp. 6-7, 24ff.

94
willing to have the states repudiate their debts outright.

Demonstrating an astute

perception of the reckless course the states had taken, the typical American response to the problem: "suppose foreign capitalists did not lend any more to the
states?,"

was the sharp retort: "Well who cares if they don't?

We are now as
81

a community heels over head in debt and can scarcely pay the interest."

The

implication was that the disappearance of foreign credit to the states would
have the healthy effect of cutting off their wasteful s p e n d i n g — a s well as
avoiding the imposition of a crippling tax burden to pay for the interest and
principal.

There was in this response an awareness by the

public that they and

their government were separate and sometimes even hostile entities rather than one

and the same organism.
By 1847, four western and southern states (Mississippi, Arkansas, Michigan,
and Florida) had repudiated all or part of their debts.

Six other states

(Maryland, Illinois, Indiana, Louisiana, Arkansas, and Pennsylvania) had defaulted
from three to six years before resuming payment.
It is

evident, then, that the 1839-43 contraction was healthy for the

economy, in liquidating unsound investments, debts and banks, including the
pernicious Bank of the United States.

But didn't the massive deflation have

catastrophic e f f e c t s — o n production, trade, employment, as we have been led to
believe?

In a fascinating analysis and comparison with the deflation of 1929-33

a century later, Professor Temin shows that the percentage of deflation over the
oo
comparable four years (1839-43, and 1929-33), was almost the same.
81
McGrane, Foreign Bondholders, pp. 39-40.

Yet, the

82
The^Americans also pointed out that the banks, including the Bank of the
United States, who were presuming to denounce repudiation of state debt, had
already suspended specie payments and were largely responsible for the contraction.
"Let the bondholders look to the United States Bank and to the other banks for
their payment declared the people." McGrane, Foreign Bankholders, p. 48.
83
From 1839-43, the money supply, as we have seen, fell by 34%, wholesale
prices by 42%, and the number of banks by 23%. In 1929-33, the money supply fell
by 27%, prices by 31%, and the number of banks by 42%. Temin, Jacksonian Economy,
pp. 155ff.

95
effects on real production of the two deflations were very different.
in 1929-33, real gross investment fell catastrophically

Whereas

by 91%, real consumption

by 19%, and real GNP by 30%; in 1839-43, investment fell by 23%, but real consumption increased by 21% and real GNP also rose by 16%.

The interesting problem

is to account for the enormous fall in production and consumption in the 1930s,
as contrasted to the rise in production and consumption in the 1840s.

It seems

that only the initial months of the contraction worked a hardship on the American
public, and that most of the earlier deflation was a period of economic growth.
Temin properly suggests that the reason can be found in the downward flexibility
of prices in the nineteenth century,so that massive monetary contraction would
lower prices but not particularly cripple the world of real production or
standards of living.

In contrast, in the 1930s government placed

massive

roadblocks on the downward fall of prices and wage rates, and hence brought about
severe and continuing depression of production and living standards.
The Jacksonians had no intention of leaving a permanent system of pet
banks, and so, after the retirement of Jackson, his successor Martin Van Buren fought
to establish the Independent Treasury System, in which the federal government
conferred no special privilege or inflationary prop on any bank; instead of a central bank or pet banks, the government was to keep its funds purely in specie,
in its own treasury v a u l t s — o r its "subtreasury" branches—and simply take in
and spend funds from there.

Van Buren finally managed to establish the Independent

Treasury System, which would last until the Civil War.

At long last, the

Jacksonians had achieved their dream of severing the federal government

totally

from the banking system, and placing its finances on a purely hard-money, specie
basis.

96
The Jacksonians and the Coinage Legislation of 1834

We have seen that the Coinage Act

of 1792 established a bimetallic system,

in which the dollar was defined as equalling both 371.25 grains of pure silver and
24.75 grains of pure g o l d — a fixed weight ratio of 15 grains of silver to 1 grain
of gold.

But bimetallism foundered on Gresham's Law.

After 1805, the world

market value of silver fell to approximately 15.75 to 1, so that the U.S.
fixed mint ratio greatly undervalued gold and overvalued silver.

As a result,

gold flowed out of the country and silver flowed in, so that, after 1810, only
silver coin, largely overvalued Spanish-Amercan fractional silver coin, circulated within the United States.

The rest of the currency was inflated bank

paper in various stages of depreciation.
The Jacksonians, as we have seen were determined to eliminate inflationary
paper money and substitute a hard-money consisting of s p e c i e — o r , at the m o s t —
of paper 100%-backed by gold or silver.

On the federal level, this meant abolishing

the Bank of the United States and establishing the Independent Treasury.

The

rest of the fight would have to be conducted, during the 1840s and later, at the
state level where the banks were chartered.
could do was readjust the specie coinage.

But one thing the federal government
In particular, the Jacksonians were

anxious to eliminate small denomination bank notes ($20 and under) and substitute
gold and silver coins for them.

They reasoned that the average American largely

used these coins, and they were the ones bilked by inflated paper money.

For a

standard to be really gold and silver, it was vital that gold or silver coins circulate and be used as a meduim of exchange by the average American.
To accomplish this goal, the Jacksonians set about to establish a comprehensive
program.

As one vital step, one of the Coinage Acts of 1834 readjusted the old

97
mint ratio of 15:1 that had undervalued gold and driven it out of

circulation.

The Coinage Act devalued the definition of the gold dollar from the original
24.75 grains to 23.2 grains, a debasement of gold by 6.26%.

The silver dollar

was left at the old weight of 371.25 grains, so that the mint ratio between silver
and gold was now fixed at a ratio of 16:1, replacing the old 15:1.

It was unfor-

tunate that the Jacksonians did not appreciate silver (to 396 grains) instead of
debasing gold, for this set a precedent for debasement that was to plague
84
America in 1933 and after.
The new ratio of 16:1, however* now undervalued silver and overvalued gold,
since the world market ratio had been approximately 15.79:1 in the years before
1834.

Until recently, historians have assumed that the Jacksonians deliberately

tried to bring in gold and expel silver, and establish a monometallic gold
standard by the back door.

Recent study has shown, however, that the Jacksonians

only wanted to givje gold inflow a little push through a slight undervaluation, and
85
that they anticipated a full coin circulation of both gold and silver.
for example, the world market ratio was as high as 15.93:1.

In 1833,

Indeed, it turns

out that for two decades the Jacksonians were right, and that the slight 1%
premium of silver over gold was not enough to drive the former coins out of
circulation.

Both silver and gold were 'imported from then on, and silver and

Probably the Jacksonians did so in order to preserve the illusion that the
original silver dollar, the "dollar of our fathers" and the standard currency of
the day, remained fixed in value, Laughlin, History of Bimetallism, p. 70.
85
For the illuminating discovery that the Jacksonians were interested in
purging small bank notes by bringing in gold, see Paul M. O'Leary, "The Coinage
Legislation of 1834," Journal of Political Economy, Vol. 45 (February 1937),
pp. 80-94. For the development of this insight by Martin, who shows that the
Jacksonians anticipated a coinage of both gold and silver, and reveals the
comprehensive Jacksonian coinage program, see David A. Martin, !tMetallism, Small
Notes, and Jackson r s War with the B.U.S.," Explorations in Economic History,
Vol. 11 (Spring 1974), pp. 227-247.

86
For the next 16 years, from 1835-1850, the market ratio averaged 15 8:1,
a silver premium of only 1% over the 16:1 mint ratio. For the data, see Laughlin,
History of Bimetallism, p. 291.

98
gold coins both circulated successfully side—by-side until the early 1350s.
Lightweight Spanish fractional silver remained overvalued even at the mint
ratio, and so it flourished in circulation, replacing depreciated small notes.
Even American silver dollars were now retained in circulation, since they were
"shielded11 and kept circulating by the presence of new
87

heavyweight Mexican silver

dollars, which were exported instead.
In order to stimulate the circulation of both gold and silver coin instead
of paper notes, the Jacksonians also passed two companion Coinage Acts in 1834.
The Jacksonians were not monetary nationalists; specie was specie, and they saw
that there was no reason that foreign gold or silver coins should not circulate
with the same full privileges as American-minted coins.

Hence, the Jacksonians,

in two separate measures, legalized the circulation of all foreign silver and
88,89
gold coins, and they flourished in circulation until the 1850s.
A third plank in the Jacksonian coinage platform was to establish branch
U.S. mints so as to coin the gold found in newly-discovered mines in Georgia
and North Carolina.

The Jackson Administration finally succeeded in getting

Congress to do so in 1835, when it set up branch mints to coin gold in North
87

Martin, "Bimetallism," pp. 435-437. Spanish fractional silver coins were
from 5 to 15% underweight, and so their circulation in the U.S. at par by
name (or "tale") meant that they were still considerably overvalued.

88
As Jackson's Secretary of the Treasury Levi Woodbury explained the purpose
of this broad legalization of foreign coins: "to provide a full supply and variety
of coins, instead of bills below five and ten dollars," for this would be
"particularly conducive to the security of the poor and middling classes, who,
as they own but little in, and profit but little by, banks, should be subjected to
as small risk as practicable by their bills." Quoted in Martin, "Metallism," p.242.
89
In 1837 another Coinage Act made a very slight adjustment in the mint
ratios.
In order to raise the alloy composition of gold coins to have them similar
to silver, the definition of the gold dollar was raised slightly from 23.2 to 23.22
grains. With the weight of the silver dollar remaining the same, the silver/
gold ratio was now very slightly lowered from 16.002:1 to 15.998:1.
Further
slight adjustments in valuations of foreign coins in another Coinage Act of 1843
resulted in the undervaluation of many foreign coins, and their gradual disappearance.
The major ones—Spanish fractional silver—continued however to circulate widely.
Martin, "Bimetallism," p. 436.

Carolina and Georgia, and silver and gold at New Orleans.
Finally, on the federal level, the Jacksonians sought to levy a tax on small
bank notes and to prevent the federal government from keeping its deposits in
state banks, issuing small notes, or from accepting small bank notes in taxes.
They were not successful, but the Independent Treasury eliminated public deposit
in state banks and the Specie Circular, as we have seen, stopped the receipt
of bank notes for public land sales.

From 1840 on the hard-money battle would

be waged at the state level.
In the early 1850s, Gresham's Law finally caught up with the bimetallist
idyll that the Jacksonians had forged in the 1830s, replacing the
de facto silver monometallism.

earlier

The sudden discovery of extensive gold mines in

California, Russia, and Australia greatly increased gold production, reaching a
peak in the early 1850s.

From the 1720s through the 1830s, annual world gold

production averaged $12.8 million, never straying very far from that norm.

Then,

world gold production increased to an annual average of $38.2 million in the 1840s,
and spurted upward to a peak of $155 million in 1853.

World gold production

then fell steadily from that peak to an annual average of $139.9 million in the
1850s and to $114.7 million from 1876-1890.

It was not to surpass this peak

91
until the 1890s.
The consequence of the burst in gold production was, of course, a fall in
the price of gold relative to silver in the world market.

The silver/gold ratio

declined from 15.97 in January 1849 to an average of 15.70 in 1850 to 15.46 in
92
1851 and to an average of 15.32:1 in the eight years from 1853 to 1860.
Martin, "Metallism, M p. 240.
91
On gold production, see Laughlin, History of Bimetallism, pp. 283-286;
David A. Martin, "1853: The End of Bimetallism in the United States," Journal
of Economic History, Vol. 33 (December 1973), p. 830.
92
The silver/gold ratio began to slide sharply in October and November 1850.
Laughlin, History of Bimetallism, pp. 291, 194.

100
As a result, the market premium of American silver dollars over gold quickly rose
above the one percent margin which was the estimated cost of shipping silver
coin abroad.

That premium, which had hovered around 1% since the mid - 1830s. sud-

denly rose to 4.5% at the beginning of 1851, and after falling back to about
2% at the turn of 1852, bounced back up and remained at the 4-5% level.
The result was a rapid disappearance of silver from the country, the
heaviest and therefore most undervalued coins vanishing first.

Spanish milled

dollars, which contained 1% to 5% more silver than American dollars, commanded
a premium of 7%, and went first.

Then went the full weight American silver

dollars, and after that American fractional silver coins, which were commanding
a 4% premium by the fall of 1852.

The last coins left were the worn Spanish

and Mexican fractions, which were depreciated by 10 to 15 percent.

By the

beginning of 1851, however, even these worn foreign silver fractions had gone to
a one percent premium, and were beginning to go.
It was clear that America was undergoing a severe small coin crisis.
coins were flowing into the country, but
usable for small

Gold

they were too valuable to be technically

denomination coins. The Democratic Pierce Administration saw

with horror a flood of millions of dollars of unauthorized private small
notes flood into circulation in early 1853 for the first time since the 1830s.
The Jacksonians were in grave danger of losing the fight for hard-money coinage,
at least for the smaller and medium denominations.

Something had to be done

quickly. 9 3
The ultimate breakdown of bimetallism had never been clearer.

If bimetallism

is in the long-run not viable, this leaves two free-market, hard money alternatives:
(a) silver monometallism with the dollar defined as a weight of silver only, and
gold circulating freely by weight at freely-fluctuating market rates; or
93

Martin, "Metallism," p. 240

101
(b) gold monometallism with the dollar defined only as a weight of gold, with
Silver circulating by weight.

Each of these is an example of what has been

called "parallel standards" or "free metallism," in which two or more metal coins
are allowed to fluctuate freely within the same area, and exchange at free market
prices.

As we have seen, colonial America was an example of such parallel

standards, since foreign gold and silver coins circulated freely, and at fluctuating
94
market prices.
The United States could have taken this opportunity of monetary crisis to
95
go on either version of a parallel standard.
of doing so.

Apparently, however, few thought

Another viable though inferior solution to the problem of bimetallism

was to establish a monometallic system, either de facto or de jure, with the
94
For an account of how parallel standards worked in Europe from the medieval
period through the eighteenth century, see Luigi Einaudi, "The Theory of Imaginary
Money from Charlemagne to the French Revolution," in F. Lane and J. Riemgrsma, eds.
Enterprise and Secular Change (Homewood, 111.: Irwin, 19*53), pp. 229-261. Robert
Lopez contrasts the ways in which Florence and Genoa each returned to gold coinage
in the mid-thirteenth century, after a gap of half a millenium: "Florence, like
most medieval states, made bimetallism and trimetallism a base of its monetary
policy....it committed the government to the Sysiphean labor of readjusting the
relations between different coins as the ratio between the different metals
changes, or as one or another coin was debased.... Genoa, on the contrary, in conformity with the principle of restricting state intervention as much as possible
[italics ours], did not try to enforce a fixed relation between coins of different
metals.... Basically, the gold coinage of Genoa was not meant to integrate the
silver and bullion coinages but to form an independent system." Robert Sabatino
Lopez, "Back to Gold, 1252," Economic History Review (April 1956), p.224. Also
see James Rolph Edwards, "Monopoly and Competition in Money," The Journal of
Libertarian Studies, Vol. IV (Winter 1980), p. 116. For an analysis of parallel
standards, see Ludwig von Mises, The Theory of Money and Credit, (3rd Ed.,
Indianapolis: Liberty Classics, 1980), pp. 87, 89-91, 205-207.
95
Given parallel standards, the ultimate, admittedly remote solution would
be to eliminate the term "dollar" altogether, and simply have both gold and silver
coins circulate by regular units of weight: "Grain," "Ounce," or "Gram." If that
were done, all problems of bimetallism, debasement, Gresham's Law, etc., would
at last disappear. While such a pure free-markst solution seems remote today,
the late 19th century saw a series of important international monetary conferences
trying to move toward a universal gold or silver gram, with each national currency
beginning as a simple multiple of each other, and eventually only units of weight
being used. Before the conferences foundered on the gold/silver problem, such
a result was not as remote or Utopian as we might now believe. See the fascinating
account of these conferences in Henry B. Russell, International Monetary Conferences
(New York:Harper & Bros., 1898).

102
other metal circulating in the form of lightweight, and therefore overvalued,
or "token" coinage. Silver

monometallism was

immediately unfeasible, since

it was rapidly flowing out of the country, and because gold, being far more
valuable than silver, could not technically function easily as a lightweight,
subsidiary coin.

The only feasible solution, then, within a monometallic

framework, was to make gold the basic standard, and let highly overvalued,
essentially token, silver coins, function as subsidiary small coinage.

Cer-

tainly, if a parallel standard was not to be adopted, the latter solution would
be far better than allowing depreciated paper notes to function as small
currency.
Under pressure of the crisis, Congress decided, in February 1853, to
keep the de jure bimetallic standard but to adopt a d_e facto gold monometallic
standard, with fractional silver coins circulating as a deliberately overvalued
subsidiary coinage, legal tender up to a maximum of only five dollars.
fractional silver coins were debased by 6.91%.
4% market premium over gold, this meant that

The

With silver commanding about a
fractional silver was debased

3% below gold. At that depreciated rate, fractional silver was not overvalued
in relation to gold, and remained in circulation.

By April, the new subsidiary

quarter dollars proved to be popular, and by early 1854 the problem of the shortage
of small coins in America was over.
In rejecting proposals either to go over completely to de jure gold monometallism, or to keep the ^existing bimetallic system, Congress was choosing a gold
standard temporarily, but keeping its options open.

The fact that it continued

the old fullbodied silver dollar, the "dollar of our fathers," demonstrates that
an eventual return to de facto

bimetallism was by no means being ruled out—-

albeit Gresham 1 s Law could not then maintain the American silver dollar in

103
,
.
circulation.

In 1857, an important part of the Jacksonian coinage program was repealed,
as Congress, in an exercise of monetary nationalism, eliminated all legal tender
power of foreign c o i n s . ^

Decentralized Banking from the 1830 r s to the Civil War

After the central bank was eliminated in the 1830s, the battle for hard
money largely shifted to the state governmental arena.

During the 1830s,

the major thrust was to prohibit the issue of small notes, which was accomplished
for notes under five dollars in ten states by 1832, and subsequently five others
98
restricted or prohibited such notes.
The Democratic Party became ardently hard-money in the various states
after the shock of the financial crisis of 1837 and 1839.

The Democratic

drive was toward the outlawry of all fractional reserve bank paper.

Battles

were fought, also, in the late 1840s, at constitutional conventions of many
states, particularly in the West.

In some Western states the Jacksonians won

temporary success, but soon the Whigs would return and repeal the bank prohibition.

The Whigs, trying to find some way to overcome the general revulsion

against banks after the crisis of the late 1830s, adopted the concept of "free"
banking, which had been enacted by New York and Michigan in the late 1830s.
From New York, the idea spread outward to the rest of the country, and triumphed
in fifteen states by the early 1850s. On the eve of the Civil War, 18 out of
99
the 33 states in the Union had adopted "free" banking laws.
96
For an excellent portrayal of the Congressional choice in 1853, see
Martin, "1853," pp. 825-844.
97
Only Spanish-American fractional silver coins were to remain legal tender,
and they were to be received quickly at government offices and immediately reminted into American coins. Hepburn, History of Currency, pp. 66-67.
98
See Martin, "Metallism," pp. 242-243.
99
Hugh Rockoff, The Free Banking Era: A Re-Examination (New York- Arno
Press, 1975), pp. 3-4.

104
It must be realized that "free" banking, as it came to be known in
the

United States before the Civil War, was unrelated to the philosophic

concept of free banking analyzed by economists.

As we have seen earlier,

genuine free banking is a system where entry into banking is totally free, the
banks are neither subsidized nor regulated, and at the first sign of failure
to redeem in specie payments, the bank is forced to declare insolvency
and close its doors.
"Free" banking before the Civil War, on the other hand, was very different.* 0 0
As we have pointed out, the government allowed periodic general suspensions
of specie payments whenever the banks over expanded and got into trouble—
the latest episode was in the Panic of 1857.

It is true that bank incorporation

was now more liberal, since any bank which met the legal regulations could become
incorporated automatically without lobbying for special legislative charters,
as had been the case before,

But the banks were now subject to a myriad of

regulations, including edicts by state banking commissioners, and high minimum
capital requirements which greatly restricted entry into the banking business.
But the most pernicious aspect of "free" banking was that the expansion of
bank notes and deposits was directly tied to the amount of state government
securities which the bank had invested in and posted as bond with the state.

effect, then, state government bonds became the reserve base upon which the banks
were allowed to pyramid a multiple expansion of bank notes and deposits.

Not

only did this system provide explicitly or implicitly for fractional reserve
banking; but the pyramid was tied rigidly to the amount of government bonds
purchased by the banks.

This provision deliberately tied banks and bank credit

expansion to the public debt; it meant that the more public debt the banks

IQ^Rockoff goes so far as to call free banking the "antithesis of
laissez-faire banking laws." Hugh Rockoff, "Varieties of Banking and
Regional Economic Development in the United States, 1840-1860," Journal
of Economic History, Vol. 35 (March 1975), p. 162. Quoted in Hummel,
"Jacksonians," p. 157.

105
purchased, the more they could create and lend out new money.

Banks, in short,

were encouraged to monetize the public debt, state governments were thereby
encouraged to go into debt, and government-and-bank inflation were hence
intimately linked.
In addition to allowing periodic suspension of specie payments, federal
and state governments conferred the privilege upon the banks of their notes
being accepted in taxes.

Moreover, the general prohibition of interstate

branch banking—and often of intrastate branches as well—greatly

inhibited

the speed by which one bank could demand payment from other banks in specie.
In addition, state usury laws, pushed by the Whigs and opposed by the Democrats, made credit excessively cheap for the riskiest borrowers, and encouraged inflation and speculative expansion of bank lending.
Furthermore, the desire of state governments to finance internal improvements was an important factor in subsidizing and propelling expansion of bank
credit.

As Hammond admits: "The wild-cats lent no money to farmers and

served no farmer interest.

They arose to meet the credit demands not of farmers

(who were too economically astute to accept wildcat money) but of states
engaged in

public improvements.

Despite the flaws and problems, the decentralized nature of the preCivil War banking system meant that banks were free to experiment on their
own with improving the banking system.

The most successful such device was

the creation of the Suffolk System.

^^Hammond, Banks and Politics, p. 627. On free banking, see Hummel,
"Jacksonians," pp. 154-160; Smith, Rationale, pp. 44-45; and Hugh Rockoff,
"American Free Banking Before the Civil War: A Reexamination," Journal of
Economic History, Vol. 32 (March 1972), pp. 417-420. On the effect of usury
laws, see William Graham Sumner, A History of American Currency (New York:
Henry Holt & Co., 1876), p. 125. On the Jacksonians versus their opponents
on the state level after 1839, see William G. Shade, Banks or No Banks: The Money
Issue in Western Politics, 1832-1865 (Detroit: Wayne State University Press,
1972); Herbert Ershkowifz and William Shade, "Consensus or Conflict? Political
Behavior in the State Legislatures During the Jacksonian Era," Journal of
American History Vol. 58 (December 1971), pp. 591-621; and James Roger Sharp,

106
A Free-Market "Central Bank'1

It is a fact almost never recalled that there once existed an American private
bank that brought order and convenience to a myriad of privately issued banknotes.

Further, the Suffolk Bank restrained the over-issuance of these notes.

In short, it was a private central bank that kept the other banks honest.
such it made New England an island of monetary stability in an America

contending

with currency chaos.
Chaos was, in fact, that state in which New England found herself just
before the Suffolk bank was established.

There were a myriad of banknotes

circulating in the area's largest financial center, Boston.
Boston banks which all in Boston knew to be solvent.
state-chartered banks.

Some were issued by

But others were issued by

These could be quite far away, and in those days such distance

impeded both general knowledge about their solvency and easy access in bringing
the banks'notes in for redemption into gold or silver.

Thus, while at the

beginning these country notes were accepted in Boston at par value, this just
encouraged some far-away banks
back them.

to issue far more notes than

they had gold to

So country bank notes began to be generally traded at discounts

to par, of from 1% to 5%.
City banks finally refused to accept country bank notes altogether.
gave rise to the money brokers mentioned earlier in this chapter.

This

But it also

caused hardship for Boston merchants, who had to accept country notes whose real
value they could not be certain of.

When they exchanged the notes with the

brokers, they ended up assuming the full cost of discounting the bills they had

Jacksonians versus the Banks: Politics in the States After the Panic of
1837 (New York: Columbia University Press, 1970).

107
accepted at par.

A False Start

Matters began to change in 1814. The New England Bank of Boston announced
it too would go into the money broker business accepting country notes from holders
and turning them over to the issuing bank for redemption.
still had to pay

the cost.

In 1818, a group of prominent merchants formed the

Suffolk bank to do the same thing.
basic rate of country note

The note holders, though,

This enlarged competition brought the

discount down from 3% in 1814 to 1% in 1818 and

finally to a bare % of 1% in 1820.

But this did not necessarily mean that

country banks were behaving more responsibly in their note creation.

By the end

of 1820 the business had become clearly unprofitable, and both banks stopped
competing with the private money brokers.

The Suffolk became just another Boston

bank.

Operation Begins

During the next several years city banks found their notes representing
an ever smaller part of the total New England money supply.

Country banks were

simply issuing far more notes in proportion to their capital (i.e. gold and silver)
than were the Boston banks.
Concerned about this influx of paper money of lesser worth, both Suffolk and
New England Bank began again in 1824 to purchase country notes.

But this time

they did so not to make a profit on redemption, but simply to' reduce the number
of country notes in ciruclation in Boston.

They had the foolish hope that this would

increase their (better) notes' use thus increasing their own loans and profits.
But the more they purchased country notes, the more notes of even worse
quality (particularly from faraway Maine Banks) would replace them.

Buying these

108
latter involved more risk, so the Suffolk proposed to six other city banks a joint
fund to purchase and send these notes back to the issuing bank for redemption.
seven banks, known as the Associated Banks, raised $300,000 for this purpose.

These
With

the Suffolk acting as agent and buying country notes from the other six, operations
began March 24, 1824. The volume of country notes bought in this way increased
greatly, to $2 million per month by the end of 1825. By then, Suffolk felt strong
enough to go it alone.

Further, it now had the leverage to pressure country banks

into depositing gold and silver with the Suffolk, to make note redemption easier.
By 1838, almost every bank in New England did so, and were redeeming their notes
through the Suffolk Bank.
The Suffolk ground rules from beginning (1825) to end (1858) were as follows:
Each country bank had to maintain a permanent deposit of specie of at least $2000
for the smallest bank, plus enough to redeem all its notes that Suffolk received.
These gold and silver deposits did not have to be at Suffolk, so long as they were
at some place convenient to Suffolk, so that the notes would not have to be sent
home for redemption.

But in practice, nearly all reserves were at Suffolk. (City

banks had only to deposit a fixed amount, which decreased to $5,000 by 1835.) No
interest was paid on any of these deposits.
performing an invaluable service:

But in exchange the Suffolk began

It agreed to accept at par all the notes

it received as deposits from other New England banks in the system, and credit
the depositor banks' accounts on the following day.
With the Suffolk acting as a "clearing bank," accepting, sorting, and
crediting bank notes, it was now possible for any New England bank to accept the
notes of any other bank, however far away, and at face value.

This drastically

cut down on the time and inconvenience of applying to each bank separately for
specie redemption.

Moreover, the certainty spread that the notes of the

Suffolk member banks would be valued at par: It spread at first among other

109
bankers, and then to the general public.

The Country Banks Resist

How did the inflationist country banks react to this?

Not very well,

for as one can see the Suffolk system put limits on the amount of notes they
could issue.

They resented par redemption, and detested systematic specie

redemption, because that forced them to stay honest.

But the country banks

knew that any bank which did not play by the rules would be shunned by the
banks that did; (or at least see their notes accepted only at discount, and
not in a very wide area, at that).

All legal means to stop Suffolk failed:

The Massachusetts Supreme Court upheld in 1827 Suffolk 1 s right to demand
gold or silver for country bank notes, and the State legislature refused to
charter a clearing bank run by country banks; probably rightly assuming* that
these banks would run much less strict operations.

Stung by these set-backs,

the country banks played by the rules, bided their time, and awaited

their

revenge.

Suffolk's Stabilizing Effects

Even though Suffolk's initial objective had been to increase the
circulation of city banks, this did not happen.

In fact, by having their

notes redeemed at par, country banks gained a new respectability.

This

came, naturally, at the expense of the number of notes issued by the worst
former inflationists.

But at least in Massachusetts, the percentage of city

bank notes in circulation fell from 48.5% in 1826 to 35.8% in 1833.

110
Circulation of the Notes of Massachusetts Banks (In Thousands)

Date

All Banks

1823
1824
1825

$3,129
3,843
4,091
4,550
4,936
4,885
4,748
5,124
7,139
7,123
7,889

1826
1827

1828
1829
1830
1831
1832
1833

Boston Banks

Boston Percentage

$1,354
1,797
1,918
2,206
2,103
2,067
2,078
2,171
3,464
3,060
2,824

43.3
46.8
46.9
48.5
42.6
42.3
43.8
42.3
44.8
43.0
35.8

Source: Wilfred S. Lake, The End of the Suffolk System, p. 188.

The biggest, most powerful weapon Suffolk had to keep stability was the power
to grant membership into the system.

It accepted only banks whose notes were

sound. While Suffolk could not prevent a bad bank from inflating, denying it
membership ensured that the notes would not enjoy wide circulation.

And the

member-banks which were mismanaged could be stricken from the list of Suffolk-approved
New England banks in good standing.

This caused the offending bank's notes to

trade at a discount at once, even though the bank itself might be still redeeming
its notes in specie.
In another way, Suffolk exercised a stabilizing influence on the New England
economy.

It controlled the use of overdrafts in the system.

When a member bank

needed money, it could apply for an overdraft, that is, a portion of the excess
reserves in the banking system.

If Suffolk decided that a member bank's loan

policy was not conservative enough, it could refuse to sanction that bank's
application to borrow reserves at Suffolk.

The denial of overdrafts to profligate

banks thus forced those banks to keep their assets more liquid.
central banks today have succeeded in that.)

(Few government

This is all the more remarkable when

Ill
one considers that Suffolk—or any central bank—could have earned extra interest
income by issuing overdrafts irresponsibly.
But Dr. George Trivoli, whose excellent monograph on The Suffolk Bank
we rely on in this study, states

that by providing stability to the New England

banking system "it should not be inferred that the Suffolk bank was operating
purely as public benefactor."

Suffolk in fact made handsome profits.

At its

peak in 1858, the last year of existence, it was redeeming $400 million in notes,
with a total annual salary cost of only $40,000.

The healthy profits were

derived primarily from loaning out those reserve deposits which Suffolk itself,
remember, did not pay interest on. These amounted to over $1 million in 1858.
interest charged on overdrafts augmented that.

The

Not surprisingly, Suffolk stock

was the highest price bank stock in Boston, and by 1850, regular dividends were
10 percent.

The Suffolk Difference

That the Suffolk system was able to provide note redemption much more cheaply
then the U.S. government was stated by a U.S. Comptroller of the Currency.
John Jay Knox compared the two systems from a vantage point of half a century:
"...in 1857 the redemption of notes by the Suffolk Bank was almost $400,000,000
as against $137,697,696 in 1875, the highest amount ever reported under the
National Banking system.

The redemptions in 1898 were only $66, 683,476, at

a cost of $1.29 per thousand.

The cost of redemption under the Suffolk system was

ten cents per $1,000, which does not appear to include transportation.

If this item

is deducted from the cost of redeeming National Bank notes, it would reduce it to
about ninety-four cents.

This difference is accounted for by the relatively

small amount of redemptions by the Treasury, and the increased expense incident
to the necessity of official checks by the Government, and by the higher salaries
paid.

But allowing for these differences, the fact is established

that private

112
enterprise could be entrusted with the work of redeeming the circulating
notes of the banks, and it could thus be done as safely and much more
economically than the same services can be performed by the Government. n

102

The volume of redemptions was much larger under Suffolk than under
the National Banking system.
$229 million per year.

During Suffolk's existence (1825-57)they averaged

The average of the National system from its start in

1863 to about 1898 is put by Mr. Knox at only $54 million.
in 1858, $400 million was redeemed.
$40 million.

This meant that,

Further, at its peak

But the New England money supply was only

astoundingly, the average note was redeemed

ten times per year, or once every five weeks.
Bank capital, note circulation and deposits considered together as
"banking power11 grew in New England on a per capita basis much faster than in any
other region of the country from 1803 to 1850.

And there is some evidence that

New England banks were not as susceptible to disaster during the several banking
panics during that time.

In the Panic of 1837, not one Connecticut bank failed,

nor did any suspend specie payments.

All remained in the Suffolk system.

And

when in 1857, specie payment was suspended in Maine, all but three banks remained
in business.

As the Bank Commission of Maine

stated, "The Suffolk system,

though not recognized in banking law, has proved to be a great safeguard to the
public; whatever objections may exist to the system in theory, its practical
operation

is to keep the circulation of our banks within the bounds of safety."

102
John Jay Knox, A History of Banking in the United States, (New York,
1903), pp. 368-69.

113
The Suffolk's Demise

The extraordinary profits—and power—that the Suffolk had by 1858 attained
spawned competitors.

The only one to become established was a Bank for

Mutual Redemption in 1858.

This bank was partially a response to the somewhat

arrogant behavior of the Suffolk by this time, after 35 years of unprecedented
success.

But further, and more importantly, the balance of power in the state

legislature had shifted outside of Boston, to the country bank areas.
politicians were more amenable to the desires of the

The

over-expanding country banks.

Still, it must be said that Suffolk acted toward the Bank of Mutual Redemption
with spite where conciliation would have helped.

Trying to force Mutual

Redemption out of business, Suffolk, starting October 9, 1858, refused to honor
notes of banks having deposits in the newcomer.

Further, Suffolk in effect

threatened any bank withdrawing deposits from it.

But country banks rallied to

the newcomer, and on October 16, Suffolk announced that it would stop clearing
any country bank notes, thus becoming just another bank.
Only the Bank for Mutual Redemption was left, and though it soon had half
the New England banks as members, it was much more lax toward over-issuance
by country banks.

Perhaps the Suffolk would have returned amid dissatisfaction

with its successor, but in 1861, just over two years after Suffolk stopped clearing
the Civil War began and all specie payments were stopped.

As a final nail in the

coffin, the National Banking System Act of 1863 forbade the issuance of any
state bank notes, giving a monopoly to the government that has continued
ever since.
While it lasted, though, the Suffolk banking system showed that it is
possible in a free market system to^have private banks competing to establish
themselves as efficient, safe and inexpensive clearing houses limiting
over-issue of paper money.

114
The Civil War

The Civil War exerted an even more fateful impact on the American
monetary and banking system than had the War of 1812.

It set the United

States, for the first time except for 1814-17, on an irredeemable fiat currency
that lasted for two decades and led to reckless inflation of prices.
"greenback" currency set a momentous precedent

This

for the post-1933 United States,

and even more particularly for the post-1971 experiment in fiat money.
Perhaps an even more important consequence of the Civil War was the
permanent change wrought in the American banking system.

The federal government

in effect outlawed the issue of state bank notes, and created a new quasicentralized, fractional reserve national banking system which paved the way for
the return of outright central banking in the Federal Reserve system.

The

Civil War, in short, ended the separation of the federal government from banking,
and brought the two institutions together in an increasingly close and permanent
symbiosis.

In that way, the Republican Party, which inherited the Whig admiration

for paper money and governmental control and sponsorship of inflationary
banking, was able to implant the soft-money tradition permanently into the
American system.

Greenbacks

The Civil War led to an enormous ballooning of federal expenditures, which
skyrocketed from $66 million in 1861 to $1.30 billion four years later.

pay for these swollen expenditures, the Treasury initially attempted, in the
fall of 1861,

float a massive $150 million bond issue, to be purchased by

115
the nation's leading banks.

However, Secretary of the Treasury Salmon P.

Chase, a former Jacksonian, cried to require the banks to pay for the loan
in specie which they did not have c

This massive pressure on their specie,

as well as an increased public demand for specie due to a well-deserved
lack of confidence in the banks, brought about a general suspension of
specie payments a few months later, at the end of December, 1861,

This

suspension was followed swiftly by the Treasury itself, which suspended specie
payments on its Treasury notes.
The U*S. government quickly took advantage of being on an inconvertible
fiat standard.

In the Legal Tender Act of February 1862, Congress authorized

the printing of $150 million In new "United States Notes" (soon to be known
as "greenbacks") to pay for the growing war deficits.

The greenbacks were made

legal tender for all debts* public and private, except that the Treasury
continued its legal obligation of paying the interest on its outstanding public
debt in specie.

The greenbacks were also made convertible at par into U.S.

bonds, which remained a generally unused option for the public, and was repealed
a year later.
In creating greenbacks in February, Congress resolved that this would be the
first and last emergency issue.

But printing money is a heady wine, and a

second $150 million issue was authorized in July, and still a third $150 million
in early 1863.

Greenbacks outstanding reached a peak in 1864 of $415.1 million.

To be able to keep paying interest in specie, Congress provided that
customs duties, at least, had to be paid In gold or silver. For a comprehensive account and analysis of the issue of greenbacks in the Civil War, see
Wesley Clair Mitchell, A History of the Greenbacks (Chicago: University of
Chicago Press, 1903). For a summary, see Paul Studenski and Herman E. Kross,
Financial History of the United States (New York: McGraw-Hill, 1952), pp. 141-149.

116
Greenbacks began to depreciate in terms of specie almost as soon as they
were issued.

In an attempt to drive up the price of government bonds, Sec-

retary Chase eliminated the convertibility of greenbacks in July 1863, an act
which simply drove down their value further.

Chase and the Treasury officials,

instead of acknowledging their own premier responsibility for the continued
depreciation of the greenbacks, conveniently placed the blame on anonymous
"gold speculators."

In March, 1863, Chase began a determined campaign, which

would last until he was driven from office, to stop the depreciation by controlling, assaulting, and eventually eliminating the gold market.

In early March,

he had Congress levy a stamp tax on gold sales, and to forbid loans on a
collateral of coin above its par value.

This restriction on the gold market

had little effect, and when depreciation resumed its march at the end of the
year, Chase decided to de facto repeal the requirement that customs duties be
paid in gold.

In late March 1864, Chase declared that importers would be allowed

to deposit greenbacks at the Treasury and receive gold in return at a premium
below the market.

Importers could then use the gold to pay the customs duties.

This was supposed to reduce greatly the necessity for importers to buy gold
coin on the market and therefore to reduce the depreciation.

The outcome,

however, was that the greenback, at 59 cents in gold when Chase began the
experiment, had fallen to 57 cents by mid-April.

Chase was then forced to

repeal his customs duties scheme.
With the failure of this attempt to regulate the gold market, Chase
promptly escalated his intervention.

In mid-April, he sold the massive amount

of $11 million in gold in order to drive down the gold premium of greenbacks.
But the impact was trifling, and the Treasury could not continue this policy
indefinitely, because it had to keep enough gold in its vaults to pay interest
on its bonds.

At the end of the month,

having sunk to below 56 cents in gold.

the greenback was lower than ever,

117
Indefatigably, Chase tried yet again.

In mid-May, 1864, he sold

foreign exchange in London at below-market rates in order to drive down
pounds in relation to dollars, and, more specifically, to replace some of the
U.S. export demand for gold in England.

But this, too, was a failure, and Chase

ended this experiment before the end of the month*
Finally, Secretary Chase decided to take off the gloves.

He had failed

to regulate the gold market; he would therefore end the depreciation of greenbacks by destroying the gold market completely.

By mid-June, he had driven

through Congress a truly despotic measure to prohibit under pain of severe
penalties all futures contracts

in gold, as well as all sales of gold by a

broker outside his own office.
The result was disaster.

The gold market was in chaos, with wide ranges

of prices due to the absence of an organized market.

Businessmen clamored

for repeal of the "gold bill," and, worst of all, the object of the law —
lower the depreciation of the paper dollar —

had scarcely been achieved.

Instead, public confidence in the greenback plummeted, and its depreciation
in terms of gold got far worse.
was worth over 52 cents in gold.

At the beginning of June, the greenback dollar
Apprehensions about the emerging gold bill

drove the greenback down slightly to 51 cents in mid-June.

Then, after the

passage of the bill, the greenback plummeted, reaching 40 cents at the end of
the month.
The disastrous gold bill was hastily repealed at the end of June, and
perhaps not coincidentally, Secretary Chase was ousted from office at the same

118
time.

The war against the speculators was over. 104, 105
As soon as greenbacks depreciated to less than 9 7 cents in gold,

fractional silver coins became undervalued, and so were exported to be exchanged
for gold.

By July 1862, in consequence, no coin higher than the copper/nickel

penny remained in circulation.

The U.S. government then leaped in to fill the

gap with small tickets, first issuing postage stamps for the purpose, then bits
of unglued paper, and finally, after the spring of 1863, fractional paper notes

^4
Chase and the Administration should have heeded the advice of Senator
Jacob Collamer (R-VT) : "Gold does not fluctuate in price.. obecause they gamble
in it; but they gamble in it because it fluctuates...But the fluctuation is
not in the gold; the fluctuation is in the currency, and it is a fluctuation
utterly beyond the control of individuals." Mitchell, History of Greenbacks,
pp. 229-230.

105
On the war against the gold speculators, see Mitchell, History of
Greenbacks, pp. 223-235. The greenbacks fell further to 35 cents in mid-July
on news of military defeats for the North. Military victories, and consequently
rising prospects of possible future gold redemption of the greenbacks, caused a
rise in greenbacks in terms of gold, particularly after the beginning of 1865.
At war's end the greenback dollar was worth 69 cents in gold. Ibid. pp. 23 2238, 423-428.

Some of the greenbacks had been decorated with portraits of President
Lincoln ($5) and Secretary Chase ($1). However, when Spencer Clark, chief
clerk of the Treasury's National Currency Division, put his own portrait on
5 cent fractional notes, the indignant Representative Martin R. Thayer
(R-PA) put through a law, still in force, making it illegal to put the
picture of any living American on any coin or paper money. See Gary North,
"Greenback Dollars and Federal Sovereignty, 1861-1865," in H. Sennholz, ed.,
Gold Is Money (Westport, Conn.: Greenwood Press, 1975) pp. 124,150*

119
A total of $28 million in postage currency and fractional notes was issued by
the middle of 1864.

Even the nickel/copper pennies began to disappear from cir-

culation, as greenbacks depreciated, and the nickel/copper coin began to move
toward being undervalued.

The expectation and finally the reality of under-

valuation drove the coins into hoards and then into exports. Postage and fractional
notes did not help matters, because their lowest denominations were 5 cents
and 3 cents respectively.

The penny shortage was finally alleviated when a

debased and lighter weight penny was issued in the spring of 1864, consisting of
bronze Instead of nickel and c o p p e r . ^ ^
As soon as the nation's banks and the Treasury itself suspended specie
payments at the end of 1861, Gresham's Law went into operation and gold coin
virtually disappeared from circulation, except for the government ? s Interest
payments and importers 1 customs duties.

The swift issuance of legal tender

greenbacks, which the government forced creditors to accept at par, insured the
continued disappearance of gold from then on.
The fascinating exception was California.

There were very few banks during

this period west of Nebraska, and in California the absence of banks was insured
by the fact that note-issuing banks, at least, were prohibited by the California
constitution of 1 8 4 9 . 1 0 8

The California gold discoveries of the late 1840 f s

insured a plentiful supply for coinage.
Used to a currency of gold coin only, with no intrusion of bank notes,
California businessmen took steps to maintain gold circulation and avoid coerced
payment in greenbacks.

At first, the merchants of San Francisco, in November 1862,

jointly agreed to refrain from accepting or paying out greenbacks at any but the
107

See Mitchell, History of Greenbacks, pp. 156-163.

Banks of deposit existed in California, but of course they could not
supply the public's demand for cash. See John Jay Knox, A History of Banking
in the United States (New York: Bradford Rhodes & Co., 1900), pp. 843-845.

120
(depreciated) market value, and to keep gold as the monetary standard.

Any firms

that refused to abide by the agreement would be blacklisted and required to pay
gold in cash for any goods which they might purchase In the future.
Voluntary efforts did not suffice to

overthrow the federal power standing

behind legal tender, however, and so California merchants obtained the passage in
California legislature of a "Specificcontract act" at the end of April 1863.

The

specific contract provided that contracts for the payment of specific kinds of
money would be enforceable in the courts.

After passage of that law, California

businessmen were able to protect themselves against tenders of greenbacks by inserting gold coin payment clauses in all their contracts.

Would that the other
109

states, and even the federal government, had done the same!

Furthermore, the

private banks of deposit in California refused to accept greenbacks on deposit,
newspapers used their influence to warn citizens about the dangers of greenbacks,
and the state government refused to accept greenbacks in payment of taxes.

In that

way, all the major institutions in California joined in refusing to accept or give
their imprimatur to federal inconvertible paper.
Judicial institutions also helped maintain the gold standard and repel the
depreciated U.S. paper.

Not only did the California courts uphold the constitu-

tionality of the specific contracts act, but the California Supreme Court ruled
in 1862 that greenbacks could not be accepted in state or county taxes, since the
state constitution prohibited any acceptance of paper money for taxes.
The state of Oregon was quick to follow California's lead.

Oregon's consti-

tution had also outlawed banks of issue, and gold had for years been the exclusive

currency.

Two weeks after the agreement of the San Francisco merchants,

109

This experience illustrates a continuing problem in contract law: it is
not sufficient for government to allow contracts to be made in gold or gold coin.
It is necessary for government to enforce specific performance of the contracts,
so that debtors must pay in the wieght or value of the gold (or anything else)
required in the contract, and not in some paper dollar equivalent decided by
law or the courts.

121
the merchants of Salem

Oregon, unanimously backed gold as the monetary standard

and refused to accept greenbacks at par.

Two months later, the leading merchants

of Portland agreed to accept greenbacks only at rates current in San Francisco;
the merchants in the rest of the state were quick to follow suit.

The Portland

merchants issued a circular warning of a blacklist of all customers who insisted
on settling their debts in greenbacks, and they would be quickly boycotted and
dealings with them would only be in cash.
Oregon deposit banks also refused to accept greenbacks, and the Oregon
legislature followed California a year and a half later in passing a specific
formance law.

per-

Oregon, too, refused to accept greenbacks in taxes, and strengthened

the law in 1864 by requiring that "all taxes levied by state, counties, or
municipal corporations therein, shall be collected and paid in gold and silver
coin of the United States and not otherwise." 1 1 0
In the same year, the Oregon Supreme Court followed California in ruling that
greenbacks could not constitutionally be received in payment of taxes.
The banking story during the Civil War is greatly complicated by the advent
of the national banking system in the latter part of the War.

But it is clear

that the state banks, being able to suspend specie and to pyramid money and credit
on top of the federal greenbacks, profited greatly by being able to expand during
this period.

Thus, total state bank notes and deposits were $510 million in

1860, and by 1863 the amount rose to $743 million, an increase in state bank
demand liabilities in those three years of 15.2Z per y e a r . 1 1 1

110

Cited in Richard A. Lester, Monetary Experiments (1939, London: David
& Charl es Reprints, 19 70), p. 166. On the California and Oregon maintenance of the
gold standard during this period, see ibid, pp. 161-171. On California, see
Bernard Moses, "Legal Tender Notes in California," Quarterly Journal of Economics,
Vol. Vii (October 1892), pp. 1-25; Mithell, History of Greenbacks, pp. 142-144.
On Oregon, see James H. Gilbert, Trade and Currency in Early Oregon (New York:
Columbia University Press, 1907), pp. 101-122.

111

Historical Statistics, pp. 625, 648-649.

122
It is no wonder, then, that contrary to older historical opinion, many
state banks were enthusiastic about the greenbacks, which provided them with
legal tender which could tunction as a reserve base upon which they could
expand.

As Hammond puts it, "Instead of being curbed (as some people supposed

later), the powers of the banks were augmented by the legal tender issues.
the issues increased, the deposits of the banks would increase. 1 , 1 1 2

Indeed,

Senator Sherman (R-OH) noted that the state batiks favored greenbacks.

And the

principal author of the greenback legislation, Rep. Elbridge G. Spaulding (R-NY),
the chairman of the House Ways and Means Subcommittee that introduced the bill,
was himself a Buffalo banker.
The total money supply of the country (including gold coin, state bank notes,
subsidiary silver, U.S. currency including fractional and greenbacks) amounted to
$745.4 million in 1860.

By 1863, the money supply had skyrocketed to $1,435 bil-

lion, an increase of 92.5% in three years, or 30.8% per annum.

By the end of the

war, the money supply, which now included national bank notes and deposits, totalled
$1,773 billion, an increase in two years of 23.6%, or 11.8% per year.
tire war, the money supply rose from

Over the en-

^5.4 million to $1,773 billion, an increase

of 137.9%, or 27.69
The response to this severe monetary inflation was a massive inflation of
prices.

It is no wouder that the greenbacks, depreciating rapidly in terms of gold,

depreciated in terras of goods as well.

Wholesale "prices rose from 100 in 1860,

to 210.9 at the end of the war, a rise of 110.9% or 22.2% per y e a r . 1 1 4
112
""Bray Hammond, Sovereignty and an Empty Purse: Banks and Policies in
the Civil War (Princeton: Princeton University Press, 1970), pp. 246, 249-250.
Also see North, "Greenback Dollars," pp. 143-148.
liJ

Historical Statistics, pp. 625, 648-649.
In a careful analysis North
estimates the total money supply at approximately $2 billion, and also points
out that counterfeit notes in the Civil War have been estimated to amount to no
less than one-third of the total currency in circulation. North, "Greenback
Dollars," p. 134. The counterfeiting estimates are in William P, Donlon ?
United States Large Size Paper Money, 1861 to 1923 (2nd Ed. Iola, Wis.: Krause,
1970), p. 15.
114
Ralph Andreano, ea., The Economic Impact of the American Civil War
(Cambridge, Mass: Schenckman, 1961), p. 178.^

123
The Republican Administration argued that their issue of greenbacks was
required by stern wartime "necessity."

The spuriousness of this argument is seen

by the fact that greenbacks were virtually not issued after the middle of 1863.
There were three alternatives to the issuance of legal tender fiat money: 1)
the government could have issued paper money but not made it legal tender; it
would have depreciated even more rapidly.

At any rate, they would have had

quasi-legal tender status by being receivable in federal dues and taxes; 2)
it could have increased taxes to pay for the war expenditures; 3) it could have
issued bonds and other securities and sold the debt to banks and non-bank
institutions.

In fact, the government employed both the latter alternatives, and

after 1863 stopped issuing greenbacks and relied on them exclusively, especially
a rise in the public debt.

The accumulated deficit piled up during the war was

$2,614 billion, of which the printing of greenbacks only financed $431.7 million.
Of the federal deficits during the war, greenbacks financed 22.8% in fiscal
1862, 48.5% in 1863, 6.3% in 1864, and none in 1 8 6 5 . 1 1 5

The Confederacy, on the other hand, financed virtually all of its
expenditures through mammoth printing of fiat paper, the Southern version of
the greenback. Confederate notes, which were first issued in June 1861 to a sum
of $1.1 million, skyrocketed until the total supply of confederate notes in
January 1864 was no less than $826.8 million, an increase of 750.6% for three
and a half years, or 214.5% per year. Bank notes and deposits in the Confederacy rose from $119.3 million to $268.1 million in this period, so that the
total money supply rose from $120.4 million to $1,095 billion, or an increase
of 1060% — 302.9% per year. Prices in the Eastern Confederacy rose from 100
in early 1861 to no less than over 4,000 in 1864, and 9,211 at the end of the
war in April, 1865, Thus, in four years, prices rose by 9100%, or an average
of 2275% per annum. See Eugene M. Lerner, "Inflation in the Confederacy,
1861-65," in H. Friedman, ed., Studies in the Quantity Theory of Money (Chicago:
University of Chicago Press, 1956), pp. 163-175; Lerner, "Money, Prices and
Wages in the Confederacy, 1861-65," in Andreano, Economic Impact, pp. 11-40.

124
This Is particularly striking if we consider that the peak deficit came
in 1865, totalling $963.8 million.
debt.

All the rest was financed by increased public

Taxes also increased greatly, revenues rising from $52 million in 1862

to $333.7 niillion in 1865.

Tax revenues as a percentage of the budget rose

from the minuscule 10.7% in fiscal 1862 to over 26% in 1864 and 1865.
It is clear, then, that the argument from "necessity" in the printing of
greenbacks was specious, and, indeed the greenback advocates conceded that it
was perfectly possible to issue public debt, provided that the Administration
was willing to see the prices of its bonds rise and its interest payments rise
considerably.

At least for most of the war, they were not willing to take their

chances in the competitive bond market.

The Public Debt and the National Banking System

The public debt of the Civil War brought into American financial history the
important advent of one Jay Cooke.

The Ohio-born Cooke had joined the moderately

successful Philadelphia investment banking firm of Clark and Dodge as a clerk at
the age of eighteen.

In a few years, Cooke worked himself up to the status of

junior partner, and, in 1857, he left the firm to branch out on his own in canal
and railroad promotion and other business ventures.

There he doubtless would have

remained, except for the lucky fact that he and his brother Henry, editor of the
leading Republican newspaper in Ohio, the Ohio State Journal, were close friends
of U.S. Senator Salmon P. Chase.

Chase, a veteran leader of the anti-slavery

movement, fought for and lost the Republican Presidential nomination in 1860 to
Abraham Lincoln.

116

At that point, the Cookes determined that they would feather

Mitchell, History of the Greenbacks, pp. 61-74; 119f., 128-131.
Also see Don C. Barrett, The Greenbacks and Resumption of Specie Payments,
1862-1879 (Cambridge: Harvard University Press, 1931), pp. 25-57.

125
their nest by lobbying to make Salmon Chase Secretary of the Treasury.

After

heavy lobbying by the Cookes, the Chase appointment was secured, and so Jay
Cooke quickly set up his own investment banking house of Jay Cooke & Co.
Everything was in place; it now remained to seize the opportunity.
the Cooke's father wrote of Henry:

"I took up my pen principally to say that

H.S.'s [Henry's] plan in getting Chase into the Cabinet and [John] Sherman into
the Senate is accomplished, and that now is the time for making money, by
honest contracts out of the government." 1 1 ^
Now indeed was their time for making money, and Cooke lost no time in doing
so.

It did not take much persuasion, including wining and dining, for Cooke

to induce his friend Chase to take an unprecendented step in the fall of 186 2:
granting the House of Cooke a monopoly on the underwriting of the public debt.
With enormous energy, Cooke hurled himself into the task of persuading the mass of
public to buy U.S. government bonds.

In doing so, Cooke perhaps invented the art

of public relations and of mass propaganda; certainly, he did so in Jthe realm of
selling bonds.

As Kirkland writes:

With characteristic optimism, he [Cooke] flung himself into a
bond crusade. He recruited a small army of 2,500 subagents among
bankers, Insurance men, and community leaders and kept them inspired
and informed by mail and telegraph. He taught the American people
to buy bonds, using lavish advertising in newspapers, broadsides, and
posters. God, destiny, duty, courage, patriotism — all summoned
"Farmers, Mechanics, and Capitalists'1 to invest in loans —
H8
loans which of course they had to purchase from Jay Cooke.
And purchase the loans they did, for Cooke's bond sales soon reached the
enormous figure of one to two million dollars a day.

Perhaps $2 billion In bonds

were bought and underwritten by Jay Cooke during the war.

Cooke lost his monopoly

In Henrietta Larson, Jay Cooke, Private Banker (Cambridge: Harvard
University Press, 1936), p. 103. Also see Edward C. Kirkland, Industry Comes
of Age: Business, Labor and Public Policy, 1860-1897 (New York: Holt, Rinehart
and Winston, 1961), p. 20.

118

Kirkland, Industry, pp. 20-21.

126
in 1864, under pressure of rival bankers; but a year later he was reappointed,
to keep that highly lucrative post until the House of Cooke crashed in the Panic
of 1873.
In the Civil War, Jay Cooke began as a moderately successful promoter;
he emerged at war's end a millionaire, a man who had spawned the popular motto,
"as rich as Jay Cooke."

Surely he must have counted the $100,000 he had poured

into Salmon Chase's political fortunes by 1864 one of the most lucrative investments he had ever made.
It is not surprising that Jay Cooke acquired enormous political influence
in the Republican Administration of the Civil War and after.

Hugh McCulloch,

Secretary of the Treasury from 1865 to 1869, was a close friend of Cooke's, and
when McCulloch left office he assumed the post of head of Cooke's London office.
The Cooke brothers were also good friends of General Grant, and so they wielded
great influence during the Grant Administration.
No sooner had Cooke secured the monopoly of government bond underwriting
than he teamed up with his associates Secretary of the Treasury Chase and Ohio's
Senator John Sherman to drive through a measure which was destined to have far
more fateful effects than greenbacks on the American monetary system:
National Banking Acts.

the

The National Banking Acts destroyed the previous decen-

tralized and fairly successful state banking system, and substituted a new,
centralized and far more inflationary banking system under the aegis of Washington
and a handful of Wall Street banks.

Whereas the effects of the greenbacks were

finally eliminated by the resumption of specie payments in 1879, the effects of
the national banking system are still with us.

Not only was this system in place

until 1913, but it paved the way for the Federal Reserve System by instituting
a quasi-central banking type of monetary system.

The "inner contradictions" of

the national banking system were such that the nation was driven either to go

127
onward to a frankly central bank or else to scrap centralized banking altogether
and go back to decentralized state banking.

Given the inner dynamic of state

intervention to keep intensifying, coupled with the almost universal adoption
of a statist ideology after the turn of the twentieth century, which course
the nation would take was unfortunately inevitable.
Chase and Sherman drove the new system through under cover of war necessity,
but it was designed to alter the banking system permanently.

The wartime ground

was to set up national banks which were so structured as to necessarily purchase
large amounts of U.S. government bonds.

Patterned after the "free11 banking

systems, this tied in the nation's banks with the federal government and the
public debt in a close symbiotic relationship.

The Jacksonian embarrassment of

the independent treasury was de_ facto swept away, and the Treasury would now
keep its deposits in a new series of "pets": the national banks, chartered
directly by the federal government.

In this way, the Republican Party was

able to use the wartime emergency, coupled with the virtual disappearance of
the Democrats from Congress, to fulfill the Whig-Republiean dream of a
centralized banking system, able to inflate the supply of money and credit
in a uniform manner, controlled by the federal government.

Meshing with this

was a profound political goal: as Sherman expressly pointed out, a vital object
of the national banking system was to eradicate the embarrassing doctrine of
state's rights, and to nationalize American politics.^^

^ ^ In his important work on Northern intellectuals and the Civil War,
George Fredrickson discusses an influential article by one Samuel Fowler
written at the end of the war: "' The Civil War which has changed the current of
our ideas, and crowded into a few years the emotions of a lifetime,' Fowler
wrote, 'has in measure given to the preceding period of our history the character
of a remote state of political existence.' Fowler described the way in which
the war, a triumph of nationalism and a demonstration of 'the universal tendency
to combination,' had provided the coup de grace for the Jefferson philosophy
of government with its emphasis on decentralization and the protection of local
and individual liberties." George Frederickson, The Inner Civil War: Northern
Intellectuals and the Crisis of the Union (New York: Harper & Row, 196 5),
p. 184. Also see Merrill D. Peterson, The Jeffersonian Image in the American
Mind (New York: Oxford University Press, 1960), pp. 217-218.

128

As established in the Bank Acts of 1863 and 1864, the national banking
system provided for the chartering of national banks by the Comptroller
of the Currency in Washington, D.C.

The banks were "free" in the sense that

any institution meeting the requirements could obtain a charter, but the
requirements were so high (from $50,000 for rural banks to $200,000 in the bigger
cities) that small national banks were ruled out, particularly in the large
cities.120
The national banking system created three sets of national banks:

central

reserve city, which was only New York; reserve city, other cities with over
500,000 population; and country, which included all other national banks.
Central reserve city banks were required to keep 25% of their notes and
deposits in reserve of vault cash or "lawful money," which included gold, silver,
and greenbacks.

This provision incorporated the "reserve requirement" concept

which had been a feature of the "free" banking system.

Reserve city banks, on

the other hand, were allowed to keep one-half of their required reserves in vault
cash, while the other half could be kept as demand deposits (checking deposits)
in central reserve city banks.

Finally,

country banks only had to keep a

minimum reserve ratio of 15% to their notes and deposits; and only 40% of these
reserves had to be in the form of vault cash.

The other 60% of the country

banks 1 reserves could be in the form of demand deposits either at the reserve
city or central reserve city banks.
The upshot of this system was to replace the individualized structure of the
pre-Civil War state banking system by an inverted pyramid of country banks
expanding on top of reserve city banks, which in turn expanded on top of New York
city banks.

Before the Civil War, every bank had to keep its own specie reserves,

120 For a particularly lucid exposition of the structure of the national
banking system, see John J. Klein, Money and the Economy (2nd Ed., New York:
Harcourt, Brace and World, 1970), pp. 140-147.

129
and any pyramiding of notes and deposits on top of that was severely limited
by calls for redemption in specie by other, competing banks as well as by the
general public.

But now, reserve city banks could keep half of their reserves

as deposits in New York City banks, and country banks could keep most of theirs
in one or the other, so that as a result, all the national banks in rthe country
could pyramid in two layers on top of the relatively small base of reserves in
the New York banks.

And furthermore, those reserves could consist of inflated

greenbacks as well as specie.
A simplified schematic diagram can portray the essence of this revolution
in American banking:

Figure 1

notes and
deposits
specie

Figure 1 shows state banks in the decentralized system before the Civil War.
Every bank must stand or fall on its bottom.

It can pyramid notes and deposits

on top of specie, but its room for such inflationary expansion is limited, because
any bank's expansion will cause increased spending by its clients on the goods
or services of other banks.

Notes or checks on the expanding bank will go into

the coffers of other banks, which will call on the expanding bank for redemption.
This will put severe pressure on the expanding bank, which cannot redeem all of
its liabilities as it is, and whose reserve ratio has declined, and so it will
be forced to contract Its loans and liabilities or else go under.

130
Figure 2

Figure 2 depicts the inverted pyramid of the national banking system.

New

York City banks pyramid notes and deposits on top of specie and greenbacks;
reserve city banks pyramid their notes and deposits on top of specie, greenbacks
and deposits at New York City; and country banks pyramid on top of both.

This

means that, for example, if New York City banks inflate and expand their
notes and deposits, they will not be checked by other banks calling upon them for
redemption.

Instead, reserve city banks will be able to expand their own loans

and liabilities by pyramiding on top of their own increased deposits at New York
banks.

In turn, the country banks will be able to inflate their credit by

131

pyramiding on top of their increased deposits at both reserve city and New
York banks.

The whole nation is able to inflate uniformly and relatively

unchecked by pyramiding on top of a few New York City banks.
The national banks were not compelled to keep part of their reserves
as deposits in larger banks, but they tended to do so —

in the long run, so

that they could expand uniformly on top of the larger banks, and in the short
run because of the advantages of having a line of credit with a larger
"correspondent11 bank as well as earning interest on demand deposits at that
bank.121

121
Banks generally paid interest on demand deposits until the practice
was outlawed in 1934.

132
Let us illustrate in another way how the national banking system pyramided
by centralizing reserves.

Let us consider the hypothetical balance sheets of

122
the various banks.

Suppose that the country banks begin with $1 million in

vault cash as their reserves.

With the national bank system in place, the country

banks can now deposit three-fifths, or $600,000 of their cash in reserve city
banks, in return for interest-paying demand deposits at those banks.
The balance-sheet changes are now as follows:
Country Banks
Assets

Liabilities + Equity

Reserves
Vault cash

-$600,000

Deposits at
Reserve City
banks

+$600,000

Reserve City Banks
Assets

Liabilities + Equity

Reserves
Vault cash

+$600,000

Demand deposits
due country
banks

Total reserves for the two sets of banks have not changed.

+$600,000

But now

because the country banks can use as their reserves deposits in reserve city
banks, the same total reserves can now be used by the banks to expand far more

122

Adapted from Klein, Money and the Economy, pp. 144-145.

133
of their credit.

For now $400,000 in cash supports the same total of notes

and deposits that the country banks had previously backed by $1 million,
and the reserve city banks can now expand $2.4 million on top of the new
$600,000 in cash —

or rather, $1.8 million in addition to the $600,000

due to the city banks.

In short, country bank reserves have remained the same,

but reserve city bank reserves have increased by $600,000, and they can
engage in 4:1 pyramiding of credit on top of that.
But that is not all.

For the reserve city banks can deposit half of their

reserves at the New York banks.

When they do that, the balance sheets of the

respective banks change as follows:

Reserve City Banks

Assets

Liabilities 4- Equity

Reserves
Vault cash

+$300,000

Deposits at
central reserve
city banks

Demand deposits
due country
banks
+$600,000
+$300,000

Central Reserve City Banks
Assets

Reserves
Vault cash

Liabilities + Equity

+$300,000

Demand deposits
due reserve
city banks
+$300,000

134
Note that since the reserve city banks are allowed to keep half of their
reserves in the central reserve city banks, the former can still pyramid $2.4
million on top of their new $600,000, and yet deposit $300,000 in cash at the
New York banks.

The latter, then, can expand another 4:1 on top of the new

cash of $300,000, or increase their total notes and deposits to $1.2 million.
In short, not only did the national banking system allow pyramiding of the
entire banking structure on top of a few large Wall Street banks, in addition,
the very initiating of the system allowed a multiple expansion of all bank
liabilities by centralizing a large part of the nation's cash reserves from the
individual state banks into the hands of the larger, and especially the New York,
banks.

For the expansion of $1.2 million on top of the new $300,000 at New

York banks, served to expand the liabilities going to the smaller banks, which in
turn could pyramid on top of their increased deposits.

But even without that

further expansion, $1 million which, we will assume, originally
$6 million in notes and deposits,

supported

will now support, in addition to that

$6 million, $2.4 million issued by the reserve city banks, and $1.2 million
by the New York B a n k s — t o say nothing of further expansion by the latter two
sets of banks which will allow country banks to pyramid more liabilities.
In June 1874, the fundamental structure of the national banking system was
changed when Congress, as part of an inflationist move after the Panic of 1873,
eliminated all reserve requirements on notes, keeping them only on deposits.

This

released over $20 million of lawful money from bank reserves, and allowed a further
pyramiding of demand liabilities.^-^

In the long run, it severed the treatment

of notes from deposits, with notes tied rigidly to bank holdings of government debt,
and demand deposits pyramiding on top of reserve ratios in specie and greenbacks.

123 see Hepburn, History of Currency, pp. 317-318.

135

But this centralized inverse pyramiding of bank credit was not all.

For,

in a way modeled by the "free" banking system, every national bank's expansion
of notes was tied intimately to its ownership of U.S. Government bonds.

Every

bank could only issue notes if it deposited an equivalent of U.S. securities as
collateral at the U.S. Treasury, ^ 4

t^at

national banks could only expand their

notes to the extent that they purchased U.S. Government bonds.

This provision

tied the national banking system intimately to the federal government, and, more
particularly, to its expansion of public debt.

The federal government had an

assured, built-in market for its debt, and the more the banks purchased that
debt, the more the banking system could inflate.

Monetizing the public debt

was not only inflationary per se, it provided the basis —
larger city banks —

when done by the

of other banks pyramiding on top of their own monetary

expansion.
The tie-in and the pyramiding process
visions.

were cemented by several other pro-

Every national bank was obliged to redeem the obligations of every

other national bank p.t par.

Thus, the severe market limitation on the

circulation of inflated notes and deposits —
the bank increases —

was abolished.

depreciation as the distance from

And while the federal government could not

exactly make the notes of a private bank legal tender, it conferred quasi-legal
tender status on every national bank by agreeing to receive all its notes and
deposits at par for dues and taxes.

^ ^ Originally, national banks could only issue notes to the value 90
per cent of its U.S. Government bonds. This limitation was changed to 100
per cent in 1900.

Except, of course, as we have seen with the greenbacks, for payment
of customs duties, which had to be paid in gold, to build up a fund to pay
interest on the government debt in gold.

136
It is interesting and even heartening to discover that, despite these enormous
advantages conferred by the federal government, national bank notes fell below
par with greenbacks in the financial crisis of 1867, and a number of national
banks failed the next year.

126

Genuine redeemability, furthermore, was made very difficult under the
national banking system.

Laxity was insured by the fact that national banks were

required to redeem the notes and deposits of every other national bank at par,
and yet it was made difficult for them to actually redeem those liabilities in
specie; for one of the problems with the pre-Civil War state banking system is
that interstate or even intrastate branches were illegal, thereby hobbling the
clearing system for swiftly redeeming another bank's notes and deposits.
might

One

think that a national banking system would at least eliminate this problem,

but on the contrary, branch banking continued to be prohibited, and interstate
branch banking is illegal to this day.

A bank would only havfe to redeem its notes

at its own counter in its home office.

Furthermore, the redemption of notes

was crippled by the fact that the federal government imposed a maximum limit of
127
$3 million a month by which national bank notes could be contracted.
Reserve requirements are now considered a sound and precise way to limit
bank credit expansion, but the precision can work two ways. Just as government
safety codes can decrease safety by setting a lower limit for safety measures and
inducing private firms to reduce safety downward to that comnon level, so reserve

See Smith, Rationale, p. 48.

127

See Smith, Rationale, p. 132.

137
requirements can and ordinarily do serve as lowest common denominators for
bank reserve iatios.

Free competition can and generally will result in banks vol-

untarily keeping higher reserve ratios.

But a uniform legal requirement will

tend to push all the banks down to that minimum ratio.

And indeed we can see

this now in the universal propensity of all banks to be "fully loaned up,"
that is, to expand as much as is legally possible up to the limits imposed by
the legal reserve ratio.

Reserve requirements of less than 100 per cent are

more an inflationary than a restrictive monetary device.
The national banking system was intended to replace the state banks, but
many state banks continued aloof and refused to join, despite the special
privileges accorded to the national banks.

The reserve and capital requirements

were more onerous, and at that period, national banks were prohibited from making
loans on real estate.

With the state banks refusing to come to heel voluntarily,

Congress, in March 1865, completed the Civil War revolution of the banking
system by placing a prohibitive 10 per cent tax on all bank notes —

which had the

desired effect of virtually outlawing all note issues by the state banks.

From

1865 on, the national banks had a legal monopoly on the issue of bank notes.
At first, the state banks contracted and disappeared under the shock, and it
looked as if the United States would only have national banks.

The number of

state banks fell from 1,466 in 1863 to 297 in 1866, and total notes and deposits
in state banks fell from $733 million in 1863 to only $101 million in 1866.
After several years, however, the state banks readily took their place as an
expanding element in the banking system, albeit subordinated to the national banks.
In order to survive, the state banks had to keep deposit accounts at national banks,
from whom they could "buy" national bank notes in order to redeem their deposits.
In short, the state banks now became the fourth layer of the national pyramid of
money and credit, on top of the country and other banks, for the reserves of the

138
state banks became, in addition to vault cash, demand deposits at national
banks, which they could redeem In cash.

The multi-layered structure of bank

inflation under the national banking system was intensified.
In this new structure, the state banks began to flourish.

By 1873, the

total number of state banks had increased to 1,330, and their total deposits
were $789 million.

128

The Cooke-Chase connection with the new national banking system was simple.
As Secretary of the Treasury, Chase wanted an assured market for the government
bonds that were being issued so heavily during the Civil War.

And as the

monopoly underwriter of U.S. Government bonds for every year except one from
1862 to 1873, Jay Cooke was even more directly interested in an assured and
expanding market for his bonds.

What better method of obtaining such a market than

creating an entirely new banking system, the expansion of which was directly tied
to the banks' purchase of government bonds —

from Jay Cooke?

The Cooke brothers played a major role in driving the National Banking
Act of 1863 through a reluctant Congress.

The Democrats, devoted to hard-money,

opposed the legislation almost to a man.

Only a majority of Republicans could be

induced to agree on the bill.
for the measure, Henry Cooke —
Cooke —

After John Sherman's decisive speech in the Senate
now head of the Washington office of the House of

wrote jubilantly to his brother:

"It will be a great triumph, Jay, and

one to which we have contributed more than any other living man.

The bank had

been repudiated by the House, and was without a sponsor in the Senate, and was
thus virtually dead and buried when I induced Sherman to take hold of it, and
we went to work with the newspapers.

128

129

Historical Statistics, pp. 628-629.

Quoted in Robert P. Sharkey, Money, Class and Party: An Economic Study
of Civil War and Reconstruction, (Baltimore: Johns Hopkins Press, 1959), p. 245.

139
Going to work with the newspapers meant something more than mere persuasion
for the Cooke brothers; for as monopoly underwriter of government bonds, Cooke
was paying the newspapers large sums for advertising, and so the Cookes thought
as it turned out correctly —

—

that they could induce the newspapers to grant

them an enormous amount of free space "in which to set forth the merits of the
new national banking system." Such space meant not only publicity and articles,
but even more important, the fervent editorial support of most of the nation's
press.

And so the press, implicitly bought for the occasion, kept up a drumfire

of propaganda for the new national banking system.

As Cooke himself related:

"For six weeks or more nearly all the newspapers in the country were filled with
our editorials [written by the Cooke brothers] condemning the state bank system
and explaining the great benefits to be derived from the national banking system
now proposed."

And every day the indefatigable Cookes put on the desks of every

Congressman the relevant editorials from newspapers in their respective districts.
While many state bankers, especially the conservative old-line New York
bankers, opposed the national banking system, Jay Cooke, once the system was in
place, plunged in with a will.

Not only did he sell the national banks their

required bonds, he also set up new national banks which would have to buy his
government securities.
the South and West.

His agents formed national banks in the smaller towns of

Furthermore, he set up his own two large national banks, the

First National Bank of Philadelphia and the First National Bank of Washington, D.C
But the national banking system was in great need of a mighty bank in New
York City to serve as the base of the inflationary pyramid for a host of country
and reserve ciry banks.

Shortly after the inception of the system, three national

See^Hammond, Sovereignty pp. 289-290.

140
banks had been organized in New York, but none of them was large or prestigious
enough to serve as the key fulcrum of the new banking structure.

Jay Cooke,

however, was happy to oblige, and he quickly established the Fourth National Bank
of New York, capitalized at a huge $5 million.

After the war, Jay Cooke favored

resumption of specie payments, but only if greenbacks could be replaced one-toone by new national bank notes.

In his unbounded enthusiasm for national bank

notes and their dependence on the federal debt, Cooke urged repeal of the $300
million legal limit on national bank note issue.

In 1865, he published a

pamphlet proclaiming that in less than 20 years national batik note circulation would
total $1 billion.

131

The title of the pamphlet Cooke published is revealing:
Debt May Be A National Blessing.

How Our National

The Debt is Public Wealth, Political Union,

Protection of Industry, Secure Basis for National Currency.

132

By 1866, it was clear that the national banking system had replaced the state
banks as the center of the monetary system of the United States.

Only a year

earlier, in 1865, state bank notes had totaled $142.9 million; by 1866 they had
collapsed to $20 million.

On the other hand, national bank notes grew from a mere

$31.2 million in 1864, their first year of existence, to $276 million in 1866.
And while, as we have seen, the number of state banks in existence was falling
drastically from 1466 to 297, the number of national banks grew from 66 in 1863
to 1,634 three years later.

Actually, Cooke erred, and national bank notes never reached that
total. Instead, it was demand deposits that expanded, and reached the billiondollar mark by 1879.

132

gee Sharkey, Money, Class, and Party, p. 247.

141
The Post-Civil War Era:

1865-1879

The United States ended the war with a depreciated inconvertible greenback
currency, and a heavy burden of public debt.
agenda was what to do about the greenbacks.

The first question on the monetary
A powerful group of industrialists

calling for continuation of greenbacks, opposing resumption and, of course, any
contraction of money to prepare for specie resumption, was headed by the
Pennsylvania iron and steel manufacturers.

The Pennsylvania iron masters, who

had been in the forefront of the organized protective tariff movement since its
133
beginnings in 1820,

were led here and Instructed by their intellectual mentor

himself a Pennsylvania iron master —

—

the elderly economist Henry C. Carey.

Carey and his fellow iron manufacturers realized that during an inflation, since
the foreign exchange market anticipates further inflation, domestic currency tends
to depreciate faster than domestic prices are rising.

A falling dollar and

rising price of gold, they realized, make domestic prices cheaper and Imported
prices higher, and hence functions as a surrogate tariff.

A cheap money,

inflationist policy, then, could not only provide easy credit for manufacturing, it
could also function as an extra tariff because of the depreciation of the dollar
and the rise in the gold premium.
Imbibers of the Carey gospel of high tariffs and soft money were a host of
attendees at the famous "Carey Vespers" —
and politics.

evenings of discussion of economics

Influential Carey disciples included: economist and Pennsylvania

ironmaster Stephen Colwell; Eber Ward, president of the Iron and Steel Association;
John A. Williams, editor of the Association's journal Iron Age; Rep. Daniel
Morrell, Pennsylvania iron manufacturer; I. Smith Homans, Jr., editor of the

133 xh& leader of the protectionists in Congress in 1820 was Representative
Henry Baldwin, a leading iron manufacturer from Pittsburgh. Rothbard, Panic
of 1819, pp. 164ff.

142

Bankers' Magazine; and the powerful Rep. William D. Kellay of Pennsylvania, whose
lifelong devotion to the interest of the ironmasters earned him the proud
sobriquet of

01d Pig Iron.11

The Carey circle also dominated the American

Industrial League and its successor, the Pennsylvania Industrial League, which
spread the Carey doctrines of protection and paper money.

Influential

allies

in Congress, if not precisely Carey followers, were the Radical leader Rep.
Thaddeus Stevens, himself a Pennsylvania ironmaster, and Rep. John A. Griswold,
an ironmaster from New York.
Also sympathetic to greenbacks were many manufacturers who desired cheap
credit, gold speculators who were betting on higher gold prices, and railroads,
who as heavy debtors to their bondholders, realized that inflation benefits
debtors by cheapening the dollar whereas it also tends to expropriate creditors
by the same token.

One of the influential Carey disciples, for example, was

the leading railroad promoter, the Pennsylvanian Thomas A. Scott, leading entre134
preneur of the Pennsylvania and Texas & and Pacific Railroads.
One of the most flamboyant advocates of greenback inflation in the post-war
era was the Wall Street stock speculator Richard Schell.

In 1874, Schell became

a member of Congress, where he proposed an outrageous pre-Keynesian scheme in the

On the Carey circle and its influence, see Irwin Unger, The Greenback
Era: A Social and Political History of American Finance, 1865-1879 (Princeton:
Princeton University Press, 1964), pp. 53-59; and Joseph Dorfman, The Economic
Mind in American Civilization, Vol, III, 1864-1918 (New York: Viking Press,
1949), pp. 7-8. Dorfman notes that Kelley dedicated his collected Speeches,
Addresses and Letters of 1872 to "The Great Master of Economic Science, the Profound Thinker, and the Careful Observer of Social Phenomena, My Venerable Friend
and Teacher, Henry C. Carey." Ibid., p. 8. On the link between high tariffs
and greenbacks for the Pennsylvania ironmasters, see Sharkey, Money, Class
and Party, Ch. IV.

143
spirit of Keynes* later dictum that so long as money is spent,
it doesn't matter what the money is spent on, be it pyramid-building or digging
135
holes in the ground.

Schell seriously urged the federal government to dig

a canal from New York to San Francisco, financed wholly by the issue of greenbacks.
Schell's enthusiasm was perhaps only matched by the notorious railroad speculator
and economic adventurer George Francis Train, who called repeatedly for immense
issues of greenbacks.

"Give us greenbacks w e say," Train thundered in 1867,

and build cities, plant corn, open coal mines, control railways, launch ships,

grow cotton, establish factories, open gold and silver mines, erect rolling
136
mills.... Carry my resolution and there is sunshine in the sky."
The Panic of 1873 was a severe blow to many overbuilt railroads, and It was
railroad men who led in calling for more greenbacks to stem the tide.

Thomas

Scott, Collis P. Huntington, leader of the Central Pacific Railroad, Russel
Sage, and other railroad men joined in the call for greenbacks.

So strong was

their influence that the Louisville Courier-Journal, in April 1874, declared:
"The strongest influence at work in Washington upon the currency proceeded

from

the railroads., ..The great inflationists after all, are the great trunk railroads."

137

The greenback problem after the Civil War was greatly complicated by the
massive public debt which lay over the heads of the American people.

A federal

debt, which had tallied only $64«7 million in I860, amounted to the huge amount
of $2.32 billion in*1866.

Many ex-Jacksonian Democrats, led by Senator George H.

135 Thus, Keynes wrote: "'To dig holes in the ground,' paid for out of
savings will increase, not only employment, but the real national dividend of
useful goods and services." John Maynard Keynes, The General Theory of Employment Interest and Money (New York: Harcourt, Brace, 1936), p. 220. On pyramidbuilding, see ibid., pp. 220 and 131.
136

Unger, Greenback Era, pp. 45-58.

137

Unger, Greenback Era, p. 222.

144
Pendleton of Ohio, began to agitate for further issue of greenbacks solely
for the purpose of redeeming the principal of federal debts contracted in green138
backs during the war:

In a sense, then, hard-money hostility to both

inflation and the public debt were now at odds.

In a sense, the Pendletonians

were motivated by a sense of poetic justice, of paying inflated debts in inflated
paper, but in doing so they lost sight of the broader hard money goal.

This

program confused the party struggles of the post-Civil War period, but ultimately
it is safe to say that the Democrats had a far greater proportion of Congressmen
devoted to hard money and to resumption than did the Republicans.

Thus, Secretary

of the Treasury Hugh McCulloch's Loan Bill of March 1866, which provided for
contraction of greenbacks in preparation for resumption of specie payments, was
passed in the House by a Republican vote of 56-52, and a Democratic vote of
27-1.

And in April, 1874, the "Inflation Bill," admittedly vetoed later by Pre-

sident Grant, which provided for expansion of greenbacks and of national bank
notes, was passed in the House by a Republican vote of 105 to 64, while the
Democrats voted against by the narrow margin of 35 to 37.
In the meantime, despite repeated resolutions for resumption of specie
payments in 1865 and 1869, the dominant Republican Party continued to do nothing
for actual resumption.

The Pendleton Plan was adopted by the Democrats in their

1868 platform, and the Republican victory' in the presidential race that year
was generally taken as a conclusive defeat for that idea.

Finally, however, the

Democratic sweep in the Congressional elections of 1874 forced the Republicans
into a semblance of unity on monetary matters, and, in the lame duck Congressional
138
The federal government had contracted to redeem the interest on the wartime public debt in gold, but nothing was contracted about the repayment of the
principal.
139
Similar motivations had impelled many hard-money anti-Federalists during
the 1780 f s to advocate the issue of state paper money for the sole purpose of redeeming swollen wartime public debts.
140
On the McCulloch Loan Bill, see Sharkey, Money, Class, and Party
p. 75; on the Inflation Bill, see Unger, Greenback Era, p. 410.

145
session, led by Senator John Sherman, they came up with the Resumption Act of
January 1875.
Despite the fact that the Resumption Act ultimately resulted in specie
resumption, it was not considered a hard-money victory by contemporaries.
Sherman had forged a compromise between hard and soft money forces.

For

It is true

that the U.S. government was supposed to buy gold with government bonds to prepare
for resumption on January 1, 1879.

But this resumption was four years off, and

Congress had expressed intent to resume several times before.

And in the mean-

time, the soft money men were appeased by the fact that the bill immediately
eliminated the $300 million limit on national bank notes, in a provision known as
"free banking."

The only hard-money compensation was an 80% pro-rata contraction

of greenbacks to partially offset any new national bank notes.

The bulk of the

opposition to the Resumption Act was by hard-money Congressmen, who, in addition
to pointing out its biased ambiguities, charged that the contracted greenbacks could
be reissued instead of retired.

Hard-money forces throughout the country had an

equally scornful view of the Resumption Act.

In a few years, however, they

rallied as resumption drew near.
That the Republicans were generally less than enthusiastic about specie
resumption was revealed by the Grant Administration's reaction to the Supreme
Court's decision in the first Legal Tender Case.

After the end of the war, the

question of the constitutionality of legal tender came before the courts (we have
seen the California and Oregon courts decided irredeemable paper to be unconstitutional) .

In the large number of state court decisions on greenbacks before

1870, every Republican judge but one upheld their constitutionality, whereas every

This political and compromise interpretation of the Resumption Act
successfully revises the previous hard-money view of this measure. See Unger,
Greenback Era, pp. 249-263.

146
Democratic judge but two declared them unconstitutional.

14 2

The greenback question reached the U.S. Supreme Court in 1867, and was
decided in February 1870, in the case of Hepburn vs. Griswold.

The Court held,

by a vote of 5 to 3, with all the Democratic judges voting with the majority
and the Republicans in the minority.

Chief Justice Salmon P. Chase, who delivered

the decision denouncing his own action as Secretary of the Treasury as unnecessary
and unconstitutional, had swung back to the Democratic Party and had actually
been a candidate for the presidential nomination at the 1868 convention.
The Grant Administration was upset by Hepburn vs. Griswold, as were the
railroads, who had accumulated a heavy long-term debt which would now be payable
In more valuable gold.

As luck would have it, however, there were two vacancies

on the Court, one of which was created by the retirement of one of the majority
judges.

Grant appointed not only two Republican judges, but two railroad lawyers

whose views on the subject were already known.

The

new

5-4 majority dutifully

and quickly reconsidered the question, and, in May 1871, reversed the previous
Court in the fateful decision of Knox vs. Lee.

From then on, paper money would

be held consonant with the U.S. Constitution.
The national banking system was ensconced after the Civil War.

The number

of banks, national bank notes, and deposits all pyramided upward, and after 1870,
state banks began to boom as deposit-creating institutions.

With lower requirements

I/O
See Charles Fairman, "Mr. Justice Bradley's Appointment to the
Supreme Court and the Legal Tender Cases," Harvard Law Review (May 1941),
p. 1131; cited in Unger, Greenback Era, p. 174.
'The fi r g t new justice, William Strong of Pennsylvania, had been a top
attorney for the Philadelphia and Readihg Railroad, and a director of the Lebanon
Valley Railroad. The second jurist, Joseph P. Bradley, was a director of the Camden
and Amboy Railroad and of the Morris and Essex Railroad, in New Jersey. On the
railroad ties of Strong and Bradley, see Philip H. Burch, Jr., Elites in American
History, Vol. II, The Civil War to the New Deal, (New York: Holmes & Meier, 1981),
pp. 44-45. On the reaction of the Grant Administration, see Unger, Greenback Era,
pp. 172-178. For a legal analysis of the decisions see Hepburn, History of Currency,
pp. 254-264; and Henry Mark Holzer, ed., Government's Money Monopoly (New York:
Books in Focus, 1981), pp. 99-168.

147
and fewer restrictions than the national banks, they could pyramid on top of
national banks.

The number of national banks increased from 1294 in 1865 to

1968 in 1873, while the number of state banks rose from 349 to 1330 in the same
period.

Total state and national bank notes and depo sits rose from $835 million

in 1865 to $1,964 billion in 1873, an increase of 135.2% or an increase of 16.9%
per year.

The following year, the supply of bank money leveled off, as the Panic

of 1873 struck, and caused numerous

bankruptcies.

As a general overview of the national banking period, we can agree with
Klein that "The financial panics of 1873, 1884, 1893, and 1907 were in large
part an outgrowth of...reserve pyramiding and excessive deposit creation by
reserve city and central reserve city banks.

These panics were triggered by

the currency drains that took place in periods of relative prosperity when banks
were loaned up/' ^ ^

And yet, it must be pointed out that the total money supply,

even* merely the supply of bank money, did not decrease after the Panic, but
merely levelled off.
Orthodox economic historians have long complained about the "Great Depression"
that is supposed to have struck the United States in the Panic of 1873 and lasted
for an unprecedented

six years in 1879.

Much of this stagnation is supposed to

have been caused by a monetary contraction leading to the resumption of specie
payments in 1879.

Yet what sort of "depression" is it which saw an extraordinarily

large expansion of Industry, of railroads, of physical output, of net national
product, or real per capital income?

As Friedman and Schwartz admit, the decade

1869 to 1879 saw a 3.0% per annum increase in money national product, an outstanding real national product growth of 6,8% per year in this period, and a
phenomenal rise of 4,5% per year in real product per capita.

Klein, Money and the Economy, pp. 145-146.

Even the alleged

148
"monetary contraction" never took place, the money supply increasing by 2.7%
per year in this period.

From 1873-1878, before another spurt of monetary

expansion, the total supply of bank money rose from $1,964 billion to $2,221
billion —

a rise of 13.1%, or 2.6% per year.

In short, a modest but definite

rise, and scarcely a contraction.
It should be clear, then, that the Great Depression of the 1870 fs is merely
a myth —

a myth brought about by the misinterpretation of the fact that prices

in general fell sharply during the entire period.
end of the Civil War until 1879.

Indeed they fell f r o m t h e

Friedman and Schwartz estimated that prices

in general fell, from 1869 to 1879 by 3.8% per annum.

Unfortunately, most

historians and economists are conditioned to believe that steadily and sharply
falling prices must result in depression: hence their amazement at the obvious
prosperity and economic growth during this era.

For they have overlooked the fact

thatyin the natural course of events, when government and the banking system do
not increase the money supply very rapidly, free market capitalism will result in
an increase of production and economic growth so great as to swamp the increase
of money supply.

Prices will fall, and the consequences will be, not depression

or stagnation, but prosperity (since costs are falling, too) economic growth,
and the spread of the increased living standard to all the consumers.

145

Indeed, recent research has discovered that the analogous "Great Depression"
in England in this period was also a myth, and due to a confusion between a
contraction of prices and its alleged inevitable effect on a depression of
prices and its alleged inevitable effect on a depression of business activity.

For the bemusement of Friedman and Schwartz, see Milton Friedman and
Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960
(New York: National Bureau of Economic Research, 1963), pp. 33-44. On totals
of bank money, see Historical Statistics, pp. 624-6 25.
146

S.B. Saul, The Myth of the Great Depression, 1873-1896
Macmillan, 1969).

(London:

146

149
It might well be that the major effect of the Panic of 1873 was, not to
initiate a Great Depression, but to cause bankruptcies in overinflated banks
and in railroads riding on the tide of vast government subsidy and bank speculation,

In particular, w e may note Jay Cooke, one of the creators of the national

banking system and paladin of the public debt.

In 1866, he favored contraction

of the greenbacks and early resumption because he feared that inflation would
destroy the value of government bonds.

By the late 1860 f s, however, the House

of Cooke was expanding everywhere, and in particular had gotten control of the new
Northern Pacific Railroad.

Northern Pacific had been the recipient of the biggest

federal largesse to railroads during the 1860 f s: a land grant of no less than
47 million acres.
Cooke sold Northern Pacific bonds as he hed learned to sell government
securities: hiring pamphleteers to write propaganda about the alleged Mediterranean
climate of the Northwest.

Many leading government officials and politicians were

on the Cooke/Northern Pacific payroll, including President Grant's private
secretary, General Horace Porter.
In 1869, Cooke expressed his monetary philosophy in keeping with his
enlarged sphere of activity:

"Why," he asked, "should this Grand and Glorious

Country be stunted and dwarfed —
blood curdled by these miserable
bygone age —

its activities chilled and its very life
'hard coin' theories —

the musty theories of a

These men who are urging on premature resumption know hothing of

the great and growing west which would grow twice as fast if it was not cramped
for the means necessary to build railroads and improve farms and convey the
produce to market."

150
But in 1873, a remarkable example of poetic justice struck Jay Cooke.

The

overbuilt Northern Pacific was crumbling, and a Cooke government bond operation
proved a failure.

So the mi^frty House of Cooke —

the market economy —
1873.

"stunted and dwarfed" by

crashed and went bankrupt, touching off the Panic of

147

After passing the Resumption Act in 1875, the Republicans finally
stumbled their way into resumption in 1879, fully fourteen years after the
end of the Civil War.

The money supply did not contract in the late 1870's

because the Republicans did not have the will to contract in order to pave the
way for resumption.

Resumption was finally achieved after substantial sales of

U.S. bonds for gold in Europe by Secretary of the Treasury Sherman.
Return to the gold standard in 1879 was almost blocked, in the last
three years before resumption, by the emergence of a tremendous agitation,
heavily in the West but also throughout the country, for the free coinage
of silver.

The United States mint ratios had been undervaluing silver since

1834, and in 1853 de facto gold monometallism was established because silver was
so far undervalued as to drive fractional silver coins out of the country.
Since 1853, the United States, while de jure on a bimetallic standard at 16:1,
with the silver dollar still technically in circulation though non-existent, was
actually on a gold monometallic standard with lightweight subsidiary silver
coins for fractional use.

147

Unger, Greenback Era, pp. 46-4 7, 221.

151
In 1872, it became apparent to a few knowledgeable men at the U.S.
Treasury that silver, which had held at about 15.5 to 1 since the early
1860*3 was about to suffer a huge decline in value.

The major reason was the

realization that European nations were shifting from a silver to a gold
standard, thereby decreasing their demand for silver.

A subsidary reason was

the discovery of silver mines in Nevada and other states in the Mountain West.
Working rapidly, these Treasury men, along with Senator Sherman, slipped
through Congress in February 1873, a seemingly innocuous bill which in effect
discontinued the minting of any further silver dollars.

This was followed by

an act of June, 1874, which completed the demonetization of silver by ^ending
the legal tender quality of all silver dollars above the sum of $5.

The timing

was perfect, since it was in 1874 that the market value of silver fell to greater
than 16:1 to gold for the first time.

From then on, the market price of silver

fell steadily, declining to nearly 18:1 in 1876, over 18:1 in 1879, and reaching
the phenomenal level of 32:1 in 1894.
In short, after 1874, silver was no longer undervalued, but overvalued, and
increasingly so, in terms of gold at 16:1.

Except for the acts of 1873 and

1874, labelled by the pro-silver forces as "The Crime of 1873,11 silver would
have flowed into the United States, and the country would have been once again on
a de_ facto monometallic silver standard.
champions of inflation, saw a

The champions of greenbacks, the

hard-money" way to increase greatly the amount

of American currency: the remonetization of a flood of new overvalued silver.
The agitation was to remonetize silver by "the free and unlimited coinage of
silver at 16 to 1."
It should be recognized that the silverites had a case.

The demonetization

of silver was a "crime" in the sense that it was done shiftily, deceptively,

152
by men who knew that they wanted: to demonetize silver before it was too late
and silver would replace gold.

The case for gold over silver was a strong one,

particularly in an era of rapidly falling value of silver, but it should have
been made openly and honestly.

The furtive method of demonetizing silver, the

"crime against silver,1' was in part responsible for the vehemence of the silver
1 AQ
agitation for the remainder of the century.

Ultimately, the Administration was able to secure the resumption of payments
In gold, but at the expense of submitting to the Bland-Allison Act of 1878,
which mandated that the Treasury purchase $2-$4 million of silver per month
from then on.
It should be noted that this first silver agitation of the late 1870 f s,
at least, cannot be considered an "agrarian" or a particularly southern and
western movement.

The silver agitation was broadly based throughout the nation,

except in New England, and was, moreover, an urban movement.

As We ins te in points

out:
Silver began as an urban movement, furthermore, not an agrarian crusade.
Its original strongholds were the large towns and cities of the Midwest and
middle Atlantic states, not the country's farming communities. The first batch
of bimetallist leaders were a loosely knit collection of hard money newspaper
editors, businessmen, academic reformers, bankers, and commercial groups.
With the passage of the Silver Purchase Act of 1878, silver agitation died
out in America, to spring out again in the 1890's.

148
For the best discussion of the crime against silver, see Allen Weinstein, Prelude to Populism: Origins of the Silver Issue,, 1867-1878 (New Haven:
Yale University Press, 1970), pp. 8-32. Also see Paul M. O'Leary, "The Scene
of the Crime of 1873 Revisited: A Note," Journal of Political Economy, Vol.
68 (1960), pp. 388-392.

122

Weinstein, Prelude to Populism, p. 356.

153
The Gold Standard Era with the National Banking System, 1879-1913

The record of 1879-1896 is very similar to the first stage of the alleged
"Great Depression,11 from 1873 to 1879.

Once again, we have a phenomenal expan-

sion of American industry, production, and real output per head.

Real r e p r o —

ducible tangible wealth per capita rose at the decadel peak in American history
in the 1880 T s, at 3.8% per annum.

Real net national, product rose at the rate of

3.7% per year from 1879 to 1897, while per capita net national product increased
by 1.5% per year.
Once again, orthodox economic historians are bewildered; for there should
have been a "Great Depression," since prices fell at a rate of over 1 percent per
year in this period.

Just as in the previous period, the money supply grew, but

not fast enough to overcome the great increase in productivity and the supply of
products.

The major difference in the two periods JLs that money supply rose more

rapidly from 1879-1897, by 6% per year, compared to the 2.7% per year in the
earlier era.

As a result, prices fell by less, by over 1 per cent per annum as

contrasted to 3.8%.

Total bank money, notes and deposits, rose from $2.45 billion

to $6.06 billion in this period, a rise of 10.45% per annum —
satisfy all but the most ardent inflationists.

surely enough to

150

For those who persist in associating a gold standard with deflation, it
should be pointed out that price deflation in the gold standard 1879-1897 period
was considerably less than price deflation from 1873 to 1879, when the United
States was still on a fiat greenback standard.

150
Friedman and Schwartz, Monetary History, pp. 91-93; Historical
Statistics, p. 625.

154
After specie resumption occurred successfully in 1879, the gold premium
to greenbacks fell to par, and the appreciated greenback promoted
in the gold-backed dollar.

confidence

More foreigners willing to hold dollars meant an

inflow of gold into the United States and greater American exports.

Some

historians have attributed the boom of 1879-1882, culminating in a financial
crisis in the latter year, to the inflow of gold coin in the U.S., which rose
from $110.5 million in 1879 to $358.3 million in 1 8 8 2 . 1 5 1

In a sense this

is true, but the boom would never have taken on considerable proportions without the pyramiding of the national banking system, the deposits of which increased
from $2,149 billion in 1879 to $2,777 billion in 1882, a rise of 29.2%, or
9.7% per annum.

Wholesale prices were driven up from 90 in 1879 to 108 three

years later, a 22.5% increase, before resuming their long-run downward path.
A financial panic in 1884, coming during a mild contraction after 1882,
lowered the supply of bank money in 1884.

Total bank notes and deposits dropped

slightly, from $3.19 billion in 1883 to $3.15 billion the following year.

The

panic was triggered by an outflow of gold abroad, as foreigners began to lose
confidence in the willingness of the United States to remain on the gold standard.
This understandable loss of confidence resulted from the inflationary sop to the
pro-silver forces in the Bland-Allison Silver Purchase Act of 1878.

The shift

in Treasury balances from gold to silver struck a disquieting note in foreign
financial circles. -^2

151
Friedman and Schwartz, Monetary History, pp. 98-99.
152
See Rendigs Fels, American Business Cycle, 1865-189 7 (Chapel Hill,
N.C.: University of North Carolina Press, 1959), pp. 130-131.

155
Before examining the critical decade of the 1890's, it is well
to point out in some detail the excellent record of the first decade
after the return to gold, 1879-1889.
America went off the gold standard in 1861 and remained off after the
war's end.

Arguments between "hard-money" advocates who wanted to eliminate

unbacked greenbacks and "soft-money" men who wanted to increase them raged
through the 1870's until the Grant Administration decided in 1875 to resume
redemption of paper dollars into gold at pre-war value on the first day of 1879.
At the time (1875) greenbacks were trading at a discount of roughly 17% against
the pre-war gold dollar.

A combination of outright paper-money deflation and

increase in official gold holdings enabled a return to gold four years later,
which set the scene for a decade of tremendous economic growth.
Economic record-keeping a century ago was not nearly as well developed as
today, but a clear picture comes through nonetheless.

The Encyclopedia of

American Economic History calls the period under review "one of the most
expansive in American history.

Capital investment was high;... there was little

unemployment; arid the real costs of production declined rapidly."

Prices, Wages, and Real Wages

This is shown most graphically with a look at wages and prices during the
decade before and after convertibility.

While prices fell during the 1870 T s

and 1880 f s, wages fell only during the greenback period, and rose from 1879 to
1889.

(See Table I).

156

TABLE I

WHOLESALE PRICE INDEX

Year

Index

1869
1879
1889

151
90
81

(1910-1914»100)
% change

-40.4%
-10.0%

CONSUMER PRICE INDEX

1869
1879
1889

138
97
93

-28.8%
- 4.2%

WAGES

(1910-1914-100)

Urban Labor

1869
1879
1889

77
61
72

Farm Labor

96
61
78

Combined

87
61
75

157
These figures tell a remarkable story.

Both consumer prices and nominal

wages fell about 30% during the last decade of greenbacks.
1889, while prices kept falling, wages rose 23%.
inflation —— or the

But from 1879-

So real wages, after taking

lack of it —— into effect, soared.

No decade before or since produced such a sustainable rise in real wages.
Two possible exceptions are the period from 1909-1919 (when the index rose from
99 to 140) and 1929-1939 (134-194).
plummeted the next year —
1934.

But during the first decade real wages

to 129 in 1920, and did not reach 1919's level until

And during the 1930 f s real wages also soared, for those fortunate enough

to have jobs.
In any event, the

contrast to this past decade is astonishing.

And while

there are many reasons why real wages increase, three necessary conditions must
be present.

Foremost, an absence of sustained inflation.

This contributes

to the second condition, a rise in savings and capital formation.
People will not save if they believe their money will be worth less in
the future.

Finally, technological advancement is obviously important.

But it is not enough.

The 1970 T s saw this third factor present, but the absence

of the first two caused real wages to fall.

158
Interest Rates

Sidney Homer writes in his monumental History of Interest Rates, 2000 B.C.
to the Present that "during the last two decades of the nineteenth century
(1880-1900), long-term bond yields in the United States declined almost
steadily.

The nation entered its first period of low long-term interest

rates" finally experiencing the 3-3*j long-term rates which had characterized
Holland in the 17th century and Britain in the 18th and 19th:

in short,

the economic giants of their day.
To gauge long-term rates of the day, it is best not to use the long
term government bonds we would use today as a measure.
Acts of 1863-1864

The National Banking

stipulated that these bonds had to be

used to secure bank notes.

This created such a demand for them that, as

Homer says, "by the mid 1870 , s £itT] put government bond prices up to levels
where their yields were far below acceptable rates of long-term interest."
But the Commerce Department tracks the unadjusted index of yields of American
railroad bonds.

We list the yields for 1878, the year before gold, 1879,

and 1889.

Railroad Bond Yields
1878
1879
1889

6.45%
5.98%
4.43%

159
We stress that with consumer prices about 7% lower in 1889 than they had
been the decade before, the real rate of return by decade's end was well
into double-digit range, a bonanza for savers and lenders.
Short-term rates during the last century were considerably more
skittish than long-term rates.

But even here the decennial averages of

annual averages of both 3-6 month commercial paper rates and

(over-night)

call money during the 1880's declined from what it had been the previous
decades:
commercial
paper

call
money

6.46%
5.14%

5.73%
3.98%

1870-1879
1880-1889

h. Burst in Productivity

By some measures the 1880's was the most productive decade in our
history.

In their A Monetary History of the United States, 1867-1960,

Professors Friedman and Schwartz quote R.W. Goldsmith on the subject:
"'The highest decadal rate £of growth of real reproducible tangible wealth
per head from 1805 to 195(Q for periods of about ten years was apparently
reached in the eighties with approximately 3.8%'."

The statistics give

proof to this outpouring of new wealth.

Gross National Product
(1958 prices)
Total
(billions of dollars)
decade average 1869-78
decade average 1879-88
decade average 1889-98

$23.1
$42.4
$49.1

Per capita
(in dollars)
$531
$774
$795

160
This dollar growth was occuring, remember, in the face of general price
declines.

Gross Domestic Product
(1929 prices in billions of dollars)

1869-1878
1879-1888

$11.6
$21.2

(average per year)
(average per year)

Gross domestic product almost doubled from the decade before, a far larger
percentage jump decade-on-decade than anytime since.

Labor Productivity
Manufacturing Output per man-hour
(1956»100)

1869
1879
1889

14.7
16.2
20.5

The 26.5% increase here ranks among the best in our history.

Labor

productivity reflects increased capital investment.

Capital Formation
From 1869 to 1879 the total numoer of business establishments barely
rose.

But the next decade saw a 39.4% increase.

Not surprisingly, a decade

of falling prices, rising real income and lucrative interest returns made
for tremendous capital investment, insuring future gains in productivity.

161
Purchase of Structures and Equipment
(Total, in 1958 prices, in billions of dollars)

1870
1880
1890

$ .4
$ .4
$2.0

This massive 500% decade-on-decade increase has never since been even
closely rivalled.

It stands in particular contrast to the virtual stag-

nation witnessed by the

1970's.

Private and Public Capital Formation
(Total Gross, in billions; 1929 prices)

Average

1872-1876
1877-1881
1882-1886
1887-1891

$2.6
$3.7
$4.5
$5.9

These five-year averages are not as "clean" as some other figures, but
still show a rough doubling of total capital formation from the seventies
to the eighties.
It has repeatedly been alleged that the late 19th century, the "golden
age of the gold standard" in the United States, was a period especially
harmful to farmers.

The facts, however, tell a different story.

manufacturing in the 1880's grew more rapidly than did agriculture

While
("The

Census of 1890 r " report Friedman and Schwartz, "was the first in which the
net value added by manufacturing exceeded the value of agricultural output"),
farmers had an excellent decade.

162
Number of Farms
(in thousands)

1880
1890

4,009
4,565

Farm-Land
(in millions of acres)
1880 „
1890

536,182
623/219

Farm Productivity
(person^ supplied by farm worker)
1880
1890

5.1
5.6

Value of Farm Gross Output and Product
(1910-1914 dollars, in millions)
1880
1890

$4,129
$4,990

So farms, farmland, productivity, and production all increased in the
1880*s, even while commodities prices were falling.

And as we see below,

farm wage rates, even in nominal terms, rose during this time.

Farm Wage Rates
(per month, with board and room, in 1879, 1889 dollars)
1879 or 1880
1889 or 1890

$11*50
$13.50

163

This phenomenal economic growth during the decade immediately after
the return to gold convertibility cannot be attributed solely to the gold
standard.

Indeed all during this time there was never a completely free-

market monetary system.

The

National Banking Acts of 1863-1864 had semi-

cartellized the banking system.
Only certain banks could issue money, but all other banks had to have
accounts at these.

The financial panics throughout the late 19th century

were a result of the arbitrary credit-creation powers of the banking system.
While not as harmful as today's inflation mechanism, it was still a storm
in an otherwise

fairly healthy economic climate.

164
The fateful decade of the 1890s saw the return of the agitation for
free silver, which had lain dormant for a decade.

The Republican Party

intensified its long-time flirtation with inflation, by passing the Sherman
Silver Purchase Act of 1890,which roughly doubled the Treasury purchase
requirement of silver.
of silver per month.

The Treasury was now mandated to buy 4.5 million ounces
Futhermore, payment was to be made in a new issue of redeem-

able greenback currency, Treasury Notes of 1890, which were to be a full legal
tender, redeemable in either gold or silver at the discretion of the Treasury.
Not only was this an increased commitment to silver, it was a significant
step on the road to bimetallism

w h i c h — a t the depreciated market

would mean inflationary silver monometallism.

rates—

In the same year, the

Republicans passed the high McKinley Tariff Act of 1890, which reaffirmed
their commitment to high tariffs and soft money.
Another unsettling inflationary move made in the same year was that the New
York Subtreasury altered its long-standing practice of settling its clearing house
balances in gold coin.

Instead, in August 1890, it began using the old green-

backs and the new Treasury notes of 1890.

As a result, these paper currencies
153

largely replaced gold paid in customs receipts in New York.
Uneasiness about the shift from gold to silver and the continuing freesilver agitation caused foreigners to lose further confidence in the U.S.
gold standard, and to cause a drop in capital imports and severe gold outflows
from the country.

This loss of confidence exerted contractionist pressure on the

American economy and reduced potential economic growth during the early 1890s.
153

See Friedman and Schwartz, Monetary History, pp. 106, 106n.

165
Fears about the American gold standard were intensified in March 1891,
when the Treasury suddenly imposed a stiff fee on the export of gold bars
taken from its vaults, so that most gold exported from then on was American
gold coin rather than bars.

A shock went through the financial community, in

the U.S. and abroad, when the United States Senate passed a free silver coinage
bill in July 1892; the fact the bill went no further was not enough to
restore confidence in the gold standard.

Banks began to insert clauses

in loans and mortgages requiring payment in gold coin; clearly the dollar
was no longer trusted.

Gold exports intensified in 1892, the Treasury's gold

reserve declined, and a run ensued on the U.S. Treasury.

In February 1893,

the Treasury persuaded New York banks, which had drawn down $6 million on
gold from the Treasury by presenting treasury notes for redemption, to return
the gold and re-acquire the paper.

This act of desperation was scarcely calculated

to restore confidence in the paper dollar.

The Treasury was paying the

price for specie resumption without bothering to contract the paper notes in
circulation.

The gold standard was therefore inherently shaky, resting only

on public confidence, and that was giving way under the silver agitation
and under desperate acts by the Treasury.
Poor Grover Cleveland, a hard-money Democrat, assumed the Presidency
in the middle of this monetary crisis.

Two months later,

the stock market

collapsed, and a month afterwards, in June 1893, distrust of the fractionalreserve banks led to massive bank runs and bank failures throughout the country.
Once again, however, many banks, national and state, especially in the West and
South, were allowed to suspend specie payments.
In a few months, Eastern bank
City.

The Panic of 1893 was on.

suspension occurred, beginning with New York

The total money supply—gold coin, treasury paper, national bank notes,

166
and national and state bank deposits—fell by 6.3% in one year, from June
1892 to June 1893.

Suspension of specie payments resulted in d e p o s i t s —

which were no longer immediately redeemable in cash—-going to a discount in
relation to currency during the month of August.

As a result, deposits became

less useful, and the public tried its best to intensify its exchange of deposits
for currency.
By the end of 1893, the Panic was over, as foreign confidence rose with
the Cleveland Administration's successful repeal of the Sherman Silver Purchase Act in November of that year.

Further silver agitation of 1895 endangered

the Treasury's gold reserve, but heroic acts of the Treasury, including buying
gold from a syndicate of bankers headed by J.P. Morgan and August Belmont,
restored confidence in the continuance of the gold standard.

The victory of

the free-silver Bryanite forces at the 1896 Democratic convention caused further
problems for gold, but the victory of the pro-gold Republicans put an end
to the problem of domestic and foreign confidence in the gold standard.

1896: The Transformation of the American Party System

Orthodox economic historians -attribute the triumph of William Jennings
Bryan in the Democratic Convention of 1896, and his later renominations for
President, as a righteous rising up of the "people" demanding inflation over
the "interests" holding out for gold.

Friedman and Schwartz attribute the

rise of, Bryanism to the price contraction of the last three decades of the
nineteenth century, and the triumph of gold and disappearance of the "money"

155
issue to the price rise after 1896.

silver agitation, the gold reserves, and the Panic of 1893
see Friedman and Schwartz, Monetary History, pp. 104-133, 705.

155

Friedman and Schwartz, Monetary History, pp. 113-119.

167
This conventional analysis overlooks several problems.

First, if

Bryan represented the "people" versus the "interests," why did Bryan lose
and lose soundly, not once but three times?

Why did gold triumph long

before any price inflation became obvious, in fact at the depths of price
contraction in 1896?
But the main neglect of the conventional analysis is the disregard of the
highly illuminating insights provided in the past fifteen years by the "new
political history" of nineteenth century American politics and its political
culture.

The new political history began by going beyond national political

issues (largely economic) and investigating state and local political contests,^
It also dug into the actual voting records of individual parishes, wards, and
counties, and discovered how people voted and why they voted the way they did.
The work of the new political history is truly interdisciplinary, for its methods
range from sophisticated techniques for voting analysis to illuminating insights
into American ethnic religious history.
In the following pages, we shall present a summary of the findings of
the new political history on the American party structure of the late nineteenth
century and after, and on the transformation of 1896 in particular.
First, the history of American political parties is one of successive
"party systems."
party having

Each "party system" lasts several decades, with each particular

a certain central character; in many cases,

the name of the

156
The locus classicus of the new political history in late 19th century
politics is Paul Kleppner, The Cross of Culture: A Social Analysis of Midwestern Politics, 1850-1900 (New York: The Free Press, 1970). Also see
other writings of the prolific Kleppner, especially his magnum opus, The Third
Electoral System, 1853-1892: Parties, Voters, and Political Cultures (Chapel
Hill, N.C.: University of North Carolina, 1979). On the late nineteenth century,
see also Richard J. Jensen, The Winning of the Midwest: Social and Political
Conflict, 1888-1896 (Chicago: University of Chicago Press, 197177" On the Civil
War period and earlier, see the works of Ronald Formisano, Joel Sibley, and
William Shade. For Eastern confirmation of the Kleppner and Jensen findings on
the Middle West, see Samuel T. McSeveney, The Politics of Depression:
Political
Behavior in the Northeast, 1893-1896 (New York, 1972).

168
party can remain the same but its essential character can drastically
in the so-called "critical elections.11

change—

In the nineteenth century, the Second

Party System (Whigs vs. Democrats) lasting from about 1832 to 1854, was
succeeded by the Third Party System (Republicans vs. Democrats) lasting from
1854 to 1896.
Characteristic of both party systems was that each party was committed
to a distinctive ideology clashing with the other, and
world-views made for fierce and close contests.
hard-fought.

these conflicting

Elections were particularly

Interest was high since the parties offered a "choice not an

echo," and so the turnout rate was remarkably high, often reaching 80 to
90 percent of eligible voters.

More remarkably, candidates did not, as we

are used to in the twentieth century, fuzz their ideology during campaigns
in order to appeal to a floating, ideologically indifferent, "independent voter."
There were very few independent voters.

The way to win elections, therefore,

was to bring out your vote, and the way to do that was to intensify and
strengthen your ideology during campaigns.

Any fuzzing over would lead the

Republican or Democratic constituents to stay home in disgust, and the election
would be lost.

Very rarely would there be a crossover to the other, hated party.

One problem that strikes anyone interested in nineteenth century political
history is: How come the average person exhibited such great and intense
interest in such arcane economic topics as banking, gold and silver, and
tariffs? Thousands of half-literate people wrote embattled tracts on these
topics, and voters were intensely interested.

Attributing the answer to in-

flation or depression, to seemingly evident economic interests as do Marxists
and other economic determinists, simply won't do.

For the far greater depressions

169
and inflations of the twentieth century have not educed nearly as much
mass interest in economics as did the milder economic crises of the past
century.
Only the findings of the new political historians have cleared up this
puzzle,

it turns out that the mass of the public was not necessarily

interested in what the elites, or national politicians, were talking about.
The most intense and direct interest of the voters was applied to local and
state issues, and on these local levels the two parties waged an intense and
furious political struggle that lasted from the 1830s to the 1890s.
The beginning of this century-long struggle began with the profound
transformation of American Protestantism in the 1830s.

This transformation

swept like wildfire across the Northern states, particularly Yankee territory,
during the 1830s, leaving the South virtually untouched.

The transformation

found particular root among Yankee culture, with its aggressive and domineering
157
spirit.
This new Protestantism—called "pietist"—was born in the fires of Charles
Finney and the great revival movement of the 1830s.
follows:

Its credo was roughly as

Each individual is responsible for his own salvation, and it must

come in an emotional moment of being "born again."

Each person can achieve

salvation, each person must do his best to save everyone else.

This compulsion

to save others was more than simple missionary work; it meant that one would go
to hell unless he did his best to save others.

But since each person is alone

and facing the temptation to sin; this role can only be done by the use of the
157

"Yankees" originated in rural New England, and then emigrated westward
in the early 19th century, settling in upstate (particularly western) New
York, northern Ohio, northern Indiana, and northern Illinois.

170
State.

The role of the State is to stamp out sin and create a new

Jerusalem

158,159
on Earth.
'
The pietists defined sin very broadly.

In particular, the most im-

portant politically was Demon Rum, which clouded men's minds and therefore
robbed them of their theological free will.

In the 1830 f s, the evangelical

pietists launched a determined and indefatigable prohibitionist crusade on the
state and local level which lasted a century.

Second was any activity on Sunday

except going to Church, which led to a drive for Sabbatarian blue laws.
Drinking on Sunday was of course a double sin, and hence particularly heinous.
Another vital thrust of the new Yankee pietism was to try to extirpate Roman
Catholicism, which robs communicants of their theological free will by subjecting them to the dictates of priests who are agents of the Vatican.

If Roman

Catholics could not be prohibited per se, their immigration could be slowed
down or stopped.

And since their adults were irrevocably steeped in sin, it

became vital for crusading pietists to try to establish public schools as
compulsory forces for Protestantizing society or, as the
it, to "Christianize the Catholics."

pietists liked to put

If the adults are hopeless, the children

must be saved by the public school and compulsory attendance laws.
Such was the political program of Yankee pietism.
were scorned.

Not all immigrants

British, Norwegian, or other immigrants who belonged to pietist

churches (whether nominally Calvinist or Lutheran or not) were welcomed as
158
These pietists have been called "evangelical pietists" to contrast
them with the new Southern pietists, called "salvational pietists" who did
not include the compulsion to save everyone else in their doctrine.
159
These pietists are distinguished from contemporary "fundamentalists"
because the former were "post-millenialists" who believe that the world must
be shaped up and Christianized for a millenium before Jesus will return.
In
contrast, contemporary fundamentalists are "pre-millenials" who believe that
the Second Coming of Jesus will usher in the millenium. Obviously, if everyone must be shaped up before Jesus can return, there is a much greater incentive to wield State power to stamp out sin.

171
"true Americans/ 7

The Northern pietists found their hoine, almost to a man,

first in the Whig Party, and then in the Republican Party.

And they did

so, too, among the Greenback and Populist parties, as we shall see further
below.
There came to this country during the century an increasing number of
Catholic and Lutheran immigrants, especially from Ireland and Germany.

The

Catholics and High Lutherans, who have been called "ritualists" or "liturgicals,"
had a very different kind of religious culture.

Each person is not responsible

for his own salvation directly; if he is to be saved, he joins the church
and obeys its liturgy and sacraments.

In a profound sense, then, the Church

in responsible for one's salvation, and there is no need for the State to stamp
out temptation. These Churches, then, especially the Lutheran, had a laissezfaire attitude toward the State and morality.

Furthermore, their definitions

of "sin" were not nearly as broad as the pietists.

Liquor is fine in moderation;

drinking beer with the family in beer parlors on Sunday after Church was a
cherished German (Catholic and Lutheran) tradition; and parochial schools were
vital in transmitting religious values to their children in a country where
they were in a minority.
Virtually to a man, Catholics and High L u t h e r a n s f o u n d
during the 19th century, in the Democratic Party.

their home,

It is no wonder that the

Republicans gloried in calling themselves, throughout this period, "the party
of great moral ideas," while the Democrats declared themselves to be "the
party of personal liberty."

For nearly a century, the bemused liturgical-

Democrats fought a defensive struggle against people whom they considered
^^Lutherans, then as now, were split into many different synods, some
highly liturgical, others highly pietist, and still others in between. Paul
Kleppner has shown a one-to-one correlation between the degree of liturgical^
ness and the percentage of Democratic Party vote among the different synods.

172
"pietist-fanatics" constantly swooping down trying to outlaw their
liquor, their Sunday beer parlors, and their parochial schools.
How did all this relate to the economic issues of the day?

Simply

that the leaders of each party went to their voting constituents and
"raised their consciousness" to get them vitally interested in national
economic questions.
file and say:

Thus, the Republican leaders would go to their rank-and-

"Just as we need Big Paternalistic Government on the local and

state level to stamp out sin and compel morality, so we need Big Government
on the national level to increase everyone's purchasing power through inflation,
keeping out cheap foreign goods (tariffs), or

keeping out cheap foreign labor

(Immigration restrictions)."
And for their part, the Democratic leaders would go to their constituents
and say: "Just as the Republican fanatics are trying to take away your liquor,
your beer parlors, and your parochial schools, so the same people are trying
to keep out cheap foreign goods (tariffs), and trying to destroy the value of
your savings through inflation.

Paternalistic government on the federal level

is just as evil as it is at home."
So statism and libertarianism were expanded to other issues and other
levels.

Each side infused its economic issues with a moral fervor and passion

stemming from their deeply held religious values.

The mystery of the passionate

interest of Americans in economic issues in the epoch is solved.
Both in the Second Party and Third Party Systems, however, the Whigs and
then the Republicans had a grave problem.

Partly because of demographics—

greater immigration and higher birth r a t e s — t h e Democrat/liturgicals were slowly
but surely becoming the majority party in the country.
asunder by the slavery question in the 1840s and 50s.

The Democrats were split
But now, by 1890, the

173
Republicans saw the handwriting on the wall.

The Democratic victory in the

Congressional races in 1890, followed by the unprecedented landslide victory
of Grover Cleveland carrying both houses of Congress in 1892—indicated to the
Republicans that they were becoming doomed to be a permanent minority.
To remedy the problem, the Republicans, in the early 1890s, led by Ohio
Republicans

William McKinley and Marc Hanna, launched a shrewd campaign of

reconstruction.

In particular, in state after state, they ditched the pro-

hibitionists, who were becoming an embarrassment and losing the Republicans large
numbers of German Lutheran votes.
immigration.

Also, they modified their hostility to

By the mid-1890s, the Republicans had moved rapidly toward the

center, toward fuzzing over their political pietism.
In the meanwhile, an upheaval was beginning to occur in the Democratic
Party.

The South, by now a one-party Democratic region, was having

pietism transformed by the 1890*s.

Quiet pietists were now becoming

and Southern Protestant organizations began to call for prohibition.
new sparsely settled Mountain states, many
also largely pietist.

its own#
evangelical,
Then, the

of them with silver mines, were

Moreover, a power vacuum, which would ordinarily have

been temporary, had been created in the national Democratic party.

Poor Grover

Cleveland, a hard-money laissez-faire Democrat, was blamed for the Panic
of 1893, and many leading Cleveland Democrats lost their gubernatorial and
senatorial posts in the 1894 elections.

The Cleveland Democrats were temporarily

weak, and the Southern-Mountain coalition was ready to hand.

Seizing his

opportunity, William Jennings Bryan and his pietist coalition seized control
of the Democratic Party at the momentous convention of 1896.
Party was never to be the same again.

The Democratic

161

161
Grover Cleveland himself, of course, was neither a Roman Catholic
nor a Lutheran. But he was a Calvinist Presbyterian who detested the takeover of the Presbyterian Church by the pietists.

174
The Catholics, Lutherans, and the laissez-faire Cleveland Democrats
were in mortal shock.

The "party of our fathers" was lost. The Republicans,

who had been moderating their stance anyway, saw the opportunity of a lifetime.
At the Republican convention, Representative Henry Cabot Lodge, representing
the Morgans and the pro-gold standard Boston financial interests, told McKinley
and Hanna: Pledge yourself to the gold standard—the basic Cleveland economic
issue—and drop your silverite and greenback tendencies, and we will all back
you.

Refuse, and we will support Bryan or a third party.

McKinley struck the

deal, and from then on, the Republicans, in nineteenth century terms, were
a centrist party:

Their principles were now high tariffs and the gold

standard, and prohibition was quietly forgotten.
What would the poor liturgicals do?

Many of them stayed home in droves,

and indeed the election of 1896 marks the beginning of the great slide
downward in voter turnout rates that continues to the present day.
of them, in anguish at the pietist, inflationist, and prohibitionist

Some
Bryanites,

actually conquered their anguish and voted Republican for the first time in
their lives.

The Republicans, after all, had dropped the hated

prohibitionists

and adopted gold.
The election of 1896 inaugurated the Fourth Party System in America.
From a third party system of closely fought, see-sawing races between a
pietist/statist Republican vs. a liturgical/libertarian Democratic Party, the
Fourth Party System consisted of a majority centrist Republican party as against
a minority pietist Democratic party.

After a few years, the Democrats lost their

pietist nature, and they too became a centrist, though usually minority party,
with a moderately statist ideology scarcely distinguishable from the Republicans.
And so the Fourth Party System went until 1932.
A charming anecdote, told us by Richard Jensen, sums up much of the 1896

175

election.
for years.

The heavily German city of Milwaukee had been mainly Democratic
The German Lutherans and Catholics in America were devoted, in

particular, to the gold standard and were bitter enemies of inflation.

The

Democratic nomination for Congress in Milwaukee had been obtained by a PopulistDemocrat, Richard Schilling.

Sounding for all the world like modern monetarists

or Keynesians, Schilling tried to explain to* the assembled Germans of Milwaukee
in a campaign speech that it didn't really matter what commodity

was chosen

as money, that "gold, silver, copper, paper, sauerkraut or sausages" would
do equally well as money.

At that point, the German masses of Milwaukee laughed

Schilling off the stage, and the shrewdly opportunistic Republicans adopted
162
as their campaign slogan "Schilling and Sauerkraut"

and swept Milwaukee.

The Greenbackers and later the pro-silver, inflationist, Bryanite Populist
Party were not "agrarian parties;"

They were collections of pietists aiming to

stamp out personal and political sin.

Thus, as Kleppner points out, "The

Greenback Party was less an amalgamation of economic pressure groups than an
ad hoc coalition of 'True Believers,' 'ideologues,' who launched their party as
a 'quasi-religious' movement that bore the indelible hallmark of 'a transfiguring
faith.'"

The Greenbackers perceived their movement as the "religion of the

Master in motion among men."

And the Populists described their 1890 free-

silver contest in Kansas, as not a "political campaign," but as " a religious
revival, a crusade, a pentecost of politics in which a tongue of flame sat
upon every man, and each spake as the spirit gave him utterance...."
people had "heard the word and could preach the gospel of Populism."

The
It was

no accident, we see now, that the Greenbackers almost invariably endorsed
prohibition, compulsory public schooling, and crushing of parochial schools.
intense was the German-American devotion to gold and hard money
that even German communist-anarchist Johann Most, leader of a movement that
sought the abolition of money itself, actually came out for the gold standard
during the 1896 campaign! See Jensen, Winning of the Midwest, pp. 293-295.

176
Or that Populists in many states "declared unequivocally for prohibition" or
163
entered various forms of fusion with the Prohibition Party.
The Transformation of 1896 and the death of the Third Party System meant
the end of America's great laissez-faire, hard money and libertarian party.
The Democratic Party was no longer the party of Jefferson, Jackson, and Cleveland.

With no further political embodiment for laissez-faire in existence, and

with both parties offering an echo not a choice, public interest in politics
steadily declined.

A power vacuum was left in American politics for the

new corporate statist ideology of progressivism, which swept both parties
(and created a short-lived Progressive Party) in America after 1900.

The

Progressive Era of 1900-1918 fastened a welfare-warfare state on America which
has set the mould for the rest of the twentieth century.
1900 not because of inflation or deflation, but

Statism arrived after

because a unique set of

conditions had destroyed the Democrats as a laissez-faire parry and left a
power vacuum for the triumph of the new ideology of compulsory cartellization
through a partnership of big government, business, unions, technocrats, and
intellectuals.
163

Kleppner, Third Electoral System, pp. 291-296.

CHAPTER 3

MONEY AND BANKING IN THE UNITED STATES IN THE TWENTIETH CENTURY
After 1896 and 1900, then, America entered a progressive and predominantly
Republican era.

Compulsory cartellization in the name of "progressivism"

began to invade every aspect of American economic life.

The railroads had

begun the parade with the formation of the ICC in the 1880*3, but now field
after field was being centralized and cartellized in the name of "efficiency,"
"stability," "progress," and the general welfare.

Theodore Roosevelt, Taft

and Wilson were each in his way progressives, and each advanced the cause of
cartellization, with the process culminating in the presidency of Woodrow
Wilson.

In particular, various big business groups, led by the J. P. Morgan

interests often gathered in the National Civic Federation and other think
tanks and pressure organizations, saw that the voluntary cartels and the
industrial merger movements of tfie late 1890 f s had failed to achieve monopoly
prices in industry.

Therefore, they decided to turn to governments, state and

federal, to curb the winds of competition and to establish forms of compulsory
cartels, in the name, of course, of "curbing big business monopoly" and advancing
the general welfare.^
America's bankers had long chafed to cartellize the banking industry
still further.

The national banking system was a long step forward, from

their point of view, but it was still only quasi-centralized.

Bank credit

and money pyramided on top of New York (and after 1887, also Chicago and St.
Louis) banks.

But this system was, to use a universally adopted term,

"inelastic" —

that is, it could not assure the pumping in of more money during

^ See in particular, Gabriel Kolko, The Triumph of Conservatism: A
Reinterpretation of American History, 1900-1916 (Glencoe, III.: The Free Press,
1963.) While in less harsh a form, variants of this interpretation have now
swept the field in Progressive Era historiography. Thus, see the works of
Samuel Hays, James Weinstein, Arthur Ekrich, Louis Galambos, William Graebner,
Jordan Schwarz, Ellis Hawley, Joan Hoff Wilson, and many others.

177

178
contractions or runs on banks,

"Inelastic" was a code word for not enough

assured inflation of the money supply. ^

The growing consensus, then, was to

re-direct the banking system by establishing, at long last, a central bank.
The central bank would have an absolute monopoly of the note issue, and reserve
requirements would then ensure a multi-layered pyramiding on top of these
central bank notes, which could bail out banks in trouble, and, moreover, could
inflate the currency in a smooth, controlled, and uniform manner throughout
the nation.
In addition to this chronic problem, the large banks, particularly in
Wall Street, saw financial control slipping away from them.

The state banks

and other non-national banks began to grow instead and outstrip the nationals.
Thus, while in the 1870 f s and the 1880's, most banks were national, by
1896 non-national banks comprised 61 percent of the total number of banks, and
by 1913, 71 percent.

By 1896, these non-national banks had 54 per cent of the

total banking resources of the country, and 57 per cent in 1913.

The inclusion

of Chicago and St. Louis as central reserve city banks after 1887 diluted Wall
Street's power.

With Wall Street no longer able to cope, it was time to turn to

the United States government to do the aentralizing, cartellizing, and controlling
instead. 3
It often takes a crisis to focus one's mind and it takes a financial
crisis or notable event to move men to institutional reform.

The Civil War

2
National banks also had a particular form of "inelasticity":
Their
issue of notes was limited by their deposit of government bonds at the Treasury.
Yet government bonds were generally 40% over par, which imposed a penalty on
further issue. See Robert Craig West, Banking Reform and the Federal Reserve,
1863-1923.
(Ithaca: Cornell University Press, 1977).

See Kolko, Triumph, p. 140.

179
was the previous occasion for overhaul of the nation's money and banking
system.

The Panic of 1907 provided the spark for a return to central banking.

The Republicans fulfilled their promise, and, in March 1900, finally
placed the United States officially on a monometallic gold standard.

All

paper was to be redeemable in gold, and silver continued as a subsidiary
metal.
An unusual increase in gold production from' discoveries in South Africa
and Alaska doubled the world's gold stock from 1890 to 1914, causing a rise
of U.S. prices of nearly 50% from 1897 to 1914, or 2 1/2% per year.

Until

after World War II, this was the largest sustained rise in prices in peacetimes but still the rise only returned to approximately 1882 levels.

In the

United States, the gold supply rose at a rate of 7 1/2% per year in this period.
But despite this impact, the bulk of the increase in the supply of money in
the period came from bank deposits pyramiding on top of the increase in gold.
Thus, from June 1896 to June 1914, total bank deposits rose from $3.43
billion to $14.32 billion, or an increase of 317.5% or an annual rise of
17.6% ™

a substantially greater percentage than the 7 1/2% year increase of

the gold stock.

Once again, fractional-reserve banking under the national

banking system was far more to blame for price rises than international movements
in gold.
There were several mini-panics, averted or stopped by infusions of
Treasury money, after 1900; but the Panic of 1907 frightened the banks into
calling for a new central banking system*
not save the New York banks themselves.

Wall Street and the Morgans could
There was general speculation of

specie payment throughout the country* and premiums of currency over deposits.
Again, the Treasury was called upon to intervene.

The Wall Street banks now

knew that they could not cope, and federal government cartellization and support

180
for fractional reserve banking would be necessary.^
All banks, and both parties, now agreed on seme form of central banking,
and the rest of the story is jockeying for minor advantage.

The Wilson

Administration finally established central banking with the creation of the
Federal Reserve System in 1913 —

the symbolic end of the Jacksonian hard-money

heritage in the Democratic Party.

From 1913 until 1933, the United States

would be formally under a gold standard, but actually governed by a Federal
Reserve System designed to inflate uniformly and bail out banks in trouble.
The banking system would now be pyramiding on the U.S. issue of paper money.
By establishing the Federal Reserve System, the federal government changed
the base of the banking pyramid to the Federal Reserve Banks.

Only the Federa

Reserve could now print cash, and all member banks could now multiply their deposits
on top of Federal Reserve deposits.

All national banks were required to join the

Federal Reserve, and their gold add other lawful money reserves had to be transferred to the Federal Reserve.

The Federal Reserve, in turn, could pyramid its

deposits by three to one on top of gold.

This centralization created an enormous

potential for inflationary expansion of bank deposits.

Not only that, reserve

requirements for the nation's banks were deliberately cut in half in the course of
establishing the Federal Reserve System, thereby inviting the rapid doubling of
the money supply.

Average reserve requirements for all banks prior to the Federal

Reserve Act is estimated to be 21%.
11.6% and three years later to 9.8%.

In the original Act of 1913in these were cut to
It is clear then that the Federal Reserve was

designed from the very beginning to be an instrument for an uniform and coordinated
inflation of bank money. ^

^ See Kolko, Triumph, pp. 153-158; Friedman and Schwartz, Monetary
History, pp. 156ff.
5

See the illuminating discussion in C. A. Phillips, T.F. McManus, and
R. W. Nelson, Banking and the Business Cycle (New York: McMillan, 1937), pp. 23-29.

181
Indeed, total bank deposits were $14.0 billion at the beginning of the
Federal Reserve System in January 1914; after six years, in January 1920, total
bank deposits had reached $29.4 billion, an enormous increase of 110% or
18.3% per year.
possible.

The creation of the Federal Reserve had made that expansion

182
The GoId-Exchange Standard

Faced with a global inflation of unprecedented

volume and destruction—

both during World War I and immediately after it, the world attempted to
restore monetary stability.

But while most officials wanted gold to re-

appear as the monetary anchor, they also wanted to be able to keep inflating.

Put another way, they wanted to have their cake and eat it too.

Preeminent victims of this delusion were the British; with a burgeoning
welfare state in the early 1920's, and especially with rigid wage rates, it
was difficult politically to end inflation.

Further, Britain wanted to re-

turn to gold, but for reasons of national "prestige" she wanted to go back
at the pre-war, pre-inflation rate of $4.86 per pound.

In effect, she

wanted to pretend that the inflation had never happened.

There was only

one way Britain could get away with enthroning an artifically overvalued
pound:

By making other countries play along.

persuaded

Other nations had to be

(or forced) into either likewise returning to gold at an unrealistic

rate or inflating their monies so as not to cripple Britain T s exports

(also

priced artificially high)•
Britain accomplished this at the Genoa Conference of 1922.

Emerging

from that first post-war economic meeting was not a gold standard, but a
more slippery "gold-exchange" standard.

Here's how it worked:

Only the

United States stayed on the old gold-coin standard, where anyone could
present notes totalling $20.67 to the Treasury and receive an ounce of gold
in return.

But Britain began redeeming pounds not just in gold,but in

Federal Reserve notes or dollars.
dominantly

Further, the other nations began pre-

using British pounds as their backing.

And importantly, when

they did pay gold they only paid in large bullion bars, not coins, so the
average citizen was not able to redeem his currency.

The Genoa Accord made

the pound as well as the dollar as good as gold, even though sterling

183
was not in fact a sound currency.

Britain now printed its "gold" with

American support—the U.S. agreed to inflate enough to keep Britain T s

reserves

of dollars or gold from flowing to America.
This inflationary charade was played to buttress Britain's fading
dreams as an imperialist world power.

But also involved was the rise of the

new doctrines of John Haynard Keynes, who by the early 1920's had become a
foe of the

barbarous relic" gold and extolled instead the alleged virtues

of a politically managed paper currency.

That these ideas became so

influential so fast in London banking circles was due in no small part to the
catastrophic loss suffered during World War I of truly the finest minds of
a generation.

These would have normally become leaders during the 1920 f s.

This left a gap which affected Britain as it did few other countries.

For,

at the risk of broad brush painting, the British are a people which have always
put more stock in practical knowledge than the more philosophical French or
Germans.

But pragmatism depends less on book-knowledge than on skills handed

down orally.

The annihilation of a generation thus created a gap in the

continuity of knowledge those mora bookish nations escaped.

So as one

contemporary observer of London financial circles perceptively explained, by
the mid-1920 ? s, there would be few remaining grandfathers who remembered the
virtues of sound money.
Keynes.'1

And there would be their grandsons "miseducated by

Between them was a gap, which created such "a barrier in ideas that

it was not easy for tradition and practical knowledge to pass." °

American Inflation 19 22-28
With the "discovery" of open market pperations around 19 22, the Federal
Reserve thought it had found a way to smooth out business cycles.

Benjamin Anderson, Economics and the Public Welfare,
Liberty Press, 19 79), p. 174.

In practice,

(Indianapolis:

184
it caused a substantial 6-year bank credit inflation by buying securities on
the open market and printing the money to pay for them.

This money —

bank

reserves — w a s pyramided several-fold by means of the fractional reserve
banking system.

This policy of stabilizing the price level, was deliberately

engineered by the leader of the Federal Reserve System, Benjamin Strong, to
follow the proto-monetarist theory of Yale economist Irving Fisher.
The 1920 f s are not often seen as an inflationary period because prices did
not rise.
terms.

But the money supply can rise even without prices rising in absolute

The 1920 f s saw such a burst of American technological advancement and

cheaper ways of producing things that the natural tendency was for prices to
fall (i.e., more goods chasing the same number of dollars).
caused prices to rise relative to what they would have done.

But the inflation
So a "stable"

price level was masking the fact that inflation was going on, and creating
distortions throughout the economy.
Between mid-1922 and April 1928, bank credit expanded by over twice as
much as it did to help finance World War I.

As with all inflations, this

caused speculative excess; in this case new money poured into the stock market
and real estate.

The cooling of this speculative fever in 1928 by officials

who tightened the money supply because they were finally afraid of the overheated
economy led to the Depression, which in turn led to the world's abandonment of
the gold standard.

W e would do well to examine this period closer.

Bailing Out Britain
Britain during this time used her power to treat the pound like gold as
one might expect, keeping interest rates artifically low and inflating recklessly,
thus piling up billions of pounds at the Bank of France, which finally began
asking for gold instead.

Panicked, the Bank of England in mid-1927 induced

the New York Federal Reserve Bank to lower its interest rates and step up openmarket purchases of securities, thus fueling inflation further.

(This move to

make unnecessary the payment of British gold obligations to France and to keep

185
England inflating by causing America to inflate was disguised as
the farmer."

helping

It was the Kansas City Federal Reserve Bank which first lowered

its discount rate, the others following.)
A major reason for the inflationary pro-British policies of the 1920 f s
wasr the close personal connections formed between Benjamin Strong, the
dominant leader of the Federal Reserve System, and Montagu Norman, head of the
Bank of England.

In several secret conferences with Norman, unknown to the rest

of the Federal Reserve or the American government, Strong agreed to inflate
money and credit in order to bail out England.

The ties between Norman

and Strong were not only personal; both were intimately allied with
the House of Morgan.

Before he became the first leader of the Federal

Reserve, Strong was head of the Morgan-created Bankers Trust Company in
New York.

He was urged to accept the post by his two closest personal

friends, Henry P. Davison and Dwight Morrow, both partners at the Morgan Bank.
The Morgan connection with Britain was very close; J. P. Morgan and Company
was the fiscal agent for the Bank of England, and underwrote the massive
sale of British bonds in the United States during World War I.

Montagu Norman

himself had close personal connections with the United States investment
banks and had worked in the offices of Brown Brothers in New York.

Only

the death of Strong in 1928 ended the inflationary Federal Reserve

policy

designed to help Britain.

186
By April of 1928, the new Governors of both the Federal Reserve Board
and the New York Federal Reserve Bank, made an effort to hold down bank credit
expansion.
goals.

But those efforts were stymied by following two conflicting

Federal Reserve officials wanted both to reduce credit going into stock

market speculation yet at the same time not to tighten money either at home
or abroad (this latter for fear of pulling gold out of Britain).
And while the anti-inflationist policy predominated, it is not easy to
reduce inflation in an economy grown accustomed to it, which by 1928 America
had.

Further, 1928 was a Presidential election year, with great pressure

to inflate.
control.

It therefore took about a year before the money supply was under

But as the tables below show, the long money-supply inflation was over

by the end of 1928.

At mid-1929 money supply growth was creeping at an annual

rate of only 0.7%, a marked deceleration from previous years.

The depression

caused by years of inflation was about to begin, and with it would come the
end of the American gold standard.

Total Money Supply of the United States, 1921-29
(in billions of dollars)

Total Money
Supply

Date

1921
1922
1923
1923
1924
1924
1925
1925
1926
1926
1927
1927
19 28
1928
1929

- June
- June
- June
- Dec.
- June
- Dec.
- June
- Dec.
- June
- Dec.
- June
- Dec.
- June
- Dec.
- June

30
30
30
31
30
31
30
31
30
31
30
31
30
31
30

45.30
47.16
51.79
53.06
54.67
57.85
59.86
62.59

63.62
64.96
66.91
69.61
71.12
73.00
73.26

Per Cent Annual Change
From Previous

4.1
9.8
4.9

6.1
11.6
7.1
9.2
3.3
4.2

6.0

8.1
4.4
5.2
0.7

187

Federal Reserve Bank Credit, 1914-1934
($ millions)

Reserve bank credit outstanding
End of Year
Total loans
and securities

1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934

Source:

11
84
222
1060
2291
3090
3235
1524
1326
1211
1249
1395
1335
1591
1783
1548
1352
1825
2128
2670
2457

Through purchase of
bills and securities

0
40
184
395
526
874
547
379
708
489
927
749
696
1009
717
903
1093
1156
1888
2570
2436

U.S. Department of Commerce, Historical Statistics of the
United States, Colonial Times to 1957 (1961), series X 245-254,
p.642.

188
The International Crisis: 19 31

The stock market collapse in late 1929 was only a harbinger of things
to come.

It was not until 1931 that international bank collapses caused

abandonment of gold.

The first to go was Austria.

Kredit-Anatalt, Austria's largest bank and supported by the Austrian government,
had for years been making bad loans on a meagre reserve base.

Austria had been

part of the "sterling-bloc,11 buttressed by Britain, a development
resented by France, heavy with gold claims on Britain.

The formation of

an Austrian customs union with Germany in late March 1931 was feared by
France, who saw it as a step to political union.

The French central bank

now insisted upon immediate repayment of her short-term debts from Austria
and Germany.

Austrian banks clearly could not meet their liabilities,

and in late May, Kredit-Anstalt went bankrupt, taking Austria off the gold
standard.

A run on German banks now started.

That country had been quickly

affected by the tightened American credit conditions in mid-1928, and was
quite vulnerable.

Runs continued and even though President Hoover declared

on June 20 a moratorium on German debt, France was not immediately inclined
to go along.

She delayed too long; and on July 15 Germany declared national

bankruptcy by going off the gold standard.
It must be said that both these nations fought desperately to maintain
gold redemption, and when the end came, each regarded the act with shame.
Not so with Britain.

The country which had caused the others to inflate

for her and did more than any other to bring on the crisis went off the gold
standard without a fight.
As runs on British gold increased through the summer, Britain refused
to defend the pound by raising interest rates.

Instead, as gold flowed out

of the banks, the Bank of England created new money to replenish the banks 1
reserves.

The Bank of France cooperated loyally, and didn't present many

189
claims.

The French bank held sterling claims worth fully seven times its

capital, and thus feared for a Britain off the gold standard.
joined America

in offering massive loans to Britain.

Indeed, France

But the Bank of England

didn't even take full advantage of these credit lines, and two days after
assuring the Netherlands Bank (with all its capital in sterling) that
England would not go off the gold standard, that is exactly what happened.
The announcement was made on Sunday September 20, 1931, thus capping 17
years of gradual monetary disintegration.
Britain had for centuries been the world's premier financial power,
so the announcement left the world stunned.
had been deliberately deeeived.

Moreover, other governments

The capital of the central banks of France

and Holland had been made worthless in one day.

Governments could no longer

trust each other's financial promises, and the stage was set for perhaps
the most treacherous decade In international economic relations, a decade
from which we have not yet recovered.

As Chase economist and contemporary

eyewitness Benjamin Anderson recalled, "An immense world asset was destroyed
when the Bank of England and the British government broke faith with the
world.

Years later after we in the United States had also broken faith with

the world, the head of the national bank of one of the Scandinavian countries
said, 'I have lost money in sterling.

I have lost money in dollars.

have never lost money by holding gold.'"

America Breaks Faith
If sterling was not good, the world asked itself, what was?

looked nervously at America, and had presented claims for $728 million
of our gold by the end of October 1931.

Anderson, o£. cit., p. 254.

But Americans thought any such fears

190
were silly.

After all, we had continued to pay gold to foreigners even in

the crisis of 1895, with a low point of only $41 million of gold in the
Treasury.

Alone among belligerents we had not gone off gold in World War

I, although we had stopped the export of gold.
in notes for gold in late 1931.

Certainly, few Americans cashed

They may have doubted the solvency of some

banks, but few if any doubted the good faith of the American government's
promise to redeem notes for gold.

The platforms of both parties in 1932 contained

vows that the gold standard would be maintained.

The Democratic platform was

largely written by Senator Carter Glass of Virginia and Cordell Hull, later
Secretary of State.

As events proved, both these men were sincere.

The first sign of shakiness in the American position was a foolish and
false statement by President Hoover one month before the November election.
He charged that the Federal Reserve had been within two weeks of going off
the gold standard earlier that year.

The statement was soon proved untrue,

but it aroused doubts for the first time in people's minds.
These grew into rumors beginning in late-December that President-elect
Roosevelt was going to take the country off the gold standard.

Roosevelt

would not deny them, and American hoarding of gold started for the first time
on a grand scale.
The feelings of disquietude were made worse by a paralyzed

government.

The new President was not to take office until March 4 (the old Inauguration
date) and a lame-duck Congress had ipany members due to retire.

In the cabinet

departments, anyone whose job was not protected by civil-service rules was
preparing to find a new job in the midst of a terrible depression.
Runs on banks by depositors anxious to get cash and runs on the Federal
Reserve Banks by cash holders eager to turn their paper into gold

191

accelerated.

It should not have come as a surprise when on February 14

Michigan became the first state to declare a bank "holiday,71 i.e., to
close the banks to depositors:

Michigan had been the home of some of the more

reckless lending by banks during the boom.
and then a score of states in a cluster.

Nine days later Indiana followed,
Late on the night of March 3, the

big New York banks reluctantly agreed to close, though they were not in
trouble, smaller upstate banks were.

Roosevelt became President the next

day with almost every bank in America closed.

He kept them all closed until

March 13, when the Federal Reserve banks opened, with others a day or two
later.

The public, assuaged by FDR's promise that the reopened banks would be

good, poured both gold and cash back into the banks.

But on March 9 Congress

passed, at Roosevelt's request, a bill "to provide relief in the existing
national emergency in banking, and other purposes."

It gave him the power to do

all he pleased regarding money and banking, including authority to seize the
American people's gold coins, bullion, and gold certificates.

America Off the Gold Standard
Within a month this power was used.

On April 5, it became illegal to

own or hold any form of monetary gold, either coins, bullion, or certificates.
(Industrial users of gold were not affected.)
been brought on by past inflation.

The banking crisis had

But that crisis, ironically, was made the

excuse to abandon the gold standard.
At first, it was stressed that these measures were temporary, only to
be used as long as the crisis lasted.

But on May 12 a law was passed (the

Thomas Amendment to the Agriculture Adjustment Act) which gave the President
the ability to increase vastly the money supply and to reduce by up to half the
weight of gold dollar.

Democratic Senator Glass called it "dishonor... This

192
great government, strong in gold, is breaking its promises to pay gold to
widows and orphans to whom it has sold government bonds with a pledge to paygold coin of the present standard of value.

It is breaking its promise to redeem

its paper money in gold coin of the present standard of value.
g
dishonor, sir.1'

It's

Another Democratic Senator, Thomas Gore of Oklahoma, was

asked by the President for his opinion about another law (signed on June 5)
abolishing the gold clause in all past debt obligations:
plain stealing, isn't it, Mr. President?"

"Why, that's just

Later in Senate debate, Gore also

added that "Henry VIII approached total depravity but the vilest thing he
9
ever did was to debase the coin of the realm."
One final step remained.

Using the Gold Reserve Act of January 30, 1934,

President Roosevelt arbitrarily reduced the weight of gold that would define
each dollar.

The "old" dollar had been defined as 25.8 grains of gold,

nine-tenths fine.

The new devalued dollar would only be worth 15 5/21

grains, nine-tenths fine.

So even the act of abandoning gold was done with the

implicit admission that the dollar was still defined in terms of it.
The London Conference
Just as he had taken America off gold, Roosevelt took steps to ensure
that there would be no international return to gold.

The Gold Bloc of re-

maining gold standard nations, France, Belguim, Switzerland, Holland, and
Italy, had called the London Conference for June 19 33 to persuade Great
Britain and the United States that "gold should be reestablished as the
international measure of exchange v a l u e " — a n d

that non-gold countries should

agree that their ultimate objective was to restore the gold standard.
g
Anderson, p. 315.

Anderson, p. 317.

Even

193
the official American delegation, which included Secretary of State
Cordell

Hull, approved this declaration, and all were shocked when

Roosevelt's reply rejected the proposals.

Said he, "The sound internal

economic system of a nation is a greater factor in its prosperity than
the price of its currency in changing terms of other nations."

He thus

missed the point of a gold standard, which defines all currencies as an
unchanging weight of gold.

Incredibly , the President stated that the new

order would mean currency stability:

"Let me be frank in saying that the

United States seeks the kind of dollar which a generation hence will have
the same purchasing and debt-paying power as the dollar value we hope to
maintain in the near future."
by 40.9%.

Seven months later, the dollar was devalued

And we of "a generation hence" know what has happened to the

purchasing power of the dollar.

Gold Remains the World's Money
Finding no support, all the remaining Gold Bloc

countries stopped

redeeming their paper for gold, Holland and Switzerland being the last in
1936.

But gold was far from banished.

The deteriorating European political

situation after 1936 caused everyone from homeless Jews to central bankers
to trust gold over any paper currency and to transfer gold to the United
.States, the safest haven.

Further, the stabilization funds set up by

governments to stabilize now floating currencies settled their differences
in gold.

Remembering British and American actions to change arbitrarily

the value of their currencies, no one would trust anything else.
Nor was there reason to.
order of the day.

Beggar-thy-neighbor policies were the

International economic peace was shattered during the

1930s by economic nationalism, competitive devaluation, high tariffs, and
exchange controls.

Moreover, this poisoned atmosphere played its part in

causing World War II.

194
The Coining of Bret ton Woods
Try as they might, countries just before World War II were unable to
carry on unsound currency and fiscal policies without seeing their currencies depreciate in terms of gold, their capital flee, or their credit
markets crippled.

The only pre-war exception was Nazi Germany, which

achieved those goals at the cost of a complete and unprecedented economic
regimentation.

With the coming of war, other nations as well achieved far-

reaching control over internal and foreign exchange.

The end of war found

government officials wishing they could retain those controls which allowed
them to inflate and run budget deficits as they pleased while still having
access to easy credit, stable foreign exchange rates and an absence of international "flight capital."
This was the root idea behind the international monetary conference
in mid-1944 at Bretton Woods, New Hampshire, which set up the monetary order
that would break down 25 years later.

For while the new Bretton Woods system

was supposed to restore the currency stability of the gold standard it was
designed to do so without gold.

The system placed its trust, not in the

workings of the marketplace, but in the judicious restraint of the American
government.

It therefore contained within itself the seeds of its own destruction.

The Rules of the Game
While the dollar would be convertible into gold at $35 an ounce, it
would be so only to foreigners, and after 1962 only to foreign governments.
All other currencies were defined in terms of
defined as l/35 of an ounce of gold.

the dollar, which itself was

But the upshot of the arrangement gave

America the power to have the dollar treated as gold.
called for stable currency values:
or fall more than one percent.

The Bretton Woods rules

No currency was allowed to either rise

The Swiss franc, for example, was, at the

time of the agreement (1944), fixed at 22.9 cents; it could go no
lower than 22.7 cents and no higher than 23.1

195
cents.

If the franc threatened to break these limits, the Swiss central

bank was obliged to enter the exchange market and either buy or sell francs
to hold its currency within the narrow margin.

As the franc was usually

bumping against the upper limits of this margin, Swiss authorities were
usually selling francs and buying dollars.

Most other governments were

doing the same, especially those whose currencies were not inflating as much
as the dollar was.

But all of these nations were soothed with the promise

that the dollar was indeed "as good as gold," and that any foreign holder
of dollars, individual or government, could present American currency to
the U.S. Treasury at any time to collect one ounce of gold for 35 of their paper
dollars.

Many, of course, took advantage of this opportunity.

The U.S.

government continued inflating the dollar, and out gold supply plummeted
from a peak of 701 million ounces in 1949 to 296 million ounces in March 1968.
No government in history had held the kind of power handed to the
United States in 1944: having its paper money treated like gold.
action overlooked the stark reality that paper
gold cannot be printed wildly as paper could.

But this

not gold, that
Another effect of the

Bretton Woods regime was to subsidize American consumers at the expense
of foreigners.

For a long time, America prospered at the expense of her

trading partners.

For years, the dollar's value was artificially high,

and therefore actually bought more than it should have been able to buy.
This meant that foreign products were available to Americans at bargain
prices.

This left foreign consumers less to enjoy.

Moreover, the foreigners

had to pay more for their own goods, thanks to American "exporting" of
inflation by , in effect, forcing foreign central banks to print more of
their own

currency to absorb the unwanted, overvalued dollars they accepted.

Predictably, those nations who had managed their own monetary affairs

196
most conservatively were the one hardest hit by the American action.
Switzerland, that paragon of monetary restraint, now madly printed francs
to pay for all dollars shunned by Swiss commercial banks.
money supply soared 22 percent in 1971 alone.
had never signed

Switzerland's

(Ironically, Switzerland

the Bretton Woods agreement, but chose nevertheless to

continue to adhere to the strictures—to its own great detriment—long after
the system's founder and chief beneficiary, the United States, had broken
its commitment). Switzerland could not be expected to continue this
suicidal policy forever; as we will see later, it was Swiss action which
finally brought the injustice of the post-war system to an abrupt end.

The London Gold Pool
Dollars flooded the world through the 1950s, and few worried about
the gold reserves leaving the U.S. Treasury.

But sometime in the early

1960s the market price of gold threatened to rise above the official $35
per ounce figure.

For many years, the $35 figure was above the market price,

making holding dollars attractive.

In response to this rise in gold's

price, the West's major central banks in 1961 established the London
Gold Pool.

With the U.S. in the lead, the banks agreed to sell gold when-

ever the price threatened to rise above $35.
as long as world inflation fears abated.

But this was successful only

However, by the late 1960's the

world had paused to assess the effects of a massive dollar inflation to pay
for both the Great Society programs and the Vietnem War.
had now clearly become overvalued;

The U.S. dollar

gold's price undervalued.

Britain was the first major nation to violate the fixed-exchange regime
by devaluing in November of 1967.
the first of the post-war era.

This caused a massive flight into gold,

Billions of dollars were spent by central

banks in the next four months trying to force the market gold price down.

197

Finally in March, governments threw in the towel and gave up suppressing
the market T s wishes.

The Approaching Crisis

From March 1968 to August 1971, during the period of the "two-tier"
gold market, the political world pretended that the dollar was still convertible, and for most of that time, the monetary scene was placid.

This was due

in part to the moderate lessening of American inflation during the recession
of 1969-1970,

But after that brief respite, the printing presses again went

into high gear.

The results were predictable.

By early 1971, astute financial

observers began to sense the imminent collapse of the dollar.

One of the signs

they saw was the lowering of American interest rates compared to European ones.
When any nation inflates, money usually becomes cheaper,. if only in the beginning,
and therefore easier to borrow.

The interest rate charged by banks to borrowers

of money declines, and the interest rate paid by banks to depositors of money
also declines.

Money then flows out of those low-interest rate countries into

countries where it can enjoy higher returns.

During the beginning months

of 1971 the outflow of funds from New York to European money markets accelerated.
This forced most European currencies hard against their upper ceiling.
Germany in particular had maintained a very tight credit stance —
rate —

Because

a low inflation

the mark was besieged with an unprecendented flood of buyers.

Events

now began to move swiftly.
In early May, on the heels of a joint report by major German economic
institutes that the mark should be inflated or revalued upward,
massive speculation hit that currency.

Dollars poured into Geraany and

the Bundesbank was forced to buy them in mounting volume —

more than $1

billion on May 3-4 and a further $1 billion during the first 40 minutes of
trading on May 5.

At that point the German central bank gave up the

198
struggle, withdrew from the market, and let the mark float. Neighboring
countries, afraid of seeing now-homeless dollars careen across their own
borders, were quick to join Germany.
The following weekend the central banks of the Netherlands, Switzerland, Belgium, and Austria likewise ceased support operations and set
their currencies afloat.

In the cases of Austria and Switzerland, re-

valuations of 5 to 7 percent were also realized. Not surprisingly, the
newly-floated currencies continued appreciating, most of them rather
sharply.
in

There were rumblings inside the Nixon administration—especially

Treasury Department—

that the gold "window" ought to be

slammed unequivocally shut.
It is important to realize that while other governments

theoretically

could redeem their dollars for gold, most handled the U.S. Treasury with
kid gloves:

Only a golden trickle left Washington.

Some nations, such as

Germany, did this because they were obliquely threatened with U.S. troop
pullbacks, but there were others who sincerely believed that their sacrifices
were going toward the maintenance of the world monetary order.
As in any unnatural economic imbalance, speculators had jumped into
the fray and began betting against the dollar.

The reasons for their position

were justified by every piece of economic news emerging from the United
States by mid-1971.

Each monthly figure was worse than its predecessor:

the nation had slipped into severe trade and payments deficits.

But the

allies were patient; only a relatively paltry $300 million in gold left the
U.S. from January

to early August, 1971.

Rumors spread among foreign central

banks that the gold window was about to be shut.

Rumblings from the Bank

of England suggested that they were preparing to turn in dollars for gold
in huge amounts.

As Treasury Secretary Connally said (privately) at the

199
time, "We're completely exposed.

Anybody can topple us anytime they

want to."
On August 6, a congressional subcommittee report concluded that the
dollar had become overvalued and called outright for an exchange rate
realignment.

That same day more than $1 billion in gold or other reserve

assets were drained from the treasury, and over that next week almost
$4 billion fled the country.
During the week ending Friday, August 13, the U.S. Treasury borrowed
almost $3 billion in foreign currency to try to halt the dollar's decline
(by buying dollars with that currency).

But it soom became obvious that

the anti-dollar forces had too much strength.
President Nixon responded by declaring international bankruptcy.

a televised address on Sunday, August 15, 1971, he announced that no more
gold would be given in exchange for dollars.

There were now absolutely no

checks on the ability of the United States to inflate.
Nixon's speech to the world that night was a cunning attempt to lay
the burden of guilt for this assault upon the shoulders of America's
trading partners, who had maintained, Nixon astonishingly asserted,
"unfair exchange rates."

The cause of the problem had indeed been inequitable

exchange rates, but not in the way that Nixon meant.

The injustice of

this statement is unsettling even ten years after it was made.

200
"Unfair" Japan
It is interesting to trace the Immediate reactions of one of those
"unfair" partners, Japan.

Unlike Western Europe, whose exchanges were

closed when news of the announcement came, it was Monday morning in the
Far East.
cameras.

Trading was already underway when Nixon stepped before the
Paralyzed by the news, the Japanese nevertheless kept their foreign

exchange market o p e n — n o t only for the rest of the day, but for two weeks
afterward.

As the European markets had sensibly remained closed, Tokyo

became the dumping ground for anyone who wanted to get rid of dollars.
During those two weeks the Bank of Japan absorbed $4.5 billion.

Finally,

on August 28, they threw in the towel and joined the other currencies in
floating.
The European markets had remained closed, stunned and confused by
the president's action.

But they could not remain shut forever, and

after efforts to decide upon a common course of action failed, they opened
on August 23 on an uncoordinated basis.

Even though they all continued

to adhere officially to their pre-August 15 parities with the dollar,
virtually all of them stopped defending the upper limits of their exchange
rates.
In the months that followed, the spotlight turned on the United States
as other nations waited for an American move.

Their view was the under-

standable one that since the United States had thrtfwn the monetary system
out of kilter, it was up to

America to make the first move.

American officials finally revealed a plan whereby most other currencies
would be revalued upward against the dollar; no mention at all was made of
the United States devaluing its dollar by raising the official price of
gold.

This overture naturally struck America's trading partners as still

201

one more affront.

When the director of the IMP, Pierre-Paul Scheitzer,

suggested that the U.S. might share in this realignment by a minor increase
in the gold price, he was immediately moved onto the "most wanted" column
of the Nixon administration's enemy list.

But the Europeans were intransigent;

the American plan made no headway.

The "Greatest Agreement"
Massive runs continued on the dollar, belying Nixon's August 15 claim
that a dollar cut from gold would "never again be subject to international
speculation."

By mid-December—four months l a t e r — t h e dollar had declined

by 12.5 percent against the mark, 12.3 percent against the yen, and had
even lost ground to the lire and the pound, falling by 5.4 percent and 4.1
percent respectively.

The world monetary situation not only continued

in disarray, it seemed to be getting worse.
On December 18, 1971, the Smithsonian agreement was announced.

For

the first time in the post-war era, the dollar was devalued by raising the
official gold price from $35 to $38 an ounce (8.6 percent).

But gold

convertibility was not restored, so the devaluation meant little.
Nixon's aim was to recreate an international order with fixed exchange
r a t e s — b u t without gold.

He referred to this as "the greatest monetary

agreement in the history of the world," but it was clear that no system
would break down faster than a system of fixed rates fixed to nothing:
neither to gold nor to anything else.
Nixon's "greatest monetary agreement" was smashed on the shoals of
economic reality barely fourteen months later, because the dollar and

pound

sterling continued to be drastically overvalued in terms of the
other industrialized nations' currencies and, most importantly, in terms
of gold.

The lack of confidence in the dollar sent gold prices soaring

202
to $90 an ounce, almost tripling the formerly sacred $35 figure.

There

continued to be periodic flights from the dollar.
Finally, on January 24, 1973, the Swiss government stopped supporting
the dollar.

Other governments quickly followed:

They had all had enough*

One month later, the entire fixed-rate order collapsed.

The actual story

of how it happened would be a dreary repetition of the tales recounted above
billions of unwanted dollars reluctantly bought; another frantic but fundamentally ineffective dollar devaluation in an unsuccessful attempt to
restore tranquility; and ultimately, closure of the world exchange markets.
When those markets reopened, they did so without fixed rates.
of fixed rates meant, logically, de facto- floating rates.

And the absence

Floating rates

had not really been adopted; rather, fixed rates had been abandoned.

203
Floating and Sinking

Since 19 73 we haven't had the former condition of "public crises"
where inflationist governments would be forced to spend millions in the
foreign exchange markets defending their currencies until finally giving
up and devaluing their currencies.

For all its messiness, that system

at least called people's attention to the fact that offending governments
were in effect publicly

confessing their sins.

What we have had since is

rather a quiet but constant withering away of values of those currencies
which are inflated more than others, and a large drop in the value of all
currencies in terms of gold.

While the dollar—and even the Swiss

franc—

is not today what it was in 1973, an ounce of gold remains an ounce of gold.
Even under the flawed Bretton Woods fixed rates, there were limits
to how far governments could inflate.

Granted, it took a quarter-century,

but the U.S. eventually inflated to such a degree it lost too much gold.
The floating rate system has given, however, complete control of the
value of each currency to the respective government.
about gold flowing into other central banks.

They need not worry

There are thus no institutional

limits to inflate, and it should come as no surprise that the past decade
has seen a marked jump in average annual world inflation.
The only effect of internal inflation now is a drop in the currency
exchange rate; a currency falling in value.

But in each country, there

are special interests who desire just that.

These include domestic

businessmen who can't compete with the better-made or lower-cost products
of other lands.

If these inefficient firms' goods are priced in a currency

becoming cheaper, consumers of stronger-currency countries can more easily
buy those goods.

But the reverse of this is that goods from those stronger-

204

currency countries, priced as they are in currencies rising in value,
become more expensive for the consumers of the nation whose currency is;
falling. Their living standards thus fall as they are in effect forced to
subsidize inefficient domestic producers.

Also gainers in a depreciating

currency country are all export firms, inefficient or otherwise.

They can

exert powerful pressure in favor of international inflation.
But as one can guess, this system does not exactly promote international
harmony.

Temptations are great for the "competitive" devaluations which

so upset world economic peace in the 1930 f s.

As we enter the 1980's

unpleasant rumblings in favor of protectionism, and high tariff barriers are
being heard on a grand scale for the first time in
world economy is being pulled apart.

half a century.

The

It in no coincidence that world

trade wars are threatened more now than at any time since the last regime
of floating exchange rates, during the depression-ridden

1930*s.

Islands of Calm in a Churning Sea
There have been attempts to operate localized fixed rate systems
amidst the generalized floating.

Foremost among these attempts have been

the two efforts of that most cohesive and interdependent group of countries,
the European Common Market.
Being linked by culture, geography and the need for trade, they
realize more than America does what havoc floating rates have wreaked
and it is a hopeful

sign that these nations are more and more including

gold in their dealings.
The first of these stabilizing attempts was the Common Market "snake,"
so-called because all the currencies moving up or down within predetermined

205

limits called to mind the undulations of a moving snake*

Begun in 1972,

it was over by 1976 simply because several different governments, each with
their own inflation rates, from the start moved away from each other,
flinging accusations of bad faith at each other while they did.
Having more flexible limits, Western Europe tried again and in March
1979 inaugurated the European Monetary System.

While the EMS enables countries

to revalue more easily, each time a member does it strains the very cohesion
the system was meant to foster.

It was nonetheless successful during its

first two and one half years of operation.

Traditionally strong currencies

like the German mark weakened while perpetually weak ones like the French
franc and Italian lira were strong.
There was therefore only one major realignment until October 1981.
Since then though, there have been two (the most recent on February 21, 1982)
and signs point to European currencies falling back into their usual patterns.
But while EMS is likely in for hard time, in the background of this latest
attempt at monetary union has been a gradual but clear remonetization of
gold, the only stable unifying force among

currencies.

Even before EMS 1 s 1979 birth, both Italy and Portugal borrowed billions
of dollars from other European nations and used as collateral part of their
gold holdings.

But in those cases in the mid-70 f s, the gold was valued at

around 20% below the prevailing free market price.
With EMS's founding, things took a turn.

In exchange for member gold

deposits, nations received a new currency called the European Currency Unit
(ECU).

The hope is that one day ECU will be the European currency.

This

currency not only represents deposits in gold, but the gold is valued at the
free market rate.

Further, under European Monetary System rules gold can

206
act as a means of settlement between members.
EMS two of three functions of money:
an instrument of payment.

So gold now fulfills in the

It is both a reserve instrument and

Gold only lacks the final prerequisite for

money, a standard of value.

This is so because current IMF rules

(effective

April 1, 1978) forbid all reference to gold in defining currency values.
This has led to the absurd situation where currency A is defined in terms
of B, C, and D; B in terms of A, C, and D, and so on.

Each currency is

thus defined in terms of others which themselves depend for definition
upon it.
The market has not been fooled by any of this.
currencies—in terms of gold.

It knows how to value

And that valuation has been since 1971

embarrassing for every currency.

One-tenth of an ounce of gold will today

buy as many dollars as one ounce did ten years ago.
The market has delivered its verdict on the battle between gold and
the dollar waged throughout the 1970 f s by the American government.

First

the 19 71 suspension of any remaining convertibility, and then two devaluations in rapid succession.

At the Jamaica Conference of 19 76, the IMF

approved the U.S. wish to demonetize gold by abolishing the official price
and selling over 600 tons, one-sixth of all IMF holdings (returning another
one-sixth to member nations).

The U.S. Treasury itself announced in January

1978 that it would sell gold beginning that May.

But all during the time of the

sales (which totalled about 500 tons) gold r s price rose.

Finally realizing

it was throwing away a precious resource, Treasury gold sales ceased
after November 1979.

The Treasury thus implicitly backed-up the enhanced

roles which Europeans had given gold earlier that year.

207

Indeed, as pointed out by Yves Laulan, chief economics of Societe
Generale (one of France's largest banks), the U.S. Treasury, in an attempt to
demonetize sold, authorized its sale to end circulation among individual Americans.
Paradoxically, that act caused people to value it even more.
This subjective revaluation of gold has since spread to the Treasury, which
now realizes that it holds far more gold reserves than any other country.

Those who

wish to reestablish American dominance in the world are not blind to the fact that
gold is a powerful weapon.

It is thus unlikely that Washington will wage last

decade's war on gold again.

Conclusion
Our historical experience illustrates the overwhelmingly superior case for
the gold standard as against any form of paper standard.

There has never, in

peacetime American history, been any sustained rate of inflation to match the
inflation since 1941.

The same, in fact, is true of wartime, which at least has

never lasted more than a few years.

And it is not an accident that the highest,

most accelerated rate of inflation has taken place since 1971, when the United
States went off the international aspects of the gold standard and went over
completely to fiat paper.
The same conclusion is true if we consider price stability.

Even deflation

has been more acute under the fiat standard than under gold, as happened in the fiat
standard wea of 1873-79 as contrasted to the gold standard period from 1879-1896.
Bimetallism doesn't work either, as America learned painfully from a century's
experience.

Gresham's Law, driving out undervalued moneys, works there as it does

whenever the government overvalues one money and undervalues another.

The dollar

must be defined once again as a fixed weight of gold, with coinage and paper dollars
always redeemable one into another at that weight.

Ideally, full bodied silver

would fluctuate freely alongside the gold dollar; short of that, fractional, subsidiary silver, as well as other metals such as copper would circulate in minor
capacity along with gold.

208
The dollar must be redefined as a unit of weight of gold again, and
gold coins should be encouraged to actually circulate among the public, to
be used not simply as long-range investment but as a medium of exchange
functioning as money.

As Mises 1

"regression theorem" showed in 1912, new

currency units cannot be imposed de novo from above, by politicians or
economistsThey

must emerge out of the experience and the valuations of

the public on the market.

The public is now long used to the "dollar" as the

money-unit, and therefore the "gold gram" or "gold ounce" cannot be simply
adopted by the public as a money out of the clear blue sky.

The eventual

adoption of a gold-gram or gold-ounce is basically a two-phase process:
First, the "dollar," now of course the common currency unit, must be firmly and
permanently tied to gold at a fixed weight; the public must become accustomed
to this concept; and then finally, the currency unit can become that fixed
weight directly.
What weight we choose to define the dollar is a matter of convenience, since
any initial definition is arbitrary and we can pick the most useful one.

This

is no more "fixing the price of gold" and violating the free market than
defining two nickels as equal to one dime "fixes the prices" of these two entities,
or any more than defining 1 pound as equal to 16 ounces "fixes the price" of
ounces and pounds.

What the definition should be depends on the preferred use,

and what the remainder of the monetary and banking system will look like.
Eventually, too, we must abolish the central government's monopoly of
the minting business.

Surely the idea that the sovereignty of the king must

be expressed through stamping his face on a coin can now be discarded as a relic

See Ludwig Mises, The Theory of Money and Credit.

209

of a bygone age.

There is no reason why private firms cannot mint coins as

well, or better, than the national mint.
long last, to the minting business.

Free competition should come, at

The cost would be far cheaper, and the

quality of the coins much improved.
From our historical analysis, it becomes clear that the problems of money
and the business cycle under the gold standard, of inflation and contraction
in the 1818-36 era, of World War I inflation, the boom of the 19 20's and the
disasters of the Great Depression of 1929-33, stemmed not from the gold standard
but from the inflationary fractional-reserve banking system within it.

This

inflationary banking system was made possible by the government's imposition of a
central bank:

the Federal Reserve, the Bank of the United States, or by the

quasi-centralized system of the national banking era after the Civil War.

These

boom and busts would not have occurred under "free-banking", i.e., the system
in which banks are decentralized, able to issue either notes or deposits, no
lender of last resort bails than out, and they are forced to close their doors
permanently if they fail to redeem their liabilities in specie.

The quasi-free

banking period from the 1830 f s to the Civil War was far sounder and more stable
than any period before or since in American history —
coming to recognize.

as historians are now

It would have been far better but for the periodic

suspensions of specie payment that governments continued to permit.

The

legalization of branch banking would have made it far easier to call upon banks
for redemption.
Once again, it was the intervention of government that caused the difficulty,
not the market.

Laissez-faire has not been consistently applied to banking.

historical evidence shows that monetary freedom does not fail, intervention by
the government does.

The

CHAPTER 4
THE CASE FOR MONETARY FREEDOM

America ? s First Free Market Gold Coins

Most people assume that governments must be the only parties allowed to
mint money.

Private minters, the argument goes, will put out coins of uncertain

quality, and take advantage of people.

But not only have privately jninted

coins flourished, in at least one instance admitted by the U.S. Treasury's
Mintmaster, the private minter had the edge over the government.
The first coiners of American copper and silver money were private
citizens.

The former was done by one John Higley of Granby, Connecticut.

From

1737 to 1739 he issued coins that first were marked with a three pence value.
But as he minted more of them, and used them mostly to buy drinks at the
neighborhood bar, objections were raised to valuing them at his "high" rate.
So he "lowered" his price, and the legend was changed to read "VALUE ME AS YOU
PLEASE - I AM GOOD COPPER." 1

Actually, after he stopped minting them, they came

to be valued by the market at 2 shillings, six pence —

or 30 pence.

The first American silver was coined after the Revolution in 1783 by I.
Chalmers, an Annapolis goldsmith.

There had been a shortage of silver with

Spanish silver circulating by being cut into "pieces of eight," that is into
eight "eights."

But unscrupulous cutters were cutting the coin into nine or ten

"eights," and Chalmers'
received.

idea of minting American Shillings and pence was well-

Unfortunately, Chalmers succumbed to the same temptation that has

afflicted national money issuers:

he started putting in less silver for the

same face value.

F. Crosby, Early Coins in America.

210

211

Coin shortages plagued early America, with all the minor inconveniences associated with that state.
money.

People responded by making their own

As William Wooldridge wrote, in his fine chapter on private

coinage in Uncle Sam the Monopoly Man,

people made money "in whatever

quantity suited the need or the impulse of the moment, out of whatever
medium they found most convenient, and emblazoned it with
portrait or motto they fancied.
it and then made some more.

whatever device,

They passed it on to whoever would take

Not only did the United States have a private

coinage, it had dozens, at one point hundreds, of private coinages simultaneously. 11
Many of these have survived.

One particularly affecting copper coin

has on its obverse a kneeling slave woman in chains with the legend, "AM
I NOT A WOMAN AND A SISTER[?]."

On the reverse is "UNITED STATES OF AMERICA,"

and "LIBERTY/1838" within an' olive wreath.

Some copper coins cleverly skirted

the counterfeit laws, rarely enforced in times of shortage.
coin says "NOT ONE CENT, BUT JUST AS GOOD."

One penny size

At least some of these coins,

minted before 1840, were still found in circulation as late as 1879.

Gold Coins
By their nature, gold coins don't usually serve as small change.
Therefore, we find private gold much less frequently than silver and
copper.

And their issuance was local, only in places where the U.S. Mint

had not provided adequate assaying or coining facilities.

Further, because

gold is much more valuable, any private mintmaster would have to build up
his reputation for integrity over many years. This also limited the number
of minters.
There were some private gold coins, however.
by Templeton Reid in Lumpkin county, Georgia.

The first were minted

He produced $10, $5, and

212

$2.50 gold pieces roughly the same in weight and fineness as "official
coins" of like value.

All his coins are dated 1830, but he minted after that,

but no one knows for how long.

It is known that he was doing business in

California in 1849.
The brightest name in American private gold coinage is Christopher
Bechtler, a German Immigrant who arrived in Rutherfordton, in western
North Carolina

in 1830, then the premier gold-producing area in America.

He began minting coins one year later, and continued until he died in 1842.
There was a crying need:

The nearest federal mint was in Philadelphia, too

far to provide much circulating gold or to enable miners to travel there
easily and have their gold coined.
Bechtler minted, along with $2.50 and $5 coins, the first American
gold one dollar, 18 years before the United States did.
minted $2,241,840.50

By 1840 he had

worth of gold—roughly one-fourth of the total North

Carolina coin values from the first mint record in 1804 through 1839.
coined for a profit of

of the

bullion he handled.

But he never

accumulated great wealth, and his integrity became legendary.
published in London in 1847 by G.W. Featherstonebaugh

A book

(A Canoe Voyage Up

the Minnay Sotor)related how impressed people were with his honesty in
making his coins tha same value as official U.S. coins.

213
Both Bechtler f s coins and his reputation were known far and wide.
emigrations of the 1850 ! s brought many of his coins out West.

The

And in

Massachusetts constitutional lawyer Lysander Spooner argued that if Bechtler
was allowed to coin money constitutionally then surely Spooner 1 s private
American Letter Mail Company (which made him a folk hero for carrying
mail faster and cheaper than the Post Office) should be allowed to carry
mail privately.
In fact, only a legislative oversight long since changed kept Bechtler
out of jail.

While private coinage of copper was considered

counterfeiting,

there was at that time no similar prohibition on silver and gold coinage.
So highly regarded was the Bechtler dollar that even when the United States
Mint opened an office in Charlotte, North Carolina in 1838, Bechtler
successfully competed with it.

His equipment is now in museums:

his dies at

the North Carolina Hall of History at Raleigh, and his press at the American
Numismatic Society in New York.

They act as proof that someone once successfully

competed with the government in money, the service which "everyone knows" only
the government can provide.

Other Gold Coins
During the California gold rush government minting offices were sometimes
slow in appearing and private firms filled the breach.
had sprung up.

By 1852, 14 companies

While the absolute amount coined by these firms ($4,240,000) was

larger than Bechtler, they handled a much smaller percentage share of the
roughly $260,000,000 worth of gold coined by 1854.

214

But though the general appearance of these $5, $10, $20, and $50
coins resembled each other, their value was not uniform, and some of the
firms were not completely honest in their minting.

In any case, in

1854 the San Francisco mint was established, and private coinage was
discouraged. But at least $2 million worth of these coins circulated for
years to come.
Other Western states were host to private gold coinage.

The Orange

Exchange Company in Oregon City, Oregon issued $5 and $10 coins in 1842.
The Mormons struck $2.50, $5, $10, and $20 coins in 1849 and 1860.

They

bore the legend "HOLINESS TO THE LORD" on one side, and the letters
"G. S.L.C .P.G."(Great Salt Lake City Pure Gold) on the other.

In discussing

one assay of these coins Bankers 1 Magazine (Vol. 4, 1849-50, page 669) opined,
"If this assay at the mint be a fair test of the value of the whole of
of the Great Salt Lake manufacture of c o i n — t h e Mormons seem to know what
they are about, and to be determined to make the best of their gold mines."
Three Colorado companies minted $2.50, $5, and $10 coins in 1860-61.

They

made quite a bit of it, and the coins had circulation all over the West.
They were larger than "official" gold coins, but had more of a silver
alloy in them, making them paler in color than other gold coins.

Of the

three minters, only those coins of Clark, Gruber and Company tested out
well against government coins.

The others presumably traded at discount.

The desire for these coins continued until the Denver mint was established
in 1863.

Finally, a Leavenworth, Kansas mint issued in 1871 a half-dollar

gold piece (which must have been very small),

But it tested out at only

17 cents, and its creators were prosecuted—not for fraud which they
should have been, but for counterfeit.

The state of Kansas had passed in

215

June 1864 the first act prohibiting private gold coinage.
Altogether, then, we find private gold coins minted in seven
states and territories.

In 1851 when the Philadelphia Mint assayed 27

different kinds of gold coins no less than 15 private mints were
represented. That was the peak of private gold activity, because with the
Civil War the nation went off the gold standard, though in the West
gold continued to circulate.

And by 1879, when gold redemption was restored,

non-governmental minting of gold coins was

generally illegal.

Granted, the short history of private gold contains instances of
dishonest minters.

Gold Rush California in particular was the site of

fly-by-night operations.

And yet the example of Bechtler hints to us that

if the government would have gotten out of the way, and private minters
given more time to establish their reputations, a sturdy system of private
coins of sound repute and wide circulation would have arisen.
have done so either by weight or stamped dollar value.
all of them would have kept honest.
ways been strong.

They could

Without doubt, not

The temptation to debase coins has al-

And yet the firms doing so would have lost business to

Bechtlers of the trade.

In a system of competing private money when one

goes bad, consumers can always turn to another.

But today, when only

Washington has the monopoly on money, what protects us when the government debases its currency?

216
Free Banking in Scotland

(1714-1844)

Not only does economic freedom work with regard to coinage, it has had
spectacular results when applied to banking.

As shown in chapter two, one

of the prime causes of economic instability in the 19th century was the special
privilege conferred on banks by either the state or federal governments.
These privileges, which protected the banks from their creditors and

allowed them

to pyramid money supplies, caused the banking panics of the last century.

But

if one were to eliminate those privileges, the resulting instability would also
disappear.
There once was a country with a stable banking system the envy of the rest
of the world.

While there's nothing so extraordinary in that, it was a system

with aspects almost everyone would call - were it proposed to them - unworkable.
Not only was there no central bank, there were no legal tender laws, no political
banking regulations, no monetary policy and no restrictions on the right of
anyone to form a bank and issue his own money.
1714-1844.

The country was Scotland from

When English law put an effective end to this "free-banking11

regime, there were 19 different banks issuing their own notes.
The Bank of England, the first central bank, was founded In 1694.
later, a Bank of Scotland was founded by the Scottish Parliament.
still technically two different countries.)
issuing paper money for 21 years.
to renew it.

A year

(They were

The Bank was given a monopoly of

This expired in 1716 and no effort was made

All apparently thought that there would never be any other

note-issuers.
It's important to realize that despite its official-sounding name, the Bank
of Scotland was a completely private institution, with no governmental connection.
Indeed, the Act creating the Bank prohibited it from lending to the Scottish
government.

But after 1707, there was no more sovereign Scottish government, as

the two Parliaments merged into one, in London.

This was in the reign of Queen

217
Anne, a (Scottish) Stuart.

When she died a few years later, the German Hanovers

acceded to the throne, and their

descendants still sit upon it.

sit well with many Scots, who longed for a Stuart king.

But this did not

Their men were called

Jacobites, and England would wage war upon them until "Bonnie Prince Charlie"
was finally defeated in 1745.
All this is important to our story.

In 1727, the Bank of Scotland's first

real rival in note issuance was formed, the Royal Bank of Scotland.

The Bank

of Scotland petitioned the English king for monopoly status, but the English
ignored the request, aware of the Bank's Jacobite sympathies.
There now began something unprecedented:

a "note-duel" whereby each bank

would send large quantities of the other's bank notes back to it and demand
specie redemption.

The old Bank, having less silver, lost the duel and for

several months in 1728, suspended silver payments.
though, and it did.

All the while it paid a 5% interest rate to its note

holders to keep demand from collapsing.
this time.

It intended to reopen,

The Bank's notes traded at par all

The Royal Bank soon began paying interest rates on deposits; this

long before English banks did.

It was an obvious benefit of competition in

banking.
The two banks remained the only rivals until 1750.

Each were Edinburgh

banks and each sponsored a Glasgow bank to act as its note "salesman11 In that city.
To the surprise of each, both banks soon began Issuing their own money.

Neither

note-dueling or a cartelization attempt to divide the nation into two "districts"
worked, and a proliferation of "banks of issue" occurred.

There were a few

who issued far more paper than they had silver to back it, and they soon went
bankrupt.

But most were successful.

One of these newcomers, the British Linen

Company (later Bank), became the world's first innovator in branch-banking,
having 12 branches by 1793.

218
During this time, there were sporadic attempts by the first two or three
banks to obtain a money-issuing monopoly for themselves, but these failed.
laws did pass left the system largely intact.

What

The Act of 1765 outlawed notes in

smaller denominations than one pound, and insured that all notes were to be
redeemable in gold oncfemand.

The total number of Scottish banks

money or otherwise) climbed from 5 in 1740 to 32 In 1769.

(issuing

In that year the Ayr

bank was founded on the inflationist schemes which the Scotsman John Law had
tried unsuccessfully to get the Bank of Scotland to adopt in 1705.

(He later

got the French government to listen to him, and caused the first nation-wide
paper money inflation.)

Law's idea was for a bank to issue notes not backed by

gold or silver, but on the reputation of the issuer and "backed" by land.
In a mere three years, the Ayr bank managed to create a tremendous amount
of unbacked paper and when it finally collapsed in 1772, losses amounted to
two-thirds of a million pounds, a staggering amount for those days.
But the intriguing thing is that the Ayr bank's collapse had limited
repercussions.

It took with it only 8 small private banks in Edinburgh.

This

is largely because of a well-developed clearing house mechanism that the large
Scottish banks employed.
notes to the issuing bank.

They accepted each others 1 notes and returned those
Suspicious of the Ayr bank's issue, other banks

made a practice of quickly returning Ayr's notes to it.

When the collapse came,

they were ^ot affected.
Nevertheless, to insure public confidence (and get their own notes into
wider circulation) the two largest banks, Royal Bank and the Bank of Scotland,
announced that they would accept the bankrupt bank's notes.
mad as it may appear.

This was not as

The collapse had few rippling effects because of Scotland's

extraordinary practice of unlimited liability on the part of the bank's shareholders.

So Ayr's loss was borne completely by the 241 shareholders, who paid

all creditors in full.

219
Scottish banking grew apace, and around 1810 a new development occurred.
This was the founding of the Commercial Bank of Scotland on joint-stock
principles.

Joint-stock banks, unlike private banks, raise their capital by-

selling shares of stock.

This development grew, and with it branch banking.

By 1845, there were 19 banks of issue with a total of 363 branches across
Scotland, or one branch for every 6600 Scots•

This compares with one for

every 9405 Englishman and one for every 16,000 Americans at that time.
This was the heyday of Scottish free banking.
the ideal:

The arrangement approached

many competing banks with none disproportionately large; their notes

circulating throughout the country (and even in northern England) being
exchanged effectively by the banks themselves through a clearinghouse; and
competition keeping profits down, with small spreads between what the interest
they paid depositors and the interest they charged borrowers.
These banks were the envy of thoughtful .Englishmen.

Scottish banks con- •

sistently proved themselves more stable than their English counterparts.

While

English provincial, or "country11 banks were able to issue their own notes until
1845, there were many differences.

The Bank of England (a state institution)

limited their size, and refused to accept their notes.

Further, the Bank did

not branch out of London until an 1826 law encouraged it to do so.

So for years,

England was bedevilled with small unstable country banks and an uncompetitive
Bank of England (which unlike Scottish banks paid no interest not only on
demand deposits, but even on six-month

certificates).

During the financial panics of 1793, 1797, 1815, 1825-26 and 1837, English
country banks collapsed right and left, while the record for Scotland was always
far better.

When in trouble, Scottish banks could always turn to each other for

help, which the stronger banks would give for reasons of self-interest as we
saw in the extreme case of the Ayr bank.
turn to.

English country banks had no one to

220
English and Scottish Bank Failures, 1809-1830

Year

English bankruptices/1000

Scottish bankruptcies/1000

1809
1810
1811
1812
1813
1814
1815
1816
1817
1818
1819
1820
1821
1822
1823
1824
1825
1826
1827
1828
1829
1830

5.7
25.6
5.1
20.6
8.7
28.7
27.3
44.5
4.0
3.9
16.5
5.2
12.8
11.6
11.6
12.8
46.4
53.1
11.9
4.5
4.4
20.9

0
0
0
0
14.3
0
9
14.1
0
0
0
13.2
0
13.0
0
0
12.0
11.0
0
0
11.4
0

Avg/yr.

18.1

4.0

In computing the Scottish bank failure rate, up to three branches of
a bank were similarly included in the computation, while non-issuing banks
were excluded. The number of branches was estimated by interpolation where
figures for a particular year were not available. No more than one Scottish
bank failed during any year in the sample.

221
From 1797 to 1821, England suspended gold payments.

Scotland went along

not because it had to but because it realized that its gold would be drained
if it didn't.

And there is evidence that Scottish banks quietly continued

gold payments to their best customers.
This difference between the 2 nations is graphically illustrated by a cartoon
published in the Northern Looking Glass in 1825, a year of severe panic in
Britain.

(This is reproduced in Checkland's Scottish Banking, A History:

1695-1973, Collins, 1975, p.- 407.)

Entitled "State of the Money Market," it

shows two scenes, "England" with a fat banker in the midst of banks and paper
crashing down around him; and "Scotland", where 2 tartaned Scots are happily
dealing in coin, with bags more of it visible across the banker's desk.

While

60 English banks collapsed in 1825-26 none in Scotland did, although some partners
sustained severe losses.
As an interesting aside, counterfeiting was never a problem for Scottish
banks; a situation unlike the Bank of England, especially during the latter f s
suspension of gold payments.
life of Scottish notes.
catch on.

Perhaps this is due to the much shorter average

Turnover was heavy and the issuing bank quick to

Even so, Scotch banks would honor counterfeits if turned in by

innocent parties.

To do anything else would have been bad business in a truly

business-like atmosphere.
The first editor of the London Economist, James Wilson, wrote in 1847 that
"we have only to look at Scotland to see what has been the effect of a long
career of perfect freedom and competition upon the character and credit of the
banking establishment of that country."
And yet two years before those words were written, legal action finally
brought the "career of perfect freedom" to an end.

Peel's Act of 1844 and the

Scottish Banking Act of 1845 abolished freedom of entry into banking and the
right of those remaining banks of freedom of note issue.

However, Bank of

England notes were not forced upon Scotland as legal tender; only gold was

222
so established.
Abolition of free entry caused a gradual reduction in banks issuing
notes, and Scottish pound notes today have long since become like those of
any other part of Great Britain.

That is, with one exception:

If you go

to Scotland today, you will see pound notes issued by the three remaining
banks of issue in business before 1845:
Bank of Scotland, and Clydesdale Bank.

The Bank of Scotland, the Royal
These are actually as good - or as

bad - as the Bank of England's notes circulating throughout the rest of the
United Kingdom, because everything else about them is dictated by the Bank
of England.

But they provide daily proof that once there was a free market

in money issuance with no legal tender laws, and that the system worked very
well.

CHAPTER 5
REAL MONEY:

THE CASE FOR THE GOLD STANDARD

In chapters two and three, on the history of the gold standard in the United
States it was made clear that the economic shortcomings of the past were due to
abuse of the gold standard, not to the standard itself.

Men and governments

have failed in the past; gold has not. The rule of law has been challenged by
the rule of men throughout history, and this will continue.

But the rule of

law and the sovereignty of the people are much more likely to prevail with gold
than with paper.

For many economic reasons it is critical that the rule of

law and gold win the great debate on monetary policy.

Low Interest Rates
The most pressing problem today for consumers and businessmen is high
interest rates.

Even those who do not understand the process of inflation

easily recognize the great harm brought to an economy through high interest
rates.

The real interest rate, usually 3 per cent - 5 per cent, the cost of

using another's capital, remains relatively stable.
charged in an age of inflation

The inflationary premium

changes inversely to the confidence the market

places in the monetary authorities and the spending habits of Congress.

Contrary

to popular belief, this premium is not equivalent to the current rate of price
increases.

This is certainly a factor, but only one of many in determining the

anticipation of the future purchasing power of the currency.

If prices are

accelerating at an annual rate of 10 per cent, the inflation premium can still be
15 per cent if the market anticipates a more rapid rate of currency depreciation
in the future.

The further a nation is down the road of inflationary policies

223

224
the more difficult it is to reverse the expectations of more inflation by the
people.

In the early stages of inflation, more people are deceived and interest

rates are actually lower than one would project if only computer analysis were
In the later stages the rates, some claim, "are higher then they should

used.
be."

This Is what w e are hearing today.
The inflationary premium is completely removed if a true gold standard

exists.

There would be no need to anticipate a depreciation of the currency,

for the record is clear that gold maintains or increases its purchasing power.
This ought not to be confused with sharp fluctuations in dollar-denominated
of gold in a period of dollar speculation.

prices

The problem under those circumstances

is the inflationary policies of the government, not the natural variation in the
purchasing power of gold.

Dr. Roy Jastram, In his book, The Golden Constant,

has demonstrated quite clearly that gold maintains its value over both long and
short periods of time.
With the classical gold standard long-term interest rates were in the range
of 3 per cent - 4 per cent.

There is no reason to believe that these same rates

or lower rates would not occur with a modern gold standard.

The economic benefit

of low rates of interest is obvious to every American citizen.

Accelerated real

economic growth would result from such interest rates, and it cannot be achieved
apart from these low rates.

Increased Savings
When a currency sustains steady and prolonged depreciation as the dollar has
for decades, the incentive to save is logically decreased.
citizens have been one of the lowest in the world.

Savings by American

If the dollar

were guaranteed

not to lose any value, and 3 per cent interest were paid on savings, as under a
gold standard, a high savings rate would be quickly achieved.

Getting $1.03 of

225
purchasing power after one year for every dollar saved is much better than
getting $.94, as happens if $1 is saved in a conventional savings account today.
A 9 per cent differential provides a real incentive to save under a gold standard
and a strong disincentive under an irredeemable paper standard.
a gold standard for savings —
be obvious to all doubters.
place ~

The benefits of

the source of capital in a growing economy —

should

One reason it is hard to accept is that the market

the people and voluntary exchange —

is compatible with the gold standard,

while government management and coercion are relied on with a paper standard.

as a nation have grown to mistrust and misunderstand a free system and have
become dependent upon and misled by the money managers and central planners
found in all interventionistic

economies.

Revival of Long-Term Financing
Under the gold standard bonds were sold for 100 years for 4 per cent 5 per cent.

Today the long-term bond market Is moribund.

are so costly that few Americans can qualify.

Mortgages for houses

With lower interest rates,

increasing savings,and trust that the money will maintain its value, the long-term
financial markets will be revitalized —
temporary government programs.
currency is a dream.

all without government subsidies cr

Reviving the economy without restoring a sound

Only with a currency that is guaranteed not to depreciate

will we ever be able to have once again low long-term rates of interest.

Debt Held in Check
During the time we were on a gold standard federal deficits were very small
or nonexistent.
could it create.

Money that the government did not have, it could not spend nor
Taxing the people the full amount for extravagant expenditures

would prove too unpopular and a liability in the next election.

226

Justifiably the people would rebel against such an outrage.

Under the gold

standard, inflation for the purpose of monetizing debt is prohibited, thus holding
government size and power in check and preventing significant deficits from
occurring.

The gold standard is the enemy of big government.

In time of war,

in particular thoae wars unpopular with the people, governments suspend the
beneficial restraints placed on the politicians in order to inflate the currency
to finance the deficit.

Strict adherence to the gold standard would prompt a

balanced budget, yet it would still allow for "legitimate" borrowing when the
people were willing to'loan to the government for popular struggles.

This would

be a good test of the wisdom of the government's policy.
Finally, the inflationary climate has encouraged huge deficits to be run up
by governments at all levels, as well as by consumers and corporations.

The

unbelievably large federal contingent liabilities of over $11 trillion are a
result of inflationary policies, pervasive government planning, and unwise tax
policies.

Full Employment
In a growing economy, labor is in demand.

In a recession or depression,

unemployment apparently beyond everyone's control plagues the nation.

The un-

employment is caused by the correction that the market must make for the misdirection o f investment brought on by government inflation and artificial wage
levels mandated by "full employment" policies.

Full employment occurs when

maximum economic growth is achieved with a sound monetary system, and wages are
allowed to be determined by the market place.
Some would suggest that at times those rates are too low and must be raised
by law.

This can be done only at the expense of someone else losing a job to

pay another a higher wage than deserved.

The forced increases in wage benefits

227

increase corporate debt and contribute to their need for more inflationary
credit to help keep them afloat.

Although only government can literally inflate,

higher than market wages in certain businesses prompts the accommodation of monetary
policy to keep these companies going, Chrysler Corporation being a prime example.
High wages contributed to Chrysler's financial plight and government guaranteed
loans (inflation) were used to "solve" the problem.

It's well to remember that

working for $8 an "hour is superior to having a wage of $16 an hour but no job.
For awhile the artifically high wage seems to be beneficial, but the employment
and the recession that eventually come makes the program a dangerous one.

For

years it was believed that "inflation" stimulated the economy and lowered unemployment rates.

But in the later stages of inflation its ill effects are felt arnd

unemployment increases while real wages fall.

More inflation and wage controls to

keep wages high will make the problem significantly worse and only raise the
unemployment rates.

Only a sound currency and a market determination of wages can

solve this most explosive social problem of ever-increasing unemployment.

Economic Growth Enhanced
The record for real economic growth while we were on a gold standard surpasses
the growth we have experienced during the past ten years.

Current economic

statistics stow the conditions worsening with no end to the crisis in sight.

Only

with a gold standard will we see revitalization of a productive economic activity.
The "Austrian" economists, and in particular Ludwig Mises, have demonstrated
clearly that the business cycle is a result of unwise monetary policy (frequently
compounded by other unwise government policies such as wage controls and protectionist legislation).

The business boom results from periods of monetary growth;

the recession results from the restraints that are eventually placed on this money

228
growth, either by the government or the market.

As government increases the

money supply, false signals are sent to the market with lower than market interest
rates and ready access to investment funds causing a misdirection of investment.
This misdirection must later be corrected by market forces.

This whole process

is aggravated by massive disruption in the market direction of investment by
government guaranteeing hundreds of billions of dollars of loans which prompts
more monetary growth.

Government becomes a direct participant in credit

allocation in an inflationary economy.

Although

during all stages and in

isolated cases "benefits" are demonstrated, the overall economic harm done by
inflation and mal investment is overwhelming.

We are seeing those results all

around us today.

Money Growth Not Necessary
Advocates of discretionary and monetarist monetary policies claim that
money growth is needed to "accommodate" economic growth.
not dependent on money growth.

Economic growth is

Economic growth comes from productive efforts

which are encouraged by savings, low interest rates, reliable currency and minimal
taxes.

Attempting to control and stimulate economic growth with monetary growth

does the opposite; it destroys the environment required for real growth to occur.
With the gold standard and the free market, investments are strictly made by
enterprising individuals eager to make a profit.
prudently are encouraged.
penalties to the investors.

Those done carefully and

Successful investments bring rewards, and mistakes bring
In contrast, a government-directed economy, backed

up by unlimited supplies of paper money and fabricated credit, prompts the bailing
out of unsuccessful enterprises and promotes investments for political, not
economic reasons.

It is inevitable that the system of inflation and government-

directed investment will fail.

229

With a gold standard the money supply would probably increase on an
average of 2 per cent per year.

If the growth is smaller or larger, prices

will adjust posing no limitation on economic growth due to a "shortage" of
capital.

With the gold standard, confidence in the monetary unit would exist,

and credit extended from one business to another, to consumers and purchasers,
would be greatly encouraged.

Information on the credit needs of the market

would be available Immediately, in contrast to the late information the Federal
Reserve always receives.

(The Federal Reserve never planned to increase the

money supply at a rate of 19 per cent in January 1982 —
react to it after the fact.)

it was only able to

Under a real gold standard "controlling" the

money supply is irrelevant as long as the market is allowed to adjust the perceived value of gold by an absolutely free pricing mechanism and no wage or price
controls of any sort instituted.

Price "Stability"
Prices are never rigid in a free market.

A gold standard permits price

adjustments to accommodate the flow of gold into and out of a country as well as
to regulate new production of gold.
stable —

that is, rigid —

In contrast to popular belief^ the goal of

price levels as proclaimed by paper money managers

is not the goal of the gold standard.

The irony, however, is that the goal of

rigid prices set by the paper money managers is completely elusive« but a gold
standard, in which the goal is honesty and freedom and flexibility of prices, achieves
significant price "stability."

230
Economic

Calculation

A precisely defined unit of account by weight, an ounce of gold for
instance, provides a needed objective measurement to allow reasonable economic
calculations.

Under social ism, economic calculation is impossible.

a gold standard economic calculation is extremely difficult.

Without

Without this tool,

a precise unit of account, sound economic planning becomes practically impossible,
resulting in only speculative ventures and barter.

Having a unit of account

that has no definition or one that changes continually produces a situation
equivalent to a carpenter using a yardstick that on an hourly basis changes the
number of inches it contains.

It is easy to see how foolish It would be to have

any other unit of measurement changing in definition on a constant basis, yet
many believe that a whole nation's economy can operate with a monetary system in
which the "dollar" has no definition and its measurement and value depend on
politicians and bureaucrats.
Trade is enhanced domestically and internationally when a precise unit of
account is used.

The failure of the Confederation was due principally to the

absence of a unit of account that all the colonies could use to facilitate
exchange.

This problem was solved when the Constitutional Convention precisely

defined the dollar.

The chaotic conditions that are developing today will

only be solved when we once again accept a sound monetary system.
Internationally, all payments with the gold standard could be made by
the actual transferring of gold.
to export their inflation.

Such a policy would limit the ability of nations

The decrease in the gold supply of an importing

nation would prompt prices to drop allowing for more competitive prices and more
competition in world markets.

The key to third world economic success is not

their gold supply (or imported inflation in terms of Eurodollars) but whether
or not they can work and produce a product that is exportable.

This is dependent

231
oil the degree of economic freedom that the people have and their right to own
property.

The policy that guarantees a continuation of third world starvation

and poverty is the present policy of continued worldwide inflation and centrallycontrolled economies.

Economic Limitations of Gold
The economic advantages of the gold standard are many and compelling.
However, it is important that one does not expect from the gold standard
something that cannot be achieved.

The errors of a government-planned economy

cannot be cancelled out by instituting a gold standard alone.
policies must be changed to allow an economy to thrive.

Abusive tax

And although sound

money goes a long way toward protecting a worker's real income, it will not
overcome bad labor laws.
Gold is used as money in a free market because the people throughout
history have chosen gold.

Although historically a free market means a gold,

standard, a gold standard by itself will not ensure a free market.

When a market

economy is in place, a gold standard holds in check the ability of the government
officials to expand their power.
Some claim that a gold standard cannot be put into place until big government is brought under control and the budget is balanced; they further claim
that it then becomes unnecessary.
institute a gold standard together.
for one mandates the other.

It is necessary to balance the budget and
The discipline and determination required

If government is to be limited in size, the budget

balanced and the market free, gold will be a necessary adjunct.

It will give

assurance that the size and scope of government will be held in check.

government is to continue running the economy and accumulating massive deficits,

232
inflationary monetary policy will persist.

A gold standard cannot exist

in a vacuum; it must be part of a broader freedom philosophy.

When we as

a nation reject political control of the economy and the money, the gold
standard will return in a modern version —
at establishing sound money.

far surpassing all previous attempts

U n t U then, as we opt for more and more ad hoc

"solutions" to the government-created problems, freedom will be further
diminished, the economy will deteriorate further, and inflation will accelerate.
Gold must be allowed to perform its vital service in building a healthy
economy and restraining the tendency of all governemnts to become large and
oppressive.

233
Common Objections to Gold

In any debate about the gold standard, certain objections are repeatedly
raised by opponents of monetary freedom, even though those objections have been
refuted many times before.

Some of these objections are:

There is not enough gold.

The Soviet Union and South Africa, since they are the
principal producers of gold, would benefit from our
creation of a gold standard.

The gold standard causes panics and crashes.

The gold standard causes inflation.

Gold is subject to undesirable speculative influences.

The first objection, there isn't enough gold, is based upon, a misunderstanding of a gold standard.

It assumes that the present exchange ratio (or a

lower ratio) between a weight of gold and a greenback is the exchange ratio that
must prevail in a gold standard.

Such obviously is not the case.

Doubling the

exchange ratio, for example, doubles the money supply.

Lower prices under a gold

standard eliminate

One can buy a suit that

the necessity for such large sums.

costs 400 paper dollars with 20 gold dollars.
In 1979, there were a total of 35,000 metric tons of gold in central
bank and non-Communist government treasuries alone.

The United States Government,

officially holding 264 million ounces (8,227 tons) owns about 1/4 of that total.
The best estimate on the total amount of gold in the world is three billion
ounces, meaning that about one-third of the world's gold is held by governments
and central banks, and two-thirds by private persons.
of gold, there are enormous amounts in existence.
remains in existence.

Par from being a dearth

Gold, unlike most commodities,

It is not burned or consumed, and the amounts actually

lost are insignificant when compared to the amounts now in public and private
possession.

234
The second objection, concerning the Soviet Union and South Africa, is
equally groundless.

These nations, as the world's largest producers of gold,

have profited handsomely from the massive increase in gold prices in the past
ten years.

Such increases do not occur under a gold standard.

Recently a newsmagazine reported that "The Soviet Union holds an estimated
60 million ounces of gold and has unmined reserves of perhaps 250 million
ounces more.

At today's prices that would give the Soviets a $146 billion

stranglehold on western economies."

But let us put these figures in perspective.

Below is a table showing the gold holdings of major central banks.

Official Gold Holdings
September 30, 1979
(tons)
United States
Canada
Austria
Belguim
France
German Federal Republic.,
Italy
Japan
Netherlands
,
Portugal
South Africa
Switzerland
U.K
OPEC
Other Asia
Other Europe
Other Middle East
Other Western Hemisphere
Rest of World
Unspecified
Total
IMF
European Monetary
Cooperation Fund

8,227
657
657
1,063
2,546
2,961
2,074
..754
1,367
..689
..374
2,590
..584
1,207
..607
1,209
461
654

320
113

29,110
.3,217
2,664

This table, taken from the Annual Bullion
Review 1980 of Samuel Montagu & Co., is based
on IMF statistics.

235
The Soviet Union f s alleged 60 million ounces is less than 1900 tons,
less than 1/4 of the U.S. official gold holdings.

Even the alleged 250

million ounces of "unmined reserves" are less than the U.S. has in Fort Knox
and our other bullion depositories.
Consolidated Gold Fields Ltd. of London has estimated the net outflow
of gold from the Communist empire:
Year
197 0
197 1
197 2
197 3
197 4
197 5
1976..,
197 7
197 8
197 9

Net Outflow
-3
54
213
275
220
149
412
401
410
.....................199

198 0

In 1976, the Soviets produced 412 tons, 1.2 per cent of the governmental
holdings of the non-Communist world.
continously —

Assuming they could produce at this rate

a very doubtful assumption —

just to match current official, holdings.

it would take them almost a century

If one includes private holdings,

the percentage drops to about 1/2 of 1 per cent, and the time required extends
to more than two centuries.

The fear of the Soviet Union and South Africa either

dumping or withholding gold and thereby wrecking a gold standard by altering
significantly the purchasing power of gold is baseless.

The only reasons sales

by such governments now influence the market is that official holdings are
immobilized and the value of the paper dollar fluctuates violently.

Were we to

institute a gold standard, those holdings would once again enter the market.

should stop giving such windfalls to the Soviets and South Africans as they have
enjoyed during the last ten years.

236
The real fear should be the massive increase in the money supply caused by the
Federal Reserve in the last ten years, and the probability of still further
massive inflation.

The red herring of external shock destroying a gold

standard is designed to distract one's attention from the threat of internal
shock caused by the Federal Reserve.
The third objection, that the gold standard causes panics and crashes, »is
also false.

The extensive examination of the monetary history of the United

States during the 19th-century demonstrated that it was not the gold standard, but
government intervention in the banking system that caused the problems.

The

legal prohibition of branch and interstate banking prevented the prompt and
convenient clearing of notes issued by those banks.

Frequent suspensions of

specie payments were special privileges extended to the bakks by the government.
Fractional reserves, wildcat banking, the national banking systefl, and the issuance
of greenbacks all contributed to the instability experiences during the 19th-^century.
But even with these interventions, as long as the dollar was defined as a
weight of gold, the benevolent influences of the gold standard were felt.

Chapter

two of the Commission's Report indicates that the problems of the 19th-century
were due to abuses and lapses of the gold standard, not the standard itself.
Victor Zarnowitz has found evidence that the so-called recessions of 1845, 1869,
1887, and 1899 were mere pauses in growth.^"
since 1893 by their severity.

Jeffrey Sachs categorized

He found only one strong and one moderate contrac-

tion in the period of 1893-1913.

Since the institution of the Federal Reserve,

however, we have had three strong contractions and three —
contractions.

recessions

now four —

moderate

"Business Cycles and Growth: Some Reflections and Measures," (NBER
Working Paper #665, April 1981).

2
"The Changing Cyclical Behavior of Wages and Prices: 1890-19 75" (NBER
Working Paper //304> December 1978).

237
Economist Alan Reynolds has pointed out that "Michael Parly found
that unemployment rates in the 1930's had been exaggerated by failure to count
those on government work programs.. *as employed.

When the adjusted unemploy-

ment rate is added to the consumer inflation rate to arrive at Art Okun T s
'discomfort index* 1 the last two administrations experienced the worst
combination of inflation and unemployment (16 per cent) of any in this
century except for Franklin Roosevelt's first term (15.7 per cent) and
President Wilson's second (19.6 per cent).
per cent from 1975 to date.
in only two years.

Unemployment averaged more than 7

From 1899 to 1929, unemployment reached 7 per cent

We are in no position to be smug about the relative per-

formance of a seemingly old-fashioned monetary standard.

The fact is that
3

it worked very well under conditions more difficult than those we face today."
In a report prepared by EMB Ltd. and submitted to the Commission, it was
stated that "In the United States there were 12 panics and crises between
1815 and 1914."

Dr. Roy Jastram's testimony to the Commission demolished that

popular myth:
This draws upon a book by Willard Thorp, Business Annals,
published by the National Bureau of Economic Research in 19 26.
Year-by-year Thorp gleaned his characterization of the year stated
from the contemporary press and writers of the day. When I was at
the National Bureau we considered Professor Wesley C. Mitchell as
the patron saint of objectivity. Mitchell wrote in the Introduction
to Thorp's book:
"'Crisis,' then, is a poor term to use... But
sad experience shows how much misunderstanding comes from the effort
to use familiar words In new technical senses."
Both the Commission Staff and I agree that the true gold standard
ran between 1834-1861 and 1879-1914. Even with Professor Mitchell's
admonition about the use of the terms, this leaves us with 8 instead
of EMB T s 12 "crises" or "panics" associated with a real gold
standard. A consultation of the original Thorp volume shows that EMB
is simply wrong about 188 2 and 1890 - Thorp does not label either

Testimony Before the United States Gold Policy Commission, Washington,
D.C., November 13, 1981.

238
of them as "crisis11 or "panic." So the count is reduced to 6.
In 4 of these 6, part of the year is called by Thorp "prosperity."
Hence we have only 2 out of the EMB's original 12 that were labeled
in the original source as being unmitigated crises or panics during
an actual gold standard. This kind of misinformation cannot go
unchallenged•
And I might close with a thought of my own: if w e were to use
today these terms in their archaic sense, every week of the past
two years could have been labeled a "panic.

The fourth objection, the gold standard causes inflation, can also easily
be disposed of.

Dr. Alan Reynolds, in his appearance before the Commission, did

so:

When the 1968-1980 period is compared with the "purest" gold
standard, 1879-1914, it is not at all clear that even shortterm price stability was superior in recent years. Average changes
in consumer prices were zero under gold, over 7% under paper;
the standard deviation of those prices was 2.2% under gold,
3.1% under paper. Annual variations appear slightly wider under the
old wholesale price index for 1879-1914 than under the recent
producer price index for finished goods, but that is probably due to
the greater importance of volatile farm commodities and crude
materials a century ago. As Sachs points out, farm prices
were 43% of the wholesale index as late as 1926, but only 21%
in 1970.
Perfect short-term price stability has never been achieved anywhere,
so the issue is relative stability and predictability. By comparing
unusual peak years to recession lows, as Professor Allan Meltzer
does, it is possible to show annual rates of inflation or
deflation of 2-3% in wholesale prices under the gold standard.
Exaggerated as that is, it still doesn't sound too bad for price
indexes dominated by farm products. The most persistent inflation
under a gold standard was from 1902-07, when Gallman's estimate
of the price deflator rose by 2.4% a year.

Testimony Before the Gold Commission, Washington, D.C., November
13, 1981.

239
Long-term interest rates were much lower and more stable
under any form of gold standard than in recent years, and annual
price changets were typically smaller. James Hoehn of the
Federal Reserve Bank of Dallas concludes that, "Short-run
monetary stability is no better today than it was in the gold
standard period. This result is surprising and difficult
to explain in view of the greater present day stability of the
banking system."
One indication of the loss of long-term stability was provided
by Benjamin Klein, who found that the average maturity of new
corporate debt fell from over 37 years in 1900-04 to 20
years in 1968-72. 5

Now that the market for long-term bonds has been destroyed by ten years
of paper money, and the U.S. has experienced its worst price inflation
in its national history, it is difficult to take the charge that the gold
standard causes inflation seriously.
Dr. Roy Jastram, in his seminal work, The Golden Constant, presents
the statistical evidence that gold provides protection against inflation,
and actually results in gently falling prices.
cause increases in the real wages of workers.

Such gentle falls in turn
Below is a table showing the

index of whole commodity prices for the United States from 1800-1981.
figures are quite surprising to anyone who has come to regard continual
price inflation as a fact of life to which we all must adjust.

Loc. cit.

The

240
The Index of Wholesale Commodity Prices
United States 1800-1981
(1930 - 100.0)

Year

Index

Year

Index

Year

Index

1800
1801
1802
1803
1804
1805
1806
1807
1808
1809
1810
1811
1812
1813
1814
1815
1816
1817
1818
1819
1820
1821
1822
1823
1824
1825
1826
1827
1828
1829
1830
1831
1832
1833
1834
1835
1836
1837
1838
1839
1840

102.2
112.6
92.8
93.5
100.0
111.9
106.3
103.1
91.3
103.1
103.8
100.0
103.8
128.5
144.4
134.8
119.7
119.7
116.6
99.1
84.1
84.1
84.1
81.6
77.8
81.6
78.5
77.8
76.9
76.2
72.2
74.4
75.3
75.3
71.3
79.4
90.4
91.3
87.2
88.8
75.3

1841
1842
1843
1844
1845
1846
1847
1848
1849
1850
1851
1852
1853
1854
1855
1856
1857
1858
1859
1860
1861
1862
1863
1864
1865
1866
1867
1868
1869
1870
1871
1872
1873
1874
1875
1876
1877
1878
1879
1880
1881

72.9
65.0
59.4
61.0
65.9
65.9
71.3
65.0
65.0
66.6
65.9
69.7
76.9
85.7
87.2
83.2
88.1
73.8
76.3
73.8
70.6
82.5
105.4
153.1
146.6
137.9
128.5
125.3
119.7
107.0
103.1
107.8
105.4
100.0
93.5
87.2
84.1
72.2
71.3
79.4
81.6

1882
1883
1884
1885
1886
1887
1888
1889
1890
1891
1892
1893
1894
1895
1896
1897
1898
1899
1900
1901
1902
1903
1904
1905
1906
1907
1908
1909
1910
1911
1912
1913
1914
1915
1916
1917
1918
1919
1920
1921
19 22

85.7
80.0
73.8
67.5
65.0
67.5
68.2
64.1
65.0
64.6
60.3
61.9
55.4
56.5
53.8
53.8
56.1
60.3
64.8
63.9
68.2
69.1
69.1
69.5
71.5
75.3
72.9
78.3
81.4
75.1
80.0
80.7
78.7
80.5
98.9
135.9
152.0
160.3
178.7
113.0
111.9

241
Year

Index

Year

Index

Year

Index

1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942

116.4
113.5
119.7
115.7
110.5

1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962

120.2

1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981

211.9
212.3

112.1
110.1
100.0
84.3
75.3
76.2
86.5
92.6
93.5
99.8
90.8
89.2
90.8

101.1

114.1

120.2
122.4
139.7
171.5
185.7
176.5
183.4
204.3
198.7
196.0
196.4
196.9
203.4
209.2

212.1

212.6

212.1
212.6

216.6

223.8
224.2
229.8
238.8
247.5
255.4
267.0
302.0
359.0
392.2
410.2
435.5
469.3
528.2

602.8
657.8

In the 67 years prior to the beginning of the Federal Reserve system in 1913
the consumer price index in this country increased by 10 per cent, and in the
67 years subsequent to 1913 the Consumer Price Index increased 625 per cent.
This growth has accelerated since 1971 when President Nixon cut our last link
to gold by closing the gold window.
In 1833, the index of wholesale commodity prices in the U.S. was 75.3
In 1933, just prior to our going off the domestic gold standard, the index
of wholesale commodity prices in the U.S. was 76.2:
nine-tenths of 1 per cent.
was

255.4.

The index of wholesale commodity prices in 1971

Today, the index is 657.8.

For 100 years on the gold standard

wholesale prices rose only nine-tenths of 1 per cent.
of paper money they have gone up 259 per cent.

a change in 100 years of

In the last 10 years

242
The final objection to the gold standard, that gold is subject to
speculative influence and therefore too unstable to be used as a standard for
anything, is also spurious.
hedge against inflation.

During the past decade, gold has become a major

The runup in gold prices from $35 to $850 per ounce

came as a result of fears about the value of paper currencies and developing
international crises.

This speculation —

actually a seeking of protection from

the continual devaluation of paper currencies —
in recent years.

has markedly accelerated

Not only is the decline of the paper dollar causing larger

investments in gold coins, but also in real estate, collectibles of all types,
and any other good

that promises to retain its value.

The Commodity Exchange

reports that there are now over 100 different futures contracts offered by the
nation's 11 exchanges.

Since 1975, 42 new futures contracts have been introduced,

and 37 proposed contracts are currently pending government approval.

This

enormous growth in speculation has occurred during the last ten years.

People

who object to gold because it is speculative confuse cause and effect.

Were we

on a gold standard, there would be no speculation in gold at all.

Gold is

currently an object of "speculation" precisely because we have an irredeemable
paper money system and people are trying to protect themselves from it.

The

real speculation is in the anticipation of the further depreciation of the dollar.
All these objections to gold cannot shake the overwhelming historical and
theoretical arguments for a gold standard.
gold as well.

But there are other arguments for

We will now take them up in turn.

243
MONEY AND THE CONSTITUTION

In addition to the compelling economic case for the gold standard, a
case buttressed by both historical and theoretical arguments, there is a
compelling argument based upon the Constitution.

The present monetary

arrangements of the United States are unconstitutional—even

anti-constitutional—

from top to bottom.
The Constitution actually says very little about what sort of monetary
system the United States ought to have, but what it does say is unmistakably
clear.

Article I section 8 clause 2 provides that "The Congress shall have

power...to borrow money on the credit of the United States...[clause 5:]
to coin money, regulate the value thereof, and of foreign coin, and fix the
standards of weights and measures... [and clause 6:] to provide for the
punishment of counterfeiting the securities and current coin of the United
States...f!.

Further, Article I section 10 clause 1 provides that "No state

shall... coin'money; emit bills of credit; [or] make anything but gold and silver
coin a tender in payment of debts...".
When the Founding Fathers wrote the Constitution in the summer of 1787,
they had fresh in their minds the debacle of the paper money printed and
issued by the Continental Congress during the Revolutionary War.

The paper

notes, "Continentals" as they were called, eventually fell to virtually zero
percent of their original value because they were not redeemed in either
silver or gold.

They were "greenbacks," and were the first of three major
£

experiments with "greenbacks" that this nation has conducted.

The Continental

greenback failed miserably, giving rise to the popular phrase "not worth a
Continental."
Consequently, when the Constitutional Convention met in 1787, the opposition to paper money was strong.

George Mason, a delegate from Virginia,

6
The other two experiments were during the Civil War, 1862-1879, and
the present period from 1971. The second experiment had a happy conclusion
because the Civil War greenbacks were paid off dollar for dollar in gold.
As Chapter two shows, the colonies also frequently experimented with papermoney.

244

stated that he had a "mortal hatred to paper money."

Delegate Oliver

Ellsworth from Connecticut thought the Convention "a favorable moment to
shut and bar the door against paper money."

James Wilson, a delegate from

Pennsylvania, argued that "It will have a more salutary influence on the
credit of the United States to remove the possibility of paper money."
Delegate Pierce Butler from South Carolina pointed out that paper was not
a legal tender in any country of Europe and that it ought not be made one
in the United States.

Mr. John Langdon of New Hampshire said that he would

rather reject the whole Constitution than allow the federal government
the power to issue paper money.

On the final vote on the issue, nine

states opposed granting the federal government power to issue paper money,
and only two favored granting such power.
The framers of the Constitution made their intention clear by the
use of the word "coin" rather than the word "print," or the phrase "emit
bills of credit."

Thomas M. Cooley's Principles of Constitutional Law

elaborates on this point:

"To coin money is to stamp pieces of metal for

use as a medium of exchange in commerce according to fixed standards of
value."
Congress was given the exclusive power (as far as governments are
concerned) to coin money; the states were explicitly prohibited from doing
so.

Furthermore, the states were explicitly forbidden from making anything

but gold and silver coin a tender in payment of debt, while the federal
government was not granted the power of making anything legal tender.
In his explanation of the Constitutional provisions on money, James
Madison, in Federalist No. 44, referred to the "pestilent effects of paper
money on the necessary confidence between man and man, on the necessary
confidence in the public councils, on the industry and morals of the people,
and on the character of republican government."

His intention, and the

245
intention of the other Founders, was to avoid precisely the sort of paper
money system that has prevailed for the past ten years.
This intention was well understood throughout the 19th century, and
was denied only when the Supreme Court found it expedient to do so.

For

example, Daniel Webster wrote:
If we understand, by currency, the legal money of the
country, and that which constitutes a lawful tender for debts,
and is the statute measure of value, then undoubtedly, nothing
is included but gold and silver. Most unquestionably, there is
no legal tender, and there can be no legal tender in this country
under the authority of this government or any other, but gold
and silver, either the coinage of our mints or foreign coins at
rates regulated by Congress. This is a constitutional principle,
perfectly plain and of the very highest importance. The states
are expressly prohibited from making anything but gold and silver
a tender in payment of debts, and although^no such expressed prohibition is applied to Congress, yet as Congress has no power
granted to it in this respect but to coin money and to regulate
the value of foreign coins, it clearly has no power to substitute
paper of anything else for coin as a tender in payment of debts
in a discharge of contracts....
The legal tender, therefore, the constitutional standard
of value, is established and cannot be overthrown. To overthrow
it would shake the whole system.
(Emphasis added.)
In 1832, the Select Committee on Coins of the House of Representatives
reported to the Congress that "The enlightened founders of our Constitution
obviously contemplated that our currency should be cojnposed of gold and silver coin....The obvious intent and meaning of these special grants and restrictions [in the Constitution] was to secure permanently to the people of
the United States a gold or silver currency, and to delegate to Congress
every necessary authority to accomplish or perpetuate that beneficial
institution."
The Select Committee stated its conclusion that "The losses and
deprivation inflicted by experiments with paper currency, especially during
the Revolution; the knowledge that similar attempts in other countries...
were equally delusive, unsuccessful, and injurious; had likely produced the
conviction [in the minds of the framers of the Constitution] that gold and

246
silver alone could be relied upon as safe and effective money.'1
Twelve years later, in 1844, the House Committee of Ways and Means
concluded that:
The framers of the Constitution intended to avoid the paper
money system. Especially did they intend to prevent Government
paper from circulating as money, as had been practised during the
Revolutionary War. The mischiefs of the various expedients that
had been made were fresh in the public mind, and were said to have
disgusted the respectable part of America...The framers [of the
Constitution]...designed to prevent the adoption of the paper
system under any pretext or for any purpose whatsoever; and
if it had not been supposed that such object was effectively
secured, in all probability the rejection of the Constitution
might have followed.
Later in the century, Justice Stephen

Field presciently wrote

in the case Julliard v. Greenman (1884):
There have been times within the memory of all of us when
the legal tender notes of the United States were not exchangeable
for more than half of their nominal value. The possibility of
such depreciation will always attend paper money. This inborn
infirmity, no mere legislative declaration can cure. If Congress
has the power to make the [paper] notes legal tender and to pass
as money or its equivalent, why should not a sufficient amount
be issued to pay the bonds of the United States as they mature?
Why pay interest on the millions of dollars of bonds now due when
Congress can in one day make the money to pay the principal; and
why should there be any restraint upon unlimited appropriations
by the government for all imaginary schemes of public improvement
if the printing press can furnish the money that is needed for
them?
Justice Field

foresaw exactly what would happen in the 20th

century when the federal government has used the printing p r e s s — a n d

the

computer—as the means of financing all sorts of "imaginary schemes of
public improvement."
Under the Constitution, Congress has power to coin money, not print
money substitutes.

Such money is to be gold and silver coin, nothing else.

It is significant that this power of coining money is mentioned in the
same sentence in the Constitution as the power to "fix the standards of

247
weights and measures," for the framers regarded money as a weight of
metal and a measure of value.

Roger Sherman, a delegate to the

Constitutional Convention, wrote that "If what is used as a medium of
exchange is fluctuating in its value, it is no better than unjust weights
and measures.. .which are condemned by the Laws of God and man...".
The Founders were greatly influenced by both the English common law and
Biblical law.

Sherman's comment about unjust weights and measures, and the

juxtaposition of the powers to coin money and fix the standards of weights
and measures in the Constitution are examples of that influence.
For the framers of the Constitution, money was a weight of precious
metal, not a weightless piece of paper with green ink printed on it.

The

value of the money was its weight and fineness, and its value could be
accurately determined.
Today's paper money system, issued b y a coercive banking-monopoly, has
no basis in the Constitution.

It is precisely the sort of government

institution—one far more clever than the bumbling

efforts of Charles T

to confiscate w e a l t h — t h a t can forcibly exact financial support from the people
without their consent.

As such It is a form of taxation without

representation,

and a denial of the hard fought and won principle of consent before payment
of taxes.
Remarkably enough, the Supreme Court has not decided any cases challenging
the constitutionality of the present irredeemable paper money system; in fact
such a case has not yet been adjudicated before the Court or at the federal
appellate level.
It is to be hoped that this will soon change, and the Court forced to
recognize, as was recognized throughout history, that the states may make only
"gold and silver coin a tender in payment of debt."
stitutional.

Anything else is uncon-

As for the Congress, we strongly recommend that the Coneress abide

by the supreme law of the land by repealing those laws that contravene it.

248

THE MORAL AGRUMENT FOR GOLD

A monetary standard based on sound moral principles is one in which
the monetary unit is precisely defined in something of «al value such as a
precious metal.

Money that obtains its status from government decree alone

is arbitrary, undefinable, and is destined to fail, for it will eventually
be rejected by the people.

Since today's paper money achieves its status

by government declaration and not by its value in itself, eventually total
power over the economy must be granted to the monopolists who manage the
monetary system.

Even with men of good will, this power is immoral,

for men make mistakes/ and mistakes

should never have such awesome

consequences as they do when made in the management of money.

Through the

well-intentioned mismanagement of money, inflation and depression are created.
Political control of a monetary system is a power bad men should not have and
good men would not want.
Inflation, being the increase in the supply of money and credit, can only
be brought about in an irredeemable paper system by money managers who create
money through fractional reserve banking, computer entries, or the printing
press.

Inflation bestows no benefits on society, makes no new wealth, and

creates great harm; and the instigators, whether acting deliberately or not,
perform an immoral act.

The general welfare of the nation is not promoted

by inflation and great suffering results.
Gold is honest money because it is impossible for governments to create
it.

New money can only come about by productive effort and not by political

and financial chicanery.

Inflation is theft, and literally steals wealth

from one group for the benefit of another.

It is possible to have an increase

in the supply of gold; but the historical record is clear that all great inflations
occur with paper currency.

But an increase in the supply of gold-presuming

249
that it is not accomplished through theft-is quite different from an
increase in the supply of irredeemable paper currency.

The latter is a

creature of politics; the former is a result of productive labor, both mental
and physical.

Gold is wealth; it is not just exchangeable for wealth.

notes are not wealth.

Today's

They are claims on wealth that the owners of wealth

must accept as payment.
No wealth is created by paper money creation; only shifts of wealth
occur, and these shifts, although significant and anticipated by some, cannot
always be foreseen.
are unearned.

They are tantamount to theft in that the assets gained

The victims of inflation suffer through no fault of their own.

The beneficiaries of the inflation are not necessarily the culprits in the
transfer of wealth; the policy makers who cause the inflation are.
Legally increasing the money supply is just as immoral ats the counterfeiter who
illegally prints money.

The new paper money has value only because it steals

its "value" from the existing stock of paper money.
however.

(This is not true of gold,

New issues of paper money are necessarily parasitic; they depend on

their similarity to existing money for their worth.
carries its own credentials.)

But gold does not.

Inflation of paper money is one way wealth

can be taken against another's wishes without an obvious confrontation; it is
a form of embezzlement.

After a while, the theft will be reflected in the

depreciation of money and the higher prices that must be paid. The guilty are
difficult to identify due to the cleverness of the theft.
punished because of the legality of their actions.

They are never

Eventually, though, as

the paper money becomes more and more worthless, the "legalized counterfeiting"
becomes obvious to everyone.

Anger and frustration over the theft results

and is justified, but it is frequently misdirected, and may even lead to a
further aggrandizement of governmental power.

250
Ideally, the role of government in a sound monetary system is minimal.
Its purpose should be to guarantee a currency and assure that it cannot
be debased.

The role would be similar whether it is protecting a government

gold standard or private monies.

Neither the government nor private issuers

of money can be permitted to defraud the people by depreciating the currency.
The honesty and integrity of the money should be based on a contract; the
government's only role should be to see that violators of the contract are
punished.

Depreciating the currency by increasing the supply and diluting

its value is comparable to the farmer who dilutes his milk with water yet
sells it for whole milk.
Open Market Committee.

We prosecute the farmer, but not the Federal Reserve
Those who must pay the high prices from the inflation

are like those who must drink the diluted milk and suffer from Its "debased11
content.
The Coinage Act of 1792 recognized the importance of not debasing the
currency and prescribed the death penalty for anyone who would steal by
debasing the metal coins.

Yet today the Treasury is closing the very office

set up to assure honest money, the New York Assay Office.

Though largely

symbolic since 1933, this office is the most important office of the federal
government if we are ever again to commit ourselves to money that cannot be
arbitrarily destroyed by the politicians in office.
Throughout history, rulers have used inflation to steal from the people
and pursue unpopular policies, welfarism, and foreign military adventurism.
Likewise throughout history, as they are doing today, the authorities who
inflated resort to blaming innocent citizens who try to protect themselves from
the government caused inflation as "speculators" and the real cause for the
turmoil the authorities themselves caused.

This is done both out of ignorance

as well as from a deliberate desire to escape deserved blame.

251

Gold money is always rejected by those who advocate significant government intervention in the economy.

Gold holds in check the government's

tendency to accumulate power over the economy.

Paper money is a device by

which the unpopular programs of government intervention, whether civilian
or military, foreign or domestic, can be financed without the tax increases
that would surely precipitate massive resistance by the people.

Monetizing

massive debt is more complex and therefore more politically acceptable, but it
is just as harmful, in fact, more harmful, than if the people were taxed
directly.
This monetizing of debt is literally a hidden tax.

It is unevenly

distributed throughout the population, one segment paying much more than
another.

It is equivalent

to a regressive tax, forcing the working poor

to suffer more than the speculating rich.
Deliberately debasing the currency for political reasons, that is,
paying for programs that the politicians need in order to be re-elected, is
the most immoral act of government short of deliberate war.

The tragedy is

that the programs that many believe helpful to the poor, usually end up
making the poor poorer, destroying the middle class, and enriching the wealthy.
Sincere persons vote for programs for the poor not fully understanding the
way in which the inflation used to finance the programs brings economic
devastation to those Intended to be the beneficiaries.
Great power is granted to the politicians and the monetary managers with
this authority to create money.
laws, can create new money.

Bankers, through fractional reserve banking

The initial users of the new money as it is

created benefit the most, and have a vested interest in continuing the process
of inflation and opposing a gold standard:
large banks, and welfare recipients.

the government, large corporations,

Paper money is political money with

the politician in charge; gold is free market money with the people in charge.

252
John Locke argued for the gold standard the same way he argued for the
moral right to own property.

To him the right to own and exchange gold was a

civil liberty equal in importance to the liberty to speak, write, and practice
one's own religion.

Free people always choose to trade their goods or services

for a marketable commodity.

Money is the most marketable of all commodities,

and gold the best of all money.

Gold has become money by a moral commitment

to free choice and honest trade, not by government edict.

Locke claimed the

right to own property was never given to the individual by society but that
government was established to ensure integrity in contracts and honest money not to be the principal source of broken contracts or the instigators of a
depreciating currency.

Gold is not money because government says it is:

It is money because the people have chosen

to use it in a free country.

Eliminating honest money - commodity money defined precisely by weight is a threat to freedom itself.

It sets the stage for serious economic

difficulties and interferes with the humanitarian goal of a high standard
of living for everyone, a standard which results from a free market and a sound
monetary standard.

For centuries kings have used the debasement of coins to

raise funds for foreign and aggressive wars that otherwise would not have
been supported by people voluntarily loaning money to the government
or paying taxes.

Even recently

inflation has been resorted to in order to finance wars about which the people
were less than enthusiastic.
another way.

Inflation is related to preventable wars in

As the economy deteriorates in countries that have inflated and

forced to go through recession and depressions, international tensions build.
Protectionism (tariffs) and militant nationalism generally develope and contribute to conditions that precipitate armed conflict.

The immorality of

inflation is closely linked to the immorality of preventable and aggressive wars.

253
Money, when it is a result of a moral commitment to honesty and integrity,
will be trusted.

Trustworthy money is required in a moral soceity.

This

requires all paper money and paper certificates to be convertible into
something of real worth.

Throughout history, money has repeatedly failed

to maintain trust due to unwise actions of governments whose responsibility
was to protect that trust, not destroy it.

Without trust in money gained by a

moral commitment to integrity, a productive economy is impossible.

Inflation

premiums built into the interest rates cannot be significantly altered by
minor manipulations in the growth rate of the supply of money nor by the painful
decreases in the demand for money brought on by a weak economy.

Only trust in

the money can remove the inflation premium from our current financial transactions.
Trust is only restored when every citizen is guaranteed convertibility
of money substitutes into tangible money at will.

False promises and

hopes cannot substitute for a moral commitment of society to honest money ingrained in the law and not alterable by the whims of any man.

The rule of

moral law must replace the power of man in order for sound money to circulate
once again.

Ignoring morality in attempts to stop inflation and restore the

country's economic health, guarantees failure.

A moral commitment to honest

money guarantees success.
In the seventh century before Christ the Greeks began the first
coinage, striking silver into pieces of uniform weight.
located in temples.
of Athene.

Greek mints were

The Athens mint was either in or adjacent to the temple

This was done

for a purpose, for the temple marks were designed -

and accepted- as evidence of the honesty of the coins.

In Rome, the coinage

began in the temple of Juno Monere, from which we get our word "money."
Biblical law, which informs the Common Law and has shaped the legal institutions of Western Europe and North America, regards money as a weight,
either of silver or gold, and stern commands against dishonest weights and
measures were enforced with severe punishments.

The prophet Isaiah condemned

254
Israel because "your silver is become dross, your wine mixed with water."
Debasement of the money wan very severely condemned.

In his Commentary on

the Epistle to the Romans, Martin Luther wrote, "Today we may apply the
Apostle's words [Romans 2:2-3] first to those [rulers] who without cogent
cause inflict exorbitant taxes upon the people, or by changing and devaluating
the currency, rob them, while at the same time they accuse their subjects
of being greedy and avaricious."
It is not surprising, then, given this background, that the Congress of
1792 imposed the death penalty on anyone convicted of debasing the coinage.
Debasement, depreciation, devaluation, inflation - all stand condemned by
the moral law.

The present economic crisis we face is a direct consequence

of our violations of that law.

CHAPTER 6
THE TRANSITION TO MONETARY FREEDOM

Our present monetary system Is failing.
monetary reform.

The time is ripe for fundamental

Yet there are two distinct and different processes through

which this reform may be achieved.

We have already discussed the type of

monetary system most desirable, yet there are different methods of reaching
that goal.

For simplicity's sake, we shall refer to these procedures as

"descending" reform and "ascending" reform.

The first term refers to action

taken by the government directly to create the system desired; it is from
the top down.

The danger of this type of reform is that the government will

not create a real gold standard but a pseudo-gold standard.

The second term

refers to the absence of government action and the subsequent appearance
of the reforms despite the government's inaction; it is bottom-up reform.
There is a third type of reform which mixes both the ascending and the descending procedures whereby the government clears the obstacles now impeding
reform from the bottom up.

It is our opinion that this third type of reform

would be the least painful for reasons shortly to he made clear.
During the course of a monetary crisis —
now —

such as we are experiencing

there comes a time when descending reform becomes much more difficult.

It is our belief that we have not yet reached that point, but that we are
rapidly approaching it.

There Is still time to proceed with the reforms

outlined below, but that time is rapidly slipping away.

In order to achieve

this descending reform, the Congress must quickly repeal certain laws that
have created our present crisis: the legal tender laws, the authority of the
Federal Reserve to conduct open market operations, and so forth.
so will result in a complete collapse of our economic system.

255

Failure to do

256
The process of mixed reform is preferable because it can achieve the
desired end with a minimum of injury to the people.

It can avert an economic

calamity if executed in time; but should descending reform not occur in time

—

and it now appears that it will not, given the unwillingness of the Commission
to make more far-reaching recommendations to the Congress —

w e can hope that

ascending reform will still be possible.
Should the Congress not adopt the reforms we advocate, w e can expect our
economic situation to deteriorate further.

First, there will be a continuation

of both price increases and high interest rates.

Such prices and rates may

fluctuate in a cyclical pattern, but they will not secularly decline.
rate has already reached 21.5 per cent.

The prime

Perhaps within a year it will move

to 25 per cent, fall back, and then surge ahead to 30 per cent.

The exact

figures are not as important as realizing that the present irredeemable paper
money system is just that:

irredeemable.

Such systems have not and cannot

work for any significant period of time.
Further cyclical price and interest rate increases will, in turn,
trigger many more bankruptcies, both commercial and personal.

Bank runs,

panics, and holidays will occur as the people lose confidence in the financial
institutions.

Such collapses will, in turn, trigger higher unemployment

reaching levels not seen since the 1930 f s —
further inflation.

—

larger federal deficits, and

The paper economy is a circle of dominoes; once they start

to fall, they bring others down with them.

Real wage rates will slide;

applications for welfare will accelerate.
These economic events will have social and political consequences;
inflations always do.

The inflation of the 1920's led to the rise of Hitler

in Germany, and that of the 1940 ! s to the victory of Mao Tse Tung in China.
The increase in the size and scope of government is a significant effect of
such crises, yet it is the effect that threatens to choke off any possibility
of ascending reform.

Such reform, when it comes, will have to emerge from the

257
marketplace, either through the legalization of competing currencies, or

through development in the underground (illegal) economy.

Economists

already believe that there may be an underground economy in the U.S. onefifth the size of the official economy.

With the collapse of the official

money and the official economy, the underground economy might be able to
shift to using silver and gold coins, and thus some ascending reforms might
be possible.
However, simply waiting for the present system to collapse is neither
responsible nor moral. As members of the Gold Commission, we must urge
Congress to act upon our specific suggestions for reform as speedily as
possible.
situation,

We do not believe that we overestimate the gravity of the present
and we think it is better by far to be two years too early than

two days too late.

258
Specific Reforms Required

The growth of the American government in the late 19th and 20th
centuries is reflected in its increasing presence and finally monopolization of the monetary system.

Any attempt at restoring monetary freedom

must be part of a comprehensive plan to roll back government and once
again confine it within the limits of the Constitution.
sive plan may be

That comprehen-

divided into four sections: monetary legislation,

the budget, taxation, and regulation.

We shall begin with monetary

reforms, and conclude with a word about international cooperation and
agreement.
MONETARY LEGISLATION
Legal Tender Laws

As we have seen, the Constitution forbids the states to make anything
but gold and silver coin a tender in payment of debt, nor does it permit the
federal government to make anything a legal tender.

One of the most im-

portant pieces of legislation that could be enacted would be the repeal of
all federal legal tender laws.

Such laws, which have the effect of forcing

creditors to accept something in payment for the debts due them that they
do not wish to accept, are one of the most tyrannical 4evices of the present
monetary authorities.
Not only does the Federal Reserve have a coercive monopoly in issuing
"money,11 but every American is forced to accept it.

Each Federal Reserve

note bears the words "This note is legal tender for all debts, public and
private."

The freedom to conduct business in something e l s e — s u c h as gold

and silver coin—^annot exist so long as the government forces everyone to
accept its paper notes.

Monetary freedom ends where legal tender laws begin.

259

The United States had no such laws until 1862, when the Congress—
in violation of the Constitution—enacted

them in order to ensure the

acceptance of the Lincoln greenbacks, the paper notes printed by the
U.S. Treasury during the wartime emergency.

That "emergency" has now

lasted for 120 years; it is time that this unconstitutional action by the
Congress be repealed.

Freedom of contract—and the right to have such

contracts enforced, not abrogated by the government—is one of the fundamental pillars of a free society.

Defining the Dollar

A second major reform needed is a legal definition of the term "dollar."
The Constitution uses the word "dollar" at least twice, and it is quite
clear that by it the framers meant the Spanish milled dollar of 371 1/4
grains of silver.

Since 1968, however, there has been no domestic definition

of "dollar," for in that year redemption of silver certificates and delivery of
silver in exchange for the notes ended, and silver coins were removed from circulation.
In 19 71, the international definition of the "dollar" as 1/42 of an
ounce of gold was also dropped.

The Treasury and Federal Reserve still value

gold at $42.22 per ounce, but that is a mere accounting device.

In addition,

IMF rules now prohibit any member country from externally defining its currency
in terms of gold.

The word "dollar," quite literally, is legally meaningless,

and it has been meaningless for the past decade.

Federal Reserve notes are

not "dollars;" they are notes denominated in "dollars."

But what a "dollar"

is, no one knows.
This absurdity at the basis of our monetary system must be corrected.
It is of secondary importance whether we define a "dollar" as a weight of
gold or as a weight of silver.

What is important is that it be defined.

The current situation permits the Federal Reserve—and

the Internal Revenue

260
Service for that m a t t e r — t o use the word any way

they please, just like

the Red Queen in Alice in Wonderland.
No rational economic activity can be conducted when the unit of account is undefined.

The use of the meaningless term "dollar" has all but

wrecked the capital markets of this country.

If the "dollar" changes in

meaning from day-to-day, even hour-to-hour, long-term contracts denominated
in "dollars" become traps which all wish to avoid.

The breakdown of long-

term financing and planning in the past decade is a result of the absurd
nature of the "dollar."
at the present.

There is very little long-term planning occuring

The only way to restore rationality to the system is to

restore a definition for the term "dollar."

We suggest defining a "dollar"

as a weight of gold of a certain fineness, .999 fine.

Such a fixed defini-

tion is the only way to restore confidence in the markets and in the
"dollar."

Capitalism cannot survive the type of irrational surd that lies

at the basis of our present monetary arrangements.

A New Coinage
We are extremely pleased that the Gold Commission has recommended to
the Congress a new gold goinage.

It has been almost fifty years since the

last United States gold coins were struck, and renewing this Constitutional
function would indeed be a cause for celebration and jubilee.
We believe that the coins should be struck in one ounce, one-half
ounce, one-quarter ounce, and one—tenth
of coin designs > that
1907.

ounce weights, using the most beautiful

A coinage in such weights would allow Americans to exchange their

greenbacks for genuine American coins; there would no longer be any need for
purchasing Canadian, Mexican,South

African or other foreign coins. Combined

261
with the removal of capital gains taxation on the coins, and the elimination
of all transaction taxes, such as excise and sales taxes, the new American
coinage could quickly become an alternative monetary system to our present
paper monopoly.
In addition to the new official coinage private mints should also be
permitted to issue their own coins under their own trademarks.
marks should be protected by law, just as other trademarks are.

Such tradeFurthermore,

private citizens should once again enjoy the right to bring gold bullion to
the Treasury and exchange it for coins of the United States for a nominal
minting fee.
In the last six years, Nobel Laureate Friedrich Hayek has called attention
once again to the economic advantages of a system of competing currencies.
In two books, Choice in Currency, and Denationalization of Money, Professor
Hayek proposes that all legal obstacles be removed and that the people be
allowed to choose freely what they wish to use in transactions.

Those competing

monies might be foreign currencies, private coins, government coins, private
bank notes, and so on.

Such unrestricted freedom of choice would result in

the most reliable currencies or coins winning public acceptance and displacing
less reliable competitors.
drives out bad.

Good money - in the absence of government coercion -

The new coinage that the Gold Commission has recommended

and which we strongly endorse is a first step in the direction of allowing
currencies to compete freely.

The Failure of Central Banking

By a strict interpretation of the Constitution, one of the most unconstitutional

(if there are degrees of unconstitutionality) of federal agencies

262
is the Federal Reserve.

The Constitution grants no power to the Congress

to set up such an institution, and the Fed is the major cause of our present
monetary problems.

The alleged constitutional authority stems from a loose

and imaginative interpretation of the implied powers clause.
Functioning as the central bank of the United States, the Federal
Reserve is an anachronism.

It was created at a time when faith in control

of the economy by Washington was growing, but since it started operations
in 1914, it has caused the greatest depressions

(1929-19 39), recessions

(too numerous to mention), inflations, and unemployment levels in our nation's
history.

The only useful function if performs, the clearing of checks between

banks, could be much better handled through private clearing houses or
eliminated entirely by electronic funds transfer.

Given its record, there

simply is no good reason for allowing the Federal Reserve a monopoly over the
nation's money and banking system.

Eliminating the power to conduct

market operations must be achieved if we expect to stop inflation and restore
monetary freedom.
Such a step may alarm some, however.

They might be concerned about

what will happen to all the Federal Reserve notes now in circulation, and
what they will be replaced with.

First:

the present Federal Reserve notes

would be retired and replaced by notes redeemable in gpld or silver or some
other commodity.

Such notes would b e similar to travelers checks now in use

which are, at the present time, redeemable only in paper notes.

Like travelers

checks, such notes would not be legal tender and no one would be forced to
accept them in payment.

And since they would be promises to pay, any

institution that issued them and then failed to redeem them as promised, would
be subject to both civil and criminal prosecution, unlike the Federal Reserve,
which is subject to neither.

263
As for the present circulating Federal Reserve notes, they could be
made redeemable for gold once a "dollar" is defined as a weight of gold.
Anyone Vho wishes to redeem them could simply do so by exchanging them for
gold coins at his bank.
It is important to note that should we institute a gold standard before
the Federal Reserve System is ended, that System must function along classical
gold standard lines.

As Friedman and Schwartz pointed out, it was the failure

of the Federal Reserve to abide by the classical gold standard rules that caused
the panic of 1929 and the subsequent depression.
In chapters two and three, we demonstrated the disruptive effects fractional
reserve banking has caused in the United States.

Since we still suffer with that

system, it is imperative that a fundamental reform of it be made.

That reform is

simply that all promises to pay on demand, whether made in the form of notes or
deposits, be backed 100% by whatever Is promised, be it silver, gold or watermelons.
If there is any failure to carry 100% reserves or to make delivery when demanded,
such persons or institutions would be subject to severe penalties.

The fractional

reserve system has created the business cycle, and if that is to be eliminated,
its cause must be also.

Audit, Inventory, Assay, and Confiscation
One of the areas in which we believe a majority of the Gold Commission
erred is in not requiring a thorough and complete assay, inventory and audit of
the gold reserves of the United States on a regular basis.

Perhaps there is less

of an argument for such a procedure when the gold reserves are essentially stable,
but when there is any significant change in them —
age is issued —

as will happen when a new coin-

careful scrutiny of the government's gold supplies is necessary.

There have been cases of employee thefts at government bullion depositories,
unrecorded shipments of gold from one depository to another, and numerous
press reports about millions of dollars worth of gold missing.

264
It seems elementary that the government ought to ascertain accurately its
reserves of this precious metal, and that the present ten year "audit"
of the gold inventory is totally inadequate for this purpose.

We are quite

sure that the Federal Reserve has a much better idea now many Federal
Reserve notes are printed and circulating than the Treasury does of the
weight and fineness of its gold assets.

This irrational treatment of paper

and gold must be corrected Immediately.
Finally, there are laws on the books empowering the President to compel
delivery, that is, to confiscate, privately owned gold bullion, gold coins,
and gold certificates in time of war.

There can be no monetary freedom

when the possibility of such a confiscation exists.

THE BUDGET

One of the standard objections raised against a gold standard is that
while it may have worked in the 19th century, it would not work today, for
government has grown much larger in the past one hundred years.
There is an element of truth in such an argument, for the gold standard
is not compatible with a government that continually incurs deficits and
lives beyond its means.

Growing governments have always sought to be rid

of the discipline of gold; historically they have abandoned gold during
wars in order to finance them with paper dollars, and during other periods
of massive government g r o w t h — t h e New Deal, for example.

265
Because gold is honest money, it is disliked by dishonest men.
Politicians, prevented from buying votes with their own money, have
learned how to buy votes with the people's money.

They promise to vote

for all sorts of programs, if elected, and they expect to pay for those programs
through deficits and through the creation of money out of thin air, not higher
taxes.

Under a gold standard, such irresponsibility would immediately re-

sult in high interest rates (as the government borrowed money) and subsequent
unemployment.

But through the magic of the Federal Reserve, these effects

can be postponed for awhile, allowing the politicians sufficient time to
blame everyone else for the economic problems they have caused.
is, as John Maynard Keynes said many years ago,

The result

that not one man in a million

understands who is to blame for inflation.
Because the gold standard would be incompatible with deficit financing,
a major reform needed would be a balanced budget.
easily be achieved by cutting spending

Such a balance could

surprising as it may be, no cuts

have been made y e t — t o the level of revenue received by the government.
But beyond that, there should be massive cuts in both spending and taxes,
something on the order of what President Truman did following World War II,
when 75% of the federal budget was eliminated over a period of three years.
Honest money and limited government are equally necessary in order to end
our present economic crisis.
As part of this budget reform, the government should eventually be required to make all its payments in gold or in gold denominated accounts.
No longer would it be able to spend "money" created out of thin air by the
Federal Reserve.

266
TAXATION
In order to make such gold payments, the government should begin
accepting gold as payment for all taxes, duties, and dues.

As a tax col-

lector, the government must specify in what form taxes may be paid

(or

must be paid)-, and it should specify that taxes must be paid in either
gold or silver coins or certificates.

Such an action should occur, of

course, as one of the last actions in moving toward a sound monetary system.
All of the other reforms discussed here should be accomplished first.

Such

a requirement to pay taxes in gold or silver would yield the necessary flow
to put the government on the gold standard and allow it to make all payments in gold.
But long before this is achieved, since gold is money, there should
be no taxation of any sort on either gold coins or bullion.

The Commission

has judged rightly in recommending that capital gains and sales taxes be
eliminated from the new American coinage.

We would go further, in the

interest of monetary freedom, and urge that all taxation of whatever sort
be eliminated on all gold and silver coins and bullion.

That would mean the

elimination of not only capital gains and sales taxes, but also the discriminatory treatment of gold coins in Individual Retirement Accounts, for
example.

Persons saving for their retirement should be free to keep their

savings in gold coins without incurring a penalty.

One reform that might

be accomplished immediately would be to direct the Internal Revenue Service
to accept all U.S. money at face value for both the assessment and collection of taxes.

At the present time, the IRS accepts pre-1965 silver

coins at face value in the collection of taxes, but at market value in
the assessment of taxes.

This policy is grossly unfair, has no basis in

law, and should be corrected immediately.

267
REGULATIONS
Together with monetary, tax, and budget reforms, a comprehensive plan
for a gold standard and monetary freedom requires several improvements in
our present regulatory structure.
For example, mining regulations which make it difficult and expensive
to open or operate gold and silver mines would have to be eliminated.
All regulations on the export, import, melting, minting and hoarding of
gold coins would also have to be repealed.
But the major reforms needed are in our banking laws.

Under present

law, there is no free entry into the banking industry; it is largely
cartelized by the Federal Reserve and other federal and state regulatory
agencies.

Deregulation of banking, including free entry by simply filing

the legal documents with the proper government clerk, is a. must for
monetary freedom.

All discretion on the part of the regulators must be

ended.
At the same time, there would need to be stricter enforcement of the
constitutional prohibition against states "emitting bills of credit."

must be clearly recognized that the states, neither directly not indirectly
through their creatures, state chartered banks, may get into the paper
money business.

A CONSTITUTIONAL AMENDMENT
Although we believe that there is actually nothing in the Constitution
that legitimizes our present banking and monetary arrangements, the present
system has been with us for so long that a Constitutional Amendment is probably needed to reaffirm what the Constitution says.
We propose that the following language become Article 2 7 to the

268
Constitution:
Neither Congress nor any state shall make anything a
tender in payment of private debts, nor shall thev
charter any bank or note-issuing institution, and states
shall make only gold and silver coins a tender in payment of public taxes, duties, and dues.

AN INTERNATIONAL AGREEMENT
While the achievement of monetary freedom can be accomplished without
any international conferences or agreements, there is no need to spurn
such conferences should they be requested by other nations, or should they
be thought advisable simply as a way of informing other nations of our
plans.

Were we to adopt the proposals outlined in this Report, the dollar

would once again become as good as gold, and paper currencies would fall
in value against it on the international exchanges.

In that case, one

would expect other nations to define their currencies also as weights of gold,
simply out of self-defense.

Were that to happen, we would see the end of the

worldwide inflation that has plagued us since 1971.

Fixed exchange r a t e s —

though not fixed by any international agreement—would also result, simply
because currencies would be defined as weights of gold.
Thus the wholly domestic reforms suggested here would have worldwide
repercussions, international effects that would solve one of our most
troubling problems: worldwide inflation and the breakdown of world

trade.

269
THE TRANSITION TO GOLD

The transition from the present monetary system to a sound system will
probably not be painless, as some have suggested.

Whenever the increase in

the supply of money slows, there are always recessions.

They are the

inevitable consequences of the previous inflationary boom.

The present

system, relying as it does on the political creation of new purchasing power
rather than the economic creation of such power, has distorted and disrupted
the pattern of economic activity that would result were the markets for goods
and money allowed to function freely.

In any transition to a sound monetary

system there will, of necessity, have to be readjustments made in various sectors
of the economy.
and enterprises.

Such readjustments will temporarily hurt certain individuals
The alternative, of course, is to continue with our present

system and destroy the entire economy with the evils of hyperinflation and
depression.

It is our conclusion that the temporary economic hazards of the

gold standard are far less significant than those posed by a continued
attempt to make the paper system work.
We have a precedent for a return to gold in the 19th century.

During

the Civil War, the Union had issued United States notes that were not
redeemable in gold.

In that respect they were somewhat similar to the

Federal Reserve notes that circulate today.

A major difference between

the experience following the Civil War and our situation today is, of course,
that the U.S. gold coinage continued to circulate during and after the war.
Today, such coins have been removed from circulation by law, and they must
be restored to circulation by law.

That is essentially the recommendation

of the Commission, a recommendation that we fully support.
will facilitate the transition to a full gold coin standard.

Such an action
Once it is

achieved, the transition to a full gold standard could be done as simply as
during the 19th century, with the economic consequences roughly the same.
We must now discuss the transition effect —

not the long term effects

—

270
of monetary reform on various sectors of the economy.

l,7e have selected

six sectors for brevity's sake: real estate, agriculture, heavy
small business, exports, and banking.

industry,

Let us begin with real estate.

Transition Effects on the Real Estate Sector

The concern of many people with monetary reform is that it will affect
them or their businesses adversely.

They would prefer to continue with the

present system, hoping that it will not collapse, rather than seeking to
correct it through fundamental change.

In this attitude, they are similar

to the patient with an abdominal pain who refuses to be examined by a doctor,
hoping that the discomfort will cease or at least not worsen. When his
appendix bursts, however, the patient realizes that he would have been
much better off to have the needed examination and surgery in time.

At least the

surgery—the timely correction of the problem—would not have threatened his
life.
How will a transition to gold affect the real estate market?

It is

important to realize that there is no one real estate market, but several.
The commercial market is quite different from the residential, for example.
Within the residential, the single-family housing market is quite different
from the rental housing market.

While there may be factors that

affect all markets, it is necessary to realize that the various markets will
be affected differently by the same factors, and also by different

factors.

During the last ten years of paper inflation, real estate of all sorts
has become both an inflation hedge and a haven against exorbitant

taxation.

In a transition to gold, there will be falling inflationary expectations,
and, if our recommendations are pursued, lower taxes.

Both these effects

will gradually eliminate the desire to use real estate as a shield against
inflation and taxation.

The result generally will be falling prices for

271
real estate of all kinds, as people shift from protecting their capital
in real estate to more productive enterprises.

It is likely

the paper values

of both residential and commercial properties will fall during the transition
to a sound money system.
This in turn would have several effects.

First, as residential prices

fall, more young couples who cannot afford a house at the present time
would be able to purchase.

More h o u s e s — b u t at lower prices—would be

sold during each year of the transition to gold.

For state and local

governments this would mean an expanding property tax base, but it would
also offer some relief to the badgered homeowners who have seen their
property taxes skyrocket because of inflated housing prices.

The passage

of Proposition 13 in California in 1978 was a result of this property tax
rise.

With a transition to gold, homeowners across the whole nation, not

jus* California, would be afforded some tax relief.
Lower home prices will eventually translate,into a booming market for
both single-family and

rental units, spurring new construction.

Lower prices

would also affect all forms of commercial property, allowing more economical
expansion of the business use of property.
Along with lower prices, there will be lower interest rates.

Market

interest rates are ordinarily divided into three components by economists:
originary interest, the risk

premium,

and the inflation premium. As the

transition toward gold is accomplished, the inflation premium would gradually
disappear, as the people's confidence in morley was restored.
probable that both the risk and

It is also

originary components would decrease,

although not nearly so much as the inflation component, for people will once
again begin to plan for longer than twelve months into the future.

And as

the size of government shrinks, the risk premium will also shrink.

One

great area of risk and uncertainty—actions by federal bureaucrats and
regulators—will be eliminated.

272
Falling interest rates would also encourage greater activity in all
real estate markets.
younger couples and

The result would be greater access by

first-time-owners—

small businessmen.

Transition Effect on Agriculture
Closely related to real estate is agriculture.

Speculation in real

estate in the past 10 years—speculation resulting from inflation and taxation
by the government—has caused the price of prime farmland to be bid up to
levels higher than prevailed ten years ago.

One serious consequence of

this has been the almost total Inability of new, small farmers to buy farms,
and of older small farmers to retain farms.

High land values, while giving

many farmers paper wealth, have raised property taxes exorbitantly, and
have forced more and more small farmers to sell out to larger competitors.
The result has been the growth of agribusiness and the euthanasia of the
family farmer.
During the transition to a gold system, interest rates and land values
would both fall, the former primarily because of lower inflation expectations;
the latter primarily because there would be far less demand for land as
aaa inflation hedge.
A parallel may be found in the 19th century.

From 1880 to 1890, immediately

after the return to the gold standard, the number of farms in the U.S. increased
by over 500,000, the number of acres on these farms by almost 90 million, farm
productivity by 10% and the value of farm output by over $800 million.
During this time, however, farm commodity prices were falling, an
effect of the transition to gold that many fear.

But wholesale prices

for the goods farmers used were falling as well, faster than were prices
for the goods they produced.

The real income of farmers—and of all w o r k e r s —

273

was actually rising during this period, unlike, for example, the past
ten years.

The transition to a sound monetary system, while it may

adversely affect a few farmers and real estate holders, will enormously
benefit most, and will allow more entry into farming.

Transition Effects on Heavy Industry

One of the prime benefits of sound money and small government is the
low long-term interest rates that prevail in such an environment.

During the

19th century it was common for 100 year bonds to be offered and sold at
4% and 5%, and even for bonds in perpetuity to be sold at those rates.
Today, after a decade of paper money, long-term means three years, and the
prime rate is

Transition to a gold system will include a fall in

interest rates from their present historically unprecedented levels to
levels approximating those of the late 19th and early 20th centuries.

For

the decade 1880-1889, three to six month commercial paper averaged 5.14%.
Call money averaged 3.98%.

Railroad bond yields averaged 4.43% in 1889.

Such rates will once again allow heavy industry to expand, perhaps even
matching the unsurpassed real growth rate for the economy in the decade
1879-1889.

The recent concern about the revitalization of America, or the

"^industrialization of America" is a genuine and legitimate concern.
important
and

What is

to realize, however, is that it is the paper money, high tax,

regulatory

policies of the government that have impeded long-term

planning and capital investment.

Anyone who expresses concern about the

industrial strength of America and advocates a continuation of the policies
that have caused the present recession/depression has not yet learned elementary
economics.
Some heavy industries that have been "protected" by government action
may suffer some setbacks when that "protection" is removed.

However, if

274
regulatory burdens and subsidies are eliminated in an evenbanded

fashion

during the transition, those industries, as well as others, should quickly
enjoy rapid growth.
Further, there will be a desire of investors, now concerned about sheltering
their capital in the unproductive areas of real estate, collectibles, and
gold coins, to invest in productive enterprises.

There would be a market

shift of investment from such "speculative11 areas to industry.

Transition Effects on Small Business

The shift of capital investment from the more "speculative" areas to
the more productive will directly affect small business.

The stock

market would come to life, perhaps even making up for the horrendous losses
in constant dollars it has suffered since 1965.

Business investment would

skyrocket, and a great deal of this investment would flow to smaller businesses.

As with real estate and farming, it would be the n e w c o m e r — t h e young

couple buying a house, the young farmer, and the small businessmen—who
would benefit most during the transition to economic and monetary freedom.
Small businesses would no longer be crushed by large corporations
and bloated government absorbing all the capital in the capital markets.
Funds would flow to establish new enterprises rather than being invested
in Treasury securities at 14% or 15%.

A gold system would see the gradual

elimination of "hot m o n e y " — a phenomenon that did not exist before the
formation of the Federal Reserve in 1914—racing from investment to investment as interest rates fluctuated.
The growth in small business would, of course, mean the creation of
new jobs.

The unemployment that is an inevitable product of a paper money

system—after all, John Maynard Keynes liked the system because it was a

275

device to cheat the workers—would be eliminated and fall to the frictional
rate, perhaps 2% or 3%.
The transition to freedom would also mean the gradual elimination of the
"underground economy," for the reasons for its existence, high taxes and
inflation, would disappear.

Such illegal economic activities would once

again become part of the official economy.

The elaborate bartering systems

that have evolved in the past ten years would be ended.

It is ironic that

opponents of gold deride transactions made in gold as a form of barter,
for it is precisely the high tax, paper money system that encourages barter
as a way to avoid both taxation and inflation.

Transition Effects on Exports

To understand the effects of the reforms we recommend on export industries,
it is necessary to keep two more fundamental effects of the transition in
mind: no more general price increases will occur, and interest rates will
actually fall by at least 50%.

Price stability in all products, including

those for export, will open up greater overseas markets for U.S. goods.

the other hand, the present complicated system of export subsidies—such as
guaranteed loans and direct l o a n s — w i l l come to an end during the transition
to freedom, and those companies (and banks) that benefitted from such
sweetheart deals with the government will have to make it on their own
or fail.
The government's policies for the past ten years and longer have diverted
a great deal of capital, that should and would have been invested in the
U.S., to foreign nations.

This misdirected investment would be corrected

during transition, as foreign aid programs were phased-out, the Export-Import
Bank eliminated, and the various other government programs that have put us

276
in a very precarious financial position are terminated.
In the long run, of course, exports are not a worry.

No one worries

about the balance-of-trade or the balance-of-payments between Texas and California
or New Jersey and New York.

with

the

end

paper system with its

chaotic exchange rates, some semblance of order will return to the world
economy.

The exporting of inflation will be gradually eliminated, and

rather than moving toward protectionism and isolationism, the international
economy will gradually open up to further investment and trade.
Export industries may be the most affected of all industries during
a transition to a sound money system, but that is only because they have been
so heavily subsidized by a government that has had to print the paper to subsidize them.

In the long run, such industries also will benefit from a return

to freedom.

Transition Effects On Banking

The last of the six sectors is perhaps the one that will be most
adversely (in the short run) affected by the reforms we propose.

To under-

stand why this is so, one must understand the cartelization of the financial
industries in the 1930*s, accomplished primarily by the McFadden Act and
the Glass-Steagall Act.

The breakdown of this cartel has already begun,

as a result of the high interest rates now prevailing, and it will proceed
whether the reforms here suggested are adopted or not.

The only question

is whether a new cartel arrangement will be created or whether freedom will
be allowed to flourish.
The McFadden Act, among other things, forbade interstate

branching

Chase Manhattan could open a branch in Moscow, for example, but not in

277
Minneapolis.

This resulted in a great deal of interest in overseas

loans with a tremendous diversion of capital from domestic to foreign investment.

The Glass-Steagall Act, among other things, erected a wall of separation

between banking and commercial enterprises, a wall that now more
resembles a Swiss cheese.

But such a separation, combined with other restrictions

on free entry, enhanced the privilege and profitability of banks.
The reforms we advocate include free entry into banking.

Anyone would

be permitted to open a bank and issue 100% redeemable notes simply upon
filing the legal documents with the county (or state or federal) clerk.
Such free entry will result in greater competition in the banking industry,
and lower margins of profit.

Not only would the competition benefit consumers

financially, more and more services would also be offered.

Thus if Anytown

Savings and Loan wished to give away toasters for new deposits, the DepositoryInstitutions Deregulation Committee could not stop them from doing so.

And if

their neighbors, Anytown Credit Union wished to offer electronic funds transfer
and free travelers checks, no regulator would prevent that from happening.
But there are further effects that would become apparent during transition
to a gold system.

As interest rates fell, the current crisis among financial

institutions would be alleviated.

Unless such a transition begins quickly

we can expect to see the most massive failure of depository institutions in
our history.

A movement toward sound money, while opening up all financial

institutions to the sort of competition they should have faced all along,
will, at the same time, relieve some of the pressure on the most critical of
these institutions.
costing tens —

The alternative, of course, is massive government bailouts

perhaps hundreds —

of billions of dollars.

278
Conclusion

We have selected these s ix sectors of the economy as bases for
discussing what effects a transition to monetary freedom will have on the
economy.

While the results have not been unifprmly optimistic, it is

clear that the major effects of stable prices and falling interest rates
will open all sectors up to newcomers: new farmers, new homeowners, new
small businessmen, and new bankers.

Those companies that have been subsidized

by the government will suffer most from a movement toward freedom.

Those that

have profited from tthe misdirection of capital investment by the government
will also suffer.

gold standard recession," however, would be quite

different from a paper money recession, such as we are now suffering.

Were

the government to refuse to interfere with the adjustment process, the
recession would be over very rapidly, as we saw in the last "free market
recession" of 1921.^
not be sharp.

And while the recession would be short, it would also

There would undoubtedly be a tremendous outpouring of new

savings and investments in response to the new confidence in honest money and
the realization that inflation was a thing of the past.

The transition to a

gold system will bring increasing prosperity, real growth, lower unemployment,
higher real wages, and greater capital investment.

The transition to freedom,

in short, is the only way out of the economic crisis we are now in.

See Benjamin M. Anderson, "The Road Back to Full Employment," in
P. Homan and F. Machlup, eds., Financing American Prosperity. (New York:
Twentieth Century Fund, 1945), pp. 25-28.

CHAPTER 7
THE NEXT TEN YEARS

The transition to gold, as we have outlined it in chapter five, should
be accomplished in no more than three years, with any resulting recession
lasting about a year.

The following ten years should be ones of prosperity,

high real economic growth, and low levels of unemployment.

Inflation and

the business cycle would be things of the past, as a genuine free banking
system would eliminate the possibility of national inflations and contractions.
Interest rates would fall to the "normal" interest rates that prevailed for
centuries before our national and international experiment with paper money.
Confidence in the monetary unit - the gold dollar - would elicit enormous
savings and investments.

Prices could be expected to fall gently, resulting

in large real wage increases for all workers.

In short, the next ten years

with gold would be similar to the prosperity, full employment, and rapid
economic growth this nation experienced in the last third of the 19th century.
If anyone would like to know what the next ten years with a gold standard and
monetary freedom would be like, he can get a pretty good idea from studying
the American economy in the last portion of the last century.
In their Monetary History of the United States, Friedman and Schwartz write:
Both the earlier 11879-1897] and the later [1897-1914] periods were
characterized by rapid economic growth. The two final decades of the
nineteenth century saw a growth of population of over 2 percent per year,
rapid extension of the railway network, essential completion of continental settlement, and an extraordinary increase both in the acreage of land
in farms and the output of farm products. The number of farms rose
by nearly 50 per cent, and the total value of farm lands and buildings
by over 60 per cent - despite the price decline. Yet at the same time,
manufacturing industries were growing even more rapidly, and the Census
of 1890 was the first in which the net value added by manufacturing
exceeded the value of agricultural output. A feverish boom in western
land swept the country during the eighties.
"The highest decadal rate

279

280
[of growth of real reproducible tangible wealth per head from 1805
to 1950] for periods of about ten years was apparently reached in the
eighties with approximately 3.8 per cent."... [Gjenerally declining
[at 1 per cent per year] or generally rising [at 2 per cent per year]
prices had little impact on the rate of growth, but the period of
great monetary uncertainty in the early nineties produced sharp deviations
from the longer-term trend.
It was the return of the United States to the gold standard in 1879
that stimulated this real economic growth, and it was the "monetary uncertainty in the early nineties" that slowed and almost stopped that growth.
Today it is once again "monetary uncertainty" that has brought us to our
present crisis.
The pre-1914, gold standard was invented by no one.
was also managed by no one.

More important, it

Modern economists too often look upon the classical

gold standard and attribute its success to the Bank of England's ability to
follow the "rules of the game."
the authorities let it work.

But in fact, the system worked to the extent

Of course there had to exist an environment where

governments kept their promises to define and redeem their currencies in a
specific weight of gold, and would allow gold to be traded freely.
their success in doing this managing gold is to play with language.

But to call
Gold can

manage itself if governments do not hinder it.
The best of all worlds would be to have Bank and State separated the
way Church and State are.

That is what we propose.

For a gold standard still

coupled with government monopoly on note issue would only be as sound as the
promise of the government to redeem their notes.
In the classical gold standard before 1914, promises made by governments
were kept.

Everyone expected that they would be.

And not only the promises

Milton Friedman and Anna J. Schwartz, Monetary History, pp. 9 2-93.

281
of governments to their citizens, but to other governments.

Those governments

who broke faith with other governments were treated as parians.

Treaties

were taken seriously.
If it is too much to expect that governments will always be honest,
at least w e can improve matters whereby governments are condemned and punished
for breaking promises.

If the government debases its paper money, there ought

to be alternatives which people can use for exchange.
The contrast is stark between a regime of money regulated by the marketplace and our system manipulated by politicians.

John Maynard Keynes

rhapsodized on the world before 1914 in his 1920 book The Economic

Consequences

of the Peace:

What an extraordinary episode in the economic progress of man
that age was which came to an end in August, 1914! The greater part
of the population, it is true, worked hard and lived at a low standard
of comfort, yet were, to all appearances, reasonably contented with this
lot. But escape was possible, for any man of capacity or character at
all exceeding the average, into the middle and upper classes, for whom
life offered, at a low cost and with the least trouble, conveniences,
comforts, and amenities beyond the compass of the richest and most
powerful monarchs of other ages. The inhabitant of London could order
by telephone, sipping his morning tea in bed, the various products of the
whole earth, in such quantity as he might see fit, and reasonably expect
their early delivery upon his doorstep; he could at the same moment and
by the same means adventure his wealth in the natural resources and new
enterprises of any quarter of the world, and share, without exertion or
even trouble, in their prospective fruits and advantages; or he could
decide to couple the security of his fortunes with the good faith of
the townspeople of any substantial municipality in any continent that
fancy or information might recommend. He could secure forthwith, if
he wished it, cheap and comfortable means of transit to any country or
climate without passport or other formality, could despatch his servant
to the neighboring office of a bank for such supply of the precious
metals as might seem convenient, and could then proceed abroad to foreign
quarters, without knowledge of their religion, language, or customs,
bearing coined wealth upon his person, and would consider himself
greatly aggrieved and much surprised at the least interference. But,
most important of all, he regarded this state of affairs as normal,
certain, and permanent, except in the direction of further improvement,
and any deviation from it as aberrant, scandalous, and avoidable. The

282
projects and politics of militarism and imperialism, of racial and
cultural rivalries, of monopolies, restrictions, and exclusion, which
were to play the serpent to this paradise, were little more than the
amusements of his daily newspaper, and appeared to exercise almost no
influence at all on the ordinary course of social and economic life,
the internationalization of which was nearly complete in practice. 2

The next ten years with gold hold great promise.

But tc realize

that promise, Congress must act qui&cly to clear the legal underbrush and
obstacles out of the way of free men.

Their failure to do so will result in

a totally unnecessary and totally avoidable tragedy.

Ten Years Without Gold
Since 1971, America's monetary unit has been both undefined and
undefinable.

The meaning of the term "dollar" has changed from year-to-year,

month-to-raonth, even day-to-day.

The economic consequences of this irration-

ality are clear; there is no need to review them again.

The question

we must attempt to answer in this concluding section is, quite simply,
what will happen if the American people are forced to endure another decade
without gold and monetary freedom?

What is likely to occur should Congress

fail to act on the recommendations we have made in chapters five and* six?
Without a gold standard, and continuing roughly with the present system,
we can expect more of the same —

except worse.

For every year, as inflationary

expectations become more and more embedded, we can expect the central
"core" rates of both inflation and unemployment to rise.

We should never forget

that Richard Nixon imposed price-wage controls in 1971 because the government
was panicking at a 4.5% per annum rate of inflation.

In 1982, we would

John Maynard Keynes, The Economic Consequences of the Peace (19 20)
pp. 10-12.

283
consider returning to this rate tantamount to reaching the state of Nirvana.
The prime interest rate in July 1971 was 6%.

Each year we get accustomed to more

and more inflation, so that now any inflation rate below 10% ("double digit") is
considered a virtual end to inflation.

Should Congress not adopt the recommendations

outlined above, we can expect core inflation rates to rise over the next decade,
and at an accelerated rate —

so that in ten years from now we can expect cheering

in the media when the inflation rate falls below 50%.

As inflation deepens and

accelerates, inflationary expectations will intensify, and prices will begin to
spurt ahead faster than the money supply.
It will be at that point that a fateful decision will be made —

the same

that was made by Rudolf Havenstein and the German Reichsbank in the early 1920's:
whether to stop or greatly slow down the inflation, or to yield to public outcries
of a "shortage of money" or a "liquidity crunch" (as business called it in the
mini-recession of 1966) ,
In the latter case, the central bank will promise business or the public
that it will issue enough money to enable the money supply to "catch up" with
prices.3 When that fateful event occurs, as it did in Germany in the early 1920 f s,
prices and money could spiral upward to infinity and it could cost $10 billion
to buy a loaf of bread.

America could experience the veritable holocaust of

runaway inflation, a cataclysm which would make the Depression of the 1930 f s
let alone an ordinary recession —

—

seem like a tea party.

That this horror can happen here can be seen in the reaction to the first
peacetime double-digit inflation, of 1973-1974, by former Chairman of the Council
of Economic Advisers, Walter Heller.

Writing in the Federal Reserve Bank of

Philadelphia Review in 1974, Heller pointed out that in the past year, prices
had risen faster than the money supply, and that therefore [sic] an increase
in the money supply could not be a cause of the inflation.

On the contrary,

opined Dr. Heller, it was the duty of the Federal Reserve to increase the money
See Fritz K. Ringer, ed. German Inflation of 1923 (New York: Offshore
University Press, 1969), p. 96.

284
supply fast enough so that the real money stock (M corrected for price changes)
would return to pre—1973 highs.

In short, while using modern jargon, Heller

said exactly the same thing as Rudolf Havenstein had said a half-century
earlier: that the authorities must increase the money supply fast enough to
catch up with inflation.

That way lies disaster, and who of us is to say

that the United States, at some point in the next ten years without gold,
will not take the very same course?
Heller's claim that the money supply growth did not cause the price
inflation is an example of many current economists' befuddlement over money.
In a similar way we saw the coining of a new word in the 1974-75 recession:
"stagflation," to describe the event of rising prices in a business slump.
This appeared mysterious to the conventional economists yet was predicted by the
hard money, free market economists.

Depreciating a currency through monetary

inflation always brings escalating prices with recessions in the latter stages
of a currency destruction.

In the early stages of a currency destruction,

recession may well slow the increase in prices, but that is only because not
too many people h a w caught on to the monetary policies of the government.
As the inflation progresses more and more people catch on.
There now is consternation among orthodox economists over persistently
high interest rates in the midst of a severe recession —
financial signal.

a very bad monetary and

Conventional economists remain baffled over the modest

price inflation currently associated with record high "real" interest rates,
exclaiming they are "higher than they should be."

This confusion comes from

ignoring the fact that computer calculations of the money supply cannot project
interest rates accurately.
the quality of money.

It fails to address the subject of trust in and

Interest rates are set in the market taking into

consideration money's quality, anticipated future government monetary policy,
and trust in the officials, in addition to immediate short term changes in the
supply and demand for money and credit.

285
Precise price correlation (to money supply increases), stagflation,
and high interest rates are all understood and anticipated by the advocates
of sound money who emphasize the importance of the quality of money as well as
its quantity.
In snort, if w e continue to stay on the course of fiat money, facing
America at the end of the road is the stark horror —
runaway inflation.

the holocaust —

Such an inflation would wipe out savings, pensions, thrift

instruments of all kinds; it would eliminate economic calculation; and it would
destroy the middle and poorer classes.

In America, hyperinflation will not be

the relatively "moderate" steady 100% per year or so that Israel or that many
countries in Latin America have experienced.

For in these small countries,

particularly in Latin America, the currency becomes only hand-to-hand cash;
all investments move to the U.S. and the dollar.

The United States would not

be so fortunate.
America, in sum, must choose, and the choice is a vital one.

In three

years, perhaps sooner if necessary, another Gold Commission should be established
to make more recommendations to the Congress.

At that time, the choice will be

perfectly clear to all, even to those now opposed to gold.

Either we must move

to the gold standard and monetary freedom, with long-run stability of prices
and business, rapid economic growth and prosperity, and the maintenance of a
sound currency for every American; or we will continue with irredeemable paper,
with accelerating core rates of inflation and unemployment, the punishment of
thrift, and eventually the horror of runaway inflation and the total destruction
of the dollar.

The failure of irredeemable money nostrums is becoming increasingly

evident to everyone —

even to the economists and politicians.

have the courage to more forward to a modern gold standard.

Congress must

APPENDIX

CHART
1.

Purchasing Power of Gold and the Dollar, 1792-1981

Producer Prices, 1913-1981

Consumer Prices, 1913-1981

Short-Term Interest Rates, 1929-1981

Long- and Short-Term Interest Rates, 1913-1981

Commodities Futures Price Index, 1958-1981

Standard and Poor's Index of Stock Prices, 1945-1980

Long-Term Bond Yields, 1926-1981

10.

Standard and Poor's Index of Bond Prices, 1945-1980

11.

Federal Budget, 1950-1981

12.

Net Federal Debt, 1950-1981

13.

Gold Value of Major Currencies, U. S. and Britain, 1968-1981

14.

Gold Value of Maj or Currencies, U. S. and Italy, 1968-1981

15.

Gold Value of Major Currencies, U. S. and Japan, 1968-1981

16.

Gold Value of Maj or Currencies, U. S. and Switzerland, 1968-1981

17.

Gold Value of Major Currencies, U. S. and West Germany, 1968-1981

286

The Purchasing Power of Gold and the Dollar, 1792-1981

Source•

American Institute (or Economic Research

n
H

PRODUCER PRICES
QUARTERLY

RATIO SCALE. 1967=100
360
260

200
160

120
100

60
50
40

30
± U
1920

U L!.-1J-! I 1 L i-L-LJ ±jl LLi^J^.l.
1930
1940
1950

J-LL
1960

1970

1980

CONSUMER PRICES
ALL ITEMS AND FOOD

QUARTERLY AVERAGES, 1913-

RATIO SCALE. 1067=100

SHORT-TERM INTEREST RATES
BUSINESS BORROWING

PRIME RATE. EFFECTIVE DATE OF CHANGE; PRIME PAPER. QUARTERLY AVERA6ES
PERCENT PER ANNUM

SHORT-TERM INTEREST RATES
MONEY MARKET

DISCOUNT RATE. EFFECTIVE DATE OF CHANGE; ALL OTHERS, QUARTERLY AVERAGES

PERCENT PER ANNUM

LONG- AND SHORT-TERM INTEREST RATES
ANNUALLY
PERCENT PER ANNUM

i i i i i i i i n i i i i i i M n i i i i i i i i n i i i i i i i i n i i i i i i i i n i i i i i i i i n M i i i i i i n i i i i |

1920

1930

1940

1950

1960

1970

1980

293
CHART 7

120

Standard and Poor's Index of Stock Prices
S & P Index

no
100

/ / / / / / n*n / /

//////

//^///

/ /

LONG-TERM BOND YIELDS
QUARTERLY AVERAGES
PERCENT PER ANNUM

Standard and Poor's Index of Bond Prices
125

Sources:

100

Standard and Poor's Corporation
U.S. Department of Labor
Bureau of Labor Statistics
U . S . Department of Interior
Bureau of Mines

(S&P Index)
to
vo

(Constant 1945 dollars)
25

** f

FEDERAL BUDGET
NIA BASIS

SEASONALLY ADJUSTED ANNUAL RATES, QUARTERLY
BILLIONS OF DOLLARS

NET FEDERAL DEBT
AMOUNT OUTSTANDING} END OF YEAR, 1850-51; SEASONALLY ADJUSTEO, END OF QUARTER, 1952BILLIONS OF DOLLARS

299

CHART 17

Gold Value of Major Currencies
United States andWestG e r m a n y
January 1968 to February 1982
Xndax
(January 1968 - 100}

Gold V c l u . o f fch. U.S. D o l l a r
Gold V a l u a o f t h « B r i t i s h Pound

300
CHART 17

Gold Value of Major Currencies
United States andWestGermany
January 1968 to February
Indax
(January 1968 -

100)

- Gold V a l u a o f ihm U.S. D o l l a r
. C o l d V a l u a o f hhm I t a l i a n L i r a

1982

301

CHART 17

Gold Value of Major Currencies
United States andWestGermany
January 1968 to February

1982

(January 1966 - 1BSD

125

L........l..........l......i...l..........l........iil.
1968
1970
1972

.il.mnm.Ltiiim.li.iiiiiinl.il
1974
1976

G o l d V a l u a o f t h « U.S. D o l l a r
Gold Valu* of th« Japan«m« Y«n

.1HI..I....1IHHIHI.1IIIIHIIII1IHIIIIIII1IIIIIIIIIIII

1978

1980

1982

302
CHART 17

Gold Value of Major Currencies
United States and West Germany
January 1968 to February
Indox
(January 1968 -

100)

_ Gold V a l u * o f t h a U.S. D o l l a r
_ Gold V a l u * o f khm S w I m Frano

1982

303

CHART 17

Gold Value of Major Currencies
United States and West Germany
January 1968 to February 1982
Indax
(January 1969 -

100)

125
H.C. Wainwright St Co., Economics

iiiiiiMlnmiHiilniiiiiiiiliiiiMiiMliiiMiHiiiiimMii
1972
1970
1974
1968

C o l d V a l u e o f t h e U.S.

1976

1978

Dollar

G o l d V a l u e o f t h e Want German DeutchemarW

1980

1982

Dissenting

V i e w s of C o n g r e s s m e n

H e n r y S. R e u s s and C h a l m e r s P. W y l i e

W e o p p o s e the r e c o m m e n d a t i o n of the Gold C o m m i s s i o n that
C o n g r e s s c r e a t e a new gold coin, e x e m p t from c a p i t a l g a i n s and
s a l e s t a x a t i o n , for the following r e a s o n s :
1)
interest

It s e r v e s no p r o d u c t i v e
to issue such a c o i n .

or useful p u r p o s e or

public

2)
The coin would e x a c e r b a t e e x i s t i n g m o n e t a r y c o n f u s i o n , and
p r o v i d e an e x c u s e for the gold bloc to further d e l u d e their p u b l i c
w i t h the belief that C o n g r e s s w a s m o v i n g to r e - e n t h r o n e g o l d .
3)
The d e s i g n a t i o n of the r e c o m m e n d e d gold p i e c e as a "coin
w i t h o u t legal t e n d e r s t a t u s " is c o n f u s i n g , since the term "coin"
W i t h o u t legal tender s t a t u s
c o m m o n l y i m p l i e s legal t e n d e r s t a t u s .
the "coin" is r e a l l y a m e d a l l i o n , and we a l r e a d y have a p r o g r a m
to p r o d u c e those.
4)
The e x e m p t i o n from c a p i t a l g a i n s and s a l e s taxes would
make the p r o p o s e d "coin" a h i g h l y sought a f t e r s p e c u l a t i v e a s s e t ,
and would d r a i n i n v e s t m e n t funds from c o m m o n s t o c k s and o t h e r p r o d u c t i v e u s e s , as w e l l as adding s e n s e l e s s l y to the d e f i c i t .
5)
The r e c o m m e n d a t i o n is f u t i l e , since a m a j o r i t y of the
M e m b e r s of the H o u s e B a n k i n g C o m m i t t e e have a l r e a d y a n n o u n c e d that
they w i l l o p p o s e it.
Their statement follows:

S T A T E M E N T BY M E M B E R S OF T H E H O U S E C O M M I T T E E ON B A N K I N G , F I N A N C E
A N D U R B A N A F F A I R S ON T H E G O L D C O M M I S S I O N ' S P R O P O S A L
F E B R U A R Y , 1982

W e note
follows:

that

the Gold

C o m m i s s i o n on F e b r u a r y

recommended

W e favor T r e a s u r y issue of gold b u l l i o n coins
of s p e c i f i e d w e i g h t s , and w i t h o u t d o l l a r d e n o m i n a t i o n
or legal t e n d e r s t a t u s , to be m a n u f a c t u r e d from its
e x i s t i n g s t o c k of g o l d , and to be sold at a s m a l l
m a r k u p o v e r m a r k e t v a l u e of the gold c o n t e n t , and
r e c o m m e n d that the C o n g r e s s i m p l e m e n t this p r o p o s a l .
F u r t h e r m o r e , we r e c o m m e n d that the c o i n s shall be
e x e m p t from c a p i t a l g a i n s t a x e s , and that the c o i n s
shall be e x e m p t from sales t a x e s .
L e g i s l a t i o n to p e r m i t this m u s t come b e f o r e o u r C o m m i t t e e .
B e c a u s e the Gold C o m m i s s i o n ' s r e c o m m e n d a t i o n w h i l e p e n d i n g w i l l
c r e a t e f u r t h e r u n c e r t a i n t y in a n a t i o n a l r e a d y beset by f i n a n c i a l
and e c o n o m i c p r o b l e m s , we think it n e c e s s a r y to speak out now.
W e o p p o s e the Gold C o m m i s s i o n ' s r e c o m m e n d a t i o n .
No purpose
is served by it o t h e r than to a p p e a s e the gold l o b b y .
Worse,

305

306
a f f i r m a t i v e h a r m can be d o n e by issuing gold c o i n s w h i c h lack legal
t e n d e r s t a t u s but are e x e m p t from taxes and h a v e s p e c u l a t i v e
p o s s i b i l i t i e s v a s t l y p r e f e r a b l e to i n v e s t m e n t in the p r o d u c t i v e
p l a n t and e q u i p m e n t the n a t i o n n e e d s .
For e x a m p l e , a s p e c u l a t o r
w h o m i g h t buy the p r o p o s e d gold coin at the c u r r e n t p r i c e of $375
an o u n c e , m i g h t soon find h i m s e l f able to sell it at $ 7 7 5 an o u n c e ,
its p r i c e just a few y e a r s a g o .
He would pay no tax on the $400
capital gain.
But one w h o buys and s e l l s c o m m o n s t o c k in a p r o d u c t i v e c o m p a n y for a s i m i l a r gain p a y s a 20 p e r c e n t c a p i t a l g a i n s
tax on the $ 4 0 0 .
W h y , p a r t i c u l a r l y at this time, should we do
f u r t h e r d a m a g e to the n a t i o n ' s a l r e a d y w e a k e n e d s e c u r i t y m a r k e t s ?
In a d d i t i o n , w i t h all the h o n e s t c o n f u s i o n in o u r e c o n o m y and
o u r own c o m m i t t e e h e a r i n g s o v e r w h a t is or is not m o n e y , how can
w e c o n s i d e r a r e c o m m e n d a t i o n that w e s u p p o r t the i s s u a n c e of c o i n s
w i t h o u t legal t e n d e r s t a t u s , a n o t h e r m o n e t a r y c o n f u s i o n ?
F u r t h e r m o r e , at a time w h e n our f e d e r a l b u d g e t s are d i r e c t i n g
p r o g r a m s to the s t a t e s , we can h a r d l y justify f e d e r a l a c t i o n s
w h i c h c r e a t e p r i v i l e g e d p r o d u c t s that are a l s o e x e m p t from the
s a l e s taxes and s t a t e s need for r e v e n u e to c o v e r t h e i r e n h a n c e d
obligations.
For these r e a s o n s , we s t r o n g l y urge the G o l d C o m m i s s i o n to
r e p a i r the d a m a g e it is c a u s i n g by w i t h d r a w i n g its F e b r u a r y 12
r e c o m m e n d a t i o n , w h i c h there is still time to d o .
Signed,
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.

John J . L a F a l c e (D-NY)
W a l t e r E. F a u n t r o y (D-DC)
J. W i l l i a m S t a n t o n (R-Ohio)
J i m M a t t o x (D-Tex)
S t a n l e y N . L u n d i n e (D-NY)
W i l l i a m J . C o y n e (D-Pa)
Stewart B. McKinney (R-Conn)
David W . E v a n s (D-Ind)
J o s e p h G . M i n i s h (D-NJ)
G r e g o r y W . C a r m a n (R-NY)
R o b e r t G a r c i a (D-NY)
H e n r y B . G o n z a l e z (D-Tex)
D o u g l a s K . B e r e u t e r (R-Neb)
M a r y R o s e O a k a r (D-Ohio)
J e r r y M . P a t t e r s o n (D-Calif)

Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.
Rep.

Chalmers P. Wylie (R-Ohio)
H e n r y S. R e u s s ( D - W i s )
Frank A n n u n z i o (D-Ill)
Ed B e t h u n e (R-Ark)
P a r r e n J . M i t c h e l l (D-Md)
Mike Lowry (D-Wash)
C h a r l e s E. S c h u m e r (D-NY)
N o r m a n E. D 1 A m o u r s (D-NH)
James J. Blanchard (D-Mich)
Steny H. Hoyer (D-Md.)
Ed W e b e r ( R - O h i o )
B r u c e F. V e n t o ( D - M i n n )
G e o r g e C. W o r t l e y (R-NY)
F e r n a n d J . St G e r m a i n (D-RI)
C a r r o l l H u b b a r d (D-Ky)

In a d d i t i o n , we s t r o n g l y o b j e c t to the Gold C o m m i s s i o n ' s
p r a c t i c e , in its R e c o m m e n d a t i o n s and in the R e p o r t , of a d v e r t i n g
to m a t t e r s o u t s i d e its legal j u r i s d i c t i o n .
The m a n d a t e of the
G o l d C o m m i s s i o n w a s to e x a m i n e the role of gold in d o m e s t i c and

307
international monetary systems.
The R e c o m m e n d a t i o n s and R e p o r t ,
h o w e v e r , m a k e repeated r e f e r e n c e to such m a t t e r s as m o n e t a r y g r o w t h
r u l e s and the system of floating as compared with fixed e x c h a n g e
rates.
The C o m m i s s i o n w a s not authorized to d i s c u s s these m a t t e r s ,
w a s not c o n s t i t u t e d w i t h a v i e w to p r o v i d i n g a balanced and
p r o f e s s i o n a l p e r s p e c t i v e on them, did not d i s c u s s them a d e q u a t e l y
in its m e e t i n g s , and should not have m e n t i o n e d them in its R e p o r t .
F i n a l l y , we o b j e c t v i g o r o u s l y to the s u g g e s t i o n that C o n g r e s s
c o n t i n u e the s t u d y of v a r i o u s s c h e m e s to p r o m o t e i n v e s t m e n t s in
gold.
C o n g r e s s has q u i t e e n o u g h to do w i t h o u t e n g a g i n g in e n d l e s s
d e b a t e o v e r h y p o t h e t i c a l and u n r e a l i s t i c ideas.
Appendix

to D i s s e n t i n g

V i e w s of C o n g r e s s m a n

CONGRESSIONAL

RESEARCH

CANADIAN GOLD

Chalmers

SERVICE

P. W y l i e

ON:

COINS

U n d e r S e c t i o n 4 of the C u r r e n c y and E x c h a n g e Act of C a n a d a ,
the G o v e r n o r in C o u n c i l is a u t h o r i z e d to issue gold coins having
the " d e s c r i p t i o n , s t a n d a r d s , r e m e d y a l l o w a n c e and least current
w e i g h t " as is set out in Part I of the s c h e d u l e to the A c t . J V
A d d i t i o n a l l y , the G o v e r n o r in C o u n c i l has the a u t h o r i t y to amend
the s c h e d u l e by p r o c l a m a t i o n . 2 /
C o n s e q u e n t l y , gold coins can be
issued by C a n a d a p u r s u a n t to r e g u l a t i o n s drafted by the Royal
C a n a d i a n M i n t , approved by the c a b i n e t , and assented to by the
Governor General.
U n d e r s e c t i o n 7 of the C u r r e n c y and E x c h a n g e A c t , gold coins
issued under the a u t h o r i t y of section 4 are e x p r e s s l y deemed to
be "legal t e n d e r . "
H o w e v e r , under section 7 ( 2 ) (a) of this law,
p a y m e n t of any a m o u n t is o n l y a legal tender if the t e n d e r c o n s i s t s
of not m o r e than one coin having a value g r e a t e r than ten d o l l a r s .
T h i s r e s t r i c t i o n a p p l i e s to s i n g l e t r a n s a c t i o n s and not to indiv i d u a l p a y o r s or r e c i p i e n t s .
B o t h the $100 c o m m e m o r a t i v e gold coin and the $50 M a p l e Leaf
b u l l i o n coin c u r r e n t l y being minted in O t t a w a have been issued
u n d e r the a u t h o r i t y of section 4 of the C u r r e n c y and E x c h a n g e A c t . 3 /

1/ The C u r r e n c y
S e c . 4 (1970).

and

Exchange

Act, Can. R e v . S t a t . ,

ch.

2/ T h e C u r r e n c y and E x c h a n g e Act, Can. R e v . S t a t . , ch.
(1970), as amended by 1977-78 Can Stat., ch. 35, S e c . 2.

C-39,

3/ For e x a m p l e , see P r o c l a m a t i o n A u t h o r i z i n g Issue and Pres c r i b i n g D e s i g n and D i m e n s i o n of One Hundred D o l l a r Gold Coins
E f f e c t i v e D e c e m b e r 18, 1980.
S O R / 8 1 - 1 8 1 , 115 Can. G a x . , Pt. II,
p . 711 (Mar. 11, 1 9 8 1 ) .

308
Therefore, legal tenders can be made with either of these coins for
their face value, subject to the restriction contained in section
7(2) (a). The remedy allowances for the Maple Leaf coin are contained
in the "Proclamation Amending Part I of the Schedule to the Act With
Respect to the Fifty Dollar Gold Coin Effective January, 1980."4/
Prepared by Stephen F. Clarke
Senior Legal Specialist
American-British Law Division
Law Library, Library of Congress
March 1982

4/ S0R/8Q-2, 114 Can. Gaz., Pt. II, p. 5 (Jan. 9, 1980).

* * *

GOLD COINS AS LEGAL TENDER IN SOUTH

AFRICA

Under section 12 of the South African Mint and Coinage Act,l/
Republican and Transvaal gold coins are legal tender provided their
weights are not less than:
Krugerrand
1/2 Krugerrand
1/4 Kurgerrand
1/10 Krugerrand
Two Rand
Rand

33.718
16.859
8.429
3.372
7.938
3.961

grams
grams
grams
grams
grams
grams2/

Prepared by Belma Bayar
Legal Specialist
Near Eastern and African Law Division
Law Library, Library of Congress
March, 1982

1/ African Mint and Coinage Act No. 78 of 1964 as amended In 4
Statutes of the Republic of South Africa classified and annotated
From 1910-.
345 (Durban, Butterworth & Co.).
2/ First Schedule to the South African Mint and Coinage Act
Id. at 351.

309
Additional Dissenting Views of Congressman Henry S. Reuss

The procedures followed by the Chair in presenting for
Commission approval the compendious text of this Report provided
little opportunity for discussion by Commission Members and none
for competent professional review of the many facts cited and
assertions made.
As a result, the text contains many controversial historical
judgments, statements of opinion presented as fact, and choices of
I
tone and emphasis with which many specialists would not agree.
have sought to point these out by providing extensive footnotes.
To further provide the reader of this Report with a balanced view,
I am including here as part of my own Views for printing in full
at this point in the Report, several papers by a distinguished
expert on gold, Dr. Edward M. Bernstein, dated October 16, 1980,
March 25, 1981, June 17, 1981, and November 19, 1981.

310

E M B (LTD.)
RESEARCH ECONOMISTS
R E P O R T NO.

80/19

IS A RETURN TO THE GOLD STANDARD FEASIBLE?
October 16, 1980

Summary and conclusions
The persistent inflation has revived interest in the gold standard and two
bills have been introduced in the Congress to restore a gold standard. This reflects
an idealization of the 100 years of the classical gold standard as an era of great
monetary stability and economic progress. In fact, prices rose and fell alternately
by 50 per cent or more over periods of 25 or 30 years, depending on gold production.
The gold standard was marked by recurring crises which sometimes degenerated into
panics. In the United States there were 12 such panics and crises between 1815 and
1914, apart from numerous milder recessions. The great depressions that occurred
twice in the nineteenth century and even more destructively in the 1930s resulted
from the interaction of wartime inflation and the gold standard.
These problems were caused by the rigidities Imposed by the classical gold
standard. The monetary unit was defined as a fixed weight of gold and this gold
value of the currency was immutable. Honey was maintained equivalent to gold by the
free coinage of gold and the redemption of money in gold. Most important, the money
supply was limited by the gold reserve and monetary policy had to respond to the inflow or outflow of gold. In the great depression of 1929-33, the Federal Reserve
eased monetary policy, but intermittently raised the discount rate when there was an
outflow of gold. From 1928 to 1933, the money supply fell by 25 per cent. The tie
between the money supply and gold reserves became inoperative after World War II.
When the gold reserve became inadequate to support the expanding money supply, the
gold reserve requirements were reduced and finally eliminated.
The Bretton Woods system was designed to provide exchange stability and convertibility of currencies without the rigidity of the gold standard. Two problems
related to gold emerged in the 1950s and 1960s. First, the amount of gold added to
the monetary stock was inadequate and the growth of reserves was met by a moderate
increase in official holdings of dollars. Second, the growing preference for gold
over dollars resulted in a sharp reduction of U.S. gold reserves from 1957 to 1969.
Nevertheless, the Bretton Woods system worked reasonably well until the inflation
compelled the United States to terminate gold convertibility and abandon the par
value of the dollar. After 1973, the free market price of gold rose rapidly and
reached $275 an ounce in mid-1979. Because of the political uncertainty resulting
from the events in Iran and Afghanistan the price rose to a peak of $850 an ounce in
January 1980 but has dropped since then to $670 an ounce.
The restoration of a gold standard would compel the monetary authorities to
maintain the equal value of gold and the dollar at a fixed price and to limit the
money supply through gold reserve requirements. The sharp fluctuations in the price
of gold during the past two years show that it would be difficult to maintain gold
convertibility at a fixed price under present conditions. Nor would it be possible
to have an adequate growth of gold reserves to allow for the trend increase of the
money supply. It is impractical to restore a gold standard at this time. It would
first be necessary to end the inflation and to maintain stability of the foreign exchange value of the dollar relative to the other major currencies.
If this could be
achieved, there would be no need for a return to a gold standard.

311
Is a Return to the Gold Standard Feasible?

Prices and crises under the gold standard
The persistent inflation and the inability of the United States to restore
monetary stability has led to proposals to return to the gold standard. Bills have
been introduced in the Congress to establish a gold coin standard and a flexible gold
standard based on an adjustable price for gold. More important, Public Law 96-389,
authorizing the increase of the U.S. quota in the International Monetary Fund, provides for the establishment of a Commission of 15 members under the chairmanship of
the Secretary of the Treasury with the following duty:
'The Conmission shall 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 and shall transmit to Congress a report containing its findings
and recommendations not later than one year after the .date of enactment
of this Act.11
The interest in returning to a gold standard reflects the view that if the
creation of money were limited, the inflation would stop for lack of the monetary
fuel that powers it. Much of the support for a return to the gold standard, however,
is based on an idealized view of the 100 years of the classical gold standard, as an
age of unparalleled monetary stability and economic progress. The fact is that under
the gold standard prices rose and fell for 20 to 30 years at a time so that the history
of prices in that period was one of alternate inflation and deflation.
Palgrave's
Dictionary of Political Economy discussed the behavior of prices under the gold standard in these terms (Vol. II, p. 222, col. 2 and p. 223, col. 1):
f,

Under these complicated influences [affecting the supply of
and demand for gold] it would be surprising if the value of gold remained stable over long periods of time. For short periods this value
has great stability owing to the high proportion that the total stock of
gold bears to any possible changes in the amount demanded or supplied. An
exception may perhaps be made in cases where inflated credit is suddenly
shaken.
. . But over long periods great changes have taken place in the
value of gold. These changes have been on the whole in the direction of
depreciation [inflation], but there have been long periods of progressive
appreciation [deflation]."
The first of these inflation peaks was in 1814 after prices had risen sharply
in Europe because of the Napoleonic Wars and in the United States because of the War
of 1812. From then to 1843, the U.S. wholesale price index fell by nearly 60 per
cent. Incidentally, in 1834 the United States raised the price of gold from $19.39
an ounce to $20.67 an ounce in order to change the mint ratio of gold to silver from
15:1 to 16:1. After 1843, wholesale prices in the United States rose by 157 per cent

* This paper was prepared by Mr. Bernstein for a hearing on the feasibility of a
return to the gold standard held by the Subcommittee on Mines and Mining of the
Interior Affairs Conmittee of the House of Representatives. This subcommittee
is primarily concerned with the effect that a return to the gold standard would
have on the U.S. gold mining industry.

312
in the 21 years to 1864. Most of the rise, however, occurred during the Civil W a r —
that is when the term inflation was coined-- and prices fell moderately in the following ten years.* In Europe, which was on a specie s t a n d a r d — silver, gold, or
bimetallism— prices rose by about 60 per cent in the 30 years to 1873.
In that year, all of the great trading countries began to follow the newlycreated German Empire in abandoning the silver standard or the bimetallic standard
and adopting a gold standard. This greatly increased the dependence of the world
economy on gold production to provide the reserves necessary for the growth of the
money supply. It was also the beginning of a new period of deflation. From 1873 to
1896, wholesale prices fell by 49 per cent in the United States, but slightly less in
Europe. After the deflation ended, the U.S. wholesale price index rose by 233 per
cent between 1896 and 1920, mostly during World War I. Even from 1896 to 1913, however, U.S. wholesale prices rose by 50 per cent. It is interesting to note that the
high cost of living, popularly known as HCL, was a Democratic campaign issue in the
election of 1912. From 1920 to 1932, the U.S. wholesale price index fell by 58 per
cent, although most of the fall occurred in 1921. After this early postwar plunge in
farm prices, the U.S. wholesale price index fell by one-third in 1922-32.

The gold standard was marked by recurring monetary crises sometimes degenerating into financial panics. In his Business Annals, Willard Thorp identifies 12
such crises or panics in the United Stated and seven in England in the hundred years
from 1815 to 1914. The crises were periods at the peak of the business cycle when
* Earl Hicks, in an article in the Southern Economic Journal (January 1940), said
that the term inflation was first used by Alexander del Mar in a pamphlet, 'The
Great Paper Bubble, or the Coming Financial Explosion,11 issued by the Democratic
Party in the campaign of 1864. Hicks wrote: "The frontispiece of the pamphlet
shows Secretary [of the Treasury] Chase nonchalantly blowing bubbles in the economic system. One huge bubble sits upon his pipe, and Del Mar undertakes to prove
that this bubble is about to b r e a k — not only because of its great size, but because
its 'inflation1 has been accompanied by an unequal expansion of its various parts.11
Rurt Singer in his article on "Inflation," Handwoerterbuch des Staatswissenshaften,
Vol. V, p. 466, asks, ,yErste Verwendung des Wortes?"

313
when it was not possible to meet the increased demand for currency and credit so
that prices plunged and interest rates soared. The panics were extreme crises
usually accompanied by numerous bankruptcies.
In England, the crises were due to
the rigidity of the Bank Charter Act of 1844 and the modest size of the free gold
reserves that the Bank of England customarily held. This made it impossible to meet
currency needs in an emergency except by suspending the gold reserve provision of
the Act which was done on a number of occasions. In the United States, the national
banking system provided no flexibility at all in the issue of currency and that, as
Professor 0. M. W. Sprague wrote in his study for the National Monetary Conmission
(1908-12), was the cause of the recurrent crises.

CRISES AND PANICS IN THE UNITED

Year

United States
Crisis or panic*

1815
1825
1833
1837
1839
1847
1857
1873
1882
1890
1893
1907

Crisis
Panic
Panic
Panic
Panic
Panic
Panic
Panic
Panic
Crisis
Panic
Crisis

Comment

AND UNITED KINGDOM, 1815-1914

Year

United Kingdom
Crisis or panic*

1815
1825
1836
1847
1857
1866
1890

Crisis
Panic
Panic
Panic
Panic
Crisis
Crisis

Comment

Severe

Violent

Severe
Severe

* This does not include 14 recessions in the United States and nine in the United
Kingdom which are not classified as crises ot panics, although some were accompanied
by financial stringency. The table is adapted from Willard Thorp, Business Annals,
page 42 for the United States and page 44 for the United Kingdom.

The great depressions that occurred twice in the nineteenth century and
reached a new level of severity in 1929-33 were the result of the interaction of
great wars and the gold standard. In brief, the war inflation exhausted the moneycreating power of a gold standard system. As a consequence, it was not possible to
continue the growth of the money supply at a rate that would have sustained the price
level reached during or immediately after the war. Furthermore, the inflation engendered by the war was very unequal among the belligerents, so that the maintenance of
the gold standard or the return to the historical gold parity of the currency required
the more inflated countries to deflate their prices and costs. This created centers
of deflation in the world economy which spread from country to country. The result
was a great depression in which countries competed in deflating the money supply in
order to protect their gold reserves.

What the gold standard requires
There have been many forms of the gold standard, but they all had a few
elements in common. First, the value of the currency was defined as a fixed weight
"of gold and this gold parity was regarded as immutable. If the gold standard had to

314
be abandoned in time of war, it was a moral imperative to restore it promptly after
the war at the historical parity. Second, all forms of money were maintained equivalent in value to gold. This required the free coinage of gold to prevent the value
of money from rising above that for gold and the gold convertibility of the currency
to prevent the value of money from falling below that for gold. Third, the money
supply was limited by the gold reserve. The usual link was to require a proportionate
gold reserve against the currency and deposit liabilities of the central bank. Besides, the monetary authorities were expected to change their policy in response to
the inflow or outflow of gold.
By these tests, the gold standard came to an end in the great depression of
the 1930s. Although by Executive Order under the Gold Reserve Act of 1934, the United
States defined the dollar as 1/35 of an ounce of gold, there was no requirement of
convertibility. The Secretary of the Treasury, however, undertook to convert dollars
into gold for foreign monetary authorities, but not for private holders, either domestic or foreign. This necessitated a major change in the operation of the international monetary system. Until 1933, exchange rates were kept within a narrow range
(the gold points) by exchange and bullion dealers. When a currency reached the lower
limit of the range, they converted the currency into gold, shipped it to the country
whose currency was at the upper limit of the range, converted the gold into that currency, and sold it in the exchange market. Central banks bought and sold gold for
their own currencies; they did not ordinarily intervene in the exchange market. The
Gold Reserve Act compelled foreign monetary authorities to intervene in the exchange
market if they wanted to stabilize the dollar exchange rates for their currencies.
The most important change in the gold standard was not stated in the Gold Reserve Act, but emerged in U.S. monetary policies in the next three decades. A n essential element of the classical gold standard was that the money supply must be limited
by the gold reserves and a change in the gold reserves should be followed by a change
in monetary p o l i c y — an increase in the discount rate when there was a gold outflow
and a decrease in the discount rate when there was a gold inflow. This aspect of the
gold standard had already become tenuous in the 1920s as noted by Keynes in the Tract
on Monetary Reform, p. 198.
"The theory on which the Federal Reserve Board is supposed to
govern its discount policy, by reference to the influx and efflux of gold
and the proportion of gold to liabilities, is as dead as mutton.
It perished, and perished justly, as soon as the Federal Reserve Board began to
ignore its ratio and to accept gold without allowing it to exercise its
full influence, merely because an expansion of credit and prices seemed at
that moment undesirable.
. . For the past two years the United States
has pretended to maintain a gold standard.
In fact, it has established a
dollar standard; and instead of ensuring that the value of the dollar shall
conform to that of gold, it makes provision, at great expense, that the
value of gold shall conform to that of the dollar."
Of much greater importance was the concern of the monetary authorities to
protect the gold reserve during the great depression. At the end of 1928, the gold
reserves of the United States were $3.75 billion, and they increased gradually to
$4.63 billion at the end of August 1931. The abandonment of the gold standard by
Britain in September 1931 resulted in a large outflow of gold from the United States
and at the end of October 1931 the reserves were down to $3.91 billion. The discount
rate at the Federal Reserve Bank of New York had been reduced from 6 per cent in
October 1929 to 1-1/2 per cent in May 1931 because of the severe depression. After

315
the outflow of gold, the rate was raised to 2-1/2 per cent on October 9th and to
3-1/2 per cent on October 16, 1931. This halted the outflow of gold and the reserves remained stable at about $4.00 billion until April 1932. A renewed outflow
began then and the reserves fell to $3.47 billion at the end of June 1932, partly
in response to the reduction of the discount rate to 3 per cent and 2-1/2 per cent
as the depression deepened. Nevertheless, the reserves recovered to $3.81 billion
in February 1933. On March 3, 1933, however, the last day of the old Administration, the discount rate was raised to 3-1/2 per cent because of a run on the dollar,
mainly internal.
In the greatest depression in U.S. history, the money supply as measured
by currency outside banks plus demand deposits adjusted fell from $26.7 billion at
the end of 1928 to $19.8 billion at the end of 1 9 3 3 — a decrease of 26 per cent. A
broader money supply, including time deposits at commercial banks, mutual savings
banks, and the postal savings system, fell from $55.4 billion at the end of 1928 to
$41.5 billion at the end of 1 9 3 3 — a decrease of 25 per cent. While monetary policy
was directed toward protecting the gold reserve, which was slightly higher at the
end of the recession than at the beginning, that was not the main reason for the
deflation of the money supply. The depression reduced the demand for credit; and
the fall in prices, profits and incomes placed pressure on the solvency of banks
and their ability to supply credit. The Federal Reserve was not bold enough in
countering these deflationary forces until the depression had become very severe.
2.

ASSETS OF FEDERAL RESERVE BANKS, 1928-33

1928
Gold reserves
Other reserves
Bills discounted
Bills bought
U.S. Government securities
(Bonds)
(Notes)
(Certificates)
(Bills)
Other assets

2,506
203
1,056
489
228
(54)
(106)
(68)

TOTAL ASSETS
Addendum:
Total gold reserves, including Treasury

Million dollars; end of year
1930
1929
1931
1932

1933

2,784
227
632
392
511
(77)
(216)
(162)
(56)
912

2,906
176
251
363
729
(164)
(226)
(315)
(24)
776

2,933
225
638
339
817
(360)
(33)
(271)
(152)
720

3,110
3,524
221
269
235
98
33
133
1,855
2,437
(422)
(433)
(300) (1,053)
(719)
(516)
(425)
(415)
661
580

5,352

5,458

5,201

5,672

6,115

7,041

3,746

3,900

4,225

4,052

4,045

4,012

Currency outside banks
Demand deposits adjusted, all banks
Time deposits at commercial banks
Other time deposits

3,593
23,081
19,761
8,925

3,557
22,809
19,192
8,997

3,605
20,967
19,012
9,664

4,470
17,412
15,366
10,613

4,669
15,728
13,631
10,826

4,782
15,035
11,019
10,696

TOTAL MONETARY ASSETS

55,360

54,555

53,248

47,861

44,854

41,532

(..)

870

The total assets of the Federal Reserve Banks, which are the source of currency and bank reserves, declined in 1930, rose considerably in 1931 and 1932, and
rose sharply in 1933. This was accompanied by a great change in the composition of
-the assets of the Federal Reserve Banks, apart from their gold and other reserves

316
which accounted for much of the increase in total assets from 1928 to 1933. At the
end of 1928, discounts were $1.06 billion and bills bought and holdings of Government
securities were $717 million. By the end of 1933, discounts were down to $98 million,
but bills bought and U.S. Government securities had increased to $2.57 billion. Excluding gold and other reserves, the total of all other assets of the Federal Reserve
Banks fell by 20 per cent from the end of 1928 to the end of 1930, but rose by 53 per
cent in the following three years to the end of 1933.
The increase in the monetary price of gold from $20.67 an ounce to $35 an
ounce created the conditions necessary for recovery. It strengthened the competitive
position of the United States in world trade and provided the additional gold reserves
to support a more expansionist monetary policy if that was regarded as necessary.
In
a basic way, however, the gold standard was changed after 1934. The dollar was still
convertible into gold for foreign monetary authorities and the gold reserve requirements were unchanged, but the Treasury and the Federal Reserve no longer allowed the
gold reserves to govern the money supply. This became apparent^ very soon when the
flood of gold into the United States after the devaluation increased the gold reserves
from $4.0 billion (at $20.67 an ounce) at the end of 1933 to $22.8 billion (at $35 an
ounce) at the end of 1941. In an attempt to avoid the enormous expansion of the money
supply that the inflow of gold would have necessitated, the Treasury sold bills to
finance its purchases of gold which it then placed in an inactive account. The mounting interest cost as the gold piled up finally led the Treasury to terminate the inactive account and to monetize the gold it had previously bought.
A quite different problem, however, emerged during World War II when the gold
reserves were reduced by $2.7 billion while the wartime expansion of the money supply
continued unabated. From the end of 1941 to the end of 1945, currency outside banks
increased from $9.6 billion to $26.5 billion, demand deposits 1 increased from $39.0 billion to $75.9 billion, and time deposits increased from $27.7 billion to $48.5 billion.
As it was evident that with the continued expansion of the money supply the somewhat
smaller gold reserves would not be adequate to meet the requirements on Federal Reserve
notes and on the deposit liabilities of the Federal Reserve Banks, legislation was enacted in 1945 reducing the gold reserve requirements. The gold reserves became inadequate for the money supply again in the late 1950s and 1960s and the reserve requirements were reduced twice more until they were finally eliminated. Without the limitation imposed by the gold reserves on the money supply, the United States could not be
said to have been on a true gold standard.

Bretton Woods and the gold standard
The Bretton Woods system was intended to provide exchange stability and convertibility of currencies without the rigidities of the gold standard. The par values
of currencies were expressed in gold as a common denominator and members were obligated
to keep the exchange rates for their currencies withia 1 per cent of the par value.
Members were expected to follow policies conducive to exchange stability, but not to
reduce output and employment or to inflate their prices and costs in order to maintain
the par value.
Instead, a country could change the par value of its currency as a
means of adjusting a large and prolonged imbalance in its payments. Members also had
to establish convertibility of their currencies for monetary authorities, but not
necessarily in gold. The United States elected to buy and sell gold freely for international settlements, an obligation it undertook voluntarily as an alternative to
the responsibility for intervening in the exchange market or controlling exchange
'rates to keep them within the prescribed range.

317
Although the Bretton Woods system was not a gold standard, the Fund Agreement took cognizance of the important monetary role of gold, particularly as a reserve asset. Members were required to pay part of their quota subscriptions in gold,
and the IMF sold foreign exchange to members for gold as well as for their own currencies. Countries whose currencies were held by the IMF in excess of 75 per cent
of their quotas had to repurchase their currencies when their reserves improved and
to make the repurchases in gold and convertible currencies in proportion to the increase in their holdings of such reserves. Members were also required to pay c h a r g e s transactions fees and interest on drawings— in gold unless their holdings were too
small. Thus, the IMF accumulated 153 million ounces of gold before the sale of some
of its holdings in 1976-80.
The Bretton Woods Agreement authorized the IMF to set margins above and below
the par value for the gold transactions of its members. This provision was intended
to prevent the emergence of de facto exchange rates which departed too much from the
par value. Thus, if a country sold gold at much more than $35 an ounce, it would
have created an implicit exchange rate for its currency below the par value. Under
this provision, the IMF for a time forbade members from dealing in gold in the premium
markets. The premium disappeared in 1953. When the free market price threatened to
rise considerably above $35 an ounce again in 1960, the United States and several
other countries established a gold pool which bought and sold gold in the London market. It succeeded in keeping the price close to $35 an ounce until speculation in
gold increased enormously following the devaluation of sterling in September 1967.
After selling nearly 100 million ounces in the fourth quarter of 1967 and the first
quarter of 1968, the members of the gold pool announced that they would no longer
buy or sell gold in the free market.
Two other problems related to gold emerged under the Bretton Woods system.
First, it became apparent in the 1950s that the amount of newly-mined gold added to
the monetary stock was inadequate to provide for the trend growth of reserves. From
the end of 1950 to the end of 1957, the aggregate gold reserves of all countries and
international institutions increased at an average annual rate of $550 million.
In
addition, foreign official assets in the United States increased at an average annual
rate of $470 million. The dependence on U.S. balance of payments deficits for such
a large part of the increase of reserves was ominous for the dollar and for the international monetary system. The alternatives to continued and accelerated growth
of official dollar holdings were a uniform increase in the price of gold in all currencies or the creation of a new reserve asset by the IMF. The decision was made to
create Special Drawing Rights and to allocate them to members in proportion to their
quotas. Three issues were made in 1970-72 and issues were made again in 1979 and
1980 with another scheduled for the beginning of 1981.
The second problem which emerged after 1957 was the growing preference of
foreign monetary authorities for gold over dollars. U.S. gold reserves were about
the same at the end of 1957 as at the end of 1950. Thus, nearly all of the deficit
on an official reserve basis was financed through the increase in official dollar
holdings. From the end of 1957 to the end of 1969, however, U.S. gold reserves decreased by $11.0 billion while foreign official assets in the United States, including
nonmarketable U.S. Government securities denominated in foreign currencies, increased
by $5.9 billion. The accumulation of official assets in the United States continued
at a rate of about $500 million a year, but the rest of the growing deficit was met
by a reduction of nearly $1.0 billion a year in U.S. gold reserves. The greater
conversion of dollars into gold was also partly due to the very small amount of
newly-mined gold added to the monetary s t o c k — $2.4 billion in 1957-69 of which

318
$1.0 billion was acquired by the IMF. The enormous U.S. deficit in 1970 and the
first three quarters of 1971 was financed by an increase of $28.9 billion in foreign
official assets in the United States and by a reduction of only $1.65 billion U.S.
gold reserves, but that was because foreign countries were asked not to convert dollars into gold even before convertibility was terminated in August 1971.
The growing official preference for gold had little effect on the free market price until 1973. Although the price in London rose by about 20 per cent above
the monetary price after the termination of sales by the gold pool in 1968, it was
back to $35.25 an ounce by the end of 1969. The two devaluations of the dollar resulted in a moderately large increase in the price, byt it was still below $100 an
ounce until the floating of the dollar in March 1973. Since then, the price of gold
has increased enormously, although most of the increase was in the past 18 months.
At the end of 1978, the price of gold in London was $226.00 an ounce. By the end of
October 1979, the price had risen to $375.00 an ounce. In the following three months
the price rose to a peak of $850 an ounce on January 21, 1980. It fell thereafter to
$485.75 an ounce on April 3rd and has recovered since then to about $670 an ounce at
present. Until 1978, the increase in the dollar price of gold was mainly a response
to the inflation and the depreciation of the dollar in terms of the strongest currency,
usually the Swiss franc. The enormous rise in late 1979 and early 1980 was due to the
political uncertainties arising from the seizure of the American hostages by Iran and
the invasion of Afghanistan by the Soviet Union.

Year

Price

1953
1954
1955

34.71
35.04
34.97

1956
1957
1958
1959
1960

34.91
35.00
35.08
35.07
35.60

1961
1962
1963
1964
1965

35.15
35.07
35.08
35.12
35.12

Source:

DOLLAR PRICE OF GOLD IN LONDON, 1953-80

Dollars per troy ounce; end of year or month
Price
Month
Year
1966
1967
1968
1969
1970

35.19
35.20
41.90
35.20
37.37

1971
1972
1973
1974
1975

43.63
64.90
112.25
186.50
140.25

1976
1977
1978

134.75
164.95
226.00

Price

1979- Mar.
June
Sept.
Dec.

240.10
277.50
397.25
512.00

1980- Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct. 14

653.00
637.00
494.50
518.00
535.50
653.50
614.25
631.25
666.75
668.50

International Financial Statistics, Yearbook 1980, p. 42, and Oct. 1980, p

The Bretton Woods system functioned very well until about 1965. Not only
were exchange rates for the major currencies very stable after the devaluations of
1949, but prices changed less than they had in corresponding periods after previous
great wars. The U.S. wholesale price index rose by 52 per cent froiL 1945 to 1948, but
that was a result of the termination of price controls which had suppressed the wartime inflation and kept the index fairly stable from 1942 to 1945. The wholesale

319
price index rose again by 11 per cent in 1951 because of the Korean war. In the
following 13 years to 1964, however, this index rose by less than 4 per cent, and
from 1958 to 1964 the index was virtually unchanged. There has never been a period
of greater price stability in U.S. history than in these seven years. Moreover,
after World War II the world economy avoided a great depression, cyclical fluctuations were more moderate, and the growth of output and employment was greater than
at any time in the past.
The Bretton Woods system broke down because of the prolonged inflation in
the United States. The inflation originated in the Vietnam war and investment boom
of 1965-68. It was aggravated by adverse changes in the terms of trade, particularly
the huge increases in the price of oil, by the lag in the improvement of productivity,
and most important by the excessive increase of wages because of their formal or informal link to the consumer price index. Because of these developments, it was inevitable that the par value of the dollar and its convertibility into gold would
have to be abandoned. The United States not only decided to let the dollar float,
but it led the movement to diminish the role of gold in the international monetary
system. At the 30th Annual Meeting of the Board of Governors of the IMF, a resolution was adopted endorsing the sale of 50 million ounces of its g o l d — 25 million
ounces to be sold at auction with the profits placed in a trust fund for the benefit
of low-income members and 25 million ounces to be sold to members in proportion to
their quotas at that time at the book value of SDR 35 an ounce (restitution). The
Board of Governors also expressed its approval of including in a forthcoming amendment the abolition of an official price for gold and the elimination of the requirements for gold payments by members to the IMF. These provisions are now embodied
in the Second Amendment to the Fund Agreement.

Can the gold standard be restored?
It is always possible to establish a gold standard if a country is willing
to accept the restraints that this entails and the economic consequences that may
ensue. The minimum tests of a gold standard are (1) the maintenance of the equal
value of the currency and gold by the monetary authorities through the purchase and
sale of gold freely at a fixed price; and (2) limitation of the money supply through
gold reserve requirements, including the obligation to reduce the money supply when
there is a diminution of the gold reserves. As a practical matter, a gold standard
can function properly only as part of an international monetary system. Otherwise,
sudden changes in the supply of or demand for gold would fall entirely on one country,
as it did on the United States after 1934. Purchases and sales of gold by the monetaru authorities at a variable free market price do not constitute a gold standard.
Such transactions are merely another form of intervention in the exchange market and
another type of open market operation.
Those who advocate a return to the gold standard assume that it would be
possible to select some price of gold that would enable the monetary authorities to
maintain the equivalence of gold and currency without being drained of their gold
reserves or being swamped by a backflow of gold from hoarders, investors, and speculators. The change in the price of gold since 1973, and particularly its volatility,
should make one skeptical of this possibility.
It was possible to maintain the equivalence of the value of money and gold for generations under the classical gold standard because the allocation of private monetary assets to gold and money had been
adapted to the traditional monetary price in the course of centuries. Changes in
the preference for gold relative to money were small and took place gradually, but

320
the monetary authorities could keep gold and money equally attractive in the long
run by allowing commodity prices to rise or fall with changes in the cost of producing gold and in the short run by changing interest rates which raised or lowered
the opportunity cost of holding gold instead of money.
As the price of gold has ranged between $226 an ounce and $850 an ounce in
the past two years, it is not possible to say now at what price the monetary authorities could expect to maintain the equivalence of gold and money under stable monetary
conditions. If gold were an ordinary conmodity, with production and consumption
usually about equal, apart from relatively small changes in stocks, it would be possible to estimate what the price would be if supply and demand were at trend levels.
In the long run, the price would have to reflect the cost of production and demand
would be adjusted to the relative price of gold and other commodities. The supply of
and demand for gold does not fit this pattern. Production accounted for about 59 per
cent of the supply in 1976-79 and consumption in the arts and industry accounted for
70 per cent of the private absorption of gold. The price has fluctuated sharply in
this period without any apparent relation to changes in production or in the absorption of gold in the arts and industry.
The present price of gold and the fluctuations in the past two years were
brought about by the demand of hoarders, investors, and speculators. Their demand is
for holding gold as an asset, but the value of gold cannot be determined in the same
way as the value of other assets. It is possible to estimate the value of such typical assets as stocks and bonds because they are income-earning assets. Their value
is determined by discounting the future flow of earnings, and for bonds also the return of principal, at current interest rates. One may err in projecting the flow of
earnings and the security of the principal of a bond, or the appropriate interest
rate at which the flows should be discounted, but the method of valuation is clear.
Even the value of undeveloped land can be estimated by discounting the projected
flow of earnings, although there is greater uncertainty about the earnings. As gold
is not an income earning asset, it cannot be valued in that way.
Its sole return to
the owner is through a rise in price. What makes the price of gold $670 an ounce
today is that buyers expect the price to be about $760 an ounce a year from now.
The view that the price of gold will increase at a rate in excess of the
interest rate assumes that the present price is justified by economic conditions and
that the inflation will accelerate. The inflation of itself does not justify the
enormous increase in the price of gold to its present level. At $670 an ounce, the
purchasing power of gold as measured by the U.S. wholesale price index (290.8 in
September 1980 on a 1957-59 base) is nearly three times as high as at the two previous p e a k s — in 1896 when the index was 25.4 and the price of gold was $20.67 an
ounce, and in 1934 when the index was 41.0 and the price of gold was $35 an ounce.
The recent rise in the price of gold was not in response to the acceleration of inflation but to the political situation in Iran and Afghanistan. Without saying that
world peace was an essential element of the classical gold standard, it is a fact
that the political disorder in the world adds to the difficulty of maintaining the
equivalence of gold and currency at a fixed price.
If the monetary authorities were to establish a gold standard now with the
price at close to the present free market price a deterioration of the political
situation could cause an enormous outflow of gold and a sharp contraction of the
money supply, even if the economic situation should become more stable. On the
other hand, if reasonable price stability were restored and the political situation
improved, the monetary authorities could be confronted with an enormous backflow of

321

gold which would necessitate an expansion in the money supply. From the floating of
the dollar in 1973 to 1979, investors and speculators increased their holdings in the
form of bullion by about 66 million ounces and hoarders increased their holdings in
the form of coins, facsimile coins, medals and medallions by about 55 million ounces.
A large part of these holdings, particularly those of investors and speculators, could
be sold to the monetary authorities if the gold standard were restored and price stability achieved. It is worth noting that they reduced their holdings by about 16 million ounces in 1969-72 after their huge purchases in 1967-68,
4.

SUPPLY OF GOLD A N D ITS ABSORPTION IN PRIVATE USES, 1968-79

Supply
(Million ounces)
Private absorption
Production Communist Official
Total supply
Industry# Coins and
Investors,
sales
sales*
® absorption
metals
speculators*?
1968
1969
1970

40.03
40.25
40.96

-0.93
-0.48
-0.10

19.93
-2.89
-7.59

59.03
36.88
33.28

35.75
36.33
41.02

3.47
2.25
3.22

19.81
-1.70
-10.96

1971
1972
1973
1974
1975

39.74
38.07
36.04
32.38
30.67

1.74
6.85
8.84
7.07
4.79

3.09
-4.85
0.19
0.64
0.29

44.56
40.06
45.07
40.09
35.75

41.22
39.87
25.24
14.18
22.85

3.41
3.34
2.41
9.45
8.74

-0.06
-3.15
17.43
16.46
4.15

1976
1977
1978
1979

31.15
31.25
31.51
30.93

13.25
12.89
13.18
7.36

1.86
8.65
11.64
18.45

46.26
52.79
56.33
56.74

37.04
39.45
40.44
31.90

7.46
6.20
10.87
10.38

1.77
7.14
5.02
14.47

* Sales by monetary authorities, including IMF, net of purchases.
# Jewelry, dentistry, electronics, and other industrial and decorative uses.
@ Net purchases (or sales) in the form of bullion derived as a residual.

It would also be very difficult to maintain the gold standard if it were
restored. Under a gold standard, the increase of the money supply is limited by the
increase in the gold reserves. Assuming that confidence in currencies were restored
so relatively little of the supply would be absorbed by hoarders, investors and speculators, the growth of the monetary stock of gold would depend on newly-mined production, net sales of the Communist countries, and the consumption of the arts and industry. The production of gold outside the Communist countries reached a peak of 41
million ounces in 1970, fell to 31 million ounces in 1975, and has remained at that
level since then. The decline was almost all in South African production, although
output of other areas was also down slightly. The smaller output of South Africa may
be partly due to real factors, but it is mainly due to the policy of mining and milling lower grades of ore as the price of gold increases.
In the first eight months of
1980, South African production was 3.6 per cent less than in 1979 and some of the output was added to reserves instead of being sold in the free market.
Sales by the Communist countries, nearly all by the Soviet Union, were very
large in 1972-79. These sales are for the purpose of acquiring foreign exchange to
finance imports from the West. Sales are highly volatile, fluctuating directly with
the Soviet balance of payments deficit and inversely with the price of gold. An

322
article in the Financial Times, September 15, 1980, states that the Soviet Union has
sold no gold in the Zurich market since January 1980 when it delivered about 160,000
ounces, although it may have sold some gold directly to oil-producing countries. The
Soviet balance of payments seems to have been somewhat better this year as indicated
by its claims and liabilities in the Eurocurrency market.
In any case, the gold sales
of the Soviet Union are highly variable and cannot be regarded as a reliable source
for additions to the monetary stock of gold.
Even if hoarding, investing and speculation were to fall to the moderate
levels of the early 1960s, the supply of gold that could be added to the monetary
stock would be very small. The absorption of gold in the arts and industry has exceeded newly-mined gold by 20 per cent in 1976-79, although some of the gold purchased
by fabricators may have gone into inventories. This occurred in spite of a large reduction in such use of gold in 1979 because of the high price and the slowdown in some
industrial countries. Perhaps, if a gold standard with a fixed price of gold were restored, the gold producing countries might increase their output. But unless there
were an adequate, steady, and assured growth of the monetary stock of gold, it would
not be possible for a gold standard system to function effectively.
The existing stock of monetary gold, apart from the holdings of the Communist
countries, is over 1.13 billion ounces, including holdings of the international monetary institutions. Most countries carry these reserves at an average market value
over a preceding period, although the United States still values its holdings at the
old monetary price of $42.22 an ounce. No large country has monetized its gold reserves at the present price. These gold holdings constitute a huge reservoir of
assets, that would free the international monetary system from dependence on additions
to the monetary stock for the growth of the monetary base. Countries could' monetize
their gold holdings at a regular rate to assure the monetary growth that they regard
as necessary. Sales of gold could also be made out of these gold holdings without
the necessity of deflating the money supply, and purchases of gold could be added to
these gold holdings if they were financed by sales of Treasury bills without inflating
the money supply. However, if the monetary authorities followed such policies, making
the money supply independent of the increase or decrease in the gold reserves, it
could not be said that the country was on the gold standard.
The bills introduced in the Senate (S. 3181) and the House of Representatives
(H.R. 7874) would establish gold convertibility of the dollar or a gold coinage immediately or within a few months. This attitude of urgency in establishing a kind of
gold standard is reminiscent of the debate on the resumption of specie payments after
the Civil War. Some people thought it would be prudent to accumulate a larger gold
reserve and to reduce the amount of greenbacks in circulation before undertaking
specie payments. Others, among them Chief Justice Chase, who had been Secretary of
the Treasury during the wartime inflation, believed that no delay was necessary, that
"the way to resume is to resume.11 Inherent in this approach is the assumption that if
inter-convertibility of gold and dollars were established at some price previously
determined in the New York market, purchases of gold from or sales of gold to the
Federal Reserve Banks would by themselves adjust the money supply to an amount appropriate to the monetary price of gold. That could entail a large contraction of the
money supply through Federal Reserve sales of gold or an excessive expansion of the
money supply through Federal Reserve purchases of gold. It would be ironic if the
restoration of the gold standard were itsel-f to have a seriously destabilizing effect
on the money supply. Actually, it is questionable whether the monetary systems contemplated in the bills referred to above could be regarded as a gold standard in the
usual meaning of this term.

323
The gold standard is not an end in itself but a means of achieving certain
objectives. The first is to restore and maintain a reasonably high degree of stability of prices and costs. This cannot be achieved automatically by establishing
gold convertibility of the dollar. It requires greater budgetary discipline, a more
cautious monetary policy, and the limitation of the increase of incomes to the increase of productivity. The second objective is to achieve greater stability of
exchange rates. Initially, the target could be to maintain the average foreign exchange value of the dollar within a moderately broad range relative to the other
currencies in a unit of Special Drawing R i g h t s — the D-mark, sterling, the French
franc, and the yen. Ultimately the dollar would have to be stable in terms of each
of these currencies. That would necessitate keeping down the inflation to the same
rate as in the most stable industrial country and giving greater consideration to
the behavior of the exchange rate in formulating monetary policy. These are the
conditions that would have to be established before the United States could safely
return to a gold standard. If the United States could achieve such a degree of
price and exchange stability, there would be no need for a gold standard.
Finally, it should be noted that the Second Amendment to the Fund Agreement
contains important provisions relating to gold. Article IV, Section 2 (b) states
that the permissible exchange arrangements "may include the maintenance by a member
of a value for its currency in terms of the Special Drawing Right or another denominator, other than gold, selected by the member. 1 ' Article IV, Section 4 states that
the IMF may determine by an 85 per cent majority that international economic conditions permit the introduction of a widespread system of exchange arrangements based
on stable but adjustable par values. If the IMF makes such a determination, then
Schedule C, paragraph 1 provides that it "shall notify members that par values may
be established in terms of the Special Drawing Right, or in terms of such other
conmon denominator as is prescribed by the Fund. The common denominator shall not
be gold or a currency." These provisions do not prohibit the United States from
giving gold a role in the domestic monetary system. If the Commission established
by Public Law 96-389 should recommend the restoration of a par value for the dollar, however, it would have to be in terms that conform to the Second Amendment
of the IMF Agreement.

324

E M B (LTD.)
RESEARCH

ECONOMISTS

R E P O R T NO.

81/5

IS THERE A N ALTERNATIVE TO THE GO ID STANDARD?
March 25, 1981

Summary and conclusions
Some members of the Congress and some economists whose views carry weight
in the Administration believe that it is necessary to restore the gold standard in
order to end the inflation. In fact, prices were not stable under the gold standard and the alternate inflation and deflation caused great hardship. The gold
standard survived until World War I because the maintenance of the gold value of
the currency was the sole objective of economic policy. After being restored with
great difficulty in 1925-30, the gold standard collapsed again in the great depression of the 1930s. The Bretton Woods system of fixed parities, established after
World War II, functioned reasonably well for about 20 years, but it came under
3tress in the 1960s and was abandoned in 1973. The main reasons were the inability
of the Ln",w»d States to keep the dollar equally attractive with gold, partly because of tne inadequate growth in the monetary stock of gold, but mainly because
of the inflation that has persisted for 15 years.
It would not be possible to restore the gold standard even if the United
States and other countries were to succeed in ending the inflation. Because of
the huge rise in the price of gold and its great volatility in the past two years,
there is a danger that any monetary price would prove to be too high or too low and
become the source of renewed instability. The decline in gold production and the
increase in the industrial use of gold would make it difficult to maintain an adequate growth in the monetary stock of gold, a problem that became acute in 1950-65.
The large amount of gold absorbed by speculators in recent years reflects not only
fear of inflation, but the tense international political situation. Finally, it
would be impossible to maintain gold convertibility of the dollar while the oilexporting countries have enormous current account surpluses and most of the oilimporting countries have large deficits.
If inflation were ended and fluctuations
in exchange rates were moderated, however, it would be possible to establish a new
system of fixed par values based on Special Drawing Rights, with the dollar and
other currencies convertible in SDRs.
The best way to restore fixed par values and convertibility in SDRs would
be to establish a Reserve Settlement Account in which members of the IMF would deposit their foreign exchange reserves and SDRs in return for a credit balance in
SDRs. Balance of payments settlements would be made through transfers of SDRs between monetary authorities. If the United States had a balanced payments position,
it could not be subjected to massive conversions of dollars into SDRs because most
of the official holdings would be deposited with the Reserve Settlement Account and
the United States would receive reserve assets in settlement of its surplus.
Confidence in currencies would be strengthened if a role for gold were found in the
international monetary system. That cannot be done now, but after the inflation
has ended, the pattern of international payments is better balanced, and gold
speculation has subsided, the IMF could set a monetary price for gold in SDRs.
Members would be invited to deposit part of their gold in the Reserve Settlement
Account in return for SDRs and the IMF could buy gold offered to it which would be
placed in the Reserve Settlement Account.

325

Is There an Alternative to the Gold Standard?*

Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall;
All the King's horses and all the King's men
Cannot put Humpty Dumpty together again.
Mother Goose

Rise and fall of the gold standard
The prolonged inflation has inevitably given rise to the question whether it
is due to an inherent defect in the monetary system. Some critics say that it will
not be possible to end the inflation until the monetary authorities are compelled to
limit the creation of money by restoring some kind of gold standard. There seems to
be interest in the Congress in establishing some kind of monetary link to gold. This
reflects widespread dissatisfaction with the present monetary system. It is useful,
therefore to consider how the gold standard worked during the period of its preeminence, why
tempts to restore some form of the gold standard have hitherto failed,
and what other means there may be for imposing monetary discipline.
The classical gold standard in Great Britain lasted from 1816, when the
sovereign was made the standard coin by Act of Parliament, until 1914 when the convertibility of Bank of England notes into gold sovereigns was terminated de facto.
Through most of these hundred years, the United Kingdom was the only country on the
gold standard, with other countries on a silver or bimetallic standard. As the sole
basis for the international monetary system, the classical gold standard reigned for
a much shorter p e r i o d — from 1873 to 1914. In these forty years, gold came to be
universally accepted as the ideal monetary standard, little short of being divinely
created for that purpose. A departure from the gold standard could be justified
only by the exigencies of a great war. And when this occurred, the first objective
in economic reconstruction had to be the restoration of gold convertibility of the
currency at its historical parity.
This quasi-mystical attitude toward the gold standard had very little to do
with what we would now regard as the central role of money in the economic system-regulating production, distribution and utilization of the national income. Nor was
the gold standard regarded by 19th century economists as successful in maintaining
price stability. On the contrary', as W. S. Jevons pointed out in his Money and the
Mechanism of Exchange, price fluctuations were enormous and disruptive.
[There] is abundance of evidence to prove that the
"
value of gold has undergone extensive changes. Between 1789 and 1809,
it fell in the ratio of 100 to 54, or by 46 per cent.
. . From 1809
to 1849, it rose again in the extraordinary ratio of 100 to 245, or by
145 per cent, rendering government annuities and all fixed payments,
extending over this period, almost two and a half times as valuable
as they were in 1809. Since 1849 [to 1863] the value of gold has
again fallen to the extent of at least 20 per cent and a careful
study
. * . shows that fluctuations of from 10 to 25 per cent,
occur in every credit cycle.1' (pp. 325-26).
* This paper was prepared by Edward M. Bernstein for a symposium on the international monetary system sponsored by the Lehrman Institute.

326
Most American busines stnen regarded these price fluctuations as an unavoidable part of the gold standard. Other economic groups, however, were more critical
of the gold standard and the measures taken to restore and maintain it, particularly
from 1873 to 1896. Farmers found the falling prices a heavy burden for them as producers and debtors. Long before Bryan became the champion of bimetallism, the Greenback Party opposed the retiring of greenbacks as a means of restoring specie payments.
In spite of the great importance of agriculture in the U.S. economy of the 19th century, farmers had only a limited influence on monetary policy. They did succeed,
however, in freezing the outstanding greenbacks in May 1878 and in getting intermittent purchases of silver by the Treasury until it was ended in November 1893.
Labor in this country and in Europe also suffered from the deflation. According to the National Bureau of Economic Research, more than half of the period
from January 1873 to December 1897 was marked by recession or depression. The worst
time was from December 1873 to May 1885 when the economy was in recession or depression in three-fourths of these 11-1/2 years. This was not an environment in which
labor could expect much in the way of wage increases, although real wages did rise.
According to the article on the gold standard in Palgrave's Dictionary of Political
Economy, "the general level of wages [in the United Kingdom] was probably as low in
1905 as in 1870; though the fact of the fall, and especially its amount, is not so
certain as the fall in [prices of] commodities" (Vol. II, p. 223, column 2). Complaints about the gold standard disappeared when prices rose after 1896.
The classical gold standard was destroyed by the inflation of World War I.
In the United States, prices doubled between 1914 and 1920 and in some other countries they rose threefold or more. Under the circumstances, all of the belligerents
except the United States terminated the convertibility of their currencies into gold.
After the war, it was generally agreed that the gold standard should be restored as
promptly as possible. At the same time, it was recognized that some means would
have to be devised to secure greater stability in the purchasing power of g o l d —
that is, in the level of commodity prices.
One difficulty in restoring the gold standard was the greatly increased
need for gold reserves because of the very large monetary expansion during World
War I. It was hoped to limit the need for gold by withdrawing gold coin from circulation and by wider use of the gold exchange standard. When the United Kingdom
resumed gold convertibility in 1925, it was in bullion rather than in coin; and as
other countries restored the gold standard, it was to a large extent based on dollar
and sterling reserves. In fact, by 1930 more than one-fourth of total international
monetary reserves consisted of foreign exchange. Nevertheless, Professor Gustav
Cassel warned of a possible shortage of gold reserves and the League of Nations
appointed a committee of experts to study the gold problem.
The newly restored gold standard soon collapsed in the worldwide deflation
of the 1930s. The huge monetary expansion during World War I greatly reduced the
money-creating power of gold standard countries by absorbing most of their free
gold; and gold production after the war was not enough to support the much higher
level of prices. Moreover, in the United Kingdom the restoration of the historical
dollar-sterling parity greatly overvalued sterling, while in some countries the new
parities greatly undervalued their currencies. The resulting imbalance in international payments was aggravated by the sharp increase in U.S. tariffs' in 1930. These
adverse developments created the severe worldwide depress ion that compelled the
abandonment of gold parities, first by the United Kingdom in 1931, then by the United
States in 1933, and finally by the gold bloc in 1935-36.

327
The international monetary system established at Bretton Woods in 1944 was
intended to prevent a postwar depression and to secure the benefits of exchange stability without the rigidity of the gold standard. Members of the International Monetary Fund were required to establish a par value for their currencies in terms of
gold or the U.S. dollar of the gold content of 1944, and to maintain exchange rates
within one per cent of the par value. A member could change the par value of its
currency after consultation with the IMF and in most instances only with its approval,
if that was necessary to adjust its balance of payments. The IMF had large resources
to extend credit to its members to be used in conjunction with their own reserves in
financing balance of payments deficits. Members were required to convert balances
of their currencies held by the monetary authorities of other countries, but the
conversions could be in currencies rather than gold. Only the United States undertook to buy and sell gold freely for international settlements.
The Bretton Woods system worked reasonably well until about 1967. Strains
in the system first began to emerge in 1958, mainly because the European countries
were unable to satisfy their preferred holdings of gold relative to dollars from the
addition of newly-mined gold to their reserves. The situation became worse after
1967 when the inflation caused a large increase in the U.S. payments deficit and an
unwanted ir ->tary expansion in the surplus countries. As the deficit became massive
in 1970 and the first half of 1971, the Treasury felt compelled to terminate the convertibility of the dollar. A new pattern of par values was established by the Smithsonian Agreement in December 1971 which provided for a devaluation of the dollar and
a revaluation of the currencies of the surplus countries. The United States did not,
however, undertake to resume convertibility of the dollar in reserve assets.
Instead,
the other members of the Group of Ten agreed to support the dollar. The devaluation
did not improve the payments position and in February 1973 the dollar was devalued
again. As other Governments were unwilling to accumulate inconvertible dollars, the
par value was abandoned in March 1973 and the Bretton Woods system came to an end.

Social and political aspects of the gold standard
The classical gold standard was a symbol of political as well as financial
morality. The maintenance of the gold value of the currency was not merely the primary objective of monetary p o l i c y — it was the sole objective. And monetary policy
was supported by a Draconian fiscal policy. In the United Kingdom, the Chancellor
of the Exchequer was figuratively busy saving cheese parings and candle ends, and a
budget deficit was a political as well as an economic sin. Gladstone carried budgetary caution to lengths that his own cabinet regarded as extreme. Here is what his
biographer said of the budget fight of 1890: "[Heavy] recent increases in expenditure upon armaments by foreign powers had aroused widespread alarm in Great Britain.
Whole new classes of warships, incorporating the latest developments in the
art of naval warfare, were certain to be required
. . .
to maintain British
naval supremacy.
. . Lord Spencer [First Lord of the Admiralty] was only asking
for an additional £3 million." But Gladstone was adamant in opposing the extra
expenditure and resigned as prime minister rather than accept the measure supported
by his cabinet.
(Philip Magnus, Gladstone, pp. 414-19).
Until the 1930s, central banks were unwilling to accept the stabilization
of prices as an appropriate objective of monetary policy.
In 1927 a bill was introduced in the House of Representatives to amend the Federal Reserve Act by adding this
statement:
"All of the powers of the Federal Reserve System shall be used for promoting stability in the price level.11 In the hearings, Professor Irving Fisher

328
supported the bill, although he emphasized that it would be difficult to maintain
stability through open market operations and the discount rate if gold reserves were
not sufficient for the growth of the money supply. The Federal Reserve System opposed
the bill and it failed to pass*
It did not want such an obligation because it feared
that it would not be able to carry it out. 'There is a strong temptation,11 Governor
Miller said, "to exaggerate the influence that can be exercised upon the movement of
business and the course of prices through the operations of the Federal Reserve System,
through either its discount rates or open market operations."
As events showed, there are times when maintaining the gold value of the
currency is not compatible with price stability.
In 1929, the Federal Reserve Bank
of New York raised the discount rate to 6 per cent to restrain the exuberant economy.
The rate was reduced in November and December because of the recession and it was
reduced again in 1930 and 1931 to 1-1/2 per cent as the depression became worse.
After Britain abandoned gold, the rate was raised twice in October 1931 in steps
of one percentage point to 3-1/2 per cent because of the large outflow of gold. Although the discount rate was reduced in 1932, it was raised again to 3-1/2 per cent
in March 1933 as the gold reserve ratio dropped to the lowest it had been since January 1921. In the meantime, the wholesale price index fell by 30 per cent between
1929 and 1 3 while the unemployment rate soared from 3.2 per cent to 24.9 per cent.
In a world in which all countries were engaged in a competitive race to deflate
their economies in order to protect their gold reserves, it was not possible for
the Federal Reserve to give much consideration to prices and employment if it wanted
to maintain the gold convertibility of the dollar.
The gold standard was never again a major objective of U.S. monetary policy.
Although the United States established a new gold value of the dollar in February
1934, it did not allow the growth of the money supply to be governed by changes in
the gold reserve. The Employment Act of 1946, which created the Council of Economic
Advisers, made the maintenance of a high level of output and employment the major objective of economic policy. The Act did not mention price stability. Actually, there
is little indication that either monetary or fiscal policy was actively directed toward
expanding the economy prior to 1961. Monetary policy was usually accommodating in the
expansion and contracyclical in the recession.
It is worth noting that in the 14 years
from 1947 to 1960 the cumulative budget deficit was $1.0 billion.
The very active policy of attempting to maintain full employment began 20
years ago. Instead of relying on the built-in stabilizers to moderate recessions,
the Government took measures to offset any developments that had a contractive effect.
As this required Increased spending, a justification had to be found for larger budget
deficits. The rationalization was that it did not matter what the actual budget deficit was provided the "full employment budget" was in surplus. That is to say, if
estimated receipts with full employment would exceed estimated outlays, then the
budget deficit did not matter.
In fact, it might even be necessary to have a deficit
in the full-employment budget under certain circumstances. Perhaps that is why the
budget was in deficit in every year but one from 1961 to 1980 and the cumulative
deficit over this 20-year period was more than $556 billion.
The policy of using the budget to fine-tune the economy was given legislative
status in the Full Employment and Balanced Growth Act of 1978 (the Humphrey-Hawkins
Act). The Economic Report of the President for 1979 (p. 167) commented on this as
follows: 'The Act reaffirms and enlarges upon the commitment of the Employment Act
of 1946 by declaring that it is a national objective to provide full opportunities for
useful employment to all Americans willing and able to work. The Humphrey-Hawkins

329
Act also legislates for the first time a national commitment to reduce the rate of
inflation." Unfortunately, the measures taken to implement this Act helped to increase rather than decrease the rate of inflation.
There is no great mystery why the classical gold standard could survive for
100 years while the more flexible gold standard after World War I broke down in six
years and the Bretton Woods system lasted only 25 years. The reasons are partly
economic and partly political.
It is probably true that it would not have been possible for the highly industrialized economies of today to function effectively under
the monetary restraints of the classical gold standard, particularly with the tense
international situation of the postwar period. Nevertheless, if U.S. and other Governments had given as much emphasis to monetary stability as they gave to full employment, the inflation could not have been so great or lasted so long.

Problems in restoring a new gold standard
An inflation of the magnitude that the United States has had in the past
15 years would have been impossible under a gold standard. From 1965 to 1980, the
consumer price index of all items rose by 161 per cent and the wholesale price index
of all conmodities rose by 178 per cent. Since 1933, when the United States could
be said to have given up the restraint on the money supply imposed by a gold standard,
the consumer price index has risen by 536 per cent and the wholesale price index has
risen by 689 per cent. Such an inflation did not occur under the gold or silver
standard except in the price revolution of the 16th and 17th centuries when Europe
was inundated with gold and silver from the New World. While the classical gold
standard did not prevent inflation, it set a limit to the inflation because the rise
of prices could not continue without an increase in the stock of monetary gold at an
equal or nearly equal rate. It is this restraint on the growth of the money supply
that the advocates of a gold standard want to restore.
There are a number of technical problems that would have to be met in restoring a gold standard. The first problem is to determine an appropriate monetary
price for gold. In the past, when countries temporarily abandoned the gold standard
they usually returned to gold at the historical value of the currency. Even if the
depreciation had been so large that it was impossible to restore the previous gold
value, the exchange rate on a gold standard currency provided a guide for a new gold
parity. No such guide is available for setting a new monetary price of gold. Since
1972, the free market price of gold has ranged between $42.72 an ounce in January
1972 and $850 an ounce in January 1980. The price subsequently fell to $457 an
ounce in March 1981 and is now over $500 an ounce.
As there is no gold standard currency whose exchange rate could be a guide
to a new dollar price of gold, an appropriate monetary price would have to be determined by some other criterion.
In 1896 the purchasing power of gold at $20.67 an
ounce, measured by the U.S. wholesale price index, was about the highest in the
19th century.
In 1934, after the deflation of commodity prices and the increase in
the monetary price of gold to $35 an ounce, its purchasing power was 5 per cent higher
than in 1896. In January 1980, when the free market price of gold reached a peak of
$850 an ounce, its purchasing power was 3.9 times as high as it had been in 1896.
More recently, when the price was around $500 an ounce in February 1981, the purchasing power Oi gold was slightly more than twice as much as it had been in 1896.
If the price of gold had risen gradually to its present level, it could have been
said that its higher purchasing power represented a new trend value on which it

330
would be reasonable to base a gold standard. The large fluctuations in the past
year, however, indicate that the price of gold includes a highly variable premium
for a safe asset in a time of economic and political disorder.
Ideally, the monetary price of gold should be such that there is no largescale conversion of currency into gold or gold into currency, except in balance of
payments settlements. This assumes that with an appropriate price, the demand for
gold for industrial purposes and for hoarding, investment and speculation would be
met out of part of the current production with the rest going into monetary reserves.
If the monetary price of gold is too low, the industrial and speculative demand will
absorb all of the current production and some of the gold held in reserves. On the
other hand, if the monetary price of gold is too high, the monetary authorities will
have to absorb most of the current production and some private holdings of gold. The
conversion of dollars into gold would reduce the reserves and result in a contraction
of the money supply. The conversion of gold into money would add to reserves and
result in an expansion of the money supply. If the conversion were on a very large
scale, the monetary expansion would cause prices to rise until the monetary price
of gold represented an appropriate value measured in commodities.
As
is indicates, one function of the monetary price of gold is to encourage an adequate level of production and a limitation on private absorption of
gold so that the monetary stock of gold can increase at a rate conducive to price
stability. The experience of recent years indicates that this will be very difficult. Gold production outside the Communist countries reached a peak of 40.9 million ounces in 1970 and has declined since then to about 30.4 million ounces in 1980.
Nearly all of the decline was in South African production which fell from 32.4 million ounces in 1970 to 21.7 million ounces in 1980, not all of which was sold. Relative to the monetary stock of gold, including holdings of international institutions,
production fell from 3.5 per cent in 1970 to 2.7 per cent in 1980. The fall in South
African production is the result of the high price of gold which encourages mines to
exploit low-grade ores and keep the higher grades in reserve.
None of the newly-mined gold went into the monetary gold stock in the past
ten years. According to the International Monetary Fund, the monetary gold stock
declined from 1,182 million ounces in 1970 to 1,133 million ounces in 1980. The
reduction in the monetary stock of gold was the result of a deliberate decision to
sell some holdings in the free market. Nevertheless, it would not have been possible to increase the monetary gold stock significantly in this period of inflation
without causing an even greater increase in the free market price of gold. The
absorption of gold in jewelry and other industrial and decorative arts exceeded production in every year since 1970 except 1973-75 and possibly 1980. Thus, even if
all of the newly-mined gold had been available for industrial and monetary use, very
little would have gone into the monetary stock in this period.
What is most striking is the very large amount of gold absorbed by hoarders,
investors and speculators. Their net purchases reached a peak of 25.9 million ounces
in 1974 and after declining for a time rose to 24.9 million ounces in 1979, although
they must have fallen again in 1980. The gold for this purpose was matched by net
sales of Communist countries and by sales of the monetary authorities outside the
Communist group. Communist sales were very large in 1976-78, coinciding with the
need of the Soviet Union for foreign exchange. Sales by the IMF were intended to
minimize the monetary role of gold. Sales by the U.S. Treasury were intended to
strengthen the dollar.
If monetary stability were restored, the demand for gold
by speculators would probably be greatly reduced.

331
Although an adequate growth of the stock of monetary gold may be a longrun problem in maintaining a gold standard, there is no shortage of monetary gold
at this time. With the large official holdings of gold, the revaluation of present
reserves at a new monetary price would provide enough reserves for the growth of the
money supply for many years ahead. There are some objections, however, to providing
reserves in this way. First, the profit from the revaluation of gold would go to
Governments and it might be difficult to induce them to sterilize the p r o f i t — say,
by retiring Government securities held by the central bank. Second, the large increase in the monetary value of gold reserves might make it difficult to avoid an
excessive expansion of the money supply and a renewed inflation.
Perhaps the greatest difficulty in restoring a gold standard may be the
unsettled international conditions. The gold standard flourished in an era of
peace; and it was destroyed in World War I. The free market price of gold today
reflects not only the persistent inflation but also the tense international situation. According to the Brookings Institution, since 1945 armed forces have been
used for political purposes over 200 times by the United States and 190 times by the
Soviet Union. Most of these incidents were minor, but some had grave international
repercussions. The more serious incidents were accompanied by a flight from currencies to gc. . Under present conditions this would result in a rise in the price of
gold with little if any official reserves used to meet the increased demand. Under
a gold standard, with the monetary authorities obligated to provide gold for dollars
at a fixed price, the drain of reserves could be enormous. Even if other countries
were on a gold standard, virtually all of the conversions of their currencies into
gold would come out of U.S. reserves.
In any case, the international economic situation would make it impossible
to establish gold convertibility of the dollar. Paradoxically, the gold standard
can function only in a world in which there is a well-balanced pattern of international payments, so that there is little need to use gold reserves in international
settlements. At present, the oil-exporting countries have a current account surplus
of over $100 billion a year which is expected to decline much more gradually than
after 1974. The oil-exporting countries have invested nearly all of their current
account surplus in assets denominated in various currencies, including dollars.
Some oil countries, however, were large purchasers of gold last year. If the United
States established gold convertibility of the dollar it could be confronted with massive conversions by these countries. While some dollars would come from the U.S. deficit, most would be dollars used by other countries to pay for their oil imports.

Monetary stability without a gold standard
There is widespread agreement now that ending inflation should be the first
objective of economic policy-- more important at this time than full employment. The
basic requirements for monetary stability are a fixed par value for the currency that
is appropriate to the relative international economic position of the country, and
wage rates that reflect the real economic value of labor f s contribution to output.
With an appropriate par value, fluctuations in a country's balance of payments would
be primarily due to cyclical factors. Thus, if output and employment expand more
than in other countries, its imports of goods and services will increase relative to
its exports. The increased imports will enable the country to meet the increased
demand, minimize the rise of prices, and avoid an excessive increase of wages. On
the other hand, if output and employment contract more than in other countries, its
exports will increase relative to its imports. The increased exports will moderate

332
the decline in output and employment and minimize the downward pressure on prices
and wages.
In the meantime, of course, a country would have to follow policies that
would restore its balance of payments and defend the par value of its currency.
A system of fixed par values can function only if the great trading countries follow policies that maintain stability of prices and costs. To achieve this,
labor compensation must increase only as much as the trend growth of productivity in
the export industries.
If the increase in labor compensation exceeds this standard,
unit labor cost will increase, prices will rise, and the country's competitive position in world trade will be impaired. Even with stability of unit labor cost, a
country's international economic position can deteriorate if its demand for imports
grows more than the world's demand for its exports or its import prices increase
relative to its export prices. Under such conditions, labor compensation would have
to increase less than the increase of productivity.
The present inflation originated in the 1960s in the excess demand generated
by the investment boom and the increased expenditures of the Government on the Vietnam
war. The failure to prevent or halt the excess demand caused the demand inflation to
be converted into a cost inflation which has accelerated because labor has insisted
that it is entitled to an offsetting increase in wages for every increase in prices,
regardless of the cause. In fact, there is no way to offset the adverse effect on
real wages of a rise of food prices due to bad crops, a rise of energy prices due to
the increased cost of imported oil, or a rise of all prices due to a decrease in
productivity. The attempt to raise real wages by a larger increase in money wages
will accelerate the inflation; and through the cost of living adjustment the larger
yage increase will become imbedded in the structure of the economy.
A new system of fixed par values cannot be established before the inflation
is ended.
In the meantime, the policy should be to reduce fluctuations in exchange
rates as progress is made in slowing the inflation, until there is a high degree of
exchange stability. When reasonable price stability has been restored and fluctuations in exchange rates are within a moderate range, it will be possible to establish
a new par value system as provided in Article IV, Section 4 of the Articles of Agreement of the International Monetary Fund as amended. This provision states:
"The Fund may determine, by an eighty-five per cent majority of
the total voting power, that international economic conditions permit
the introduction of a widespread system of exchange arrangements based
on stable but adjustable par values. The Fund shall make the determination on the basis of the underlying stability of the world economy, and
for this purpose shall take into account price movements and rates of
expansion in the economies of members."
The new par value system would have to be based on a unit of Special Drawing Rights-the reserve asset created by the International Monetary Fund. Since January 1, 1981,
a unit of SDRs has consisted of specified amounts of five currencies, with weights
of 42 per cent for the U.S. dollar, 19 per cent for the Deutsche Mark, and 13 per
cent each for the French franc, the yen, and sterling.
The problems that would arise in a system of fixed par values are in most
respects the same as those with a gold standard. The difference is that it would
be possible to devise better means of meeting them. The first problem is to establish some form of convertibility. Without convertibility, deficit countries have no
compulsion to restore their balance of payments; and without convertibility, surplus

333
countries have no reason to support the exchange rates of the deficit countries. To
maintain convertibility, countries need reserves and these reserves would have to
grow at about the same trend rate as the growth of international trade and payments.
Excluding gold, the reserves of all countries outside the Communist group at the end
of January 1981 were about SDR 325 billion ($408 billion), of which 90 per cent was
in foreign exchange and the rest about equally divided between Special Drawing Rights
and reserve positions in the IMF. In addition, these countries had gold reserves
worth about $470 billion valued at $500 an ounce. The IMF had large resources of
currencies and SDRs which it could use to extend reserve credit to its members, apart
from its gold holdings worth about $50 billion at $500 an ounce.
It would be difficult for the United States to restore convertibility of the
dollar unless there were new arrangements for balance of payments settlements. The
difficulty is not the lack of U.S. reserve assets which amounted to $17.2 billion at
the end of January 1981, in addition to 264 million ounces of gold, but the enormous
liabilities to foreign official institutions. According to the Federal Reserve Bulletin, such liabilities amounted to $164 billion at the end of 1980. If the United
States were to restore convertibility, it could find itself drained of reserves even
when its balance of payments on an official reserve basis was in surplus. That could
happen bee
je deficit countries would draw down their dollar reserves to meet their
deficits while surplus countries would present the dollars they acquire for conversion into reserve assets. Although the net reserve position of the United States
would be improved by the reduction in its liabilities to foreign official institutions, its reserve assets would be depleted. This difficulty could be avoided if
the United States were not confronted with conversion of existing dollar balances
and if it received reserve assets in settlement of its surpluses.
One method of achieving this would be to establish a Reserve Settlement Account in the International Monetary Fund in which members would deposit their holdings of SDRs and foreign exchange, except working balances, in return for a credit
balance denominated in SDRs. The Account would transfer the foreign exchange to the
members whose liabilities they are in return for interest-bearing notes denominated
in SDRs. Balance of payments settlements would be made through the Reserve Settlement Account in much the same way as under a gold standard. A deficit country requiring dollars in order to support its currency would sell (transfer) SDRs from
its balance in the Reserve Settlement Account to the Federal Reserve Bank of New
York as agent for the Treasury. A surplus country acquiring dollars would present
them to the Federal Reserve Bank of New York for conversion into SDRs to be transferred to its balance in the Reserve Settlement Account.
An International monetary system based on fixed par values requires an adequate but not excessive growth of reserves. The alternate inflation and deflation
under the gold standard was primarily due to the irregular growth of the monetary
stock of gold. Professor Gustav Cassel argued that if the monetary stock of gold
had increased at a regular rate of 3 per cent from 1850 to 1910, the wholesale price
index, which was about the same at the end as at the beginning of this period, would
have been reasonably stable throughout these sixty years. Even before the U.S. inflation began, the Bretton Woods system was under pressure because the monetary stock
of gold rose at an average annual rate of only 1.1 per cent from 1950 to 1965, resulting in a depletion of U.S. gold reserves to meet the preference of the surplus
countries for adding gold instead of dollars to their reserves. One reason why it
would be difficult to maintain a gold standard is that all of the production would
be absorbed by industrial uses, apart from the gold absorbed by hoarders, investors
and speculators which might have to come out of existing reserves. No such problem

334
would arise with Special Drawing Rights. They could be issued and allocated by the
IMF to provide for the trend growth of reserves at a regular rate. Nor would it be
possible to deplete aggregate SDR reserves as all transfers would be between monetary authorities on the books of the Reserve Settlement Account and privately held
balances of currencies would not be convertible into SDRs.
As a practical matter there would be no need for private conversions. Any
holder of dollars, for example, could acquire SDRs by the simple process of selling
enough dollars for the four other currencies in the proportions they have in a unit
of SDRs. If there were a demand for balances of SDRs, banks could very easily provide such deposits in exchange for any currency. They would, of course, hold assets
in the form of cash, loans, and investments denominated in the five currencies in
the proper proportions to cover their SDR deposit liabilities. SDR deposits would
probably have little attraction for private holders, although bonds denominated in
SDRs could offer some safeguard against the depreciation of a major currency in which
international loans are usually denominated. Borrowing Governments might also find
the issue of SDR bonds more attractive than bonds denominated in a foreign currency,
not only because of the risk of the appreciation of that currency, but also because
their own reserves would be held in SDRs and if necessary they could receive reserve
credit from the IMF in SDRs. It should be noted that there is no way by which SDRs
on deposit with banks could be transferred to the Reserve Settlement Account.
Thus,
the growth of aggregate reserves in the Reserve Settlement Account would be determined solely by the decision of the IMF to make new issues.
There is a danger that pressure would be put on the International Monetary
Fund to increase issues of Special Drawing Rights when many of its members have payments difficulties. That has not happened in spite of the fact that most members
have large deficits. Nevertheless, it would be difficult to maintain convertibility
of currencies in SDRs through the Reserve Settlement Account if international payments were to remain as unbalanced as they are now, with a few oil-exporting countries having enormous current account surpluses and most of the oil-importing countries having large current account deficits. But if the surpluses of the oil-exporting countries were reduced to a manageable level and financing were available through
the IMF to supplement credits through private markets, it would be possible to finance
the additions to the reserves of the oil-exporting countries through the Reserve Settlement Account. Article IV, Section 4 of the Fund Agreement requires the IMF to
consider the adequacy of reserves (liquidity) as one of the factors in determining
whether to establish a new system of fixed par values.
A new system of fixed par values with convertibility in SDRs through a Reserve Settlement Account would work as well as the Bretton Woods system did until
1967 and perhaps better. That is because it would require greater discipline of the
United States, which is essential to make a fixed par value system work. It would
not be possible for the United States to have a persistent deficit mainly financed
by the accumulation of dollar balances by the surplus countries. The settlement of
U.S. deficits in this way placed no pressure on the United States to restore its balance of payments and had very little effect on the monetary situation. By contrast,
with convertibility through the Reserve Settlement Account, a deficit would deplete
U.S. reserves and if continued it would threaten the par value of the dollar.
Furthermore, a deficit would automatically reduce the money supply and the reserves of
the banking system in the same way as an outflow of gold under the gold standard.
If
the Federal Reserve were to engage in open market operations to offset the monetary
effects of the deficit, it would have to be a conscious decision in full knowledge
of the state of the balance of payments.

335
Admittedly, there wcxild not be the same compulsion to maintain an established
par value as there was under the gold standard. Nevertheless, public opinion in the
United States will become educated to the importance of the exchange rate as a factor
affecting monetary stability; and the monetary authorities may be more inclined to
use monetary policy to support the dollar than they were in the past, at least until
two years ago. Jevons may have struck the right note on the question of discipline
through stable exchange rates without gold convertibility. Here is what he said in
Honey and the Mechanism of Exchange (pp. 229-30):
"A theory wis very much in favour among bank directors at the beginning of this [19th] century that a paper currency could be regulated
merely by watching the rates of the foreign exchanges, and restricting
the issue when the loimess of the rates and the export of specie showed
a depreciation of the paper [money]. This was one of the methods proposed in opposition to the celebrated Bullion Report.
. . Regulation
[of the currency issue] by the foreign exchanges is much better than no
regulation at all, but if perfectly carried out it would give exactly the
same results as the deposit [gold reserve] method, and it is only a loose
and indirect way of reaching the same end."
How well a new international monetary system based on fixed par values and
official convertibility in Special Drawing Rights would function without the additional restraint on the money supply imposed by gold reserve requirements would depend primarily on the United States. If this country were to succeed in restoring
and maintaining a reasonable degree of price stability, then other countries that
regard stable exchange rates as a major economic objective would follow policies
that would keep the dollar exchange rates for their currencies within an agreed
range around their par values. But if the United States permits the inflation to
continue, even at a more moderate rate, it would be difficult to establish an international monetary system based on fixed par values and, if attempted, impossible to
maintain it very long. Even a group of closely integrated countries, like the European Economic Community, find that a floating dollar greatly increases the difficulty
of maintaining stable exchange rates among themselves. That is the lesson of the
Bretton Woods period and of eight years of the floating dollar.

Future monetary role of gold
The second amendment to the Articles of Agreement of the International Monetary Fund, that abandoned the par value system and gave legitimacy to floating exchange rates, placed various restrictions on the IMF and Its members regarding gold.
These restrictions were intended to minimize the monetary role of gold. Actually,
the gold provisions of the second amendment had no practical importance as the monetary role of gold had already been severely restricted by the same events that destroyed the Bretton Woods s y s t e m — the inflation in the United States and other
countries, the reduction in the monetary stock of gold by 4 per cent in the ten years
to the end of 1980, and the huge increase in and great volatility of the free market
price of gold. It is very unlikely that gold will again acquire its previous role as
the center of the International monetary system, but it may have an ancillary monetary role that has real as well as symbolic significance.
Traditionally, the monetary functions of gold were to limit the expansion of
the money supply through gold reserve requirements and to compel the restoration of
the balance of payments through gold convertibility. Very few countries have gold

336
reserve requirements any longer. In Switzerland, a gold reserve of 40 per cent is
still required on the note issue. In an interview on March 2, 1981, the head of the
Swiss National Bank said that present gold reserves at the official price would be
sufficient to cover the currency expansion for another year or two. Although Dr.
Leutwiler said that he regards the law as somewhat old-fashioned, it is not practical
to alter it. The Bank could maintain sufficient cover by revaluing its gold reserves,
but Dr. Leutwiler does not like that either, as politicians and the public might view
such a move as a means of financing the budget deficit. These observations indicate
why it is very unlikely that gold reserve requirements would be restored in the countries where they have been abandoned.
Gold has almost ceased to be used in international settlements. The sharp
rise in the free market price gave additional luster to gold as a reserve asset. As
countries believed they would be unable to replace their gold reserves if they were
once drawn down, gold came to be regarded as a national patrimony to be kept but not
used. The United States sold gold, initially to Indicate that it had downgraded the
monetary role of gold, later to strengthen the dollar in the exchange market and to
improve the trade balance, as gold sales are included in exports. The United States
has not sold any gold in bars since November 1979 although it is now selling a limited
amount of t ^d in the form of one-ounce and half-ounce medallions, as required by law.
Many gold-producing countries sell part of their output in the form of gold coins
which command a premium over bar gold in excess of the cost of minting. A few other
countries have sold gold in the free market to acquire funds to support their currencies and some countries have borrowed on gold collateral. These sporadic uses of
gold, although necessitated by balance of payments conditions, cannot be regarded
as the use of gold in international settlements.
At the beginning of 1979, members of the European Economic Community established a modified system of stable exchange rates, the European Monetary System, based
on a European Currency Unit (ECU). Participating countries were required to deposit
20 per cent of their gold and 20 per cent of their dollar reserves in a European Monetary Cooperation Fund (EMCF) in return for a credit balance denominated in ECUs. The
EMCF holds about 85 million ounces of gold. If balances in ECUs were transferred
from deficit to surplus countries, they would involve the use of gold and dollars in
international settlements.
In practice, this does not happen. Members of the EMS
use dollar and other reserves to intervene in the exchange market and thus obviate
the drawing down of ECU balances to settle a deficit. Moreover, countries can secure
credits from the EMCF in ECUs to finance a deficit, repaying later when they have a
surplus or with funds borrowed from other sources.
While this is not the traditional way in which gold reserves were used in
international settlements, it does indicate the kind of role that gold could play in
a new international monetary system based on fixed par values.
If the United States
were to succeed in restoring and maintaining a reasonable degree of stability of
prices, and if a new system of fixed par values were to result in a high degree of
stability in the dollar exchange rates for the four other major currencies in a unit
of SDRs, the huge demand for gold for hoarding, investing, and speculation would
probably subside and some of the present holdings might even be sold. It would then
be possible to maintain the dollar and other major currencies equally attractive with
gold through cautious monetary policies and remunerative interest rates, so that the
free market price of gold would become more stable. This would require the supply
of gold from newly-mined output and Communist sales to be sufficient to meet the
private demand at a reasonably stable price. To facilitate this, the monetary
authorities would in general refrain from buying gold in the free market.

337
Under such conditions, it might be possible to make gold one of the reserve
assets used in international settlements. The Fund could fix an SDR price for gold
as a reserve asset. Countries would be free to place part of their gold reserves
in the Reserve Settlement Account along with other reserve assets. One inducement
to make such deposits would be the interest paid on SDR balances in the Reserve
Settlement Account. The funds for this purpose would come from the interest paid
to the Reserve Settlement Account by all members on their allocations of SDRs and
interest paid by some countries on the SDR notes issued to the Reserve Settlement
Account in place of their currencies deposited with the Account.
In order to avoid
a growth of reserves outside the Reserve Settlement Account, except for working
balances, the countries with large gold reserves would undertake not to add to
their holdings by purchases in the free market. Countries with small gold reserves, however, could buy gold if they wished to hold such reserves. The limitation on purchases of gold would help to keep the free market price of gold at or
below the monetary price. If it were later found desirable, provision could be
made for official purchases of gpld, perhaps through the IMF, to be added to the
Reserve Settlement Account.
There would be important benefits in ultimately including gold among the
assets of the Reserve Settlement Account. The use of gold in the international
monetary system could contribute to monetary stability by adding to the attractiveness of SDRs as a reserve asset and by encouraging countries to act promptly to
adjust their balance of payments in order to protect their reserves. Many countries would favor such a monetary role for gold because of the confidence it would
create in a new international monetary system. The United States has in the past
said that it is opposed to having gold in the international monetary system. Such
pronouncements are never as absolute as they seem. In July 1933, President Roosevelt
sent a message to the London Economic Conference stating that the United States would
not agree to fix a new par value for the dollar. Less than eight months later, he
sent a message to the Congress requesting it to pass the Gold Reserve Act of 1934
which fixed the value of the dollar at 1/35 of an ounce of gdld.

338

E M B (LTD.)
RESEARCH

ECONOMISTS

REPORT NO.

81/11

DEVELOPMENTS IN THE GOLD MARKET, 1980-81
June 17, 1981

Summary and conclusions
The price of gold was very volatile in the past 26 months. From April 1979
to January 1980, the price rose by 260 per cent to $850 an ounce. Since then, to
mid-June 1981, the price has fallen by 46 per cent to $462 an ounce. These enormous
fluctuations were due more to political than economic developments. At its high in
January 1980, the value of gold as measured by the U.S. wholesale price index was
nearly four times what it was in 1896, the peak vaLue in the 19th century.
After
the large fall to mid-June 1981, the purchasing power of gold was almost twice as
high as it had been in 1896. Even after the large fall, the dollar price of gold is
still about double what it was only two years ago.
The supply of gold from all sources fell by 53 per cent in 1980 to 25.8 million ounces.
Production in South Africa fell by 4.0 per cent to 21.7 million ounces,
but production in other non-Communist countries increased by 3.9 per cent to 8.6 million ounces. So far in 1981, South African production has declined by 2.8 per cent,
but this may be offset by an increase in other countries.
Communist sales fell by
55 per cent in 1980 to 6.4 million ounces. Because of the doubling of the average
price in 1980 the Soviet Union earned as much from the smaller sales as from the
larger sales in 1979. The most important reason for the reduced supply was that the
monetary authorities of the non-Communist countries were net buyers of gold. The U.S
Treasury sold almost no gold in 1980, the IMF sold less, and a number of gold-producing and oil-exporting countries bought gold in the free market.
The absorption of gold in the arts and industry fell by 67 per cent to 10.5
million ounces in 1980 because of the high price. Nearly all of the reduction was
in the use of gold in jewelry.
Such uses fell sharply in the industrial countries
while in the developing countries there was a large conversion of jewelry into bullion, mainly in the Middle East and the Far East. The absorption of gold in dentistry, electronics and other arts and industry also fell sharply. The absorption
of gold in coins, medals and medallions, and in bars in developing countries fell by
60 per cent to 3.6 million ounces in 1980. This was due to the fall in the price of
gold from the peak reached in January 1980. On the other hand, purchases of large
bars by investors and speculators in developed countries increased by 29 per cent
to 9.0 million ounces in 1980. Much of this must have been after the very large
fall in the second quarter of 1980.
The volatility in the price of gold has greatly increased.
The demand in
the arts and industry is elastic and would tend to moderate the fluctuations in
price due to changes in supply.
On the other hand, speculative demand has a perverse elasticity, increasing when prices are rising and decreasing when prices are
falling. The influence of speculation on the price of gold has increased because
of the growth of the futures markets.
In the United States, transactions in the
futures markets in 1980 were about 40 times the supply of that year. The abatement
of the U.S. inflation, the strength of the dollar, and the high interest rates may
hold down the rise in the price of gold in the near future even if it does not fall
from its present level.

339
Developments in the Gold Market, 1980-81

Subsidence of the gold boom
In the nine months to mid-January 1980, the price of gold in London rose
from $236.40 an ounce on April 20, 1979 to $850.00 on January 21, 1980. It is impossible to devise an economic rationalization for this enormous increase in the
dollar price of gold in such a short period. The inflation in the United States had
accelerated and the dollar had depreciated relative to the Swiss franc; but this
would have justified an increase of only 10 per cent in the dollar price of gold or
somewhat more if the price could be regarded as relatively low in April 1979. The
actual rise of 260 per cent was almost entirely due to the tense international
political situation resulting from the seizure of U.S. hostages by Iran and the
Soviet invasion of Afghanistan. Even allowing for the uncertainty that these actions created, the magnitude of the increase was an aberration as indicated by the
rapid fall in the following ten weeks to $485.75 an ounce on April 3, 1980, although
there was no change in the international political situation. The price recovered
from this initial fall to $698.75 an ounce on September 26, 1980, but has declined
since then to $461.50 on June 16, 1981. The fall of 46 per cent from the peak of
January 1980 is essentially a correction of the previous excessive rise, although
the decline was helped by favorable economic developments in the United States.
There was little abatement of the U.S. inflation in these 18 months, but
the dollar appreciated sharply in the exchange market. Since early January 1980,
the dollar has risen by about 30 per cent against the Swiss franc. This affected
the gold prices in much the same way as it affected prices of basic commodities,
intensifying the downward pressure on the dollar price of gold in this period.
Furthermore, U.S. money market rates have risen considerably since January 1980.
On a monthly average basis, the yield on three-month Treasury bills has risen from
12.00 per cent in January 1980 to 16.30 per cent in May 1981. Other short-term
interest rates in the United States have risen about the same or somewhat more.
Prices of basic commodities are sensitive to changes in interest rates, and that is
particularly true of gold held for investment and speculation.
The only return to investors and speculators in gold is the prospective rise
in its price. Such investment and speculation, however, involves large costs, primarily the interest on the funds used to buy the gold. This is reflected in the
prices quoted in the futures markets. On the New York Commodity Exchange, June 15th,
the price of gold for delivery in June 1982 was 14.7 per cent higher ($530.00 an
ounce) than gold for delivery this June ($462.20 an ounce). An increase in money
market rates widens the percentage spread between the spot and future prices of gold
to the same extent. In theory, the widening of the spread could be achieved by a rise
in the price for future delivery, with little or no change in the spot price. In
practice, however, the effect of a rise in money market rates is to drive down both
the spot and future prices, although obviously the reduction must be more in the spot
price than in the future price. That is not only because the higher interest rates
increase the cost of investing and speculating in gold, but also because they may
dampen expectations on inflation, one of the main reasons for holding gold.
The purchasing power of gold, as measured by the U.S. wholesale price index
of all conmodities, varied considerably under the gold standard as the monetary price
remained fixed while the prices of conmodities rose and fell. The highest commodity
value of gold in the 19th century was in 1896 when the monetary price of gold was

340
1.

1979

DOLLAR PRICE OF GOLD AND EXCHANGE RATE FOR SWISS FRANC, 1979-81

Gold*

Swiss
franc#

1980

Gold*

franc#

4
11
18
25

588.00
623.00
835.00
668.00

63.500
63.190
62.794
61.900

1
15
22
29

676.50
692.00
667.00
630.00
637.00

61.237
61.793
61.414
60.187
58.754

Mar.

7
14
21
28

609.00
523.00
523.00
490.00

58.326
57.035
56.227
54.591

4**
11
18
25

485.75
530.50
515.60
551.50

53.505
57.257
57.521
59.102

2
9
16
23
30

512.50
508.25
516.50
511.25
535.50

59.032
59.506
59.880
60.632
60.205

6
13
20
27

597.00
608.40
602.90
637.50

61.200
61.996
61.293
61.463

3
11
18
25

663.50
667.00
606.00
651.75

62.023
62.723
62.104
62.566

1
8
15
22
29

622.00
630.00
624.50
639.20
631.25

60.150
60.606
60.846
59.755
60.680

5
12
19
26

651.00
685.50
674.00
698.75

61.181
61.350
60.827
60.790

Apr.

6
13**
20
27

239.75
233.95
236.40
243.70

58.346
57.850
58.021
58.292

Jail.

May

4
11
18
25

248.45
251.50
256.40
270.60

58.190
58.113
57.504
57.607

Feb.

1
8
15
22
29

275.10
280.00
280.00
283.45
277.50

57.670
57.827
58.827
50.478
60.514

6
13
20
27

290.25
287.45
298.75
305.80

60.140
60.449
60.927
60.872

Apr.

3
10
17
24
31

286.50
303.75
300.55
314.75
315.10

60.255
60.746
60.277
60.427
60.390

May

7
14
21
28

320.15
345.80
369.00
385.00

61.433
61.233
63.662
64.371

June

5
12
19
26

385.00
395.00
393.00
375.00

63.319
61.690
60.827
59.923

July

2
9
16
23
30

372.80
389.50
390.35
392.00
415.65

60.976
60.514
60.716
60.551
62.617

Aug.

7
14
21
28

430.40
456.80
473.10
512.00

61.881
62.131
62.274
62.775

Sep.

June

July

Aug.

Sep.

Oct.

Nov.

Dec.

1980

Gold*

Swiss
franc#

Oct.

3
10
17
24
31

660.50
685.25
670.50
633.00
629.00

60.790
61.143
60.332
59.701
58.326

Nov.

7
14
21
28

596.00
612.50
634.75
619.75

57.356
58.360
57.894
57.554

Dec.

5
12
19
29

617.00
562.75
575.00
593.75

56.497
55.081
55.571
56.417

Jan.

2**
9
16
23
30

597.50
577.75
560.75
533.00
506.50

55.944
55.679
54.915
54.363
51.813

Feb.

6
13
20
27

500.50
491.50
511.50
489.00

51.520
49.579
53.121
51.020

Mar.

6
13
20
27

467.00
492.00
516.75
538.75

51.104
51.913
53.022
51.746

Apr.

3
10
17
24

523.00
493.50
482.50
494.50

51.546
51.020
50.075
50.441

May

1
8
15
22
29

487.50
485.75
485.00
472.75
479.25

49.575
48.709
48.356
48.274
48.186

June

5
12

460.00
472.00

46.871
47.733

1981

* The price of gold Is in dollars per fine troy ounce at the Friday afternoon fixing
in London or at the afternoon fixing on other days as noted below.
# Noontime rates in New York on Fridays, U.S. cents per Swiss franc.
**Gold price on April 12, 1979, April 3, 1980, and January 5, 1981.

341

$20.67 an ounce and the U.S. wholesale price index was 25.4 on a 1957-59 base. In
the following 24 years to 1920, the purchasing power of gold fell by 70 per cent as
the monetary price was unchanged and commodity prices rose sharply, mainly because of
the inflation in World War I and in the inmediate postwar years. From 1920 to 1933,
conmodity prices fell sharply, but the purchasing power of gold was still 30 per cent
less than it had been in 1896, in spite of the severe depression in the United States
and other gold standard countries.
The fall in the real value of gold was reversed by the change in the monetary
price to $35.00 an ounce in February 1934. Although commodity prices began to recover,
the purchasing power of gold was 5 per cent higher in 1934 than it had been in 1896.
This very favorable relationship was terminated by the inflation during and immediately
after World War II and the renewed inflation that began in 1965. Before the United
States abandoned the gold standard in August 1971, the purchasing power of gold at the
monetary price of $35 an ounce had fallen by 65 per cent from what it had been in 1934.
The subsequent changes in the monetary price of gold to $38 an ounce in 1971 and $42.22
an ounce in 1973 had very little effect on the purchasing power of gold as commodity
prices rose even more.
In the free market, however, the rise in the price of gold
to $127.00 an ounce in May 1973 restored the purchasing power of gold to about what
It had been in 1896 and 1934.
From mid-1973 to early 1979, the purchasing power of gold as measured by the
U.S. wholesale price index rose gradually but was still less than 25 per cent above the
1896 level. As a result of the enormous rise in the price of gold between April 1979
and January 1980, however, the purchasing power of gold increased to 3.9 times what it
had been in 1896. Since then, the dollar price of gold has fallen by about 44 per cent
and the U.S. index of wholesale prices of all .commodities has risen by 15 per cent, so
that in mid-June 1981 the purchasing power of gold was somewhat less than twice the

342
1896 level. The fall in the price of gold in 1980-81 occurred in spite of a huge
reduction in the supply. The consumption of gold in the arts and industry fell even
more proportionately, and the absorption of gold in hoarding, investment and speculation fell considerably. Even so, the dollar price of gold in June 1981 was still
nearly twice as high as it had been in April 1979.

PURCHASING POWER OF GO ID MEASURED BY U.S. WHOIZSAIE PRICES, 1896-1981
Dollars per
troy ounce
of gold

U.S. wholesale
price index
1957-59-1000

1896
1914
1920
1933

20.67*
20.67*
20.67*
20.67*

25.4
37.3
84.5
36.1

100.0
100.0
100.0
100.0

100.0
146.8
332.7
142.1

100.0
68.1
30.1
70.4

1934
1945
1970
1972
1973 (Feb.)

35.00*
35.00*
35.00*
38.00*
42.22*

41.0
57.9
117.1
126.4
134.6

169.3
169.3
169.3
183.8
204.3

161.4
228.0
461.0
497.6
529.9

104.9
74.3
36.7
36.9
38.6

(Feb.
(May)
(Apr.)
(Jan.)
(Hay)

89.00#
114.75#
245.30#
85,0.00#
501,00#

134.6
141.3
244.0
270.4
311.6

430.6
555.2
1186.7
4112.2
2423.8

529.9
556.3
960.6
1064.6
1226.8

81.3
99.8
123.5
386.3
197.6

Yeai• or
month

1973
1973
1979
1980
1981

Price of
gold

Index, 1896- 100
Wholesale
Purchas ing
price index
power of gold

* Official monetary price in the United States.
# Highest free market price in London during the month.
@ Bureau of Labor Statistics, wholesale price index of all commodities. Data from
1860 to 1965, Department of Commerce, Long-Term Economic Growth, p. 207.
Current
data are published by the Bureau of Labor Statistics on 1967 and 1957-59 bases.

Supply of gold to the private sector
The supply of gold to the private sector from all sources fell by 29.0 million
ounces (53 per cent) to 25.8 million ounces in 1980 from 54.8 million ounces in the
previous year. About 85 per cent of the reduction was the result of the shift from
net sales to net purchases by the monetary authorities excluding the Communist countries. Hie other large reduction was in net sales by Communist countries. Although
newly-mined production declined, it was a minor factor in the sharp reduction of
supply. The supply of gold to the private sector from all sources in 1980 was the
smallest in 21 years.
Production. The production of gold outside the Communist countries fell by
600,000 ounces (1.9 per cent) to 30.3 million ounces in 1980. Output in South Africa
fell by 900,000 ounces (4.0 per cent) to 21.7 million ounces. This was the result of
a continuation of the policy of reducing the grade of ore to extend the life of the
mines when the price of gold increases more than mining costs. Over the past ten
years, the average grade of ore has been reduced from 13.28 grams per metric ton

343
milled (13.28 parts in a million) in 1970 to 7.28 grams per metric ton in 1980. In
spite of an increase of 21 per cent in the tonnage milled, South Africa f s gold production fell by 32.5 per cent over these ten years. That is how the South African
mining industry has responded to the increase in the price of gold from a monetary
price of $35 an ounce in 1970 to an average free market price of $612 an ounce in
1980. The decline in South African production will continue if the price of gold
remains at about its present level relative to mining costs. In the first four
months of 1981, South African production was 6.99 million ounces, doim 200,000
ounces (2.8 per cent) from the sane period last year.

SUPPLY OF GOID FROM PRODUCTION AND OTHER SOURCES, 1977-80
Million troy ounces
1977
1978
1979
1980

1977

Metric tons*
1978 1979 1980

Production, ex Communist areas
South Africa
Other Africa
Canada
United States
Brazil
Other Latin America
Asia
Oceania
Europe

31.25
22.50
1.33
1.74
1.03
0.51
1.29
0.97
1.46
0.42

31.47
22.71
1.10
1.74
0.97
0.71
1.31
0.99
1.55
0.40

30.91
22.61
0.91
1.64
0.97
0.80
1.34
0.93
1.38
0.32

30.32
21.70
0.95
1.58
0.89
1.13
1.62
1.01
1.13
0.30

972
700
41
54
32
16
40
30
46
13

979
706
34
54
30
22
41
31
48
13

961
703
28
51
30
25
42
29
43
10

943
675
30
49
28
35
51
31
35
9

Other sources
Communist areas, net sales
Official transactions, net sales

21.54
12.89
8.65

24.82
13.18
11.64

23.89
6.40
17.49

-4.50
2.89
-7.39

670
401
269

772
410
362

743
199
544

-140
90
-230

TOTAL SUPPLY

52.79

56.29

54.80

25.82

1,642 lk 751 1,704

803

* The original data are in metric tons and for production, but not for other sources,
are rounded to one-tenth of a ton. There are 32,150 troy ounces in a metric ton.
Source: Consolidated Gold Fields Limited, Gold 1980, London, May 1980, pp. 19 and 16.

In other non-Coranunist countries, output increased by 320,000 ounces (3.9 per
cent) to 8.62 million ounces in 1980. The largest increases were in Brazil (330,000
ounces) and other Latin America (280,000 ounces), mainly in Colombia. On the other
hand, output fell slightly in Canada and the United States and fell sharply in
Papua/New Guinea (down by 180,000 ounces). The decline in Canada and the United
States was mainly due to the mining of a lower grade or ore, but also because of a
copper strike which reduced the output of by-product gold. In Papua/New Guinea the
fall in output was the result of the large fall in copper production which is the
main source of gold in that country. The decline in gold production in some other
countries was also attributable in part to the reduction In copper mining. The high
price of gold did stimulate production in a number of countries and that will have
an even greater effect if there is a recovery in copper prices. New mines are being
opened in a number of countries in response to the high price of gold, but they may
not contribute significantly to production for some time. In the next year or two,
the increase in gold production in other countries may barely offset the continued
reduction of output in South Africa.

344
Sales of Coniminist countries. The net sales of gold by Communist countries
fell by 3.51 million ounces (54.8 per cent) to 2.89 million ounces in 1980. This is
the smallest amount supplied by these countries since 1971. These sales are predominantly by the Soviet Union and are closely related to its need for foreign exchange.
In the past two years, the trade balance of the Soviet Union with the non-Communist
countries has greatly improved. Its trade deficit declined from about $3.9 billion
in 1978 to $1.9 billion in 1979 and $1.6 billion in 1980. This has greatly diminished
the need of the Soviet Union to sell gold to finance its payments deficit. Moreover,
because the average price doubled from $307 an ounce in 1979 to $612 an ounce in 1980,
the Soviet Union received almost as much from the reduced sales in 1980 as it did from
the much larger sales in 1979. This has enabled the Soviet Union to continue to rebuild its gold reserves which were drawn down in 1976-78 and partly restored in 1979
out of its estimated production of 9.5 million ounces a year.
Official sales and purchases. In 1979, the very large sales of the U.S.
Treasury, the considerable sales of the International Monetary Fund, and the small
net sales of other monetary authorities provided 17.5 million o u n c e s — about 32 per
cent of the total supply to the private market in that year. In 1980, however, official purchases exceeded official sales by 7.4 million ounces. This was by far the
largest factor in the sharp fall of the supply of gold in the private market last
year. A large part of the reduction in the supply from official sources was due to
the change in the policy of the U.S. Government.
In 1979, the Treasury sold 11.75
million ounces of gold at auction in order to support the dollar in the exchange
market. In 1980, the Treasury sold no gold at auction, as the dollar became stronger
relative to the other major currencies. Under newly-enacted legislation, however,
the Treasury is required to offer for sale to the public up to one million ounces of
gold a year in the form of one-ounce and half-ounce medallions. Actual sales in 1980
(373,000 ounces) fell far short of the authorized amount.
In May 1980, the IMF completed its four-year program of selling about 25 million ounces of gold at auction, with the excess over book value (35 SDRs an ounce)
placed in the Trust Fund for the benefit of its low-income members.
In the five
monthly auctions in 1980, the IMF sold 2.2 million ounces. The IMF also sold 3.4 million ounces of gold to its members in 1980 at 35 SDRs an ounce, but these transactions
are not included in net official sales as the gold was acquired by other monetary
authorities. The authority previously given the IMF to sell gold at auction and to
its members has terminated. Any further sales out of its present holdings of 103
million ounces would require approval of 85 per cent of the total voting power of
its members. It would be almost impossible to secure such approval under present
circumstances, and it may be assumed that the IMF will not add to the supply of gold
in the next few years.
According to the data in International Financial Statistics, the gold holdings of all non-Communist countries increased by 7.6 million ounces in 1980 to 937.6
million ounces at the end of the year. In part this increase was the result of sales
of the IMF to members and is not an increase in aggregate holdings of the monetary
authorities. Several countries reduced their holdings. The United States, as already noted, used gold for the production of medallions. Canada used some of its
newly-mined gold and reduced its gold reserves by 1.2 million ounces for its Maple
Leaf coins. On the other hand, there were large increases in the gold holdings of
several countries. With the great improvement in its payments position, South Africa
increased its gold reserves by 2.1 million ounces of which 800,000 ounces came from
a reversal of the swaps made several years ago with Swiss banks, and 1.3 million
ounces came from its own production. Western Hemisphere countries increased their

345

gold holdings by 1.4 million ounces, mainly Brazil, Colombia, Chile, Peru and Uruguay, out of their own production. The oil-exporting countries increased their gold
holdings by 3.4 million ounces as a result of purchases in the market by Indonesia
(2.1 million ounces), Libya (620,000 ounces) and a few other members of OPEC. The
tendency of some goId-producing countries and some oil-exporting countries to add to
their gold reserves may continue.

Absorption of gold by the private sector
The absorption of gold by the private sector is equal to the supply, and it
fell by 29.0 million ounces in 1980. Nearly three-fourths of the decline was in the
arts and industry where the net use of gold fell by 21.4 million ounces (67 per cent)
to 10.5 million ounces. This is probably the smallest amount of gold absorbed in
this sector since the 1960s. The absorption of gold by hoarders, investors and
speculators fell by 7.6 million ounces (33 per cent) to 15.3 million ounces in 1980.
While this was a large reduction, it was from a very high level in the previous year.
All of the reduction was in net sales of official coins, medals and medallions, and
bars in developing countries. Net sales of large bars in developed countries increased considerably in 1980.
Jewelry. Host of the reduction in the absorption of gold in the arts and
industry was in the form of jewelry. The net amount of gold used for fabricating
jewelry is estimated to have fallen by 19.9 million ounces (84 per cent) to 3.8 million ounces in 1980. In the industrial areas, the absorption of gold by jewelry
manufacturers fell by 9.2 million ounces (51 per cent) to 8.7 million ounces. Host
of the fall .was in Italy where the jewelry industry reduced its net use of gold by
4.5 million ounces (62 per cent) to 2.8 million ounces. Italy is by far the largest
fabricator of jewelry and nearly all of its production is exported. The reduction in
Its use of gold in manufacturing jewelry is a reflection of the sharp fall in demand
in importing countries. In other industrial areas, the absorption of gold in jewelry
fell by 2.9 million ounces (50 per cent) to 2.9 million ounces in Europe outside Italy,
by 1.0 million ounces (33 per cent) to 2.0 million ounces in the United States and
Canada, and by 875,000 ounces (51 per cent) to 850,000 ounces in Japan. There were
small changes in the use of gold for jewelry in Australia and South Africa. The large
reduction in the absorption of gold in manufacturing jewelry in these industrial areas
in 1980 was due in part to the slowing of economic activity, but mainly to the high
price of gold which held down consumer purchases and encouraged them to sell some
of their old jewelry for bullion.
In many developing countries, jewelry Is bought as a form of saving and investment. In 1979, the addition to holdings of jewelry in the developing countries
amounted to 5.7 million ounces. In 1980, however, the holdings of jewelry in these
countries were reduced by 4.9 million ounces. The greatest reduction was in the
Hiddle East, where 2.9 million ounces of jewelry were melted down and used as bullion.
Nearly all of this was in Iran, although there were large reductions in holdings of
jewelry in Turkey and in a few other Hiddle East countries.
In India, Pakistan and
Bangladesh 420,000 ounces of jewelry were converted into bullion. And in the Far East
outside Japan, 1.9 million ounces of jewelry were converted into bullion, mainly in
Indonesia. In Latin America, the absorption of gold in fabricating jewelry fell by
1.3 million ounces (84 per cent) to 250,000 ounces. Most of the reduction was in
Brazil, by far the largest manufacturer of jewelry in Latin America, while in some
other countries in this region jewelry was melted down and resold to fabricators.
In Africa, outside South Africa, the use of gold in manufacturing jewelry fell by

346
650,000 ounces (91 per cent) to 60,000 ounces. As these data indicate, the high
price of gold not only held down jewelry purchases in developing countries, but resulted in a net reduction in gold holdings in this form.

ABSORPTION OF GOLD IN INDUSTRY AND IN HOARDING AND INVESTMENT, 1977-80
Million troy ounces*
1978
1979
1980
1977

Arts and Industry
Jewelry
Dentistry
Electronics
Other arts and industry

39. 44
32. 23
2. 65
2. 46
2. 10

40. 47
32. 38
2. 87
2. 76
2. 46

31. 92
23. 69
2. 77
3. 03
2. 43

10.50
3. 84
1. 98
2.59
2. 08

Hoarding, investment, etc.
Official coins
Medals, medallions, etc.
Bars in developing countries
Bars in developed countries*

13. 36
4. 56
1. 63
2.40
4. 77

15. 81
9. 24
1.59
3. 63
1. 35

22. 88
9. 31
1. 05
5. 55
6. 96

15. 31
5. 75
0. 49
0. 08
8. 99

TOTAL ABSORPTION

52. 79

56. 29

54. 80

25. 82

* The original data are in metric tons and
bars in developed countries, which are a
by investors and speculators. There are
Source: Consolidated Gold Fields Limited,

1977

Metric tons*
1978 1979 1980

1.227 1.259
1,003 1,007
89
82
77
86
65
77

993
737
86
94
76

327
120
62
81
65

712
290
33
173
217

476
179
15
3
280

1,642 1.751 1.704

803

416
142
51
75
149

492
287
50
113
42

rounded to one-tenth of a ton, except for
residual, and are presumed to be absorbed
32,150 troy ounces in a metric ton.
Gold 1981, pp. 24r44.

Other arts and industry. The doubling of the price of gold in 1980 had a
considerable effect on other uses of gold, although much less than in manufacturing
jewelry. In dentistry, the absorption of gold fell by 785,000 ounces (28 per cent)
to 2.0 million ounces. Most of the decrease was in the United States, where use of
gold in dentistry fell by 240,000 ounces (35 per cent) to 445,000 ounces, and in
Japan where it fell by 195,000 ounces (51 per cent) to 190,000 ounces.
In Germany,
which is the largest user of gold in dentistry because it is covered by social insurance, net absorption fell by 90,000 ounces (10 per cent) to 810,000 ounces.
In
all other countries, the use of gold in dentistry fell by 260,000 ounces (32 per
cent) to 540,000 ounces. The reduction in the dental use of gold in 1980 resulted
from the substitution of other materials for gold in fillings and dentures because
of the high price.
The absorption of gold in the manufacture of electronic components fell by
430,000 ounces (14 per cent) to 2.6 million ounces in 1980. The decline was mainly
in the United States (130,000 ounces), Japan (93,000 ounces), and in Germany, the
United Kingdom, France, Switzerland and Italy (154,000 ounces together).
In spite
of the enormous expansion of electronics, the absorption of gold in these industries
was less in 1980 than in seven of the ten preceding years, as the high price has led
to more economical use of gold and its replacement by substitutes. The absorption
of gold in all other arts and industry fell by 350,000 ounces (14 per cent) to 2.1
million ounces in 1980. This includes gold used in manufacturing costume jewelry,
pens, brazing alloys and other products. About two-thirds of the reduction was in
the United States where such uses of gold fell by 230,000 ounces (20 per cent) to

347

860,000 ounces. This decline was due to the doubling of the price of gold in 1980.
In electronics and in other industrial uses, the absorption of gold in some industrial countries was held down by adverse economic conditions.
Official coins. The wide interest in owning gold has induced a number of
countries to issue coins to meet this demand. The coins are generally sold at a
premium above their bullion value that ranges between 4 per cent for the one-ounce
Canadian Maple Leaf to 6 per cent for the one-ounce South African krugerrand and
about the same for the Mexican 50-peso coin of 1.2 ounces. The traditional c o i n s —
the sovereign, the napoleon, and the U.S. eagle-- sell at a somewhat higher premium
over their bullion value. Virtually all of the gold used for official coinage in
1980 was by the mints of South Africa, the United Kingdom, Canada, and Mexico although
some of the coins were struck on behalf of other countries. The actual sale of coins
by the monetary authorities of all countries fell by 4.6 million ounces (38 per cent)
to 5.8 million ounces. While this was much less than in 1978-79, it was somewhat
more than the average in 1976-77. The sharp decline in the price of gold in the
coursed of 1980 had a moderating effect on the demand for gold coins.
Medals, medallions, and facsimile coins. Net purchases by the public of
gold medals, medallions and facsimile coins fell by 560,000 ounces (53 per cent) to
490,000 ounces in 1980. The premium over the bullion value is less than for official
c o i n s — generally about 2 to 4 per cent. Three-fourths of the total sales in 1980
were of the new one-ounce and half-ounce medallions that the U.S. Treasury was required by law to issue and sell to the public. Net sales of all other medals,
medallions, and facsimile coins produced privately in the Middle East and some
European countries fell by 90 per cent to 110,000 ounces in 1980. In some countries, particularly Iran, there was a net reduction in the holding of gold in this
form. The demand for medals, medallions and facsimile coins has fallen sharply not
only because of the high price of gold but also because of the ready availability at
a small premium of official coins in convenient size.
The demand for the medallions issued by the U.S. Treasury was for their
keepsake character as well as a means of holding gold. Sales of these medallions
were far less than expected. The Treasury was legally required to sell each year
for five years up to 500,000 one-ounce medallions and 1 million half-ounce medallions-- a maximum of 1 million ounces a year. It offered the medallions for sale to
the public at a premium of 2 per cent over the bullion value. Actual sales from midJuly to the end of December 1980 amounted to 373,000 ounces. Sales may have been
held back not only by the fall in the price of gold but by the complexity and delay
in purchasing the medallions through the postal system. For accounting purposes,
sales in January and February 1981 (61,000 ounces) are considered part of the 1980
series. A new series will be struck in July 1981 and offered to the public. Unless
the method of selling is simplified, sales may be far less than the maximum of 1 million ounces set by law.
Bars in developing countries. The absorption of gold bullion for hoarding,
speculation and investment in the developing countries is usually in the form of
small bars weighing a fraction of an ounce to a few ounces. Larger bars may be
acquired by wealthy people or business firms or held by dealers and banks for
trading purposes or as cover for sales for future delivery.
In 1980, the estimated absorption of gold in bullion form in Latin America, Asia and Africa was
about 80,000 ounces, down sharply from 5.5 million ounces in 1979. The data are
uncertain and the estimate includes an adjustment for the reclassification of
Vietnam and Laos as Communist countries which involves a deduction of nearly

348
500,000 ounces in 1980. Quite apart from this, it is clear that in many developing
countries there was dishoarding of gold held in bar form because of the fall in the
price last year.
Bars in developed countries. The absorption of gold in bars in the developed
countries-- essentially by Europe and North A m e r i c a — is estimated as a residual. That
is to say, the identified absorption of gold in the arts and industry, in coins, medals
and medallions, and in bars in developing countries is subtracted from the estimated
supply of gold to the private market and the remainder is attributed to the increase
in holdings of gold bars in the developed countries. In 1980, the absorption of gold
in this form in developed countries increased by 2.0 million ounces (29 per cent) to
9.0 million ounces. Gold bars are held by individuals, business firms, banks and
bullion dealers in their own possession, in deposits, as trading stock, and as cover
for contracts for future delivery. The ultimate owners are investors and speculators
who hold gold in order to avoid a loss from the depreciation in the real value of currencies or to realize a profit from a rise in the price of gold in dollars and other
currencies. The absorption of gold in this form indicates that large speculators and
investors, as distinguished from small hoarders, added significantly to their holdings
in spite of the fall in the price of gold during most of 1980.

Markets for gold
There are markets for gold in all parts of the world, differentiated by the
type of transaction of buyers and sellers. The spot markets for gold, the most important of which are in London and Zurich, are unique in a number of respects.
First,
Governments and monetary authorities have an important role in adding to or subtracting
from the supply available to the private market.
In 1977-79, net sales of Conmunist
countries and of the monetary authorities of other countries and international institutions averaged 23.4 million ounces a year and accounted for 43 per cent of the total
supply to the private market.
In 1980, however, Governments were net buyers of gold
from the private market so that the total supply was less than production.
Because
of the role of Governments, the total supply to the private market may vary considerably from year to year, even though newly-mined production in the non-Communist countries changes relatively little.
A second feature of the spot markets for gold is the large proportion of the
supply absorbed by hoarders, investors and speculators.
In 1977-78, they absorbed an
average of 14.6 million ounces a year, constituting nearly 27 per cent of the total
supply to the private market.
In 1979, their net purchases increased to 22.9 million
ounces or 42 per cent of the supply. In 1980, their net purchases fell to L5.3 milliou
ounces, but that was 59 per cent of the much smaller supply of last year. Hoarders,
investors and speculators also play a role in the silver market, although to a much
lesser extent except in unusual cases as in 1979. In the spot markets for other basic
commodities, speculators absorb an insignificant part of the supply and do not accumulate massive holdings as is true of gold and to some extent silver.
The demand for gold in the arts and industry is responsive to much the same
forces as act on other commodities. The demand will vary directly with the increase
or decrease in economic activity and inversely with the relative price of gold. The
real income elasticity of the demand for gold in the arts and industry may be close
to unity-- that is, the demand at a constant price of gold relative to all other
prices would tend to vary proportionately with changes in economic activity. The
real price elasticity of the demand for gold in the arts and industry, however, is

349
much higher than for other commodities and may be in excess of unity. That is because the gold content of jewelry, the most important industrial use of gold, is a
very high proportion of the total cost.
If the real price rises enough, there could
even be a negative d e m a n d — that is, a sale of gold jewelry by consumers to producers
and traders. Under ordinary circumstances, the high price elasticity of demand for
gold in the arts and industry would of itself tend to minimize the effect of variations in the supply on the price of gold.
The volatility in the price of gold is due to the large and important role
of speculators in the gold markets. Disturbing economic or political developments
will lead to an increase in their demand for gold and cause the price to rise. The
rise in price will lead to expectations of a further increase and add to the demand
for gold. On the other hand, favorable economic or political developments will lead
to a decrease in the speculative demand for gold and cause the price to fall. The
expectation of a continued fall will cause speculators to decrease their demand still
more. Of course, after a large and extended rise in the price of gold, some speculators will recognize that the price is too high to be maintained and sellers will
predominate in the market. This will precipitate a fall in price which will accelerate as speculators liquidate their position, until the price has fallen so low
that it calls forth new buyers in the expectation that the fall in price will be
reversed. A similar pattern will ultimately limit the fall in the price of gold
that may be initiated by adverse economic or political developments.
The opening of futures markets in the United States after ownership of gold
by Americans was legalized in 1974 has probably increased the volatility in the price
of gold. The size of the futures markets in the United States has grown enormously.
In 1980, the Commodity Exchange (New York) had transactions (contracts to buy) of
800 million ounces and the International Money Market (Chicago) had transactions of
254 million ounces, with smaller volumes in other futures markets in the United States.
This was about 40 times the supply to the private market last year. That is not to
imply that transactions on the spot markets are limited to the annual supply from
newly-mined gold and net gold sales of the Communist countries and the monetary
authorities of other countries. Obviously, spot gold bought at one time will be sold
at another and the annual turnover will be far greater than the annual supply. Nevertheless, the futures markets are far larger than the spot markets, and for this reason
have a greater effect on the price of gold.
The spot markets and the futures markets are related and prices in one affect
prices in the other, although that will be more often from the futures markets to the
spot markets.
If demand in the futures markets for contracts to buy gold for a future delivery date exceeds the supply of such contracts, the price of gold for delivery
on that future date will rise relative to the spot price. When the differential between the spot and futures prices exceeds the interest cost for the period, banks and
dealers will sell gold for future delivery and buy gold in the spot market to cover
their position. This will tend to raise the spot price and to hold down the rise in
the futures price. And if the supply of contracts to sell gold for delivery at some
future date exceeds demand, the price for future delivery will fall relative to the
spot price. When the differential becomes less than the interest cost, fabricators
will be induced to buy gold for future delivery and cover their position by selling
some spot gold from their inventory. This will tend to lower the spot price and
moderate the fall in the futures prices. Quite apart from such arbitrage between
the spot markets and the futures markets, speculators will seek the most favorable
market in which to buy or sell gold, and that will have the effect of unifying the
spot and futures markets.

350
The operations of the futures markets have greatly increased the role of
speculators in the determination of the price of gold. Their transactions dwarf the
sales and purchases of producers and fabricators and even those of hoarders, investors
and speculators in the spot markets. Moreover, the importance of futures markets is
likely to grow as new markets are opened in Europe and Asia. On the other hand, the
necessity of dealing in physical gold, even if only through transfers on the books of
bankers and dealers, must limit the growth of the spot market. The fact that speculators will have a greater role in the determination of the price of gold does not
mean that the markets will act haphazardly. On the contrary, they are likely to
respond more promptly to economic and political developments, and the response is
likely to be much greater than in the past. Because speculation in futures markets
can be undertaken with less capital and at less transactions cost, the speculative
response to changes in economic and political conditions may be greater than in the
spot markets, and gold prices will be more volatile. Speculators may also exaggerate
the importance of political developments relative to economic developments.
As a practical matter, the large fluctuations in the price of gold that took
place in 1979-81 could not be justified by changes in economic conditions. An acceleration of the inflation by 5 per cent a year could justify a rise of that much more
in the dollar price of gold from a trend rate based on inflation. A depreciation of
the dollar by 10 or 15 per cent relative to the strongest currencies of the industrial
countries could add that to the trend rise in the dollar price of gold. That is very
different from having a three- or four-fold increase in the price of gold in less
than a year. Recent economic developments may keep the price of gold from rising
much in the near future, even if it does not fall from its present level. The inflation in the United States has slowed, although it is still at a high rate. The
dollar has been strong in the exchange market, although it may have risen too much
relative to the currencies of other industrial countries. What may be of greatest
importance in holding down the price of gold is that interest rates are much higher
in all industrial countries than they were one or two years ago. Speculators in the
futures markets are very sensitive to high interest rates because they show very
clearly what the price of gold will have to be three months, six months, and a year
from now to make speculative buying profitable.

351

November 19, 1981
WHAT ROLE FOR GOLD IN THE MONETARY SYSTEM?
By Edward M. Bernstein

Summary and conclusions
The hundred years of the classical gold standard were marked by large secular
changes in prices. The most difficult period was the last quarter of the 19th
century, when there was a large fall of prices. The reason for this was the
irregular growth of the world stock of monetary gold. According to Professor
Cassel, if this had been at a steady rate of 3 per cent a year, prices would have
remained relatively stable.
Instead, the gold stock increased irregularly, depending on gold production. After World War I, the gold stock was not sufficient
to sustain the high postwar level of prices and gold production was less than half
as much relative to world reserves as before the war. The gold standard, which
was restored in 1925-30, collapsed in the great depression of the 1930s. In the
United States gold redemption of currency was terminated in March 1933 and the gold
clause was abrogated in June. In accordance with the Gold Reserve Act of 1934, the
President fixed a new price of $35 an ounce for gold. The private holding of gold
was forbidden, but the Treasury sold gold to foreign monetary authorities until
this was ended in August 1971. Gold did not act as a limitation on the money
supply, however, because whenever the reserves were near the legal minimum, the
requirements were reduced until they were finally eliminated in 1968.
The persistent inflation has revived interest in restoring the gold standard. The
problems this would create seem insuperable at present. Gold production has been
falling since 1966 and the absorption of gold in the arts and industry has exceeded
production in recent years. Even before the inflation, the growth of the monetary
stock of gold was minimal. The world pattern of payments is seriously unbalanced,
and if members of OPEC could convert their current account surplus into gold at a
fixed price they would probably do so on a large scale. Other countries could also
decide to diversify their reserves by converting dollars into gold. Finally, private holders of dollars could present enormous amounts for redemption in gold if
tbey thought the price was too low, and private holders of gold could sell enormous
amounts to the Treasury for dollars if they thought the price was to high. Although it is not feasible to restore the gold standard, some of its features could
be gradually adopted.
It might be possible to require reserves against Federal

352
Reserve notes and deposits, although not as rigidly as in the past. It would be
desirable to moderate the fluctuations in dollar exchange rates for the major currencies and ultimately to return to fixed par values with considerable flexibility.
It would also be possible to restore convertibility of the dollar in reserve assets,
but not in gold. These are steps that could be taken gradually instead of undertaking far-reaching commitments on gold.

Gold standard before 1914
The function of the monetary system is to regulate the production, distribution and
utilization of the national income. To perform this function, the monetary system
should facilitate a fairly steady growth of output at a reasonably stable level of
prices. It is by this test that the classical gold standard should be judged; and
it is this test that the Gold Commission should apply to the proposals it will consider on the appropriate role of gold in the monetary system.
Nearly all economists of the nineteenth century regarded the gold standard as the
best practical monetary system. They did not, however, believe that the gold standard worked very well. They frequently referred to the great instability of prices
and the cyclical fluctuations in trade. Actually, the periods of rising prices did
no harm. In the thirty years from 1843 to 1873, the U.S. wholesale price index rose
by 77 per cent-- an average annual increase of less than 2 per cent. That omits the
intervening sharp rise and fall of prices during the Civil War when greenbacks were
not redeemable in gold. In the 18 years from 1896 to 1914, the U.S. wholesale price
index rose by 50 per c e n t — an average annual increase of 2.3 per cent.*
The periods of deflation presented much more serious problems. Omitting the wartime
peaks in 1814 and 1864, the U.S. wholesale price index fell by 29 per cent from 1822
to 1843 and by 38 per cent from 1876 to 1896. The earlier fall was at an average
annual rate of 1.7 per cent and the later fall was at an average rate of 2.4 per cent.
By ignoring the intervening rise and fall of prices one could conclude that there was
remarkable long-run stability of prices under the gold standard because the wholesale
price index was about the same in 1914 as in 1880 and, more astonishing, about the
same in 1933 as in 1883.*
It was no comfort to the generation that lived through the protracted recessions
that accompanied the fall in prices to know that the preceding generation had had
an equal rise in prices. The importance of the deflation problem is indicated by the
fact that the British Government appointed a Royal Commission on the Depression of
Trade and Industry in 1886 and another Royal Commission on the Values of Gold and
Silver in 1887. It is worth noting that the theory relating interest rates to changes
in prices was expounded by Professor Irving Fisher in the 1880s in Appreciation and
Interest to explain why interest rates were low in a deflation, not why they were
high in an inflation. Table 1 on the duration of U.S. business cycles shows clearly
the long recessions and short expansions in the deflation of the last quarter of the
nineteenth century.

* rhe index numbers prior to 1860 are taken from G. F. Warren and F. A. Pearson,
Wholesale Prices in the United States, Memoir 142, Cornell University Agricultural
Experiment Station. The index numbers after 1860 are taken from the series of the
Bureau of Labor Statistics, published in Long-Term Economic Growth. 1860-1965,
p. 202, U.S. Department of Commerce.

353
1.

BUSINESS CYCLE EXPANSIONS AND CONTRACTIONS IN THE UNITED STATES

Reference dates
Peak
Trough
December 1854
December 1858
June 1861
December 1867
December 1870

June 1857
October 1860
April 1865
June 1869
October 1878

March 1879
May 1885
April 1888
May 1891
June 1894

Contraction
Trough from
previous
peak
• • • •

Duration in months
Expansion
Complete cycle
Trough to
Peak from
Trough from
following
previous
previous
peak
peak
trough

18
8
32*
18

30
22
46*
18
34

March 1882
March 1887
July 1890
January 1893
December 1895

65
38
13
10
17

36
22
27
20
18

99
74
35
37
37

101
60
40
30
35

June 1897
December 1900
August 1904
June 1908
January 1912

June 1899
September 1902
May 1907
January 1910
January 1913

18
18
23
13
24

24
21
33
19
12

36
42
44
46
43

42
39
56
32
36

December 1914
March 1919
July 1921
July 1924
November 1927

August 1918
January 1920
May 1923
October 1926
August 1929

23
7*
18
14
13

44*
10
22
27
21

35
51*
28
36
40

67*
17
40
41
34

March 1933
June 1938
October 1945
October 1949
May 1954

May 1937
February 1945
November 1948
July 1953
August 1957

43
13
8*
11
10*

50
80*
37
45*
39

64
63
88*
48
55*

93
93*
45
56*
49

April 1958
February 1961
November 1970
March 1975
July 1980

April 1960
December 1969
November 1973
January 1980

8
10
11*
16
6

24
106*
36
58

32
116*
47
74

• • • •

47
34
117*
52
64

22.4
19.0
10.5
10.3

25.5
24.8
65.0
49.3

48.0
43.8
75.5
59.6

47.6
39.8
93.0
59.9

Average, all cycles:
1854-1914
1914-1933
1933-1945
1945-1980

• • • •

48
30
78*
36

40
54*
50
52

• • • •

* Figures are the wartime expansions (Civil War, World Wars I and II, Korean war, and
Vietnam war), the postwar contractions, and the full cycles that include the wartime
expansions.
Source: National Bureau of Economic Research. This table adapted from Business
Conditions Digest, July 1981.

354
Nevertheless, most economists believed that there was no alternative to the gold
standard. Jevons, noting the extreme changes in the values of gold and silver, and
writing in a period of rising prices, thought it would be possible to avoid the
effect of inflation on rents fixed in long-term leases by requiring them to be adjusted to offset changes in the purchasing power of money as shown by an index
number of prices-- the tabular standard. Alfred Marshall saw a much broader role
for the tabular standard and stressed its importance in a period of falling prices.

"A great cause of the discontinuity of industry," he wrote, "is the want
of certain knowledge as to what a pound is going to be worth a short time
hence. With every expansion and contraction of credit prices rise and
fall. This change of prices
. . .
increases in many ways the intensity of commercial fluctuations. When traders are rejoicing in high
prices debenture and mortgage holders and other creditors are depressed;
and when the pendulum swings the other way traders, already depressed,
are kept under water by having to pay an exceptionally heavy toll to their
creditors. This serious evil can be much diminished by a plan which economists have long advocated.
"[The Government] should publish tables showing as closely as may be
changes in the purchasing power of gold, and should facilitate contracts
for payments to be made in terms of units of fixed purchasing power.
In Mr. Palgrave's memorandum a most interesting example is shown of the
kind of index number that is wanted.
. . The unit of constant general
purchasing power would be applicable, at the free choice of both parties
concerned, for nearly all contracts for the payment of interest, and. for
the repayment of loans; and for many contracts for rent, and for wages
and salaries." Alfred Marshall, Official Papers, pp. 9-12, London 1926.

Restoring the gold standard in the 1920s
Economists were aware that the prolonged rise or fall in prices over periods of 20
or 30 years was caused by the increase in the production of gold at a higher or
lower rate than the increase in the output of goods and services. Professor Gustav
Cassel noted that the index number of wholesale prices in the United Kingdom,
Sauerbeck's index, was about the same in 1850 and in 1910 and that the four-year
averages for 1848-51 and 1908-11 were precisely the same. This showed, he said,
that the world stock of monetary gold was sufficient in 1850 and again in 1910 to
maintain the same level of prices in those years.
If the stock of monetary gold
had increased at a regular rate throughout this period, approximately 3 per cent a
year, any variation in the price level, according to Cassel, would have been due to
the irregular rate of economic growth. As there was no great change in the rate of
growth of output, he concluded that "the main cause of the secular variations of
the general price level lies in the changes in the relative gold supply," A Theory
of Social Economy, p. 447.
For the monetary stock of gold to grow at a regular 3 per cent annual rate, gold
production would have to increase at about this rate, assuming that the nonmonetary
absorption of gold was a fairly steady proportion of the gold output. The chart on
page 5 shows world production of gold from 1873 to 1933, as estimated by the U.S.
Bureau of the Mint, plotted on a logarithmic scale against isorropic lines that
eliminate a 3 per cent trend, and the Bureau of Labor Statistics index of U.S.

355

wholesale prices plotted on a non-trend logarithmic scale. It is evident that until
1914, the wholesale price index followed a pattern similar to changes in world production of gold adjusted for a 3 per cent trend, although with a lag of several
years. The inflation during and immediately after World War I disrupted the relationship of prices to the stock of monetary gold and compelled the bandonment of
gold redemption in all of the belligerent countries except the United States.

There was widespread agreement that the restoration of the gold standard was an
important part of postwar reconstruction. There were a number of difficulties, however, that prevented the immediate adoption of an international gold standard. The
inflation continued for several years after the war, longer in continental Europe
than in the United States and the United Kingdom. The monetary stock of gold was
not sufficient to maintain the money supply required for the postwar level of prices
with the prewar type of gold standard. This difficulty was intended to be met in
two ways. First, the relation of gold to the money supply was diluted by eliminating
or reducing the use of gold coins in domestic transactions, which had already been
done during the war. When the gold standard was restored in the United Kingdom in
1925, the fixed fiduciary issue was greatly enlarged and convertibility of sterling
was in bars of 400 ounces-- the gold bullion standard. Second, the need for gold as
reserves was reduced by wider use of the gold exchange standard. The Genoa conference in April 1922 recoizimended the central banks enter into an agreement that "should
embody some means of economizing the use of gold by maintaining reserves in the form

356
of foreign balances, such, for example, as the gold exchange standard or an international clearing system." When the League of Nations arranged stabilization loans
for a number of European countries, the proceeds were held as reserves in the form
of dollars and sterling.
Nevertheless, there was a widespread fear of a gold shortage, a view most firmly held
by Professor Cassel. The reason was not only that the ratio of the monetary gold
stock to the money supply in the large trading countries was so much less than it had
been before the war, but that the production of gold had fallen sharply during and
after the war. Gold production averaged $380 million a year in 1921-30. This represented an average annual increase of 1.4 per cent over the 40 years from the previous relative low of $215 million a year in 1881-90. The decrease in gold production was even greater compared to official reserves and the money supply. World
gold production was 4.0 per cent of reserves of all central banks and treasuries in
1928, down from 9.6 per cent in 1913. Compared to the U.S. money supply, currency
outside banks plus total deposits adjusted in all banks, gold production fell from
2.4 per cent in 1913 to 0.7 per cent in 1928. The decline would have been proportionately about the same if gold production were compared with the money supply,
measured in dollars, in other large trading countries. The League of Nations appointed a Gold Commission to study the problem, but by the time of their report the
new gold standard was already moribund.
It is useful to note another proposal made in the 1920s for stabilizing the value
of money in a gold standard system. Instead of a tabular standard under which the
amount of money paid under loan and other contracts would be adjusted to offset a
change in prices, Professor Irving Fisher proposed that the gold content of the
dollar be adjusted to maintain a constant purchasing power of money. Thus, if an
index number showed that prices had risen, the monetary authorities would increase
the gold content of the dollar to bring the price level down to what it had been
at the base date. On the other hand, if an index number showed that prices had
fallen, the gold content of the dollar would be decreased to bring the price level
up to what it had been at the base date. Professor Fisher called this a compensated dollar.
It was the most important of several proposals for varying the monetary price of gold when prices were rising or falling on the assumption that this
would of itself stabilize prices.

Gold in the U.S. monetary system, 1934-71
The new gold standard, gradually put together from 1925 to 1930, promptly fell
apart from 1931 to 1936. The United States went through a painful deflation from
1929 to 1933 in order to maintain the historic gold value of the d o l l a r — the mint
price of $20.67 an ounce that had been established in 1837. The severity of the
depression, with an unemployment rate of 24.9 per cent in 1933, compelled President
Roosevelt to terminate the gold redemption of the dollar. A Joint Resolution of
Congress in June 1933 abrogated the gold clause provision in contracts and made all
coin and currency legal tender in payment of all debts, public and private.
By January 1934, the Administration was ready to organize the monetary system on a
new basis. The Gold Reserve Act of 1934 required the Federal Reserve Banks to turn
over their gold to the Treasury in exchange for gold certificates which were to be
held as reserves against their note and deposit liabilities. The coinage of gold
was terminated and the private holding of gold coin and bullion, with some exceptions,

357
was forbidden, although Treasury regulations permitted the sale of gold to foreign
monetary authorities for the settlement of international balances. The President
was authorized to fix the new gold content of the dollar at not less than 50 per
cent nor more than 60 per cent of the previous content. On January 31, 1934 the
President set the gold content at 59.06 per cent of the previous content, equivalent
to $35 an ounce.
Was this a gold standard? There was no redemption of U.S. currency in gold coin
for private persons in the United States and abroad. Gold convertibility for official institutions was established in order to maintain stable exchange rates, but
this function was shifted from gold and foreign exchange arbitrageurs to central
banks. From an economic point of view, the most important aspect of the gold
standard was the limit it placed on the money supply through the requirement of
gold reserves. This was supposed to act on the monetary situation directly through
the effect of gold flows on reserves.
In the United States, before the establishment of the Federal Reserve System, an inflow or outflow of gold resulted in an
immediate change in the monetary situation. After the Federal Reserve System was
established, however, the effect of gold flows was muted because of the large free
reserves, except temporarily in 1920, and because the Federal Reserve Banks through
open market operations and member banks through discounts were able to offset the
effect on the money supply.
The Gold Reserve Act did not change the reserve requirements, although the required
reserves were held by the Federal Reserve Banks in gold certificates instead of
gold. The reserve requirements were not an actual limitation on monetary expansion
until near the end of World War II. By early 1945 the large increase in the money
supply and the small decrease in gold reserves placed the reserve ratio close to
the legal minimum while the war was still on. The Treasury asked the Congress to
reduce the gold reserve requirement on both notes and deposits to 25 per cent and
the Federal Reserve Act was amended in this way. By 1956 the continued expansion
of the money supply, although at a slow rate, had again reduced the gold reserve
close to the legal minimum and the law was changed to eliminate the requirement of
reserves against deposits with the Federal Reserve Banks. And by 1968, the large
decrease in the gold reserve and the continued expansion of the money supply had
again brought the gold reserve to the legal minimum and this time the Congress
eliminated it entirely.
Thus, three years before President Nixon terminated the gold convertibility of the
dollar, the gold reserve requirement for the money supply had already been eliminated. And 20 years before that, the decision was first made to change the gold
reserve requirement rather than to restrict the expansion of money. This was a
complete departure from the most important monetary aspect of the gold standard.
The first change could be explained as a war necessity, although the reserve requirement could have been suspended temporarily and resumed after the end of the
war when U.S. gold reserves were greatly increased. The second change could be
explained as reasonable because there had been no reduction in U.S. gold reserves
between the end of 1951 and the end of 1957, and the monetary expansion had been
moderate. The third change could be explained as due to Europe's preference for
holding gold instead of dollars, although the inflation was already under way and
the capital outflow had increased enormously. The changes in reserve requirements
were Droposed by Democratic and Republican Presidents and in all instances by
Secretaries of the Treasury with conservative views. They had concluded that the
United States could not allow the money supply to be determined solely on the basis
of the gold reserve.

358
The reduction of $8.79 billion in U.S. gold reserves in 1958-65 presented in a clearcut manner the question whether the money supply should be limited by the gold reserves. This huge outflow of gold in eight years, 38.5 per cent of the reserves at
the end of 1957, occurred in a period when the U.S. balance on current account averaged $3.28 billion a year compared with $815 million in the previous eight years.
Net capital outflow, however, had increased sharply after 1955. In 1951-57, the
deficit on an official reserve basis was met entirely by an increase in foreign official assets in the United States ($4.70 billion), with virtually no change in U.S.
gold reserves. In 1958-65, the deficit on an official reserve basis was met by almost the same increase in foreign official assets in the United States ($4.72 billion),
but mainly by the large reduction in gold reserves and a decline of $590 million in
other U.S. reserve assets. The capital outflow might have indicated that U.S. interest rates were too low, and this was the rationalization for the interest equalization tax and the voluntary limitation on bank loans to foreigners. Foreign direct
investment, however, continued on a large scale even after it had to be financed by
corporate borrowing in the Eurobond market.

Trade
balance

U.S. BALANCE OF PAYMENTS, GOLD OUTFLOW, AND PRICES, 1958-65
Billion dollars
Balance on Change in
current
U.S. gold
reserves
account

Per cent change from previous year
Consumer
Nonfarm
GNP
Manufacturing
price
price
price
Price
Labor
index
deflator deflator deflator cost

1958
1959
1960
1961

3.46
1.15
4.89
5.57

0.78
-1.28
2.82
3.82

-2.28
-1.07
-1.71
-0.85

2.8
0.8
1.6
1.0

1.7
2.4
1.6
0.9

1.3
2.0
1.4
•0.6

3.1
2.2
1.5
0.3

4;9
-0.9
3.5
0.1

1962
1963
1964
1965

4.52
5.22
6.80
4.95

3.39
4.41
6.82
5.43

-0.89
-0.46
-0.13
-1.40

1.1
1.2
1.3
1.7

1.8
1.5
1.5
2.2

1.5
1.1
1.0
1.9

0.7
-2.1
0.1
0.9

-0.4
-3.9
-0.7
-1.1

Source:

Economic Report of the President, January 1981, p. 344.
Financial Statistics, Yearbook 1981, pp. 438-39.

International

The domestic price and cost situation was remarkably stable in 1958-65, particularly
when measured by producer prices of commodities. Over the whole period, the consumer
price index rose at an average annual rate of 1.5 per cent. The GNP price deflator
rose at an average rate of 1.7 per cent and the deflator of the nonfarm business product rose at an average rate of 1.4 per cent. These two deflators and the consumer
price index are heavily weighted by services which have an upward trend relative to
prices of commodities. The index of prices of nonfarm commodities, which is a better
measure of price stability under a system of fixed parities, rose very little in
1958-65. The producer price index of industrial commodities rose at an average annual
rate of 0.4 per cent. The producer price index of finished consumer goods, excluding
food, rose at an average rate of one-fourth of one per cent, and did not increase at
all from 1960 tc 1965. The implicit price deflator of manufactured goods rose at an
average rate of 0.8 per cent and declined slightly from 1960 to 1965. Unit labor

359
cost in manufacturing rose by slightly more than 0.1 per cent a year from 1957 to
1965 and fell at an average rate of 2.0 per cent from 1961 to 1965.
This would not seem to be a situation which called for a contraction of the money
supply as would have had to occur if it were determined by the gold reserve. The
monetary expansion was on the generous side, but not markedly excessive. The average annual increase in M-1B was 3.0 per cent from the end of 1959 to the end of
1965, although it stepped up to 4.6 per cent in 1964 and 1965. The average annual
increase in the new M-2 was 7.5 per cent, but rose to over 8 per cent beginning in
1962. Greater restraint in the expansion of the money supply was called for, but
not on the scale indicated by the gold outflow. A more cautious monetary policy
could have reduced the gold outflow but would not have stopped it. As gold production was not enough to enable the Europeans to add to their reserves on the
scale they preferred, they did it by cannibalizing the reserves of the United
States. This is a problem that could recur if the United States restores a gold
standard.

Problems in restoring the gold standard
The most remarkable aspect of the gold standard Is not that it provided price stability or steady economic growth, but that it could survive so long under great
strain and stress. The gold standard began with a deep depression in the 1820s
that disrupted the political stability of Europe and it ended in a great depression
in the 1930s that threatened the political stability of the United States. In the
intervening period, recessions were usually longer and deeper than they have been
since 1933, and they were frequently accompanied by financial crises from which the
economy was free after 1933. It is important to know why the gold standard was
able to survive for a century under such conditions.
The reasons are partly social, partly economic, and partly political. Gold was
regarded as natural money and the maintenance of the gold value of the currency
was the sole objective of economic and monetary policy. The money illusion cast
a veil over price movements which the public regarded as due to changes in supply.*
Recessions were considered acts of God in the same category as crop failures. No
one expected Governments to do anything about unemployment, or believed that they
could if they tried. Besides, intervention by the Government would have required
expenditures that would have unbalanced the budget, a moral sin except in time of
war. Finally, the hundred years from 1815 to 1914 were free of a prolonged war
that engaged the Great Powers-- the longest was our own Civil War. Economic policy
can no longer subordinate social security and national security to the maintenance
of the gold value of the dollar, as is evident in the budget.
In 1913, Federal

* Even Thomas Tooke, who on budget deficits was a complete monetarist, was taken
in by the money illusion.
In explaining the decline of prices from 1814 to 1837,
he listed the following causes:
(1) a series of good harvests following a series
of bad harvests; (2) elimination of obstacles to imports; (3) the reduction in
transport costs and war risk insurance on imports, and cheaper internal communications; (4) the rise in the foreign exchange value of sterling after resumption
of gold convertibility; (5) technical improvements in production and introduction
of new lower-cost products; and (6) a reduction of the general rate of interest
and wider use of savings in productive investment.

360
expenditures of $680 million were 1.7 per cent of the GNP.
In 1980, budget outlays
of $580 billion were 22.4 per cent of the GNP, with 70 per cent for transfer payments
and national defense.
There are a number of problems that make it difficult if not impossible to restore
a gold standard. The secular fluctuations in prices under the classical gold standard were a consequence of changes in gold production adjusted for a 3 per cent trend.
It is doubtful whether gold production can be adequate for price stability under a
gold standard. The production of gold outside the Communist countries reached a
peak in 1966 and has declined by 26 per cent since then. In South Africa, production
reached a peak in 1970 and has fallen by 34 per cent. Net sales of gold by the Communist countries fluctuate considerably from year to year, depending mainly on the
need for foreign exchange by the Soviet Union to pay for grain imports. And while
production has fallen, more of it has been absorbed in nonmonetary uses rather than
added to gold reserves. From 1951 to 1960, the monetary stock of gold, excluding
the reserves of the Communist countries, increased by an average of $580 million a
year (1.5 per cent). From 1961 to 1970, it increased by an average of $100 million
a year (0.2 per cent). From January 1971 to July 1981, the monetary stock of gold
fell by 2.9 per cent because of gold sales by the International Monetary Fund, the
United States and a few other countries.
In the long run, the gold standard cannot function effectively unless there is an
adequate but not excessive growth in the monetary stock of gold at a fairly regular
rate. In spite of the recent decline in output, the restoration of a fixed monetary
price of gold at about the present value, assuming the inflation were ended, would
encourage more production as the increase in output could not affect its price.
Gold producers would also offer all of their production for sale, instead of using
it for collateral on loans as South Africa has done at times to avoid putting pressure on a weak market. Nevertheless, it is unlikely that gold production would be
sufficient to enable gold reserves to grow at an adequate rate. That is because
the growth of production depends on the discovery of new gold fields and such
discoveries are becoming less frequent. At the same time, the absorption of gold
by the arts and industry has increased considerably and from 1976 to 1979 exceeded
gold production outside the Communist countries, although such use of gold fell
sharply in 1980 because of the high price.
The growth of the monetary gold stock would not be an immediate problem as gold
reserves at present market prices are adequate to support a moderate growth of
the monetary base for some time. In the United States, the gold reserves valued
at $400 an ounce were equal to 67.3 per cent of the note and deposit liabilities
of the Federal Reserve Banks at the end of September 1981. The ratio is very
much higher in Germany, France, the United Kingdom and Italy, but considerably
lower in Japan. The immediate problem for the United States would be to maintain
convertibility of the dollar. This is essentially a question of maintaining the
equal attractiveness of gold and the dollar. Under the classical gold standard,
when the world pattern of payments was always reasonably well-balanced, and deficits were mainly of a cyclical or fortuitous character, a financial center like
London could always minimize a gold outflow or induce a gold inflow when the
exchange rate fell to the gold export point by raising bank rate by 1 per cent
or under crisis conditions by 3 or 4 per cent. Actually, it was not until 1860
that the Bank of England began the svstematic use of bank rate to attract an

361
inflow of gold when sterling fell, although bank rate was previously raised when
there was a domestic drain or a foreign drain of gold.*
The situation is completely different now. A small group of countries, members of
OPEC, had a current account surplus of over $100 billion in 1980 and will have a
surplus of close to $80 billion this year. In a world of inconvertible currencies,
the members of OPEC must of necessity have a capital outflow of equal magnitude.
This capital is invested in a variety of assets in different countries and in
different currencies.
In determining the distribution of their assets, the members
of OPEC are concerned with the stability of the value and the return on these assets,
minimizing risks by diversification. Although some members of OPEC bought gold last
year, they can put only a limited amount into such purchases because large-scale
buying would raise the price enormously. This also applies to some other assets,
such as common stocks, of which the supply, although large, is limited because new
issues are relatively small. For this reason, the main assets acquired by members
of OPEC have been deposits, money market paper, and other debt obligations.
The asset preference of members of OPEC would change considerably if the gold standard were adopted. Even if they were to use only a small part of their current account surplus to acquire gold, it would result in a rapid depletion of U.S. reserves.
Moreover, members of OPEC could decide to use some of the present official assets in
the United States for this purpose.
In fact, there would be nothing to stop other
countries that have dollar reserves from diversifying their holdings by converting
some of the dollars into gold. With the huge current account surplus of members of
OPEC and the large official holdings of assets in this c o u n t r y — $162.2 billion at
the end of August 1 9 8 1 — it would not be feasible for the United States to resume
the conversion of dollars into gold for foreign official agencies.
Finally, the changing preference of the public for holding gold, now met through
price changes, would be a potential source of instability if the United States
adopted a gold standard. The amount of gold that has gone into hoarding, investment and speculation has increased enormously since 1967. Such holdings are very
sensitive to the price of gold and the prospect of a change in price. If the gold
standard were restored at a monetary price that hoarders, investors and speculators
thought too low, they could absorb all the gold that was available in the market and
drain tens of millions of ounces from reserves, as they did in 1967-68. On the
other hand, if they thought that the price was too high, the reserves would be inflated by the dishoarding of hundreds of millions of ounces of gold. In the former
case, the money supply would have to be sharply contracted; in the latter case, the
money supply would have to be enormously expanded. It is paradoxical that the
restoration of the gold standard could become the greatest threat to monetary stability if the inflation were ended.

* '^Whatever p e r s o n s — one bank or many b a n k s — in any country hold the banking
reserve of that country [the reserves above the legal minimum on the currency
in circulation], ought at the very beginning of an unfavourable foreign exchange
at once to raise the rate of interest, so as to prevent their reserve from being
diminished farther, and so as to replenish it by imports of bullion. This duty,
up to about the year I860, the Bank of England did not perform at all
. . .11
Walter Bagehot, Lombard Street, p. 46 (New Yor\, 1873).

362
A role for gold in the monetary system
Although it is not feasible to restore the gold standard, some of its traditional
features could be incorporated in the national and international monetary system and
would contribute to the maintenance of monetary stability. The most important feature of the gold standard is the limitation it placed on the growth of the money
supply. The traditional method of limiting the money supply by requiring gold reserves and having the money supply expand and contract automatically with the inflow and outflow of gold was too restrictive. Under present conditions, the growth
of the money supply would depend on the erratic changes in gold production and gold
sales of the Soviet Union; and with the unbalanced pattern of international payments
and the speculation in gold, it would be impossible to let the money supply expand
and contract in response to an outflow and Inflow of gold.
It would be desirable, however, to devise a method by which the note and deposit
liabilities of the Federal Reserve Banks would again be subject to reserve requirements. The reserves would have to be of a kind that would grow at a fairly regular
rate and that could not be injected haphazardly into the world stock of monetary
reserves or withdrawn suddenly from aggregate reserves. Mr. Robert E. Weintraub
of the staff of the Joint Economic Committee has suggested a method by which the
book value of U.S. gold reserves would be increased at a regular rate to allow an
adequate expansion of the money supply. Similar methods could be used to assure
a steady growth in the value of the world stock of monetary gold. If a system of
fixed par values is to be restored ultimately, it would be desirable to have the
requirements stated in terms of reserves used in international settlements. If
U.S. reserves are to increase and decrease with changes in the balance of payments,
the Federal Reserve would have to have flexibility in adjusting the money supply to
changes in reserves while recognizing the -need t6 respond to a decline in reserves.
Fixed par values can contribute to monetary and economic stability, provided the
par values of the currencies of the large trading countries are appropriate for
their international economic position. The Bretton Woods system broke down because of the inflation in the United States and the failure to adjust the par values
of the currencies of deficit and surplus countries. Ultimately, it would be desirable to return to fixed par values, although with greater flexibility than under the
original Bretton Woods rules. That is obviously not possible under present conditions. Much can be done, however, to improve the system of floating rates. Fluctuations in the dollar exchange rates for the major currencies have been excessive
and disruptive. The rise and fall of such rates by 15 to 20 per cent in a few
months and by as much as 40 per cent in a year cannot possibly reflect changes in
underlying economic conditions. With such large fluctuations, the dollar must be
overvalued at the top rate or undervalued at the bottom rate, and most likely overvalued and undervalued alternately.
The International Monetary Fund has a mandate to maintain surveillance of the
exchange rate policies of its members. It can meet this responsibility by having
its members cooperate in avoiding very large fluctuations in exchange rates, specifically the dollar rates for the currencies in the European Monetary System. Exchange rates fluctuate so much because traders know from previous experience that
once a currency begins to rise it will continue to rise until the rate is so high
that maintaining a long position has become too risky.
It is a serious mistake for
the monetary authorities to ignore the behavior of the exchange rate as it is an
integral part of monetary policy. An undervalued currency is like a too-easy

363
monetary p o l i c y — it stimulates output and accelerates the rise of prices. And an
undervalued currency is like a too-tight monetary policy-- it holds down output and
slows the rise of prices. There is no merit in the argument that the monetary authorities should refrain from intervention because no one knows what the right exchange rate is. The purpose of intervention is not to establish a right rate, but
to avoid the extremes which are obviously not the right rates.
In a system of fixed parities, it is essential that countries accept responsibility
for maintaining the foreign exchange value of their currencies. Until 1971, the
United States did that by buying and selling gold for international settlements.
At present, the dollar is not convertible in reserve assets, although it is convertible into other currencies through the exchange market and countries that want
gold can buy it with dollars in the free market. Unless the system of holding and
using reserves were changed, the United States could not undertake to convert the
dollar in reserve assets if fixed parities were ever restored, as it could be
stripped of much of its reserves even when it had a balance of payments surplus
on an official reserve basis. That is because deficit countries would settle
their deficits with the United States by drawing down their dollar balances, while
surplus countries could present the dollars they acquire for conversion in reserve
assets. If the United States is to settle its deficits in reserve assets, it must
receive the same reserve assets in settlements when it has a surplus.
This could be done through establishment of a Reserve Settlement Account in the
International Monetary Fund. Member countries would deposit their foreign exchange and SDRs in this Account in return for a balance denominated in SDRs. The
IMF would establish a new monetary price for gold in SDRs and this would result in
a fixed price for gold in terms of every currency. To avoid a sudden massive increase in reserves through the revaluation of goJLd, members would deposit in the
Account only an agreed proportion of their gold reserves each year valued at the
new monetary price. Settlement of balance of payments surpluses and deficits
would be made only through the Account in much the same way that they were made
under the classical gold standard. A deficit country needing dollars could acquire them from the Federal Reserve Bank of New York, as agent for the Treasury,
in return for a transfer from its balance in the Account. And a surplus country
acquiring dollars would have them converted through a transfer to its balance in
the Account. The U.S. balance in the Account would be included in the reserves
that could be held against the note and deposit liabilities of the Federal Reserve Banks.
Gold would be the main reserve asset in this system and the annual addition of
gold to the Account at the new monetary price would provide a steady increase in
aggregate reserves for many years. The IMF would also place its gold holdings in
the Account at the new monetary price, thus increasing the resources at its disposal for granting reserve credit. Members of the IMF would not buy gold in the
free market to add to their reserves, but the IMF would stand ready to buy gold
offered to it. Whether it should also sell gold to the market is a question
that requires further consideration.
If the annual increase of reserves through
the revaluation of gold and the purchase of newly-mined gold is not adequate, the
IMF would be authorized to issue enough SDRs, after approval by an 85 per cent
majority, to bring the increase in aggregate reserves to the target r a t e — say,
3 per cent a year. The IMF would continue to grant reserve credit through its
General Account to enable countries to meet temporary balance of payments deficits, along with the use of their own reserves.

364
The inclusion of gold as the major component of aggregate reserves and the denomination of par values in gold would impart a gold aspect to the international monetary system that would add to confidence in currencies. The requirement that balance of payments deficits be settled in reserves through the Account would impose
discipline on members of the IMF. The establishment of such an international monetary system would have to be preceded, of course, by the elimination of inflation
in the large trading countries and the de facto stabilization of the exchange rates
for their currencies. That is the long, hard task to which the monetary authorities
should devote themselves before undertaking far-reaching connnitments on gold.

• * * * •

365
Finally, in order to better inform the public of the legal
obstacles to a return to gold than is done in this Report, I am
including as part of my Views, for printing in full at this point
in the Report, a study prepared by Raymond Natter of the Congressional Research Service, entitled "Legal Considerations Relating
to a Return to a 'Gold Standard' Without New Legislation."

366

Congressional Research Service
The Library of Congress
Washington. DC. 20540

LEGAL CONSIDERATIONS RELATING TO A RETURN TO A "GOLD STANDARD"
WITHOUT NEW LEGISLATION

Raymond Natter
Legislative Attorney
American Law Division
December 3, 1981

367
EXECUTIVE SUMMARY

A return to a linkage between U.S. currency and gold may involve
convertibility between paper currency and gold, backing of paper currency
with gold, or some form of indexing so that the value of Government
securities is related to the price of a fixed amount of gold bullion.
Convertibility between paper currency and gold would appear to be
inhibited by several statutes, including 31 U.S.C. § 315b which prohibits
the minting of United States gold coins for domestic circulation, and
31 U.S.C. §§ 773a-773d, which withdraws the consent of the United States
to be sued to enforce so-called "gold clause" provisions or to redeem currency
for more than its face value. In addition, these statutory provisions prohibit
the expenditure of any funds in payment upon U.S. currency except on an
"equal and uniform dollar for dollar basis." Since gold is not considered
legal tender, and since there is no longer a gold value for the dollar, this
provision may prevent the redemption of paper currency for gold, and certainly
for a fixed amount of gold. Finally, the Articles of Agreement of the
International Monetary Fund as well as the Bretton Woods Agreement Act appear
to prevent the establishment of a par value for the dollar without
Congressional action.
With regard to gold backing for the dollar, the Treasury has considerable authority to deal in gold, and could issue gold backed certificates
under 31 U.S.C. S 405b. However, this provision requires that gold be
valued at approximately $42.22 per ounce for this purpose, thus imposing
a practical difficulty upon such issuance to the general public. Gold
backing for other forms of currency, such as Federal reserve notes,
Treasury notes and U.S. notes may also be prohibited by Public Law 90-269,
which removed the requirement for such backing which previously existed.
It may be possible for the Board of Governors of the Federal Reserve
System to informally target the growth of money supply to U.S. gold
holdings, although such actions may be open to the charge of being contrary
to congressional intent as expressed in Public Law 90-269.
Indexing of U.S. securities and the price of a fixed amount of gold
would appear to be prevented by 31 U.S.C. SS 773a-773d, which withdrew
the consent of the United States to be sued on gold clause provisions, and
precluded payment on such obligations at other than their dollar face value.
"Gold clause" provisions have been defined to include terms indexing the
value of a security to the price of gold.
Although at present various statutes appear to prevent or restrict
a return to one of the forms of a gold standard discussed, the repeal or
appropriate modification of these restrictions would allow the Executive
to return to a gold standard.
In addition, since the term "gold standard"
is not legally defined, the Executive may be able to achieve some
linkage between gold and U.S. currency through a mechanism not prohibited
by the above provisions of law.

368
LEGAL CONSIDERATIONS RELATING TO A RETURN TO A "GOLD STANDARD"
WITHOUT NEW LEGISLATION

Introduction
During the past few years considerable attention has been focused

on the question of whether or not the United States should return to some
form of "gold standard" with regard to our domestic monetary system.

This

paper will discuss the feasibility of such action under present laws in
order to determine whether additional legislation would be needed to achieve
this end.
It should be noted at the onset that, from a legal point of view,
the term "gold standard" is not given a precise meaning, but rather is a
1/
descriptive phrase indicating a relationship that may take various forms.
For example, under the "gold coin standard," the Government establishes and
maintains a fixed price for gold, and allows unlimited convertibility
paper currency and gold coins.

between

Gold coins are freely minted without

restriction and circulate along with paper currency. Thus an individual can
freely exchange paper currency for gold coins or gold coins for paper currency
at any time.
The "gold bullion standard" is a gold standard in which gold coins
do not circulate, but instead are melted down into bullion.

Under one

version of this standard individuals may convert paper currency into gold
through the purchase of minimum amounts of bullion.

However, as it

existed in the United States after 1933, paper currency could not be ex-

1/ However, technical economic usage of the term usually requires at least
that the domestic monetary unit be defined in terms of gold, be freely
convertible into gold at a fixed price, and that the free export and import
and melting of gold be permitted.

369

changed domestically for gold bullion.

Until August 15, 1971, the United

States did stand ready to convert U.S. dollars with gold for foreign official
holders, for international monetary purposes.

Gold, under this type of

standard provided backing for the paper currency issued by the Government,
either fully or partially.
Another alternative under this standard would be to retain the gold
bullion as a required backing for paper currency, but not allow redeemption
in gold either internationally or domestically.

Under this version the

gold bullion would simply act as a limitation upon the total amount of
paper currency which could be legally authorized.
Finally, some economists have recently proposed that a return to a
"gold standard" could be accomplished through the issuance of Government
securities and notes indexed to the price of gold.

Under this concept,

the value of the securities so issued would vary in direct proportion
to the value of gold, and if allowed to circulate freely, could become,
in essence, a form of paper currency as valuable as the equivalent fixed
amount of gold purchasable at the date of issuance.
Thus, the following characteristics would appear to be relevant in
determining whether or not the United States could return to a "gold
standard" without additional legislation: (1) convertibility of currency
and gold; (2) backing of currency by gold, either partially or fully;
and (3) indexing Government securities or notes with the price of gold,
even if convertibility is not permitted.

370
II.

P r o v i s i o n s Which R e s t r i c t
to a Gold Standard

the

Ability

the

Government

Return

The following provisions appear to restrict or prohibit the Federal Reserve System, the U.S. Treasury Department, or any other Executive
Branch agency, from taking actions to reinstitute one or more elements
of the gold standards described above.
A.

Gold Reserve Act of 1934, 48 Stat. 337.

Among other things, the Gold Reserve Act of 1934 amended Section 16 of
the Federal Reserve Act, 12 U.S.C. § 411.

Prior to the amendment the Federal

Reserve Act specified that Federal reserve notes "shall be redeemed in gold
on demand at the Treasury... or in gold or lawful money at any Federal reserve
bank."

The Gold Reserve Act removed the word "gold" from this provision and

reworded the section so that it now provides that Federal reserve notes "shall
be redeemed in lawful money on demand at the Treasury... or at any Federal
reserve bank."

Thus, it appears that by implication this amendment had the

effect of prohibiting the redemption of Federal reserve notes in gold, since
the amendment distinguished "lawful money" and gold.

31 U.S.C. § 315b.

Section 5 of the Gold Reserve Act of 1934, 31 U.S.C. § 315b, provides
that "no gold shall hereafter be coined, and no gold coin shall hereafter
be paid out or delivered by the United States...All gold coins of the United
States shall be withdrawn from circulation, and, together with all other
gold owned by the United States, shall be formed into bars of such weights
and degrees of fineness as the Secretary of the Treasury may direct."
provision would appear to

prevent the return to a gold coin standard in the

United Stages by Executive action alone.
gold coin mintage for foreign countries.

This

This provision did not restrict

371
C.

31 U . S . C . §§ 7 7 3 a - 7 7 7 3 d .

The Joint Resolution of August 27, 1935, codified at 31 U.S.C. §§ 773a773d, was enacted in response to the Supreme Court's decision in Perry v.
United States, 294 U.S. 330 (1935).
1st Sess. 5 (1935).

See, H.R. Rep. No. 74-1519, 74th Cong.

In Perry the Court held that the provisions of the

Joint Resolution of 1933, the so-called Gold Clause Resolution, were
unconstitutional to the extent they attempted to override existing obligations
of the United States Government. The Gold Clause Resolution provided that any
clause in an obligation, public or private, which called for payment in gold,
or in an amount of money measured thereby, was void as against public policy.
The Court upheld the validity of the Resolution as it applied to future
contracts of the Government, and as it applied to all contracts made by
State governments or private parties, but held that it could not be used
to invalidate existing contractual obligations of the United States Govern-

ment.
In response to this decision, Congress passed the Joint Resolution
of August 27, 1935.

This Resolution provided: (1) that lawful holders of

coins or currencies of the United States shall be entitled to exchange them,
dollar for dollar, for other coins or currencies which may be lawfully acquired and are legal tender; (2) that the United States would no longer
consent to be sued with regard to any gold-clause security, coin or currency
in which a claim is made for payment or credit in excess of the face or
nominal value in dollars of the securities, coins or currencies in question;
and (3) that no sums shall be appropriated or expended in payment upon

2/ The provisions of the Gold Clause Resolution of 1933 were repealed
as to obligations entered into on or after October 28, 1977. See,
Public Law 95-147.

372
securities,

coins

dollar basis."

currencies

except

"an equal

and u n i f o r m

dollar

for

The term "gold clause security" was defined by the Resolu-

tion to mean a provision in a contract which purports to give the obligee
a right to require payment in gold, or in a particular kind of coin or currency of the United States, or in an amount in money of the United States
measured thereby.
The Joint Resolution of 1935 would appear to have the direct effect
of preventing the United States Government from issuing debt securities
or notes which are Indexed to the price of gold, since

such an indexing

provision would be a "gold clause" as that term is defined in the Resolution.

Southern Capital Corp. v. Southern Pacific Co., 568 F. 2d 590

(8th Cir. 1978).

As such, a party could not obtain enforcement of this

provision in the courts, since the United States effectively withdrew its
permission to be sued on such clauses.

Similarly, suits involving conver-

tibility between currency and gold may be barred by this provision to the
extent that a claim is made for payment in excess of the nominal or face
value of the currency.

And under the Resolution, a private party is not

entitled to demand gold in exchange for currency since gold is not considered legal tender (See 31 U.S.C. §§ 451 et seq.).

In addition, the

Resolution prohibits Federal expenditures for payment on securities or
currencies except on an "equal and uniform dollar for dollar basis."
Since gold coins have been statutorily withdrawn from circulation (31
U.S.C. § 315b), and gold bullion and other forms of gold are not legal
tender, and since there is no official gold value for the dollar (See G
below), this Resolution may limit the ability of the Treasury to redeem
currency in gold, and certainly for a pre-determined, fixed amount of
gold.

373
D.

Public Law 90-269 (1968).

Public 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
actual circulation*

In addition, this Act eliminated the gold reserve re-

quirement for U.S. notes and Treasury notes of 1890, thus ending all gold
backing for U.S. currency.
(1968).

See, H.R. Rep. No. 90-1095, 90th Cong. 2d Sess.

Reserves now consist primarily of deposits backed by Government

securities and vault cash.
E.

31 U.S.C. § 821 (b)(2).

The so-called Thomas Amendment to the Agricultural Adjustment Act of 1933,
Public Law 73-10, codified at 31 U.S.C. § 821(b)(2), granted to the President
the discretionary authority to fix the weight of the gold dollar at such amounts
as he finds necessary to stabilize domestic prices or to protect foreign commerce.
This authority specifically expired on June 30, 1943 pursuant to the provisions
of the Gold Reserve Act Amendments of 1941, 55 Stat. 395 (1941).

Thus, it appears

that Congress specifically revoked any unilateral Presidential authority to adjust
the weight of the gold dollar.

Second Amendment To The Articles of Agreement of the International
Monetary Fund, 29 U.S. Treaties 2204.

The Second Amendment to the Articles of Agreement of the International Monetary Fund greatly reduced the role of gold in international finance, and substituted in its place Special Drawing Rights or SDRs, consisting of a "basket" of
currencies.

Article IV, Section 2 of the Amendment provides that member nations

may enter into exchange arrangements which may include:

(i) the maintenance by a member of a value for its
currency it terms of special drawing right or another
denominator, other than gold, selected by the member,

374
or ( i i )
maintain

c o o p e r a t i v e a r r a n g e m e n t s by w h i c h members
the value of t h e i r c u r r e n c i e s i n r e l a t i o n

to the value of the currency or currencies of other
members, or (iii) other exchange arrangements of a
member's choice*
(emphasis added)
Article VIII, Section 4 of the Amendment provides that each member country
shall buy balances of its currency held by another member, and specifies that the
buying countries shall have the option to pay either in special drawing rights or
in the currency of the member making the request.

Section 7 of that same Article

provides that each member country shall undertake to collaborate with the Fund and
with other member countries in order to assure that the policies of members with
respect to reserve assets shall be consistent with the objectives of making the
special drawing right the principal reserve asset in the international monetary
system.

Finally, Schedule C of the Articles of Agreement provides that par

values may be established in terms of special drawing rights or in terms of other
common denominators prescribed by the Fund, but that the common denominator shall
not be gold or a currency.

Bretton-Woods Agreement Act, Public Law 94-564

Section 5 of the Bretton-Woods Agreement Act, 22 U.S.C. § 286c, provides
that unless authorized by Congress by law, neither the President nor any other
person or agency may propose or approve any change in the par value of the
dollar under the Articles of Agreement of the International Monetary Fund.
However, under section 6 of this Act, the official par value for the dollar
was abolished. Therefore, these provisions prevent the establishment of a par
value for the dollar in gold or any other asset, without Congressional authorization.
Taken together, the Articles of Agreement and this provision appear to
prevent the United States from establishing and maintaining an official value
of the dollar in terms of gold for settling international balances.

Of course,

375
t h e s e t r e a t y p r o v i s i o n s do not p r e v e n t f u t u r e changes i n t h i s s i t u a t i o n

through

amendments to the Agreement, with the consent of three-fifths of the members
having eighty-five percent of the total voting power, or through Acts of
Congress.
III.

Provisions Which Would Allow A Return To A Gold Standard Through Executive
Action
A.

Gold Reserve Act of 1934, 48 Stat. 340.

As noted in the previous section, the Gold Reserve Act withdrew gold coins
from circulation and provided that Federal reserve notes would no longer be redeemed in gold.

Section 6 of the Act, 31 U.S'.C. § 408a, also provided:

Except to the extent permitted in regulations which may
be issued hereunder by the Secretary of the Treasury with
the approval of the President, no currency of the United
States shall be redeemed in gold....
No redemptions in gold shall be made except in gold bullion bearing the stamp of the United States mint or assay
office in an amount equivalent at the time of redemption
to the currency surrendered for such purpose, (emphasis added)
Thus, under this provision the Secretary of the Treasury could, with the
consent of the President, choose to redeem United States currency in gold.

How-

ever, since Federal reserve notes arguably cannot be redeemed in gold bullion
but instead only in "lawful money," 31 U.S.C. § 408a may be limited in effect
only to the redemption of other forms of currency, such as U.S. notes, or Treasury
notes.

In any case, the fact that a gold value for the dollar can only be estab-

lished by statute, coupled with the terms of the Joint Resolution of 1935, probably prevents the Secretary from taking such action now.

Public Law 93-110, As Amended by Public Law 93-373.

These laws repealed the prohibition against United States citizens purchasing, holding, selling or otherwise dealing in gold in the United States,
effective either as of December 31, 1974 or at a prior time if the President
finds that the elimination of the restrictions on owning gold will not adversely

376
affect

the

United

States'

international

monetary

position.

President

Ford

is-

sued Executive Order No. 11825 (40 Fed. Reg. 1003) (Dec. 31, 1974) repealing
prior Executive Orders prohibiting the acquisition of gold bullion or gold
certificates by private parties in the United States.
C.

31 U.S.C. S 405b.

This section authorizes the Secretary of the Treasury to issue gold certificates in such form and such denominations as he may determine, against any gold
held by the United States Treasury.

Under a 1976 amendment to this section (Pub-

lic Law 94-564 § 8), the amdunt of gold certificates Issued and outstanding may
at no time exceed the value of the gold so held against such gold certificates,
as measured by the par value existing on October 19, 1976.

At that time the par

value was set at the equivalent of approximately $42.22 per fine troy ounce of
gold.

Thus, under this provision, the Secretary of the Treasury could issue

gold certificates backed by gold, but only to the extent that gold holdings,
valued at $42.22 per fine ounce, equal the total amount of certificates issued
and outstanding.

In addition, under the terms of the Joint Resolution of 1935,

holders of these certificates would not be entitled to redeem the certificates
in gold, but only in other forms of currency.

31 U.S.C. § 428.

This provision enacted in 1863, authorized the Secretary of the Treasury
to receive deposits of gold coin and bullion and to issue certificates of deposit therefor corresponding with the denominations of United States notes.
However, the Joint Resolution of 1935 apparently prevents these certificates
from being redeemed in gold, or in any other manner than on a dollar for dollar
basis.

And in light of 31 U.S.C. §405b and section 6 of the Gold Reserve Act of

377
1934,

this

provision

may

be c o n s i d e r e d

obsolete.

See,

Staff

the

House

Com-

mittee on the Judiciary, 97th Cong. 1st Sess. Report on H.R. 4774, Revision of
Title 31 United States Code 328 (Comm. Print Oct. 19, 1981).
E.

31 U.S.C. § 429.

This provision, as amended in 1916, authorized the Secretary of the Treasury to receive deposits of gold coin and to issue gold certificates therefore,
and to receive deposits of foreign gold coin and gold bullion, and to issue gold
certificates therefor, provided the latter certificates do not exceed two-thirds
of the total amount of certificates outstanding.

Since 31 U.S.C. § 315b withdrew

gold coins from circulation and required that they be melted into bullion, the
Secretary 9 s ability to issue new gold certificates based upon the purchase of
gold bullion or foreign gold coins may have been effectively eliminated. In any
case, 31 U.S.C. § 405b may require that any gold so purchased be valued at $42.22
per ounce, which would appear to preclude any purchases. And even if the Secretary could issue gold certificates under Section 429, the Joint Resolution of
1935 would still act to prevent the redemption of gold for such certificates.
Thus, this section may also be considered obsolete.
Committee on the Judiciary, 97th Cong., 1st Sess.

See, Staff of the House
Report on H.R. 4774, Revision

of Title 31 United States Code 328 (Comm. Print Oct. 19, 1981).

31 U.S.C. § 822a.

Section 10 of the Gold Reserve Act of 1934, as amended in 1976 by Public Law 94-564, and codified at 31 U.S.C. § 822a, provides that the Secretary of the Treasury, with the approval of the President, is authorized to
deal in gold and foreign exchange for the account of the stabilization fund
established by this provision.

This section also provides that such dealings

378
must

be c o n s i s t e n t

with

tional Monetary Fund*

the

obligations

the

United

States

the

Interna-

The fund was originally established in order to sta—

blize the exchange value of the dollar, however of the $2 billion appropriated to the fund, $1.8 billion was used, pursuant to a 1945 Act of Congress
(59 Stat* 514) to pay part of the United States' subscription to the IMF,
leaving only $200 million for the fund's capital.

31 U.S.C §§ 733, 734

Sections 8 and 9 of the Gold Reserve Act, codified at 31 U.S.C. §§ 733
and 734, authorize the Secretary of the Treasury 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.
Gold purchases may be made with any direct obligation, coin, or currency of the
U.S. authorized by law, or with any funds of the Treasury not otherwise appropriated, without regard to the laws relating to the maintenance of parity.

IV.

Discussion and Conclusion
In determining whether or not the Executive can return to a "gold standard"

without additional legislation, the following characteristics of most "gold
standard" plans may be considered:

(1) the ability to freely convert with the

U.S. Government currency for gold at a fixed price; (2) the ability to back
currency with gold even if convertibility is not permitted; and (3) the ability
to index securities or notes with the price of gold, regardless of convertibility
privileges.
With regard to convertibility, we note that Section 5 of the Gold Reserve Act, 31 U.S.C. § 315b prohibits the Government from minting gold coins

379
for d o m e s t i c purposes, and directs the Government to melt e x i s t i n g c o i n s

into

gold bullion, thus preventing the return to a "gold coin standard" without
new authorizing legislation.

However, despite this restriction, it may still

be argued that currency could still be exchanged for gold bullion, held by
the Treasury, thus for practical purposes establishing convertibility at a
fixed price.

Support for this position may be found in Section 6 of the

Gold Reserve Act, 31 U.S.C. § 408a, which authorizes the Secretary of the
Treasury, with the approval of the President to redeem currency in gold
bullion, and Public Law 93-373 allowing private parties to hold gold.
Nevertheless, the Joint Resolution of 1935, 31 U.S.C. §§ 773a-777d, withdraws
the consent of the Government to be sued with regard to any coin or currency
in which a claim is made for payment in excess of the face amount of the
coin or currency, and prohibits any expenditures on any coin or currency except
on an "equal and uniform dollar for dollar basis."

In addition the authority

of the President to fix the weight of the gold dollar was restricted by
law so that any establishment of a gold or par value for the dollar requires
Congressional action.

And the Articles of Agreement of the International

Monetary Fund prohibit the use of gold as a common denominator for international
monetary purposes. Taken together, these provisions would appear to prevent
the free convertibility by the Government between United States currency
and gold at a fixed price both domestically and at the international level,
despite the provisions of Section 6 of the Gold Reserve Act which would
appear to otherwise authorize such actions.
With regard to gold convertibility and gold backing for U.S. currency,
the Secretary of the Treasury has considerable authority under 3 1 U.S.C.
§ 822a and 31 U.S.C. § 734 to deal in gold with the approval of the President.

380
And w i t h

the

expiration

the

ban a g a i n s t

private

parties

holding

gold

certificates, the Secretary would appear to be able to issue such certificates
backed by gold so purchased or already in the possession of the Treasury.
However, under the Joint Resolution of 1935, 31 U.S.C. § 773a-773d, one
could not sue the Government for payment in gold on these certificates,
and the Government may not be able to expend funds in redeeming the certificates in gold.

Further, under 31 U.S.C. § 405b, the gold certificates would

have to be backed by gold valued at $42.22 per ounce, which could
create great practical difficulties.
On the other hand, it may be possible to link gold reserves held by the
Treasury with other forms of U.S. currency, such as Federal Reserve notes.

How-

ever, such a correlation would apparently have to be done on an informal basis,
since the official gold reserve requirement for Federal reserve notes, as well
as Treasury notes and United States notes was terminated through an Act of Congress in 1968.

(Public Law 90-269).

Any such informal linkage would also be

open to the charge that it was contrary to the intent of Congress as expressed
in 1968, and with regard to Federal reserve notes, would require the cooperation of the Board of Governors of the Federal Reserve System*

And since no

authority exists at present for the issuance of Treasury notes, and the circulation of U.S. notes must be maintained, by statute, at the fixed amount of
$300 million dollars (31 U.S.C. § 403), the possibility of direct backing
other forms of U.S. currency and gold without additional legislation must be
considered problematic.
Finally, with regard to indexing U.S. securities and the price of gold,
such action would appear to be prohibited by the terms of the Joint Resolution
of 1935, withdrawing the consent of the United States to be sued on so-called

381
"gold
the

clauses."

payment

These

clauses

in c u r r e n c y w h i c h

have

been d e f i n e d

is i n d e x e d

the

include

price o f

clauses

gold.

See,

authorizing
e.g.

South-

ern Capital Corporation v. Southern Pacific Co., 568 F. 2d 590 (8th Cir. 1978).
Since such clauses could not be enforced in the courts, it would be unlikely
that a market would exist for such securities while the Joint Resolution is
still in effect.
In summary, existing laws appear to effectively prevent the Executive
Branch from returning to any of the several forms of "gold standard" described
in this paper.

If these laws were appropriately modified by Congress,

authority could be provided for the Executive to reinstitute a gold standard
in the country.

However, it should also be noted that the term "gold standard"

is not necessarily a term of art, and it is possible that the Executive may be
able to initiate some formal type of relationship between the value of gold and
U.S. currency without contravening the provisions discussed in this paper.

Raymond Natter
Legislative Attorney
American Law Division
December 3, 1981

ANNEX B

Summaries 6f Statements
Submitted to the Commission*

^Individuals that testified and submitted statements in response
to the Commission's invitation were asked to prepare brief
summaries of their statements for inclusion in this report.
All summaries received are reproduced, as submitted, in this
annex.

383

385
Summaries of Statements
Submitted to the Commission
Aliber, Robert Z., University of Chicago, "U.S. Policy Toward Gold,"
March 4, 1982.
Barlow, Wallace, "Comment by the International Institute for Resource
Economics," December 29, 1981.
Benko, Ralph J., Pattison, Sampson, Ginsberg, and Griffin, P.C.,
"Constitutional Gold," November 12, 1981.
Bernstein, Edward M., EMB (Ltd), "What Role for Gold in the Monetary
System?", November 12, 1981.
Blain, Robert R., "The Necessary Characteristics of a Monetary
Standard," January 7, 1982.
Bostian, David B. Jr., Bostian Research Associates, Inc., "Assessing
the Role of a Restoration of a Gold Standard," November 12, 1981.
Browning, George L., "Why Gold," January 19, 1982.
Cobb, Joe, Choice in Currency Commission, "The Real Issue is Freedom
of Choice in Currency," November 12, 1981.
Collins, Barry R., "Gold is the Only Permanent Stable Money,"
January 6, 1982.
Cooper, Richard N., Harvard University, "The Irrecoverability of
the Gold Standard," January 1982.
Davies, Richard L., The Gold Institute/L 1 Institut de l'Or,
"Facilitating the Options of Using Gold as an Auxiliary Currency,"
November 13, 1981.
Dessauer, John P., "Gold:
January 15, 1982.

Archaic Throw Back on Modern Tool,"

Dockstader, C.F., "Tender and the U.S. Constitution," February 1, 1982.
Dornbusch, Rudiger, Massachusetts Institute of Technlogy,
Before the Gold Commission," November 13, 1981.

"Statement

Durell, Edward, "The Inadequacy of Accounting and Security of the
Nation's Alleged Gold Reserves and Possible Replacement of these
Reserves," February 10, 1982.
Fellner, Wiliam, American Enterprise Institute, "Views Presented to
the Gold Commission," November 13, 1981.
Firth, Brian W., "Currency as Seigniorage," February 1982.
Gold Bondholders Protective Council, Inc., "Possession vs. Promises:
Public Policy Issues for Reconciliation," February 11, 1982.

386
Groganf Michael, "Population Standard," October 9, 1981.
Groseclose, Elgin, Institute for Monetary Research, "The Objects of
Monetary Reform," December 29, 1981•
Harris, John H., "As Good as Gold," January 13, 1982.
Hasson, Joseph A., "Some Neglected Aspects of Gold," January 13, 1982.
Haw, Richard C., "Gold-Based Currency?"

January 21, 1982.

Hazlitt, Henry, "Summary of My Views on Restoring the Gold Standard,"
January 26, 1982.
Holt, Thomas J., T.J. Holt and Co., "Too Early for Gold,"
February 1, 1982.
Holzer, Henry Mark, Brooklyn Law School, "Gold and Monetary Freedom,"
November 12, 1981.
Jastram, Roy W., University of California, Berkeley, "Historical
Evidence Supporting a Return to a Gold Discipline," February 1, 1982.
Junz, Helen B., Townsend-Greenspan and Co., Inc., "Statement Before
the Federal Gold Commission," November 13, 1981.
Kenen, Peter B., Princeton University, "Why Gold Is Not the Answer,"
November 12, 1981.
Kingsbury, Edward H., "Gold, the Only Honest Universal Money,"
February 3, 1982.
LaRouche, Lyndon H., "An Urgent Return to the American System,"
January 8, 1982.
Larson, Martin A., Liberty Lobby, "The Desirability of a Specie
Monetary Standard," January 10, 1982.
Lurio, Mitchell S., "A Permissive Way of Achieving a Gold Standard
Without Prior Fixing of the Dollar Price of Gold," December 28, 1981.
Mallin, Tony, "Comments on the Proposal of a Gold Standard to
Revitalize Our Economy," February 11, 1982.
Mann, Philip H., "Summary of Statement to the Gold Commission,"
February 4, 1982.
Mason, Will E., "The Gold Standard:
February 11, 1982.

Retrospect and Prospect,"

McMillan, George, "The Use of a Basket of Commodities to Back the
Currency," January 14, 1982.
Meltzer, Allan H., Carnegie-Mellon University, "An Epistle to the
Gold Commission," September 17, 1981.

387
Miles, Marc A.,
Price Rule Such

Rutgers University-New
as the G o l d S t a n d a r d , "

B r u n s w i c k , "The C a s e
N o v e m b e r 13, 1981.

for

Nordt, Paul W. Jr., "Better a Cinder Block Standard Than No Standard
at All," January 5, 1982.
North, Gary, "The Moral Issue of Honest Money," February, 1982.
Ockert, Carl E., "Flexible Gold Convertibility," January 9, 1982.
Popp, Edward E., "How to Make Full Bodied Gold and Silver Coins
Improve Our Monetary System," January 15, 1982.
Powers, Lois, Economic News Agency, Inc., Editorial by Charles R. Stahl
in Green's Commodity Market Comments, September 23, 1981 and
October 21, 1981.
Puffer, K. Hart, "The Best Money System," December 1, 1981.
Racz, Andrew G., "Testimony to the Gold Commission," November 12, 1981.
Reisman, George, "Gold: The Solution to Our Monetary Dilemma,"
February 9, 1982.
Reynolds, Alan, "Gold Commission Testimony," November 13, 1981.
Rothbard, Murray N., "For a 100% Gold Standard," November 12, 1981.
Russell, Jim, "PLEASE," January 4, 1982.
Russell, Robert R., "The Essentials of a Sound Currency System,"
February 1982.
Scharlach, Harry R., "Return U.S. Dollars to Quality Money,"
December 30, 1981.
Schoen, Edgar J., "The Undisciplined Dollar," January 29, 1982.
Shapiro, Paul, "Gold and the Reigning Delusion," February 5, 1982.
Silcox, John V., "Gold and the Need for Discipline in Managing Our
Money Supply," November 4, 1981.
Sinclair, James E., "Is a Gold Standard Workable?", January 20, 1982.
Solomon, Robert, "Issues Before the Gold Commission," November 12, 1981.
Solyom, Richard L., "Transition Period-Irredeemable Paper to SpecieBacked Currency," February 6, 1982.
Sonawala, ShantilaJ, "Gold Paper-Currency for Future," June 8, 1981.
Taylor, Leslie, "Constitutional Currency," January 28, 1982.

388
Thompson, Earl A., "Free Banking Under a Labor Standard —
Perfect Monetary System," January 8, 1982.

The

VanBuren, Weston I., "U.S. Monetary System 1981 Versus U.S. Constitution," November 18, 1981.
VanMoore, John, "Termination of Ongoing Gold Price Manipulator's
Inflation," January 19, 1982.
Von der Porten, Herbert P., "GRAMDOR: A Proposal to Establish a
Resilient Gold Currency," January 18, 1982.
Welker, Ernest P., "First Things First in the Managed-Money GoldMoney Debate," March 8, 1982.
Whelpley, James D., "If Possible, At Least Be Honest About Fiat
Credit Systems Excluding Gold Versus Non-Fiat Systems Incorporating
Gold Backing," January 4, 1982.
Weintraub, Robert, "Weintraub Gold Certificate Plan," February 1982.
Williamson, John, "Monetary Stability and Gold," November 13, 1981.
Wrisley, John, "Restore Redeemability," December 31, 1981.
Wythe, Joseph, "Why the U.S. Must Not Return to Gold," March 5, 1982.

389
U.S. Policy Toward Gold
Submitted by
Robert Z. A l i b e r
U N I V E R S I T Y OF CHICAGO
Graduate School o f Business
5836 Greenwood Avenue
Chicago, I l l i n o i s
60637
March

1982

T h e U n i t e d S t a t e s n e e d s a new p o l i c y t o w a r d g o l d .
For the previous
s e v e r a l d e c a d e s , U . S . g o l d p o l i c y was o b s e s s e d b y t h e c o s t s o f a l t e r i n g
t h e ?35 p a r i t y r a t h e r t h a n b y a r e a s o n e d a n a l y s i s o f how U . S . g o l d h o l d i n g s
c o u l d be managed t o enhance U . S . economic and f o r e i g n p o l i c y
interests.
The U . S . G o v e r n m e n t owns 264 m i l l i o n o u n c e s o f g o l d w h i c h , a t r e c e n t m a r k e t
p r i c e s , has a v a l u e i n e x c e s s o f $100 b i l l i o n .
This gold is too valuable
t o s e l l and t o o c o s t l y t o h o l d as a s t e r i l e a s s e t .
The o b s e r v a t i o n t h a t t h e r e was p r i c e l e v e l s t a b i l i t y i n t h e l o n g r u n
i n the nineteenth century provides the r a t i o n a l e f o r the proposals that the
U n i t e d S t a t e s now r e t u r n t o t h e g o l d s t a n d a r d .
However, l o n g - t e r m s t a b i l i t y
i n t h e p r i c e l e v e l was n o t a t t a i n e d w i t h o u t c o s t ? c y c l i c a l v a r i a t i o n s
in
income and employment were p e r v a s i v e under t h e g o l d s t a n d a r d .
Moreover,
f i n a n c i a l c r i s e s o c c u r r e d on t h e average o f once a decade and were t h e source
o f p r e s s u r e s t o e s t a b l i s h a c e n t r a l bank as a l e n d e r o f l a s t r e s o r t , b o t h t o
cope w i t h f i n a n c i a l d i s t r e s s and t o p r o v i d e an " e l a s t i c
currency."
The r a t i o n a l e f o r e s t a b l i s h i n g a m o n e t a r y s t a n d a r d i s t o h e l p a c h i e v e
f i n a n c i a l and economic s t a b i l i t y .
A monetary standard i s successful only
i f i t i s c o n s i s t e n t w i t h t h e f i n a n c i a l and b u d g e t a r y p r a c t i c e s .
Many c o u n t r i e s have sought t o e s t a b l i s h f o r e i g n exchange p a r i t i e s f o r t h e i r
currenc i e s , o n l y t o be o b l i g e d t o abandon them because t h e y were i n c o n s i s t e n t w i t h
t h e i r f i n a n c i a l and b u d g e t a r y p r a c t i c e s .
The U n i t e d S t a t e s h a s h a d a c e i l i n g on t h e F e d e r a l d e b t f o r a t l e a s t f i f t y y e a r s ; h o w e v e r , whenever t h e
g r o w t h o f e x p e n d i t u r e s r e l a t i v e t o revenue has caused t h e F e d e r a l d e b t t o
press against the c e i l i n g , the c e i l i n g is quickly raised.
B o l i v i a , which
h a s h a d more t h a n 100 r e v o l u t i o n s a n d c o u p d ' e t a t s i n t h e l a s t c e n t u r y ,
would not suddenly r e a l i z e p o l i t i c a l s t a b i l i t y by a d o p t i n g a U . S . - t y p e
constitution.
The t a s k o f a t t a i n i n g U . S . p r i c e l e v e l s t a b i l i t y i s n o t t h e i n s t i t u t i o n a l one o f d e c i d i n g on a p a r i t y f o r g o l d , and t h e n s t i p u l a t i n g t h a t t h e
changes i n g o l d h o l d i n g s o f t h e m o n e t a r y a u t h o r i t i e s w i l l be t h e o n l y s i g n i f i c a n t source o f changes i n the monetary base.
Rather, the task i s to
e s t a b l i s h t h e c r e d i b i l i t y o f t h e U . S . government's commitments t o a s t a b l e
p r i c e l e v e l , and t h a t s i g n i f i c a n t c o s t s w i l l be i n c u r r e d t o a c h i e v e t h i s
objective.

390
If the U.S. authorities decide to go "back on gold," they must choose
a new parity for the dollar. Consider that Rip van Winkle went to sleep in
1 9 6 1 , when t h e d o l l a r p r i c e o f g o l d was $ 3 5 . 0 0 .
Upon a w a k e n i n g i n 1 9 8 1 , he
i s a s k e d , " W h a t s h o u l d b e t h e new d o l l a r p r i c e o f g o l d ? "
On t h e b a s i s o f
t r a d i t i o n a l arguments about a p r o p o r t i o n a l r e l a t i o n s h i p between the w o r l d
p r i c e l e v e l and t h e d o l l a r p r i c e o f g o l d — t h e t y p e o f argument t h a t p r o v i d e s
the

justification

for

the

gold

standard—he

might

decide

$105 =

s i n c e t h e U . S . p r i c e l e v e l now i s a b o u t t h r e e t i m e s h i g h e r t h a n t h e 1 9 6 1
price level.
B u t t h i s p r i c e i s much, much l o w e r t h a n r e c e n t m a r k e t p r i c e s .
I f t h e / g o l d p a r i t y were set a t or near r e c e n t market p r i c e s , then i t
almost
c e r t a i n l y w o u l d p r o v e t o be much t o o h i g h i f t h e U n i t e d S t a t e s s u c c e e d s i n
achieving reasonable p r i c e l e v e l
stability.
From t h e p o i n t o f v i e w o f t h e U . S . n a t i o n a l i n t e r e s t , g o l d has a much
more i m p o r t a n t r o l e i n t h e s e t t l e m e n t o f payments i m b a l a n c e s
internationally
t h a n i n d e t e r m i n i n g t h e r a t e o f g r o w t h o f t h e money s u p p l y .
As l o n g as t h e
market p r i c e o f g o l d i s h i g h l y v a r i a b l e , the most a p p r o p r i a t e approach i s
t o d e v e l o p t r a d i n g a r r a n g e m e n t s f o r t r a n s a c t i o n s i n g o l d among c e n t r a l
banks.
T h e U . S . i n t e r n a t i o n a l balance
s h e e t — t h e r e l a t i o n between U.S.-owned
r e s e r v e d a s s e t s and l i q u i d d o l l a r a s s e t s h e l d by f o r e i g n o f f i c i a l
institut i o n s — a p p e a r s s i g n i f i c a n t l y d i f f e r e n t i f t h e g o l d owned b y t h e U . S . a u t h o r i t i e s i s v a l u e d on c u r r e n t o r r e c e n t m a r k e t p r i c e s .
The U . S .
authorities
should take the i n i t i a t i v e i n a t t e m p t i n g t o standardize the approaches
taken by n a t i o n a l monetary a u t h o r i t i e s t o the v a l u a t i o n o f monetary g o l d .
A
f o r m u l a m i g h t be d e v i s e d t o v a l u e U . S . g o l d i n t h e b a s i s o f t h e a v e r a g e o f
prices over the l a s t three or four years.
For example, the formula might
u s e t h e c l o s i n g p r i c e i n 36 o f t h e l a s t 4 8 m o n t h s , t h e s i x m o n t h s w i t h t h e
h i g h e s t p r i c e s and t h e s i x months w i t h l o w e s t p r i c e s w o u l d be e x c l u d e d f r o m
the determination of the value.
A t some f u t u r e d a t e i f t h e m a r k e t p r i c e o f g o l d i s a t o r n e a r t h e
levels consistent w i t h i t s long run e q u i l i b r i u m values, the U.S.
authorities
might take the i n i t i a t i v e toward e s t a b l i s h i n g a p a r i t y f o r the d o l l a r
in
terms of g o l d .
The n e c e s s a r y c o n d i t i o n f o r a move t o s u c h a p a r i t y i s t h e
attainment of relative price s t a b i l i t y .
The s u f f i c i e n t c o n d i t i o n i s t h e
move b a c k t o w a r d a s y s t e m o f p e g g e d e x c h a n g e r a t e s f

391
COMMENT BY THE INTERNATIONAL INSTITUTE FOR RESOURCE ECONOMICS
Submitted

Wallace D. Barlow, P 0 E 0 , Director, IIRE
6210 Mass. Ave., Washington, D.C. 20016
December 29, 1981
My recent speech to the Men 1 s Republican Club of Montgomery Connty Maryland
expressed the views of the International Institute for Resource Economics on the gold
issue. It is still relevant. Here it is:
"Since 1971 the dollar has been convertible only into an unspecified quantity of an unknown commodity. Since that date, only fools have chosen to hold
dollars instead of goods. This must continue, until the dollar is again convertible into a specific quantity of a known commodity.
Which commodity? This decision can be left to the technicians.
value and ease of identification are considerations.

High unit

The decision to close the gold window, rather than to change the price in
accordance with the increased cost of production was dictated by idiots. They
were concerned with minor advantages that might accrue to the Soviet Union and
South Africa. They predicted a price of $6 as the free market price of gold.
Most important of all, they ignored the fact that the convertibility of the dollar into gold, as agreed to at Bretton Woods, ahd become the cornerstone of civilization on this planet.
When the International Monetary Fund met to vote on "Paper Gold"; I was
there. What was I doing? I was giving away rubber yardsticks. On each yardstick, in ten languages, was the warning: f,Never Trust a Politician!"
INFLATION HAS A SIMPLE SOLUTION!
ATION TO RESTORE CONVERTIBILITY!"

ALL THAT IS NEEDED IS A FIRM DETERMIN-

The Institute deplores the efforts of the enemies of convertibility to complicate this issue. It is brutally simple. There are two kinds of money; HONEST and
DISHONEST. History teaches us that honest money has a batting average of 1000; dishonest money a batting average of zero.

392
CONSTITUTIONAL GOLD
Submitted by
Ralph J. Benko, A11orney-At-Law
Pattison, Sampson, Ginsberg & Griffin, P.C.
22 First Street, P.O. Box 899
Troy, New York 12181
November 12, 1981

The most important "commission11 on the gold standard in American history
was the Constitutional Convention. What is now Article I, Section 8, Clause
2 of the Constitution originally gave Congress the power "To borrow money
and emit bills on the credit of the United States". The language "and emit
bills", understood to authorize inconvertible paper money, was opposed
almost unanimously, the delegates voting by an overwhelming majority to
strike it from the text of the Constitution. As George Bancroft, the great
nineteenth century American historian, concluded, "The adoption of the
Constitution is to be the end of paper money ... if the Constitution shall
be rightly interpreted and honestly obeyed."
In the Convention debate, absolute prohibition of paper money was urged
by Oliver Ellsworth, later second Chief Justice of the United States Supreme
Court, and Senator who decisively shaped the federal judiciary. The record
states: "Mr. Elseworth thought this a favorable moment to shut and bar the
door against paper money. The mischiefs of the various experiments which
had been made, were now fresh in the public mind and had excited the disgust
of all the respectable part of America. By withholding the power from the
new Government more friends of influence would be gained to it than by
almost any thing else. Paper money can in no case be necessary. Give the
government credit, and other resources will offer. The power may do harm,
never good."
Reservation of an emergency paper money power was urged by James Madison,
chief architect of the Constitution, author of the Bill of Rights, fourth
American President. The journal of the proceedings, which is Madison's own,
records: "This vote (to bar the power) in the affirmative by Virginia was
occasioned by the acquiescence of Mr. Madison who became satisfied that
striking out the words would not disable the Government from the use of
public notes as far as they could be safe and proper; and would only cut
off the pretext for a paper currency, and particularly for making the bills
a tender either for public or private debts."
(Emphasis original.) Contrast
Madison's intent to the legend on our Federal Reserve Notes, "legal tender
for all debts public and private".
Among other implacable foes of paper money was Alexander Hamilton, our
first Secretary of the Treasury, who historians conclude "in economic
terms, literally built the United States". Paper money, he said, is "so
certain of being abused—that the wisdom of the Government will be shown
in never trusting itself with the use of so seducing and dangerous an
expedient."

393
C h i e f J u s t i c e M a r s h a l l a l s o condemned p a p e r money, o b s e r v i n g ,
"Its
v a l u e is c o n t i n u a l l y c h a n g i n g ; a n d t h e s e c h a n g e s , o f t e n g r e a t a n d s u d d e n ,

expose individuals to Immense loss, are the sources of ruinous speculations,
and destroy all confidence between man and man.11
Only the Civil War and Reconstruction, our greatest constitutional crises,
could undermine the integrity of the monetary system carefully established by
the Revolutionary generation. Our recent inflation confirms again the folly
of ignoring the political vision of the Founding Fathers. Yet our problems
are compounded by economists more intent on testing their theories than in
fulfilling their responsibility to repair us to the classical gold standard
that is part of our most fundamental political legacy.
Unless one is ready to hold the First Amendment, or representative democracy,
out of date, the ideas of Madison and his peers cannot be dismissed as inapplicable to today's conditions. Since the other political institutions these
men built for us continue to serve so well, we should not so casually dismiss
the gold standard as the product of another age. Madison's ideas are very
modern. In one of his lesser known works, entitled "Money", he examines the
defects of monetarism. In the eighteenth century, "monetarist" claims were
asserted by Hume and Montesquieu. Madison refuted them with the sounder
classical doctrine. Inflation, wrote Madison in 1780, "has not been the
effect of the quantity, considered of itself, but considered as an omen of
public bankruptcy." He presents telling arguments to prove the case.
The recorded thoughts of our greatest statesmen and thinkers—both economic
and political—establish beyond doubt the intellectual legitimacy of the
gold standard. We all would benefit by an end to the recent, discredited,
experiment with inconvertible paper money, and the restoration of the
classical quality of free convertibility of notes into gold that America's
founders originally secured in the Constitution.
This Gold Cbmmission should especially heed the words of Thomas Paine,
America's most influential Revolutionary thinker, who decisively shaped
the ideological direction of the American Revolution. Shortly before the
Constitutional Convention he wrote: "As to the assumed authority of any
assembly in making paper money, or paper of any kind, a legal tender, or
in other language a compulsive payment, it is a most presumptuous attempt
at arbitrary power. There can be no such power in a republican government:
the people have no freedom, and property no security where this practice can
be acted: and the committee who shall bring in a report for this purpose, or
the member who moves for it, and he who seconds it merits impeachment, and
sooner or later may expect it."

Ralph J. Benko

394
WHAT ROLE FOR GOLD IN THE MONETARY SYSTEM?
Submitted

EDWARD M. BERNSTEIN
1775 MASSACHUSETTS AVENUE, N.W., WASHINGTON, D.C.
NOVEMBER 12, 1981

The hundred years of the classical gold standard were marked by large
secular fluctuations in prices. The most difficult period was the last quarter
of the 19th century when prices fell sharply and the world economy was in a protracted recession. The reason for the secular price fluctuations was the irregular
growth of the world stock of monetary gold. According to Professor Cassel, if
gold reserves had increased at a steady rate of 3 per cent a year prices would
have remained reasonably stable. Instead, the gold stock increased at much higher
or lower rates for periods of 20 to 25 years, depending on gold production. Until
1914, the index of wholesale prices in the United States fluctuated with world
production of gold adjusted for a 3 per cent trend, although with a lag of five
years. The inflation in World War I disrupted the relationship of gold to prices
and all of the belligerents except the United States abandoned the gold standard.
The restoration of the gold standard after World War I presented a number
of problems. The stock of monetary gold was not sufficient to sustain the high
postwar level of prices and gold production was less than half as much relative to
world reserves as before the war. The gold exchange standard economized on the
need for gold reserves, but not enough to compensate for the decrease in gold
production. The gold standard, which was restored in 1925-30, collapsed in the
great depression of the 1930s, and all countries abandoned the gold parities of
their currencies. In the United States, gold redemption of the dollar was
terminated in March 1933 and the gold clause in contracts was abrogated by the
Congress in June. In accordance with the Gold Reserve Act of 1934, the President
fixed a new price of $35 an ounce for gold. The private holding of gold was forbidden, but the Treasury sold gold to foreign monetary authorities until this was
ended in August 1971. Gold did not act as a limitation on the money supply after
1934 because whenever the reserves were near the legal minimum the requirements
were reduced until they were finally eliminated in 1968.
The persistent inflation has revived interest in restoring the gold
standard. The problems this would create seem insuperable at present. Gold
production has been falling since 1966 and the absorption of gold in the arts and
industry has exceeded production in recent years. Even before the inflation, the
growth of the stock of monetary gold was minimal. The world pattern of payments
is seriously unbalanced, and if members of OPEC could convert their net dollar
earnings into gold at a fixed price they would probably do so on a large scale.
Other countries with large holdings of dollars could also dacide to diversify
their reserves by converting them into gold. Finally, private holders of dollars
in this country and abroad could present enormous amounts for conversion into
gold if they thought the price was too low; and private holders of gold could
sell enormous amounts to the Treasury for dollars if they thought the price was
too high.

395
Although it is not feasible to restore the gold standard, some of its
features could be gradually adopted as domestic and international monetary conditions improve. It might be possible to find a way of resuming reserve requirements
against Federal Reserve notes and deposits, although not as rigidly as in the past.
It would be desirable to moderate the fluctuations in dollar exchange rates for
the major currencies and ultimately to return to fixed par values with considerable
flexibility. It might also be possible to restore convertibility of the dollar
into reserve assets for settling balance of payments deficits if the United States
were to receive reserve assets in settlement of its surpluses. These are steps
that should be considered when our inflation has been halted and the world pattern
of payments becomes better balanced, instead of undertaking far-reaching commitments on gold which the United States would be unable to meet.

396
THE NECESSARY CHARACTERISTICS OF A MONETARY STANDARD
Submitted by
ROBERT R. BLAIN, Ph.D.
SOUTHERN ILLINOIS UNIVERSITY AT ED WARDS VILLE
JANUARY 7, 1982

There are already in use in the United States a large number of standards of weight
and measure including standards of weight, liquid measure, length, area, volume,
temperature, barometric pressure, time, speed, and numerous engineering standards for
pipes, bolts, threads, and others. These standards have proven themselves in actual practice
to be effective and efficient means, without government intervention, for people in our
economy to cooperate in the production and distribution of goods and services.
Identification of the characteristics that these standards share in common will, therefore,
provide an empirically sound basis for identifying the characteristics that are necessary in
order for a monetary standard to achieve comparable results.
All successful standards of weight and measure possess four characteristics;
1. THEY ARE REAL. They all have an actual, observable, measurable,
substantive existence outside the minds of their users. None is subjective. Length can be
seen, weight can be measured on a scale, speed is observable. However, while all standards
are real, the application of all standards involves important subjective aspects. While a
yardstick is objective, users of it decide subjectively how large to make their houses, how
much land to allow for various uses, etc.
2. THEY ARE STABLE. All standards remain the same from place to place
and from one time to another. Stability is necessary in order that economic activities that are
dispersed in space and time be coordinated accurately and predictably.
3. THEY ARE SYSTEM-WIDE. All successful standards are available and
known by all people in the system that use the measure — thus facilitating cooperation.
4. THEY ARE APPROPRIATE. All standards possess the quality that is being
measured. A standard of length is a length, a standard of weight has weight, a standard of
volume has volume. Nowhere is a length used as a standard of weight, or a speed used as a
standard of temperature.
These four characteristics make all existing standards of weight and measure
effective and efficient means for coordinating the production and distribution of goods and
services throughout the economy. The only role of government in this process is to define
the standard and to insure that scales and other measuring devices are accurately calibrated.
Decisions as to actual dimensions of goods in the economy are left to the subjective
discretion of the people involved.
When gold is evaluated in terms of these four characteristics, we find that it fails to
meet all but the first condition, that of being real.
1. GOLD IS REAL. Gold has an observable, tangible existence. It is the reality
of gold that leads proponents to believe that the use of gold as a monetary standard would
rationalize the money supply.

397
2. GOLD IS NOT STABLE. The total supply of gold changes as new gold is
added through mining operations and existing gold is used for industrial and cosmetic
purposes. Gold is stable only in a relative sense being relatively more stable than iron or
wheat. The value of gold is highly unstable, varying from person to person and from
time to time.
3. GOLD IS NOT SYSTEM-WIDE. While almost everyone has heard of gold,
very few people can accurately identify gold, and only experts know how to measure
"karats''. While anyone could weigh a piece of gold, only an expert could certify the metal
as gold and attest to its purity.
4. GOLD IS NOT APPROPRIATE. Gold is measured by weight. The function
of a monetary standard is to measure economic price. If weight were an appropriate
measure of price, the heaviest goods would have the highest prices and all services, having
no weight at all, would be free. Clearly, gold fails to meet the test of appropriateness.
Therefore, gold fails three of the four tests that a monetary standard must meet. Its
popularity as a possible monetary standard can probably be accounted for by the fact that,
historically, gold worked better than other commodities like grain and iron. Going on the
gold standard today, however, would be like the Wright brothers, failing to make their
airplane fly, advocating return to the horse and buggy. The wiser course would seem to be
to search for something that successfully meets the four tests for a monetary standard.
Such a search leads to TIME as the proper monetary standard.
1. TIME IS REAL. Time is based on the rotation of the earth (hours and days)
and the orbit of the earth around the sun (days and years). Time is as real as the rising and
setting of the sun and the changing seasons. Its reality is measured by clocks and calendars.
2. TIME IS STABLE. Time is as stable as the rotation and orbit of the earth —
extremely stable — the benchmark against which all other changes are measured.
3. TIME IS WORLDWIDE. All peoples of the earth keep time records. Clocks
and calendars are found all around the earth.
4. TIME IS APPROPRIATE. A great deal of evidence supports the proposition
that time is an appropriate monetary standard. One body of evidence consists of all the ways
that time is presently used to organize and coordinate economic activities. Work is regulated
in hours, days, and weeks; entry into the labor force is governed by age as is exit from it;
rent and interest are charged by the month; taxes come due annually; depreciation is
defined by time; economic planning is done in man-hours; and, ironically, inflation is
measured by price changes over time. Another body of evidence is the universal association
of time with money. People spend time, invest time, and save time just as they spend,
invest, and save money. Finally, the time required to produce a good or render a service is a
reasonable basis for setting price, as evidenced by actual practice in most fields, including
auto repair, psychotherapy, and consulting.
A reasonable basis for adopting time as the monetary standard in the United States
would be to convert dollars to hours by the following equation;
Gross National Product
_ „
-——
^ — = Dollars per hour.
Total Hours Worked
For 1980, the equation is $2,626b
= $13.49 per hour.
194.66b

398
ASSESSING THE ROLE OF A RESTORATION OF A GOLD STANDARD
STATEMENT OF

DAVID B. BOSTIAN, JR.
PRESIDENT
BOSTIAN RESEARCH ASSOCIATES, INC.
100 PARK AVENUE
NEW YORK, N.Y. 10017
NOVEMBER 12, 1981
Mr. Chairman and members of the Gold Commission, I am David
B. Bostian, Jr., and I am appearing today as President of Bostian
Research Associates,* Inc. It is a privilege to accept your invitation to state my view on the possible role of gold in the domestic and international monetary systems.
I do not advocate an immediate return to a domestic or international gold standard because of major economic and structural problems which exist today. I do advocate a gradual and experimental shift toward a possible full gold standard through the
issuance of new gold-backed bonds or notes. The interest rate
that such a new gold-backed issue would bear and the yield
spreads relative to the existing, unconvertible government securities of similar maturity would offer important free market
benchmarks by which to gauge the plausibility of an eventual return to a complete gold standard. Clearly, considering our $1
trillion national debt and the approximately $100 billion in interest that must be paid on it each year, a possible lowering of
the interest expense would be a worthwhile goal. Nevertheless,
when the basic question of instituting a gold standard as a fiscal and monetary discipline arises, those who favor it in any
form must realize' that it may fall short of optimistic expectations because the sources of real long term economic growth are
not solely monetary in nature. Restraint in both the creation of
money and federal deficits, while a constructive policy, does
not, of itself, insure a greater supply of goods and services by
which real economic wealth is measured!
There are many advantages to be derived, however, from any
effort which reduces inflationary expectations and a gradual
shift toward a gold standard through a possible experimental issue of gold-backed government securities is one way to maximize
the advantages without incurring undue risks. If world political
and economic conditions were more stable, this Commission might
be advised to move more rapidly on instituting a gold standard,
but we cannot rapidly return to the stable conditions that would
allow the institution of a full gold standard. Indeed, one might
ask if such a standard would be needed under an assumption that

399
conditions were actually stable? The risks of a hasty return to
a gold standard are much more clearly defined. Consider the following :

- It would be difficult to determine the proper price at
which gold should be fixed under such a standard. A price
that was too high would be inflationary and a price that
was too low could result in deflation.
- World gold production over the years has been very volatile with major discoveries and events disruptive of continuous mining hard to predict.
- The Soviet Union and South Africa accounted for approximately 111 of world gold production in 1980. (Soviet
Union production was 8,300,000 troy oz., South African
production was 21,669,468 troy oz- and world production
was 38,882,381 troy oz.)
- Assuming adequate production and availability of gold,
there is still the question of whether it would provide
an adequate base to support real economic growth.
- Given the tremendous worldwide debt burden today and the
inflation that has been a precondition to the servicing
of that debt, a sudden disinflationary trend, such as
might follow the rapid movement to a full gold standard,
would possibly cause the disorderly liquidation of said
debt with dire economic consequences.

- For maximum worldwide effectiveness, should an eventual
return to a full gold standard be deemed worthy of serious
consideration, a meeting of the IMF would be necessary to
consider establishing an international gold standard. Given the need for three-fifths of the membership (and 85% of
the votes) to agree on such a course of action, an exploratory meeting should be convened.
CONCLUSION
We must move with caution in reestablishing a gold standard
because of the political and financial instability that characterizes the modern world economy. There is no easy solution to
the economic malaise in which we find ourselves today and any
sudden movement to an assumed panacea could be costly. If there
is to be a relatively painless way out of the debt-ridden morass
in which we find ourselves, it will only be through significant
increases in productivity, i.e., through a national effort to
increase the output of goods and services, the benchmarks of
real wealth. In the last analysis, only if the nation has the
will to be disciplined and productive will it ever adhere to any
standard, gold or otherwise, nor will it ever achieve its maximum long term economic growth potential.

400
WHY GOLD?
By George L. Browning
14329 Chandler Blvd.
Van Nuys, CA 91401
January 19, 1982
THE QUESTION: Is a money system based on gold e s s e n t i a l t o the social and
economic health of the United States? THE ANSWER: C l e a r l y and d e f i n i t e l y , "YES".
America's economic and money history provides the proof.
From 1776 t o 1933, a period of 157 y e a r s , t h i s commonwealth was elevated from
thirteen impoverished colonies to the position of the wealthiest and most powerful n a t i o n
in the World. This feat was not accomplished through the use of large quantities of
money. I t was accomplished by the wise and e f f i c i e n t use of manpower and m a t e r i a l
resources. In 1933 the total quantity of money in America was only $42.0 b i l l i o n .
Today, in 1982, 49 years l a t e r , the money supply of the United States i s over
$ 2 , 5 0 0 . 0 b i l l i o n - - s i x t y times as much money as i t had in 1933. The n a t i o n s ' s
population has almost doubled and the physical quantity of material wealth a v a i l a b l e f o r
purchase is nearly twice that of 1933. With sixty times as much money and twice as many
people capable of rendering services, the economic management of the United States does
not have the competency to provide for the needs of her people.
Horrendous unemployment, underproduction and maldistribution of w e a l t h , and lack
of housing and health requirements - - these are producing social u n r e s t , rebellion
against authority, violence, crime and insecurity for our families and properties.
America's s u f f e r i n g s are due to f a l s e money and economic concepts. Believing
that increased money quantities would provide needed management for the nation's manpower
and material resources, t h i s nation cut the cords which tied the dollar to the hitching
post of gold reserves. Only the whims of the p o l i t i c i a n s and money managers in power
were l e f t to control the quantity of dollars to be manufactured out of credit paper.
With sixty times as many d o l l a r s , America is unable t o provide f o r the needs of
only two times as many citizens. A better understanding of the nature and of the correct
uses of good money is needed.
Money, per se, is not wealth. Money, per se, cannot create wealth. That vrfiich
is used as money may have, or i t may not have, a commodity value. Gold and s i l v e r coins
have a commodity value. Paper currency and bank checks have no commodity value. Money
is merely a mental thing based on f a i t h - f a i t h t h a t the next f e l l o w w i l l accept t h a t
which is p r o f f e r e d as money in exchange f o r his goods or services. In the absence of
that f a i t h , not even gold would serve as good money.
Money's power, whether for good or e v i l , resides in i t s circulation - not in i t s
mere existence. Centuries ago A r i s t o t l e s a i d : "MONEY HOARDED AND NOT CIRCULATED IS
STERILE AND NONPRODUCTIVE". Today, one t r i l l i o n b i l l i o n dollars locked up in vaults or
in time and savings deposits, without c i r c u l a t i o n , could not produce employment, wealth
or the d i s t r i b u t i o n of wealth. When money i s c i r c u l a t e d in the home economy, not
exported to a foreign economy, no money i s consumed, used up or wasted. This i s t r u e
whether the purpose of the spending is productive or destructive. Bad spending may waste
precious manpower and material resources; i t may impoverish the nation i n material
wealth, but i t does not waste money.

401
For money to retain its value, its purchasing power, the money quantity must not
be excessively increased over the quantity of wealth available for purchase. The total
quantity of money in a nation, multiplied by i t s circulating velocity and d i v i d e d by the
t o t a l t h i n g s sold determines the purchasing power of each unit of money - or the price
level.
Gold's value in preserving the i n t e g r i t y of money is found in i t s disciplinary
power to prevent over expansion. For thousands of years gold has been admired and
desired for i t s beauty, i t s d u r a b i l i t y and i t s many uses, however, i t s scarcity has given
i t i t s greatest monetary value. The growth in gold quantity has never seriously exceeded
the growth in material wealth quantity. Since early c i v i l i z a t i o n , nothing has been found
which w i l l equal gold as a measuring s t i c k f o r value, as a medium of exchange or as a
temporary storage house for earnings or accumulated wealth. No credit money, throughout
history, which has been securely and adequately t i e d to gold reserves, has ever d e f a u l t e d
or lost i t s purchasing power.
The United States can easily provide i t s people with a sound money system based
on g o l d , without economic cost but with enormous social and economic gains. All the
financial machinery needed is here. While, in recent y e a r s , America has l o s t t o other
nations over h a l f of the monetary gold i t held, the nation s t i l l holds enough gold to
back the new money system.
I t i s u t t e r l y i l l o g i c a l to even consider r e t u r n i n g the present dollar money
system to a gold basis. The disparity between d o l l a r q u a n t i t y and-gold q u a n t i t y i s so
great that such an attempt would bring to the nation and to dollar holders insufferable
punishment. The dollar should be given an extended l i f e of about t w e n t y - f i v e y e a r s , but'
with i t s q u a n t i t y reduced at least four per .cent each year. This can be accomplished by
requiring banks to reduce t h e i r d o l l a r loans at l e a s t four per cent per y e a r .
Since
money does not a f f e c t prices u n t i l i t c i r c u l a t e s , and since only twenty per cent of
American dollars are now f u l l y circulating in the forms of currency and demand d e p o s i t s ,
and are responsible f o r p r i c e i n f l a t i o n , i t is evident that i f a l l dollar holders were
allotted t h e i r share of available material wealth or gold, each dollar would have no more
purchasing power th$m that now possessed by two dimes.
I t is proposed that the United States create an e n t i r e l y new money system. The
new u n i t of money should be c a l l e d "GOLDER". One hundred golders shall have a value
equal to one ounce of gold. The Federal Reserve System and a l l banks of the nation s h a l l
be required to carry accounts in both golders and dollars. Gold reserve requirements for
golders shall be approximately the same as those required for dollars in the 1930's. To
avoid f u t u r e money q u a n t i t y i n f l a t i o n , i t w i l l be necessary to bring a l l financial
i n s t i t u t i o n s carrying checking accounts under the c o n t r o l of the Federal Reserve. The
d o l l a r ' s value in relation to the golder's value must be determined in the international
money market. I f i t takes four hundred dollars to buy one ounce of g o l d , i t w i l l take
four d o l l a r s to buy one g o l d e r .
I f i t takes eight hundred dollars to buy one ounce of
gold, i t w i l l take e i g h t d o l l a r s t o buy one g o l d e r . An attempt on the part of the
government to give d o l l a r s a d e f i n i t e value in golders would create such economic chaos
as to endanger our fonm of government.

402
THE REAL ISSUE IS FREEDOM OF CHOICE IN CURRENCY
Submitted by Joe Cobb
Choice in Currency Commission
325 Pennsylvania Avenue, S.E.
Washington, D.C. 20003
November 12, 1981
The madate of the U.S. Gold Commission, to examine the appropriate role for gold in the U.S. monetary system, has been interpreted
by most commentators as "whether or not to fix the price of gold in
terms of dollars." We submit, for your consideration, an alternative proposal: Let the American people have freedom of choice in
currency; demonopolize the monetary system of the United States and
let gold (or silver, or Swiss francs, or anything else chosen by
individuals) circulate or be used as a lawful tender.
The most important function that a monetary unit serves is as a
noun for quoting relative prices. The context of this inquiry into
the role of gold, therefore, must address the meaning of the very
words we use to write contracts.
In the novel "1984" by George Orwell, there was a government agency
called the Ministry of Truth that deliberately changed the definitions
of words in the English language, so that victims of Big Brother's
tyranny could not communicate with each other and organize a political
revolution. The evolution of the U.S. monetary system over the past
190 years has followed the same path.
In 1792, Congress passed the first Coinage Act (1 Stat. 250) which
created our decimal coinage system. The U.S. dollar was defined as
416 grains of silver .89243 fine. Because the new nation, for political reasons — Article I, Section 8, of the Constitution — was supposed to have a common currency, the Congress established a monopoly
for the central government's coins. Under Article I, Section 10,
however, it is clear that the intent of the Founding Fathers was for
the U.S. monetary system to be based on silver and gold, not paper
money. None of the Founding Fathers suspected that just 7 0 years
later, Congress would pass the legal tender law and make the paper
dollar our basic unit of money (12 Stat. 345).
Because there was a government monopoly for "dollars," the Supreme
Court refused to distinguish between paper dollars and silver dollars
(79 US 457) . The principle had been established that the word "dollar"
is a governmentally defined word, and whenever Congress wants to do
so, it can change its definition. In 1913 and 1933, moreover, Congress created the Federal Reserve System and subsequently prohibited
Americans from using anything other than its monopoly money (Federal
Reserve Accounting Unit Dollars) . Congress simply stripped any and
all meaning from the word "dollar" in its original sense.
Because businessmen and investors, and those who accumulate savings,
rely upon the name of the monetary unit to calculate and plan and to

403
Statement of Joe Cobb, Choice in Currency Commission

write contracts for future payment, philosopher John Locke developed
a principle for honest money. He wrote, the "unit was and should be
a definite weight of bullion, which must not be altered." (1695)
Bullion — pure "noble" metal. Definite weight — the monetary
system should emerge from the common system of weights and measures;
it should not be "invented" by government as an artificial denomination of weight. It was an unfortunate historical accident that the
common coin in the Thirteen Colonies was not precisely an ounce of
silver, which might have gone by the name "One Ounce" without the
government's trademark ("silver dollar"), but for that matter there
was not a standard definition of the ounce in those days either. It
was the monetary use of metal that led to the establishment of the
U.S. standards of weight in 1827 (cf. NBS special publication 447).
The principle of freedom of choice in currency, therefore, is
founded on the use of gold and silver, by units of weight, in all
kinds of transactions where honest men and women come together to
make contracts. It is impossible today to make an honest long-term
contract in terms of "dollars" because the word has no meaning.
There is no difference between using the word "dollar" today in
a contract and using the word "shrug" (e.g., I promise to pay you
100 shrugs in five years, at 10,000 percent interest); how many Big
Mac hamburgers do you think you will be able to buy with the "dollars"
you get back? Yet, in the U.S. courts and in payment of taxes, the
undefined word "dollar" is the unit of measurement.
Since the issue we believe the U.S. Gold Commission should address
is really the essence of a market economy, and the capital markets in
particular, that is the definition of the noun that Americans may use
to quote relative prices, we urge you to recommend the repeal of all
monopoly elements in the U.S. monetary system. Two bills in Congress
would achieve this: The Free Market Gold Coinage Act, sponsored in
the Senate by Mr. Symms (S.1704) and in the House by Mr. Crane (HR.3789)
and the Free Market Silver Dollar Act (HR.4965). These legislative
proposals would create a parallel currency system for the United States
and permit individuals to exercise freedom of choice in currency — a
right they have not had since 17 92 because of a monopoly in courts for
something called the "dollar."
In a free market economy, freedom of choice always makes the system
work better. There are many reasons to believe that the new frontier
in freedom of choice — currency competition — will be the only way
to save the United States from a devastating inflation that has already
caused the highest interest rates in history, because nobody with any
money to invest is willing to secure those investments with pieces of
paper promising to pay "one shrug" in the future in exchange for real
goods and services today.
If the principles of John Locke were good enough for Thomas Jefferson and Congress when the Declaration of Independence was signed in
1776, the principle of "bullion weight" and "freedom of choice" must
be the guiding principle for re-establishing the monetary system, and
strengthening the capital markets, of the United States today.

404
GOLD IS THE ONLY PERMANENT STABLE MONEY
Submitted by
BARRY R. COLLINS
4910 Thor Way Carmichael CA 95608
6 January 1982
The U.S. Gold Commission has a golden o p p o r t u n i t y to recommend a r e t u r n
to the gold standard f o r the f o l l o w i n g reasons:
1. The present system o f having unbacked and u n l i m i t e d c r e a t i o n o f paper
money has l e d , both i n the U.S.A. and f o r e i g n n a t i o n s , to unending i n f l a t i o n
w i t h o u t avoiding such t r a d i t i o n a l economic i l l s as unemployment, recessions
and high i n t e r e s t r a t e s .
2. A f u l l y c o n v e r t i b l e gold standard w i l l avoid the dangers of both
i n f l a t i o n and an i n f l e x i b l e monetory base.
3. No p r a c t i c a l s u b s t i t u t e f o r gold e x i s t s which w i l l be u n i v e r s a l l y
acceptable as a constant medium o f payment between nations and persons.
In view of the above, the f o l l o w i n g p o l i c i e s are recoimended:
1. The U.S. by law provide t h a t U.S. currency and coin be f u l l y c o n v e r t i b l e
i n t o gold c o i n , at the p a r i t y o f $500 per t r o y ounce of f i n e g o l d . This p a r i t y
would provide approximately 100% gold backing f o r U.S. currency and coin i n
c i r c u l a t i o n , and t h e r e f o r e allow an ample amount o f golcl f o r making i n t e r i m
i n t e r n a l and f o r e i g n adjustments before a s t a t u t o r y 40% gold backing l e v e l
would be reached.
2. The U.S. mint only one type of gold c o i n , namely a $500 coin which
would have the same w e i g h t , composition and dimensions as the South A f r i c a n
Krugerrand, and which a p p r o p r i a t e l y should have the head o f Alexander Hamilton
and the motto " I n God We T r u s t , A l l Others Pay^Cash" stamped en one s i d e , and
w i t h the Great Seal o f the U.S. on the obverse. The Krugerrand could also be
made U.S. legal tender f o r $500.
3. The President, by and w i t h the advice and consent of the Secretaries o f
S t a t e , the Treasury and Commerce, have power by law to declare a f o r e i g n
currency, which i s not f u l l y c o n v e r t i b l e i n t o gold c o i n , to be a Paper Currency
and to determine i t s value i n U.S. currency f o r the purpose o f c a l c u l a t i n g
import d u t i e s and o f f i c i a l p e n a l t i e s .
4. The U.S. by law recognize t h a t :
a. The period from the present time to about the year 2000 w i l l be one
of real d e f l a t i o n , even i f disguised by monetary i n f l a t i o n , based upon both
expectations and the K o n d r a t i e f f Cycle.
b. In order t o maximize the employment o f l a b o r , wage rates should be
determined by the Law of Supply and Demand, and the U.S. reduces employment
by attempting to set a r t i f i c i a l l y high wage rates f o r any group of persons.
c. No U.S. i n d u s t r y should have any r i g h t to request governmental
assistance i f i t s workers are employed at wage rates above those p r e v a i l i n g i n
a f r e e labor market.
d. The U.S. should by law deprive the states of the power to r e g u l a t e
wage r a t e s , prices and r e n t s .

405
5. The U.S. take prompt action to reduce high i n t e r e s t r a t e s , which are
c r i p p l i n g the housing and other i n d u s t r i e s , by balancing the federal budget
through the r a i s i n g of excise taxes on a l c o h o l , tobacco, etc to approximately
one-half o f the general West European l e v e l s , thereby also leaving some tax
resources to the s t a t e s .
This submission i s based upon t r a d i t i o n a l p r i n c i p l e s o f f r e e market
economics which always work when given the o p p o r t u n i t y to f u n c t i o n i n a
c i v i l i z e d s o c i e t y . F a i l u r e t o r e t u r n to a f u l l y c o n v e r t i b l e gold standard
and i t s necessary attendant economic d i s c i p l i n e s and freedoms w i l l only
damage the U.S. economy and f u r t h e r undermine the p r o s p e r i t y of the people.

406
THE I R R E C O V E R A B I L I T Y OF THE GOLD STANDARD

Richard N. Cooper
Harvard University
January 1982
The idealized gold standard as it appears in text books conveys a
sense of autanaticity and stability - a self-correcting mechanism with
minimum human intervention which assures rough stability in prices and
balance in international payments. The actual gold standard could
hardly have been further frcm this representation. Major countries of
the world were on the gold standard proper only frcm 1870s to 1914,
and briefly during the late 1920s and early 1930s. The first period
went dcwn in history as the Great Depression - until the second period
came along to exceed it in depth and severity.
In the United States the last third of the nineteenth century was
a period of unprecedented controversy over the monetary standard, first
over the resmption of gold convertibility for the greenbacks issued during the Civil War, then over the monetary role of silver. Legislation
was constantly before Congress to change monetary relationships. The
year 1896 saw the only U.S. presidential campaign devoted to the issue
of monetary standard. The question of the monetary standard was thus
a source of continual turmoil and uncertainty, not serene stability.
The public debate reflected the fact that, contrary to current
claims for it, price stability was not assured either during the gold
standard period proper or over a longer period during which gold held
dominant influence. Short-run variations in prices, in fact, were considerably higher during the period of the U.S. gold standard, 18791913, than in the more recent period, 1960-1979.
Long-run price movements were also substantial. Prices declined
about 50% in Britain, France, Germany and the United States frcm 1816
to 1849, then rose about 50% until the general establishment of the gold
standard in the early 1870s, then fell nearly 50% again until the gold
discoveries of the 1890s, then rose sharply in the two decades before
World War I. This is hardly a pattern of stability, although it is true
that prices sometimes declined over long periods of time. However, contemporaries had no confidence that price levels would return to earlier
levels. This lack of confidence is reflected in the moverments of interest rates. Real interest rates on long-term bonds - interest rates
corrected for the movements in prices - followed roughly the same pattern as prices themselves: high in the 1870s, gradually declining to
the turn of the century, and then rising again. This pattern implies
that the bond-purchasing public did not anticipate correctly future
price movements. They apparently adjusted their expectations slowly, in
response to past price movements. It is thus not true, as is sometimes
claimed, that the metallic standard provided for stability in the real
value of long-term financial contracts. A close look at history pro-

407
vides little ccmfort to the proponents of a revived gold standard.
If we turn frart history to the contemporary setting, there are two
broad proposals for gold in the U.S. monetary system, each with numerous
variations in detail. The first involves ^introduction of sane form of
gold backing for U.S. monetary liabilities. The second involves same form
of convertibility of U.S. monetary liabilities into gold at a known price.
Sane of the proposals for backing involve basically a monetary rule in thin
disguise: gold plays no essential role in these proposals. Sane variants
would however require periodic purchases of gold by the United States,
giving rise to technically difficult but not insuperable problems concerning the discrepancy between the market price for gold and the official price for gold.
The second class of proposals involves convertibility of one form
or another of dollars into gold at a known price. The difficulty with
these proposals is determining the price. Foreign monetary authorities
hold around $250 billion and an additional $700 billion is in private
dollar deposits outside the United States. This is over and above dollars
held by Americans and others in the United States. Too low a price for
gold would invite large-scale conversion of these dollars into gold. The
system would quickly collapse through the exhaustion of U.S. official gold
holdings. This continguency could of course be avoided by pricing U.S.
gold at a much higher than current market price. But then the U.S. would
almost certainly have to buy gold out of new production and private hordes.
This would undermine the discipline which gold convertibility was supposed
to establish in the first place.
There is another disadvantage with reinstituting gold in a monetary
role that is in any way linked to the market for gold. The major producers of gold in the world, together accounting for 80% of world production,
are South Africa and the Soviet Union. Both countries exercise considerable discretion in the amount of gold they sell into the market. Both
are at political odds with other nations. To restore an important monetary role for gold would give these two countries a windfall of considerable magnitude, because of the higher price involved. An ill-conceived attempt to avoid this price increase and to rely on new supplies
would place the monetary system of the United States hostage to political decisions in one or both of these countries.
The choice of a price for gold plays a central role in the viability of any restoration of gold to monetary role. Yet the choice of a
price, while crucial, is unavoidably arbitrary. So long as this is so,
a rule based on a supposedly fixed price of gold can not be a credible
rule. If gold were to become unduly constraining, its price could be
changed, and that possibility would be widely known. In this respect,
the situation is fundamentally different firm that in the nineteenth
century. Then the dollar price of gold was historically given and not
open to question. The price was not conceived as a policy variable.
Yet gold ceases to provide monetary discipline if its price can be
varied. So long as the price of gold is a policy variable, the gold
standard provides no escape fran the need for human management, however frail that may seen to be.

408
FACILITATING THE OPTIONS OF USING GOLD AS AN AUXILIARY CURRENCY
Submitted by

Richard L. Davies, Managing Director
The Gold Institute/1'Institut de l'Or
1001 Connecticut Avenue, N.W., Washington, D. C. 20036
November 13, 1981
The Gold Institute/1 'Institut de l'Or is the developmental, technical
and industrial arm of leading producers of gold and gold products in 15 countries, outside of South Africa and the Soviet Union which have their own entirely separate gold activities. We provide precise and timely statistics
on the production and flow of gold, and extend the beneficial uses of gold
by technical assistance to the many industries which use it, and to central
banks, ministries of finance and mints in their issuance of gold coinage.
Last year 57 governments issued some gold coins as detailed in our annual
publication MODERN GOLD COINAGE.
Same nations, such as Switzerland and the United States, have had considerable time periods of economic and governmental activities which have
resulted in steady levels of purchasing power of their currencies; whereas
others have had economic and governmental activities resulting in continually depreciating currencies. An example of this latter is Brazil, the
largest country in Latin America. For half a century the purchasing power
of its units of currency has been continually decreasing by 20% to more than
50% each year, so that the value of today's Brazilian cruzeiro expressed in
Swiss francs or dollars or gold is less than one-thousandth of what it was
thirty years ago. The Brazilians have survived for many decades with a traditionally depreciating national currency, just as the United States survived with a temporarily depreciating "greenback" currency from the Civil
War years until the restoration in 1879 of dollars having a relatively
steady purchasing power.
The United States is now in a period in which its units of currency
are depreciating in value and the nation is indicating its desire to undertake the economic and governmental activities which will result in its currency having a steady rather than a declining purchasing power. However,
these measures are, of necessity, fundamental ones, requiring careful and
enormous efforts, not only by the Federal Reserve System, but by the whole
Executive Branch of the government, the whole Congress, and the support of
the majority of the entire electorate. They require time to accomplish.
Meanwhile, just as was necessary in the United States in the years
after the Civil War until 1879, and has continually been necessary in Brazil,
some auxiliary, or parallel, currency is useful. In Brazil, the auxiliary
currency for two generations was the United States dollar, 1equivalent
to one
thirtyfifth ounce of gold. In the Uhited States "greenback 1 dollar period
after the Civil War, the auxiliary currency was gold, or sometimes the British pound, equivalent to a quarter of an ounce of gold. In the United States
today, needs for an auxiliary currency are beginning to be met by the use of
metallic gold in the form of gold bullion bars, bullion coins of other

409
countries, and other gold pieces of precisely marked purity and weight. Residents of the United States, recently estimated at 8 million in number, have
large amounts of gold bullion, coins, medallions, and precisely marked pieces,
in what might be called their "private reserves," and these are available

for various transactions in which the payer and the receiver wish to use
gold as an auxiliary currency.
An example of usefulness of an auxiliary currency earlier, was in 1865
when a Pennsylvania coup any was able to make a favorable multi-year contract
with a Danish company to import the mineral cryolite from Greenland, The
payments were specified not in United States Mgreenback,f dollars nor in
Danish kroner, but in British pounds (quarter ounces of gold), the then
auxiliary currency for both the United States and Denmark. Likewise, in
Brazil, where the cruzeiro interest rates are high, many productive operations have been made possible by dollar financing, with corresponding repayments in dollars.
Examples of the present use of gold as an auxiliary currency include
the payment of dividends in the form of gold, and a 3-1/4% industrial bond
issue with both principal and annual interest payable in gold. The trustee
of this is Continental Illinois National Bank § Trust Company of Chicago.
The securities firms involved include Drexel Burnham Lambert, Inc. of
New York and Ross and Partners of London, and they are equipped to arrange
similar low interest bond issues payable in gold for others.
The U.S. government has already done much to restore freedom of gold
movement. In this present period it would seen desirable to further facilitate the options for U.S. private citizens and corporations to use gold as
an auxiliary currency. Encouragement should be given to the private financing of construction and other productive projects by the use of gold
with its attendant low interest rates, without which the projects and their
resulting contribution to employment and the strength of the economy, would
not occur. There are many examples of the beneficial use of an auxiliary
gold or gold-based currency to accomplish this in other countries.
To protect the U.S. economy, the gold which constitutes most of the
U.S. government's crucial foreign reserves needs to be gradually increased
and not depleted. However, U.S. refiners are producing around three million
ounces of refined gold bullion per year and it is recommended that the U.S.
government convert some of this into weight-denominated gold bullion coins
and issue the coins, without tax impediment, through bullion dealers and
banks equipped to distribute them and maintain markets for them, just as
U.S. Treasury bills and bonds are now marketed through dealers and banks
especially equipped for the purpose.

410

GOLD ; ARCHAIC THROW BACK OR MODERN TOOL?
Submitted by:

John P. Dessauer
P.O.Box 1718
Orleans, MA 02653
Jan.15,1982

Returning the United States to a gold standard could
be either the most effective way to fight inflation or the
introduction of monetary rigidity that would set the stage for
crisis in the financial markets.
The key determinent of the puzzel is the price at
which gold and the dollar are proposed to be connected. If
the price is set too low, giving the dollar and inflated value,
there would be claims against the U.S. gold stock as dollars
were offered for gold. An outflow of gold would result with
the same destructive consequences seen in the late
1950s and early 1960s. If the price were set too high the
dollar would be undervalued causing an influx of gold and the
threat of renewed inflation. Only the "right" price would
work.
It is impossible for any group, government or otherwise
to determine the right price. The right price is a moving
target. The "free" market is not a mechanism for determining
price. The Russians have been trying to manipulate the gold
price for over a year. They withhold supplies when they feel
the price is low and sell when it is high. Through their bank
in Zurich Switzerland they are constantly trading gold.
Ricght now the possibility of the U.S. returning to a gold
standard is depressing the gold price. Investors fear that
the U.S. would choose a low price in order to give a higher
value to paper dollars.
The United States should take steps to enter the gold
market, obtain current experience and struggle to find a way
to make a connection between the dollar and gold.
A first logical step is to join the ranks of governments
such as South Africa and Russia that realize income from the
sale of gold coins. Selling a U.S. coin that flutuates with
the gold price makes sense.
A second logical step would be to begin buying and
selling gold with the objective not of manipulating the gold
price but of blunting Russian efforts at manipulation and
increasing U.S. gold holdings. This would make the U.S.
an important participant in the gold market and provide a
sound basis for determining if a full return to the gold
standard is warranted.

411
John P. Dessauer

Gold is money and has been for centuries. Gold bugs
use that historical fact as evidence to their point that
returning to a gold standard offers only benefits. They
should really look at gold as money to see both sides of the
issue.
Look at prices in terms of gold. We are eccustomed
to looking at prices only in terms of dollars. Take oil
for example. All the while the price of oil was rising in
dollars it was falling in terms of gold. Lately as the
dollar price for a barrel of Saudi crude has been falling
the gold price for that barrel has been rising.
Understanding gold as money is key to the issue.
World markets would not be automatically served by returning
to the gold standard.
There is a difference betwee dilution and inflation.
Using gold as a monetary tool could be helpful in preventing
excessive dilution of the dollar but not necessarily helpful
in fighting inflation.
Consider the oil example. If rising prices for
important commodities such as oil are inflationary when they
occurr in dollars they must also be inflationary when they
occurr in terms of world money or gold.
A falling gold price can be just as inflationary as
a rising gold price. Stability is the objective. But not
forced manipulated stability. Rather genuine stability
is the requirement for lower inflation and reduced dilution.
A free gold market is a useful score card. If the
gold price stabilizes as a consequence of U.S. monetary
and fiscal policies we would know that we were doing the
right things. If we lock in a gold price through a gold
standard connection we wouldn't know whther or not our
policies were correct. We would only know how we were doing
as a manipulator of the gold market.
Staying off the gold standard could be just as useful
as returning to the gold standard. The key is having respect
for gold as world money. If we have genuine respect for gold
as money and show that by participating in the gold market
we will reap the benefits no matter how the gold standard
issue is finally resolved.
GO SLOWLY. WALK BEFORE RUNNING. SELL GOLD COINS
AND BECOME MORE ACTIVE IN THE GOLD MARKET. LATER LOOK AT
THE GOLD STANDARD ISSUE AGAIN.

412
TENDER 8c THE U . S . C O N S T I T U T I O N

page l
of 2*

Submitted by
C- F* Dockstader
61 South Julian - Denver, Colorado
February 1, 1982.
Tou may get two ideas from this: (1) The use of any tender
other than gold and silver is Unconstitutional(2) Legal Tender
statutes are Unconstitutional because they deprive individuals of
property (money is property) without due process of law*
HISTORY:

Pre-Constitution 1787: Colonies in chaos due to flat
money* Creditor runs from debtor- Creditors were
paid without mercy*

1787 -1900: U. S* made greatest progress in history
of mankind* Mostly on gold/silver standard- U* Sstill a Republic- Well, almost-

1900-1968: U* S- drifts to Democracy- Last
underpinning of precious metal removed (silver-certificates)- Federal Reserve established-

D-

1968 - present: Democracy in full force* Fiat money
* 100% I Tending to chaos; democracy leads to mob—
ocracy, commissions, skepticism, collectivism*

EVIDENT TRUTHS:

No nation ever survived intact that debauched its
currency (commercial life blood) & No nation has
ever lived more than 200 years under Democracy-

According to the U• S* Constitution fiat money must be Unconstitutional- Article I Section 8-5*-: "Congress shall have Power:
To coin Money, * *-" period- It does not say "to coin it out of
paper". The 1787 Committee of 11 considered "emission of bills of
credit" which means fiat money- By a vote of n i n e in favor - one
against and one divided, it rejected "bills of credit"- The key
words are CONSIDERED and REJECTED* The Legal Tender Decisions
have ignored the intent of the writers of the Constitution- If
the Constitution meant to coin Money out of paper,, they would have
stated: "and emit bills of credit"The combination of Art I Sec 8*5* and 10-1- closed the door to
fiat paper forever* Section 10*1*: "No State shall**- make any
Thing*but gold and silver Coin a Tender in Payment of Debts;*.*"
The word "coin" was capitalized- These 17 words were composed by
Roger Sherman, an enemy of fiat money for many reasonsAmong
them; he was cheated by it and lost a lawsuit about itThese 17 words were accepted by the Committee unanimously (110)- The Legal Tender Decisions have totally scorned this
prohibition on the States to impose on their citizens any Thing
but gold and silver- They have nicely coerced the States to
violate the Constitution on a wholesale basis*
Noah Webster called Legal Tender "the devil* and those who

413

favor it "were counterfeiters, deserving of the gallows,•
"The very words Legal Tender...", according to Paul Leicester
Ford, Editor of the FEDERALIST (1898), "... are a lie and a fraud,
through which someone is to be robbed• "
Daniel Webster said Legal Tender statutes were Unconstitutional. Amendments (V) & (XIV): "No person shall... be deprived of
life, liberty, or property, without due process of law;..."*
Additionally; Art I Sec 10 says, along- with its prohibition
of fiat money: "No State shall..* pass any bill... or law impairing the Obligation of Contracts,...". Contracts are sacred!
Debts are not to be paid at a discount with a printing press!
CONCLUSION:
I* Gold/silver coins should be imprinted with the weight of
pure metal in grams or decimals & value in dollars ("dollar" is
used twice in the Law). It is a power of Congress to; "... regulate the Value thereof, and of foreign coin, and fix the Standard of Weights and Measures;..*" No other power is enumerated
for the physical description of real money! The dollar is our
trademark for real money*
II. Since gold is necessary for a specialized nation and division of labor (which means a high standard of living), and since
gold production represents a consumption of capital, it would be
advantages to everyone to economize the use of gold*. The banking
system has provided an ingenious solution to this problem: Fiduciary media. FM consists of 1 claims to money 1 that are not backed
by gold. Therefore, I suggest reserve requirements be set at 2025% gold backings Experience has shown this to be a practical
figure* If a note is known to be convertible 100% of the ti/re into
real money, then it becomes the absolute equivalent of 1 real moneys
Thus, people do not hoard to any extent when government keeps its
contracts.
III. Eliminate any mention of "legal" on any notes denominated in real money. It is not necessary. See also 111 US 701*
FINALLY: When the time comes to sequester imaginary* debts, in
whatever fashion, let it be known IT IS NOT THE FAULT OF OUR CONSTITUTION! Do not blame it! Let that one-of-a-kind masterpiece
be preserved unblemished for it intended to do away with bogus
money & bullets and install a Republic* Please join me in noticing those who have and do violate their oath to support it*
Respectfully,

• HUgh Williamson, May 13, 178?, used the term "imaginary money
of the several states" in his paper on the adoption of the Dollar*
Serious students of proper tender under the Constitution should
read THAYER v. HEDGES, 1864, 22 Indiana 282. Note that not once
did the Supreme Law use the word "legal". Also see Hagar 111 US 701 „
TENDER & THE U. S* CONSTITUTION

Page 2 of 2

414
STATEMENT BEFORE THE GOLD COMMISSION
Submitted by
Rudiger Dornbusch
Massachusetts Institute of Technology
November 13th, 1981

Lack of fiscal discipline, high real interest rates and persistently
high inflation, all draw attention to disarry in our macroeconomic policies.
The Enquiry of the Gold Commission is an important opportunitv to look for
more coherent policies and for institutions that lend stability and credibility to our macroeconomic targets.
The historical record does not bear out the belief that the gold standard provided a stable economic environment. Under the gold standard of the
19th and early 20th century one crisis chased another and macroeconomic performance, except for the average rate of inflation, was poorer then compared
to the last twenty years. The accompanying table makes this point for the
case of the US.
A Comparison of Macroeconomic
Period

Inflation
Average

Stability

Variability of:
Unemployment

Inflation

Money
Growth

Real
Interest

1879-1913

0.5

4.5

5.5

6.7

13.2

1960-1979

4.6

1.4

4.3

1.9

3.5

Variability is measured bv the standard deviation.
age rates.

All data are percent-

The table reveals that unemployment, inflation, money growth and the real
interest rate all were more variable under the gold standard than they have
been in the recent past. Even the low average rate of infaltion under the
gold standard is accidental. From 1870 until 1895 prices were continually
falling. Later, under the impact of Australian gold discoveries prices were
rapidly rising. The long term average happens to be near zero inflation, but
for shorter periods there is substantial instability, especially in wholesale
prices.
A gold standard is undesirable from a cost-benefit point of view because
it absorbs real resources that have alternative, productive uses. If in the
present US economy all highpowered money were to be backed by gold an amount
equal to 0.3 per cent of GNP would have to be devoted every year to provide
for growth in the real money stock. Under a fiat-money, by contrast, we can
have monetary control without a real resource cost.
The adoption of a gold standard presents extraordinary difficulties in
selecting the appropriate support price and the transition strategy. A price

415
t h a t i s too low i n v i t e s a r u n , a p r i c e t h a t i s too h i g h i n v i t e s d e f l a t i o n . A
t r a n s i t i o n to gold a t a f u t u r e p o i n t i n t i m e , a t t h e then p r e v a i l i n g market
p r i c e , i s e n t i r e l y u n r e a s o n a b l e s i n c e i t a l l o w s a s p e c u l a t i v e bubble to
d e t e r m i n e the path of p r i c e s .
If gold is not to serve a formal role in the monetary system then gold
should be immediately denationalized. The existing gold stock should be sold
off with the proceeds used to finance budget deficits. The current gold
holdings at $300 an ounce are worth nearly $80 biillion and can thus make an
important contribution to deficit finance. There is no reason for the minting of gold coins at a time of public sector austerity, nor is there a reason
to maintain gold for potential uses as a foreign exchange market intervention
asset. Of course, gold holdings could perhaps turn out to be convenient, but
on that argument we should also hold ample supplies of Deutsch Mark, Sterling
and Yen, Silver and Platinum. There is no indication that the present, large
gold holdings yield services, current or prospective, that are at all in line
with the resource cost of holding the treasure.
A lesson of the 1970s is that fiat-money, managed with imperfect knowledge and under political pressure, can easily give way to cumulative inflation. It is important to lock In the gains from two years of prudent monetary policy by a move to formal monetary rules that establish the fact and
expectation of long-term price level stability. In the transition such
monetary rules should be accompanied by transitory incomes policy.

416
THE INADEQUACY OF ACCOUNTING AND SECURITY
OF THE NATION'S ALLEGED GOLD RESERVES AND
POSSIBLE REPLACEMENT OF THESE RESERVES
Submitted
Edward
c/o

Durell

U n i o n F o r k A n d Hoe C o m p a n y
P . O. B o x 1 9 4 0
Columbus, Ohio
43216
February

10,

1982

T h i s i s a b r i e f summary o f t h e w r i t e r ' s w r i t t e n t e s t i m o n y b e f o r e
P o l i c y Commission.
This w r i t t e n testimony includes the f o l l o w i n g :

the

Gold

(1)

My c e r t i f i e d l e t t e r t o a l l m e m b e r s o f t h e G o l d P o l i c y C o m m i s s i o n
d a t e d 1 2 / 4 / 8 1 c o n t a i n i n g a c o p y o f my p r i v a t e l y p r i n t e d p a m p h l e t ,
" M r . P r e s i d e n t , Where I s Our G o l d ? H , t o g i v e t h e C o m m i s s i o n a
s a m p l i n g o f my e i g h t y e a r s o f r e s e a r c h .
The l e t t e r s u g g e s t e d t o
t h e Commission t h a t i t d e t e r m i n e t h e q u a n t i t y and q u a l i t y o f t h e
n a t i o n ' s a l l e g e d g o l d , i t s r i g h t f u l owner, and t h e w h e r e a b o u t s o f
165 m i l l i o n o u n c e s o f g o l d t h a t l e f t F o r t K n o x d u r i n g t h e e i g h t
y e a r p e r i o d o f t h e London G o l d P o o l , whose d e s t i n a t i o n has n o t
been s a t i s f a c t o r i l y a c c o u n t e d f o r .

(2)

My l e t t e r d a t e d 1 / 6 / 8 2 t o S e c r e t a r y o f t h e T r e a s u r y , D o n a l d R e g a n ,
c o v e r i n g t h e i n a d e q u a c i e s o f a c c o u n t i n g and t h e i n s e c u r i t y o f t h e
nation's alleged gold reserves.

(3)

My t r a n s m i t t a l l e t t e r d a t e d 2 / 4 / 8 2 t o a l l m e m b e r s o f t h e G o l d
P o l i c y C o m m i s s i o n e n c l o s i n g my l e t t e r o f 1 / 2 8 / 8 2 t o R o b e r t B l a c k ,
P r e s i d e n t o f t h e F e d e r a l R e s e r v e Bank o f R i c h m o n d , w h i c h o u t l i n e s
t h e e v i d e n c e t h a t t h e F e d e r a l Reserve System and n o t t h e U. S.
g o v e r n m e n t has t i t l e t o w h a t e v e r g o l d i s w a r e h o u s e d by t h e U. S.
Treasury.

(4)

My l e t t e r d a t e d 2 / 9 / 8 2 t o a l l m e m b e r s o f t h e G o l d P o l i c y C o m m i s s i o n
asking t h a t the Commission c o n s i d e r s e v e r a l s u g g e s t i o n s f o r the
government t o borrow a n d / o r r e c o v e r the g o l d n e c e s s a r y t o back
U. S . c u r r e n c y a n d / o r o t h e r
g o l d c o i n s ( l e g a l tender or

instruments of
otherwise).

A l l o f t h e s e d o c u m e n t s a r e t o b e made p a r t
Gold P o l i c y Commission.
This w r i t t e n testimony
i n an e f f o r t t o p r o v e t o t h e C o m m i s s i o n t h a t
Treasury

and

its

agents

of the
covers

(1)

T h e U.

(2)

W h a t e v e r g o l d i s d i s c l o s e d as w a r e h o u s e d by
and i t s a g e n t s by an e x t e r n a l , i n d e p e n d e n t ,

liability

not

for

use

p r i n t e d record of the
the f o l l o w i n g p o i n t s

hold

the

gold

claimed.

t h e U. S. T r e a s u r y
physical inventory

and

417
g e n u i n e a s s a y , b e l o n g s not to the U. S . government, but to the
F e d e r a l Reserve S y s t e m .
(3)

The a l l e g e d a u d i t s t h a t h a v e b e e n d o n e b y T r e a s u r y w o u l d n o t
acceptable to a q u a l i f i e d c e r t i f i e d public accounting firm.

(4)

S e c u r i t y a t t h e U. S . b u l l i o n
has n o t been s a t i s f a c t o r y .

(5)

depositories,

mints

and assay

offices

(a)

Deputy S e c r e t a r y o f the T r e a s u r y , Robert C a r s w e l l , i n a l e t t e r
to Senator W i l l i a m P r o x m i r e , Chairman o f the Senate Banking
C o m m i t t e e , d a t e d 1 2 / 1 9 / 7 8 , s t a t e d t h a t , " . . . I m u s t now i n f o r m
you t h a t t h e r e have been s i g n i f i c a n t i r r e g u l a r i t i e s i n a c c o u n t i n g
a n d m a n a g e m e n t p r o c e d u r e s i n t h e New Y o r k A s s a y O f f i c e t h a t
a p p e a r t o g o b a c k a n u m b e r o f y e a r s " a n d " T h e f u l l t r u t h may
n e v e r be k n o w n b e c a u s e o f t h e i n a d e q u a t e r e c o r d s k e p t o v e r t h e
years."

(b)

S e c r e t a r y o f the T r e a s u r y , Donald Regan, on 1 1 / 1 6 / 8 1 o r d e r e d
t h e D i r e c t o r o f t h e M i n t t o move " . . . a l l T r e a s u r y o w n e d m o n e t a r y
g o l d b u l l i o n b a r s " f r o m t h e New Y o r k A s s a y O f f i c e t o t h e W e s t
P o i n t D e p o s i t o r y a n d d i d s o w i t h o u t u s i n g t h i s p h y s i c a l move t o
d e t e r m i n e t h e a c c u r a c y o f t h e c o u n t , w e i g h t and f i n e n e s s o f t h e
bars.

An i n v e s t i g a t i o n o f t h e c i r c u m s t a n c e s a n d t e r m s u n d e r w h i c h a t o t a l o f
235.3 m i l l i o n T r o y ounces o f g o l d a l l e g e d l y went i n t o t h e hands o f
" o f f i c i a l f o r e i g n monetary i n s t i t u t i o n s " ( * ) d u r i n g the p e r i o d o f 19441 9 7 1 ( w h e n t h e s o - c a l l e d " g o l d w i n d o w " was c l o s e d ) m i g h t d e v e l o p t h e
b e s t s o u r c e f o r r e c o v e r i n g a p o r t i o n o f the needed g o l d .

In respect to a l l of the f o r e g o i n g , i t i s suggested t h a t the Gold P o l i c y
C o m m i s s i o n recommend i n i t s r e p o r t t o C o n g r e s s t h a t C o n g r e s s t a k e s u c h s t e p s as
t o r e q u e s t t h e G e n e r a l A c c o u n t i n g O f f i c e t o make a t h o r o u g h i n v e s t i g a t i o n o f a l l
t h e q u e s t i o n s r a i s e d b y ray e i g h t y e a r s o f s t u d y a n d i n v e s t i g a t i o n .
In addition
t h e r e t o , i t i s s u g g e s t e d t h a t t h e C o m m i s s i o n recommend t o t h e P r e s i d e n t t h a t he
c r e a t e a " B l u e R i b b o n P r e s i d e n t i a l C o m m i s s i o n Of I n q u i r y " , a s was d o n e b y f o r m e r
P r e s i d e n t E i s e n h o w e r i n 1 9 5 3 , t o o r d e r a s e p a r a t e a u d i t and i n v e n t o r y t o examine
t h e c i r c u m s t a n c e s , r e s p o n s i b i l i t y and a u t h o r i t y f o r t h e U. S. T r e a s u r y a n d / o r
t h e Federal Reserve S y s t e m l o s i n g c o n t r o l o f 3 2 5 . 4 m i l l i o n T r o y o u n c e s o f g o l d ,
o r o v e r 60% o f t h e n a t i o n ' s g o l d h o a r d b e t w e e n 1 9 4 4 a n d N o v e m b e r 1 9 8 1 .
I s t a n d r e a d y t o a s s i s t i n any way p o s s i b l e , p a r t i c u l a r l y by b r i n g i n g t o t h e
a t t e n t i o n o f t h e G e n e r a l A c c o u n t i n g O f f i c e a n d t h e " B l u e R i b b o n P r e s i d e n t i a l Comm i s s i o n o f I n q u i r y " some o f t h e i r r e g u l a r i t i e s a n d u n a u t h o r i z e d a c t i o n s t h a t h a v e
been d i s c o v e r e d under t h e Freedom o f I n f o r m a t i o n A c t and o t h e r w i s e .

(*)

R e f e r e n c e t a b u l a t i o n " U . S. G o l d S t o c k
T r e a s u r y ' s News r e l e a s e o f 1 2 / 1 1 / 8 1 .

1944-Nov.

1981"

distributed

418
American E n t e r p r i s e
Institute
1150
1 7 t h S t r e e t , N . W.
W a s h i n g t o n , D. C. 2 0 0 3 6
Views

Presented

the

Gold

S u b m i t t e d on November

Commission

13,

1981

By W i l l i a m F e l l n e r
American Enterprise
Institute
Yale U n i v e r s i t y ,
Emeritus
I.

tion

A.
When s p e c i f i c
effeciently, with

Four

Conclusions.

conditions are s a t i s f i e d ,
major advantages over the

the g o l d s t a n d a r d can f u n c available
alternatives.

B.
I n t h e now f o r e s e e a b l e f u t u r e t h e s e c o n d i t i o n s w i l l n o t be s a t i s f i e d , and systems b e l o n g i n g i n t h e g o l d - s t a n d a r d c a t e g o r y w o u l d t h e r e f o r e
m a l f u n c t i o n w i t h v e r y damaging consequences.
C.
However, t h e more d i s t a n t f u t u r e i s u n p r e d i c t a b l e i n t h i s
regard
and, p a r t l y f o r t h i s reason, I f e e l opposed t o a resumption of g o l d s a l e s
by t h e T r e a s u r y .
D.
We s h o u l d n o t e x p e r i m e n t w i t h s c h e m e s t h a t w o u l d g i v e t h e s u p e r f i c i a l appearance of r e s t o r i n g a system b e l o n g i n g i n t h e g o l d - s t a n d a r d
category but would b u i l d i n t o the system elements a l i e n to the basic conception underlying the gold standard.
Such c o n s t r u c t s w o u l d i n v o l v e t h e
same p o l i t i c a l a r b i t r a r i n e s s w h i c h we m u s t l e a r n t o o v e r c o m e i n o u r p r e s e n t
m o n e t a r y s y s t e m a n d , b y c o v e r i n g up t h e e s s e n c e o f t h e m a t t e r , t h e y w o u l d
r e d u c e t h e l i k e l i h o o d t h a t we s h a l l d e a l w i t h t h e s e r i s k s
successfully.
II.

Sketching

the

Argument

Behind

the

Conclusions.

(1)
When s p e c i f i c c o n d i t i o n s a r e s a t i s f i e d , t h e g o l d s t a n d a r d h a s s i g n i f i c a n t a d v a n t a g e s because g o l d t h e n s e r v e s w i t h r e a s o n a b l e e f f i c i e n c y as a
p r o x y f o r goods i n g e n e r a l .
Hence, by t h e s i m p l e and c r e d i b l e t e c h n i q u e o f
s t a b i l i z i n g t h e p r i c e o f g o l d w i t h r e l i a n c e on a s t o c k p i l e , t h e a u t h o r i t i e s
c a n i n t h o s e c i r c u m s t a n c e s come r e a s o n a b l y c l o s e t o s t a b i l i z i n g a t t h e same
time the general p r i c e l e v e l .
I n v e s t o r s and consumers can t h e n g e a r t h e i r
e x p e c t a t i o n s t o such a b e h a v i o r o f t h e p r i c e l e v e l , and t h e h i g h l y damaging
u n c e r t a i n t i e s of i n f l a t i o n a r y periods are avoided.
(2)
The e s s e n t i a l c o n d i t i o n o f g o l d s e r v i n g as an a c c e p t a b l e p r o x y f o r
goods i n g e n e r a l i s t h a t t h e r e a l p r i c e o f g o l d ( d e f i n e d as i t s r e l a t i v e p r i c e
e x p r e s s e d i n r e l a t i o n t o goods i n g e n e r a l ) s h o u l d r e m a i n r e a s o n a b l y s t a b l e ,
t h a t i s , t h a t t h e r e a l p r i c e r e f l e c t i n g m a r k e t p r e f e r e n c e s s h o u l d show no d i s t u r b i n g l y s t e e p and u n p r e d i c t a b l e t r e n d .
To w h a t e x t e n t t h i s c o n d i t i o n t e n d e d
t o be s a t i s f i e d d u r i n g t h e heyday o f t h e g o l d s t a n d a r d , and what c o u l d have
b e e n d o n e i n t h o s e d a y s t o a v o i d t h e o c c u r r e n c e o f some d i s t u r b e d s u b p e r i o d s ,
are questions of considerable complexity.
But on t h e w h o l e , i n a p a s t e r a t h e
c o n d i t i o n s r e q u i r e d f o r the e f f i c i e n t f u n c t i o n i n g of the g o l d s t a n d a r d were
i n my a p p r a i s a l w e l l e n o u g h s a t i s f i e d t o h a v e made i t a n e f f i c i e n t m o n e t a r y
s y s t e m , o n e t h a t was i n d e e d s u p e r i o r t o t h e a v a i l a b l e a l t e r n a t i v e s .
I also
b e l i e v e t h a t i t w o u l d be w r o n g t o t a k e i t f o r g r a n t e d t h a t i n no f u t u r e e r a
w i l l the essential conditions of the e f f i c i e n t functioning of the gold
s t a n d a r d a g a i n be s a t i s f i e d .

419
(3) H o w e v e r , t h e s e c o n d i t i o n s w i l l n o t be s a t i s f i e d i n any f u t u r e n e a r
enough to s e r v e a s a b a s i s f o r p r e s e n t p o l i c y p l a n n i n g . Even i f by an i n t e r n a t i o n a l agreement a l l major g o l d - h o l d i n g o f f i c i a l a g e n c i e s of t h e world
d e c i d e d to r e t u r n to g o l d , and t h e r i s k o f l a r g e o f f i c i a l i n f l a t i o n a r y g o l d
s a l e s t o us o r d e f l a t i o n a r y g o l d p u r c h a s e s f r o m us w e r e e x c l u d e d , t h e r e a l
p r i c e o f g o l d — i t s p r i c e r e l a t i v e t o goods i n g e n e r a l — w o u l d n o t r e m a i n u n changed.
T h i s i m p l i e s t h a t a f i x e d c u r r e n t - d o l l a r p r i c e o f g o l d w o u l d n o t be
associated w i t h a reasonably stable general price l e v e l .
The r e a s o n i s t h a t
i n t h e p r e s e n t c i r c u m s t a n c e s t h e g o l d o u t p u t does n o t show t h e r e q u i r e d r e sponsiveness to a r i s i n g r e a l p r i c e of gold.
T h e r e i s no p o s i t i v e o u t p u t
response t h a t would prevent a r i s e i n the r e a l p r i c e o f gold from becoming
l a r g e and f r o m c u m u l a t i n g , even i f w i t h s i g n i f i c a n t p r i c e f l u c t u a t i o n s .
At
present t h e r e a l p r i c e o f g o l d i n the U n i t e d States i s roughly f i v e times what
i t was a b o u t t e n y e a r s a g o , b u t t h e n o n c o r r o r a m i s t w o r l d o u t p u t h a s d e c l i n e d
f r o m a b o u t 4 0 t o a b o u t 30 m i l l i o n o u n c e s a y e a r , a n d t h e r e o c c u r r e d a l s o a
s i g n i f i c a n t deline of the world output i n c l u d i n g rough allowances f o r the o u t p u t o f t h e communist c o u n t r i e s .
T h i s i s o b v i o u s l y n o t how a p r o x y f o r goods
i n general should behave.
I t may, o f c o u r s e , be o b j e c t e d t h a t , e v e n i n t h e
p a s t , o u t p u t r e s p o n s e s o f t e n came w i t h s u b s t a n t i a l l a g s , b u t s o f a r t h e r e a r e
no s i g n s o f s u c h a r e s p o n s e t o r e c e n t p r i c e t r e n d s .
I n the present debate the
emphasis s h o u l d be p l a c e d p r i m a r i l y on t h i s r a t h e r t h a n on mere t r a n s i t i o n
d i f f i c u l t i e s (the so-called reentry problem).
(4)
I t i s sometimes argued t h a t t h e s i z e o f
m a t t e r much b e c a u s e , due t o t h e p r a c t i c a l a b s e n c e
s i z e o f t h e s t o c k i s so l a r g e i n r e l a t i o n t o t h e
is a l l that matters.
A c c o r d i n g t o t h i s argument
amply l a r g e enough t o p r e v e n t any upward t r e n d o f
b y t y i n g t h e d o l l a r t o g o l d , we made t h e h o l d i n g
p r i v a t e owners.
This argument i s erroneous.

t h e g o l d o u t p u t does n o t
of physical depreciation,
the
current output that the stock
t h e p r e s e n t s t o c k w o u l d be
the r e a l p r i o e of gold i f ,
of gold unattractive to

A t p r e s e n t a p p r o x i m a t e l y 1 , 7 0 0 m i l l i o n o u n c e s o f g o l d seem t o be h e l d by
p r i v a t e o w n e r s , much t h e g r e a t e r p a r t i n j e w e l r y and a r t o b j e c t s .
Unless the
o f f i c i a l agencies purchased t h i s gold w i t h severely i n f l a t i o n a r y r e s u l t s ,
the
s i z e o f t h e p r i v a t e l y owned s t o c k w o u l d r e m a i n what i t i s and t h e o n l y c o n s e quence w h i c h a p o s t u l a t e d " u n a t t r a c t i v e n e s s " o f g o l d t o p r i v a t e owners c o u l d
have w o u l d be a t e m p o r a r y r e d u c t i o n o f t h e g o l d p r i c e t o a l e v e l a t w h i c h
h o l d i n g o n t o t h e g i v e n s t o c k w o u l d become " a t t r a c t i v e " .
However, t h e amount
o f g o l d t h e p u b l i c w o u l d want t o h o l d a t t h a t assumed l o w p r i c e w o u l d t h e r e a f t e r be r i s i n g , a l o n g w i t h t h e s i z e o f t h e w o r l d ' s p o p u l a t i o n and i t s
standard
of l i v i n g .
I f t h e g o l d o u t p u t r e m a i n e d i n s u f f i c i e n t t o accommodate t h i s
inc r e a s i n g demand, t h e r e a l p r i c e o f g o l d (as d e f i n e d i n ( 2 ) above) w o u l d be
r i s i n g f r o m i t s i n i t i a l l e v e l , and i t w o u l d be r i s i n g a t a h a r d - t o - p r e d i c t and
presumably i r r e g u l a r
rate.
T h i s w o u l d e x p r e s s i t s e l f i n s u b s t a n t i a l and d i s t u r b i n g
deflationary
p r e s s u r e s on t h e g e n e r a l p r i c e l e v e l u n l e s s t h e n o m i n a l ( c u r r e n t - d o l l a r )
price
o f g o l d were r a i s e d s u c c e s s i v e l y o r c e n t r a l banks and o t h e r o f f i c i a l a g e n c i e s
now j o i n t l y h o l d i n g b e t w e e n 1 , 1 0 0 a n d 1 , 2 0 0 m i l l i o n o u n c e s w e r e g r a d u a l l y u n loading their stock.
One o r b o t h o f t h e s e t w o t h i n g s w o u l d b e v e r y l i k e l y t o
happen.
B u t t o b a s e an a l l e g e d " g o l d s t a n d a r d " s y s t e m on p o l i t i c a l
decisions
c o n c e r n i n g i n c r e a s e s o f t h e c u r r e n t - d o l l a r p r i c e o f g o l d , o r t o base i t on
g o l d s a l e s o f the o f f i c i a l agencies f o r the sake of k e e p i n g t h e p r i c e o f g o l d
f r o m r i s i n g , w o u l d i n t r o d u c e i n t o s u c h a s y s t e m t h e same k i n d o f
political
l e e w a y t h e m i s u s e o f w h i c h we m u s t t r y t o o v e r c o m e i n t h e m a n a g e m e n t o f i n c o n v e r t i b l e paper money.
However, I r e p e a t t h a t I c o n s i d e r t h e market and p o l i c y
more d i s t a n t f u t u r e u n p r e d i c t a b l e , and I f e e l opposed t o t h e
g o l d s a l e s by t h e T r e a s u r y .

trends of the
resumption of

420
C U R R E N C Y

Submitted

S E I G N I O R A G E
by:

B r i a n W. F i r t h ,
206 W. Robinson, C a r s o n City, Nevada.
F e b r u a r y , 1982
SCOPE
Many c o m m e n t a t o r s a r e considering whether t h e r e is a role for gold in the
banking s y s t e m , i. e. whether gold can be linked to c u r r e n c y . It is h e r e c o n tended that any such proposal must be unsound both in policy and in principle.
In policy, because the c u r r e n c y is today heavily over-valued ( P r o f e s s o r L a f f e r
holds that the c u r r e n c y is never traded for l e s s than ten-sevenths of the
liquidated value of the a s s e t s of the F e d e r a l R e s e r v e Bank; P r o f e s s o r Rothbard — usually a protagonist of the m a r k e t — a r g u e s that the p r i c e of gold, in
c u r r e n c y , should be four or five t i m e s higher than today's $ 3 8 5 ) : thus the
debate itself might t r i g g e r a c r a s h of the c u r r e n c y . In principle, for t h r e e
r e a s o n s : (a) C o n g r e s s has been authorized to regulate the value of (its own
and foreign) coin, but of nothing else, (b) since F e d e r a l R e s e r v e notes a r e
— where C o n g r e s s has legislation — legal tender, their value can hardly fall
below that of U. S. coin, and (c) the method here recommended for the r e g u l ation of the value of coin would link not only coin but a l s o c u r r e n c y to gold.
THE P R O B L E M SITUATION
The problem with coin is easily a r t i c u l a t e d : if " r e g u l a r " means " p r e d i c t able", the C o n g r e s s has failed to regulate the value of coin. F i r s t , the metal
content of coins has, historically, proved variable — even the cent, which has
circulated continuously since "copperheads 1 1 of l / 1 0 t h . troy oz. emanated from
n u m e r o u s mints during the War between the States, is n o t safe f r o m executive
interference. Second, coins a r e — by congressional policy — in short supply:
gold coins trade for 140% of their value a s specie (i. e . the value they would
have if the mint w e r e open), silver coins for 110% of specie value, homogeneous copper coins for almost twice specie value (the " r e g u l a t e d " p r i c e
of copper would be $1. 45 per pound, the m a r k e t p r i c e is 80£ per pound).
Any solution, t h e r e f o r e , must have two qualities. F i r s t , it must convince
the owners of coin that its value will be guarded by the C o n g r e s s . Second, it
must render coins available in unlimited quantities — without, -however,, d i s turbing the m a r k e t for m e t a l s .
THE SOLUTIONS
Congress — unlike the States — has in theory an unlimited choice of species
but in fact only three options which could readily command confidence.

421
Firstly,

the C o n g r e s s

has l e g i s l a t i o n

could

transfer

— to the c e n t of l/10th.

the status

troy oz.

of l e g a l

copper,

tender

95% f i n e .

— where
There

would

then be no possibility of the "penny" e v e r being worth m o r e then
coppers
would no longer be 1 boarded 1 1 (in bottles r a t h e r than banks), and normal minting would tend toward equilibrium (i. e. C o n g r e s s would stop minting cents
when they c o s t ten m i l l s ) . Such a devaluation of the money is allowable, since
C o n g r e s s is not prohibited f r o m impairing the obligation of c o n t r a c t s ; howe v e r , it would give r i s e to a surge of wholly illusory profits (where accounts
had been kept in c u r r e n c y ) . It should be noted that c u r r e n c y would go to a p r e mium, since not only debtors but also c r e d i t o r s would p r e f e r a note to one
hundred small coins, so that the devaluation would not be a s l a r g e as today's
m a r k e t p r i c e of copper would suggest.
Secondly, the C o n g r e s s could institute f r e e coinage of 9 0 0 - p a r t s - s i l v e r
fractional coins. The " p r i c e of s i l v e r " (in c u r r e n c y ) would then e x p r e s s the
discount r a t e of F . R. notes. The advantage of this option is that the States
have traditionally used a s i l v e r s t a n d a r d , de j u r e f r o m 1792 to 1871 and de
facto f r o m 1934 to 1 9 6 4 : thus we might expect to s e e s e v e r a l States enact
legal money statutes. The disadvantage is that the value of silver is volatile,
because it is mined not for its own sake but a s a by-product of copper, e t c .
Thirdly, the C o n g r e s s could r e s u m e the minting of gold coins ( r e s u m e is
the proper word, so long a s the A m e r i c a n A r t s medallions fail to gain a c c e p t ance a s legal money in any State).
Today, a double eagle is worth, a s specie, $370 c u r r e n c y . This is to say
that the face value is 5. 4% of the value of the metal; and we know that this is
comparable to, but m o r e than, the p r e m i u m on foreign gold coins.
Thus Congress could mint its gold coins (which, be it r e m e m b e r e d , were
standardized before white men reached the Rand) for a seigniorage — payable
in c u r r e n c y — equal to the face value of the coin: the m a r k e t for bullion would
not be disturbed, since the seigniorage would be higher than for many other
coins, but n e v e r t h e l e s s gold would flow to the mint, because U. S. coins
command a high p r e m i u m .
Once c u r r e n c y - a s - s e i g n i o r a g e b e c a m e an accepted institution, the c u r r e n c y
would be stabilized. Suppose that c u r r e n c y fell until the p r i c e of gold, in
c u r r e n c y , w e r e $850; then the seigniorage would be 2 . 4 % , U. S. coins would
be the l o w e s t - p r e m i u m gold coins, and gold owners all over the world would
want F . R. notes with which to pay for the coining of their gold.
CONCLUSION
The c o n t e m p o r a r y problem, of regulating the value of U. S. coin, is open
to a legislated (i. e. lasting) solution. It is, for the C o n g r e s s to mandate that
the T r e a s u r y shall strike a U. S. gold coin for whomsoever proffers both the
n e c e s s a r y fine gold and also c u r r e n c y equal to the face value of the coin.
This would effect two m a j o r improvements over the present situation.
F i r s t , an established U. S. coin would be available in unlimited quantities,
instead of U. S. coins having a r t i f i c i a l , s c a r c i t y value. Second, the monetary
s y s t e m would be isolated f r o m , and f a i l - s a f e with r e s p e c t to, the banking
s y s t e m : a collapse of the c u r r e n c y would simply r e s t o r e f r e e coinage of gold.

422

Possession vs. Promises:
Public Policy Issues for Reconciliation
Submitted by
The Gold Bondholders Protective Council, Incorporated
P.O. Box 2283, Seattle, WA 98111
February 11, 1982
The Gold Bondholders Protective Council, Inc. is an investors association
established for the purpose of protecting the rights and interests of investors who own bonds containing a gold clause which have been distributed to the
public in these United States.
It embraces unredeemed obligations issued and
guaranteed by the United States Government and its political subdivisions,
foreign governments and their instrumentalities and like corporate entities
which have otherwise maintained sound credit ratings. The Council believes it
appropriate for the Gold Commission to examine and address conflicting U. S.
Public Policy which is clearly inconsistent with respect to the treatment currently accorded gold coin of the U. S. and contractual promises therefor.
It
should be pointed out that Treasury records indicate 66% of the gold coin
struck by the Hint is still outstanding, whereas only £ of }% of the original
gold clause obligations remain outstanding in 1982.
If a taxpayer receives gold coin of the U. S. as current income, the
Treasury requires the coins be valued at their higher market value for tax
purposes, thereby placing the taxpayer in a higher marginal bracket.
However,
when the taxpayer tenders the gold coin to the Treasury to discharge his taxes,
the Treasury credits him with their lower face value. When this policy is
changed and made consistent to promote rational planning, the hoard of gold
coin will begin to circulate and gold will flow into the Treasury.
Therefore,
the Council recommends that income denominated in terms of U. S. Gold coin be
valued at the lower, face value for tax purposes since it is in harmony with
the Administration's policy of reducing marginal rates of taxation.
Government obligations promising to pay both principal and interest
"...In gold coin of the United States of the present standard of weight and
fineness...upon presentation and surrender.... n , remain outstanding.
Although
In the
most have matured, others don't fall due until after the year 2000.
aggregate, there is less than $30 million of these gold clause obligations remaining, equally divided between Federal, State and Municipal bonds. All were
issued between 183^ and 193^ when gold was valued at $20.67 per ounce.
This
Commission has heard a number of suggestions urging the Treasury to issue new
gold bonds.
It is the Council's view that this action cannot take place until
the older gold bonds are honored according to the terms specified.
Approximately $1.25 billion par value of unmatured corporate obligations
containing a gold clause remain outstanding today. They are primarily long
term first mortgage bonds issued by the nation's railroads, with maturity
schedules extending out to the year 2361. Through various congressional enactments, the railroads were offered enormous land grants. The purpose of land
grants in excess of the needed right-of-way was to provide an asset base upon
which the capital needed to construct the railroad could be borrowed.

423
Since 1933 when the Joint Resolution outlawing gold was Initially passed,
the holders of these gold bonds have suffered.
In the corporation's case, the
shareholders have benefited. Given the current rate of inflation, the bondholders will be decimated by maturity date if the gold clause is not enforced;
all of the bondholders 1 property will then revert to the shareholders for a
pi ttance.
It is the contention of the Council that the gold clauses contained in
these public and private obligations which were widely sold to the public remain operative and should be enforced as such for the following reasons:
1)
The coinage power granted by the U. S. Constitution is not so broad a grant of
authority so as to empower Congress under the guise of controlling monetary
policy to affirmatively and directly nullify property rights created by otherwise legal contracts. 2) The Joint Resolution which the Supreme Court found to
be valid respecting private debt (Norman vs. Baltimore S Ohio, 1935) is in
reality a violation of both substantive due process and the takings clause of
the Fifth Amendment of the Federal Constitution because the Joint Resolution
does not bear a rational relationship to any legitimate end sought to be achieved or promoted either at the time the resolution was passed or in light
of current monetary policy. 3) As evidenced by the Gold Ownership Act and
more recent legislation validating contractual gold clauses, the national
economic emergency which arguably justified the passage of the Joint Resolution
has now passed and the Joint Resolution is an anachronism which can no longer
stand based on these changed facts and circumstances.
The Joint Resolution
was repealed upon passage of the Gold Ownership Act, and, therefore gold
clauses which are unredeemed remain valid* and operative. 5) Since these gold
bonds were not delivered to recent investors until after the effective date of
legislation revalidating gold clauses, for purposes of such legislation, the
bonds did not "issue11 until after the effective date of the validating legislation. Accordingly, the contractual property rights which are embodied in
the gold clause must be enforced for that portion which remains unredeemed in
order to prevent a further diminution of the Bondholders' capital.
In conclusion, it is clear the rights of the bondholder have been grossly neglected. The issuers received gold'to finance their operations and
expansion programs. They spent or invested the loan at its full buying^power
and have enjoyed the benefit of the bondholder's money since then.
In exchange, the bondholder was to receive a modest income which was secured by a
government guarantee or a first mortgage agreement and indexed to an easily
ascertainab 1e gold value. The exchange was voluntary, equal and the bargain
was fair. Congress interfered with the contractual obligations existing
between the parties and gave the issuer a windfall which unfairly and unnecessarily deprived the bondholders of their investments. Congress acted
intentionally and directly to deprive and take away the property and rights
to which the bondholders are entitled under the gold clauses in their bonds.
This intrusion upon the bondholders' contractual property rights must now
cease for no legitimate public "good" is served thereby. Accordingly, the
Gold Bondholders Protective Council requests the U. S. Gold Commission
address these claims as enumerated above and urges it to construct a coherent
policy which reflects justice and equality under law.

424

Supply-and-Demand Folly

Michael Grogan
2179 Canal Road
Lake Park

How can economic problems be solved when the
very basics of supply and demand are not understood?

Florida

33^10

October 9, 1981

To an economist, supply is the monthy Great National Product statistic, demand is a nsing standard of
living, and there are no limits to either.
To a wise man. supply is resources (water, energy,
arable land, forests, minerals, living space, privacy,
everything) and demand is nearly 5 billion males and
females (and all that that means)
Americans and Europeans, almost without exception. are brainwashed by businessmen and politicians
into lapping up the economist s definition of supply and
demand not the wise man's The rest of humanity has

to tag along So. in spite of all the talk about man's
ingenuity and cleverness, wisdom even at the university level seems to be just about nonexistent

Dear Mr. Vole leer,

Population Standard
Since money is a sort of rationing coupon,linking
population to resources, money supply should be based on
population figures, not gold.
Only if population and resources-in-use increase
roughly equally, as has been the case throughout history,
should money supply be increased to keep prices stable.
But if, as is now the case, population increases
but resources do not, money supply should not be increased,
so as to ration resources more effectively by pushing
prices up.
Is the latter YOUR idea?
Inflation may be a blessing
in disguise as an effective if inequitable way to balance
resources and population.
Basing money supply on population
would bring the growing imbalance between population and
resources home to everyone.
Sincerely,

( S

Michael Grogan
P.S.
About half a century ago my uncle asked Montagu
Norman, then Governor of the Bank of England, if it would
make the slightest difference if all the gold in the bank's
vaults wero replaced by one pellet from the droppings of
a donkey.

425
THE OBJECTS OF MONETARY REFORM
Statement Submitted By
Elgin Groseclose, Ph.D.
Executive D i r e c t o r
I n s t i t u t e f o r Monetary Research, I n c .
1200 15th S t r e e t , N.W.
Washington, D.C. 20005
December 29, 1981
1. The main task f a c i n g government today i s t h a t of r e s t o r a t i o n of
i n t e g r i t y t o the monetary system t h a t has been s t e a d i l y corrupted, p a r t i c u l a r l y since 1934, w i t h c l o s i n g of the mint to f r e e coinage, the suspension of
gold c o n v e r t i b i l i t y , the s e q u e s t r a t i o n of a l l monetary g o l d , and the repudiat i o n of a l l gold debt o b l i g a t i o n s , beginning w i t h those of the government
itself.
2. The monetary standard should be as f i x e d as t h a t of the weight of
a kilogram or the length of a meter; n e i t h e r the standard nor the c i r c u l a t i o n
should be subject to bureaucratic c o n t r o l ; t o a d j u s t e i t h e r by o f f i c i a l a c t i o n
is as f u t i l e , and as d i s r e p u t a b l e , as t o change the weight of a bushel i n the %
i n t e r e s t of a s t a b l e supply or p r i c e o f the corn crop. As a r e s o l u t i o n of
t h i s I n s t i t u t e , taken by i t s t r u s t e e s i n 1970, s t a t e s :
RESOLVED, That the essence of the money problem i s moral more
than t e c h n i c a l - t h a t as money i s the standard of economic
value and measure o f commerce the manipulation of money i s
e v i l , whether i n the i n t e r e s t of c r e d i t o r s or debtors, i n d u s t r y
or l a b o r , producers or consumers, government or taxpayers; t h a t
the i n t e g r i t y of money should be maintained by c l e a r l y defined
content and composition, and by adherence to the d e f i n i t i o n .
3. Just as the p r o s p e r i t y o f a merchant depends upon the q u a l i t y of
his merchandise and the r e l i a b i l i t y of his undertakings, so the weal of a
great power i s equally a f f e c t e d by the q u a l i t y of i t s money, and the i n t e g r i t y
of the standard. The Byzantine empire, though s h r i n k i n g p o l i t i c a l l y , was f o r
seven hundred years the dominant commercial power of Europe and the Middle
East, a p o s i t i o n c o n t r i b u t e d to by the i n t e g r i t y o f i t s coinage; Great B r i t a i n
became the ascendant corranercial power of Europe a f t e r the opening of i t s mint
to f r e e coinage i n 1666, and t h a t dominance was enhanced when i t became the
f i r s t and leading power to e s t a b l i s h i t s monetary standard on gold. The
decline of U.S. economic power and i n t e r n a t i o n a l p r e s t i g e i s a d i r e c t r e s u l t
of the wastage of t h i s precious asset.
4. The c u r r e n t world-wide i n f l a t i o n from decay of monetary i n t e g r i t y
may be due to U.S. i n f l u e n c e and adoption of U.S. monetary p r a c t i c e s , beginning
w i t h the widespread i m i t a t i o n o f the Federal Reserve System, and l a t e r w i t h the
establishment of f i a t i n t e r n a t i o n a l exchange through the I n t e r n a t i o n a l Monetary
Fund and the various i n t e r n a t i o n a l i n s t i t u t i o n s l i k e The World Bank t h a t have
promoted an excessive burden of debt.
5. A reformation of the monetary system demands r e s t o r a t i o n of c r e d i b i l i t y to U.S. monetary p o l i c y . This requires the f o l l o w i n g a c t i o n s :

426
a.

A b o l i t i o n of the Federal Reserve System w i t h i t s power to create
legal tender currency based on debt.

Reopening of the mint
from 1792 u n t i l 1934f
standard of value, at
more than the current

C o n s t i t u t i o n a l amendment declaring only gold c o i n , or o f f i c i a l
warehouse receipts f o r gold held i n government d e p o s i t o r i e s , as
legal tender i n payment of public dues or p r i v a t e o b l i g a t i o n s
denominated i n d o l l a r s .

C o n s t i t u t i o n a l amendment declaring monetary gold to be free of
government seizure except i n payment of taxes duly l e v i e d by
Congress.

to the f r e e coinage of gold, as existed
w i t h the establishment of a gold coin
a mint value o f the d o l l a r a t somewhat
world market price of gold.

6. Fear of i n s u f f i c i e n t c i r c u l a t i o n under a gold coin standard and
f r e e coinage i s groundless. No metal or other commodity i n commerce i s i n
more abundant supply i n r e l a t i o n to annual production,than gold. Under free
coinage, gold appears i n c i r c u l a t i o n , or disappears, i n response to market
demand, and not as determined by a government bureau.
7. A f r e e coinage gold standard i s not designed t o guarantee s t a b l e
p r i c e s , nor should be so used, f o r prices are the r e s u l t of a m u l t i t u d e of
forces and i n f l u e n c e s , among them p r i m a r i l y , the emphasis or mood of the
market; nor w i l l a gold standard prevent c r e d i t c r i s e s , which are also an
e f f e c t of subconscious rather than overt influences and under bureaucratic
management of the currency are o f t e n promoted by bureaucratic a c t i o n . A gold
currency w i l l only do what i t i s intended to do, t h a t i s , provide a standard
by which other goods and services can be measured, and a store of value f o r
f u t u r e payments.

427
AS GOOD AS GOLD
Submitted by
JOHN H. HARRIS
20 BHEKMAN PLACE (2B)
NEt YORK, N.Y. 10022
JANUARY 13, 1982

In the current debate on a gold standard the stumbling block la the
fundamentally vrong premise in the quest to fix a price for gold. It is not
possible to fix a price for gold in terms of any existing currency. Far
better to consider not a price but a value. Gold has a value as a medium of
exchange, in other words as a currency. Consider the implications of using
gold as money.
Assise all gold reserves minted into coins of standard weight and
fineness. At a given date equate the number of coins so available with the
figures used internationally in representing the price of goods and services
in circulation. One coin will be found to equate to many hundreds of dollars.
Now start using only gold coins to pay for goods and services. Note
the dramatic fall in the numbers on the price tickets (the first skirmish in
the war on inflation). Continue to mint all newly-won gold into the standard
coins. Charge the weight of gold going into industry or Jewellery at the
value of the equivalent number of coins. Paychecks would of course come down
accordingly. Checks and all paper transactions could be continued but only
against deposits in the equivalent number of coins. Gold money thus on
deposit would pay interest whereas gold now in the bank does not.
The result would be a stable currency and stability cf values. The
gold-producing countries would not get any richer (you can't eat gold)
whereas countries with exports of commodities or manufactures, instead of
suffering frcm "lack of hard currencies" would find that their products are
as good as gold.
This desirable state of affairs would continue as long as the supply of
coins was adequate to satisfy the needs of international commerce. However
the rate of increase of the net worth of the world is historically greater
than the rate of increase of gold production and is likely to remain so. In
this situation the remedy would be to have a periodic re-valuation of the
value of the coin. Clearly this value is going to tend upwards and, as a
concomitant, the numbers on the price tickets will go down - the very reverse
of inflation. Gold thus produces capital gains.
The return to gold usage (rather than a gold standard) would provide a
solution to currency and exchange problems and, since the money supply would
be finite, a cure for inflation and a clear directive for monetary policy.

428
SOME NEGLECTED ASPECTS OF GOLD
Joseph A* Hasson, Ph.D.
Rockville, Md. 20353
The Gold Commission has examined the historical workings of
the gold standard in the United States. This survey has not related
its actual workings to the underlying theory of the classical gold
standard, devised by David Hume and known as the price-specie flow
mechanism. Numerous studies by eminent scholars exist. Their aim has
been to examine how close has been the workings of the standard with the
the Dry. Among those scholars are J.M. Keynes for the United Kingdom,
Jacob Viner for Canada, Harry D. White for France and James D. Angell.
Viner and White, in particular, concluded that the price-specie flow
mechanism did not work in reality as predicted in theory. Differences
among countries and divergences from theory were based on alternative
domestic arrangements in different countries and different responses
to similar stimuli. Viner notes, for instance, that "variations in
Canadian gold stocks appear too small to have been effective means of
adjusting the Canadian balance of indebtedness to borrowings from
abroad." White found that "the specie flow-price mechanism is
doubtless one of the forces, but there seems to be no justification
for assuming that it is the sole or even the dominant means of adjustment. It is my opinion that nothing in the experience of France,
the U.S. or Canada verifies the claim that the specie flow-price
mechanism of the neo-classical theory is the all-important means or
adjustment.
It is posited that along with Viner and White's conclusions,
conditions for the working of the gold standard were more prevalent
in the pre-World War I era than in the contemporary world. Hence, if
the evidence does not support the gold standard for the earlier period
it is even less likely to be operative today. It is argued that
greater price flexibility, upward and downward, existed in earlier
days, in part, because jf the greater dominance of the agricultural
sector in the world and U.S. economies. Prices in the contemporary
world, both in terms of levels and by sectors, show greater flexibility
on the upside and less on the downside. Consequently, in many markets,
greater adjustments occur in output and employment than in prices. This
has significant effects. Adjustments in output and employment on
the downside have the effect of spreading fixed overhead burdens over
smaller output levels. Great resistances to price reductions develop;
and in fact, price hikes may occur at the same time that output levels
are falling. Price inflexibility would deter the smooth working of
a gold standard, domestically and internationally. I would suggest
that monetary policies become more restrictive and of longer duration
than would be required if the world were characterized by more flexible
prices. Adjustment processes would be more easily achieved and the
greater social costs incurred because of inflexible prices would be
avoided.
One expert witness has supported his position, favoring a return
to gold by citing John Maynard Keynes as authority. This was done in
a Wall Street Journal article, November 27, 1931, by Mr. Alan Reynolds.
Over more than 25 years, Keynes wrote much about the gold standard and
monetary management. It is impossible in one WSJ column or in a brief
memorandum to do f U n justice to the insights of such an

429
imaginative and loquacious man whose various writings encompass
up to twenty-five full sized volumes. Nevertheless, baser] on a

rather extensive examination of his works, I believe It fair to
conclude that Keynes would have preferred some alternative to
gold if it held prospects of Insuring domestic monetary discipline.
In the Treatise on Money, he wrote as follows:
"I think It an allusion to suppose that there
are any special characteristics governing the supply
of gold which make It likely to furnish automatically a
stable standard of value, except the characteristic
which It sh^re with all durable goods - namely, that
the increment to total supply in any year is likely to
be very small. Apart from this, gold has depended, and
will continue to depend, for its stability of value,
not so much on the condition of its supply, as on the
deliberate regulation of demand." (Volume II, p. 293)
In the same work, Keynes noted that
"There Is little evidence to support the view that
authorities who cannot be trusted to run a nationally
managed standard, can be trusted to run an international
gold standard. For a nationally managed standard would
not subject the country's internal economy to such violent
strains as those to which the attempt to continue to
conform to an international standard may subject it,
so that the inherent difficulty and the necessary sacrifice will be less in the former case than in the latter."
(Volume II, p. 299)
Keynes last view towards gold was expressed at the Brettnn
Woods1 negotiations which led to the International Monetary Fund. He
had proposed an International Claaring Unionand new monetary unit,
the Banc or« (The Bancor is currently approximated by the SDR.)
For Keynes, the Bancor would not be^ wholly divorced from gold. He
contemplated holders of gold coutcf'ft into Bancors, but holders
of Bancors would be unable to convert them Into gold. This asymmetry
implies Keynes would have been willing to dethrone gold from a
prominent position in the international monetary system. He was, it
is reasonable to infer, a realist who never abandoned his view that
"in truth, the gold standard is already a barbarous relic." (Monetary
Reform, 1924, p. 137.) Keynes contended that even Mr. Hawtrey and
other gold standard supporters would "allow gold back only as a
constitutional monarch, shorn of his ancient despotic powers and
compelled to accept the advice of a Parliament of Banks." (ibid.,
P.137)
One cannot infer in honesty what Keynes would say to the Gold Commission
today. One feels he would support an SDR, based on a basket of
currencies as has evolved under the IMF. He might have difficulties
with a monetary rule currently advocated by some. He would not,
contrary to views of one expert witness, advocate a return to gold.
Finally, Keynes as a realist and pragraatist was more concerned vith
having things work than with theoretical esoterica or elegeant
arrangements.

430
REFERENCES CITED

Jacob Viner, Canadians Balance of International Indebtedness
1900-1913 (Cambridge: Harvard University Press, 192*1)
Harvard Economic Studies , Volume XXVI.
Harry D. White, The French International Accounts. 1980-1913
(Cambridgel Harvard University Press, 1933)* harvard
Economic Studies, Volume XL.

Alan Reynoldsj "Keynes and Gold: He Didn't Love it but He Was for It/'
The Wall Street Journal, November 2 7, 1931,
John Maynara neynes, Treatise on Money, Volume II: Applied Theory
of Money, (New York: Harcourt, Brace and Co., 1930)
John Maynard Keynes,
Monetary Reform (New York: Harcourt,
Brace and Co., 1924)
James W. Angell, The Theory of International Prices: History,
Criticism, Restatement (Cambrdlge:Harvard University
Press, 192b), Harvard Economic Studies, Volume XVIII.

Note:

The author earned his Ph.D. from the University of Chicago,
has served in the Department of State and taught at
the London School of Economics.

431
GOLD-3ASSD CURRENCY?

Submitted by Richard C 9 Haw.Former overseas member of the
Economic fiesearch Council(London),and authar of several books.
P.O.Box 232 Gillitts,Natal 3603,South Africa. January

21,1982.

Few would dispute the fact that monetary discipline is needed to r e s t ore order and balance to the economy.There is a growing call for gold
to play a x>art in this discipline,but we cannot ingore the fact that the
goId-standard era was not one of economic stability,but of traumatic fluctuation.A former director of the Bank of England,Vincent Vickers,(a prominent industrialist) resigned in protest againstthe gold standard.He said,
"Ve returned to the gold standard in 1925 for the benefit of the City of
London,and so ruined our basic industries.A monetary system which begets
such flagrant injustice cannot be regarded as an equitable system. "
Though a gold basis would be less regid and restrictive than a goldstandard, the fact remains that neither bears any necessary relationship
to the actual financial needs of industry and commerce.The value of the
metal itself moreover is subject to violent fluctuations as a result of
psychological factors quite unrelated to those needs.A fluctuating standard is no s t a n d a r d s contradiction in terms.
The absurdity of monetising gold is illustrated be the fact that when
the metal has been dug out of holes in the ground it is promptly buried
in other holes (called vaults),whence itwould dictate the quantity of
goods and services that intelligent beings may produce and consume.Presumably someone would decide what proportion of a country*3 gold is to
be monetised,and its value,and presumably such decisions are arrived at
through intelligently assessing the actual needs of the economy.lt would
then seem the height of absurdity to abdicate this rational process to
a non-intelligent metal i
Winston Churchill,when Chancellor of the Exchequer,called it a "deadly
absurdity".He said in Parliament , (see Hansard Vol. 264, 21.4. 1932) "When
I was moved by many arguments and forces in 1925 to return to the gold
standard I was assured by the highest experts
that we were anchoring out selves to reality and stability
.But what has happened? We have
had no reality,no stability.The price of gold has risen since then by more
t h a n 70^.That is as if a 1 2-inch foot rule had suddenly been stretched
to 19 or 20 inches,or the pound avoirdupois had suddenly become 23 or
24 ounces.Look at what this has meant to everybody who has been c o m pelled to execute their contracts on this irrationally enhanced scale.
Look at the gross unfairness of such distortion to all producers of new
wealth,and to all that labour and science and enterprise can give us.
Look at the enormously increased volume of commodities which have to be
created in order to pay off the same mortgage loan or debt.
I say
this monetary convulsion has now reached a pitch where I am persuaded
that the producers of new wealth will not tolerate indefinitely so h i d eous an oppression.

432
Mr.Churchill continued; "Are really going to accept
the position that the whole future development of science,our organisation,our increasing co-operation and fruitful era of peace and goodwill among men and nations;are these develoments to be arbitrarily
barred by the price of gold?Is the progress or rhe human race in this
age of almost terrifying expansion to be arbitrarily barred and regulated by the fortuitous discoveries of gold mines here and there or by
the extent to which we can persuade the existing cornerers and hoarders of gold to put their hoards again into the common stock?Are we to
be told that human civilisation and society would have been impossible
if gold had not happened to be an element in the composition of the
globe?These are absurdities,but they are becoming dangers and deadly
absurdities.They have only to be left ungrappled with long enough,to
endanger that capitalist and credit system upon which the liberties andenjoyments and prosperity,in my belief,of the masses depend."
Our liberty depends on the survival of the free-enterprise system and
is inseparable from it.The productive potential of the system has been
almost destroyed by creeping socialism and the growth of bureaucracy.
But unless the supply of money is controlled it will be found necessary to control everything else.For this purpose a Statutory Authority
is neededfor its scientific control.Charged with the specific duty
of maintaining a stable price-level,it would use as its gauge a weighted average of all the prices which go to make up the cost of living.
Exercising inexorable monetary discipline,it would not permit deficit
financing by government except within the parameters it establishes
in order to maintain the value of money. Taxation likewise would be
governed by those parameters.
The trade cycle,based as it is,on psychological factors, would be
levelled off if the public KNEW that positive action would be taken
by the Statutory Authority to keep the money supply in balance with
the wealth-on-sale (goods and services).There would in effect be a
commodit.y-etandard.Gold is neither a standard nor a commodity if it is
monetised.Wealth is not money or gold (these may merely be tokens to
facilitate exchange).True wealth should rather be gauged by the goods
and services,with which the monetary tokens should always be kept in
balance by the Statutory Authority.

433
SUMMARY OF MY VIEWS ON RESTORING THE GOLD STANDARD
Submitted by
Henry Hazlitt
65 Drum Hill Road
Wilton, Conn.

06897

January 26, 1982

This summary consists in two parts:
(1) A condensation of
my previous criticisms of Dr. A.nna J. Schwartz's definition of a
gold standard which she submitted to the Gold Commission on
October 6, 1981; (2) a short statement of my own views on restoring
a gold standard,
(1) Dr. Schwartz 1 s "definition" of a gold standard is
seriously misleading in two respects:
It assumes that this must
necessarily be an international gold standard ~ arrived at by
a vote of (presumably) the majority of members of the United
Nations.
It would be impossible to get any dependable restoration
of a gold standard by this method.
The other more fundamentally misleading defect is that
Dr. Schwartz persistently confuses a weight with a price. She
therefore wrongly declares that adopting a gold standard is an
act of "price-fixing" of gold. When the U.S. changed the socalled "price"" of gold from $20.67 to $35 an ounce, what it
really did was to declare that the paper dollar, instead of
being convertible into gold at approximately one-twentieth of
an ounce, would be convertible at only one~thirty-fifth of an
ounce.
It was, in other words, defining the value of a paper
dollar as being one-thirty-fifth of an ounce of gold —> a weight f
not a "price."
(2) The restoration of the gold standard in the United
States need not depend on our ability to get a vote by the
majority (or any oth«r portion) of the members of the United
Nations to participate. The participation of other nations
would help, but the United States would be well able to adopt
the standard alone.
It would involve an undertaking on the
part of our government to convert its paper dollars on demand
into gold at a fixed gold weight for the dollar.
This could not be undertaken immediately. The first step
would be for th8 government to announce its intention of returning
to a gold standard not later than such-and-such a date (at least
two or three years in the future). The next step would be for
the government immediately to stop inflating.
It would be

434
impossible to return to a sound and maintainable gold standard
if the value of th* paper dollar kept falling. Therefore, the
inflation would have to stop almost immediately after the
government's intentions of restoring a gold standard were
announced* If this were done, and if the general public were
confident that the government would actually carry out its
promise to return to gold, the currency would approach and reach
parity with gold even before the date of the actual beginning
of convertibility of the paper money into gold.
It will be noticed that this schedule implies the almost
immediate discontinuance of any budget deficit.
This is the essence of the proposed program. A few
additional reforms would be desirable along with it. One
would be th* abolition of the Federal Reserve System, which
in its very nature is an assurance of inflation. (The government, of course, should not continue to have power to make money
artificially cheap or artificially dear).

435
Sunmary of "Gold and Monetary Freedom11
Submitted by
Henry Mark Holzer

c/o Brooklyn Law School
250 Joralemon Street
Brooklyn, New York 11201
November 12, 1981
Dr. Allan Greenspan has written
. . that the gold standard is an instrument of laissez-faire and that each implies and requires the other.11 Of course,
he is correct: economic freedom—more specifically, for our purposes, monetary
freedom—is an indispensable prerequisite to any meaningful financial use of gold.
However—and this is the core of the Cormrission1 s problem—today there is
little economic freedom in America. And almost from our first day as a Nation,
there was little monetary freedom; now, there is none.
To understand our lack of monetary freedom it is necessary to go back into
history. With the birth of our Nation at the Constitutional Convention of 1787,
our Founding Fathers created a new government which possessed expressly delegated
powers. Congress was the recipient of legislative power, and in the monetary
realm it was authorized only to borrow money, to coin money and regulate its
value, and to punish counterfeiting—as to monetary affairs at least, the delegates had substantially resisted the siren song coming from the unfree and semifree statist European political systems.
But the resolve of America's leaders soon began to ebb. Less than four
years after the Convention, the scope of our government's monetary power divided
our Nation's leaders at the highest level. The question was whether Congress
could charter a bank. President Washington sought opinions from his Treasury
Secretary, Alexander Hamilton, and his Secretary of State, Thomas Jefferson. It
is popularly believed that the two disagreed. Actually, on the issue of government pcwer, they were in complete agreement—in principle. Hamilton held that
Congress1 s few delegated monetary powers were sufficiently broad to encompass
chartering the bank, especially if those powers were "loosely11 interpreted, and
that Congress even possessed extra-constitutional powers beyond those which had
been specifically delegated. Although Jefferson denied to Congress the bank
chartering power, he would have granted it to the states—thus sharing Hamilton's
statist premise about the power of government over monetary affairs. When the
Bank Controversy'was over, Hamilton's view prevailed. The monetary power of
Congress had grown considerably.
Congressional power expanded nearly thirty years later, when Hamilton's
views about its extra-constitutionality became part of the bedrock of American
constitutional law. In 1819 John Marshall's opinion for the Supreme Court in
M'Culloch v. Maryland expressly held that in monetary affairs, the government
of the United States was, like the monarchs of Europe, "sovereign."
That sovereignty was never more apparent than throughout the Civil War's
"greenback" episode. In order to fight the war, the northern government of
President Lincoln created legal tender and sinply forced individuals to accept
greenbacks, no matter what they thought the paper was worth. As usual, the
Supreme Court of the United States was a willing accomplice to Congress's usurping of nondelegated, extra-constitutional monetary power. In the first important
legal tender case to reach the Court, Hepburn v. Griswold, every one of the
justices (majority and dissent) agreed on the underlying principle: that Congress possessed a broad monetary power whose outer boundaries were far from clear.
Less than eighteen months later, Hepburn was overruled by Knox v. Lee, and legal
tender was expressly held to be constitutional.

436
By the time of the last legal tender case some years later, nearly three
centuries had passed since the 1604 English Case of Mixed Money had approved
Queen Elizabeth's sovereign power to debase her coinage. Yet despite the fact
that in America we had created a different kind of political system, despite a
written Constitution that narrowly circumscribed the power of our government,

the foreign sovereign who had been repudiated by the colonists seemed to have
been replaced by a domestic one—at least in monetary affairs. The idea that
monetary power belongs to the sovereign was conceived in Europe. If, despite
the United States Constitution, that idea was born in America in John Marshall's
M'Culloch decision (nrLdwifed by Hamilton's opinion to Washington in the Bank
Controversy) and reached its majority in the Legal Tender Cases, then its maturity came in three twentieth century cases.
In Ling Su Fan v. United States, the Supreme Court concluded that attached
to one's ownership of silver coins were "limitations which public policy may
require,11 and that the coins themselves "bear, therefore, the impress of sovereign power.11
Two months later the Court went even further, at least in dicta. Nobel
State Bank v. Haskell held that a state bank could be forced to help insure its
competitors1 depositors against insolvency. In the course of his opinion for a
unanimous Court, Justice Oliver Wendell Holmes actually went so far as to admit
that government monetary power was indeed cxmipotent: "We cannot say that the
public interests to which we have adverted, and others, are not sufficient to
warrant the State in taking the whole business of banking under its control.11
Holmes1 dictum very nearly became a reality in the early days of the "New
Deal/1 when, in a statist orgy of rules, regulations, proclamations, executive
orders, resolutions, decrees and manifestos, America's banks were ordered closed,
her dollar was devalued, her gold standard abandoned, private ownership of gold
was illegalized, and gold clauses were nullified. Although only the gold clause
issue reached the Supreme Court, when nullification of the clauses was upheld,
it was crystal clear that the Court had de facto approved of all the New Deal' s
statist exercises of raw government pcraer—based on a chain of precedents running back inexorably to Noble State Bank, Ling Su Fan, the Legal Tender Cases,
M'Culloch, the Bank Controversy, and thence to the Elizabethan Case of Mixed""
Money. Ironically, but not surprisingly, in little more than three hundred
years, a round trip had been completed: from an English monarch's unlimited
monetary power, to the reposing of identical power in the hands of a supposedly
free representative democracy. When the smoke of the Gold Clause Cases had
cleared—to the profound detriment of individual rights—the government of the
United States unquestionably controlled every aspect of this Nation's monetary
affairs: money, credit, banking, gold, the securities business, and more.
In the nearly fifty years since then, that control has both deepened and
become considerably more sophisticated (as in the Bank Secrecy Act), emulating
other contemporary societies which we rightly disparage for their lack of freedom.
The United States—its government and its people—can not have it both ways.
Either we have monetary freedom and a gold standard, or no monetary freedom and
no gold standard. There is no middle ground.
Indeed, should this Comnission reconmend that a gold standard be instituted,
and should Congress and the President take the unlikely follow-up step of introducing one, even then, a gold standard resurrected under today's economic and
monetary controls would not be worth the paper it was proclaimed on. Until the
government of the United States once and for all pulls out of the economic and
monetary affairs of its citizens—whether there be a gold standard or not—we
cannot have economic, or monetary, freedom. Without it, what we have instead,
as uncomfortable as this may be to admit, are revocable privileges—which are
the antithesis of individual rights.

437
HISTORICAL

EVIDENCE

SUPPORTING

Submitted
ROY W.

RETURN

GOLD

DISCIPLINE

JASTRAM

School of Business A d m i n i s t r a t i o n
U n i v e r s i t y of C a l i f o r n i a , Berkeley
F e b r u a r y 1, 1982
My historical research has led me to see t h e s t a b i l i z i n g powers of gold
w i t h i n monetary systems.
T h i s research has been collated in The Golden
Constant: T h e English and American Experience, 1560-1976.
My f i n d i n g s can be summarized as follows:
1.

T h e r e must be a d i s c i p l i n e over t h e money s u p p l y .
Nearly
everyone
agrees w i t h t h i s in t h e a b s t r a c t .
Disagreement arises over t h e question
of at what levels and how to exercise t h e d i s c i p l i n e .

Attempts at monetary d i s c i p l i n e when managed b y men have not w o r k e d .
I am not r e f e r r i n g solely to t h e h i s t o r y of the United States. The same
observation can be made f o r England, Germany, France, Italy and Japan.
The only exceptions were draconian measures ending b r i e f periods of
crisis.

T h e r e f o r e , I believe t h e r e must be management by law—not by men.
An
example of what I mean b y "law 11 is t h a t c u r r e n c y must be c o n v e r t i b l e
into precious metal at a p r i c e f i x e d by law, w i t h a legal reserve in place
to guarantee c o n v e r s i o n .
One example of managerial judgment by men is when a g o v e r n i n g
board selects t a r g e t i n t e r e s t rates or t a r g e t g r o w t h rates in selected
d e f i n i t i o n s of money s u p p l y and makes c o n t i n u i n g judgments of a p p r o p riate open market operations to t r y to h i t these t a r g e t s .

Those monetary laws t h a t w o r k e d best t h r o u g h o u t h i s t o r y have been
based upon t h e d i s c i p l i n e of the precious metals.
Notice t h a t I am not
saying t h a t whenever the system was based on precious metals it was
stable; I am saying t h a t when in h i s t o r y we f i n d l o n g - r u n s t a b i l i t y of
prices we f i n d precious metals standing behind i t .

The precious metal t h a t has had the most successful experience in stabilizing p r i c e levels is gold.

Based upon these f i n d i n g s I submit the following conclusions.
The
American public and the w o r l d at large would be well served b y a monetary
reform t h a t would include:
a.
Some form of a gold standard based on law;
b.
A r r i v e d at in consultation w i t h our t r a d i n g p a r t n e r s ;
c.
Accompanied
by
extensive
fiscal
reforms
including
budgetary
policies to preclude o v e r - s p e n d i n g .

438
Statement

by H e l e n B . J u n z .

Vice P r e s i d e n t ,

Townsend-Greenspan

& Co.,

Inc.,

New Y o r k ,

Mr. Chairman, I will focus my remarks primarily on the international aspects of
some
of the gold
link proposals before you. Although the Imp!Icatlons of each of these
proposals differ, the objectives a r e consistent and clear: they spring from the growing
dissatisfaction
with the apparent IntractablItty of Inflationary tendencies In
the world economy and the attendant volatility of Interest and
exchange
rates.
To
bring about a greater degree of price stability and, thereby of predictability of the
economic environment, Is a policy priority shared among most nations today.
However,
there
Is considerably less agreement about the way In which this goal can be acccmpltshed and about the role that gold can play In the process.
At this time when Interest In relinking gold and the domestic money supply Is being
revived In the United States, other countries seem to be moving away
from
gold
for
purposes of controlling
domestic monetary
expansion. Even the most traditionally
gold-conscious countries, such as Switzerland, appear to be headed towards a
weaker
rather
than a stronger linkage. And both, the Swiss and the Dutch, who together with
the French have generally been Europe's spokesmen in favor of a role for gold in
the
International
financial
system, do not consider a move to gold convertibility practical at this time. Although currently not supportive of moves to restore a system of
gold
convertibility, most Industrial countries and a number of developing countries
a s well never really fully agreed to the concept of demonetisation
of gold
either.
Accordingly, a number of developing countries, particularly some OPEC members, have
materially Increased their gold reserve holdings. And the members of the
European
Monetary
System, have
Included gold in their reserve pooling arrangements. Foreign
authorities clearly are m o r e Interested in the ability to activate their gold
reserves for purposes of intervention In foreign exchange markets, and, if needed, as collateral for official
foreign
borrowing, than
they
are
In re-establishing
convertibility. These attitudes
have clear Implications for the success or failure of
some of the gold standard arrangements this Commission Is examining.
These
arrangements can
be grouped
into three
sets by ascending degrees of convertibility. The first set of proposals calls
for a
link
between
gold
and
the
domestic money
supply
without convertibility
of dollar
assets
into gold. Such
arrangements are least subject to International influences. Their purpose is to
Impose a
legal
constraint or specific rule on the expansion of the money supply. The
imposition of such an objective rule stems from the belief that the authorities
are
too exposed to political and social pressures to be able to pursue their stated goals
in a steady fashion. If this Is so, it Is hard to understand why they would
be
able
to
remain
within the gold cover constraint, when they were unable to stick to other
promises. A gold cover commitment on the monetary side, a
priori,
is no
different
from a legislated debt ceiling on the fiscal side. And the experience with the latter
has been that whenever the ceiling became a real constraint there was a change in the
legislation
rather than In policy. Thus, before a gold cover commitment could change
market expectations about Inflation
in the United
States, domestic
and
foreign
holders of dollar
assets would have to be convinced that the imposition of such a
requirement somehow Is more binding than past experience Indicates.
The
second set of proposals attempts to shield a gold based domestic monetary policy
from external Influences by limiting convertibility to domestic residents. This would
require the Imposition of exchange and capital controls. Enforcement of such controls
in a world with capital markets that have become increasingly Interrelated and
by a
country
that
is at the very center of this International financial network just is
not realistically feasible.

439
The f i n a l
set of p r o p o s a l s i n v o l v e s broad gold c o n v e r t i b i l i t y at a fixed o f f i c i a l
p r i c e . Under ideal
c i r c u m s t a n c e s , such a gold standard w i l l ,
indeed, work t o
stabilize the domestic price level. For that to happen, the supply of gold needs to
expand In line with the growth of real demand for money. But past experience
has
shown that this Is not always so, particularly In the short-run. The supply of gold
Is governed by rather different factors than Is the demand
for money.
Furthermore,
because decisions about new supply are concentrated among a very small number of gold
producers, there can be no assurance of a smooth flow of new supply. Further, the
consequences of having supply decisions for a core commodity concentrated In the
hands of a small number of producers are abundantly clear.
A perhaps even more serious problem In operating a gold standard system Is that any
addition to, or decrease of, the Treasury's gold stock triggers an offsetting
change
in the money supply. Whereas such an offset Is fully appropriate when the change In
gold holdings stems from portfolio decisions of U.S. residents, this cannot be taken
as given when It originates abroad. The essence of the gold rule Is that It functions
objectively and does not distinguish among the causes that trigger changes
In the
monetary environment. This means, however, that any overseas disturbance will Immediately reverberate through the U.S. economy, regardless of the state of the
economy at the time. U.S. monetary conditions, thus would swing with the rise and
fall In world demand for gold. For example, the Soviet Union covers Its foreign
currency needs largely through gold sales Into the free world market. A harvest failure
In the Soviet Union, thus triggers gold sales. These In turn exert downward
pressure
on the world price of gold, making It profitable to sell gold to the U.S. Treasury.
This Inflow of gold then would cause an Increase In the money
supply and
In the
domestic
price
level. Conversely, an Increase In political tensions tends to % raise
the demand for gold triggering a deflationary reaction In the United
States. Portfolio decisions by foreign
holders of dollar assets, politically or financially
motivated, would affect U.S. monetary conditions In a parallel manner,
destabilizing
the U.S. economy, purposely or Indirectly.
Given the relative volatility both economically and politically, that appears to
be
characterIzlng
the
1980s, there
likely would be a significant number of occasions
when outside Influences could effectively destabilize domestic monetary
conditions.
Accordingly, pressure would
build
for dIscretlonary action to shield the domestic
economy from such outside Influences. But once an override mechanism to the objective
rule of the gold standard Is established, the system Is as vulnerable to the push and
pull of domestic political and social pressures as Is the system It is Intended
to
rep I ace.
These problems are quite fundamental and exist aside from the thorny question of
how
to determine the appropriate official
price for gold at which re-entry could be
effected. The gold standard, like any other simple objective rule, cannot be an unerringly appropriate guide to policy action In today's complicated world. The discipline It would exert clearly would be helpful in containing
Inflationary
tendencies.
However, the costs associated with failure could be tremendous for such failure would
put In question the polItlcal
determination of the authorities to achieve and
maintain
financial
stability. What it finally comes down to, is that discipline can
be successful only In achieving Its goal, If the political will to do so
Is strong.
Any woman can tell you that no corset can help fit a size 18 body into a size 8 dress
for any length of time. Imposition of outside discipline can help an overeater shed a
few pounds, but without a change
In basic attitudes, inevitably this discipline
eventually will give way to another
eating
binge. However, once attitudes
have
changed and discipline has become a part of the behavior pattern, outside constraints
appear unnecessary.

440
TOO EARLY FOR GOLD
Submitted by
Thomas J. Holt
T. J. Holt £ Co.
290 Post Road West
Westport, CT 06880
February 1, 1982
Discussion about going back to a gold standard has suddenly become
respectable. The idea that something must be done to restrain the
inflationary habits of politicians has gained an acceptance that was
unthinkable a few years ago. Advocates of a gold standard believe
that once convertibility of the dollar into gold at a fixed price is
restored, inflationary expectations would quickly fall, prices would
stabilize, interest rates would decline, and real growth would return
to the economy.
We do believe that a monetary system built on a hard base is the
only way to prevent the government from printing money willy-nilly. As
it has in the past, gold can probably play this role in the future
better than anything else. Being commodity money, gold has the advantage of enabling free-market forces to maintain relatively stable prices
over the long term.
The fact that the gold standard is desirable, however, does not
mean that it can be reinstated any time soon. Excessive credit expansion since gold-backing behind the dollar was removed has led to rampant inflation and has brought acute illiquidity to both the private
and public sectors. Until these imbalances are corrected, reinstating
the gold standard can do more harm than good.
Assuming that we can return to gold now, what should the price
be? The best way is to let the free market set this price. One proposal now receiving attention would have the government announce a set
date several months hence when it would start to buy and sell gold at
a fixed price. That official rate would be based on the market quotation prevailing just before the deadline. The problem with such a plan
is that no free market for gold would really be in existence during the
interim period. The huge supply held by central banks wouldn't be
available for sale. Speculators could drive the price sky high by buying as much gold as possible. When the government absorbs this vast
influx of gold at lofty prices, it would inject billions of dollars of
new reserves into the monetary system. Banks could then effect a new
wave of credit expansion, the money supply would skyrocket, and runaway
inflation would surely follow.
Why can't the government simply fix
the dollars now outstanding or to cover
ities? For one thing, such an arbitrary
recent market quotations.
It would have

a rate high enough to support
the nation's foreign liabilrate must be set far above
the inflationary effects noted

441
earlier. Also, it would freeze the existing illiquidity into a new
monetary system and would prevent the free market from correcting
the mess.
A return to the gold standard is possible only if the metal is
fairly priced relative to all commodities. This is the only way the
purchasing power of gold - and the money it backs - can benefit from
the self-stabilizing feature of a hard money system. What, then, is
a fair price for gold in terms of its purchasing power? Since 1934,
when gold was fixed at $35 an ounce, producer prices have increased
by about 670%. A comparable increase for gold would give us a price
of $270 an ounce. Looking at gold over a much longer period of time,
during the 100 years when gold was fixed at $20.67 an ounce, the producer price index average 38.4 (1967=100). Currently standing just
below 300, it has multiplied roughly eightfold. A similar increase
for gold would bring a price of only $165 an ounce. In terms of its
commodity purchasing power, then, the next official gold price should
be somewhere in the range of $150-300 an ounce.
A return to a gold standard now at this price would be terribly
disruptive, however. The public is still highly inflation-conscious.
If the government agreed to sell the metal so far below the current
market price, it would surely lead to a run on the U.S. stockpile.
Tens of billions of dollars could be drained out of the banking system
and the overall effect would be drastically deflationary.
Politicians
will never willingly deflate the economy to such a degree. Hence
restoring the gold standard in the near future is out of the question.
This does not mean that some kind of gold standard can't eventually be reestablished. The gold standard was restored in the 1870 f s
after commodity prices had fallen by more than 50% from their Civil
War peaks. A similar opportunity may present itself later in the
1980 f s. Free-market forces are now at work to bring about a switch
from inflation to deflation. Widespread price declines are now a fact
for all financial assets, including gold and collectibles, and they
are beginning to emerge in the real estate sector. Soon this deflation
will spread to other sectors of the economy.
After this deflation has finally led to credit contraction and a
worldwide depression, the price of gold may well have dropped to its
fair market value later in this decade - perhaps below $200. At that
time, but not before, it will be possible to reinstate the gold standard.

442
WHY GOLD IS NOT THE ANSWER
Submitted by;
PETER B. KENEN
International Finance Section
Princeton University
Princeton NJ 08544
November 12, 1981
You have received many proposals to give gold a centrol role in our monetary system. The proposals differ widely and so do the arguments advanced on
their behalf.
Some believe that gold is "honest" money. Those who bring goods and services to market should be paid with money containing equivalent real resources.
This doctrine appeals to concepts of value handed down for centuries and embodies view about the nature of the contract between citizen and sovereign. The
honesty of money, however, is not guaranteed by backing it with gold. If the
U.S. Government were required to mint gold coins from newly mined gold, the
coins would embody the real resources used in producing them. But producers of
other goods and services would be wrong to regard them as honest money. The
value of money derives from our ability to use it, not the cost of producing it.
An honest money is one whose purchasing power is stable. If there were new discoveries of gold or dramatic improvements in methods of mining, the resource
cost of a gold coin would fall, and it would not be an honest money.
Two other arguments are advanced by advocates of gold. They say that a
gold standard is the best way to maintain price stability in the long run. They
say that the decision to adopt a gold standard will dispel uncertainty in the
short run.
I have doubts about the promise of long-run stability. You went over the
record at one of your meetings, when you discussed the excellent paper by Anna
Schwartz, and I agree with the conclusion that one of you drew then. Some say
that the gold standard gave us price stability. It may be more accurate to say,
however, that we were able to stay on gold in periods that were intrinsically
stable and forced to abandon gold when they ended.
I have even deeper doubts about the assertion that a quick return to gold
will dispel uncertainty, assuring the success of supply-side policies.
Consider the legislation introduced by Senator Helms. Six months after Congress adopts his bill, the Federal Reserve banks will start to buy and sell gold freely at a "standard" price equal to the average of market prices in the previous
week. There is no way to know how this legislation would affect market prices
during that critical week. There is no way to know what will happen thereafter.
The public might sell large amounts ofr gold to the Federal Reserve banks, and
the legislation would then mandate rapid expansion of the monetary base. The
public might buy large amounts of gold, and the legislation would then mandate
rapid contraction. In either case, the Federal Reserve System might have to declare a "gold holiday" very soon. This seems to me a recipe for heightening uncertainty, not for ending it.
A fourth argument is advanced on behalf of gold.

It is the case for not

443
going back to pegged exchange r a t e s . Let me make t h r e e o b s e r v a t i o n s :
(1) Exchange r a t e s can be pegged w i t h o u t u s i n g g o l d . A l i n k to gold i s not n e c e s s a r y nor s u f f i c i e n t to keep a p e g g e d - r a t e s y s t e m f r o m b r e a k i n g down. ( 2 ) M o s t
o b s e r v e r s have s t r o n g doubts about r e t u r n i n g t o pegged r a t e s .
T h o s e who f a v o r
them b e l i e v e t h a t f l o a t i n g r a t e s have been a major cause o f i n t e r n a t i o n a l
instability.
F l o a t i n g r a t e s were a d o p t e d , however; t o i n s u l a t e n a t i o n a l economies
f r o m e x t e r n a l shocks, and they have been r a t h e r h e l p f u l i n t h i s r e g a r d .
(3)
I
w o u l d r e m i n d t h o s e who f a v o r p e g g e d e x c h a n g e r a t e s t h a t w e c a n n o t a d o p t t h e m
u n i l a t e r a l l y . To d o s o d e f a c t o w o u l d r e q u i r e t h e c o o p e r a t i o n o f o t h e r c o u n t r i e s ;
t o do so de j u r e w o u l d r e q u i r e a f o r m a l d e c i s i o n b y t h e I n t e r n a t i o n a l M o n e t a r y
Fund.
A t one o f y o u r s e s s i o n s , someone s a i d t h a t h e f a v o r s t h e " d e v e l o p m e n t 1 1 o f
a gold standard, not a "return" to a gold standard.
I take t h i s
distinction
seriously.
I f a g o l d s t a n d a r d i s t o have any chance o f c o n f e r r i n g l o n g - t e r m
s t a b i l i t y , i t must p r e v e n t t h e monetary system f r o m c r e a t i n g o r accommodating
i n f l a t i o n a r y pressures.
I t w o u l d h a v e t h u s t o be v e r y much s t r i c t e r t h a n e a r l i e r gold standards.
I t w o u l d be n e c e s s a r y t o back t h e c u r r e n c y c o m p l e t e l y by
gold.
Y e t t h i s r a d i c a l r e f o r m m i g h t n o t go f a r e n o u g h .
During the l a s t decade,
we h a v e b e e n a s s a u l t e d b y a d o z e n d e f i n i t i o n s o f m o n e y .
This barrage r e f l e c t s
u n c e r t a i n t y about t h e u s e f u l n e s s o f any s i n g l e concept.
I t a l s o r e f l e c t s an
economic p r o c e s s .
When t h e a u t h o r i t i e s c l a m p d o w n o n t h e s u p p l y o f o n e m o n e t a r y
asset, the f i n a n c i a l system produces s u b s t i t u t e s f o r i t .
The v e r y a t t e m p t t o
c o n t r o l a p a r t i c u l a r aggregate^ even by b a c k i n g i t w i t h gold, reduces t h e r e l e vance o f t h a t aggregate.
I n y o u r d e l i b e r a t i o n , you have c o n c e n t r a t e d on a r e t u r n t o g o l d by t h e
United States, acting u n i l a t e r a l l y .
You s h o u l d pay c l o s e a t t e n t i o n ,
however,
to the i n t e r n a t i o n a l ramifications.
Under p r e s e n t i n t e r n a t i o n a l monetary a r rangements, a f o r e i g n government can peg t h e v a l u e o f i t s c u r r e n c y t o t h e U.S.
d o l l a r . (To t h i s e x t e n t , t h e U n i t e d S t a t e s c a n n o t d e c i d e u n i l a t e r a l l y t h a t d o l l a r exchange r a t e s s h o u l d f l o a t . ) Under p r e s e n t arrangements, however, a c o u n t r y
can m a i n t a i n i t s peg o n l y by p u r c h a s i n g and s e l l i n g d o l l a r s .
I f the United
S t a t e s r e s t o r e d c o n v e r t i b i l i t y t o g o l d , o t h e r c o u n t r i e s c o u l d s t i l l peg d i r e c t l y
to the d o l l a r .
B u t t h e y c o u l d move t o a g o l d s t a n d a r d , t o o , a n d t h i s w o u l d
l i k e w i s e f i x the p r i c e s o f t h e i r c u r r e n c i e s i n terms o f the d o l l a r .
More i m p o r tantly
c o u n t r i e s p e g g i n g t o t h e d o l l a r and t h o s e p e g g i n g t o g o l d c o u l d buy
gold from or s e l l gold to the United States.
There i s another
possibility.
F o r e i g n g o v e r n m e n t s a n d c e n t r a l b a n k s h o l d some $ 1 6 7 b i l l i o n i n b a l a n c e s w i t h
U . S . b a n k s , T r e a s u r y b i l l s , and o t h e r d o l l a r c l a i m s . They h o l d an a d d i t i o n a l
$80 b i l l i o n o f E u r o d o l l a r d e p o s i t s . These c o u l d be u s e d t o p u r c h a s e g o l d f r o m
t h e U n i t e d S t a t e s , a f f e c t i n g t h e m o n e t a r y b a s e . Many p e o p l e a s k w h a t s h o u l d b e
done w i t h t h e l a r g e U . S . g o l d s t o c k i f i t i s n o t g i v e n a new m o n e t a r y r o l e .
I
b e l i e v e t h a t t h e G o v e r n m e n t s h o u l d h o l d o n t o i t s g o l d s t o c k . The U n i t e d S t a t e s
has huge s t o c k s o f t a n k s , a i r c r a f t , and m i s s i l e s . I t does n o t want t o use them
b u t c a n n o t g e t r i d o f them. The U n i t e d S t a t e s s h o u l d keep i t s g o l d f o r a n a l o g o u s
r e a s o n s . T h e f u t u r e i s u n d e r t a i n a n d u n s a f e . One c a n c o n c e i v e o f
international
e m e r g e n c i e s i n w h i c h gold may b e t h e o n l y a c c e p t a b l e means o f p a y m e n t . One c a n
c o n c e i v e o f c i r c u m s t a n c e s i n w h i c h we w o u l d w a n t t o r e d e e m t h e d o l l a r s h o l e d b y
f o r e i g n governments.
Do n o t t r y t o c o n c o c t a n e w u s e f o r g o l d .
I n the words
o f a n o t h e r economist on a n o t h e r o c c a s i o n :
D o n ' t j u s t do s o m e t h i n g . S t a n d t h e r e !

444
GOLD, THE ONLY HONEST UNIVERSAL MONEY
Submitted by
Edward H. Kingsbury
3 Live Oak Lane, Zellwood, FL.,

32795.

February 3, 1932.
"How many reams of paper cut into bills can circulate a3 money?
The worthless tokens are signs of value only in so far as they represent gold.••While gold circulates because it has value, paper
has value because it circulates." That irrefutable and cogent truism, in and of itself, is the concise epitome of the case for a
prompt return to the discipline of the gold reserve standard which
would automatically place a limit on the profligate printing of
fiat money by vote-buyingpoliticians and their associated selfserving pressure groups. It is not a quotation from any great American; it is from the "Critique" of Karl Marx, a true believer in
honest money. The nearly half century binge on dishonest nothings
is the core of our inflation. The U. S. and the western world are
now on the brink of a monetary catastrophe that can make the great
depression appear to have been a boom unless the discipline of gold
is invoked.
The enemies of gold, knowing that that discipline will end their
self-serving, resort to such specious superficialities as Russia
and South Africa will also benefit. Their incidental benefit does
not compare with the greater vital benefit to the staggering monetary system of the western world. The blacks of South Africa had
their wages held down by the blatant hypocrisy of the U. S. in its
futile endeavor to keep the price of gold at $35* Since that hypocrisy has been shattered, black wages have bean quintupled. Any
figures on Russian gold and the important cost of its production
are pure guesstimates; most likely, Russian propaganda. To the
adamantly biased, the simple answer is to demand that both pay in
gold for everything they buy from the west.
Paper money Is pure fiat(government IOUS of nothing). By whatever nomenclature, none is as "good as gold" nor will the contrived rhetorical alchemy of the political hierarchy turn them into
gold by its deceptive hogwash. Under a convertible gold standard,
preferably with a 100$ gold requirement, they would be given value
as warehouse receipts for gold* It would give the electorate the
power to pull the rug out from und9r the vote-buying spenders who
would then find little inducement to run for office and give the
people a sound reason to vote. It would -be the crux of putting
the kibosh on inflation and the devastating interest rates. If
this last chance administration had given the return to the gold
standard its first consideration, it would have facilitated its
success in its needed reforms. If it does not return to it very
shortly, its patchwork surgery will be but an interlude to the
next spree and the ultimate monetary collapse.
In the face of the glaring success of OPEC in setting its own
price for Its valuable asset and keeping it from the manipulations7
of the so-called free market, gold advocates, without any reg9rd

445
for our gold as an asset that will buy materiel and arms (even
from your enemy) in time of war, without sound reasoning, either
propose, a denigrating gold low price arrived at through each in-

dividual crystal ball or tossing to the wolves on what they naively term the "free" market to be gobbled up as in the past, e. g.
wanton Carter, at their price.
There is only one sound basis upon which to return to the gold
reserve standard; that is, by the coramonsense of shedding the politically embedded complex of denigrating our gold asset and recognizing the unequivocal fact that the tobaggoning dollar is close
to the bottom of the hill. That commonsense mandates, that the
U. S. and it alone must commensurately equate the value of our In—
valuable gold asset with the reality of the billions of owe-younothing dollars that have been spewed around the world. This sound
mathematical equation calls for an initial price of several thousand dollars an ounce as our selling price. Our purpose then should
be to, over time, take a goodly part of those gold threatening dollars out of circulation; thus gradually increasing the gold value
of the dollar. At this initial stage we would not oblige ourselves
to buy gold at our set selling price. Sellers of gold would have
the world gold markets. Over time, our price and the markets1
price would meld to a consensus price. We would have an honest
convertible dollar with increasing substance value and our gold asset wbuld be protected from the machinations of the marauders.
The sufference of the glaring failure of monetarist fine tuning
boggles one's reason. It is clear that it is politically perpetuated by and for that hierarchy. Ludicrously, the punishment by
staggering Interest rates is being meted out upon its victims by
the culprit, the Federal Reserve Bank.
The stacked Gold Commission with but two of its seventeen membars for the gold standard is a sad omen. It has seriously jeopardized the stature of this reform administration, giving it a
resemblance to that of the voted-out Carter. If its only monetary reform is to be the issuance of more gold coins as the surgery to right the inflationary monetary mess, it will be a tragic
cop-out to those who put It in office, tragic for the country,
and probably tragic for It.
Unless President Reagan has it up his sleeve to insist upon the
return to the gold standard at a high protective price and gets it
so cemented that it can not be violated in the future, whatever
little success he may hope to have in controlling inflation will
be very short lived.
International trade is seriously in need of a gold value denominator.
It would eliminate costly currency hedging and would
foster world trade.
It would also control inflation through its
penalty, the loss of gold by the inflationist country.

446
THE DESIRABILITY OF A SPECIE MONETARY STANDARD
Submitted by
Martin A. Larson, Consultant for Liberty Looby
?. 0. Boa 15059t Phoenix, Aris., 85060
January 10 f 19$2
The role of gold and silver has been fundamental in the monetary systems of all countries since the dawn of civilized society. This has been and remains true because a reliable and stable-medium of exchange is a basic necessity in every economy, especially in one consisting of advanced and sophisticated production; and that gold and silver alone have ever served in this
crucial capacity with any degree of continued success*
should note (1) that no nation or monetary authority has
ever had the power to issue fiat money without abusing this power and thus causing destructive inflation; and (2) that such abuse has always resulted in the most serious consequences* Sometimes , the outcome has been a dictator or the utter breakdown
of the social order; in others, where wisdom and statesmanship
have supervened, reforms were effected which placed the nations
involved, not only on the course of recovery, but gave them periods of prosperity and tranquility.
Perhaps the most important historical instance of great statesmanship was that of our Founding Fathers, who had, from bitter
experience, learned the inevitable consequences of inflation (in
that case unavoidable because of the War of the Revolution). After the Continentals, as well as tho various irredemable currencies issued by the colonies reached a certain point of depreciation, they ceased to circulate; and those who prepared our Constitution were determined that no such tragedy should recur in
the United States. They therefore enacted two provisions in that
instrument, one of which states that "Congress [alone] shall
have power to coin Money, regulate the \alue thereof, and of foreign coin;" and that "No State shall...make any Thing but -gold
and silver Coin a Tender in the Payment of Debts." This means
simply that there shall be no currency except specie issued by
Congress (or notes redeemable in oich medium); and that every
state must pay its obligations in such currency*
Perhaps the most important example of devastating inflation
is that of the decline and fall of the Roman Empire; as its powers waned and tributes no longer flowed in from the conquered
provinces, there was no employment for millions of slaves who had
previously produced goods lor export or served in the mansions of
the wealthy. Once emancipated, they had to be supported and entertained; thus, bread and the circus* However, since taxes were
insufficient to pay for this welfare, the government attempted to
solve its problem by issuing vast amounts of debased currency;

447
and, though Draconian laws were enacted to compel the acceptance
of this at face value, it ceased, in due course, to circulate at
all; and this was one of the baaic causes leading to a millennium
of Dark Ages, during which life expectancy fell t o four years,and
the entire population of Europe was threatened with extinction*
In 1922-23, inflation occurred in Austria and Germany which
finally increased the price of a loaf of bread to a trillion
marks* The middle class was destroyed, a development which
brought Hitler to power and resulted in WW II, with costs which
are beyond comprehension*
Since it is so much easier to print flat money than it is to
extract taxes from an angry and restive population, the temptation to Issue it is almost irresistible* -But this is the road to
national suicide!
We know there are serious monetary students who believe that,
in order to avoid inflation, we need only limit the federal budget to current income, restrict the Issuance of currency to actual
need, and exercise a strong fiscal restraint. But, as w e have
noted, we know of no historical instance in which any authority
-with power to issue fiat currency has refrained from abusing that
power. Thus it is that since WW n f inflation, taxes, and interest rates have gone into the stratosphere.
Thomas Jefferson was an uncompromising proponent of a solid
and redeemable currency. He held that the national government
alone should have power to issue currency and that this should
forever be in the form of specie or in notes so redeemable*
The great monetatry scholar, Ludwig von Mises, declared that
sound money is libertarian, because it is affirmative in approving commodity choice in a free marketplace; it is negative only
in preventing the government from meddling with the economic and
monetary systems. In practice, the classical gold standard is
the only effective curb on the power of government to inflate
Currencies, and thus enslave the people by destroying their lifesavings; its abolition renders all other legal and constitutional
safeguards useless. History demonstrates that whenever government cannot negotiate loans and dares not impose additional taxes,
it resorts, if possible, to the dishonest use of fiat currency*
After much research, I find myself in agreement with those who
advocate the gold standard; and I can see no impediment to its return except the opposition of powerful political and economic interests who wish to continue the present manipulation of our money*
For these and related reasons, I urge the Gold Commission,
Department of the Treasury, and its Secretary, Donald Regan,
give serious thought to the need and expediency of returning
the gold standard — to the constitutional mandate — before
continuing inflation shall have brought this great nation to
very brink of economic catastrophe*

the
to
to
the
the

448
A PERMISSIVE V;AY OP ACHIEVING A GOLD STANDARD

WITHOUT PRIOR FIXING 0? THE DOLLAR PRICE CP GOLD
Submitted by
Mitchell S. Lurio
25 Griggs Terrace
Brookline, MA. 02146
December 28, 1981
To object to the gold standard because it will not bring
freedom from poverty, depression, unemployment and war, is
surely the setting up of a strawman. The gold standard
prevents debasement of the monetary unit. Like a huge flywheel it gives stability to the monetary system.
Although forces in government, in the Fed and its member
banks will oppose giving up their banking powers and privileges, they cannot very well object to a gold standard
brought about in a permissive manner in the free marketplace.
Only the following legislation is required. The Secretary of
the Treasury is instructed to offer monthly, gold notes in
such amounts and durations as the market can absorb. The
competition of money-market, mutual, pension and other funds
will produce bidding, even though payment is made in gold.
The price of gold should not rise unduly because the increased
demand is relatively small. The Fed should be enjoined from
buying government or other securities. Its discount rate
must be at or above the prime bank rate.
The Fed must not issue any more Federal Reserve notes (dollar
currency) but existing dollar currency must be exchangeable
at market rates for up to S0i/o of Treasury gold, for gold
currency, the dollars received being destroyed. Gold from any
source ;may be used to back up additional gold currency.
Gold deposits will come into existence, side by side with
dollar deposits, just as gnId and greenbacks did after the
Civil War. Gold reserves for gold deposits would be the
same percentage as dollar reserves. Gold currency is 100>
backed by gold. Gold loans will be at lower interest rates
and markets will quicken. Dollar deposits will gradually
disappear as old dollar loans are repaid and new loans are
made in gold.
The Fed would be shorn of most of its functions. It would
be hard to make a case that it has served the country well.

449
AN URGENT RETURN TO THE AMERICAN SYSTEM

Submitted by
Lyndon Hermyle LaRouche, Jr.
Chairman, Advisory Committee
NATIONAL DEMOCRATIC POLICY COMMITTEE
Post Office Box 26
Midtown Station
233 West 38th Street
New York, New York 10018
January 8, 1982

Since approximately October 1981, the economy of the United
States has entered the beginning phase of a new world depression.
At this moment, we are near the threshhold of several alternative
kinds of chain reactions of financial collapse in both our
domestic economy and the world market. Although restoration of a
gold reserve system will not stop this depression by itself, the
immediate establishment of such a gold reserve system is an
indispensable part of any effective package of remedies.
The government of the United States must take immediate,
unilateral action to (a) define the monetary gold reserves of
the United States as the sole basis for circulation of our nation's
currency in international markets, and (b) to invite other
governments to join with us in creating a new gold reserve
system. Monetary gold should be priced at approximately $500
an ounce, the estimated competitive market price for adequate
supplies of monetary gold from mining. Gold reserve transfers in
settlement of monetary accounts is to occur only among nations
which enter into such an agreement.
The banking system of the United States must be regulated
in a manner consistent with such a gold reserve policy, and no
foreign financial institutions should be permitted to engage in
business within the United States except on condition that
they accept the conditions of regulation and transparency of
regulated banking institutions of the United States.
The effect of these two cited measures will be to tena to
dry out the flood of fictitiously generated "offshore, unregulated" credit into U.S. capital markets.
Therefore, the government
and banking system must take concerted action to generate adequate
supplies of credit.
The Congress must authorize gold reserve issues of U.S.
Treasury, gold reserve-denominated currency notes. These issues
of currency should not be employed for government spending, but
for lending through special discount windows of the Federal
Reserve System. This lending should occur, at rates of not above
4%interest per annum, as participation in a percentile of

450
American System
d

_
January 08, 198 2

individual loan agreements contracted between borrowers and
private banking institutions.
Such participation should be
restricted to capital-intensive improvements of production of
agricultural and industrial goods, of transportation, and to
capital improvements by designated units of government.
The domestic objective of such supplementary lending is to
expand rapidly the tax revenue basis and to increase average
levels of national productivity as measured in terms of per
capita output of tangible goods. This is the only possible
means for remedying in-sight Federal deficits now aimed at
levels of $150 billion a year or higher, deficits which will
skyrocket off the charts once the full impact of the new
depression is felt.
The foreign policy objective of such measures is to create
a degree of order in international monetary and economic relations,
within which order reorganization of the debt overhang of developing nations can be reorganized on a gold reserve-denominated
basis. The objective of such actions is to achieve a level of
increased volume of hard-commodity world trade in the reasonably
projected magnitude of between $200 and $400 billion annually.
The proposal to re-establish the gold reserve policies of the
American System of political economy should not be confused with
proposals to introduce a "gold exchange system." The latter
proposals would have catastrophic consequences, including a
general collapse of the capitalist economy worldwide.
The
function of a gold reserve system is hard, gold backing for
that margin of credit which is not immediately secured by sale
of commodities for dollars. By making new issues of currency as
good as gold, we make our entire currency issue implicitly
also "as good as gold."
We must act quickly. Farms and firms which have been driven
out of existence are no longer prospective borrowers, employers
or purchasers of goods. V7e muct act before the chain reaction of
collapse enters the next phase-change, while most of the
structure of our goods-producing and transportation sectors still
exist to be revived to healthy economic life.

451
THE USE OF A BASKET OF COMMODITIES TO BACK THE CURRENCY
Submitted by
GEORGE MCMILLAN
1941 WEST OAKLAND PARK BOULEVARD, FORT LAUDERDALE, FLORIDA 33311
JANUARY 14, 1982

group
using
gold.

T h i s i s t o s u g g e s t t h a t t h e G o l d Commission c o n s i d e r t h e use o f a b r o a d
of commodities to back the c u r r e n c y .
T h e r e w o u l d be a d v a n t a g e s i n
a number o f c o m m o d i t i e s as compared t o t h e use o f a s i n g l e c o m m o d i t y ,

Some o f t h e c o m m o d i t i e s t h a t m i g h t b e c o n s i d e r e d f o r i n c l u s i o n i n a
broad group of commodities would i n c l u d e , besides g o l d :
o i l , steel, coal,
c o f f e e , wheat, copper, corn, aluminum, soybeans, s i l v e r , p l a t i n u m , uranium,
and wood.
I f the currency were f u l l y c o n v e r t i b l e i n t o commodities, i n f l a t i o n would
l a r g e l y come t o a n e n d f o r t h e s i m p l e r e a s o n t h a t t h e f i n a l
relationship
b e t w e e n u n i t s o f money and u n i t s o f goods w o u l d h a v e b e e n f i n a l l y and d e f i n i tively established.
I n f l a t i o n o n l y e x i s t s b e c a u s e t h e r e i s no f i x e d r e l a t i o n s h i p b e t w e e n u n i t s o f money a n d u n i t s o f g o o d s .
T h e r e w o u l d be v a r i o u s c r i t e r i a t h a t w o u l d need t o be met f o r a p a r t i c u l a r c o m m o d i t y t o be i n c l u d e d i n t h e g r o u p as a b a c k i n g f o r a c u r r e n c y :
the
c o m m o d i t y s h o u l d be e a s i l y s t o r e d , w i t h o u t s p o i l i n g ; t h e r e s h o u l d be a r e l a t i v e l y a b u n d a n t and s t a b l e s u p p l y ; i t s h o u l d be r e a d i l y t r a n s p o r t a b l e ;
it
s h o u l d h a v e a r e l a t i v e l y h i g h r a t i o o f v a l u e t o s i z e and w e i g h t , so t h a t t h e
s t o r a g e c o s t i s n o t e x c e s s i v e ; t h e c o m m o d i t y s h o u l d be s u f f i c i e n t l y
uniform
s o t h a t u n i t s a r e o f t h e same v a l u e ( o r a t l e a s t i t i s r e l a t i v e l y e a s y t o
d e t e r m i n e g r a d e o r q u a l i t y ) ; and p r e f e r a b l y t h e r e s h o u l d be e i t h e r a good d o m e s t i c s u p p l y o r a number o f f r i e n d l y n a t i o n s w i t h a v a i l a b l e
supplies.
The a d v a n t a g e s f r o m use o f a number o f c o m m o d i t i e s , r a t h e r t h a n g o l d
alone, would center around
avoidance of the s p e c i a l problems associated w i t h
g o l d , s u c h as t h e f a c t t h a t t h e s u p p l y o f g o l d i n t h e U . S . i s t o o s m a l l t o
back the c u r r e n c y ( a t c u r r e n t v a l u e s , less than l / 4 t h the v a l u e of the e x i s t i n g money s u p p l y ) ; g o l d p r o d u c t i o n i s e x c e s s i v e l y c e n t r a l i z e d i n t w o c o u n t r i e s ,
S o u t h A f r i c a and U . S . S . R . , whose c o n t r o l o v e r t h e s u p p l y c o u l d be i n i m i c a l t o
t h e b e s t i n t e r e s t s o f t h e U . S . ; a n d t h e r i s i n g c o s t o f new g o l d , as l e s s a c c e s s i b l e v e i n s are mined, would cause a b u i l t - i n i n f l a t i o n e f f e c t .
Other advantages of using a group of commodities would r e l a t e to the
a v o i d a n c e o f t h e p r o b l e m s a s s o c i a t e d w i t h use o f any s i n g l e c o m m o d i t y , w h e t h e r
i t i s gold or something e l s e .
This would include the obvious problems of
t y i n g c u r r e n c y t o any commodity w h i c h has had t h e s e v e r e f l u c t u a t i o n s i n u n i t
v a l u e t h a t g o l d has had o v e r t h e l a s t y e a r o r s o .
Also, of course,
inflation
( o r d e f l a t i o n ) i s n o t p r e v e n t e d by t y i n g t h e c u r r e n c y t o a s i n g l e c o m m o d i t y ,
i f t h e r e i s the p o s s i b i l i t y t h a t the v a l u e of t h a t commodity w i l l
fluctuate
i n r a t i o to the value of o t h e r goods.
However, w i t h a group of commodities,

452
i f the group i s s u f f i c i e n t l y i n c l u s i v e ,
a l m o s t by d e f i n i t i o n .

i n f l a t i o n can be l a r g e l y

eliminated,

A n o t h e r a d v a n t a g e o f a g r o u p o f c o m m o d i t i e s i s t h a t t h e s u p p l y may b e
p a r t l y r e p r e s e n t e d by commodities a l r e a d y under U . S . c o n t r o l , f o r example,
metals under the s t o c k p i l i n g program, o i l under the government reserve supply
program (or Naval r e s e r v e s ) , v a r i o u s foods s t o r e d under farm subsidy programs,
t i m b e r on U . S . l a n d s , a n d so f o r t h .
This can reduce the problem of a c q u i r i n g
the commodities used t o back the c u r r e n c y .
F u r t h e r , g o l d t o a n e x t e n t s u f f e r s f r o m t h e same d e f e c t a s a p a p e r c u r r e n c y i n t h a t i t s v a l u e d e p e n d s on mass p e r c e p t i o n o f i t s f u t u r e e x c h a n g e a b i l i t y , o f t h e w i l l i n g n e s s o f o t h e r s t o a c c e p t i t i n payment i n the f u t u r e .
I f everyone l o s t f a i t h i n the f u t u r e acceptance of paper c u r r e n c y , i t
could
cease t o h a v e v a l u e , as i t d i d i n Germany i n t h e 1 9 3 0 ' s .
The o n l y r e a s o n t h e
same t h i n g c o u l d n o t h a p p e n t o g o l d i s t h e f a c t t h a t i t d o e s h a v e some i n t r i n s i c v a l u e - i n - u s e ; b u t , i n the absence o f a h o a r d i n g f a c t o r , t h i s v a l u e c o u l d
be much l e s s t h a n any f i x e d v a l u e as a b a c k i n g f o r c u r r e n c y .
T h e r e i s a b a s i c p r o b l e m a s s o c i a t e d w i t h any p r e c i o u s m e t a l as an e x c l u sive basis for a currency.
I t s very preciousness r e s u l t s l a r g e l y from scarc i t y , b u t t h i s s c a r c i t y means t h a t t h e s u p p l y i s n o t l a r g e e n o u g h t o b a c k a
currency.
Further, the mystique associated w i t h precious metals r e s u l t s i n a
h o a r d i n g t h a t d i s t o r t s t h e m a r k e t v a l u e , as c o m p a r e d w i t h w h a t t h e v a l u e - i n use w o u l d o t h e r w i s e b e .
*

I t i s suggested t h a t the Gold Commission give
cept of using a broad group of commodities to back
appear t o have s u b s t a n t i a l advantages over the use
such as g o l d .

consideration
the currency.
o f any s i n g l e

to t h i s conI t would
commodity,

453
COMMENTS ON THE PROPOSAL OF A GOLD STANDARD

TO REVITALIZE OUR ECONOMY
Submitted by:
Tony Mallin
6351 N. Oakley Avenue
Chicago, Illinois

60659

Did you ever really look at a tree? Do you know what it is?
Do you know how important it is to our survival?
It gives us
shade in the summer and in the winter warmth from a fire place.
It
gives us shelter in a house and it gives us communication through
our newspapers and letters.
We over exploit this wonderful "gift of nature" by destroying
oxygen producing forests, that help us to survive, and then turn
them into thin sheets of paper, worthless paper, stamped with ink
and the words "legal tender" as if to give them some value that
nature didn't.
This bad paper is called "money." Originally this money was
accepted as having value when it was exchangeable for so much of
nature in the form of gold or silver. Then it was good paper.
Good paper was a check on our plunder of nature as it represented
certain resources of nature such as gold and silver in a ratio to
other resources of nature such as trees and therefore we could not
so readily devastate these trees.
What we have now is "legal tender" paper that can be exchanged
for other "legal tender" paper — in other words nothing.
But we
use this "nothing" as falsely representing a resource of nature
that isn't there to plunder another resource of nature that is
there — in other words we get something for nothing.
Eventually
this leads to a day of reckoning. Our blind fascination with this
"legal tender" bad paper carries us to our self destruction.
Young eskimos were given so much bad paper as payment for
working on the Alaskan Pipe Line that they went and bought out
their own whaling fleet to plunder the endangered Bowhead whale
with the latest weapons of destruction and carnage.
The elder
eskimo whaling captains were so appalled at this paper funded war on
whales that they set up their own organization to control it —
they were closer, historically, to a barter economy or value oriented economy. The eskimos cla im that they need the whale to
survive but bad paper led some to destroy the very basis of their
survival.
Again I say, and I cannot be too emphatic in these dire
times of ever diminishing and plundered resources, the rain forests
of the world are being destroyed by the leverage of bad paper.
The rain forests give us our oxygen — the natives call them the
lungs of the world.

454
In parts of South America where unbacked paper money is dropped
like confetti, inflation is so rampant that tourists have their eye
glasses torn right off of their faces by the natives for the gold
content of the frames.
Our bankers, the megabankers, have dropped so much confetti on
Poland that Poland is exporting food from the mouths of citizens to
try and pay off its debt not realizing how its natural wealth was
ripped off by confetti.
But this Disney Land Empire of MegaBankers
is awakening to the fact that followers of their "paper cross" are
diminishing and that they themselves are losing faith in it.
So to boost their religion they are seeking gold relics and
turning to the "gold cross" of the infidels and their barbaric
worship.
To help them do this they got a "bail out" insurance to
give their confetti, they just can't seem to give up this "opiate
of the bankers," substance, in the form of the Monetary Control Act
and other pending legislation, that is to be subsdized by the
taxpayers. Now they will have a direct path to Fort Knox and our
pockets.
What this means is that you and I, as usual, the tax payer,
particularly the middle class tax payer, is to further subsidize
the further blunders of the "confetti boys" as well as our self
destruction. While we choke on paper the bankers, Like the South
Americans, go after our eye glass frames.
To save ourselves, let's cut off the bankers' paper supply and
return to a gold standard with a free circulating gold coin currency
with gold and silver backed treasury bonds so that we can keep our
eye glasses as well as our shirts.

455
SUMMARY OF STATEMENT OF NOVEMBER 3 ,

1 9 8 1 SENT TO GOLD COMMISSION f

Submitted

WASHINGTON, DC

Philip H. Mann - 7737 N. Kendall Dr.(C201), Miami, Fl.

33156 —

Feb. 4, 1982

PART I - CONDITIONS PREVAILING PRIOR TO DEPARTURE FROM GOLD STANDARD,MAR, 1933:
During 1928-1929 general business was good, but terrific speculation
in Commodity and Stock markets. By Sept. 1929 the Dow Jones Ind. reached 386;
call-money 20% - all commercial banks a high Loan/Deposit Ratio of 78%. Drastic
liquidation in commodity and stock markets, and bank credit began in October
1929 and continued until June/July 1932, resulting in THE DEPRESSION. By July
8, 1932 the D.J. Ind. Avgs. declined 89i% to a low of 41. Commodities suffered
sharp declines. Also, by July 1932, all basic indices: production of automobiles, building, steel, lumber, electric power, paper, carloadings, retail
store sales, wholesale prices, etc. were at depression lows. The Great Depression was ended in July 1932.
The recovery started in July/August 1932. By Sept. 7, 1932 the D.J.
Ind. advanced 100% to 80. Commodities also advanced sharply. Basic indices
also shared in this recovery. Their message was loud and clear. The Great
Depression's backbone was broken. Such recoveries usually continue a long time.
The foregoing conditions prevailed when President Roosevelt was inaugurated March 4, 1933. At the end of his three hour radio inaugural speech he
announced he would recommend to Congress: (a)that the U.S. go off the Gold
Standard; (b) raise official price of gold from $20.67 to $35 an ounce, a
40.94% devaluation; (c) refuse to pay gold for Gold Certificates^
The late'Senator Carter Glass of' Virginia, former Secretary of the
Treasury in Woodrow Wilson's Administration and chief architect in forming the
Federal Reserve System in 1913, was shocked at President Roosevelt's sudden
repudiation of his party's platform to maintain the Gold Standard• He delivered a most eloquent speech April 27, 1933 on the Senate floor, part of which
I quote: "With nearly 40% of the entire gold supply of the world, why are we
going off the Gold Standard? With all the earmarked gold, with all the securities of ours they hold, foreign governments could withdraw in total less
than $700 Million of our gold which would leave us an ample fund of gold in
the extreme case to maintain gold payments both abroad and home. To me, the
suggestion to devalue the gold dollar 50% means national repudiation. To me
it means dishonor. It is immoral
". "The history of inflation is recited.
Bacon, the wisest philosopher since Christ, the author of the inductive system
from which we have drawn all our inventions, valued experience; Edmund Burke,
the great rhetorician of all times, was logician enough to magnify experience;
Patrick Henry, the great advocate of human liberty, said that his feet were
lighted by the lamp of experience. Yet, here today, we are flying right in the
face of human experience, rejecting it all. More than half of our laboring
population will be the people to suffer under this unbridled expansion. That
is what it is, because the rein is so loose that the steed will never stop
until he goes over the precipice killing his rider." (See Exhibit 1A - Congressional Record, Senate, April 27, 1933, pages 2460-2462.)
Also, shortly after Roosevelt's inauguration, March 1933, he declared
a National Emergency closing all the banks. There was no justification for
such action, because most weak banks (nearly 7,000) had failed and were closed
prior to Roosevelt's election. (See Congressional Record - Senate - April 27,
1933, page 2467 - Senator Glass' radio speech of Nov. 1, 1932) Exh. 1A.)

456
T h e data d i s c u s s e d in t h i s PART I c l e a r l y i n d i c a t e s t h e d e p r e s s i o n
r e a c h e d i t s b o t t o m i n J u l y 1932, a n d t h a t a v i g o r o u s r e c o v e r y s t a r t e d i n J u l y /
August 1932.
T h i s took place n i n e months b e f o r e Roosevelt took o f f i c e March
1933.
There were no j u s t i f i a b l e c i r c u m s t a n c e s t o d e p a r t f r o m t h e G o l d S t a n d a r d .
T h i s d e p a r t u r e s t a r t e d t h e g r e a t money p r i n t i n g p r e s s e s t h e n and h a v e c o n t i n u e d
to t h e p r e s e n t time.

PART U

- THE INFLATION THAT FOLLOWED DEPARTURE FROM THE GOLD STANDARD:

During the past 30 years I watched with great concern the acceleration
of inflation and the constant depreciation of the U.S. dollar. Have read numerous books and articles on INFLATION. It is interesting to note some important remarks made during the great debate during September 1790 by the French
statesman, Mirabeau, on irredeemable currency: "a nursery of tyranny, corruption and delusion; a veritable debauch of authority in delirium; that infamous word, paper money, should be banished from our language."
In 1933 the official price of gold was increased from $20.67 to $35
per ounce. In 1968 the last domestic connection between the dollar and gold
was removed by Congress eliminating the requirement that the Federal Reserve
hold Gold Certificates equal to 25% of the value of outstanding Federal Reserve Notes. In August 1971 the last foreign connection between the dollar
and gold was removed by President Nixon when he notified foreign central banks
that the U.S. would not redeem their dollars for gold. This action caused
domestic and foreign commodities - gold and silver to sky-rocket. Note the
steep advances from 1971 to 1980: Commodity Research Bureau Futures Index (27
markets) up 248% - Reuters Price Index up 273%; B.L.S. Wholesale Price Index
up 155%; Gold up 233%; Silver up 240%.
PART III - SUGGESTIONS FOR RETURNING TO THE GOLD STANDARD
See Exhibit 2 - attached to my Nov. 3, 1981 Statement - a splendid
article by Robert A. Mundell, Professor of Economics, Columbia University I quote: "It is unfortunate that two of the 20th Century's most influential
monetary economists, Keynes and Friedman, wrote their major theoretical
works for a closed economy with scant attention to the problems of international inter-dependence. Both economists generally assumed a national
closed economy on an inconvertable paper standard, generally ignoring that in
the 1930's as today gold represented the principal external monetary reserve."
"Keynes' system thus takes into account the wage rate, the money supply, the
price level, and the exchange rate, and the need to anchor the system by choosing a 1 standard1; he chooses wage rates. This accounts for the support of
'wage policy' by his influential disciples."
Why is gold so important? Because it has maintained a stable purchasing power which is recognized and accepted worldwide. Professor Roy Jastran,
University of California, has calculated on an index with 1930 as 100, that the
purchasing power of gold in England was 125 in the year 1600 and 129 in the
year 1900. In 1900 the average weekly earnings of British workers were equal
to I ounce of gold; in 1979 (after two world wars, a world slump, a world
inflation) their earnings were also equal to J ounce of gold, same as 1900.
CONCLUSION:
S i n c e 1933, d i s c i p l e s o f t h e Keynes System and t h e F r i e d m a n
M o n e t a r i s t S y s t e m have managed o u r m o n e t a r y p o l i c y .
They f a i l e d t o r e a l i z e
t h a t many y e a r s o f e x p e r i e n c e h a v e p r o v e n t h a t w h e n e v e r a n y c o u n t r y e m b r a c e d
t h e p o l i c y o f i r r e d e e m a b l e c u r r e n c y t h e e n s u i n g INFLATION w o u l d p r o g r e s s
a c c o r d i n g t o a l a w i n s o c i a l p h y s i c s known as ' l a w o f a c c e l e r a t i n g i s s u e and
depreciation'.
They f a i l e d t o r e a l i z e i t was e a s y t o r e f r a i n f r o m t h e
first
i s s u e ; i t was e x c e e d i n g l y d i f f i c u l t t o r e f r a i n f r o m t h e s e c o n d i s s u e ; t o r e f r a i n f r o m t h e t h i r d and f o l l o w i n g i s s u e s was i m p o s s i b l e .

457
Summary of
THE GOLD STANDARD:

RETROSPECT AND PROSPECT

Submitted
WILL E.

MASON

73 MEREDITH D R I V E
CRANSTON, RHODE ISLAND 0 2 9 2 0
FEBRUARY 1 1 ,

1982

A r e c o n s t i t u t e d g o l d s t a n d a r d i s b e i n g p r o p o s e d by " s u p p l y - s i d e r s "
as t h e o n l y means o f g i v i n g t h e c e n t r a l b a n k t h e p o w e r o v e r t h e money s u p p l y
presumed by m o n e t a r i s t s and r e q u i r e d f o r a s u p p l y - s i d e s o l u t i o n t o i n f l a t i o n .
A c t u a l l y , t h e s h a t t e r e d m o n e t a r i s t / s u p p l y - s i d e f a n t a s y c a n n o t be s a l v a g e d
i n t h i s manner.
"The g o l d s t a n d a r d " i s a euphemism f o r a v a r i e t y of a r r a n g e m e n t s i n v o l v i n g an i n c r e a s i n g l y a m b i g u o u s r e l a t i o n s h i p b e t w e e n g o l d and money.
G r a d u a l i n a d v e r t e n t de f a c t o s e v e r a n c e o f t h e c o n n e c t i o n b e t w e e n g o l d and t h e
money s t o c k l e d t o r e c u r r e n t c r i s e s c l i m a x e d by i n t e r n a t i o n a l c o l l a p s e o f t h e
gold standard (1931-33).
M i s c o n s t r u c t i o n o f t h e I n t e r n a t i o n a l M o n e t a r y Fund
( I M F ) A g r e e m e n t on e x c h a n g e - r a t e s a n d g o l d p o l i c y a s i m p l y i n g a new g o l d
( e x c h a n g e ) s t a n d a r d c o n t r i b u t e d t o t h e i n o p e r a b i l i t y and u l t i m a t e f a i l u r e o f
t h e Fund ( 1 9 7 1 - 7 3 ) .
Conceptual d e t e r i o r a t i o n explains t h i s t r a g i c h i s t o r y .
The p r e c l a s s i c a l
m o n e t a r y s t a n d a r d was, s i m p l y , t h e m a t e r i a l c o n s t i t u t i n g s t a n d a r d money.
The
t r i u m p h o f g o l d o v e r o t h e r m e t a l s was m e r e l y a m a t t e r o f c o n v e n i e n c e .
In the
c l a s s i c a l period the issue s h i f t e d from convenience to substance, i . e . ,
which
m e t a l i s t h e most s t a b l e s t a n d a r d of v a l u e ?
By t h e t i m e g o l d w o n t h e b i m e t a l l i c
c o n t r o v e r s y a t t h e end o f t h e n i n e t e e n t h c e n t u r y , t h e c o n c e p t o f a s t a n d a r d o f
v a l u e ( g o l d o r any o t h e r t a n g i b l e c o m m o d i t y ) was p r e c l u d e d by t h e c o n c e p t o f
marginal u t i l i t y , which proved that nothing i n t r i n s i c a l l y contains a given
amount o f v a l u e i n t h e manner o f l e n g t h o r w e i g h t .
I n n e o c l a s s i c a l l i t e r a t u r e t h e t e r m " m o n e t a r y s t a n d a r d " became s y n o n y m o u s
w i t h "monetary system."
The s t a n d a r d w a s , t h e r e f o r e , c o n f u s e d w i t h t h e p o l i c i e s
r e q u i r e d t o e n s u r e d e t e r m i n a t i o n o f t h e money s u p p l y b y t h e n a t i o n a l g o l d r e serve.
F o r g e t t i n g t h e purpose o f t h e p o l i c i e s p e r m i t t e d de f a c t o d e p a r t u r e
from the standard w h i l e m a i n t a i n i n g the mechanics of currency
convertibility
into gold.
H e n c e f o r t h , w h a t e v e r t h e g o l d s t a n d a r d was s u p p o s e d t o s i g n i f y ,
it
no l o n g e r l i n k e d t h e q u a n t i t y o r v a l u e o f money w i t h e i t h e r t h e q u a n t i t y o r
value of gold.
The c l a s s i c a l d i s t i n c t i o n ( a n d r e l a t i o n s h i p ) b e t w e e n t h e m o n e !tMoney"
t a r y u n i t ( d o l l a r , f r a n c , e t c . ) and t h e m o n e t a r y s t a n d a r d was l o s t .
became r e f e r r e d t o a s t h e " s t a n d a r d o f v a l u e . "
In short, the standard of value
became n o t h i n g more t h a n t h e a b s t r a c t u n i t o f a c c o u n t .
T h i s was p r e c i s e l y w h a t t h e a n t i c l a s s i c a l a n t i b u l l i o n i s t s h a d m e a n t b y
t h e a b s t r a c t s t a n d a r d t h a t t h e y o p p o s e d t o t h e g o l d s t a n d a r d d e f e n d e d by t h e
classical school.
Thus, the l e g a l l o s e r s i n the b u l l i o n c o n t r o v e r s y of the

458
early nineteenth century were ultimately the actual winners. The distinction
between gold and paper standards was erased while people thought they were on
a gold standard.
The g o l d s t a n d a r d , w h i c h i n c l a s s i c a l a n a l y s i s was a p r o x y f o r t h e l a b o r
s t a n d a r d o f v a l u e , was i n a d v e r t e n t l y r e p l a c e d by a goods s t a n d a r d o f v a l u e .
The g o a l o f s t a b l e p r i c e s t r i u m p h e d o v e r t h a t o f s t a b l e w a g e s , and p r o d u c t i v i t y
g a i n s became i n c r e a s i n g l y r e f l e c t e d i n r i s i n g wage r a t e s i n s t e a d o f
falling
prices.
T h i s s h i f t was f a c i l i t a t e d b y d e c l i n i n g p r i c e c o m p e t i t i o n a n d o r g a n i z a t i o n o f l a b o r , b u s i n e s s , and a g r i c u l t u r e .
I n due t i m e s t a b l e p r i c e s gave way
t o r i s i n g p r i c e s as w e l l as wages.
T h i s was p e r m i t t e d by a g r o w i n g e l a s t i c i t y
o f t h e money s u p p l y a c c o u n t e d f o r b y f i n a n c i a l i n n o v a t i o n s c i r c u m v e n t i n g t h e
g o l d s t a n d a r d l i m i t a t i o n on t h e money s t o c k .
Thus, the i n h e r e n t l y
deflationary
i m p a c t cf t h e g o l d ( l a b o r ) s t a n d a r d o f v a l u e w a s m i n i m i z e d .
The o n l y r e a s o n t h e
g o l d s t a n d a r d l a s t e d as l o n g a s i t d i d was t h a t b a n k demand d e p o s i t s w e r e n o t
r e c o g n i z e d as money t i l l w e l l i n t o t h e t w e n t i e t h c e n t u r y ; t h e r e f o r e , t h e y w e r e
n o t s u b j e c t t o t h e l i m i t a t i o n o f t h e g o l d s t a n d a r d t i l l o t h e r ways o f
getting
around the r e s t r i c t i o n were d i s c o v e r e d .
Legal abrogation of the gold standard
(1931-1971) represented a v o l i t i o n a l r e p u d i a t i o n of aggregative c o n t r o l of the
money s t o c k i n d e p e n d e n t o f t h e m i c r o e c o n o m i c s o f d o m e s t i c m a r k e t s .
T h e a l l e g e d a u t o m a t i c i t y o f t h e g o l d s t a n d a r d , w h i c h some p e o p l e s u p p o s e
w i l l solve our problems f o r us, i s a myth.
I s t h e (a) g o l d s t a n d a r d any more
c o m p a t i b l e w i t h c o n t e m p o r a r y i n s t i t u t i o n s t o d a y t h a n i t was i n t h e n i n e t e e n t h
a n d e a r l y t w e n t i e t h c e n t u r i e s w h e n t h e g o l d s t a n d a r d e x i s t e d i n name b u t n o t
in fact?
I s t h e r e a r o l e f o r g o l d i n the quest f o r a workable compromise b e tween t h e e x t e r n a l s t a b i l i t y d e s i r e d by o f f i c i a l " m o n e t a r y a u t h o r i t i e s " and
t h e i n t e r n a l s t a b i l i t y u n i v e r s a l l y p r e f e r r e d by t h e p u b l i c ?

459
THE

W A L L STREET JOURNAL. T H U R S D A Y . SEPTEMBER

17. 1981

An Epistle to the Gold Commissioners
B y ALLAN H . MELTZEK

The gold standard Is ao idea whose time
is past-ion? past Tbe classical gold standard is not a superior method of solving
our current problems of tnflaftfw and unemployment, whatever its merits a century
ago.
Advocates of a return to gold offer their
nostrum as a means of stabilizing prices
but offer few details about how to reach
this desirable goal All we are usually told
is that the gold standard is a "supply-side"
solution, which will reduce interest rates,
stabilize prices ami eliminate the summer's excess supply of zucchini, Nooe of
these claims is true.
The fact is that a gold standard stabilizes only one prfce-the dollar price of
gold. Whether other prices, for example an
average of the prices of the goods and services that people buy and sell are relatively stable or unstable then depends on
what happens to the aggregate demand
and supply of these goods and services.
Suppose the world price of oil falls and
Arabian sheiks or Iranian mullahs sell gold
to maintain their spending. The U.S. must
buy the gold to prevent the gold price from
falling. This expands the domestic money
stock-whether that stocK is entirely in
gold or is a mixture of gold and paper with
gold backing. The required increase in the
money stock raises aggregate demand and
the prices of all other goods and services
in the U.S.
There is nothing special about oil. A
failure of the Russian wheat crop, the
growth of world productivity relative to
U.S. productivity, world Inflation-any sizable change affecting world demand and
supply of goods and services—would cause
domestic prices to change.
Most Classical Period
These are not speculations about what
may happen. They describe what did happen under the gold standard ih its most
classical period. Prior to 1913, we did not
have a central bank. Gold coins circulated
and checking deposits, many bonds and
other financial assets were redeemable in
gold.
The U.S. price level was not stable from
year to year, or decade to decade. The
price level was approximately the same in
1913 as in 1882, but this gives a misleading
suggestion of stability. Prices of goods and
services fell 47% in 1882-96, then rose 41%
from 1896 to 1913.
Real economic activity was more variable under the gold standard than in the
recent past Recessions lasted twice as
long, on average, from 1879 to 1913 as in
1945-80, and expansions and recoveries
were about one-third shorter. Per capita
real income, a useful measure of the living
standard, rose more slowly. The most reliable statistics suggest that real per capita

income rose a btt faster in the disappointing decade of the 1970s than under gold
prior to 1913.
- All economic problems cannot be
blamed oo the monetary standard or cured
by changing the monetary standard from
gold to paper or from paper to gold. Comparisons of events in 1879 to 1913 wtth IMS
to 1960 cannot, by themselves, decide
whether the gold standard is superior or inferior in some global sense.
They do tell us that the gold standard
neither guarantees nor brings smoother
growth in standards of living, higher real
growth, shorter recessions, m m durable
f?qi»n«tfln« or year-to-year price stability.

the money stock and lower the price level.
The only permanently fixed price under
a gold standard is the one that the government fixes-the price of gold. The alleged
dlsrtpltn* of the gold standard is a political
decision to set the price of gold once and
foievermore.
Gold standard advocates should be
praised for insisting tirelessly that the only
way to maintain price stability Is by controlling money growth and for reaffirming
that tbe most reliable way to control
money growth is from the supply side.
These are views that they share wtth people like Milton Friedman or the members
of the Shadow Open Market Committee

All economic problems cannot be blamed on the
monetary standard or cured by changing the monetary
standard from gold to paper or from paper to gold.
If we care about these things, we should
have second thoughts about returning to a
gold standard.
Advocates of gold complain about current variability of money growth and tbe
uncertainty created by changes in monetary policy. A return to gold does not solve
these problems. The gold standard makes
the quantity of money in tbe U.S., and its
rate of growth, depend on the decisions of
Arabian sheiks. South African central
bankers, the productivity of foreign workers, the budget and monetary decisions of
major countries and other factors.
From 1879 to 1913, many major countries adopted or remained on the gold standard. They accepted part responsibility for
fixing gold's price. Every 50 years or so,
the demand for and supply of gold brought
the broad index of prices of goods and services into an equilibrium that was the
same as the equilibrium reached about 50
years earlier.
The belief that prices will return to the
same value wtthin a few decades probably
reduced the cost of flnandng long-term
capital, like railroads, a principal investment in the late 19th Century. But it is a
mistake to regard the gold standard as a
guarantor of price stability even in this
long-term sense.
The supply of gold depends on discoveries and improved methods of mining and
extraction. Nothing in the gold standard
mechanism guarantees that relative
changes in demand and supply for gold will
return the price level to some fixed value
every 50 years or every century. This happened in the past because gold deposits
were discovered, better methods of extraction developed and banking panics occurred often enough to wipe out some of

whom the press describes as monetarists.
Similarity in the views of monetarists
and'advocates of the gold standard does
not extend to the means of controlling
money from the supply side. Monetarists
insist there is only one way to control
money reliably. The central bank must
control the size of its own balance sheet by
resulting the dollar value of the assets it
buys. About 90% of the assets are government securities purchased in past failed attempts to set interest rates or exchange
rates.
If the Federal Reserve controls the
amount of assets on its balance sheet, the
principles of double-entry bookkeeping
guarantee that their liabilities are controlled. These liabilities, and the corresponding assets, are known as the monetary base, so the monetarist prescription
is: Control the size or growth rate of the
monetary base.
Without divine intervention, neither the
Fed nor anyone else can control the monetary base, interest rates and exchange
rates simultaneously. We are-they arepermitted to make one choice from these
three (and all the other) proposed targets.
Many attempts to watch multiple targets by using the 24 collective eyes on the
Federal Reserve committee that makes
monetary policy decisions convinced a majority of the committee's 12 members that
one target achieved is better than a basketful of failed promises. The 24 eyes are now
glued on one target-the announced growth
rate of the money stock -in hopes of repairing the Fed's damaged credibility.
Let's hope they stay there.
A gold standard is not a more believable or reliable way to control money or the
monetary base. Such statements are the
(continued on reverse

side)

460
WAUL, STREET JOURNAL

Thursday,

September

very opposite of the truth because no one
a n choose both the price of gold and the
rite of mooey growth. If the announced
price of gold is too high compared to the
demand tor gold and the world supply of
gold, gold flows to the U.S. People pound
on the door, offering gold in exchange for
dollars. Tbt Fed. or the government's gold
buyer, is required to tee more mooey.
The stock of mooey Increases, and prices
rise. If the aimrwmcwl price of gold Is too
low, people ofler dollars and buy gold The
stock of mooey Calls and prices fall. If
these changes In offers and demands for
gold are difficult to forecast, and they are,
we have boorns and recesstoos whenever
there Is a large change up or down in the
demand for goid
No Doobt About die Effect
Again, these are not speculations about
whaf could happen. They are a description
of the past performance. After Franklin
Rooeerett deckled in 1934 to raise the buyin* and telling price of gold from $20.67 to
$35 an ounce, we did a lot of buying. The
stock of monetary gold rose 50% In the
next three years. Prices rose, despite the
Depression. To prevent the effect of gold
purchases from further expanding the
mooey stock, the government thereafter
sterilized the effect of gold on money.
Whatever ooe believes about the wisdom of
these and subsequent decisions there is no
doubt about the effect of the overvaluation
of gold on the mooey stock.
Where would you set the gold price to
prevent a repeat of the inflationary gold
flows of the *30s, or deflationary gold
flows? Don't make the mistake of thinking
that someone else knows the right price to
set and keep constant for the next 100
years. He doesn't That's why advocates of
the gold standard never suggest or hint at
how or where the price of gold should be
set to stahdllie prices in an uncertain
world And don't look to the market for
guidance. The market changes its collective mind every minute.
The administration knows that we cannot fix exchange rates or the price of gold
and control money. Treasury Secretary
Regan and Undersecretary Sprinkel should
be lauded for Insisting cm a freely floating
dollar. A free float removes ooe obstacle to
better monetary control It is a step on the
path to lower Inflation that has yielded
benefits.
Other steps could be taken to make
monetary control more certain, more reliable and less variable. But it is a mistake to
thiTrk that a return to the gold standard is
one of then.
Mr. Meltzrr is professor of political
economy md public policy at Carnegie-

MeUan University.

17,

1981

461
The Case f o r a P r i c e Rule Such as the Gold Standard
Dr. Marc A . M i l e s
Associate Professor of Economics
Rutgers - The State University of New Jersey
New Brunswick, New Jersey 08903
November 13, 1981

Returning to a price rule such as the gold standard is the only way out
of the prolonged period of stagflation the United States has been experiencing. No matter to which policies the Reagan Administration turns, it
continues to face the same barriers to success - inflation. While legislation is to reduce tax rates by about 23% over four years, inflation continues to raise tax rates. By the time tax rate indexation begins in 1985,
tax rates will probably be higher than when Ronald Reagan took office.
Inflation is also hindering efforts to balance the Federal budget through
both retarding the growth of income and raising the costs of debt servicing.
Today, inflation is the problem.
There are two competing approaches for combatting inflation. One,
labelled a "quantity rule" approach, asserts that the rapid expansion of the
money supply is the source of inflation. The proposed cure: give the
Federal Reserve more power and incentive to tinker with the supply of money.
The second, labelled a "price rule,11 asserts that the value of money continues to depreciate because the government refuses to anchor the price of
money. The proposed cure: have the Federal Reserve once more intervene to
stabilize the relative price of money now and in the future.
The last twenty years has been a steady shift of U.S. monetary policy
away from the price rule approach and towards a quantity rule approach. This
period has also coincided with a steady and dramatic rise in the levels of
dollar inflation and dollar interest rates. Between 19^7 and 1964, under
the Bretton Woods System, dollar inflation averaged only 1.4% and T-bill
In 1965 the U.S. removed its commitment to reyields averaged only 2.1%.
deem Federal Reserve deposits in gold at $35 per ounce. Over the 1965-67
period, interest rates jumped to an average 4.4%, and inflation 2.0%.
Following the March 1968 abolition of the 25% gold reserve requirement behind Federal Reserve notes, average inflation rose to 3*3% and T-bills to
5.8% in the 1967^71 period.
Inflation, in the year and a half after President Nixon's August 1971 slamming of the gold window, jumped to an average
6.5%. The Smithsonian Accord still fixed the value of the dollar in terms
of other currencies. But even that was eliminated in February 1973. Between 1973 and 1977 inflation averaged 9.1% and T-bills 6.2 percent. However,
there remained one last price rule. The Fed still targeted interest rates,
the value of today's dollar relative to tomorrow's. Following the elimination of the last price rule in October 1979, we experienced record inflation
and interest rates.
The shift to a quantity rule has not worked because it is an indirect
imprecise tool for controlling inflation. The policy objective is not the
supply of dollars, it is how fast the dollars are deteriorating in value. To
affect value, the quantity of dollars must be controlled relative to their
demand. This creates several obvious problems.

462
First, most economists would agree that our ability to accurately
fo recast the demand for money is extremely limited. Second, our ability to
estimate the supply of money is not much better. There are problems with
collecting accurate data and then correcting them for seasonality and trading day variations. Third, economists cannot even agree what the correct
measure of the money supply is, much less that the Fed controls it. With the
growing list of domestic and international substitutes for Federal Reserve
liabilities, however, there is a growing consensus that those narrow definitions of money on which policy decisions are focused represent only a small
fraction of what constitutes money. Dollar money markets are global, and the
Federal Reserve is only one of many international participants.
So the Fed's new obsession with money growth targets is a search for a
mythical formula which is bound to fail. Even worse, it flies in the face
of the logic of why we have a monetary system and a central bank to begin
with. The goal of an effective monetary system should be to make money useful, not restrict its use. Monetarism has turned the logic of central banking on its head.
The key to making money useful is to stabilize the value of money now
and in the future. The way to do that is through a price rule.
Focusing
monetary policy on stabilizing the value of money is a direct way to reduce
inflation and inflationary expectations. With less emphasis on the number
of drops passing through the Fed's spigot, and more quality control in maintaining an even size, the attractiveness of the dollar improves, probably
leading to an expansion in the supply of dollars.
There are at least three different price rules which could be adopted.
One is to reestablish control over long-term interest rates. While this
mechanism stabilizes today's prices relative to tomorrow's, it does not
anchor either price level in terms of commodities. A second alternative is
for the Fed to- reestab1ish control over exchange rates. However, while such
a move stabilizes spot prices in our country relative to those abroad, it
still does not anchor spot prices acorss countries.
The third possibility is to reestablish control over commodity prices
by establishing a gold or other commodity based system. The value of the
dollar could be stabilized in terms of a basket or a single commodity,
though a single commodity is probably less prone to political manipulation.
By far this is the superior system, for it does what none of the alternatives do - stabilize spot inflation.
In turn, lower expectations of inflation lower interest rates.
The precise form of the standard, however, is not as important as the
intervention mechanism.
Regardless of the standard chosen, the Fed must be
governed by two basic rules: (l) If the dollar price of the standard starts
to rise, the Fed must intervene to buy back dollars at the fixed price, and
(2) If the dollar price starts to fall, the Fed must intervene to sell
dollars. By following these rules about price stability, the Fed knows when
and by how much it must intervene.
By watching the same market price of the
standard, the private market in turn knows quickly and efficiently whether
the Fed is "playing by the rules."

463
BETTER

A
THAN

" CINDER
NO
STANDARD

BLOCK

STANDARD"
AT

ALL!

Submitted by : PAUL
W .
N O R D T ,
JR.*
32 Maple Drive, North Caldwell, NJ 07006
* Age 67, Chmn., JOHN C. NORDT CO., INC., Precious Metals Manufacturer,
employer of about seventy persons, a business dating from the year 1872.
Mr. Nordt Is a professional Mechanical Engineer, active In public affairs
In New Jersey all his life, serving In elective office locally and Identified with community and religious affairs continuously for more than a halfcentury. Married for forty-two years, three children.
Two sons In top
management of the Nordt company, daughter a doctoral candidate In the field
of Clinical Psychology.
Since 1966 a close student of U.S. monetary problems , with an Increasing
concern as monetary policy seemed Increasingly In the hands of theorists and
academicians who seemed blind to the anthropological evidence that mankind has
at least a few quirks of behavior disqualifying him from controlling the money
system with any degree of stability, devoid of specie convertibility by the
people.
*

I have submitted not only letters, but copies of a speech (not presented) and a pamphlet "WHY WORRY?
IT'S ONLY MONEY" during the days past when the
Commission has met.
I have had responses from a few on the Commission; viz.,
Dr. McCracken, Dr. Paul, Senator Jepsen, Gov.Walllch and Congressman Wylle, but
when I realize the volume of literature showered upon you, It's not hard to see
why no more have answered.
My appeal to you Is, I think, somewhat unique In nature.
I do not
claim to be a professionally trained economist.
I wonder, though, whether very
many of you recognize how crucially Important Is the moral Issue when one considers monetary policy.
Surely, you must be aware of the great need for the
public to trust the value of The Dollar. When that trust Is destroyed, to restore It Is not an easy or quick task. I am told that Aristotle made the statement :

IN AN IDEAL STATE OF SOCIETY PERHAPS
THE INTRINSIC QUALITY OF MONEY MIGHT
ENTIRELY DISAPPEAR AND BE REPLACED
BY THE VALUE DERIVED FROM THE CONTROL
BUT FOR THAT TO OCCUR
OF THE STATE.
THE CONTROL OF THE STATE WOULD NEED
TO BE PERFECT IN AUTHORITY AND GODLIKE IN INTELLIGENCE.
To be "perfect In authority" the state would have to be manned by persons wholly free of the capacity to do 111
free of avarice and greed.
To be "God-like In Intelligence" Implies that our government would have to be
staffed by people that never make a mistake. Surely It's not necessary to
argue the fallibility of mankind.
Even "The Fed's" governors are a few steps
lower than The Almighty!
You on The Commission I am sure are sufficient students of American
history to be aware that those who founded our American Government were much
aware of mankind's frailties
FRAILTIES THAT MAKE ALL OF US UNQUALIFIED
TO MANAGE A FIAT MONEY SYSTEM! !
The people must have some form of immediate
control, a way of expressing their confidence (or lack of it) In the currency

464
BETTER A CINDER BLOCK STANDARD THAN NO STANDARD AT ALL !
By Paul W. Nordt, Jr.

(Continued)

Issued and the monetary
policy
established.
As you all know,
the Idea of
"checks and balances"
underlies
our entire system of government.
Distrust
of people In power Is, obviously,
the hard core reason for this.
Tragically,
going back decades
our people have been deprived of exercising any
"check" or "balance"
when It came to the value of dollars.
Then, In '71
the whole world lost Its power to express directly
any feelings
about The
Dollar.
After one of your meetings
I approached
Gov .Wall Ich with the
question,
"Do you see any connection
between the skyrocketing
Inflation
after August '71 and the fact that at that point President Nixon removed
from The Dollar any meaningful
definition?"
If I recall his abrupt reply,
It was,
"There Is absolutely no connection!n,
then he walked curtly away.
It Is possible I misunderstood
him at that time.
Nevertheless, I
urge you all to air your thoughts regarding
definability of The Dollar, definability
In tangible,
Intrinsic
and specific
terms. Although I have attended most of your public sessions, I recall nothing
at all that dealt with
definability
or about mankind9s
capability to control money when the people
are denied any way to express dissatisfaction over Its value.
established
the Gold Commission
It
It's a pity that when Congress
did not choose a different name.
More accurately, It ought to be "The Commission
to study DEFINABLE MONEY
vs. UNDEFINED MONEY.
Possibly with mc^re
Impact the name could have been a bit more succinct
and called It something
like THE FUNNY MONEY COMMISSION.
Gentlemen,
that Is not as "zaney" an Idea as It may sound.
When we
consider how the name
"gold" affects the minds of the Keyneslan-type
economists,
they believing
that golden money
Is a "BARBARIC RELIC", It might be
more productive
for The Commission
to think of Itself as studying
the t r u e
differences
between
good money and bad money,
"funny money" being a term of
derision for today's buck, but not too Inaccurate a description at that!
To avoid the acknowledged prejudices by so many against gold as money,
wouldn't It be useful to think of a "CINDER BLOCK STANDARD",
comparing It with
what It's like having no standard at all.
Seriously,
gentlemen
(and Mrs.
Anna Schwartz) , I challenge you to take up that argument.
It may not be as
facetious as you might think at first glance. Oh, you can change It to such
standards as barrels of bourbon,
or pork bellies, or rides on "THE METRO".
The true Issue: DOES THE WORLD HAVE A RIGHT TO KNOW JUST WHAT A DOLLAR IS?
Yes, candidly,
I believe
that If you truly, and In good faith,
really talk this out you will all agree our dollars cannot remain simply pieces
of paper , meaningless
printing
thereon. The Constitution declares that our
Congress "regulate the value thereof" (of money). Surely you can't regulate something that has no definition!!
How I'd love to chat with each of you personally!

Paul W. Nordt, Jr.
32 Maple Drive
North Caldwell, NJ

07006

465
THE MORAL ISSIT OF "HONEST MONEY"
Gary uorth

Summary o f the Paper
A.

What Economists Know
1.

Economists cannot, as s c i e n t i s t s , recommend any p o l i c y because o f
s c i e n t i f i c a l l y demonstrated b e n e f i t s t o the p u b l i c i n t e r p e r s o n a l comparisons o f s u b j e c t i v e

its

(The problem o f

utility,)

Economists, by t r a i n i n g , avoid questions o f economics and m o r a l i t y .

What Is Honest Money?
1.

Most marketable commodity
a.

Possesses h i s t o r i c

value

Expected t o possess r e l i a b l e , somewhat s t a b l e f u t u r e value

Governments possess a monopoly over the c r e a t i o n o f money
a.

Monopolies tend to be abused

Central banks tend t o accommodate past p r i c e

Monetary i n f l a t i o n becomes a permanent phenomenon

inflation

d . . . T h e i m p l i c i t c o n t r a c t — the promise o f r e l i a b l e money — i s broken
C.

C i v i l 1 i b e r t i e s and the Gold Standard
1.

2.
D.

Redeemable money r e s t r i c t s government's a b i l i t y t o debase currency u n i t
a.

P u b l i c can p r o t e s t debasement by demanding gold f o r d e p r e c i a t i n g paper

A r b i t r a r y money m a n i p u l a t i o n ( " f l e x i b l e monetary p o l i c y " ) i s hampered

I m p l i c i t c o n t r a c t by government t o produce honest money i s enforced

Iredeemable currency reduces p u b l i c ' s a b i l i t y t o pressure a r b i t r a r y

Guarding the Guardians
1:

S p e c i a l i s t s can speculate against the T r e a s u r y ' s

The g o l d standard f o r c e s the Treasury t o defend i t s promises d a i l y

promises

state

466
Summary of Appendix

Three-step Program
1.

Abolish l e g a l tender f o r U. S. government money

Allow p r i v a t e m i n t i n g o f " g o l d d o l l a r " and " s i l v e r

3.
B.

Fixed weight and fineness* e s t a b l i s h e d by law

100% reserves f o r a l l specie-money s u b s t i t u t e s

No attempt t o s e t exchange r a t i o s by law among v a r i o u s

(warehouse

F u l l g o l d - c o i n r e d e e m a b i l i t y by Treasury a t market p r i c e s

Freedom does not t h r e a t e n the f r e e

dollar"

society

receipts)

currencies

467
^LIXI3L_ GOLD ZChVZZTP 3 I L I I Y *
Submitted by
Carl
Gckert
8818 Higdon Drive
Vienna, Va. 22180
Traders are defrauded and trade is impeded when the value of the currency varies unpredictably. As abundantly demonstrated by the many arguments
presented to this Commission, neither the "Fixed Price" nor the "Free Float"
systems provide adequate predictability. With the Free Float system, the
lack is obvious. Predictability is also lacking with the Fixed Price system,
since in practice, as history shows, there is no way to maintain the system
without recurrent revaluations.
What is needed is a system which would provide free convertability
between dollars and gold at definite, predetermined and predictable values.
The system suggested here is designed to eliminate short term, unpredictable
variations in the dollar price of gold, while automatically adjusting the
price by small increments to the long term trend of the free market. This
would provide a reasonable degree of predictability during the time period
required for the delivery of goods and the completion of payments for most
contracts in both domestic and international trade.
Although the system described below does provide a reasonable degree of
predictability, it would not necessarily make the dollar a safe vehicle for
a long term storage of value, nor would it provide any effective "discipline"
on the tendency of our government to inflate the currency. It would however
provide a convenient index of whatever inflation or deflation is actually
occuring.
The benefits described above can be obtained by mandating a predetermined
relationship between the official selling price of gold (P), and the actual
inventory of gold in the Treasury (I), as shown in the attached diagram.**
This suggested relationship, dp/p = -2dl/l, would force a 2/o increase in the
price for every \% decrease in the inventory, and a 2,2 decrease in the price
for every 1% increase in the inventory, etc. To reduce speculative activity,
the official buying price would be set at 1,5 below the official selling price,
and all prices would be determined each day by the inventory of gold in the
Treasury after all orders for that day were satisfied.
Tying the dollar to gold in this predetermined relationship would stabilize
the price of both dollars and gold. This system would not prevent all variations
in the dollar price of gold, but it would damp out the short term variations
and allow analysis and extrapolation of long term trends. The actual degree
of predictability provided would of course depend on the accuracy of the
analysis of such trends.
*This proposal is also described in the author's book, "Compassion and
Common Sense" (1980, MGP Books, Box 273, Germantown, KD 208?^)
**The attached illustrative diagram is based on an assumed initial inventory
of 26k million oz. of gold, and an assumed initial price of $^50 p per oz.
Using these values and integrating gives: ($/oz)(millions of oz) = 31,363,200.

468

469
HOW TO MAKE FULL BODIED GOLD AND SILVER COINS
IMPROVE OUR MONETARY SYSTEM
Submitted by
Edward E. Popp
543 North Harrison Street
Port Washington, Wisconsin 53074
January 15, 1982

While the Gold Commission was authorized to study and make
recommendations "concerning the role of gold in domestic and
monetary systems," more good will come if the role of silver is
included in the recommendations.
The ultimate goal of any study pertaining to the monetary
system should be to recommend a monetary system as close to the
ideal as can be obtained. The ideal monetary system will be obtained when all the items in the money supply are brought into
circulation without incurring interest-bearing debts.
Gold and silver full bodied coins can be brought into circulation without incurring interest-bearing debts.
So the more full
bodied gold and silver coins we add to our money supply, the closer we will be to having an ideal monetary system.
Our money supply now consists of U.S. token coins, U.S. notes,
Federal Reserve notes, and bank credit. Of these four items, the
U.S. token coins and the U.S. notes are the only items issued by
the U.S. government.
They are the only items that came into circulation without incurring interest-bearing debts.
The U.S. government is already making and selling full bodied
gold coins called, medallions, in one ounce and in one-half ounce
coins.
In like manner it also can make and sell full bodied silver coins in one ounce and in one-half ounce coins.
To bring these full bodied coins into circulation to serve
the public as media of exchange, all the Congress has to do is to
declare that these coins will be received as payments for all taxes,
fees, duties, and other charges due the U.S. government.
The government in turn will use these coins as the payments for its current expenses.
Just as the U.S. government now sets the value of the medallions to the current market value of their me^al content (plus a
small service charge) on the day it sells the medallions, the government is to set the value of the coins to the current market value of their metal content on the day it receives them as payments.

470
Popp - 2

To give the public additional opportunities to obtain U.S.
full bodied gold and silver coins directly from the government,
Congress can authorize the mint to accept from the public gold and
silver in any acceptable form (coins, bullion, nuggets, etc.)*
make it into the current gold and silver coins and charge the owner of the metal a fee sufficient to cover the cost of the minting
process. Then give the newly minted coins back to the person who
brought the metal to the mint.
In order to bring more of the full bodied coins into the
money supply and in order to reduce the need for government borrowing, Congress can, in addition to selling the coins, authorize the
government to issue the coins as payments for its needed expenditures. The government is to pay out the coins at the market value
of their metal content at the time the coins are used as payments.
All of the government's idle gold and silver can be used in this
manner.
If the above procedures are adopted, we can expect the following results:
1.

It will not cost the government anything to adopt

The monetary system will not yet be ideal, but it will be one
step closer to the ideal.
A much greater part of the money
supply will be brought into circulation interest-free.

It will please the large number of people who want gold and
silver to be used in our monetary system.

It will do no harm; it will incur no burden or loss for those
people who do not want gold or silver in our monetary system.
Any persorl who gets paid in gold or silver coins can immediately exchange them at a bank for other currency or for bank
deposits without any loss of exchange value.

If the government's income and expenditures remain constant,
the U.S. government's interest-bearing debts can be reduced
in an amount equal to the dollar value of the gold and silver
coins sold and paid into circulation.

People will learn that when gold and silver coins are used as
media of exchange at the current market value of their metal
content, the coins will always stay in circulation.

them.

471
Submitted
LOIS D.
P.O.
Green1s

POWERS BOX 1 7 4 ,

ECONOMIC NEWS AGENCY,
PRINCETON,

INC.

08540

From E d i t o r i a l by C h a r l e s R. S t a h l i n
C o m m o d i t y M a r k e t Comments 9 / 2 3 / 8 1 a n d 1 0 / 2 1 / 8 1

The g o l d s t a n d a r d i s c u r r e n t l y t h e s u b j e c t o f a p r o f u s i o n o f p r e s s a r t i c l e s ,
most of w h i c h a r e m i s s i n g t h e p o i n t .
Whatever t h e p r o s and cons o f t h e g o l d
s t a n d a r d , and even assuming t h a t t h e g o l d s t a n d a r d i s t h e s o l u t i o n t o a l l o u r
e c o n o m i c p r o b l e m s ( w h i c h i t i s n o t ) , t h e r e i s no p r a c t i c a l way t o i m p l e m e n t a
g o l d s t a n d a r d s y s t e m w i t h i n a r e a s o n a b l e t i m e ; t h e r e f o r e t h e d i s c u s s i o n s on
the s u b j e c t a r e , i n our humble o p i n i o n , a waste of t i m e .
I n t o d a y ' s w o r l d , no
c o u n t r y can e s t a b l i s h and m a i n t a i n a g o l d s t a n d a r d a l o n e .
We h a v e a n i n t e r n a t i o n a l m o n e t a r y s y s t e m , w h i c h i s g o v e r n e d b y IMF s t a t u t e s ; t h o s e s t a t u t e s c a n
o n l y b e c h a n g e d b y n e g o t i a t i o n s a n d a g r e e m e n t among a l l m e m b e r s o f I M F .
Those
who r e m e m b e r how many y e a r s i t t o o k t o g e t r i d o f g o l d a s t h e n u m e r a i r e o f t h e
monetary system w i l l a p p r e c i a t e t h a t even i f n e g o t i a t i o n s were t o s t a r t next
y e a r , a f t e r the r e p o r t of t h e Gold Commission has been completed—assuming t h a t
i t w i l l be i n f a v o r o f r e s t o r i n g t h e g o l d s t a n d a r d — w e w i l l be w e l l i n t o t h e
1 9 9 0 ' s b e f o r e t h e new s y s t e m c o u l d b e r a t i f i e d .
And t h a t c e r t a i n l y w o u l d be
too l a t e i n order to lower the i n t e r e s t r a t e s , which the supplysiders believe
the i n t r o d u c t i o n of the gold standard would achieve.
T o d a y ' s g o l d s t a n d a r d p r o p o n e n t s must have a v e r y poor o p i n i o n of t h e
members o f t h e I n t e r i m C o m m i t t e e , o f I M F , and o f I M F ' s e n t i r e b o d y o f c e n t r a l
b a n k e r s and f i n a n c e m i n i s t e r s , i f t h e y b e l i e v e t h a t a l l t h e a r g u m e n t s w h i c h
t h e y a r e now a d v a n c i n g i n f a v o r o f t h e g o l d s t a n d a r d w e r e n o t m u l l e d o v e r a
thousand t i m e s by t h o s e e x p e r t s , and c o n s i d e r e d w a n t i n g .
The b i l l i n t r o d u c e d i n t h e U . S . S e n a t e p r o p o s i n g t h e r e t u r n t o a g o l d
s t a n d a r d i s b a s e d on t h e p r e m i s e t h a t t h e p r i c e o f g o l d s h o u l d be f i x e d a t
w h a t e v e r i t w i l l be i n t h e w o r l d m a r k e t s s i x m o n t h s
a f t e r the United States
announces i t s i n t e n t t o r e t u r n t o the g o l d s t a n d a r d ; t h a t b i l l i s t h e " L a f f e r
stock" of the gold cognoscenti.
P r o f e s s o r L a f f e r b e l i e v e s t h a t when t h e
U n i t e d S t a t e s announces i t s i n t e n t i o n of f i x i n g the p r i c e of g o l d i n terms
o f d o l l a r s o r v i c e v e r s a , t h e p r i c e o f g o l d w i l l d e c l i n e t o some " r e a s o n a b l e "
l e v e l , somewhere i n t h e $ 2 5 0 - $ 3 0 0 a r e a .
W i t h due r e s p e c t t o a l l t h e g o l d
s t a n d a r d p r o p o n e n t s , t h e v e r y day t h e U n i t e d S t a t e s announces i t s i n t e n t t o
r e t u r n t o t h e g o l d s t a n d a r d and t o peg g o l d a t w h a t e v e r t h e p r i c e w i l l be s i x
months a f t e r t h a t a n n o u n c e m e n t , g o l d w i l l embark on an a l p i n e c l i m b , and t h e
1980 g o l d E v e r e s t o f $875 w i l l be e a s i l y l e f t b e h i n d .
A f u r t h e r p r e m i s e o f t h e S e n a t e b i l l i s t o f o r b i d t h e Fed and t h e T r e a s u r y
t o i n t e r v e n e i n t h e f o r e i g n exchange and g o l d m a r k e t d u r i n g t h e s i x - m o n t h
period.
W i t h t h e Fed and t h e T r e a s u r y o u t o f t h o s e m a r k e t s as a s t a b i l i z i n g
f a c t o r , c a n a n y o n e r e a l l y b e l i e v e t h a t t h e p r i c e o f g o l d w i l l go a n y w h e r e b u t
higher?
T h e r e i s an enormous v e s t e d i n t e r e s t i n g o l d ; n o t o n l y Swiss banks
and t h e i r c l i e n t s , n o t o n l y German b a n k s and t h e i r c l i e n t s , n o t o n l y S o u t h
A f r i c a n m i n i n g c o m p a n i e s , n o t o n l y t h e S o v i e t U n i o n , n o t o n l y OPEC c o u n t r i e s ,
not o n l y Far East i n t e r e s t s ,
b u t m i l l i o n s o f p e o p l e who own g o l d a n d who
w o u l d b e o n l y t o o g l a d t o s e e i t s p r i c e go h i g h e r r a t h e r t h a n l o w e r , a n d who
w o u l d b e t on i t .

472
But let u s a s s u m e t h a t Professor Laffer is right, and that the price of gold
w i l l d e c l i n e t o $ 2 5 0 - $ 3 0 0 , o r w h a t e v e r l e v e l b e l o w c u r r e n t p r i c e s , and t h a t t h e
p r i c e o f g o l d w i l l be f i x e d a t t h a t l e v e l .
That p r i c e would then c o n s t i t u t e a
f l o o r , a n d t h e same t h i n g w o u l d h a p p e n w h i c h h a p p e n e d i n 1 9 6 8 , w h e n t h e g o l d p o o l
of t h e c e n t r a l banks o p e r a t e d by t h e Bank o f England had t o s t o p i t s s a l e s b e c a u s e t h e demand f o r t h e y e l l o w m e t a l a t t h e o f f i c i a l p r i c e was much t o o l a r g e .
I n c i d e n t a l l y , i t was i n t h e s e p a g e s i n D e c e m b e r 1967 t h a t t h e t w o - t i e r
gold
s y s t e m was f i r s t p r o p o s e d .
I t met w i t h a g r e a t d e a l o f i n c r e d u l i t y f r o m t h e
U.S. T r e a s u r y , b u t when t h e c h i p s were down, i n March 1968, t h e t w o - t i e r s y s t e m
became a r e a l i t y .
U l t i m a t e l y i t gave way t o a f r e e m a r k e t e n t i r e l y , and t h a t
i s e x a c t l y as i t s h o u l d s t a y .
Whenever t h e g o l d s t a n d a r d was i n f o r c e , t h e
exchange r a t e s would l a s t f o r e v e r .
Since forever
o f the g o l d s t a n d a r d cannot be a c h i e v e d ; t h e g o l d
once l o s t , i t cannot be r e s t o r e d .

a s s u m p t i o n was t h a t
fixed
did not l a s t , a restoration
standard is l i k e v i r g i n i t y ,

The p r o p o n e n t s o f t h e g o l d s t a n d a r d p o i n t o u t t h a t t h e r u n - u p i n t h e p r i c e
of g o l d has b e n e f i t e d t h e S o v i e t Union and South A f r i c a most.
What t h e y o v e r l o o k i s t h a t t h e $850 peak p r i c e on t h e L o n d o n f i x d i d n o t l a s t l o n g e r t h a n
o n e h o u r , a n d t h a t t h e i n t r a d a y h i g h o f $ 8 7 5 f o r s p o t g o l d o n Comex d i d n o t
l a s t more t h a n one m i n u t e , so t h a t no l a r g e q u a n t i t i e s o f g o l d w e r e s o l d a t
t h o s e l o f t y p r i c e s , e i t h e r by t h e S o v i e t U n i o n or by South A f r i c a .
As a m a t t e r
o f f a c t , t h e a v e r a g e p r i c e o f g o l d l a s t y e a r was $ 6 1 3 , a n d i n 1980 t h e S o v i e t
U n i o n s o l d o n l y 90 t o n s o f g o l d .
M a i n t a i n i n g t h e f r e e g o l d m a r k e t , as opposed
t o p e g g i n g t h e p r i c e of g o l d , does n o t p e r m i t g o l d p r o d u c e r s t o s e l l l a r g e
q u a n t i t i e s a t peak p r i c e s ; whereas s h o u l d t h e g o l d s t a n d a r d be r e s t o r e d ,
then
producers would have a ready o u t l e t at a f i x e d p r i c e .
The S o v i e t U n i o n h a s t h e w o r l d ' s l a r g e s t u n m i n e d g o l d r e s e r v e s , i n e x c e s s
of 5 b i l l i o n oz.
S h o u l d t h e p r i c e o f g o l d be pegged a t , f o r e x a m p l e , $800 p e r
oz., that would give the Soviet Union p o t e n t i a l assets of four t r i l l i o n
dollars!
W i t h t h a t k i n d o f money, o v e r t h e y e a r s , t h e y w o u l d n o t have t o b u r y u s , as
K h r u s c h c h e v once s a i d , t h e y c o u l d buy us o u t . . .
O u r r e a d e r s c e r t a i n l y r e m e m b e r t h a t we s e v e r e l y c r i t i c i z e d a n o t h e r
b i l l
i n t r o d u c e d by S e n a t o r J e s s e Helms t o r e s t o r e t h e g o l d s t a n d a r d , based on t h e
fantasies of Professor Arthur L a f f e r .
However, the Free Market Gold Coinage
A c t i s an i m p r o v e m e n t , even t h o u g h p a r t s o f i t must be changed,
particularly
t h e p a r a g r a p h r e f e r r i n g t o how t h e T r e a s u r y s h o u l d c o m p u t e t h e p r i c e o f g o l d
when b u y i n g o r s e l l i n g t h e c o i n s , and i t c o u l d h e l p r e d u c e i n f l a t i o n b y a b s o r b i n g excess l i q u i d i t y ( i f and when t h e r e i s o n e ) .
The T r e a s u r y , w o u l d use
i t s 263 m i l l i o n o z . g o l d h o a r d t o m i n t t h e c o i n s , w h i c h w o u l d b e s o l d a t t h e
market value of gold.
The b i l l c o u l d be amended t o p r o v i d e f o r u s e o f t h e
proceeds t o b a l a n c e t h e F e d e r a l b u d g e t , and t h e o r e t i c a l l y t h e T r e a s u r y c o u l d
c o l l e c t o v e r $100 b i l l i o n f r o m t h e s a l e o f t h o s e c o i n s .
However, the d i f f i c u l t y
i s t o d e t e r m i n e t h e p r i c e a t w h i c h t h e T r e a s u r y s h o u l d be s e l l i n g o r b u y i n g
t h o s e c o i n s a t any g i v e n t i m e , and w h e t h e r i t s h o u l d be e n t i t l e d t o a s e i g n o r a g e ,
a n d i f s o , how m u c h .
T h e r e i s one more q u e s t i o n t o p o n d e r : i f t h e T r e a s u r y i s
o b l i g e d t o buy any q u a n t i t y o f f e r e d o r t o s e l l any q u a n t i t y demanded, w o u l d n ' t
t h a t be l i k e g i v i n g t h e T r e a s u r y t h e m a j o r say i n w h a t t h e a c t u a l p r i c e o f g o l d
w i l l be?
On b a l a n c e , t h e r e i n t r o d u c t i o n o f U . S . g o l d c o i n s i s a n a c c e p t a b l e
i d e a , p r o v i d e d t h a t t h e T r e a s u r y w i l l j u s t m i n t them, and w i l l n o t be o b l i g e d
t o m a i n t a i n a m a r k e t ( i . e . , w i l l n o t have t o buy them b a c k ) .

473
THE BEST MONEY SYSTEM
Submitted by
K. Hart Puffer Ph.D.
R 1 Box 132
So. Boardman, Mich. 4968O
I
1 Dec. 1 9 8 ^
The best monetary system known to history was based on gold
or silver coins that were of the same size and quality for all
cooperating countries.
Its being based on coins of standard value
makes them interchangeable among countries.
This system was used by the Greek city states, by the
Byzantine and Arabic Empires between 700 A.D. and 1100 A.Dt, by
the cities of Northern Italy during the fifteenth century and by
the Latin Monetary Union and Northern or Scandinavian Union in
Europe during the latter part of the nineteenth century and early
years of the twentieth.
Although a system based on a coin of standard value for
all countries has proved its worth, it is doubtful if the United
States could stay on such a system until the budget is balanced
and inflation of the currency is discontinued.
If American
citizens are permitted to have their gold minted, the United
States will find it easier to adopt the gold standard when our
inflation of the currency is stopped and other countries start
trading the golden coins that they are now hoarding. There are
good reasons why we should plan to use the metric system with a
gram of gold being the unit of value.

LORD JOHN MAYNARD KEYNES
The writings of Lord John Maynard Keynes are being followed
in making the monetary policies of the United States and of much
of the world. A careful study of his works show that he
promoted
policies which he himself said was the best way to overthrow
capitalism.
His biographer reported that Keynes was in favor of the
undemocratic practice of leaving major decisions to a small group
of intellectuals.
In a letter to his mother Keynes referred to himself as
being a Boshevik which may account for his sabotaging democracy
and capitalism.

474
TESTIMONY OF ANDREW G. E. RACZ
TO THE GOLD COMMISSION
NOVEMBER 12, 1981

The purpose of my presentation i s :
1)

To state t h a t gold i s a monetary asset;

To state t h a t gold and s i l v e r are v i t a l
American assets;

To propose a v i a b l e , c o n s t r u c t i v e and aggressive
American gold p o l i c y ; and

To prove t h a t the United States i s the w o r l d ' s
most powerful monetary power.

strategic

This Administration can combine monetary p o l i c y w i t h fore.ign p o l i c y to
achieve prosperity at home and to play a f o r c e f u l r o l e i n constructive f o r e i g n
policy.
I recommend t h a t :
1)

The Gold Commission accepts t h a t i t i s the p o l i c y of the
United States to increase, as opposed to decrease, our
gold and s i l v e r reserves.

This Conmission should recommend the creation of a department which would empower the Treasury to enter the futures
markets in gold i n Chicago, at the COMEX, i n London, Hong
Kong and Zurich.

Immediate Recommendation
The Treasury should prepare f o r the inmiediate sale of approximately
$50 b i l l i o n i n gold-backed bonds w i t h a 2% coupon c o n v e r t i b l e i n t o gold at
$550 per ounce w i t h f i v e years m a t u r i t y . Simultaneously, the Treasury
should declare t h a t i t i s the p o l i c y of the United States to purchase gold
on the open market, e i t h e r i n i t s physical form or hedge i t s p o s i t i o n on
the futures markets. No d e t a i l s would be disclosed.
Members of the Gold Commission are to be reminded t h a t the Soviet
Union i s not in a p o s i t i o n to do the same. Whatever gold i t has i s needed
to finance i t s food b i l l . There i s no $50 b i l l i o n surplus t h a t can be held
f o r f i v e years w i t h i n the Soviet colonial system. This i s my professional
opinion.

475
The immediate e f f e c t of such an issue i s not only pure i n t e r e s t
savings, but i t would d i v e r t borrowing requirements from the government
bond market and would r e l i e v e the pressure on corporate borrowing. Most
important, however, i t would demonstrate the tremendous monetary power of
the United States of America. We are the only country whose gold i s unimportant to carry out our d a i l y business and the only country whose i n t e g r i t y t o redeem the $50 b i l l i o n gold issue e i t h e r in gold or in d o l l a r s
i s unquestionable.
Furthermore, the Treasury should create a non-marketable, 8% "Freedom
Bond" which t h i s Government can o f f e r to a l l the American banks t h a t are
c u r r e n t l y stocked w i t h u n c o l l e c t i b l e debt from Eastern European countries.
In exchange f o r the unsound paper of Poland, Rumania, East Germany and
Hungary, the banks should be o f f e r e d the opportunity to pass on the dead
assets to a low-coupon, say 8%, 10-year debt to the Treasury w i t h the commitment t h a t no f u r t h e r loans would be issued to the above-mentioned
countries.
The "Freedom Bonds," of course, are made possible because of the savings created by gold-backed bonds and p o t e n t i a l drops i n i n t e r e s t rates.
L e t ' s v i s u a l i z e f o r a single minute t h a t by c u t t i n g o f f Eastern European and Russian c r e d i t the President could s t a r t negotiating w i t h the
leaders i n the Kremlin.
Our aim i s to cut our defense appropriation immediately! A 5% cut
in our 5-year, $1.5 t r i l l i o n defense appropriation would represent a $75
b i l l i o n saving.
Just think about i t . . . $ 7 5 to $100 b i l l i o n cut i n defense spending!
THE RESULT: a single d i g i t prime rate and probably not more than a 7% or
8% i n f l a t i o n r a t e . The stock market would probably go up 500 p o i n t s .
I
estimate that w i t h such a scenario, every 100 points i s equivalent to at
least $100 b i l l i o n , maybe even a $150 b i l l i o n , increase in the gross
national product. One hundred b i l l i o n d o l l a r s i n GNP represents at l e a s t
an extra $30 b i l l i o n i n tax revenues. I t i s easy to see, Mr. Secretary,
t h a t i n 1984 instead of a balanced budget we would have a surplus; and you
would be the f i r s t Secretary of the Treasury to recommend a second tax cut
i n the f i r s t four years of an Administration.

476
GOLD: THE SOLUTION TO OUR MONETARY DILEMMA
Submitted by
George Reisman, Ph.D.
26881 Rocking Horse Lane
Laguna Hills, California 92653
February 9, 1982

We are confronted with an apparent monetary dilemma: the
choice between a 1929-style depression if we stop inflation,
and, far worse, sooner or later, a 1923-German-style currency
collapse if we allow inflation to go on. Our dilemma arises
on the one side from the inherent accelerative tendencies of
inflation—of money creation. On the other side, it arises
from the fact that the inflation we have already experienced
has encouraged people to become highly illiquid and badly overborrowed; the other side of the coin of the inflation-induced
illiquidity is an artificially high velocity of circulation of
of money. Stopping, or even substantially slowing, inflation
must produce a rebuilding of liquidity, a reduction of the
velocity of circulation, and thus a contraction of spending and
revenues and a massive inability to repay debts, along with
huge unemployment. Because these are the consequences, we cannot
realistically expect the government to stop or even reduce its
inflation for very long. Every such attempt is fairly soon abandoned and the incipient tendencies toward contraction overcome by
a fresh acceleration in the creation of money.
Most proposals for the establishment of a gold jstarfdar.d provide
no escape from this dilemma. If implemented, they would succeed
in ending inflation, but only at the price of bringing on a depression, for they would require a reduction in the rate of increase in the money supply from its present level of seven or
eight percent or more per year to a rate commensurate with the
increase in the supply of gold—perhaps two or three percent a
year. They offer no remedy for the attendant drop in the
velocity of circulation and consequent inability to repay debts.
The kind of gold standard I advocate is designed to deal
with the drop in velocity. Its aim would be to stop inflation
completely without precipitating any contraction of spending
calculated in dollars. In essence, the mechanism for achieving
this would be to go over to a 100% reserve gold coin system at
a very high price of gold.
Under such a system, the money supply of the United States
would be, in effect, a quantity of gold ounces, which I estimate
in the neighborhood of 500 million, allowing for present
official US gold reserves, private holdings, and anticipated

477
George Reisman, Gold:

The Solution to Our Monetary Dilemma

gold imports. Under this system, even if the velocity of circulation fell from its present level of roughly six to its 19^6
low of about two, there need be no contraction of spending calculated in dollars, if the gold were priced high enough. For
example, a gold-ounce GNP of 1,000 million would be equivalent
to our present dollar GNP of roughly 2.5 to 3 trillion at a
price of gold between $2,500 and $3,000 per ounce.
The transition to this system could either be abrupt or
gradual. If gradual, it should consist of the following steps,
perhaps best spelled out in a constitutional amendment. 1. An
absolute guarantee against any future confiscation of private
gold holdings, as occurred in 1933> and in 1917 in the case of
banks. 2. The abolition of all taxes, federal, state, and local r
on the purchase and sale of gold. 3*
The recognition by the
IRS and the courts of revenues and incomes calculated in gold,
with no tax imposed on account of a rise in the price of gold.
km
The full enforceability of gold contracts in terms of specific performance; the absolute immunity of all such contracts
from legal tender legislation in any form.
The granting to
private minters, for a nominal fee, of the right to use the seal
of the United States in the minting of new gold coins. 6. The
requirement that all privately issued bank notes and checking
deposits denominated in gold be 100% backed by gold coin or
bullion in the possession of the issuer. 7. The extablishment
of a legal tender value for gold in terms of debts denominated
in paper dollars, which value could be raised from time to time
as the market price of gold rose.
As these steps were taken, the private demand for gold and its
monetary use would enormously increase, as would its real value.
At some point, once gold had become reestablished as a private
money of the market, the government could use its gold reserves
to redeem the outstanding supply of non-gold money defined on an
Ml oasis. Until that time, no sales of government gold should
be permitted.
Once on the 100% reserve gold coin standard, further inf l a t i o n — i n terms of g o l d — w o u l d be virtually impossible, and
no basis would exist for a contraction of spending in terms of
gold. The 100% reserve gold coin system would thus be the ideal
monetary system, secure against the boom-bust cycle of inflation
and deflation, and the way to eventually escape from our present
inflation without contraction.

478
Summary of Gold Commission Testimony by Alan Reynolds

The

tripling

celerating
the

loss

future.

gold
the

federal

budget

Any m o n e t a r y
abandoning

long-term
changing

rates

A go-Id

without

the

standards

compare

with
of

and

broad

never

returned

during

all

predictable

rules.

has

fall,

standard

the

stop

rule's

wholesale

the

hold

its

ac-

value

5-6% under

gold

crises,

any

standard

since

level,

rule
is

end

not

can

have

constantly
If

markets

inflation,
of

interest

rule

zhe

quickly,

abrupt

France

deflation.

the
or

classical

Bretton

1971.

misleading

prices

Gold

does

1971.

violation

1968

commodity

indexes.

would

between

this

money

since

inflation

risk

but

No q u a n t i t y

rule

requiring

can

period

price

definition

a quantity

would

will

exceeded

been u n p r e d i c t a b l e

that

1965 r e f l e c t s

surplus.

may b e b e n t

because

since

dollar

rule

comparison

ancient

today's

quantity

The r e l e v a n t
gold

would

believed

deflation.
1926,

rates

the

rates

interest

and v e l o c i t y

that

interest

credibility

nonetheless

interest

confidence

Long-term

standard.

justify

long-term

(mostly

itself

farm

Woods

products)

was a b r o a d e r

measure

value.
Research by

Zarnowitz

from

1879-1914

did

not

ibly

blamed on

the

gold

were

partly

clical
service
bank.

due

performance
sector,
No g o l d

indicates

really

exist.

standard,
to

has

improved,

deposit
standard

adhere

insurance,
period

about

half

the

Not one r e c e s s i o n

has

though d e f l a t i o n s

failure
not

that

the

gold

despite

experienced

1921

standard.

such

unemployment

bad

a blend

been
and

plaus1929-30

Recent

advantages

insurance

"recessions"

and a
of

cylarge

central

unemploy-

479
ment >

inflation, volatility and stagnation as in 1979-81.
A true

a fixed

gold

weight
gold

standard

gold,

lars

for

ship

between o f f i c i a l
must

maintaining

simply

The money
to

gold

production

output.

son

that

hedge

dollars
fixed

for

price

new d o l l a r s

account

respect

nation

tons

would

become

for

gold,

that

started

a bargain.

quickly

monetary

long-term

any o b s e r v e d

dollar's

policy

a fixed

i t

stock

value

whatever

There
the

the

1970s

the

assets

a world

dollar

gold,
to

get

link

between

and

the

income

same

money.

without
Sup-

traded
gold

trade

rea-

better

managed

then

wil-

those
a

their

inflation.

can do i s

hypothetical

are

impossible.

would

outflow

gold.

gold

inflation,

farmers

any

Gold

was a

dollars,

a general
U.

Full text of Report to the Congress of the Commission on the Role of Gold in the Domestic and International Monetary Systems : Volume II: Annexes

FRASER